Financial Services Bill

Public Bill Committee, 15 December 2009.

Clause 14

Mark Hoban (Conservative, Fareham)

I beg to move amendment 2, in clause 14, page 19, line 4, after ‘person’, insert

‘or is carrying on a regulated activity in a way that could undermine financial stability’.

It is a pleasure to serve under your chairmanship again, Mr. Benton. It is good to see so many Labour Members of Parliament here today. My recollection of Thursday’s evidence session was that, without the support of Opposition Members, the Committee would have been inquorate, and that would not have aided scrutiny of this important Bill.

Mark Todd (Labour, South Derbyshire)

I was there.

Mark Hoban (Conservative, Fareham)

The hon. Member for South Derbyshire was present but, sadly, so many of his colleagues were not. However, it is good to see a few more of them gathered here today to debate an important part of the Bill. The order of deliberation has been changed to bring certain clauses to the front, because they are perhaps less controversial than the earlier clauses, but there are still some important issues that arise in the first group of clauses that we will debate.

Perhaps it would be helpful if I said something about clause 14 to put the amendment into context. The clause gives the Financial Services Authority a new power to suspend permission to carry on regulated activities for up to 12 months. Clause 16 imposes a penalty on individuals performing a controlled function without authorisation and clause 17 extends the period for taking action against individuals from two years from the date on which misconduct took place to four years. That is quite a beefing up of the disciplinary powers of the FSA.

Conservative Members have no problem in principle with the FSA being given more powers. In our white paper, “Plan for Sound Banking”, which was published in July, we said that the powers of the FSA should be reviewed to see whether they were adequate or needed reinforcement. What we want to do through the amendments that we have tabled today is to understand a little more of the Government’s thinking on why the FSA needs such powers. We want to know more about the circumstances in which those powers could be used. Perhaps the Minister can tell us when they could have been used, if they had been in place under the Financial Services and Markets Act 2000. Perhaps he could explain what the FSA has lacked in enforcement measures for nearly a decade, and could say what changes there might have been if it had had such powers.

We want to understand the proportionality of the new powers given to the Financial Services Authority, in the context of the misuse that it will be seeking to prevent, and we want to understand whether the powers will have the right effect. What will be the consequences for the financial services market as a whole if the powers are given to the FSA, and what will their impact be on individuals under clauses 16 and 17, or firms under clause 14?

In justifying the clause along with other measures, the Government said in their White Paper, published in the summer, that

“The Government is taking steps to ensure that the FSA’s objectives and powers are designed in such a way that enables it to perform the extended role envisaged in the supervisory enhancement programme and the Turner Review effectively.”

We all recognise that there needs to be a much more proactive approach to supervision. Whether we continue to pursue the status quo that the Government seem happy to defend or whether, under our proposals, we reform the regulatory architecture, we are all agreed that a more proactive approach is required if we are to avoid some of the mistakes that we have seen emerge over the past decade.

The question that has been asked by a number of those who have made submissions to us is: “Why are additional powers are being used? What is the rationale behind them?” The Association of British Insurers said in a written submission that is was not clear why the FSA is considered to be lacking in enforcement powers. For example, if an offence is considered to be so serious as to merit suspension using the powers under clause 14, in practice it is likely to be sufficiently serious to justify removal of authorisation.

In an evidence session last week, Angela Knight from the British Bankers Association suggested that there were other tools available to the FSA that would have a similar effect to the measures under clause 14 on the suspension of powers. For example, she suggested that as well as the variance of permission, which the ABI mentioned in its submission, the FSA, using the capital rules—pillar 2 rules, I think—under Basel could require an authorised firm to hold more capital, if it felt that the business that it was conducting merited that. That would be an alternative way of potentially delivering the same type of outcome as the suspension.

We need to understand from the Minister, when he responds to the amendments, quite what it is that we are seeking to tackle through the suspension. The powers in clause 14 are quite broad, as proposed new section 206A gives the FSA various powers. Proposed new subsection (3) says:

“The period for which a suspension or restriction is to have effect may not exceed 12 months”,

and proposed new subsection (4) says:

“A suspension may relate only to the carrying on of an activity in specified circumstances.”

What does “specified circumstances” mean? Proposed new subsection (5) says:

“A restriction may, in particular, be imposed so as to require the person concerned to take, or refrain from taking, specified action.”

Those powers are broadly couched. People might think about what happened over the course of the financial crisis and suggest that perhaps those sorts of powers could have been used to prevent banks lending high loan-to-value ratio mortgages, in cases where lenders were offering mortgages of, say, 125 per cent. of the value of a property. Perhaps the FSA could have taken that action and said, “Actually, we will stop this,” or “We will prevent firms from doing that; we will restrict them to being able to lend up to 100 per cent. of the value of the mortgage”—or 90, 80 or 60 per cent. It is not clear whether the powers are designed to tackle that sort of issue or, perhaps, broader issues.

We know that one of the causes of the crisis was the use of particular financial instruments that sliced and diced mortgages, and created collateralised debt obligations, CDO squared, CDO cubed and things like that. Many people say that while that spread risk around the market, it led to a point where banks lost sight of the sort of risks they had on their balance sheet. Would the powers be used to stop such activity from taking place? It would be feasible.

Charles Walker (Conservative, Broxbourne)

When looking at the conduct of companies—banks or building societies—offering mortgages, surely one has to look at the overall risk profile of their mortgage book. It may be perfectly legitimate to lend a few people 110 or 120 per cent. of the value of their home, but we would not want to have a preponderance of high-risk mortgages on the books; they need to be balanced. Perhaps the mistake that some of the banks made was to move into risky lending and not to take into account the overall risk on their mortgage book. Would the provisions deal with that?

Mark Hoban (Conservative, Fareham)

My hon. Friend raises an important point. I am not sure that I know the answer, because we need to know from the Minister what the outcome is of the power that we are discussing. That is the challenge for the Minister in responding to debate on clause 14. He needs to be very clear about what mischief the clause is trying to prevent. The comments from Angela Knight in the evidence session will perhaps bear out what my hon. Friend said. On the breadth of the clause and what it might be able to do, she said:

“It has the power to stop a firm doing one of its regulated activities, which is a pretty broad power. I suppose you are right that it could say to a bank, “You can no longer lend money on mortgages,” or, “You can no longer provide trading facilities for individuals trading their shares.”——[Official Report, Financial Services Public Bill Committee, 10 December 2009; c. 88, Q27.]

The clause is pretty broad; it is a broadly framed power that potentially gives the FSA quite significant powers to intervene in an authorised person’s business model. I look to the Minister for clarification on how that power might be used.

There was some debate in Committee on whether the power would be used for a major retail bank, whether it would be used to deal with the activities of a major national insurer, or whether it would really, in practice, be used simply to deal with problems with the high street independent financial adviser or insurance broker. A lot of comment about that power emerged in last week’s evidence session, such is its potential scale and impact.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman gave the example of offering 110 per cent. mortgages, which is a pretty stupid way to act, but lots of institutions did it. Is he saying that the Financial Services and Markets Act 2000 does not allow that, and that companies have been breaching it for years? If it is allowed under the 2000 Act, then clause 14 would not change that.

Mark Hoban (Conservative, Fareham)

That is part of the challenge that we need to understand. Mortgages are a difficult topic to deal with, because the FSA is currently consulting on changes to the regulatory regime on mortgages that would enable it to regulate products, rather than conduct under the business rules to do with those products. The hon. Gentleman raised the point about what is meant by the requirements of the 2000 Act, by which I think he referred to proposed new subsection 2(a) and (b) on page 19. What do we mean by the “relevant requirement”? It

“means a requirement imposed—

(a) by or under this Act; or

(b) by any directly applicable Community regulation made under the markets in financial instruments directive.”

My amendment seeks to tease out a little bit the circumstances in which those powers could be used.

To digress a little, it would be helpful if the Minister could explain why, of all the many directives that the EU has produced relating to financial services, the only one referred to explicitly in the provision is the markets in financial instruments directive. It would be helpful to understand why that is being singled out for special treatment, when the EU issues directives on a whole host of consumer and wholesale activities.

My amendment tries to probe the scope of the use of the power. The Bill, if it is not amended, will give the FSA a new statutory objective of financial stability and that will be inserted into the Act. It would create a new section 3A, which will, for the first time, give the FSA an explicit duty to contribute to the

“protection and enhancement of the stability of the UK financial system.”

We will have a longer debate about that when we return after the Christmas recess, but I want to tease out from the Minister whether he expects “relevant requirement” to cover financial stability implicitly, or whether we need to broaden the provision to include it explicitly.

I am pleased to see that the hon. Member for Wolverhampton, South-West is on the Committee. We missed him on the Finance Bill because he is very good at picking up both the Government and the Opposition on some of the finer points of technicality. He raised a very good point about whether a 110 per cent. mortgage was banned from sale under the existing powers in FSMA. Let us suppose that it was entirely permissible to sell that sort of mortgage under that Act. That might not change under the Bill; if it still complies with the relevant requirements a bank could continue to sell those products.

My amendment seeks to tease out what would happen when a product could be sold and was consistent with the Bill, but was seen to be contributing in some way to financial instability. Perhaps it was encouraging banks and individuals to take on more risk, perhaps it was undermining confidence in the financial services sector or perhaps it was going so far that people felt it was not

“contributing to the protection and enhancement of the stability of the UK financial system.”

Would the powers under the proposed new section 206A be sufficient to tackle those issues and prevent a bank from selling what might be perceived to be a very risky mortgage, which if sold on a systemic basis would imperil financial stability? Or is an amendment along the lines of amendment 2 needed to ensure explicitly that when an activity is taking place that has an adverse impact on financial stability, that institution or that authorised person is required to suspend the sale of the particular product or give that type of advice?

Charles Walker (Conservative, Broxbourne)

I might be in danger of repeating myself, but the role of the FSA is to reduce the overall risk to the taxpayer and the taxpayer now seems to be insuring the financial sector. Surely there will be some banks with an overall conservative lending profile but there will be others with a far riskier lending profile. It will be those banks that the FSA may want to approach and say, “You’ve got to reduce your overall risk to the taxpayer and you are going to start doing that by withdrawing certain riskier products that you have on the market, to reduce the overall level of risk within your mortgage book.”

Mark Hoban (Conservative, Fareham)

Indeed, and that touches again on the issue of the relevant requirement under the Act. The FSA could produce, and is clearly working towards this in terms of mortgages, a regime that applies to all firms selling mortgages or advising on them, so it is a sector-wide policy. But the FSA might decide, as my hon. Friend says, that a bank or institution—it could be a building society—within that sector is selling mortgages in a way that it feels endangers financial stability. The proposed new section 206A may be sufficient to give the FSA the powers to stop that institution selling those mortgages in that way because of the risk to financial stability, but I am not clear whether the clause, as currently worded, achieves that so I have tabled amendment 2 to broaden it out.

Rob Marris (Labour, Wolverhampton South West)

May I gently suggest to the hon. Gentleman that he is mixing apples and oranges? As I read clause 14, proposed new section 206A sets out the sentence—to use a criminal analogy. Amendment 2 creates a new offence, so the two are in a sense contradictory. He is inserting a new offence—as he is entitled to do—in a provision that, if implemented, would be purely about sentencing, not about the offence per se.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman once again demonstrates his legal expertise as a solicitor and points out a flaw in my reasoning. However, part of the process of tabling amendments is to probe the Government’s thinking. I could have had an extremely long stand part debate on the nature of—

Mark Todd (Labour, South Derbyshire)

You may get that, too.

Mark Hoban (Conservative, Fareham)

Well, a stand part debate is entirely within the gift of the Chairman, of course, and I do not seek to pre-judge his thoughts on that. But this is an opportunity to raise the issue of what the offence that we are trying to tease out of the Bill is. The hon. Member for Wolverhampton, South-West talked about its being a punishment, and I understand there was some discussion during the passage of the Financial Services and Markets Act 2000 about whether such a power should be included. The punishment was thought to be quite draconian at the time, given the safeguards that were built into the Bill when it initially passed through the House. There were later safeguards—for example, the introduction of the financial markets tribunal, which some would say was a sufficient safeguard to enable such a power or punishment to be introduced in this Bill. I am sure the Minister will address that point in his remarks later.

Amendment 2 is simply intended to trigger a debate about the circumstances in which the sanction could be used. What would “relevant requirement” mean under the Act? Does it include recognition of the new objective of contributing towards financial stability that would be imposed on the FSA? That teases out some of the tension that we have already explored through interventions between what might be a general FSA regulatory policy that applies to all firms, and the specific circumstances in which the FSA might apply a particular sanction to individual firms in individual circumstances. Amendment 2, which is relatively short, tries to establish that.

I want to tease out other issues in the clause, but I will leave them until we discuss later amendments and, if I am unable to tease them all out, perhaps a stand part debate.

Colin Breed (Liberal Democrat, South East Cornwall)

It is a pleasure to serve under your chairmanship this morning, Mr. Benton.

Amendment 2 is a useful probing amendment, which can clarify important aspects, as the hon. Member for Fareham has said. The FSA clearly had powers that it may not have realised it had. Sometimes, it may not have realised the extent of its powers, and it certainly did not use all the powers that it had at the time. The Financial Services and Markets Act 2000 probably needed clarification and the proposal is part of that.

The measure certainly provides increased, wider-ranging powers and potentially greater penalties and disciplinary powers, which may well be necessary in the circumstances in which we find ourselves today. We have to ensure there is a distinction between those who decide on a particular business model, which might include the famous 125 per cent. mortgages, and those who operate under it, such as mortgage brokers who are quite properly selling such a mortgage, or advising people that they may obtain one. If they are reasonably able to do that, I do not think that they are part of the problem. There ought to be a clear distinction between those who decide upon certain products and services—the models— and those who operate within that market. There are some checks and balances anyway, through the warnings and the tribunal, for example.

The “relevant requirement”, which the hon. Member for Fareham referred to in the last part of his contribution, is perhaps more interesting, and perhaps needs more teasing out. It is an interesting concept, and is probably as broad a concept as can be had. I understand that a “relevant requirement” may not necessarily be wholly and solely in the interests of either the lending party—the provider of the service—or the consumer. It is what the Government may consider a relevant requirement for financial stability, or indeed anything else—a relevant requirement could be anything. A Government could decide what the relevant requirement was and ensure that the FSA implemented it, which might seriously intervene in the normal business relationship between a bank and a customer, or a financial institution and its client. The implementation of a relevant requirement and the FSA’s subsequent embracing of it could suddenly and massively intervene in such long-standing relationships. It may not be in the interests of the bank, the financial institution or the consumer, but they would have to comply with it.

The relevant requirement is mentioned on page 19, line 4, just before where the proposed amendment would be inserted. It would help if the Minister could explain the thinking behind the words “relevant requirement”, and what the extent of that requirement is. It could include almost anything, and the clarification provided by the amendment would limit the requirement, or perhaps direct it towards the financial stability aspect.

Ian Pearson (Labour, Dudley South)

It is a pleasure to serve under your chairmanship again, Mr. Benton.

The hon. Member for Fareham began his remarks by noting that the measure was a beefing-up of the FSA’s disciplinary powers, and I agree. He set out some of the broader context of what the Government are trying to achieve, and I would like to explain in more detail what clause 14 does, as I think that would help the discussion about the amendment. It may influence your decision, Mr. Benton, as to whether the issues have been fully explored or whether we need a stand part debate when we have debated all the amendments.

Clause 14 amends section 206 in part 14 of the Financial Services and Markets Act 2000—FSMA. As the Committee knows, over the past couple of years the FSA has enhanced its supervisory approach and has sought to increase the deterrent effect of its enforcement action to deter misconduct. The FSA has reiterated publicly on many occasions its renewed focus on demonstrating that people and firms guilty of misconduct will be held to account. The purpose of the clause, and the following three clauses, is to strengthen the FSA’s enforcement powers to assist its credible deterrence strategy. The goal, which I am sure we all support, is to increase compliance and to help to foster a sounder financial system.

The FSA’s disciplinary powers in relation to authorised persons who are guilty of misconduct are currently limited to imposing either a financial penalty or public censure. The FSA can suspend a firm only if it is necessary for the protection of consumers, if the firm does not meet the threshold conditions, or if the firm has not carried on for 12 months a regulated activity for which it has permission. The FSA cannot, however, suspend a firm as a disciplinary sanction. The clause enables the FSA to suspend or restrict a firm’s permission for up to 12 months, as a punishment for misconduct, and the power will supplement rather than replace the FSA’s power to impose a fine or public censure.

We believe that in certain circumstances suspension will be a more appropriate punishment than a fine, and many firms will consider the threat of suspension as potentially more disruptive than a fine. The threat will therefore encourage compliance.

Suspension is also a different type of deterrent, as it has a more direct effect on the offending firm by restricting its ability to do business. It is more visible and creates a direct link between the misconduct and the disciplinary measure.

Charles Walker (Conservative, Broxbourne)

A business may be indulging in high-risk business practice but not actual misconduct. Are there any powers in the clauses to ensure that a business with a high-risk profile is told, “Your risk profile is too high. It poses a huge risk to the taxpayer, who is ultimately underwriting the business, and you have to change your business practices”? That is not technically the same as committing misconduct.

Ian Pearson (Labour, Dudley South)

The best reply to the hon. Gentleman is to say that clauses 14 to 17 are about disciplinary powers. If we keep that in mind for the next couple of hours, it will be helpful. They are not about preventive measures or taking remedial action. Some of the debate over the past 30 minutes has been focused on preventive or remedial measures, rather than the disciplinary powers themselves.

Suspending firms for misconduct is not a new concept; it is used in other jurisdictions. The new powers give the FSA a range of penalties to use as appropriate according to circumstances. They range from imposing limitations or other restrictions on a permission to full-scale suspension, which could mean limiting trades by a certain desk or sales of a particular product. I will give examples in a moment in response to the hon. Member for Fareham.

I stress that the clause does not create a new offence; it simply diversifies the range of actions the FSA can take against those who break the rules. This measure, along with others we will discuss shortly, is intended to give a clear signal to regulated entities that the FSA will not tolerate misconduct and that it has a wide range of disciplinary tools to use against those who breach requirements.

The FSA will be required to consult on, and issue, a statement of policy with respect to its use of the new power, in the same way as it currently does in relation to the imposition of financial penalties. The clause will enable the FSA to take more suitable and, where appropriate, tougher actions against those who breach the rules.

The clauses are designed to improve the FSA’s disciplinary powers to punish firms and individuals for misconduct, not to address preventive or remedial enforcement; for those, the FSA already has the powers it needs and can already act in a number of the areas that have been discussed. It would not be reasonable to speculate on how the powers could have been used in the past, although the hon. Member for Fareham tempts me to do so, but I will give examples of how they could be applied in the future.

The new power to suspend will apply to all regulated activity where the FSA identifies misconduct. That could cover a wide range of activities, from trading in credit default swaps to the selling of payment protection insurance, trading in shares or the selling of endowment policies, car or house insurance, mortgages or pension policies. It is right that the FSA has access to a broad range of different enforcement powers and can decide in each case which is the most appropriate sanction to use. The power is available for use against all firms regulated by the FSA, which covers large firms, as the hon. Member for Fareham mentioned, but also, potentially, small financial advisers. The emphasis is on disciplinary powers and ensuring that the FSA has a wide range of tools available, which it will need to use appropriately according to circumstance.

