Committee (2nd Day)
My Lords, the hybrid Grand Committee will now begin. Some Members are here in person, respecting social distancing, while others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
I will call Members to speak in the order listed. During the debate on each group, I invite Members, including Members in the Grand Committee Room, to email the clerk if they wish to speak after the Minister, using the Grand Committee address. I will call Members to speak in order of request. The groupings are binding.
Leave should be given to withdraw amendments. When putting the Question, I will collect voices in the Grand Committee Room only. I remind Members that Divisions cannot take place in Grand Committee. It takes unanimity to amend the Bill, so if a single voice says “Not Content” an amendment is negatived, and if a single voice says “Content” a clause stands part. If a Member taking part remotely wants their voice accounted for if the Question is put, they must make that clear when speaking on the group. We will now begin.
Clause 2: Prudential regulation of certain investment firms by FCA rules
10: Clause 2, page 2, line 28, at end insert—
“(2) Schedule 2 does not come into effect until each House of Parliament has approved accountability arrangements for the powers conferred on the FCA in that Schedule.(3) Accountability arrangements under subsection (2) include arrangements for—(a) draft rules to be laid before each House of Parliament;(b) final rules to be laid before each House of Parliament;(c) opportunities for each House of Parliament to take evidence on the draft or final rules and to express an opinion on them;(d) the consequences of an expression of opinion by either House of Parliament.”Member’s explanatory statement
This amendment would mean that the rule making powers given to the FCA in Schedule 2 can be exercised only when Parliament has agreed how accountability for those powers will be exercised by Parliament.
My Lords, this is my first day in Committee and I place on record my interests as declared in the register, particularly my shareholdings in financial services companies.
I am very grateful to the Committee for going so slowly on Monday and not reaching Amendment 10. As I think noble Lords are aware, I was in the Chamber and could not have moved it myself. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, and my noble friend Lord Holmes of Richmond; not only have they added their names to my amendments in this group but they were standing by to deal with them without me on Monday. Normal service is resumed and I can move my amendment myself. I shall also speak to Amendment 26 in this group.
This is a fairly large group of amendments but its underlying theme is a search for the right balance between letting the specialist regulators get on with the job of regulatory rule-making and the role of Parliament in overseeing those regulators. My Amendment 10 to Clause 2 says that Schedule 2 to the Bill, which amends FiSMA to create rule-making powers for the FCA to undertake prudential regulation of investment firms, will not come into effect until each House of Parliament has approved accountability arrangements for those powers.
Amendment 26 is drafted in identical terms but relates to the rule-making powers conferred on the PRA by Schedule 3, which deals with the capital requirements regulation rules.
I make no attempt in these amendments to say what form of parliamentary accountability arrangements should be put in place, although the second part of my amendment says that accountability arrangements should include a number of things: arrangements for drafting the final rules being laid before Parliament; taking evidence on a draft of final rules and, importantly, Parliament expressing an opinion on them; and the consequences of any expression of opinion. On reflection, the drafting of my amendment is perhaps not clear enough as I was not intending to suggest that Parliament had to, for example, have the laying of draft rules as part of the accountability arrangements. I merely intended to indicate that it could have that as part of the arrangements.
My amendments are predicated on a belief that we should not grant significant new rule-making powers to the regulators without sufficient checks and balances in the system. Had the Government retained the rule-making powers repatriated from the EU, it would have been pretty clear that Parliament would have had an involvement. I am clear that passing these powers to the regulators should not allow the Government to write Parliament out of the picture. I am not, however, of a settled view as to what Parliament should do, which is why my amendment says that these new rule-making powers can go to the FCA and the PRA only when Parliament’s involvement is settled by Parliament itself. I am very conscious that it is not correct—or at least not normal—for legislation to cover the precise arrangements for parliamentary scrutiny. Those arrangements are for Parliament itself to determine, and I have tried to respect that.
Other amendments in this group seek to fill the void of what Parliament should do in practice, and I shall comment briefly on some of them. The noble Lords, Lord Tunnicliffe and Lord Eatwell, in their Amendments 20, 21, 40 and 41, have set out involvement, with time limits, for each House of Parliament reporting on draft rules, with the ability to report on them but no power of veto. I can certainly see the merits of these amendments, as they strike a balance, giving Parliament an opportunity to give its views on new regulations but without allowing it to overrule our independent regulators. They should allow Parliament to take evidence on the impact of proposed new regulations, for example, on different parts of the financial services sector. This could deal well with concerns about, for example, the impact of regulations on both small and large players in parts of the financial services sector, and whether regulations create new barriers to entry. I am not sure, however, that the amendments sit easily with a need to make new regulations rapidly, which I believe is necessary from time to time.
On the other hand, many in the financial services sector are fearful of regulators gold-plating regulations and imposing unnecessary costs on whole sectors. At the end of the day, costs get passed on to consumers, even though there is often no direct correlation between a rule or regulation and any particular increase in consumer costs. That would not necessarily be well dealt with by the amendments in the names of the noble Lords, Lord Tunnicliffe and Lord Eatwell.
Some elements of Amendment 27 in the names of the noble Baronesses, Lady Bowles of Berkhamsted and Lady Kramer, would allow more thematic or cumulative reviews. I particularly like the elevation of the statutory panels of the FCA and the PRA, though I do not believe that those panels should include Members of either House of Parliament. I know that these panels could be more effective voices for industry concerns. I have in mind, in particular, the PRA’s practitioner panel, which the PRA certainly did not want when it was set up by the Financial Services Act 2012, and has had no discernible impact since then. On the other hand, other elements of Amendment 27, for example Parliament’s involvement in the regulators’ meetings with the Basel Committee or IOSCO, seem to me to go beyond what it would be reasonable for Parliament to do.
My noble friend Lord Blackwell has an amendment with yet another variant with scrutiny of rules by parliamentary committees, but with any results being passed to the Secretary of State for action. My concern with that is that the only action that could in practice be taken, once the power to make rules has been passed to the FCA and the PRA, would be more primary legislation. That seems a sledgehammer to crack a nut and would, in practice, not really act as a restraint, a check or a balance on the undesirable use by the regulators of their powers.
The issue of the nature of parliamentary involvement is discussed in the Treasury’s future regulatory framework review. The consultation on part 2 of that process, started last October, has just closed—my noble friend the Minister may want to say something about where we are with that process. I thought the section on accountability in that consultation was not strong and that reliance on the existing committee structures of both Houses was the wrong direction of travel. Whatever our views on that, a longer-term overhaul of accountability structures will not help us; we will have to find a solution that works for this Bill and until any changes emerge from the framework review. That is the challenge before us. I beg to move.
My Lords, my name is on eight amendments in this enlarged group. They cover different aspects of parliamentary accountability, although a common thread is Parliament’s right to information. Whether Parliament chooses a regime that scrutinises everything in detail or one which picks points of contention, and however it may develop over time, timely access to background and information is relevant.
My Amendment 18 and its counterpart, Amendment 38, relate to keeping Parliament informed about the discussions between the Treasury and the regulator concerning equivalence. In Schedules 2 and 3 this Bill establishes that, when making rules, the FCA or PRA may consult the Treasury about the likely effect of the rules on relevant equivalence decisions.
Parliament should be sighted of these considerations because they may affect the content and strength of rules and, as explained in the Government’s consultation, equivalence decisions may result in requirements being embedded in statutory instruments. Just as we used to have EU requirements in regulations, we may end up having equivalence requirements. There is nothing complicated about my amendment; it just says, “keep Parliament informed”. Unless Parliament establishes that right now, it will not exist.
To illustrate this, I quote from the recent FCA consultation on investment firms which, like this Bill, front-runs the Treasury consultation. Paragraph 9.68 states:
“we have discussed with HM Treasury the rules’ likely effect on relevant equivalence decisions. We are not expected under our new public accountability requirements to provide further detail on this.”
I think we need to know something, and I hope the Minister will appreciate that too.
I turn to my Amendments 19 and 39, which specify the level of detail that regulators’ explanations concerning compliance with statutory requirements should contain. I was provoked into tabling these amendments on reading the FCA’s explanations in its consultation. Although they gave a reasonable but qualitative explanation of its general approach to the Financial Services Bill, the statutory accountability statements were poor, containing nothing quantitative or illustrative. They consisted of “trust and believe me” statements littered with phrases such as “proportionality”, “business specific”, “bespoke” and “flexible”; no attempt was made to identify or quantify how that was done. Information would have to be extracted from the rest of the consultation and rules, if it were there at all; or—and this is the nub—we have to swallow that, as paragraph 9.71 states, it is left up to the
“investment firms and supervisors to focus on the core business model indicators of financial resilience relevant to each firm”.
There are no examples given.
The statutory explanations are an important part of accountability. They should be elaborated on as a stand-alone justification, perhaps to spoon-feed the non-skilled reader, but not just through assertions. We need more than assertions that supervisors cosying up with firms can decide how to get it right. That is not accountability. These statements should be written more like justifying a case in court and less like how to pander to industry. They should inform on the toughness of the regime and capital calculations.
My amendment proposes that the explanations
“must include specific, detailed and quantitative elaboration, with worked examples”,
and that Parliament may reject rules that are accompanied by inadequate explanation. By way of comparison, when I checked the PRA’s front-running consultation which came out on 12 February, it seems to have done a rather better job and included examples.