Mark Hoban (Conservative, Fareham)

I am grateful for the Minister’s explanation. He is in effect arguing that the FSA needs a more granular range of sanctions to apply to firms found guilty of misconduct. What evidence has the FSA presented to him of occasions when it had to go for either a more lenient or a more aggressive sanction, such as suspending permission to undertake a certain type of activity?

Ian Pearson (Labour, Dudley South)

It will be up to the FSA to make a decision on the basis of the misconduct that it has identified and its judgment as to how serious an offence has been committed. As a public authority, it will be required under law to act reasonably and appropriately.

Mark Hoban (Conservative, Fareham)

My point was not about how the FSA might use its power in the future and what sort of consultation it might go through, but what sort of pitch it made to the Minister for these powers to be included in the Bill? What gaps or failings did it identify in its own previous enforcement actions that led it to argue it needed these powers, as an alternative either to a more lenient sanction or a more punitive one, such as completely preventing a firm from trading in a particular activity, and not just a temporary suspension?

Ian Pearson (Labour, Dudley South)

As I outlined to the Committee a few moments ago, at present the FSA cannot suspend a firm as a disciplinary sanction. The FSA believes—we support it—that the ability to suspend a firm as a disciplinary sanction is a useful way for the FSA to add to its powers. Many firms will see the threat of suspension—rather than a fine—as a credible deterrent from taking inappropriate action. That is why it is sensible and reasonable to add to the powers.

Mark Hoban (Conservative, Fareham)

The Minister will accept that it is quite a tough power and he argues cogently that it will have a deterrent effect on firms, but he still has not answered my question about whether the FSA identified circumstances in which it would have liked to have such powers—concrete examples of when it had identified misconduct and felt constrained in the sort of sanction it was able to give. Or is the power just something the FSA could stick into the Bill and that would be nice for it to have?

Ian Pearson (Labour, Dudley South)

The power is a significant addition to the Bill. I do not want to go back into past cases when it may or may not have been more appropriate to suspend a firm rather than fine it. As the hon. Gentleman will be aware, the FSA has suspended and will suspend firms. A list of firms that have had their permission suspended is available on the FSA’s website so it is not as though the FSA does not take action to suspend firms, as the hon. Gentleman knows. At the moment there is a gap in the FSA’s powers with regard to disciplinary action. He is rightly probing the difference between areas where the FSA will want to take action under its existing disciplinary powers and where it will want to take action, as it can, under the OIVOP—own initiative variation of permission—power. I will say a little more about that in a moment.

However, before doing so, let me respond to the point made by the hon. Member for South-East Cornwall about relevant requirements. Relevant requirements include those imposed directly on firms by the Financial Services and Markets Act and those imposed on firms by the FSA in its rules—for example, to treat customers fairly. FSA rules are subject to a number of safeguards in FSMA, including public consultation, as the hon. Gentleman is aware. Relevant requirements are defined in the same way in the existing disciplinary powers in proposed new section 206A, as well as other provisions in FSMA.

Colin Breed (Liberal Democrat, South East Cornwall)

If a new relevant requirement suddenly arises that the Government feel the FSA should enforce, will it be applied retrospectively?

Ian Pearson (Labour, Dudley South)

The simple answer is no.

The hon. Member for Broxbourne asked whether the powers could be used to prevent firms from offering high loan-to-value mortgages. As I explained, these are disciplinary powers rather than preventive measures and he will be aware that the FSA is currently consulting on its mortgage policy. The consultation period does not end until 30 January, so it would not be appropriate to say any more about that.

Amendment 2 seeks to enable the FSA to suspend a firm’s permission to undertake an activity if that activity could undermine financial stability. I support the sentiment behind the amendment, but it is not necessary. The FSA has the power, under section 45 of the Financial Services and Markets Act 2000, to vary or cancel a firm’s permission. As I explained earlier, that power is known as the FSA’s OIVOP power, which can be applied to any permission granted under part 4 of the 2000 Act. Clause 7 enables the FSA to use the OIVOP power to meet any of its regulatory objectives, including its new objective for financial stability in clause 5, which we are due to debate in the new year.

If the Committee accepts the clauses, the FSA will be able to suspend or restrict a firm’s permission if it is believed that the firm’s activities were undermining financial stability. I support the sentiment behind the amendment—it has usefully probed the Government’s thinking for those who follow these matters from the outside—but it is not necessary, because clauses 5 and 7 widen the FSA’s ability to act in the interest of financial stability and to use the powers in clause 14. I invite members of the Committee to resist the amendment if the hon. Member for Fareham decides to push it to a vote.

Mark Hoban (Conservative, Fareham)

We have had a helpful debate that has opened up clause 14, so that we can understand why the power is included in the Bill. There is a clear intellectual argument for the power, but I am yet to be persuaded that there is a practical argument for it. I pressed the Minister on three occasions for the evidential base for the need for the power, but he did not provide it. I do not recall the Treasury’s financial services White Paper in the summer providing an evidential base for the power either. Moreover, the Turner report was prayed in aid in the White Paper as a rationale for the power, but I could not see a reference to the need for such additional powers in the report. I may well have missed it, but it was not one of the recommendations at the end of the Turner report. It is therefore difficult to understand the power’s genesis. I know from talking to someone outside this place who was involved in the passage of FSMA that the power was discussed at the time, but it was not included because there were insufficient safeguards in place.

I wonder whether the Minister is undermining his own argument about the need for the sanction by referring to section 45 of FSMA. He said that once the powers come into existence and financial stability becomes a statutory objective of the FSA, they could be used to prevent a firm from selling high loan-to-value mortgages. That would be a proactive attempt to prevent a problem rather than imposing a sanction when a problem had already arisen and a firm had breached FSA rules. I am still unclear as to whether clause 14 provides any additionality to the sanctions. The Minister seems to suggest, in the context of other circumstances, that the FSA could use its powers under section 45 of FSMA to stop a firm selling particular products or engaging in particular activities. [Interruption.] The Minister says that it is not a disciplinary matter, but we seem to have a power that achieves the same ends, or is it elsewhere in the Bill?

We discussed in the Banking Bill Committee last year the threshold conditions that act as a trigger for the special resolution regime. It appears that the powers may well exist, and the FSA, with a bit of nimble thinking, could perhaps use the powers under section 45 to beef up its disciplinary powers, rather than insisting on the inclusion of clause 14 in the Bill.

However, as I said, my main focus in tabling amendment 2 was to tease out issues about financial stability, which we will come to in the new year. The Minister did not explain why the markets in financial instruments directive was singled out for such special treatment in the Bill, when so many other EU directives could have been listed—although he may want to return to that matter in a later debate.

I think that we have had a helpful debate, and we now understand better how the clause fits in with the FSA’s disciplinary armoury. However, I do not think we are much further forward in knowing why that power is needed, and the evidential base for its requirement. However, further illumination may emerge at a later point, so I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 4, in clause 14, page 19, line 20, leave out ‘12’ and insert ‘6’.

The amendment is straightforward; it is again of a probing nature. Proposed new section 206A states:

“The period for which a suspension or restriction is to have effect may not exceed 12 months.”

Therefore, for a period of up to 12 months, a business may be prevented from carrying out all or part of its trade as a disciplinary sanction. Clearly, that can have a big impact on a business. The measure is meant to be a deterrent, but like all deterrents, it increases its value if used in practice. Removing the right of a business to carry out its activities for 12 months could have a significant impact on its financial situation; it could in effect lead to that business being closed down, which is equivalent to simply withdrawing its permission to undertake its functions under the 2000 Act.

It would be helpful to have some understanding or iteration by the Minister as to why 12 months is the right period. The amendment suggests reducing the period from 12 to six months, but I could have instead suggested reducing the period to four months—the amendment is probing by nature. Given the potential impact of the sanction on a regulated firm, it is important to understand the thinking behind the 12-month period, and whether the Minister has thought through the potential impact on the viability of a firm if it loses its right to conduct its business for 12 months.

Ian Pearson (Labour, Dudley South)

As the hon. Gentleman indicates, the amendment proposes that the maximum period for which a firm’s permission could be suspended should be six months, rather than the 12 months set out in the clause.

The Government consider it necessary for the FSA to have the ability to impose a suspension of up to 12 months to deter misconduct. Suspension for only up to six months will not represent enough of a disincentive. In all such matters, it is a question of achieving what we think is a right and appropriate balance, and our judgment is that a 12-month suspension will be a significant deterrent.

If hon. Members are concerned that a 12-month suspension may be excessive, I want to reassure them that the checks and balances that are built into the Financial Services and Markets Act 2000 would apply here. If the FSA wants to suspend a firm’s permission, it must go through the process of first issuing a warning notice and then a decision notice. Under normal circumstances, the FSA would probably have discussions before a warning notice is issued to a company. During this process the authorised person may make representations to the FSA. Furthermore, a person has a right to refer the matter to a tribunal. So there are a number of protections built in for the benefit of authorised persons. Again, as I mentioned earlier, the FSA has a duty to act reasonably and proportionately at all times.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for outlining the safeguards that will enable an authorised person effectively to appeal against the FSA’s proposed penalty. But during that period of appeal, will the authorised person be able to continue trading? The FSA has recognised that he is not doing his job properly and that products may be being mis-sold, but it would appear during this warning period that he could continue in the same way, breaching the same rules without hindrance. He could fight his way through the process and at the same repeat the same breaches. Is that what will happen during this appeal process?

Ian Pearson (Labour, Dudley South)

I want to draw a distinction between the powers that the FSA already has to prevent activity or take remedial action and the disciplinary powers that are being added by clause 14 and subsequent clauses. There is a matter of judgment here about the period that we have sought to impose. We think that 12 months is—

Mr. Hobanrose—

Ian Pearson (Labour, Dudley South)

I will try to answer the hon. Gentleman’s point in a moment. We both know that I am not answering it now, but I am answering a separate point. I will get back to him. I am trying to explain that there is a process in place that the FSA will have to go through that is specified within its rules. We will debate issues relating to disclosure later.

One of the hon. Gentleman’s amendments seeks to move forward the process from the final notice to the decision notice. During the process, if the FSA wishes to suspend a firm’s permission it must talk to the authorised person who can make representations to it and issue a warning and a decision notice.

There is the right to refer matters to a tribunal. We have to be careful here that we do not get into a situation where people are presumed guilty before final decisions have been taken. We want to give the FSA tools to deter misconduct. It needs to be able to impose credible sanctions. Accepting the amendment would imply that there can never be a single instance warranting a 12-month suspension and that in all circumstances a six-month suspension will be enough to deter firms from misconduct. I do not believe that that is the case. The 12-month period is more appropriate and would indeed be a significant sanction and therefore a credible deterrent. That is essentially what we are talking about here.

On the hon. Gentleman’s specific point, I cannot remember exactly what the situation is. I shall have to refer to my notes, but I shall come back to him on it.

Mark Hoban (Conservative, Fareham)

I am sure that we shall return to the higher point in the next group of amendments—amendment 5 is more tailored to that set of circumstances.

I was interested in the Minister’s argument about 12 versus six months and that there might be circumstances in which a 12-month suspension was preferred to six months, while six months would put a cap or ceiling on a previous suspension. Clearly, the same argument applies if the Government had tabled 24 months and I had tabled 12 months—a judgment is attached to how long the suspension should last, and that judgment has to be made. What the Minister is getting to is that the 12-month suspension is much more of a deterrent than a six-month suspension: people might trade their way through six months, or be able to shut up shop, and still feel that there was light at the end of the tunnel and they could revive their business after six months. Twelve months is much more of a deterrent—there is an impact from being out of the market for 12 months and, particularly given how potentially broad the measure is, it is tantamount to withdrawing permission anyway. When the FSA produces guidelines on the use of the power, it needs to consult about the breadth of circumstances in which the power can be used and the potential impact on the ability of a business to trade, if all it wants is a punishment that stops short of simply withdrawing permission. So, with that comment on what the FSA should think about before its consultation, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 3, in clause 14, page 19, line 35, at end add—

‘(9) The Authority must publish a statement that it has exercised powers under this section which includes—

(a) the name of the authorised person;

(b) details of the permission suspended; and

(c) the period of the suspension.’.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss the following: amendment 5, in clause 14, page 19, line 35, at end add—

‘(9) Where an unauthorised person refers this matter to the Tribunal in accordance with section 208, the Authority may suspend the permission until the Tribunal has reached its conclusion.

(10) Where the Authority has exercised its power under subsection (9), it must publish a statement that it has done so.’.

New clause 1—Disclosure of enforcement actions

‘In the Financial Services and Markets Act 2000, after section 349 insert—

“349A Disclosure of enforcement actions

(1) Section 348 does not prevent the disclosure by the Authority of information that—

(a) an authorised person is subject to actions taken under Part 14 of the Act; or

(b) an approved person is subject to actions taken under section 66 of the Act.

(2) Prior to a public statement that action is being taken under Part 14 or section 66 of the Act, the Authority must notify the person subject to the action seven days prior to any disclosure of its intended course of action.”.’.

Mark Hoban (Conservative, Fareham)

This group of two amendments and a new clause deals with a linked issue, but there is a tweak around the last point made by the Minister. The linked issue is how consumers know that a firm has been penalised. How do they know that the sanction—the power for a temporary suspension under clause 14, or proposed new section 206A—has been applied to a particular firm?

Amendment 3 requires a notice or statement to be published saying that the authority has used its powers under the section, with the name of the authorised person and the detail of the permission suspended and the period of suspension, so that people will know, for example, that independent financial adviser X is not able to sell pensions for the next 12 months. That will help consumers know what they are dealing with that firm about, and ensure that some publicity is attached to the firm.

Amendment 5 covers the same issue, but a slightly broader issue as well, going back to the intervention that I made on the Minister to which he said that he would give me an answer a bit later. If an authorised person has been warned that they may be suspended, has been given the appropriate notices and decides to appeal to the tribunal, what happens during the appeal process? That is an important issue. One of my hon. Friends has raised with me the way in which a particular mortgage provider dealt with repossessions and arrears. They were subject to disciplinary action by the FSA. It was a private process and was not known widely. When the institution repossessed other houses, the courts were not in a position to know about its practices. In fact, there was concern about the practice of that particular institution.

Turning to amendment 5, I am concerned that an authorised person could appeal to the financial markets tribunal and, during the appeal process, break the same rules that they had already broken, and continue to do so until the appeals process had been exhausted. Let us look at a criminal case: if someone was arrested for murder, that they might appeal against their sentence or against being found guilty of a particular offence, but they would be locked up in the meantime, so they would not be able recommit the same offence. I am not sure how the Bill would prevent someone who has been found to have breached an FSA rule from recommitting the same offence.

It might be that the authorised person appeals the punishment and accepts the offence. That would be fine, because then the offence would have stopped. If the person continued to argue about whether they were in breach of the rules, and that was that point on which they wanted to appeal to the tribunal, what stops them from doing that?

Charles Walker (Conservative, Broxbourne)

The customer would be rightly annoyed. The appeal process would go on; if the chap was found to have done nothing wrong, that would be all right, but if a customer was one of a dozen or 100 or so people who, during the six-month appeal process, had bought a dodgy mortgage or financial instrument from a person, and was not aware of the fact that he was under review, that customer would feel furious and want to know why his rights were treated in such a cavalier fashion.

Mark Hoban (Conservative, Fareham)

Indeed. That is why amendment 5 includes new subsection (10), under which the authority must publish a statement that says that it has taken action, or that action is in process.

The Minister said earlier that we were talking about pre-emptive action, and that section 45 of FSMA could be used to the same effect and could stop someone from undertaking activity when they were not perhaps in breach of the rules, but in breach of the objectives of FSMA. The Minister might respond by saying, “I understand the point exactly, and the institution could be recommitting the same offence, but section 45 is your answer; it can be used in the meantime to stop a firm from recommitting an offence.” I am not sure whether section 45 is subject to the same appeals mechanism as proposed new section 206A and the other sections in the disciplinary part of the Bill, so I am not sure what the interaction is between the point that I am trying to raise through amendment 5, and the issue of whether section 45 can prevent someone from undertaking certain activities in an interim period.

New clause 1 is a broader measure. It tackles an issue that the Treasury Committee highlighted in its 15th report of the 2008-09 session, namely mortgages. Consumer bodies have regularly raised concerns to do with naming and shaming and a more transparent enforcement process. How do people know who is going through the process? The Treasury Committee report on the handling of mortgage arrears pointed out that the FSA had not published the name of the four miscreant firms “subject to enforcement action” or the

“firms who had performed poorly in its August 2008 review of mortgage arrears policies”.

In response to that point, Jon Pain from the FSA said:

“until the full enforcement process is complete, it would be unjust to say they are guilty before they are proven guilty”.

That has support from the British Bankers Association, which followed up on that point, but Shelter questioned the applicability of the concept and said that

“firms referred for enforcement have been found categorically in breach of FSA regulations and we see no reason not to name them while they are undergoing enforcement action.”

That point was reiterated by Which?. It pointed out that until a firm saw that there was a real penalty in disclosure, it would not mend its ways. In a way, amendment 3 tackles that with its publication of notice.

Andrew Love (Labour, Edmonton)

Will the hon. Gentleman give way?

Mark Hoban (Conservative, Fareham)

I will give way in a second. Amendment 5 tackles the issue by referring to firms that are entering the tribunal process, but new clause 1 goes further. I happily give way to the hon. Member for Edmonton, who is a distinguished member of the Treasury Committee.

Andrew Love (Labour, Edmonton)

Does the hon. Gentleman agree that the issue is not just about the importance of informing consumers in the market about any disciplinary action taken, but about the reputational issue for the individual and the firm? It is that more than anything else that will hopefully curb such activity in the marketplace.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman makes a powerful point. I have talked to a number of financial institutions about the Financial Ombudsman Service’s publication of league tables and about who has had the most complaints. Obviously, size determines the number of complaints, but an institution’s approach to dealing with complaints has an impact on where it appears in the league table. Someone told me that their organisation was going to change its practices as a consequence of publication, because it was a powerful signal.

Interestingly, I spoke to someone who had just taken over the running of a major financial services business. He said that one of the first things that he looked at was the proportion of complaints found against it by the FOS. He was gratified to see that his organisation was way below the average for the industry as a whole. The issue has a powerful impact, because many businesses market themselves on their reputation and brand. They can do a lot of brand advertising, marketing and everything else to demonstrate that they are fantastic, trustworthy, credible and on the consumer’s side, until they start to appear on a list of firms that have a disproportionately high number of complaints, given the size of the business.

Mark Todd (Labour, South Derbyshire)

Does the hon. Gentleman agree that that would be an important cultural message? One of the issues raised by the FSA in defending its position was that it relies on the trust of the institutions that it seeks to regulate and the relationships that it has built up with them. A somewhat more robust approach would demonstrate more clearly to the public the difference between a regulator and the businesses that it regulates.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman raises a powerful point about public perception and the relationship between the regulator and the regulated. It is remarkable to consider and compare the different approaches to enforcement in different jurisdictions; a more public style of enforcement sends out a very different message to the more private style of enforcement that is used in this country.

In the States, people are arrested in high-profile cases, and there is the impression of activity and enforcement. I cannot comment on whether that is the right impression, but the impression of enforcement is given. The internalised process in the FSA—[Interruption.] I hear someone say “cosy”, but I am not sure that that is a judgment I would reach. The process does not give the impression of activity to the outside world. We know that we should not base public policy decisions on perception, but for many consumers perception is reality, and that is the view that they may take of that relationship.