I turn now to the amendments on the broader parliamentary oversight regime. The amendment in the name of the noble Baroness, Lady Noakes, which I signed, lays out the starting principles. My Amendment 27 is about the middle game and draws attention to the regularity of, and entitlement to, information necessary to keep abreast of what regulators are doing and to acquire knowledge for effective scrutiny of the regulators’ rule-making, rather than having to accept a regulator’s say-so.
The amendment of the noble Lord, Lord Tunnicliffe, deals with the endgame approval. The noble Baroness, Lady Noakes, has explained her amendments, which are a treasure of drafting, each point carrying a strong message. The first is, do not take Parliament for granted and legislate a new regulatory architecture that is only at the consultation stage without Parliament having its share in the new process. It is therefore reasonable that the schedules do not come into effect until Parliament has determined its share.
The second message is that Parliament wishes to hold regulators to account and to be included properly and explicitly in consultation. I am really pleased to see recognition that Parliament must be consulted on draft rules as well as final rules. Put simply, it is not possible to get to grips with what is going on just at the very end.
The third message is that there must be opportunity for each House to take evidence and express an opinion. I understand the expression “opportunity” to cover both significant and adequate time and significant and adequate access to information; otherwise, it is a fake opportunity.
The fourth message is that there must be consequences when Parliament raises concerns. That might mean modifying rules; it might mean more explanation and that checking data is required; it might mean delay in implementation. That is for Parliament to choose, but I would certainly put delay in the toolbox.
At the end of the day, however, the regulator must take responsibility for the rules and a parliamentary sign-off does not remove that responsibility. We need discussion of how much Parliament desires to check. The rules that Parliament will look at over time are extensive, ultimately encompassing and replacing all the policy and hard benchmarking that previously existed in statutory instruments from onshored EU legislation. It is not the Government’s intention to replace that layer in any substantive way. A few instances of “have regard” are the examples in the Bill, just like the suggestion in the HMT consultation, and some equivalence matters may creep into SIs. That format may technically be under consultation, but the Bill front-runs it, the regulators’ consultations front-run it and we know that it is going to happen. What we negotiate in the Bill will fix the path, so it is not the time to be faint-hearted or live on a promise. Parliament’s rights must be established.
Coming to my Amendment 27, I have drawn attention to a range of things which do not all have to be done all the time if Parliament wishes to target, rather than be comprehensive, but the rights should be there. Proposed new subsection (1) concerns the quarterly provision of regulators’ reports and, as the noble Baroness, Lady Noakes, observed, before and after meetings of international standard-setting bodies. I put that in because that is how a lot of policy will be made—in the international standard-setting bodies—and then we will incorporate it under that cover. We will not have learned anything on the way about the thinking behind the policy.
Proposed new subsection (1)(d) gives an entitlement to seek other reports, including the data necessary both to pursue incidents and to understand how rules have been calibrated. At present, neither industry nor Parliament has access to that calibration data. We may not want it all the time but on contentious points it should be possible to obtain it.
Proposed new subsection (2) provides for appearance before committees when requested in connection with those reports, and that, where necessary, there can be confidential sessions. There are times, when a lot is happening, when meetings may need to be more frequent than at other times. This was the case in the EU when the whole tsunami of legislation and technical standards following the financial crisis was going on. I am a little concerned that there may be such a tsunami in the UK as the regulators absorb the onshored EU legislation currently in statutory instruments and convert it into rulebook form. That will need scrutiny, because it is the point at which most of the hard benchmarks for holding regulators to account that currently exist in legislation will disappear and be replaced by regulators’ own policy, and their own variable ideas.
Proposed new subsection (3) provides for regulators seeking the views of Parliament before launching a consultation, when making rules, and regarding their business plan, new market activity and the regulatory perimeter.
Proposed new subsection (4) covers the statutory panels of the regulators, and suggests some changes that might be helpful to make them more independent and less influenced by the regulators, who currently choose the members, set their remits and keep control of the information. Changes are necessary in the interests of transparency, and there should also be a dialogue between those panels and Parliament, and maybe with others.
Finally, proposed new subsection (5) covers obtaining data, assistance from the NAO or other public office, including on impact assessments, assessments of regulatory burdens, and an ability for the committees to require a pause in implementation of rules for up to three months to allow further scrutiny. Parliament needs to have a grasp of what the regulators of our largest and most systemic industry are doing. It is a matter reported in international literature that financial services regulators tend to be the most captured of any regulators—which, along with their importance to the UK, is why greater attention is merited.
The amendments tabled by the noble Lord, Lord Tunnicliffe, contain provisions about Parliament giving opinions. These opinions must have weight, but they cannot be given without sufficient prior knowledge and information. I do not think that 20 days is sufficient for scrutiny of a large set of rules, or if many sets come along at once. People in industry, who do this all the time, normally get three months, and Parliament should not be squeezed to less. What might have happened in earlier stages of consultation is relevant, but I would still argue for the possibility of extension or delay, otherwise the timing will always be organised so that there is not time, and urgency can be claimed. I am aware of limitations on parliamentary capacity to do everything all the time so, to finish, I reiterate the point that information rights need to exist, even if they are used selectively.
My name is also on the amendment tabled by the noble Lord, Lord Sikka, which I support, but in the interests of time, I will leave it at that.
My Lords, before getting to the substance of the debate, I must express some puzzlement; obviously, I have much to learn about this House’s mysterious ways. The specific issue that concerns me is the grouping of amendments. We are sternly told that groupings are not to be changed, but here we have a significant change: what was two groups on Monday is now a single group. The issues are not that disparate, but it makes a big difference to the time we have available.
The main point I wish to make relates particularly to Amendments 10 and 71. The latter was tabled by my noble friend Lord Sikka. If I had been a bit more alert, I would have added my name.
The issue here is to whom the FCA should be accountable, given the well-established phenomenon of regulatory capture, as the previous speaker mentioned. It is worth emphasising the point that regulatory capture is where an industry regulator such as the FCA comes to be dominated by the industry it is charged with regulating. The result is that the agency that is meant to be acting in the public interest instead works in ways that benefit the industry. The important point to understand is that this does not happen because inadequate or ineffective people are running the regulator. It is certainly not about corruption. It is an institutional, not individual, problem.
It is important to understand why it happens. The reasons are manifold but I will emphasise three. First, the regulated industry has a keen and immediate interest in influencing the regulator, whereas the customers are less motivated; they have their lives to live and are engaged only for relatively brief periods anyway. Secondly, we know that industries are prepared to devote substantial resources to influencing the regulator. Thirdly, there is the inevitable commonality of work and social life for the individuals on both sides of the process.
Given that the phenomenon of regulatory capture is acknowledged and widely understood, what do we do about it? The first step is acknowledging the issue and recognising and addressing the challenge. The next step is making the regulator as accountable as possible. There are many ways of doing this, but we can leave those for another day. What we have here are Amendments 10 and 71. Under Amendment 10, the involvement of both Houses in considering draft and final rules would be valuable in itself, given the expertise available. However, it is also valuable because of the additional exposure that it brings to the workings of the regulator, which will have to make its case. In the same way, Amendment 71 would bring greater exposure to the work of the FCA, forcing it to expound on its performance and its objectives in public and in an expert forum.
There is much more to do on making the FCA fully accountable, but these amendments are a start and have my support.
My Lords, it is a pleasure to follow the noble Lord, Lord Davies of Brixton. He addressed in useful detail the risks of industry capture of regulators, to which the financial sector is particularly prone and which is addressed by Amendment 71 in the name of the noble Lord, Lord Sikka. Like the noble Baroness, Lady Bowles of Berkhamsted, and the right reverend Prelate the Bishop of St Albans, I have attached my name to that amendment. I associate myself particularly with the remarks of the noble Baroness, who stressed that these amendments are about the rights of Parliament and access to data and detailed information—necessary for the kind of expert work at which your Lordships’ House excels.
As the noble Lord, Lord Davies, covered the need for Amendment 71 in some depth and its author—the noble Lord, Lord Sikka—is yet to speak, I will confine myself to general remarks about how all the amendments in this large group reflect the great degree of concern on all sides of the House about, given how the Bill is currently constituted, the lack of parliamentary oversight of the actions of both the regulators and the Treasury. The noble Baroness, Lady Noakes, explained this point in her highly informative introduction to the group.
This morning, thanks to their kind indulgence, I was able to join Cross-Benchers in a briefing on the Bill, where we heard how the formalisation of the relationship between regulators, Parliament and the Treasury is “on the way”. The future regulatory framework consultation closed on Friday. We heard that the Bill is not the final word on that, and that the responses to the consultation will not be ready in time for the Bill. So, yet again, we hear that democratic controls and the details of government plans will be included in future legislation and regulation. Your Lordships’ House has heard this so often on so many subjects; perhaps we could enlist the Lords spiritual in assisting us in putting it in some kind of musical form. It simply is not good enough.