There are some benefits to a more public style of enforcement, but also some downsides. New clause 1 seeks to probe the tension between the two, and given consumer groups’ concerns about enforcement, it is important to have the discussion. However, it is not something that I would necessarily put to a vote today. I will give more detail in a minute.

Charles Walker (Conservative, Broxbourne)

I am enjoying my hon. Friend’s line of argument. Clause 6 is on enhancing public understanding of financial matters, and to do that we must allow the consumer to make an informed choice. Mortgage deals change and move quickly. If a consumer is considering a deal that superficially looks attractive, but the company offering it is under investigation or is facing disciplinary procedures, at some stage that consumer might get some compensation through the courts, but the deals that they were comparing that deal with will have been removed from the table. There could therefore be a long-term financial disadvantage to that consumer because at the time of making the choice they were not fully informed of the facts behind the mortgages on the table.

Mark Hoban (Conservative, Fareham)

My hon. Friend makes an important point, and I am pleased that he referred to the clause that removes from the FSA’s statutory objectives the objective about the protection of consumers and about public awareness. There is an issue there, which we will come back to when we look at that clause. If we say now that the responsibility for public awareness rests solely with the new consumer financial education body and not with the FSA, how does the FSA ensure that the public know about the role that it plays in regulation and enforcement? The FSA has a public duty to justify or explain itself as a regulator, and that is different to the consumer financial education bit of its current activities. There is a helpful debate to be had there, and as my hon. Friend has picked up on that point, he may want to explore it further after the Christmas recess.

Charles Walker (Conservative, Broxbourne)

What a joy.

Mark Hoban (Conservative, Fareham)

Well, that is part of the challenge that we have in scrutinising the Bill at this time.

The Treasury Committee report concluded that the balance between disclosure to the public and the need to protect firms before they have been found guilty of wrongdoing had tilted too far towards the interests of the industry, but we need to remember what John Pain said, which was that you are innocent until you are proven guilty. There is therefore a tension there. There is also a difference between criminal and civil proceedings. In effect, the FSA has internalised a civil process, but we are much more used to the public glare of criminal prosecutions.

On new clause 1, I want to draw the Committee’s attention to the clarification of section 348 of FSMA on the duty of confidentiality. I understand that when Which? submitted a freedom of information request to find out who had performed badly in the FSA’s 2008 review of the handling of mortgage arrears, the FSA rebuffed the application and prayed in aid section 348 of FSMA, which restricts the FSA’s disclosure of confidential information.

Which? is not an organisation to take things lying down. It went back to the FSA and argued its view that section 348 contained

“important gateways which allow the FSA to disclose information in certain circumstances”.

The FSA argued that those circumstances did not apply, but Which? pointed out that the FSA could publish information

“in pursuance to its function of providing guidance, information or advice...to meet its regulatory objectives such as securing the appropriate degree of protection for consumers.”

That is the point my hon. Friend made. How can consumers be protected if they do not know who has been subject to that action and who has performed very badly? I thought one of the purposes behind thematic reviews and mystery shopping was to help inform the regulatory process, and perhaps give some guidance.

In new clause 1, I seek to provide that section 348 does not prevent the disclosure of information by the authority and that an authorised person is subject to action under part 14 of the Act—of course, I use its definition of approved person: the institution that is undertaking the work—or be an approved person subject to separate actions taken under section 66. I seek to provoke a debate, as I think I have succeeded in doing to an extent, on how much information about the enforcement process should be in the public domain before the final conclusion has been reached.

The issue is important for consumer protection; consumers should know which firms are under investigation. It is also important to help change the culture of the financial services sector and to have much more public disclosure of information. I also acknowledge that it is not a straightforward issue. We need to think very carefully about the impact legislation might have on a business. We need to think about what is the right step in a process where it may be possible to publish more information than is currently the case, but a process that is entirely private until the conclusions of the financial markets tribunal could potentially be to the detriment of consumers, which is why I have tabled new clause 1.

Amendments 3 and 5 relate more narrowly to clause 14. Amendment 3 covers the publication of a statement that the powers have been exercised. Amendment 5 deals with the appeal process—the hiatus between identifying a problem and determining the sanction, and what people should be aware of during the process.

Rob Marris (Labour, Wolverhampton South West)

It is a pleasure to serve under your chairmanship again, Mr. Benton.

On amendment 5 and what the hon. Member for Fareham refers to as the hiatus, I have to say how thin the veneer is on the Opposition Benches. When we debate the 42 days for terrorists, we hear all the civil liberties arguments, which the Opposition then want to get around by using the Civil Contingencies Act 2004, by using intercept evidence during a trial and by having post-charge questioning. However, when we come to financial derring-do, we hear, “Oh we want a clampdown on the stage between charge and trial by suspending”—to use a criminal analogy—which is what amendment 5 is about. I have to say to the hon. Gentleman that I profoundly disagree with him.

If the hon. Gentleman were stopped and accused of Christmas-period drink-driving tomorrow—I am sure he will not be—he could carry on driving until his case came to court, when he would have a chance to show his innocence. I am sure he would be proved innocent, because he is an honourable and sensible man—I am just using a criminal analogy. However, someone driving around drunk could kill somebody. It is much more serious than some financial messing around, serious as that may be. Under our presumption of innocence until found guilty, that is what we do and should continue to do as a society, difficult as it is.

The hon. Gentleman is wrong to talk about people getting locked up pending an appeal. It depends on the nature of the criminal process, and very often people are not locked up pending an appeal. The overwhelming majority of people charged with a criminal offence that could carry a custodial sentence are not in custody pending the trial at which their guilt or innocence is determined. However, I have some sympathy with him on amendment 3 and new clause 1.

Mark Todd (Labour, South Derbyshire)

I am not sure that I have followed the analogy entirely. The individual involved is not granted anonymity in the process. I fully accept that there is no judgment on guilt or innocence until a judge and jury decide the matter, but the individual is not normally anonymous through that process, except in very specific cases.

Rob Marris (Labour, Wolverhampton South West)

I entirely agree, which is why I was saying that I have some sympathy with amendment 3 and new clause 1. That to me is the way to balance the “innocent until proven guilty” aspect of our system—which I support, as I suspect do all hon. Members—with the need to protect consumers. The way to protect consumers is along the lines put forward by amendment 3 and new clause 1, because it is to do with consumers making an informed choice. However, amendment 3 is not currently worded in a way I could support, because it refers solely to suspension, whereas proposed new section 206A(1)(b), which would be inserted by clause 14—referred to by the amendment—refers to “limitations or other restrictions”. It is important for that to be included—not just suspensions—because I envisage a situation when a firm offering financial advice has a member of staff who is restricted in what he or she can do, but other members of staff are not.

Charles Walker (Conservative, Broxbourne)

I appreciate the hon. Gentleman’s argument. Someone could be prosecuted for committing a crime and not proved innocent or guilty, but still out in the community and subject to a restraining order, for example. Are we suggesting, which might be a good idea, that where there is a huge question mark over the business practice of an individual or firm, that a specific restraining order be placed on that firm in the area causing concern, so that it cannot sell that financial instrument until the appeal has been settled? During the course of the appeal it would be forbidden to sell that mortgage but, once the appeal has been heard and if the firm has been found not guilty of a misdemeanour or crime, it could go back to that business practice, perhaps with some alterations or amendments to its conduct.

Rob Marris (Labour, Wolverhampton South West)

I have some sympathy with what the hon. Gentleman says, but amendment 5 refers only to suspension not to restriction. I say to the hon. Member for Fareham, who has ably moved the amendments, that that is a weakness, as restriction should be encompassed. Amendment 3 does not say when the authority should publish the statement, which can be quite important in informing consumers; nor does it have the wording I think it should. After the word “powers” in line 1 of the amendment, there should be inserted something on the lines of “even when an appeal is pending”, to make sure that consumers are informed. Something similar should happen with new clause 1. Amendment 3 and new clause 1 refer, quite understandably, to what the authority shall do, or may do in terms of new clause 1, but neither refers, as far as I can see, to what the financial institution itself should do.

There should be provision that the financial institution itself has to tell customers who come through the door about the restrictions or suspensions in place, so that the customer can decide whether to proceed with a transaction or go straight out of the door. Perhaps there is such a provision elsewhere in the measure—forgive my ignorance, Mr. Benton.

The hon. Member for Fareham referred to the comments of Which? on new clause 1. What it was told is absolutely ridiculous. If one is up before the criminal courts, unless one is a minor, it is a matter of public knowledge that a criminal trial is pending. In my analogy, if the hon. Gentleman were stopped for drink-driving and was being taken to court in a couple of months, it would, rightly, be a matter of public record that there was a question mark over his conduct, although I stress that I am sure he would never do such a thing. Similarly, in civil matters, excepting those involving minors—indeed, some that involve minors—and family matters, the existence of a legal process is a matter of public record. Why the FSA is hiding behind some kind of privacy or human rights stuff is beyond me. I am not a human rights lawyer, that is not my background.

Andrew Tyrie (Conservative, Chichester)

I always appreciate the hon. Gentleman’s interventions and I agree with more of them than I disagree with. He knows that I do not always side with the FSA, and have not done so over many years on all sorts of issues that have come before the House, but there must be a prima facie case for saying that the FSA are right in this instance. If we tell customers about action as they come through the door, we are pretty much closing down the business. Customers will say, “Crikey, there’s some row going on here. I don’t understand it so I’ll go somewhere else immediately.” We are turning an already quite significant power into something draconian. That was exactly what we went to such pains to prevent when we drafted legislation years ago in this Committee Room and in Committee Room 10, to try to bring some balance to the process and enable firms that may be wrongly fingered for an offence to carry on trading and not have their reputations shredded even when they are subsequently found not guilty.

Rob Marris (Labour, Wolverhampton South West)

I welcome being on the Committee with the hon. Member for Chichester with whom I agree more often than I would wish in the Chamber, although not on this issue. I take his point about shredding the reputation of a firm but we have to look at protecting consumers. We have to look at their level of maturity and at the details of the information that I think the FSA should publish.

Consumers are sometimes more mature about such things than one might think at first glance. I shall give him an analogy from my professional practice as a solicitor. It goes back many years, as I have not practised in this area of law for more than 25 years. The Law Society rules then were that one had to disclose to the client the commissions that one sometimes got as a solicitor and give them the option of having the commission for themselves. When I first read that rule as an articled clerk, I thought that it was absolutely potty. I thought that the rule might as well be that we should just give the commission to the client. In practice, when one said, “There is a commission with this transaction, and you are entitled to all of it if you wish or you may allow me to keep part of it”, quite a proportion of clients said, “That’s okay, you keep the commission, I’d have done the deal anyway.” That was certainly counter-intuitive to me, as I think it would be to many people.

It is a question of consumers’ maturity in weighing up information and making choices. If a firm was being investigated, the consumer might say, “Well I’ve dealt with this firm for years, I understand the two little paragraphs about what the FSA say they are investigating and why there is a restriction on somebody working here, but it’s all right with me, I’m going to carry on.”

Charles Walker (Conservative, Broxbourne)

Of course there will be an intermediate stage in the process. The FSA would have been working with that business or individual, we hope, for months and would have persuaded that business or individual to moderate their behaviour before reaching the enforcement level. If the FSA is so concerned about the business practice, there must be an opportunity, even during the appeal process, to advise potential customers about it and to let them know that the organisation or individual is in a disciplinary process.

Rob Marris (Labour, Wolverhampton South West)

I agree with the hon. Gentleman; it is not just a question of the opportunity for the FSA.

I take issue with the fact that there is nothing in new clause 1 about encouraging the FSA to disclose its information; the proposal is merely permissive. I urge the hon. Member for Fareham not to press amendment 5 to a Division, because it goes against our system. I urge the Minister not to accept amendment 3 and new clause 1, but he should seriously consider the issue of disclosure and consumer information. Not only the FSA, but the financial institution itself, should be encouraged to disclose information to consumers.

Colin Breed (Liberal Democrat, South East Cornwall)

I was not going to say much about this interesting topic, but I will offer an analogy. I have been a member of the General Medical Council for a considerable number of years, and I sit on fitness to practice panels. This is not a complete analogy, but there is a well-worn process when complaints are made against doctors that are then considered by the GMC. Complaints that are insignificant or vexatious are weeded out, and the remainder are considered in terms of their potential seriousness. If complaints are potentially serious, they are passed to an interim orders panel. I am a member of one such panel. That part of the process happens before the fitness to practice panel meets to decide upon any disciplinary action.

It is felt that the general public should be protected against a doctor who may have been involved in serious misdemeanours, so, while the doctor has not been found innocent or guilty during the period between the meeting of the interim orders panel and the meeting of the fitness to practice panel, it is decided that an order might be necessary to protect the public. That can mean a letter of warning, conditions on his or her registration, or even suspension.

If such a process takes place, the GMC requires the doctor to advise certain bodies and personnel, such as the local PCT and the director of public health, of those conditions. Indeed, if the doctor accepts an appointment or undertakes any other work, he needs to advise the people involved of the conditions under which he is working. Those conditions are published against the doctor’s registration on the GMC register. Although it is not required for him to put a notice up in his waiting room—“I am under suspension” or “I am under conditions”—if somebody interrogated the register, they would see that, and if they asked their PCT, they would be told that the doctor was under conditions or suspension, pending the ultimate fitness to practice decision, which may be six, nine or 12 months away.

That offers something of an analogy to the issues under discussion. For example, while we may not want a mortgage broker to put a notice up in his waiting room stating, “I am under threat”, we may require the FSA to hold a register that somebody could interrogate to see whether there was an action against that broker. It could also be a requirement to advise the local trading standards department so that, should someone make an inquiry of it, they would be made aware that that authorised person was under conditions in respect of a pending action.

The process might work that way. It works tolerably well in the GMC, although not everyone agrees with it, particularly those doctors who are subjected to it. However, the analogy is not unreasonable in how the process might operate. It would provide some means to the general public to interrogate and find out whether a particular individual or firm was under investigation or conditions.

Ian Pearson (Labour, Dudley South)

We have had an interesting debate and I will try to clarify matters for the Committee. As is nearly always the case, the hon. Member for Fareham has a point. However, as in many cases, a lot of my work has been done for me by my hon. Friend the Member for Wolverhampton, South-West. We have had analogies with criminal cases and most recently, from the hon. Member for South-East Cornwall, an analogy with the GMC and fitness to practice.

I do not think that there are any perfect analogies, but at the risk of extending the criminal analogy a little further, I would want to draw a distinction between the disciplinary measures here and the measures to protect consumers and prevent action from taking place. So, to pursue a criminal analogy, we are not talking about a person who has been arrested and charged and taken into preventive custody for a serious offence. We are talking about clauses that relate to disciplinary powers. The FSA’s current preventive powers can be used if there is a risk to the consumer and they can be used under section 45 of FSMA—the OIVOP provisions that I have already talked about.

A suspension could be imposed by the FSA under section 45 and could have immediate effect, thereby enabling preventive action to take place if the FSA considered that necessary because of the detriment to consumers. We are talking about a different set of circumstances—not about preventing action, but about the punishment that might be appropriate as opposed to a fine. There is the punishment and the deterrent effect of having a sanction that is all about suspending permission to carry on regulated activities.

Charles Walker (Conservative, Broxbourne)

Will the Minister confirm that the relationship between the FSA and financial advisers does not necessarily have to be built on confrontation? It would be perfectly possible for the FSA to work in partnership with a financial adviser or company and say, “Look, we have some concerns around this financial instrument. We would prefer it if you withdrew it for the next two or three months while we work with you to clear up those concerns.” Is that a possible outcome?

Ian Pearson (Labour, Dudley South)

I agree that that is likely to happen in a lot of instances. Generally, the first recourse would be the FSA having a word with the individual or the companies about areas of concern. In many cases these issues are sorted out in that way. Then, as I indicated earlier, if the FSA remains concerned that there is potential misconduct and consumer detriment, or a threat to financial stability or any of the other objectives, it can act by issuing a warning notice.

It is important to recognise that the FSA has other powers to protect the consumer that we are not discussing here, but which are all relevant. They are used by the FSA and have been used in the recent past, but they are distinct from the additional power that we are seeking to take here today, which will enable the FSA to suspend permission to carry out regulated activities in the future.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for the way he is explaining this. There is a challenge for the Committee here. I suspect that none of us took part in consideration in Committee of FSMA, for which we should perhaps be grateful, with the exception of my hon. Friend the Member for Chichester, who consequently understands the Act inside out. One problem is that while we are dealing with disciplinary powers in isolation as we amend FSMA, we are not looking at preventive power.

I put this challenge to the Minister: one assumes that a temporary suspension of activity would be on the activity where the alleged breach took place. For example, if the problem was with the sale of mortgages, the firm would be prevented from selling them. This is not a penalty that exists in isolation; there is a clear connection between the breach and the penalty. On the other hand, there is no equally clear link where, for example, there is a breach and then a fine.

That is where the issue of prevention comes in. If it is said that that there is a breach so heinous that a suspension should be the sanction, people will want to know what is going to happen in the middle period to ensure that the breach does not reoccur before the sanction is imposed.

Ian Pearson (Labour, Dudley South)

I think I understand what the hon. Gentleman is trying to get at. Again, I want to return to the fact that the FSA, as a public authority, has to act appropriately and proportionately. For example, if a problem was identified in the mortgage market, the remedy would not be to refuse the organisation permission to operate in the shares or credit default swaps markets. The remedy would, in common-sense terms, have to relate to the area in which the FSA had concerns and was talking to the individual or company.

The hon. Gentleman is right, and I am not sure that any other member of the Committee served on the Committee considering FSMA, but I would like to make a few comments in reference to it, as that will help to explain the amendments.

Mark Hoban (Conservative, Fareham)

The Minister is right. This is about trying to work out the proportionality. If the breach is in a particular type of business—with the FSA believing that the authorised person has broken a set of rules—and the penalty is that they stop transacting that type of business, what will happen between the breach and the final penalty so as to protect consumers? That is outside the scope of the part of the Bill that we are discussing, as it is about the disciplinary sanction, but I want to see where the linkage is, which will protect consumers in the interim before the final sanction is imposed.

Ian Pearson (Labour, Dudley South)

The point that I was trying to make on preventive custody will, I hope, address the hon. Gentleman’s point. If the consumer needs to be protected and the FSA has concerns, the FSA can use section 45 of FSMA to suspend an individual company from taking a particular course of action, and the customer will be protected immediately. The FSA might then want, using the powers we are discussing, to suspend the company from taking action for a period of up to 12 months, which it can determine.

The two powers are different: one is to do with discipline and punishment, the other with prevention. The section 45 powers prevent actions from being taken, while the powers under the clause are for punishment and deterrence.

Mark Todd (Labour, South Derbyshire)

The amendment is about punishment. Is the Minister arguing that there is sufficient punishment in the clause and that the additional sanction of some public information about that punishment would be unnecessarily draconian? One of my concerns is the slight haziness over where the threshold will lie when the clause is implemented. Many informal contacts will take place between the FSA and a regulated body in which it might ask questions or raise worries about a particular activity well short of the sanction in the Bill. It is perfectly reasonable that that should be conducted in private, but there is an argument for saying that, when we reach the much more formal process of the use of the law, there should be a wider currency to that decision.

Ian Pearson (Labour, Dudley South)

My hon. Friend asks about the important point at which disclosure to the public takes place. I shall explain the Government’s position on that in a few moments.