We know that, despite the long run-in time, the Government were not ready for Brexit at the end of the transition period and that civil servants, through no fault of their own, are trapped in a huge scramble to catch up with the massive backlog of government inaction and indecision—the stats tsunami, to which the noble Baroness, Lady Bowles, referred. But what we have here are sensible proposals from experienced, expert Members of your Lordships’ House. I hope that the Government will acknowledge the urgency and importance of ensuring democratic oversight and that they will take at least some of these amendments on board at the next stage of the Bill, particularly, given the arguments already made, Amendment 71. There is no need to wait. Democratic oversight should be a given, not an extra, later addition.
My Lords, it is a pleasure to take part in day two in Committee on the Financial Services Bill. In doing so, I declare my interests as set out in the register.
I speak on this group to support my noble friend Lady Noakes’s Amendments 10 and 26. I shall not detain the Grand Committee too long. I have written an extensive article on this subject—if anyone is interested, it is at lordchrisholmes.com. All the amendments in this group seek to answer a straightforward question: who watches the financial watchdogs? If I had had a more expensive education, I could do the Latin for that, but fortunately I simply had an expansive education.
It seems to me that the start point is not whether we need more or less scrutiny and accountability but what the right level of accountability is. What are we seeking to achieve? In the EU/UK process, the debate has been characterised as being between principles and prescription. That seems a somewhat false characterisation. For me, the start point of purpose would make a lot more sense. What are we trying to achieve via our regulatory approach—to the FCA and the PRA—to enable it to be to that extent and no more? We also hear of proportionality. I support the two amendments in the name of my noble friend Lady Noakes because they are elegant and leave space for detailed thinking to be done rather than for it needing to be rushed through in the Bill.
Some of that thinking needs to rest around the three Cs of capacity, consistency and co-ordination. Does any potential scrutiny have the right people, the right skills, the right experience and the right amount of time to undertake the task? On consistency, are the scrutinisers and the regulators there all the time, day in, day out, not merely when there is a significant regulatory failure or something that seems of particular political significance? Co-ordination speaks for itself, each regulator being a constituent part of a greater sector in terms of financial services and beyond that across the whole family of regulators, inspectors and ombudsmen.
In any solution that may come out of this, the greatest amount of energy seems to be around the Treasury Select Committee and a potential sub-committee. This has a great deal to recommend it, but even if we consider the first C of capacity, there would seem to be at least a challenge on this.
A similar argument, but with the addition of the right level of expertise, in my view, has been put forward in an excellent report from the All-Party Parliamentary Group on Financial Markets and Services, which was published on 18 February. It argues that a sub-committee of the Treasury Select Committee, supported by an expert panel, could be effective in this space. As has been said, it is not for the Government to prescribe what approach Parliament takes but, in this Financial Services Bill, the opportunity should be taken to provide that space and those options for such a scrutinising body to be constructed.
We have the opportunity to move a million miles away from part of the parliamentary scrutiny that we currently have—the annual report to Parliament via the Minister. We can move towards doing effective scrutiny in the 21st century in real time, rather than via the rear-view mirror: Parliament partnering with academia, the private sector and all the relevant expertise, deploying all the necessary elements of technology to enable effective and efficient scrutiny of our financial regulators for the benefit of us all.
My Lords, many of the amendments in this group share the aim of increasing or providing for the first time proper parliamentary scrutiny of some financial services regulatory regimes and of those who enforce them. Some amendments deal with the problem of absent or insufficient scrutiny on a grand scale and I strongly support their intent. This Government often seem to think that parliamentary scrutiny is best avoided or diluted. Our DPRRC, SLSC and Constitution Committee have regularly warned the Government against using skeleton Bills, against behaving as though consultation is a substitute for real parliamentary scrutiny and against using rule-making as camouflage legislation.
This Bill contains a particularly alarming example of the evasion of scrutiny in allowing the Treasury to revoke rules by SI by giving the regulator the power to make legally binding rules without any parliamentary involvement. That is completely unacceptable, as the Government must know. I strongly support Amendments 10 and 26, tabled by the noble Baroness, Lady Noakes, as a means of restoring some proper scrutiny. As the noble Baroness clearly explained, these amendments are not prescriptive as to the form of parliamentary scrutiny needed; they simply set out the principles that must guide construction of the scrutiny mechanisms. This is the equivalent of making an invitation to the Government that they should not refuse. It is an invitation to serious and substantive discussion about the way forward and it rightly, given the serious and far-reaching consequences, gives an appropriate incentive to resolve the issue quickly and collectively. I urge the Government to begin immediate cross-party talks on the issue.