For the record, let me explain why in the Government’s view the changes under the amendments and new clause 1 are not necessary. Paragraphs 18 and 19 of schedule 2 amend sections 207 and 208 of FSMA, which require the FSA to issue warning notices and decision notices when taking disciplinary measures. The specific changes will require the FSA to issue warning and decision notices in relation to suspensions or restrictions of permission under the proposed new section 206A, which is inserted into FSMA under the clause.

The amendments under schedule 2 will then lead to section 391 of FSMA being engaged. Section 391(4) requires the FSA to publish such information as it considers appropriate about the matter covered by a final notice. For the information of the Committee, a final notice is the notice given after the decision notice has been issued and any reference to the tribunal has been dealt with or the period in which to make a referral to the tribunal has passed. Therefore, on the assumption that the consequential amendments schedule is, in due course, accepted as part of the Bill, the FSA will be under an obligation to publish appropriate information about the persons whose permissions are suspended or restricted under the clause.

While I agree with the intention of amendment 3, in practice it is not necessary. However, my hon. Friend the Member for South Derbyshire is right if he is saying that the time in which the information is made public will be at or after the decision notice, and that addresses the point of innocent until proven guilty.

Mark Todd (Labour, South Derbyshire)

Will my hon. Friend clarify one point? He suggests that there would be an obligation on the FSA to publish such information, but the wording that he quoted showed a substantial degree of discretion on the FSA about how it makes such a judgment. Perhaps I misheard him, but he said broadly that the FSA would judge such information as appropriate. I am worried about the degree of obligation.

My other concern was developed by my hon. Friend the Member for Wolverhampton, South-West, which was that there is no obligation of anonymity to someone who is under suspicion and charged in the matter. I cannot quite understand why anonymity needs to be granted after the serious threshold that has been exercised of establishing a suspension, pending a possible future sanction.

Ian Pearson (Labour, Dudley South)

On my hon. Friend’s first point, he is right to refer to my words when I said that the FSA is required to publish such information as it considers appropriate. I would have thought that the type of information mentioned under amendment 3 would generally be appropriate to be published. If, for some reason, the FSA considers that it would be wrong to publish certain details, it would not be required to do so. The FSA has a general duty to act in an appropriate and proportionate manner. The important point to note is that the publication requirements for all of the FSA’s enforcement measures, including the new suspension power, will be the same. I understand that the hon. Member for Fareham has some concerns, but in practice they are not likely to eventuate.

Andrew Love (Labour, Edmonton)

May I add to the concerns? The evidence that the Treasury Committee took showed clearly the unwillingness of the FSA to carry out its obligations to disclose such matters. Therefore, I put it to the Minister that if we are not to go down the route of giving the FSA an explicit power to disclose the information, how can the Committee be reassured that the FSA will do what is necessary—if I may put it in the crudest terms—to name and shame those guilty of such misdemeanours?

Ian Pearson (Labour, Dudley South)

The key point we are discussing is when the information comes into the public domain. I recognise that there is some concern and different views about whether that should be done after the potential for referral to a tribunal and a final decision has been taken, or before, when the FSA issues its decision notice. A legitimate debate can be had in that area. I would like to explain the Government’s views and why we have come to that position. I am happy to give way before doing so.

Andrew Love (Labour, Edmonton)

I thank the Minister again for giving way so liberally on the issue, which is critically important. I am not a lawyer, therefore I defer to the greater knowledge of my colleagues on the Committee, but I would accept that amendment 5 is not perhaps one that we should wish to pursue. The wording in amendment 3 and in new clause 1 may well not be entirely appropriate to achieve what is being attempted, but I think that there is a broad measure of agreement that something needs to be done about disclosure and the FSA. I hope that the Minister is willing to take the issue away and perhaps come back at a later stage in the Bill with something that will reassure the Committee and the House that action will be taken to ensure that the FSA lives up to its responsibilities in such matters.

Ian Pearson (Labour, Dudley South)

Let me explain the Government’s position and how it has developed. I can do that helpfully by specifically referring to the new clause, which seeks to remove the relevant section of FSMA, preventing the FSA from disclosing whether it has taken action against a firm or an individual. The Committee should be aware that the legal restriction contained in section 348, which the new clause switches off, is a restriction on disclosing information received from the authorised firm or from the approved person. However, a statement such as, “The FSA has issued a warning notice to firm X” or “The FSA has begun disciplinary proceedings against person X” does not constitute information received from the firm. That means that section 348 is not engaged, therefore disapplying it is unnecessary, so the new clause does not work.

In fact, section 391 of FSMA would be the relevant provision. It provides that “Neither the” FSA

“nor a person to whom a warning notice or decision notice is given...may publish the notice or any details concerning it.”

It also provides that the FSA

“must publish such information about...a final notice...as it considers appropriate”—

as I mentioned earlier to my hon. Friend the Member for Wolverhampton, South-West.

Rob Marris (Labour, Wolverhampton South West)

Will my hon. Friend give way?

Ian Pearson (Labour, Dudley South)

In a moment—let me make a little progress, which might help my hon. Friend.

I recognise that section 391 does not require the FSA to disclose the fact that someone is subject to investigation, it simply gives the option of doing so. However, as can be seen from the section—the hon. Member for Chichester will no doubt remember this—Parliament was clear at the time that publication should happen only at the end of the process, after the firm has had a chance to make representations and the option of referring the matter to the tribunal. The Government’s position is that that is reasonable, given—again—that UK law is based on the principle that people are assumed to be innocent until found guilty.

Andrew Tyrie (Conservative, Chichester)

I hesitate to come to the defence of the Treasury Bench—indeed, I think this must be a precedent—but there is another reason why the position that the Government took, after a lot of persuasion all those years ago, is probably correct. What the FSA really wants and needs is informal contact from the firm asking about a product that might have a potential problem. If it thinks that merely by supplying that piece of information it may find itself suddenly put at high reputational risk, it will take a more strictly legal position and disclose only the minimum. It is the informal relationships that are created through ARROW visits, through the period in between those investigations, that is the best way to secure the public and protect the customer. That is quite independent of the separate issue, which is about what the public has the right to know. Has ex post taken place? The public must be informed in reasonable time about an investigation where a referral has been made to a tribunal. As I understand it, those provisions already exist in the Bill to enable that to take place.

Ian Pearson (Labour, Dudley South)

The hon. Gentleman makes some relevant and pertinent points. The Treasury Committee was concerned about the issue, as my hon. Friend the Member for Edmonton rightly pointed out. That Committee felt that the balance between disclosure to the public and the need to protect firms before they had been found guilty of wrongdoing was tilted too far towards the needs of industry. In its response to the Treasury Committee report, the FSA made the point about fairness to those accused of wrongdoing but who had not yet had the chance to defend themselves, as I mentioned. In addition, the FSA helpfully responded that it can and sometimes does publicise whether it is investigating a particular case. It tends to do that only in exceptional cases—for example, where it is desirable to do so to maintain confidence in the financial system or to protect consumers or investors. On the important issue of consumer protection, I think hon. Members would expect the FSA to have the ability to publicise whether it is investigating a particular case. Given the fact that that can happen, the FSA stated, and I agree, that the current framework allows a balance to be struck between achieving its objectives—in particular, consumer protection—and fairness to firms and individuals. It is a question of striking the appropriate balance and we believe that that balance has been struck in this case, which is why we will not support the new clause.

Rob Marris (Labour, Wolverhampton South West)

I talked about the issue, which is pretty core to our judicial system overall, of innocent until proven guilty, and that is why I resist amendment 5, as I think my hon. Friend the Minister knows. But in terms of striking that balance, it seems that the quid pro quo, or the trade-off, is that the customer and prospective customer ought to have access to information—perhaps on a register, to which the hon. Member for South-East Cornwall referred by medical analogy—about whether a firm with which he or she proposes to do business is under investigation, under suspension or whatever. That is the balancing, so the firm can carry on until the end part of the process, but the trade-off is that the consumer gets to know that that process is under way.

Ian Pearson (Labour, Dudley South)

I can understand the point that my hon. Friend makes. As I said, that was discussed at great length during the passage of the Financial Services and Markets Act 2000. It was not something that it was decided would be appropriate to do. I pointed out the flexibility in the system at the moment, and I am happy to reflect further on the points that he and other hon. Members have made, but at the moment my firm view is that the balance in giving protection to consumers is appropriate, while at the same time respecting the fact that firms should not be prejudged until the outcome of investigations has been fully settled.

I shall deal briefly with amendment 5. My hon. Friend the Member for Wolverhampton, South-West rightly made some valid points about why it would not work. It would actually be punishment before being found guilty rather than information being disclosed. It is possible to argue that, in the case of, say, a monetary fine, sometimes it does not matter if it is imposed before an appeal because, if an appeal is successful, a fine can be returned to the defendant, perhaps with interest. However, if we are talking about suspending the permission of an individual or a firm to act, that is serious. Customers will not have waited and would have gone to a competitor. The reputation of the individual or firm might have been damaged even though they might be eventually be found innocent. That point not only plays to amendment 5, but to disclosure. There is a real danger of unfairness.

The whole tenor of the Financial Services and Markets Act is that sanctions do not take effect until after a final notice has been issued, not a decision notice. In accordance with section 390, a final notice cannot be issued until after the period for reference to the tribunal has passed. We believe that that is the appropriate balance that should be struck, so we will not support amendment 5. I think that I have covered the key points with regard to the group of proposals.

Mark Hoban (Conservative, Fareham)

We have had a helpful debate on the two amendments and new clause 1. It reminds me of the error message that we occasionally pick up when looking at a document in Word, when part of a sentence is underlined and we are told that “fragments need revising”. The three proposals broaden the scope of the debate beyond the narrow sanction that is imposed. Two themes run through our argument, the first of which is how much consumers should know. The second theme is about the right protection to put in place for a consumer when there has been a breach of the rules.

On the first theme, various analogies have floated around about a person being innocent until proven guilty. That is a fundamental principle of United Kingdom law and is one that it is right to abide by, but there is a degree of publicity around a criminal case and, in some circumstances, people’s rights are protected in such cases. There is publicity; it does not prejudge the outcome, but people are aware of cases and know what is going on. Should there be greater transparency about the enforcement process in the FSA than is currently the case? That the Treasury Committee errs on the side of greater openness and greater transparency is reflected in the amendments and the new clause, while the position of the Government and the FSA is that the balance is about right now.

While the debate has been helpful in teasing out some issues, some more thought needs to go into the right circumstances in which consumers should have more information than they currently do, and what that means in compromising the interests of firms. We talked about the relationship of trust and openness between the FSA and regulated firms, and I can understand the importance of that. When I talk to businesses in the City, they say that they want to be able to share information with the FSA. However, equally, I do not think we want consumers to feel that there is a cosy relationship—I think the hon. Member for Edmonton used that phrase earlier— between firms and the regulator, as if they are in the same pocket.

Andrew Love (Labour, Edmonton)

Earlier the hon. Gentleman touched upon a wider discussion about the changes that are occurring in the FSA, which, as it is currently constituted, is funded by the industry. I think everyone recognises that that will continue in the future—it is the only practical way to fund the organisation. Almost all of its personnel come from City institutions. Again, considering the level of expertise, that is unlikely to change. It is therefore imperative, to correct its natural bias towards the industry and protect consumers, for us to write in some prescription to suggest to the FSA that it must take consumer interests into consideration. I hope that when the Minister reflects on that matter he will decide that there is a need to strengthen this part of the Bill.

Mark Hoban (Conservative, Fareham)

Indeed, and the hon. Gentleman raised some wider issues in the context of how the FSA is accountable to consumers. We have the consumer panel, and we said in our White Paper in July that we would appoint two consumer representatives to the board of the new Consumer Protection Agency, which has led a successful campaign to get two consumer representatives on to the FSA’s board. We need to ensure that a balance is struck.

There is an issue about information that leads to how we protect consumers, which is the second theme that has emerged from the debate. The Minister is right to draw us back to the fact that we are talking about sanctions where a disciplinary process has been completed. However—I intervened on him on this point—there should be a relationship between the breach and the penalty. If one breached the rules on sales of insurance policies, the penalty should be related to the sale of those policies. That is right and proportionate.

The matter becomes difficult when we ask what happens in the interim where there has been some sort of consumer detriment through a breach of the rules, which the sanction is then going to tackle. How do we protect consumers in the interim before we reach the point when the final notice is published? One argument is that we must have greater transparency: the consumer should know that a business or firm that they are about to engage with is going through a disciplinary process. Information will provide adequate protection for the consumer, and a better informed consumer can make their choice. Another argument is that we should go down the route that the hon. Member for South-East Cornwall talked about in the context of his being a lay member of the GMC panel, which is that we should take some preventive action between the identification of the misconduct and the agreement of the final sanction. That is part of the thinking behind amendment 5, which would give the FSA a power to suspend that particular activity until a conclusion is reached.

The Minister assures us that the powers to take preventive action are already there for the FSA under section 45. The problem that we have in debating such Bills is that we make incremental changes—something that the Minister and the hon. Member for Wolverhampton, South-West are familiar with from debating the Finance Bill, where each year there are incremental changes on previous incremental changes. It would be helpful for the FSA, when it produces its consultation paper on how it is going to implement the powers, to reflect on how those things interlock. Should there be more information available to act as a form of protection for consumers? Should the powers under section 45 be used as a way of bridging that gap between the breach and the final section? How does the jigsaw of consumer protection fit together?

Andrew Tyrie (Conservative, Chichester)

My hon. Friend has tabled a very helpful set of amendments for the Opposition, not least because it has smoked out exactly this issue. Is not the key to make sure that the FSA is not asleep on the job during that interim period? The FSA could say, “Well, we have someone looking at it,” so we can carry on as if nothing has happened, but what we need is vigilance from the FSA, to ensure that it is constantly assessing whether it needs to exercise its powers under section 45. We and the public need confidence that the ability to provide that is built into the systems of the FSA. The suggestion of my hon. Friend the Member for Fareham, that the FSA produce a consultation document to give us that confidence, would be welcome.

Mark Hoban (Conservative, Fareham)

I am grateful to my hon. Friend for his intervention and his comments. He is right; we all agree in the aftermath of the financial crisis that we expect the FSA to use a more proactive approach to supervision. It is referred to as being more intensive and intrusive, and I suspect that the logical outcome of that approach would be a greater use of the powers under section 45. I am looking for reassurance as to how the FSA would use the combination of section 45 and the new powers that we are giving it under proposed new section 206A to protect consumers, to ensure that in the interim, where it has identified that there is a significant breach—a breach so significant that the FSA believes that suspending a firm from undertaking that activity is warranted—consumers are protected. That is either done through use of section 45 powers or, if the belief is that those powers go too far and impinge potentially on the issue raised by the hon. Member for Wolverhampton, South-West—about innocent until proven guilty—the alternative, which is greater transparency about the enforcement process. Is that the alternative form of protection to section 45? We need to resolve that tension as the FSA moves to a different form of intervention. Regardless of whether it is the FSA or other regulatory bodies that succeed it, one of the lessons of the crisis has been a much more intrusive approach to regulation.

I regret that, as another member of the Committee who is not legally qualified, like the hon. Member for Edmonton, my amendments 3 and 5 are defective in the view of the hon. Member for Wolverhampton, South-West. If I come back to the issue again, I shall beef up my amendments and make them more inclusive in their wording perhaps. However, we have had a helpful debate, clarifying the situation for a number of us and raising some new issues that we may want to return to at a later stage. I beg to ask leave to withdraw the amendment.

Andrew Tyrie (Conservative, Chichester)

On a point of order, Mr. Benton. I am very sorry to disturb proceedings, but I wanted to point out that in the back row here the air conditioning seems to be on as if it were mid-summer. I have noticed that it is 1° outside and, though more in here, it is certainly not very warm. I wonder if you could look into this, Mr. Benton.

Joe Benton (Labour, Bootle)

That is hardly a point of order, but the point is taken, whether a point of order or not. Protestations have been made to the proper sources already, I can assure you of that. It is cold, but I do not know what the problem is. We have tried to resolve the problem this morning.

Clause 15

Rob Marris (Labour, Wolverhampton South West)

I have a simple question. “Cancelling” is used in relation to authorisation in the clause heading— page 19, line 36—but “withdrawing” is used in the body of the clause, on line 39. What is the difference between withdrawing and cancelling?

Mark Hoban (Conservative, Fareham)

I suggest that my hon. Friend the Member for Chichester move closer to the Front Bench—oh, he has gone. That would have brought him closer to the hot air that has been generated by the debate.

I expect that the Minister will deal with this matter during the stand part debate. The clause removes part of section 206 of FSMA. Therefore, if the clause passes into law, when someone loses authorisation—whether it is cancelled or whatever term is used—and loses the right to earn a living from the business, they will also face a financial penalty. That was not the case under FSMA, so what has changed in the Government’s thinking since the passing of that Act? If someone is deprived of the right to earn a living, it is much harder for them to pay a fine, unless they have accrued profits in the interim. Will the Minister clarify the Government’s position?

Ian Pearson (Labour, Dudley South)

The clause removes section 206(2) of part XIV of FSMA, which prevents the FSA from both imposing a fine on a firm and withdrawing its authorisation in relation to the same misconduct. I am sure that hon. Members will agree that if a firm gains a financial advantage from misconduct, the FSA should be able to fine it. The best answer I have for the hon. Member for Fareham is that when given a choice between withdrawing a firm’s authorisation, to remove the firm from the industry, and fining the firm, the FSA often chooses the former. That is the right choice because consumers need to be protected. It means, however, that a firm can retain any financial gains that it has made as a result of misconduct. It is not right that a firm should not have to suffer a fine when the misconduct warrants it, and it is therefore right to give the FSA the option to use both sanctions when it feels it is appropriate to do so.

On the difference between cancelling and withdrawing, which my hon. Friend the Member for Wolverhampton, South-West pointed out, I am advised that cancelling applies to permissions. Once all permissions were cancelled —removed—the FSA would have to withdraw the firm’s authorisation. I hope that that is clear to my hon. Friend, or as clear to him as it is to me.

Again, I want to make the basic point that the FSA will use the powers proportionately. It will seek to take actions only in cases where they are justified. It is important, however, that the FSA has that power, so it can use it when appropriate. It simply is not right that a firm whose authorisation could be withdrawn because it was guilty of misconduct could be allowed to keep the proceeds of financial gain that it had wrongly made. The clause will remove that possibility. Therefore, I urge that it stand part of the Bill.

Clause 16

Mark Hoban (Conservative, Fareham)

I beg to move amendment 14, in clause 16, page 20, line 7, leave out ‘P’ and insert ‘the authorised person’.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss the following: amendment 15, in clause 16, page 20, line 8, leave out ‘P’ and insert ‘the authorised person’.

Amendment 1, in clause 16, page 20, line 10, leave out from ‘P’ to end of line 14 and insert ‘either

(i) did not know, and

(ii) could not reasonably be expected to have known, that P was at that time performing a controlled function without approval, or

(b) was instructed to undertake these activities by an authorised person or where the authorised person was a company director or officer, who was an approved person.’.

Amendment 16, in clause 16, page 20, line 24, after ‘the’, insert ‘authorised’.

Amendment 17, in clause 16, page 20, line 34, leave out second ‘a’ and insert ‘an authorised’.

Amendment 18, in clause 16, page 20, line 37, leave out second ‘a’ and insert ‘an authorised’.

Amendment 19, in clause 16, page 20, line 40, leave out second ‘a’ and insert ‘an authorised’.

Mark Hoban (Conservative, Fareham)

The best place to start is a setting out of what happens by virtue of clause 16. Then I shall move on to my amendments, which would broadly have the same effect, as they flow through this section of the Bill. FSMA sets the regulatory perimeter for the FSA to find lots of activities that firms can carry out, but which have to be regulated by the FSA. It gives the FSA some statutory objectives and enforcement powers when people within its perimeter transgress its rules.

A fundamental part of the FSA’s role is authorisation, so there is talk of authorised persons and approved persons able to undertake functions within businesses that carry out financial services. That helps to create the regulatory boundary that we want the FSA to supervise, regulate and, where appropriate, enforce. What is interesting about clause 16 is that it will expand the FSA’s remit beyond people it has approved, to identify people who are undertaking a function where perhaps they should have been approved. That is a shift in the FSA’s regulatory approach.

I spoke earlier about opening up clause 14 when we discussed the Association of British Insurers submission, which questioned whether the powers in clauses 14 to 17 were needed in a generic sense. In the evidence session on Thursday afternoon last week, we spent a lot of time talking about these powers with people from the industry and those with legal expertise. We asked Guy Sears from the IMA about his understanding of the additional powers being taken by the FSA. As I said, the ABI questioned whether these additional powers were needed, while Mr. Sears, from a different perspective, said:

“It would seem so to me, if we have a system that seeks in its spirit to ensure that those who carry on important parts and important roles within regulated activities should be subject to proper standards on entry and oversight by the FSA. In a sense, if they do not do that, the FSA has no ability to deal with them—that seems to me a lacuna.”——[Official Report, Financial Services Public Bill Committee, 10 December 2009; c. 93, Q5.]

The word “lacuna” was used rather a lot on Thursday afternoon. The BBA, which I cited earlier, has been sceptical about increased powers and said in relation to this area:

“We support the FSA being given the additional power to suspend”

authorised

“persons, but... this power should be limited to those persons who carry out a ‘controlled function’.”

That gets to the heart of the debate. We are seeing a shift in the FSA’s approach, so it can take action against someone who is not authorised to perform a controlled function but may in practice be doing so.

We need to be cautious because we must ensure that there are adequate safeguards for people who suddenly find they have fallen within the remit of the FSA, when they have not been through the approval process and might not, therefore, be aware of what is happening to them. I tabled amendments 14, 15, 1, 16, 17, 18 and 19 to clarify what will happen to people who get caught by clause 16, and to try to introduce a safeguard for them.

There is a risk that people will unwittingly undertake a controlled function as part of their responsibilities in their job. Such people might not have been through the FSA’s authorisation process and might not be regulatory experts, but they might end up, for some reason, undertaking those functions. That is why I probed the Government on what defence might be available to people who undertake such functions.

I particularly focused on the protection that there might be for someone who is doing a job at the direction of somebody else in the business. What will happen if someone has been instructed to undertake that function? A board member, director or officer, or an unauthorised person, might say, “We want you to do this. It is part of your duty; you must do it.” Such a person might assume, because the other person is on the board as a director or officer of a business, that they have to do it. They might also assume that someone has gone through the process to ensure that they are able to do it. That might be a legitimate defence in their eyes, to prevent some of the sanctions being imposed on them. That is why, for example, amendment 1 would insert at the end of line 14 the words

“did not know... could not reasonably be expected to have known that... was at that time performing a controlled function”.

What can people plead in their defence to say that they undertook those functions but assumed it was okay to do so?

The amendment would move responsibility from the individual to the firm. It says that it is the firm’s responsibility to supervise people. Amendments 14 to 19 would amend the Bill so that the authorised person—the firm or business undertaking that activity—would pay the fine, not the individual. My argument is that the individual is acting at the direction of management. Therefore, it would be helpful to understand why the Government believe it should be the person, rather than the authorised person, who pays the fine.

It would also be helpful to understand what defence may be made by that individual to say, “Actually, I am just doing what I have been told to do. Is it not reasonable for me to follow the orders of a director and officer who is the authorised person?” That is the thrust behind the amendments. I would be grateful for the Minister’s clarification of how that power will be implemented in practice.

Ian Pearson (Labour, Dudley South)

The clause is about credible deterrence. Its purpose is to strengthen the FSA’s approved persons regime to ensure that people carrying out key roles in firms are only those who are fit and proper to do so, and that they perform those roles to the requisite standard. For that, we need the right balance of deterrence.

I believe that for deterrence to be credible, it needs to be directed at the firm and at the individual. It is important that employees in key decision-making or customer-facing roles are individually accountable for their actions.

Roger Gale (Conservative, North Thanet)

I apologise for the delay, which was entirely my fault. I remind hon. Members that the deadline for tabling amendments to be considered on Tuesday 5 January is 4.30 pm on Wednesday 30 December. It will be possible to table amendments during the recess.

Roger Gale (Conservative, North Thanet)

I remind the Committee that with this we are discussing the following: amendment 15, in clause 16, page 20, line 8, leave out ‘P’ and insert ‘the authorised person’.

Amendment 1, in clause 16, page 20, line 10, leave out from ‘P’ to end of line 14 and insert ‘either

(a) (i) did not know, and

(ii) could not reasonably be expected to have known,

that P was at that time performing a controlled function without approval, or

(b) was instructed to undertake these activities by an authorised person or where the authorised person was a company director or officer, who was an approved person.’.

Amendment 16, in clause 16, page 20, line 24, after ‘the’, insert ‘authorised’.

Amendment 17, in clause 16, page 20, line 34, leave out second ‘a’ and insert ‘an authorised’.

Amendment 18, in clause 16, page 20, line 37, leave out second ‘a’ and insert ‘an authorised’.

Amendment 19, in clause 16, page 20, line 40, leave out second ‘a’ and insert ‘an authorised’.

Ian Pearson (Labour, Dudley South)

It is a pleasure to serve under your chairmanship, Mr. Gale, for this afternoon sitting of the Financial Services Bill Committee.

This morning I was stressing the importance of credible deterrents. The Government recognise that the enforcement powers that allow the Financial Services Authority to penalise individuals must be carefully framed to ensure that they are proportionate and fair. As I shall set out in a moment, I am confident that the clause provides sufficient checks and balances to ensure that penalties on individuals are appropriate and proportionate.

As I am sure the Committee is already aware, certain roles in authorised firms can be performed only by individuals who have been approved by the FSA. Such roles are known as controlled functions and apply to director-level or significant management functions, and also to certain customer-related roles. The FSA approves an individual to perform such functions if he or she is determined to be fit and proper—that is, if the FSA is satisfied with the person’s honesty, integrity and competence, among several other criteria.

Amendments 14 to 19 seek to make a firm responsible for paying the fine if one of its employees performs a controlled function without approval. That would take the onus and responsibility away from the individual to ensure his or her own approval, and place it wholly on the firm. However, the power to fine a firm if it fails to take reasonable care to ensure that controlled functions are performed only by approved persons already exists. It is set out in sections 59 and 206 of the Financial Services and Markets Act 2000. In that respect, the proposed amendments are unnecessary.

In addition, the amendments would remove responsibility from the individual employee; it would remove any incentive for the individual voluntarily to initiate the approvals process with his or her firm if only the firm could be punished for non-compliance.

The FSA wants and needs to improve compliance with the approved persons regime to ensure that all who undertake key functions are properly vetted, and are found to be fit and proper to undertake those functions. As I said, many of the controlled functions include senior management roles, and it is right that the FSA should satisfy itself that the individual in question has the ability and necessary credentials to undertake the relevant function.

Credible deterrents need to target individuals and firms. Both need to be discouraged from bypassing the rules, but currently the only enforcement action the FSA can take against individuals who perform such a role without approval is to prohibit them from working in the industry, and even then only if they are not considered to be fit and proper. There is no power to fine such individuals.

That is why the Government have proposed to give the FSA the power to fine an individual who has performed a controlled function without the necessary approval. In effect, the proposal closes a loophole whereby one way of avoiding a possible financial penalty is simply not to be approved for the relevant activity.

Let me turn to amendment 1. I understand that the intention of the hon. Member for Fareham is to provide added defence for the individual. However, the amendment would create an almost limitless loophole whereby an individual, in order to escape a fine, need only conspire with their firm to have an e-mail chain telling them what to do. I understand the purpose behind the amendment, but I do not think that that is the right thing to do.

I appreciate the hon. Gentleman’s desire to protect employees who find themselves performing a controlled function without approval in a situation where they may feel that they have no choice but to do that, but someone performing a controlled function is playing a key role within a firm. The role is important enough to warrant the checks that come with approval, and we think that individuals with such significant roles should have matching levels of responsibility. What we need is not passive employees who know that responsibility can easily be shirked in favour of the firm. That would not improve compliance.

Of course, we need to make sure that the sanctions are targeted appropriately, and I would like to draw the Committee’s attention to the safeguard built into the clause to ensure that the FSA cannot be unduly severe. The new power cannot be used against individuals who did not know, or could not reasonably be expected to have known, that they were performing a controlled function without approval. We are not trying to catch out individuals who act in good faith.

The ultimate purpose of the clause is to discourage individuals from performing a controlled function without approval by threatening them with a disciplinary sanction. Such a measure will improve compliance and enable greater FSA scrutiny of persons who are carrying out controlled functions. If we were to allow the individual to escape all responsibility, or to limit the scope of the power to such an extent that it became almost inapplicable, we would not meet our objectives. I therefore urge the Committee to resist the amendments.

Mark Hoban (Conservative, Fareham)

Welcome to the Chair this afternoon, Mr. Gale.

When we get to the clause stand part debate, I would like to try to probe a bit further the issue of who will be affected by the provisions. Various comments have been made to me about the sort of people who will be caught by the measure. I take the Minister’s point that amendment 1 may be too loose and may leave too many loopholes. He suggested that some safeguards were in place to protect an individual in such a situation. I am trying to distinguish between those people who deliberately set up a structure that allows them to fall outside the scope of clause 16, and those who inadvertently fall within it. I take the Minister’s point that that could give rise to some artificial arrangements.

The Minister makes a fair point about where responsibility lies. Should we ask individuals to take more responsibility for their actions within a firm and to understand what the regulators expect of them? Whether there is a legitimate reason to be concerned will depend on how the rules are applied by the FSA. Having given the FSA new powers in the Bill, we look forward to hearing what safeguards it builds in when it starts to consult on the application of those powers. I am happy to accept the Minister’s reassurance that adequate safeguards are built in, so I ask the Committee’s leave to withdraw my amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 6, in clause 16, page 20, line 25, leave out ‘four years’ and insert ‘one year’.

This is a brief probing amendment. Clause 16 defines the limitation period as the period within which, from the date that misconduct takes place, the FSA can take action against an individual who undertook controlled functions without approval. What I want to know is: why four years? It seems a long period of time, but it is not the six years that applies under the statute of limitations. Why is four years the right period of time? Should that period be longer? Or should it be—as I suggest in my amendment—a year, to give the FSA greater focus in looking out for such people and in trying to tackle the issues more quickly, so that the matter does not hang over an individual for what appears to be quite a long period?

Ian Pearson (Labour, Dudley South)

I appreciate the probing nature of the amendment. It might be helpful if I put clause 16 and the amendment into context by drawing the Committee’s attention to clause 17, which relates to the amount of time available to the FSA to initiate disciplinary proceedings against persons who appear to the FSA to be guilty of misconduct. Currently, the FSA has two years before it must start proceedings against individuals that it believes are guilty of misconduct. We want to extend that to four years, and have made an amendment to that effect through clause 17, which we will hopefully come on to discuss in a moment.

A four-year limitation period is an appropriate time for the FSA to investigate individuals, whether they are suspected of misconduct or of performing a controlled function without approval. Let me explain why. The starting point for the provisions is that we should ensure that the FSA has enough time to prepare a case against an individual suspected of breaching the rules. There are a number of ways in which such individuals might take advantage of the current period of two years to prevent the FSA from conducting an investigation. For example, it has been known for individuals to be deliberately obstructive in order to run down the clock, hoping to escape sanction as a result. In the case of individuals performing control functions without approval, that could involve delaying the provision of information needed by the FSA to ascertain what type of role the person was undertaking, and that is clearly wrong.

Equally, a person could launch judicial review proceedings against the FSA asking a court to review the commencement of an investigation. The clock would continue to tick during such an appeal, and that would severely limit the FSA’s ability to carry out an investigation within the required time when the judicial review had finished. A sufficient period is therefore vital to allow the FSA enough time to deal with complex cases. While it could mean that complex cases take longer, it is important to allow such time to ensure that the FSA can effectively and thoroughly investigate incidences of wrongdoing and impose appropriate penalties.

I hope that the examples of judicial review, deliberately withholding information and playing it long have helped to convince the hon. Member for Fareham of my argument. I could probably cite examples of potential criminal cases that would take precedence, as a result of which the FSA’s work would only start to take place after it had been decided whether or not to prosecute. For those reasons, it is reasonable to have a period longer than two years at the moment. It is a matter of judgment whether the period is three, four or five years—and our judgment is that four years seems appropriate. It will address directly some of the problems that I have outlined in my brief contribution.

Mark Hoban (Conservative, Fareham)

I thank the Minister for his response. He has advanced an interesting argument. It relates to subsections (4) and (5) of proposed new section 63A. We have a limitation period of four years from the first day on which the authority knew that the person concerned had performed a controlled function without approval. The Minister put forward a good reason why a four-year period should apply and explained how someone might seek to frustrate it. In circumstances where the police had identified an offence, perhaps the hon. Member for Wolverhampton, South-West, who is a lawyer and has perhaps dealt with such matters in criminal cases, knows whether they are restricted to a four-year period. The offence would surely have been started. There was a motion of investigation by the FSA that it should not necessarily be a limitation period at all, given that that is how one might seek to frustrate the period. It is arguing that counter case that a year is not long enough.

Rob Marris (Labour, Wolverhampton South West)

I am not an expert criminal lawyer, but I refer the hon. Gentleman to proposed new section 63A(4), where the clock can be stopped by the issue of a warning notice. The FSA could do that. I am slightly concerned that a four-year limitation period could become an excuse for the FSA to do nothing for years, because there would be no sword of Damocles over it. It would simply need to issue a warning notice, and that would stop the clock.

Mark Hoban (Conservative, Fareham)

I wondered about that as well, but proposed new section 63B(2) states that a

“warning notice must state the amount of the penalty”.

For the FSA to have issued a warning notice, it would have had to have gone some way through the investigation process with some certainty that the person had breached the rules, and that a penalty should be imposed for that. Is there a better way of giving the same flexibility to pursue such matters if there is time-wasting? A more generous limitation period does not seem quite the right way in which to tackle that potential mischief. I apologise for giving the hon. Member for Wolverhampton, South-West more legal expertise than perhaps he is ready to profess on this occasion.

Rob Marris (Labour, Wolverhampton South West)

On this occasion.

Mark Hoban (Conservative, Fareham)

Yes. Perhaps we should debate the timing. I am not comfortable that the mechanism is right although I accept the objective that the Minister is hoping to achieve, so I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 7, in clause 16, page 21, line 18, leave out subsection (5).

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss amendment 8, in clause 16, page 21, line 23, leave out subsection (7).

Mark Hoban (Conservative, Fareham)

Amendments 7 and 8 are fundamentally probing amendments to understand why the subsections must be in the Bill. Subsection (5) of proposed new section 63C states:

“The Authority must, without delay, give the Treasury a copy of any statement which it publishes under this section.”

I wonder why the authority has to give the Treasury a copy of the notice, given that it was on the FSA website. Everybody else has to rely on the FSA website to find that information. Why should the Treasury be treated in a special way, compared with other people interested in that statement? Why should the authority be able to charge a fee for the provision of that statement? Will the FSA now try to impose a charge for content, going down the same lines as some national newspapers, as people access its statements on the website? I am not sure why the two subsections are at all necessary.

Ian Pearson (Labour, Dudley South)

The subsections are entirely consistent with the provisions for other policy statements in the Financial Services and Markets Act 2000; for example, policy statements on fines imposed on approved persons in section 69 of the Act, statements on fines imposed on those that breach the listing rules in section 93, and statements on fines imposed for market abuse in section 124. Therefore, the provisions in clause 16 simply ensure that the requirements that are in place for other penalties policy statements issued by the FSA, also apply to policy statements on penalties imposed on non-approved persons performing controlled functions.

Moreover, I cannot see the rationale behind the view of the hon. Member for Fareham that those should be removed. To my mind, it is natural that the regulator should inform the Government how it proposes to use a particular power conferred on it by Parliament. Similarly, I do not think it unreasonable for the FSA to be able to recover the cost of printing its policy statements by charging a reasonable fee to those who wish to receive hard copies. Of course, in practice, the vast majority who wish to read statements and policy can download electronic copies from the FSA’s website for free. Logically, subsection (7) of new section 63C does not enable the FSA to charge for them. I do not believe that those amendments are necessary and I hope that with those few words of clarification, the hon. Gentleman will seek leave to withdraw his amendments.

Mark Hoban (Conservative, Fareham)

I am still not convinced why the Treasury should be singled out for special treatment—being sent a copy—when the people who are regulated by the FSA, the people who foot the bill, will not necessarily be sent one of those statements automatically. However, it is not an issue that I am prepared or particularly want to press; it is a point of interest. Having had my curiosity assuaged, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 13, in clause 16, page 21, line 26, leave out from ‘must’ to ‘any’ in line 27 and insert ‘comply with’.

This is another amendment that has been tabled in order to seek clarification. Subsection (8) states:

“In exercising, or deciding whether to exercise, its power under section 63A in the case of any particular person, the Authority must have regard to any statement of policy published under this section”.

We see this happen elsewhere in FSMA, where the FSA has to “have regard to” in various aspects of policy. There is what a number of people refer to as the “have regard to” factor in part 1 of the policy in section 2(3) of FSMA, where (a) to (g) refer to various things that the authority must “have regard to”. It is not bound to comply with those, but it must bear those factors in mind when trying to discharge its general functions, which are set out elsewhere in that section. If the FSA has gone to the trouble of having a policy to deal with people who undertake controlled functions without approval, and we believe that there are sufficient safeguards in that section to prevent people suffering enforcement action when they have a reasonable defence, why should the FSA simply “have regard to”? Why does it not simply comply with the policy statement that it has published? It is very straightforward. If there is to be a policy, let it comply with it rather than say, “We will just think about it” and not always comply.

Ian Pearson (Labour, Dudley South)

We could obviously have a wider debate about “comply with” and “have regard to”. Amendment 13 refers to the need to “comply with”, rather than “have regard to”, the statement of policy in relation to the level of fines imposed on non-approved persons performing controlled functions. I appreciate the sentiment behind the amendment expressed by the hon. Member for Fareham, which is to ensure that the FSA applies the standards set out in its statement of policy. However, again referring to a point I made earlier, the language he proposes would not be consistent with that of other policy statements on penalties that the FSA is required to produce, as set out in FSMA. Again I would refer him to sections 69, 124 and 210 of FSMA, all of which refer to the need for the FSA to have regard to its policy statements.

The current language fulfils a specific purpose. Policy statements are intended as guidance and the term “have regard” is the usual way in which public authorities are required to take guidance into account. There may be exceptional circumstances where it is appropriate for the FSA to depart from its policy and the expression “have regard” enables it to do that. The FSA would, however, need a good reason for doing so. In practice, the amendment would achieve very little. In order to ensure that it could in all cases comply with its statement, the FSA would almost certainly resort to publishing a very high-level statement, which would be of little use to the entities it regulates. That would have the result of making the FSA’s published policy less clear. I want to reassure the Committee that drawing attention to the FSA’s duty to act reasonably and proportionately in all cases provides additional safeguards to how that is interpreted. Put simply, that is common practice when agencies are producing policy statements. They would have regard to them and only depart from them with very good reason. It is established that this is the right sort of expression to use and I hope that the hon. Member for Fareham will be persuaded of the appropriate terminology.