By contrast with some of the amendments in this group, our Amendment 22 has modest and narrowly defined ambitions. As the Bill stands, Clause 3 lists the provisions of the CRR that the Treasury may revoke by regulation. There are 42 of these categories of provisions, all of them significant. Clause 3(4) makes these revocations conditional on their being or having been adequately replaced by general rules made, or to be made, by the PRA, or to be replaced by nothing at all if the Treasury thinks that that is okay. The Treasury appears to be the sole judge of what may or may not be an adequate replacement. In any event, Parliament is completely bypassed in this system. But all this means is that the Treasury can revoke provisions by SI before it has published the replacement rules or even decided what they will be. This sounds like a perfect recipe for disorderliness and uncertainty and it means that Parliament will have no opportunity to consider these new rules in a legislative setting. We get to see what has been dropped, but not necessarily what the replacement rules may be. This is another example of making law by making rules that Parliament has not been able to scrutinise.
Our amendment proposes a simple way round this. It would require any revoking SI to carry not only full details of what was being revoked but the full text of the replacing rules, except, of course, where no replacement was envisaged. These new rules can and will reshape important parts of our financial services regulatory regimes, and it is quite wrong that Parliament should be unable to scrutinise them.
I hope the Minister will be able to accept our amendment or to give us an assurance that revoking SIs will contain the full text of any replacement rules.
My Lords, in addressing this group of amendments, I want to speak also to Amendment 85 in my name. As I set out at Second Reading, I should draw attention to the fact that I was chairman of a regulated bank until the beginning of the year, although my interests now are solely as a shareholder.
I agree with other speakers that parliamentary accountability for the regulators is important now that the UK has its own regulatory agenda outside the European Union, and it is missing from this Bill. However, the regulators have been established by Parliament to enable independent expert bodies to exercise delegated powers, and we need to be careful that in providing for the necessary parliamentary oversight we do not create structures that impinge on the political independence of the regulators and their ability to take a considered, apolitical view, undermine their expertise or turn Parliament effectively into the day-to-day regulatory body if it is required to approve every rule in advance. That would make the regulators simply a working body for Parliament rather than independent regulators in their own right.
A number of speakers have talked about regulatory capture. From my experience over many years, it has not felt like the regulators have been captured by the industry, but neither have they always been right, so scrutiny is important. My amendment seeks to strike the right balance of delegation and oversight by suggesting parliamentary scrutiny of rules after the event—ex post—rather than it trying to second-guess the regulator ex ante by approving rules in advance. I therefore take a different view from my noble friend Lady Noakes on Amendment 10 and some of the other amendments. If Parliament sought to approve every rule in advance, the regulators would lose their independence, and we would lose the benefits of speed and expertise. We need to recognise that, often, rules need to be made to fix a problem, and if that problem needs fixing, the regulators need to act rapidly. They obviously need to consult as far as is possible, but to set in process a whole session of approvals by Parliament would handicap them in taking action when they needed to, and it would jeopardise their political independence.
Under my amendment, if a parliamentary committee felt that the rules were inappropriate or not working properly, it could make its views known to the regulator, and I suspect that in many cases the regulator would sensibly take note of that. Ultimately, it would be up to the Secretary of State to propose changes to regulations if the regulator was not acting in accordance with the framework that Parliament set out and intended. The point was made that that might need primary legislation; my understanding is that, under this Bill, Her Majesty’s Treasury can enact a lot of changes in regulations through secondary legislation, which can be done much more rapidly.
As my noble friend Lady Noakes said, what the amendment cannot signify is exactly what the form of parliamentary scrutiny will be and therefore that cannot be written into the Bill, but, since we are having this debate, I would advocate that the scrutiny function when Parliament comes to that is best carried out by a Joint Committee of both Houses, with appropriate technical support.
Experience suggests that a Joint Committee is the best way to avoid politicising the debate. It can draw on the experience in this House while enabling the elected Members in the other place to have their legitimate role in parliamentary oversight. As and when it is appropriate to decide on the form of parliamentary scrutiny, I hope that this can be taken into account.
I know that these matters are still under consultation. I look forward to my noble friend the Minister’s response, but I support the weight of the speakers so far that this is a matter that needs to be dealt with, if at all possible, during the course of this Bill.
My Lords, I declare my interests as stated in the register. I support both Amendments 10 and 26 in the name of my noble friend Lady Noakes. They do not mean that Parliament would be seeking to usurp the role of the regulators, or to attempt to rewrite MiFID II which, according to Forbes Magazine, has required 30,000 pages to explain its regulations.
It is right that the Bill enables our regulators to act quickly and flexibly to respond to changes in the markets or the introduction of new financial products. However, without the scrutiny formerly carried out by the European Parliament of each and every detail of regulations and directives, it is necessary that Parliament should have oversight of the regulators’ work. My noble friend is right that we need to agree the optimum balance and how this will be done before the powers conferred upon the PRA and FCA are made available for them to use.