Mark Hoban (Conservative, Fareham)

If it is written like this elsewhere in FSMA, it is a good idea to write it like this in the Bill. If I had realised that consistency was such a virtue, I might have tabled amendments to change other bits of FSMA to bring them in line with my amendment. I am not sure that either I or the Committee would want to spend time doing that, Mr. Gale, so I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I want to probe the Minister a little further on the need for these powers and to get a better understanding of the circumstances in which they might be used. I am concerned about a recent example that I have seen: a company can be subject to enforcement action by the FSA that results in the company going into administration; the administrator is able to sell the company’s list of clients and transfer the employees to another company. The reason why the first company has been subject to enforcement action is that the activities it undertakes are clearly in breach of the rules, and some quite serious offences—or breach of the rules—has occurred. However, it then appears that the same type of operation is re-established under a different name, with broadly the same people, not long after the first company has been wound up. I think such companies are described on the FSA’s website as phoenix companies. People are familiar with such a situation occurring with double glazing and in a range of other areas, but it has also happened in relation to the sale of securities to individuals.

Before lunch, I tried to get the name of the company and the particular set of circumstances, but unfortunately I failed. However, I know that it has happened. In such a situation where there are relatively senior employees who are not approved people, yet who appear to be integral to the operation of that business, there seems to be no limit to their being able to move into another company and carry out exactly the same practices. Another set of consumers will then be fleeced by that company and the FSA will have to start the whole enforcement process again.

Will the powers that the FSA will get in the Bill be sufficient to take out that level below approved persons, who are fundamental to the business, to stop them from setting up another business in the same guise when their principals have perhaps been barred from working in the City?

Ian Pearson (Labour, Dudley South)

I got slightly lost part of the way through the hon. Gentleman’s example, but I began to understand it again at the end. Certainly, on the issue of phoenix companies, which he raised, what he describes is an unacceptable practice. In the past, some companies have sought to operate in such a way. One company will close and another that looks virtually identical will be set up the next day. That is not something that the Government support, and the FSA will always want to look closely at that issue.

On what clause 16 does, as the hon. Gentleman is aware, a company already has to show reasonable care when it comes to appointing individuals to a control function. Through clause 16, we are also putting in place an individual responsibility, which is a helpful way of ensuring that there is a credible deterrent. The measure is not necessarily in itself designed to solve the sort of situation that the hon. Gentleman describes, where, in effect, all or most of the senior members of the company are acting in a way that they should not. However, if individuals are not fit and proper, they can be prohibited and thereby excluded from the industry. That applies both to people performing control functions and to other people within the firm.

Through clause 16, we are closing a loophole. It is important to ensure that control functions are performed by people who are fit and proper to do so. Taking a belt-and-braces approach—focusing on both the individual and the firm—but also having the safeguards I mentioned earlier, is the right way to proceed. I hope that the Committee will feel able to support clause 16.

Clause 27

Mark Hoban (Conservative, Fareham)

I hoped that the Minister might say a few words about clause 27, but given that I am quicker on my feet than him or any other member of the Committee, I will say a few words, because the clause is a useful provision.

Roger Gale (Conservative, North Thanet)

Order. Just to set the record straight, it is customary for the Opposition to speak first on a clause stand part debate. The Minister can then respond.

Mark Hoban (Conservative, Fareham)

Thank you for that guidance, Mr. Gale. That is not something I had divined from the pattern followed on Bill Committees that I have served on since I came to the House, but there we are. There is always an opportunity to learn from the wisdom of the Chairman on such occasions. The only problem with that situation, Mr. Gale, is that we are not quite sure what the Minister will say, but sometimes I find that I end up saying it for him—or her, depending on which Minister it is.

Clause 27 tackles quite a serious problem relating to the availability of credit to households in this country. We need to remember that British consumers have a personal debt equal to the personal debt in France and Germany combined. I am told that there are more credit cards than people in the UK. I came across someone last week who had 13 credit cards, which I thought was quite a lot.

Mark Todd (Labour, South Derbyshire)

The average is five per adult.

Mark Hoban (Conservative, Fareham)

That is a phenomenal number. I think we would all accept that access to credit is a good thing; it helps even out some of the ebbs and flows in income and expenditure. However, a situation can arise where the access to credit is too easy, and it leads people who perhaps are not fully conversant with their finances to a situation in which they increase their take-up of consumer credit. The area that has always bemused me is credit card cheques, which are the subject of clause 27. I have to confess that it took me a long time to realise that they were cheques. When I received them through the post, I assumed that they were simply a marketing device. I now know that they are not just a marketing device but access to credit. I assumed that the cheques were just a marketing gimmick, and I do not think that I am alone in having thought that.

I suspect that there has been a reasonably high degree of fraud as a consequence of some of those marketing devices. The cheques are seen as another cheap and easy way for people to get credit. In its written submission to the Committee, Which? said on credit card cheques:

“These tend to have higher APRs and handling fees, offer less favourable repayment conditions, are unpopular with consumers and have been blamed for increasing fraud. We believe it is right that consumers should only receive credit card cheques if they have specifically requested them”.

It went on to say that it welcomes

“the measures to achieve this.”

I suspect that the measure in the Bill has support from across the House. It is interesting that even the publication of the Bill and the clear intention of the Government to legislate on the issue has not stopped credit card companies sending out credit card cheques. In fact, my wife received some at the weekend, which we duly shredded.

Charles Walker (Conservative, Broxbourne)

Just in time for Christmas.

Mark Hoban (Conservative, Fareham)

As my hon. Friend says, the cheques came just in time for Christmas—clearly a time to encourage my wife to spend money. It was right to shred the cheques and to keep a firm grip on domestic finances. There are limits to my powers, however. That demonstrates just how wedded the credit card industry is to the idea; it knows that credit card cheques are about to be banned, but it still continues to use them.

There were expectations outside the House that the Government would go further than they have done in the Bill when it comes to credit card cheques. My hon. Friend the Member for Tatton (Mr. Osborne) said on Second Reading that he agreed with Which?, which has said:

“we are disappointed that the Government has not taken further measures against irresponsible lending in the Bill. There is a clear need to avoid a return to the pre-credit crunch days and the wide-ranging consultation recently published identifies important issues.”

Such details were highlighted in the consultation published by BIS on consumer credit. Which? stated further that

“The delay in publication has resulted in a missed opportunity and we are concerned, given the stage in the Parliamentary cycle, that the chance to act will be missed.”

The Prime Minister is aware of the issue of consumer credit; he said:

“we are determined to do our bit...when we see hard-working, hard-pressed people being buffeted about by a storm not of their making”.

We were under the impression, as I think Citizens Advice and Which? were, that the Government and the Prime Minister had pledged, at a meeting on the culture of credit earlier in the summer, to take the earliest opportunity to ban unsolicited credit card limit increases. There is some surprise that that is not covered in the Bill, and that all we see is a minimum payment, as it were, towards redeeming that pledge.

Other issues to do with tackling the growth of credit include points relating to minimum payments, unsolicited credit increases, the re-pricing of existing debts and the order of payment. Unfortunately, the consultation that the Department for Business, Innovation and Skills has proposed will close on 19 January, the week after we finish our work in Committee. If only the usual channels had been more generous, in terms of the amount of time allowed for scrutiny, we in this place would have had some time to scrutinise the outcome of the consultation, and the Government would have been able to table additional amendments to reflect the outcome of the consultation. Will the Minister clarify the Government’s intention on redeeming their pledge to legislate against unsolicited credit limit increases, and on the other areas subject to consultation in the BIS White Paper?

Ian Pearson (Labour, Dudley South)

The hon. Gentleman is probably right that there are a number of individuals who have been sent unsolicited credit card cheques in the post and do not recognise what they are. They are, in effect, the same as current account cheques, but with some important differences. There is a danger that people do not take them seriously enough to ensure that they dispose of them in a safe and effective way. There is certainly some anecdotal evidence that unsolicited credit card cheques have been used by individuals who obtained them fraudulently.

Credit card cheques are provided by many credit card issuers. They have a similar appearance to ordinary bank account cheques, and once used, they appear on a credit card statement in the same way that an item purchased with the card, or a cash withdrawal made using the card, does. However, they attract a higher rate of interest than card purchases, do not have an interest-free period, tend to attract a handling fee—usually at 2.5 or 3 per cent. of the amount of the cheque—and do not offer protection under section 75 of the Consumer Credit Act 1974, whereas a purchase made with a card does. Under that section, as hon. Members will know, the creditor is jointly liable with the supplier in the event of a problem with the goods and services.

Every year, huge numbers of credit card cheques are sent to customers. Some 292 million credit card cheques were distributed in 2008, of which around 95 per cent. were unsolicited. Less than 1 per cent. of the cheques sent out were used, but there are signs that they are being used by customers in financial distress. Survey evidence from uSwitch in November 2008 suggests that 23 per cent. of the people who use credit card cheques use them to transfer cash into their current accounts; 16 per cent. paid utility bills with them and 7 per cent. used them to consolidate debts. One credit card issuer actually suggests in the information that accompanies its cheques that consumers can use them to pay utility bills.

There is a risk and, as I said, some evidence that vulnerable consumers are using the unsolicited cheques to get themselves into higher debt. The high costs often associated with such cheques, and the fact that those costs may not be fully appreciated by many customers, can make the situation worse. uSwitch found that 86 per cent. of consumers surveyed could not identify the correct fee charged by their provider, and even the most informed and sensible consumer can find it hard to master the complex terms and conditions attached to credit card cheques. The purpose of the clause is to ban a practice that can tempt consumers to increase their borrowing when they may already be in financial distress. We are not proposing to ban credit card cheques entirely. Used wisely, they can provide useful flexibility for the consumer, but we want to put consumers in the driving seat, which is what clause 27 does.

Rob Marris (Labour, Wolverhampton South West)

I appreciate that proposed new section 51A, as inserted by clause 27, would impose pretty severe restrictions on credit card cheques for consumers, but why does proposed new section 51B provide a total exemption for businesses? Businesses, particularly small businesses, could also get into the very difficulties to which the Minister referred with regard to consumers. In a sense, they could be running on a credit card, which is not a great way to run a business.

Ian Pearson (Labour, Dudley South)

Although unsolicited credit card cheques have been identified as a problem for consumers, we do not believe that there is a similar consumer protection justification for restricting their use by businesses. That is why proposed new section 51B exempts credit card cheques for business use from the prohibition. If my hon. Friend has evidence that there is detriment to businesses as a result of the practice, obviously the Government would want to consider it at a future date.

I do not propose to go through all the details of the different subsections of the clauses. The general principle of restricting the use of credit card cheques is welcomed in all parts of the House, and that is important.

On the points made about unsolicited credit limit increases, we are looking at the issue as part of the review of the regulation of credit and store cards. We are considering a number of options, including a ban on the practice, or requiring customers to opt into credit limit increases. The review is still out to consultation—until 19 January 2010—and final recommendations will be published in spring 2010.

Charles Walker (Conservative, Broxbourne)

Does the Minister share my view that it is rather depressing that so many financial institutions are so opposed to the concept of responsible lending and to providing a sensible level of service to their customers? I am deeply concerned that we are having to bring forward such legislation. It seems to me that many of the banks might have picked up the messages, coming out of Government and the Opposition parties over the past couple of years, that such practices are unacceptable. The banks should not need to have to comply with legislation to do away with them.

Ian Pearson (Labour, Dudley South)

I have some sympathy with what the hon. Gentleman says. The situation is patchy. Some lenders take a more enlightened approach to their activities than others when it comes to this area. We always need to make sure that we have effective regulation and that throughout primary legislation we take powers, when we believe them necessary, to ensure that the consumer is properly protected. That is why we are taking action on credit card cheques in the Bill.

As I indicated, we are consulting on unsolicited credit limit increases and on minimum payments. In many ways, we would have hoped that action in such areas was not necessary, but there has been significant evidence that consumers are getting themselves into difficulty as a result of some of the enticing offers that seem to be there from those that want to lend them money. We need to make a judgment as to whether we need to act in the future to prevent some of the practices.

Andrew Love (Labour, Edmonton)

All the written and spoken evidence that we received from consumer organisations was that while credit card cheques affect a small number of incredibly vulnerable consumers, unsolicited credit increases affect a much wider range of consumers. According to the evidence put before us, such increases have been important in the explosion of credit in recent years, which we are now trying to deal with.

I take the Minister’s point about the survey currently being carried out, but will he give the Committee an assurance that if the evidence that comes into BIS suggests that something should be done in any of those areas, he will, at an appropriate time—the timing will be critical—bring forward amendments at a later stage of the Bill to incorporate such measures into the legislation?

Ian Pearson (Labour, Dudley South)

I have always believed in evidence-based policy, with one or two caveats. It is important that we recognise that the evidence needs to be there.

Mark Hoban (Conservative, Fareham)

Will the Minister give way?

Ian Pearson (Labour, Dudley South)

In a moment. My hon. Friend the Member for Edmonton is right to point out that there has been a tendency for many people who have had their credit limit increased to spend up to that limit. Many people now want to reassess their financial circumstances and perhaps take different actions. In the past, the practice enticed them to get into higher levels of debt than they now feel comfortable with. That needs to be addressed.

To explain my caveat, I should say that sometimes in Government we have to act immediately, on a limited or non-existent evidence base. There are some situations when the evidence is there and we are too late. The danger is that we are always running to catch up. As a real aside, on the basis of the strict evidence the Government would not have introduced the car scrappage scheme; indeed, Treasury officials advised us not to. Our decision to do so was based on our belief that it would have a galvanising effect on confidence in the market. That has proved to be the case. In terms of the evidence of past schemes, it would not be something that we would do.

I had better not dilate any further on those points, Mr. Gale, other than to say that there is cross-party support for what we doing in the clause. We are looking at going further in other areas of consumer protection. As hon. Members will be aware, there are other consumer measures as part of the Bill and we will discuss them in the new year.

Clause 28

Mark Hoban (Conservative, Fareham)

I beg to move amendment 9, in clause 28, page 37, line 14, at end insert—

‘(5A) The scheme manager may request the Treasury to appoint an auditor in accordance with the regulations set out in 214D(6) to confirm that the expenses have been incurred as a consequence of the exercise of a stabilisation power.’.

I am pleased that the Minister gave an example of a policy he supported without any evidence to back it up. That was going to be my intervention, but we have one on the record now. Veterans of the Banking Act 2009, such as the hon. Member for South Derbyshire, the Minister and the hon. Member for South-East Cornwall will remember the details of the financial services compensation scheme, but I should like to put my amendment in context for those who missed out on the great opportunity to serve on that Committee.

Professor Buiter, who gave evidence for the Treasury Select Committee’s report on Northern Rock and who did not get round to teaching me when I was at the LSE, argued that the financial services compensation scheme had nothing to do with financial stability and was purely “social policy”. As we know from the 2009 Act, the FSCS has become a fundamental part of the special resolution regime and it serves as a way to maintain financial stability when a bank or a building society is put into the special resolution regime. It has been used quite often now, with Bradford & Bingley and the Dunfermline building society, and it is an established part of that architecture. The 2009 Act put in place the legislative framework for the FSCS to act in this role.

We have today, a mere number of months since the Banking Act 2009 received Royal Assent, an opportunity to rewrite part of that Act as it applies to the FSCS and to introduce new section 214B into FSMA as well as some further safeguards. Proposed new section 214B confers a power on the Treasury to require the FSCS to contribute to the costs incurred in applying the stabilisation regime. The amount is limited to that which would have been payable in the counterfactual scenario—that is, if the bank in question had become insolvent and an independent valuer was appointed to calculate the likely amount of recovery.

Proposed new sections 214B and 214D bring some corrections and clarifications to the 2000 Act. Most significantly, in subsection 2 of the clause we have amended the provision so that it applies from 19 November 2009, which allows interest to be taken into account in calculating the FSCS contributions from that day onwards, when a special resolution regime power is used. The Bill gives the FSCS the ability to charge interest on the Dunfermline loan, a provision that was omitted from the previous Bill. When we passed the 2009 Act, the expectation was that the FSCS would bear the full cost, but because of the costs that the FSCS is likely to bear the Government decided to charge the interest rather than the resolution costs to the FSCS.

I will turn to my amendment in a moment, but I wish to ask the Minister a question about an issue that we touched on during the passage of the 2009 Act. I had hoped that the Minister would use this Bill to fill in a gap, and give the FSCS and all the levy payers a greater insight into what happens in the wind-up of the affairs of banks that are being bailed out. At the moment, the FSCS does not have a formal role in looking at the activities of institutions that are being wound up, and it does not know whether those activities will be wound up in a way that will minimise the costs to itself. It is difficult for it to understand just what the likelihood of recovery is, and the problem arises, therefore, of how much levy payers are likely to have to pay in the future. Greater transparency in that process would help, as would improving the governance arrangements. I wonder whether since our debate on the 2009 Act the Minister has given any further thought to the improvement of governance arrangements.

My amendment inserts a new subsection (5A) into proposed new subsection 214B, under which the scheme manager—FSCS—may

“request the Treasury to appoint an auditor in accordance with the regulations set out in section 214D(6) to confirm that the expenses have been incurred as a consequence of the exercise of a stabilisation power.”

A question might be, “Why do we need that, given that section 214D(6) provides for the independent verification of expenses incurred? This must be for the verification of other matters, and the regulations will be introduced about the appointment and payment of an auditor”. The hon. Member for Wolverhampton, South-West will probably suggest that I should have tabled a further amendment to take out the powers under section 214D(6), but the point of my amendment is to focus more precisely on ensuring that the costs that the FSCS—ultimately its levy payers—will incur are strictly related to the exercise of stabilisation powers. The levy payers can therefore take some comfort in the fact that the costs being incurred are the right costs and they are not picking up a bill for anything else, and they can know that they are getting value for money for what they are paying out. The wording in my amendment makes the provision slightly tighter, and ensures that the levy payers get comfort in the absence of any other improved governance arrangements. That acts as a safeguard for those who ultimately have to pick up the bill.

Colin Breed (Liberal Democrat, South East Cornwall)

I support the amendment and the hon. Member for Fareham has said all the right things as to why it should be accepted. I want to add that, while the costs of the special resolution fall on the levy payers, it is actually members of the public who will ultimately have to pay for it. The costs will go back to the building societies, and you and I, Mr. Gale, and other members of the public, will be forced to pay the levies in one way or another. It is therefore important that the costs are contained and looked at. We also need to ensure that they are reasonable and that the reasons for them are addressed.

It was mentioned during today’s Treasury questions that the Dunfermline building society has lost £26 million in costs, auditors’ fees, consultants and so on. That seems an extremely large sum of money for a medium-sized building society; £26 million is a lot of money. If that is to be covered by the levy payers, they will have to recoup the money—they will do that in various ways—but it is ultimately the taxpayer, the depositor, the borrower and the customers of all those involved in the levy who will one day have to pay it. The issue is of genuine public interest.

John Howell (Conservative, Henley)

When I first read the clause, I was reminded of the words of Andrew Whittaker of the FSA during the evidence sitting. He warned us that costs will be sensitive and that at this stage we need to provide as much evidence as possible to ensure that we are reactive to that sensitivity. I am struck by how little there is in the clause about the auditor’s role compared with that of the valuer.

The two activities are actually quite similar, which raises an ancillary question. The cap on the limited expenses is set against a hypothetical scenario of insolvency. I have never been an insolvency practitioner, but I have worked alongside them and my impression is that, whatever the ground rules, what makes one practitioner better than another in what they can get out of an insolvency is their skill, their context and the way they use those principles.

The clause, however, offers a hypothetical scenario that is supposed somehow to set an average. It would be useful to know what principles—which, it is alluded, will be implemented in regulations—will apply to ensure that we can see in detail and have a good understanding of what is going on behind the hypothetical scenario.

Ian Pearson (Labour, Dudley South)

The hon. Member for Fareham shot his own amendment down when he referred to proposed new section 214D(6). As he knows, that section already provides for independent verification of special resolution regime costs, as does section 214B in its current form. It is difficult to see what a second level of audit or verification would add, and that second level would also be likely to be included in the SRR costs.

It might be helpful if I explain our view. The financial services industry as a whole benefits from the existence of a credible regime for bank resolution and depositor compensation, and the confidence that that provides to customers. It is right that when the authorities intervene to resolve a bank or building society that is failing, the industry, not the taxpayer, should pick up the tab. I think that is something that all our constituents would recognise.

Nevertheless, I recognise that many in the industry are concerned that that means that the authorities will have too little incentive to control costs. There is a feeling within the industry that there should be something akin to a creditors committee operating that would exercise greater cost control. I am not sure that the amendment would deal with such concerns.

The auditor would be required to check that the financial services compensation scheme was being asked to pay only for SRR costs and not other expenses of the authority, and he or she would not be asked to check whether those expenses were excessive or unnecessary. That can be done already. To reassure the Committee and those who follow these proceedings, I will set out what measures are in place to ensure that the FSCS contribution to SRR costs is properly controlled.

First, the FSCS contribution to SRR costs is capped to a level it would have had to pay out if the failed bank had gone into insolvency, as the hon. Member for Fareham rightly notes. That will still be the case after clause 28 is enacted. The clause simply ensures that interest is included in the costs. It is not possible for Government action under the SRR to result in the FSCS having to pay more than it would have had to pay if the Government had not intervened.

The second point is that in carrying out a resolution, the authorities must balance the five statutory resolution objectives, as we discussed at great length during the passage of the Banking Act 2009. The objectives already cover the key elements of a successful SRR action—protecting financial stability, protecting depositors and protecting property rights. There is no need for an explicit least-cost-to-industry objective.

There are also measures in place for an independent assessment of costs that the FSCS may be expected to bear. As well as provision for the costs incurred in an SRR to be independently verified, the legislation explicitly requires the appointment of an independent valuer to calculate the amounts the FSCS would recover from the bank under a hypothetical insolvency.

It is vital that the authorities are accountable for action taken under the SRR, and the Government appreciate that industry has an economic interest in the outcome of the resolution, but so do the taxpayer and the wider economy. That is why, in exercising the SRR powers, the authorities are accountable through Parliament to the wider public for how they have gone about achieving the special resolution objectives.

The statutory limit on the FSCS contribution to the SRR costs ensures that the industry will not have to pay more than it would have done if the firm had failed and the Government had not stepped in. That is the fundamental point to appreciate. I hope that my explanation clarifies the situation with regard to FSCS contributions to SRR. [Interruption.] I invite the hon. Member for Fareham to withdraw his amendment.

Mark Hoban (Conservative, Fareham)

I am pleased that the hon. Member for Leeds, East found the Minister’s answer acceptable on this occasion. In Tuesday’s evidence session, he told a witness that their answer had made him happier than the Minister’s. Clearly, the Minister has been working on the quality of his answers to keep the Whip happy.

Let me explain my concern. The Minister said that the levy payers will have to pay out no more than they would have done had the business become insolvent and the normal operation of the FSCS been applied. That almost gives a credit card limit. As we said in an earlier debate, people will spend up to the limit rather than trying to control costs. While the measure might cap the upside of the potential exposure, it does not give levy payers the reassurance that costs have been incurred wisely and carefully with a view to minimising their costs.

My amendment is better than the Government’s proposal on this occasion. Verification would be easy, because it would just require someone to check that the costs had been incurred. Before I came to the House I was an auditor. Verification simply means saying, “This is what is in the records of the resolution authority. These are the invoices that have been received and paid out again.” It a very mechanical process that requires little judgment. I am looking for a process that goes further than that and includes a check to ensure that the costs are

“wholly, exclusively and necessarily incurred”

in pursuit of the resolution regime—to use language from elsewhere—and in respect of the exercise of the stabilisation powers. My wording is tighter and would give more comfort to levy payers.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman tempts me to return to an earlier point—we have come full circle. Proposed new section 214D(6)(c) says

“may contain provision about the appointment and payment of an auditor.”

Why did he not draft a simpler amendment changing “may” to “shall”?

Mark Hoban (Conservative, Fareham)

The Treasury will, of course, draw up the regulations, whereas the amendment would give the scheme manager the power to request that the Treasury appoint an auditor. A bit more control would pass to the FSCS and a bit less to the Treasury. I could have finessed the drafting and tinkered around a bit more, but I wanted to get a point across. This should be considered from the levy payer’s point of view.

The hon. Member for South-East Cornwall was absolutely right—ultimately, the customer of the bank or building society will pick up the cost. Anyone who has had a conversation with building society senior executives over the past year will know the extent to which they believe that the costs to the FSCS have impacted on the rates that they can offer savers and charge mortgage payers, so there has been a flow-back.

I want to see what additional governance arrangements could be put in place to reassure the people who are paying the levy that the expenses incurred would be reasonable. The opportunity for the scheme manager to put in an auditor to look at the subject more tightly might help to get that reassurance across. I am still not content that the governance arrangements properly balance the interests of the taxpayer, the resolution authorities and the people who ultimately have to foot the bill. We rehearsed these issues a little during the passage of the 2009 Act and it has been useful to explore them again.

Ian Pearson (Labour, Dudley South)

At risk of prolonging the debate, I can understand the hon. Gentleman’s point about a scheme manager, but I do not accept that his amendment is superior to what the Government propose. He said that he was asking for more than verification, but I do not see how his amendment would achieve that. It suggests only that the auditor should

“confirm that the expenses have been incurred as a consequence of the exercise of a stabilisation power.”

He seems to be saying something that his amendment would not deliver.

Mark Hoban (Conservative, Fareham)

I disagree. We need to ensure that the costs incurred are properly controlled and the Bill does not get us to that point, frankly. The Minister’s assurance about a cap on the amount that levy payers would have to pay if a bank went through the usual processes with the FSCS is not adequate to reassure levy payers and, ultimately, the customers of those institutions. We need to find a way to tighten up that process; this may not be the right way, but other aspects of the resolution regime need to be determined as well. We may come back to those at some point and tighten them up.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman’s seems to have implied that “reasonably” is in the third line of his amendment—“have been ‘reasonably’ incurred”. He seems to be addressing it, although it is not there. That addresses the point made by the Minister, who rightly criticises the amendment for not including the words “reasonably incurred”, and therefore being about mere verification rather than the audit the hon. Gentleman seeks.

Mark Hoban (Conservative, Fareham)

One thing that I have learnt serving on Committees with the hon. Gentleman over the past four or five years is that he and I should talk about amendments before I table them. He adds that extra bit of finesse that might avoid at least one set of interventions. He gives me food for thought that might encourage me to return to the point on Report. On that basis, and as I have the opportunity of the Christmas recess to cogitate further, I beg to ask leave to withdraw the amendment.

Clause 29

Mark Hoban (Conservative, Fareham)

This relatively straightforward clause tries to formalise something that already exists. It concerns the powers to require the Financial Services Compensation Scheme to act in relation to other schemes. Under the provisions, the FSCS can make payments on behalf of other compensation schemes, including arrangements that do not relate to other authorised financial services firms under the Financial Services and Markets Act 2000.

The impact assessment is quite instructive in explaining the motivation behind the provisions. It states:

“In 2008 the FSCS went beyond its formal remit to ensure that eligible claimants in failed banks were fully compensated for their deposits, including those in the UK (Icesave) branch of... Landsbanki...by paying the compensation due from the Icelandic deposit-guarantee scheme”.

The key word in that passage is “formal”, because what we have seen, in effect, is the FSCS acting in relation to other schemes. It would appear to have done so successfully last year, but I suspect that it is probably one of those areas—there are several cases in the Bill—where people have acted to do the right thing but have not necessarily had the legal basis to do it, so it would be helpful to put such things on a more formal footing.

I do not think that there is anything particularly objectionable in the clause, but a couple of points emerge. The Association of British Insurers has pointed out that the EU is looking at compensation schemes on a cross-border basis at present, and whether it should plan to include one compensation scheme acting as the agent of another as part of its reform of the deposit guarantee schemes directive.

As we clearly have interim arrangements that work, is it appropriate for us to push ahead with the measures in the Bill when we may have to revisit them as a consequence of an EU directive? Given that there are moves around the EU to harmonise rules in this area, why should we react now? Why not wait until the directive is formalised?

The British Bankers Association in its representation suggested that the Bill as drafted will permit the FSA to make rules that allow the FSCS to levy UK deposit takers for irrecoverable management expenses incurred in respect of overseas schemes. I am all for UK deposit takers picking up the tab for resolving problems around UK institutions, but are we sure that we understand the true extent of the additional liability that deposit takers will take on if they are to recover the FSCS management expenses as a consequence of administering overseas schemes? In the discussions Ministers have had with their counterparts in Europe about the move to a harmonised directive, have they discussed any provision for a scheme acting as an agent on behalf of another scheme recovering such costs from the home state’s deposit protection scheme and its levy payers, rather than having to recover them from UK levy payers?

Ian Pearson (Labour, Dudley South)

The power to require the FSCS manager to act in respect of other schemes has been widely welcomed by respondents to the “Reforming financial markets” consultation. They agreed that the measure will be of real and practical assistance to depositors. Respondents to the consultation were keen to stress that the authorities must ensure that there is no additional cost to FSCS levy payers. That is the point that the hon. Gentleman raised. I confirm that that has always been the Government’s intention, and that the Bill includes suitable safeguards to ensure that in carrying out the new function, the FSCS will take on minimal financial risk. When it is acting on behalf of another scheme or authority, that scheme or authority will be expected to meet all the compensational costs and additional management expenses incurred by the FSCS in making the payout. The FSCS will be able to decline to act if it is not satisfied that funding is being, or will be, provided to meet the expenditure and expenses it will incur. A number of other grounds on which it may decline to act are set out in detail under the clause.

On the wider point made by the hon. Member for Fareham about the European Commission’s consultation on co-ordinating deposit guarantee schemes, it has always been the Government’s view that effective cross-border arrangements for deposit compensation are crucial to ensure the protection of depositors and confidence in the banking system. It is well known that the FSCS has already had to act as a paying agent for a foreign scheme, so the provision is a basic measure to ensure that it has the legal basis for that co-operation so that United Kingdom depositors can be paid out quickly and effectively, which is in customers’ best interests.

Our approach is fully compatible with the existing provisions of the deposit guarantee scheme directive. If the directive is revised in the light of the Commission’s report, we consider that the measures are likely to be compatible with any such revisions. Of course, there is always the unlikely event of some incompatibility and, in those circumstances, the Government will take the usual approach and use the powers under section 2(2) of the European Communities Act 1972 to make any necessary amendments. However, we believe that what we are doing is consistent with what seems to be an emerging approach that will be operated on a pan-European basis.

Andrew Love (Labour, Edmonton)

I apologise for asking a probing question, but the Treasury Committee received a great many representations from people with deposits in offshore centres, particularly around the United Kingdom. Are there implications for people in those circumstances? Will they continue to have to look to the offshore centre for compensation?

Ian Pearson (Labour, Dudley South)

Yes, that is the case. The situation is very much the same as has been outlined previously. It depends on the identity of the host regulator, which we have made clear on several occasions.

The measure has been welcomed as a result of the consultation exercise that we conducted. We are introducing it under the Bill, and I hope that the clause is accepted.

Clause 30

Mark Hoban (Conservative, Fareham)

I beg to move amendment 12, in clause 30, page 46, line 8, at end insert—

‘( ) The powers in section (1) can only be exercised where the overseas regulator is also able to provide the Authority with corresponding information.

( ) “Corresponding information” means information the overseas regulator can obtain in respect of financial stability from a person operating in the country or territory of the overseas regulator.’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss amendment 11, in clause 30, page 46, line 20, at end add—

‘( ) In pursuit of these powers, the Authority will have regard to section 348.’.

Mark Hoban (Conservative, Fareham)

It may be helpful if I give a little background to amendments 11 and 12. Clause 30 introduces a new power for the FSA to require information in pursuit of its objective in connection with financial stability. It is a broad power, which is helpful because it will enable the authority to collect the necessary information to ensure that it can exercise its financial stability objective. The information will also help the Bank of England to exercise its obligations and have regard to the financial stability objective that was introduced under the Banking Act 2009. Of course, we are still left with the problem of what financial stability means and what information the authority will be required to collect if we do not know what financial stability is in practice, but it is difficult to argue against the need for collecting such information.

We need to make sure that there are some safeguards because potentially the powers are broad. Our safeguards under proposed new section 165B cover the right to make representations against the requirement to provide information and a duty on the FSA to publish a statement of its policy with respect to the exercise of the new powers. However, there is no right of appeal, and the right to make representations may be excluded by the FSA in the case of an emergency. In the FSA’s consultation on these new rule-making powers, it will be important for it to be explicit about the circumstances in which the powers would be used and in which the emergency override would be used.

I want to focus on new section 169A, which will be inserted in FSMA. That new section deals with when an overseas regulator has asked the authority to exercise its powers under section 165A, so that the overseas regulator can obtain information through the FSA in connection with financial stability. As a consequence of the current crisis, we know that there needs to be greater global harmonisation and co-operation on the supervision of individual institutions and supervision on a macro-prudential level.

The discussions taking place in the European Commission, the Council and, indeed, the Parliament about the new authorities in Brussels demonstrate that there will be much more co-operation. Of course, one of the important tasks of the European systemic risk board is to gather information about financial stability across Europe. Clearly, the board will need to have access to information from member states to enable it to fulfil its responsibilities in analysing emerging trends.

I am wary about whether there will be two-way traffic between the UK and overseas regulators, and I am concerned that there could be a situation where an institution is based in a number of different jurisdictions. It may be the case that the lead regulator is in South Africa, Germany, Australia or wherever it may be and it requests as part of its financial stability remit that the FSA provides information on a firm that it regulates in the UK. As a nation, we are very compliant when it comes to requests and following instructions, and doubtless the FSA will want to meet such a request. However, it is important that the FSA does not just supply information to, for example, the home estate regulator or the regulator that takes lead responsibility globally for that company without being able to get information itself from the overseas regulator about some of the firms that it supervises, if the FSA is pursuing such a line of inquiry as part of its role to help to maintain financial stability in the UK.

There are some very big businesses operating in the UK who are headquartered overseas and whose activities could have an impact on financial stability. If we were not able to get information from their lead regulator country about its view of something—for example, the amount of capital the institution has back home or the practices that the board of directors has introduced in relation to capital, risk management and a whole host of such things—there might be a direct impact on financial stability in the UK. My amendment would ensure that there is some reciprocity between the UK and other regulators.

Mark Todd (Labour, South Derbyshire)

The hon. Gentleman will recall that I raised that matter last Thursday in the evidence session, when he slightly implied I was not present. I wonder whether he shares an additional concern about the inclusion of the word “territory.” I am unfamiliar with the concept of the financial stability of a territory rather than a nation state, yet that is one of the tests that may be employed. I understand why that word is used; I suspect it enables us to deal directly with some regulators in US states, where many financial institutions are regulated, but I wonder how the test of financial stability implied in the clause would be applied in that instance.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman asks a very good question and it is not something I had pondered. I recollect the exchanges about reciprocity that we had on Thursday afternoon. I do not know how one assesses a territory, or financial stability issues around the state of Delaware—where a large number of companies are headquartered—or the fact that some insurance companies are based in the USA. I suspect the Minister might say that some Crown Dependencies may be described as territories rather than countries in the legal sense. I do not know whether that is what the Minister is aiming at. I think there may be territories linked to the United States that are not states. It may be around that area, and I am sure the Minister will have an answer.

In terms of my amendment, imposing the duty of reciprocity gives the FSA some leverage in its relationship with other supervisors to say, “You must have these powers. Supply us with information, if we are to supply you with information.” It is not a very friendly approach to take, perhaps, but it ensures that the FSA can exercise some leverage to help ensure better information flows between states, rather than simply expecting the UK to be the one that gives but never receives.

The debate we had this morning on the inclusion of section 348, in the discussion of disciplinary powers, crops up again in the second amendment I have tabled in this area. It concerns the sort of information about a company that the FSA could give; what duty of confidentiality would bind it; how much granularity of information a regulator could ask for and the use to which it is put. I suspect that might be addressed by the representations a firm could make, but it would be helpful to know the boundaries that the FSA and the Government think are in place to protect confidential data.

Mark Todd (Labour, South Derbyshire)

It is a pleasure to serve under your chairmanship, Mr. Gale. I have already made a point about the definition of one of the terms in the clause and would welcome an explanation of that.

I have quite a lot of sympathy with the amendment, with one exception. If the FSA were prevented from providing information to a regulator unless a reciprocal arrangement were in place, one can think of certain emergencies when that would be an extraordinarily unfriendly act. For the Government of this country simply to impose an obligation to say, “I am sorry. We do not have a reciprocal arrangement in place. Obviously we need to negotiate that, but some information is needed desperately,” would be almost an aggressive act of assisting in the collapse of a country’s financial system.

There are circumstances in which I could imagine the clause being used appropriately to assist a state in distress. However, the generality of the argument presented by the hon. Gentleman, which is that this ought to be balanced by an appropriate arrangement with another state, ought to be the negotiating position generally adopted, with one further qualification which is implicit in it. That is, that we should have a clear understanding of the regulatory frameworks of other states that we are dealing with, and there should be some degree of quality test and peer exchange of information, to ensure that we provide additional support and advice in those circumstances.

One thing we have learnt thoroughly from the past couple of years is the interdependence of different regulatory functions in different states and the impact of large corporate entities across borders. Therefore, the goal of the clause is entirely sound and I have sympathy with the argument presented, with the exception I have given.

Ian Pearson (Labour, Dudley South)

I will deal with amendment 11 first, before moving on to amendment 12 and the points my hon. Friend the Member for South Derbyshire raised. Amendment 11 provides that, in exercising its powers to gather information, which are already substantial under FSMA, the FSA would have to have regard to section 348 of FSMA. That section generally restricts the disclosure of confidential information, subject to the exceptions set out in section 349, which permits disclosure for the purposes of facilitating the exercise of a public function where disclosure is in accordance with regulations made by the Treasury.

The requirements set out in sections 348 and 349 of FSMA apply to all confidential information gathered by the FSA under that Act. The ability to disclose confidential information obtained under new section 169A, inserted by clause 30 of the Bill, to an overseas regulator is already subject to section 348. The amendment is therefore unnecessary, and I hope that that clarifies matters for the hon. Member for Fareham. The amendment is not only unnecessary, but undesirable, as it would introduce uncertainty as to whether disclosure by the FSA of information it has obtained under other powers is subject to section 348. An explicit reference to section 348 in that regard might be taken to imply that the section does not apply to other information-gathering powers contains in FSMA that do not have an equivalent explicit reference. I hope, therefore, that the hon. Gentleman will not press amendment 11.