Amendments 18 and 19 in the name of the noble Baroness, Lady Bowles of Berkhamsted, are motivated by a desire to continue to align to EU regulation, even though there are no expectations that the EU will make any further significant equivalence declarations in the short term. Amendment 19 places a large, poorly defined burden on the FCA to show where and how its draft rules have been influenced. It is clear that the FCA will consider many external factors in drafting its rules. As your Lordships know, it is intended to agree a basis on which both regulators will be made accountable to your Lordships’ House and another place for the way in which they carry out their work. Accordingly, I think it would be too restrictive on the FCA if this amendment were supported. It would also create uncertainty over the Bank of England’s ability to act quickly as necessary in exercising its macroprudential responsibilities.
Similarly, Amendment 20 seeks to allow committees of your Lordships’ House and another place to publish a report on proposed Part 9C rules. It is not clear which committees these will be in the future. It would slow down changes that the FCA will want to make quickly, which could be damaging to the standing and competitiveness of the City. Perhaps my noble friend can tell the House how the Government intend to amend the Bill in order to provide for the necessary scrutiny of acts of the regulators. I am not sure that that would be the effect of Amendment 22, in the name of the noble Lord, Lord Sharkey. The Government’s intention, which I support, is that we should move away from the cumbersome, codified nature of rules. I would expect the PRA to try to make rules that are shorter and clearer than the regulations they replace. It would not always be appropriate for them to include the full text of the general rules to be replaced.
Amendment 27, in the name of the noble Baroness, Lady Bowles, seems to place a very heavy demand on Parliament to become closely involved in what our regulators do at international conferences, in a way that might be too restrictive on their freedom to participate fully at those conferences. This would be likely to weaken British influence on the outcomes of discussions and decisions made at such conferences.
In Amendment 38, the noble Baroness, Lady Bowles, seeks to duplicate other arrangements which will be made to institute the necessary parliamentary accountability and again appears motivated by a desire to continue to align to EU rules. If the Government can bring forward an amendment to increase the attention that the PRA is required to give to the competitiveness of the markets, as strongly proposed by several noble Lords on Monday, I would suggest that Amendment 38 might be unnecessary.
While considering this matter, can the Minister confirm that it remains the Treasury’s intention to advise the Bank of England not to adopt a similar measure to the EBA to permit banks to capitalise software investments for the purpose of stress testing? This is one example of where, instead of equivalence, we will have higher standards than the EU, although regulatory standards are often not two-dimensional, high or low.
The effect of Amendment 39 is surely to transfer back to Parliament the detailed rule-making powers. Quite apart from the fact that neither your Lordships’ House nor another place is equipped to carry out such detailed, line-by-line scrutiny, the amendment would seriously slow down rule-changing, removing agility and flexibility from the regulators.
Amendment 40 in the name of the noble Lord, Lord Tunnicliffe, does not remove the ultimate power to change rules from the regulator but introduces a cumbersome process involving the issuance of reports by committees of both Houses. Does the noble Lord intend these committees to be new standing committees, and how will they be resourced? I also note that in the case of a draft being laid, say, a week before Parliament rises in July, it might be three months before 20 sitting days of either House have elapsed.
I do not understand the intention of the noble Lord, Lord Sikka, in introducing Amendment 71—a requirement separately for the Treasury Committee in another place to assess the FCA’s conduct prior to the appointment of a new chief executive.
My noble friend Lord Blackwell’s Amendment 85 makes an interesting proposal as to how the regulators should be made accountable to Parliament. Does my noble friend Lord Howe think that, as far as your Lordships’ House is concerned, scrutiny would come from an existing or soon to be established Select Committee, such as the strangely named Industry and Regulators Committee, or whether a new standing committee should be set up to exercise these functions?
The noble Lord, Lord Bruce of Bennachie, in his Amendment 137 seeks to place a statutory duty to consult the devolved Administrations over a reserved matter. We await with bated breath the publication of the Dunlop review, which should inform us of how the Government intend to manage relations with the devolved Administrations in the future, including on reserved matters. However, I cannot support the noble Lord’s amendment, which is unnecessary and provocative to certain elements within the devolved authorities.
I look forward to other noble Lords’ contributions and the Minister’s reply.
My Lords, I will speak to Amendment 71, which is in my name and supported by the noble Baronesses, Lady Bennett of Manor Castle and Lady Bowles of Berkhamsted, and the right reverend Prelate the Bishop of St Albans.
The amendment seeks to strengthen the effectiveness of financial regulation and calls for scrutiny of the FCA’s conduct by the Treasury Committee prior to the appointment or reappointment of its chief executive. It effectively calls on the committee to act as a guide dog to the watchdog. We all know that effective regulation is a necessary condition for protecting people from malpractices, holding miscreants to account and promoting confidence in the finance industry.