I will move on to amendment 12 and address the wider point about reciprocal co-operation. My hon. Friend the Member for South Derbyshire and the hon. Member for Fareham made valid points, as we do need to see extensive international co-operation on the whole issue of regulation. Indeed, one of the key focuses of the Government’s activity has been through the IMF, through international regulators and through regulation at a European level, all of which are necessary.

Amendment 12 would mean that the FSA could not use the new powers to assist an overseas regulator unless that regulator was able to provide it with corresponding information. I do not think that is necessary or desirable. The FSA is not obliged to respond to information requests from overseas regulators, but it will naturally want to consider them closely and co-operate when those requests are reasonable. Section 169(4)(a) of FSMA, which applies to that provision, states that in deciding whether to exercise its powers in support of an overseas regulator, the FSA may take into account, in particular, whether corresponding assistance would be given to a UK regulatory authority in the country or territory of the overseas regulator concerned.

We would not expect the FSA to co-operate with an overseas regulator unless it was in its long-term interests to do so, but I do not agree that it would be sensible to remove entirely the FSA’s discretion to decide whether to respond to information requests where the overseas regulator, for whatever reason, was unable to provide it with corresponding information. We can certainly envisage situations in which that might be the case and would not want to prevent the FSA using the new powers, where appropriate, to build co-operation and encourage change. Again, I think that it is vital that we promote best international standards and engage with other international regulators, and we want the FSA to do that.

My hon. Friend the Member for South Derbyshire raised a point about the use of the word “territory”. It is to allow us to capture illegal jurisdictions below the level of the nation state; for example, states in the US. We believe that it is necessary to capture that.

Mark Todd (Labour, South Derbyshire)

Will my hon. Friend clarify that a little? The test that I think is imposed in the clause as it stands is that the financial stability of that territory should be the basis on which the request might be considered and made. I am not reasonably familiar with the financial affairs of the US, but I imagine that the state of Delaware—not the government of Delaware, but its financial stability as a place where people might live—is guaranteed by the US Government. It is hard to see how one could imagine the financial stability of an individual American state, which is the example he gave, being placed in jeopardy by the actions of particular institutions based here.

Ian Pearson (Labour, Dudley South)

I will reflect on that point further. My hon. Friend makes an interesting point. He mentioned Delaware; one could equally mention California, which, if it was a country, would be one of the top 10 countries in the world, economically. In designing the legislation, we have tried to get appropriate coverage and we believe that we have done that.

I do not believe that amendments 11 and 12 are necessary or desirable for the reasons that I have given. I hope that the hon. Member for Fareham will seek leave to withdraw them.

Mark Hoban (Conservative, Fareham)

I have a vision of California seeking that information and the Governor perhaps changing his name from the Terminator to the Regulator on that basis. I appreciate the comments made by both the Minister and the hon. Member for South Derbyshire. Perhaps my amendments have gone a little too far in their wording, but I am anxious to avoid ending up in a situation where we have no levers over other regulators to provide information in a reciprocal situation. In many ways, we lead the field in reforms to financial regulation. We need to encourage other nations to step up to the plate when it comes to information exchange and disclosure. This might not be the right way to do it, but it must link through the G20 and the EU to other mechanisms that people use. There was a phrase I saw earlier today about financial regulation. It referred, I think, to the US and whether it will embrace everything but act on nothing. It is very easy to pay lip service to the intentions behind information exchange. It is a different matter to get them to introduce the legislative change that is required to facilitate information exchange. There needs to be a lot of work done at international level to get comparable powers accepted as part of the regulatory regime of other member states and other jurisdictions. I am sure that we will be very good at sharing information, but the FSA should be encouraged to think very carefully about the terms by which it provides information, and the opportunities provided by its membership of international forums to push the message that there must be effective information exchange.

Colin Breed (Liberal Democrat, South East Cornwall)

I share some of those concerns. A scenario could occur where it is asked to provide information that could implicate people here, who would then immediately be the subject of an extradition order. The information that we supplied to other countries could allow them to do that. We do not have reciprocation in extradition at present with the US. There are some concerns. To get co-operation and everything else, we want to ensure that co-operation is accepted elsewhere. The only safeguard is the wording that says “may”: we do not have to, but we may—or we may not.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman makes an important point about the language, but we need to ensure that, if we are to recognise the reality of global financial institutions and global co-operation over their regulation and supervision, there is acceptance of that and it has to be underpinned by information exchange. We need to do all that we can through a range of different forums to ensure that that happens. But there must always be that opportunity for the FSA to apply a bit of muscle or leverage here to encourage others to be as open as it is prepared to be. With that in mind, I beg to ask leave to withdraw the amendment.

Clause 31

Mark Hoban (Conservative, Fareham)

I beg to move amendment 10, in clause 31, page 47, line 4, at end add—

‘(10) The Treasury will lay before Parliament a report on the losses incurred by the person participating in the scheme which are included within the qualifying scheme.

(11) The first report will be laid for the period from 26 February 2009 to 30 June 2009 and will be laid six monthly thereafter until the relevant scheme agreement has expired.’.

The amendment relates to the asset protection scheme, with which Committee members from all parties will be fully conversant. That scheme is the deal through which the taxpayer supports the Royal Bank of Scotland by providing an insurance policy for the losses it makes on some of its assets. The scheme has been in design for some time: it was announced in February, when the original agreement was tabled with RBS and Lloyds. We went through a subsequent iteration of the scheme recently and Lloyds was able to buy itself out of the arrangements, but RBS is still taking advantage of those.

Clause 31 puts some obligations on RBS and gives the Treasury the opportunity to request information or documents from RBS. In my amendment I was suggesting that the Treasury should provide us or the taxpayer with a bit more information. We are standing behind RBS and are prepared to underwrite its losses, so it would be helpful if, on a six-monthly basis, the Treasury laid before Parliament a statement setting out the losses that have been incurred under the scheme so that it can keep a close eye on how much all this is costing us.

Ian Pearson (Labour, Dudley South)

The amendment would impose in primary legislation an obligation upon the Treasury in relation to losses incurred by participants in the asset protection scheme. It further sets out a timetable for the reporting process: the first report to be laid for the period 26 February 2009 to 30 June 2009 and further reports to be laid every six months thereafter. Although I recognise what the hon. Member for Fareham is getting at, the Government’s view is that the amendment is neither necessary nor desirable, because appropriate procedures are already in place to ensure accountability to Parliament in respect of reporting on any losses incurred under the asset protection scheme. I should like to explain why I believe that that is so.

First, the Treasury has already announced procedures for reporting publicly on losses incurred by a participant to the ATS. On 7 December 2009, the Treasury published on its website a document entitled “Royal Bank of Scotland: details of Asset Protection Scheme and launch of the Asset Protection Agency”, in which it was noted that in the 2009 Budget, the Treasury set out its assessment of losses on all its financial sector interventions. The document also stated:

“Based on the due diligence of APS assets and assessment of the outlook for asset prices and the economy, HM Treasury’s central expectation is that overall net losses on the insured pool of assets will not exceed the £60bn first loss. The direct cost to the taxpayer from the APS is therefore expected to be nil.”

The document also explained that in the 2009 Budget, the Treasury set out its assessment of overall losses on all its financial sector interventions, including on the Government's equity holdings. In particular, it was stated that this assessment would be updated in the next pre-Budget report, and then in future Budgets and pre-Budget reports. It was also stated that the Treasury will make equivalent updates to its accounting treatment when producing its future annual report and accounts through the parliamentary estimates process.

Accordingly, in the pre-Budget report on 9 December the Chancellor set out the Government's expectation in relation to net losses on the assets covered by the APS. He explained that, based on due diligence of the assets and the outlook for asset prices and the economy, the central expectation is that net losses on the insured pool of assets will not exceed the revised £60 billion first loss that will fall to RBS.

Secondly, the Banking Act 2009 places a statutory obligation on the Treasury to prepare reports about any arrangements that involve or may require reliance on payments made out of money provided by Parliament for expenditure incurred by the Treasury when financial assistance has been given to a bank under section 228 of the 2009 Act. For that purpose, financial assistance includes Government guarantees. In the case of the APS, the Treasury will have to prepare reports under that Act about payments made in respect of 90 per cent. of the losses incurred over the first loss amount.

If the usual parliamentary estimates procedure is used, the Treasury will be required to prepare a report during each six-month period, beginning on 1 April and 1 October, in which payments are made. Those reports must be laid before the House of Commons, and the Treasury must aim to give as much information as possible in the report, subject to restrictions on the identification of individual arrangements or beneficiaries, and taking account of other public interest considerations.

Mark Hoban (Conservative, Fareham)

Given that for the asset protection scheme there is obviously only one beneficiary, can we assume that we will be able to see the numbers for the asset protection scheme?

Ian Pearson (Labour, Dudley South)

It is my understanding that that will be the case.

When there is urgency, such that payments are made out of the consolidated fund under section 228 of the Banking Act, the Treasury is obliged to report to Parliament as soon as reasonably practicable, specifying the amount paid, although it shall not identify the institution to or in respect of which it was paid. We have discussed that on the Floor of the House. We believe that the amendment would unnecessarily duplicate the existing reporting obligations that I have outlined at length, and which are substantial.

Mark Hoban (Conservative, Fareham)

The Minister talked about two sets of information, and I want to check that we have the full deck of cards here. He referred to the statements made by the Chancellor in the pre-Budget report and the Budget about the expected level of losses, and said that those losses would fall within the £60 billion limit. He also referred to the payments to be made under the scheme. Those payments would be made if the losses exceeded £60 billion. How would we know how far through that £60 billion layer RBS had got? Would we know, for example, twice a year that RBS had incurred losses of, say, £10 billion at the end of a six-month period, and that at the end of the next six-month period the losses had risen to £20 billion? Would we know what losses had been kept in the pool of assets covered by the APS, even if no payments were expected to be made, or had been made in respect of that pool of assets?

Ian Pearson (Labour, Dudley South)

As I have indicated, we would certainly report to Parliament on losses incurred over and above the £60 billion limit. We said at the time of the PBR that we did not expect such losses to occur on the basis of our central assumption. I also indicated that we would need to report on matters at the Budget and the pre-Budget report process in future. I would imagine that we would want to report on the Government’s liabilities at that time.

Mark Hoban (Conservative, Fareham)

Can the Minister understand what I am concerned about? We might end up in a situation where it is expected that there will be no losses, and where RBS is sitting just below the £60 billion threshold. We could then suddenly be told in the next pre-Budget report that there was an expectation of £20 billion in losses, because RBS had blown through the £60 billion. How will we monitor how far below that £60 billion RBS is?

Ian Pearson (Labour, Dudley South)

The best that I can do is explain the process that we go through—and indeed have gone through recently—in the pre-Budget report and the Budget, due to the exceptional circumstances. A lot of work went on before the pre-Budget report to consider the central case, with regard to the asset protection scheme. We would want to conduct a similar exercise, or take a similar view, in considering and reporting the central case at Budget time and, should it be necessary, in future pre-Budget reports and Budgets. An assessment of whether the central case was still the same would need to be conducted at that time.

We are publicly committed to reporting on losses. There is no reason why we should not do that. I am told that the section 231 reporting procedure applies. If RBS did burn through its first loss, there would be a report, but I do not think that the intention is to provide regular updates about how far things had got. However, as I have said, we would need to assess the situation at each Budget and each pre-Budget report, given the potential Government liabilities.

Rob Marris (Labour, Wolverhampton South West)

I am a bit concerned about what the Minister is saying, perhaps because I do not understand it, as I freely admit. It appears that we could get into a situation where there are several beneficiaries under the scheme, the Government are incurring expenditures of billions of pounds and nobody outside the charmed circle—certainly not parliamentarians or the public—will know who is receiving those billions. If that is the case, it is deeply worrying.

Ian Pearson (Labour, Dudley South)

I do not believe that that is the case. I have tried to explain that we have a process of reporting through the pre-Budget report and the Budget. We also have annual accounts and the estimates process. The procedure that I was explaining is as follows. During the run-up to this pre-Budget report, we calculated what we thought a central loss case would be on RBS’s assets, as RBS is the only company in the asset protection scheme. I have no doubt that similar work will go on in the preparation of the 2010 Budget, given the significant scale of the asset protection scheme. Indeed, I have no doubt that the Treasury Committee will want to examine the work of the Asset Protection Agency in that area.

Andrew Love (Labour, Edmonton)

Yes, the Treasury Committee has moved carefully on that. I must say that I am certainly reassured that the possible losses under the scheme have decreased significantly since the time of the Budget, when I understand that they were £20 billion to £50 billion overall. That is not just under the asset protection scheme but as a result of all the Government’s exposure to the banking crisis. That figure has decreased to £10 billion, so we are reassured. We are also reassured by the renegotiation in relation to the Royal Bank of Scotland; that provided for an exposure of up to £60 billion before the Government must put their hand in their pocket.

I accept that the appropriate way to report is through Parliament, but is not the difficulty the continuing level of uncertainty out there? The amendment calls for a report on losses; it is not yet appropriate to say that they have crystallised, but you have given a commitment here today—

Roger Gale (Conservative, North Thanet)

Order, on two counts: first, I have given no commitment at all, and secondly, it is a long intervention.

Ian Pearson (Labour, Dudley South)

I appreciate what my hon. Friend the Member for Edmonton says about the way in which such matters are being scrutinised. He is right to point out that in the pre-Budget Report we announced that our assessment of the potential liabilities as a result of our interventions has gone down from £50 billion to £10 billion.

It is always the practice that if expenditure is incurred, it is reported to Parliament, and that will remain the case. However, it needs to be recognised that we have to be as open and transparent as possible when it comes to the contingent liabilities that the Government have taken on regarding the asset protection scheme. Any Government will want to report if there are significant adverse circumstances. As we indicated at the time of the pre-Budget Report, we thought that the situation had improved substantially, so we could change our assessment. I believe that we would want to have a similar assessment conducted on our potential liabilities, which should be announced at the Budget. That would be the normal thing to do, and would provide an adequate level of scrutiny and challenge.

Rob Marris (Labour, Wolverhampton South West)

I still do not quite understand. Is the Minister saying that if there were several beneficiaries in the asset protection scheme—I understand that it is not the case at the moment, but there might be; the Presbyterian Mutual Society in Northern Ireland, for example, or other institutions—with outstanding liabilities for and actual expenditure or cost to the Government, under the current regime, the taxpayer and Parliament would not know the identities of the institutions to which those sums related, and would get only the gross figures?

Ian Pearson (Labour, Dudley South)

No, I am not saying that at all. There is only one member of the scheme at the moment, and the Government anticipate there being only one—although we cannot foresee future events. Participation in the asset protection scheme would normally be a matter of public record, and one would expect that if an organisation were to participate in it, it would be clear public knowledge.

We have gone into the issue in some detail. There are a number of ways to ensure proper public scrutiny of what we are trying to do. There is absolutely nothing that the Government want to hide on this issue—we just want to ensure that we have the right reporting arrangements, and we believe that we have achieved that.

Mark Hoban (Conservative, Fareham)

I am not sure that I am quite as convinced as the Minister is by the strength of his arguments. We will have two pieces of data: we know the actual payments the Government have made as a consequence of the £60-billion layer of insurance—once RBS has burnt through it—and we will have the Government’s estimate on whether we will have to make additional payments to RBS. The former will be in the public domain as a consequence of the reporting requirements under the Banking Act 2009, but the latter is a judgment, which will be published by the Government at the time of the Budget and the pre-Budget report. By the sound of things, the Government will not provide us with where RBS is, at the point they make the judgment between £0 and £60 billion. The Government may judge that it is unlikely that any payment will be made, but RBS could be up to £59 billion. However, we would not know it from the information published by the Treasury.

I appreciate that it is a dynamic process, and the hon. Member for Edmonton was right to say that some of that would be based on provisions, not crystallised losses, but that is the same for any company publishing its accounts. One publishes one’s account—if it is a provision for a liability—based on the probable extent of the liabilities. The information I am looking for may be published in the RBS accounts. Its shareholders may want to know where it is at on that pool of assets between the £0 and the £60 billion.

It would help parliamentary scrutiny if alongside the Government’s estimate of its expected liability they published where RBS is at that point in terms of the 0 to 60 range. People in Parliament could then decide whether the Government’s estimates are fair, over-optimistic or unduly pessimistic. Being presented with the number that the Government think is the estimated loss does not give us any context in which to gauge whether their judgment is reasonable. That is an additional piece of information that I would like to see published.

Andrew Love (Labour, Edmonton)

Would the hon. Gentleman accept that the level of uncertainty here is significant? I assume that most of the figures that he seeks from the Minister are deposited with the RBS, which must put a valuation on its assets and has indicated that it will have a programme of sale of assets. Only when it goes to market and realises a value for those assets will we know in truth what the situation is in regard to this asset deposit scheme.

Mark Hoban (Conservative, Fareham)

I am not sure that I buy that, to be honest. I agree with the hon. Gentleman that this is a dynamic process and that the bank will look at the assets it holds and will put a value against them. That value will change depending on the circumstances of the individual business and of the economy. It is a dynamic process. That is the basis on which all the banks publish their annual reports. People are comfortable with that variability. It should not frighten parliamentarians to have to deal with that degree of uncertainty. That is why it should be possible for the Government to tell Parliament what the latest estimate is of where RBS is in that 0 to 60 range.

The Government are producing an estimate of their expected value of losses. Why can we not see what RBS currently estimates that book of assets as part of the APS to be worth and what losses it has incurred so far on that book of assets? I do not think that it is unreasonable to ask the Government to produce that little bit more transparency about the losses incurred to date by RBS in the pool of assets in the APS. Due diligence has been done. The Government know what assets should be included in the APS. I am sure that RBS as part of its internal procedures will do its own valuation of that pool of assets from the APS.

I want to make sure that there is a mechanism for Parliament to be aware of that rather than rootling through the highways and byways of RBS’s annual accounts. Having looked at the annual accounts of one bank relatively recently, I know that there are pages and pages of disclosure. I was about to say that it makes the Red Book look transparent, but I had better not go down that route. But it is complex disclosure. There is an opportunity to present some more information to Parliament that enables Parliament to judge how realistic the Government’s estimates are and to have proper parliamentary scrutiny about where we are on the 0 to 60 range.

The dates in my amendment may not work, but the point I am making to the Government is that they should let us have that additional piece of information so that we can hold them to account about where they are in terms of their estimate, rather than simply having a figure for expected losses and then knowing what the payments might be. Let us know where RBS is in that 0 to 60 range. We have discussed this for some time and I hope that the Minister has taken the point on board.

Ian Pearsonindicated assent.

Mark Hoban (Conservative, Fareham)

He nods. We will see where we get to on this. The taxpayer has signed up to quite significant potential contributions to rescue these banks and it would be helpful to know exactly where we are on that. I beg to ask leave to withdraw the amendment.

Roger Gale (Conservative, North Thanet)

I remind hon. Members yet again that amendments for the next sitting will have to be tabled by 4.30 pm on Wednesday 30 December. The Table Office will not open during the new year holiday. The next sitting will be on Tuesday 5 January. May I take this opportunity to wish all members of the Committee and the Officers of the House a pleasant Christmas and a peaceful new year?