The FCA has failed to deliver robust and effective enforcement and it needs to be helped. Its failures are documented everywhere. The recent report by Dame Elizabeth Gloster on the collapse of London Capital & Finance noted that the FCA did not discharge its functions in respect of LCF in a manner that enabled it to effectively fulfil its statutory objectives and that there were significant gaps and weaknesses in its practices. From my perspective, even more damning was the revelation that FCA staff were not even trained to read financial information to recognise unusual or suspicious transactions.
Another report on the scandal-ridden Connaught Income Fund concluded that the FCA’s regulation of the entities and individuals was not appropriate or effective. We are still awaiting the report on the Woodford Equity Income Fund, when thousands of investors are trapped. Regrettably that is not an independent investigation, but we await the outcome with considerable interest.
The FCA failed to act in the case of Carillion, a company that collapsed in January 2018. Carillion inflated its balance sheet and profits through aggressive accounting practices. These included the use of mark-to-market accounting, enabling the company to leave at least £1.1 billion-worth of worthless contracts on its balance sheet. It failed to amortise £1.57 billion of good will, which was effectively worthless. The company was disseminating that misleading information to the markets but the FCA took no action whatever. Curiously, on 18 September 2020, nearly 21 months after Carillion’s collapse, the FCA issued a warning notice saying that the company and some of its directors had recklessly misled markets and investors over the deteriorating state of its finances before the company collapsed. Where was the FCA for all the earlier years while Carillion was publishing that misleading information? It was nowhere to be seen.
There is now considerable public evidence that the banks have been forging customers’ signatures to alter key documents and repossess customers’ businesses and homes, and that evidence has been published in the mainstream media. I understand that there are over 500 documented cases and the FCA has not even started any investigation. A senior Metropolitan Police fraud officer wrote to the Treasury Select Committee in 2017, stating that the executive boards of some of the most prominent banks were “serious organised crime syndicates”, yet that has not resulted in any action by the FCA.
The bank RBS has systematically defrauded its customers but the FCA has been dragging its feet, often pushed by parliamentary committees and others to do its job. In November 2013 a 20-page report prepared by Lawrence Tomlinson summarised this abuse of bank customers and small businesses at RBS’s global restructuring group, or GRG. The Tomlinson report stated that rather than nurturing small businesses, the bank actually pulled the financial rug and sent them to premature bankruptcy. GRG operated from 2005 to 2013, and at its peak handled 16,000 companies with total assets of around £65 billion. A proportion of those companies were not viable but a great number were and had never defaulted on loans. The FCA’s approach was to bury its own Section 166 report on the RBS frauds. In February 2018, the Treasury Committee ignored the FCA’s reluctance and published the report. The committee said:
“The treatment of vast numbers of SME customers placed in RBS’s Global Restructuring Group was nothing short of scandalous.”
In June 2019 the FCA published what it described as its final report on the investigation into RBS’s treatment of small and medium-sized businesses. The co-chair of the All-Party Parliamentary Group on Fair Business Banking and Finance said:
“This report is another complete whitewash and another demonstrable failure of the regulator to perform its role.”
The timidity of the FCA is also evident from the long-running HBOS frauds, which show no sign of resolution. In 2013, a report codenamed “Project Lord Turnbull” was published by Sally Masterton, Lloyds senior manager in credit risk oversight in the regulation and governance section of its risk division. It was prepared in response to inquiries made during Thames Valley Police’s investigation into the frauds at the Reading branch of HBOS, and also covered the period before the 2007-08 banking crash and bailouts and the subsequent takeover of HBOS by Lloyds Banking Group. The report noted that HBOS executives had “concealed” asset-stripping frauds at its Reading branch ahead of the bank’s takeover by Lloyds in 2008. The FCA did nothing to bring fraudsters to book.
In 2017, a group of six financiers, including two ex-HBOS bankers, were jailed for 47 years for frauds that took place over a decade earlier, prior to the takeover by Lloyds in 2008. The credit for these convictions goes to the Thames Valley police and crime commissioner, Anthony Stansfeld, who spent £7 million of the police budget to collect evidence. He said:
“The fraud was denied by Lloyds Bank for 10 years, in spite of it being apparent that senior members of the bank were aware of it at least as far back as 2008.”
On 8 February 2019, Anthony Stansfeld told the London Evening Standard:
“I am convinced the cover-up goes right up to Cabinet level. And to the top of the City.”
Such a public statement by a senior law enforcement officer should have formed the basis of a parliamentary investigation, but it did not.
Despite the high-profile convictions and leaks, neither the FCA nor Lloyds published the Turnbull report. Eventually, on 21 June 2018, the All-Party Parliamentary Group on Fair Business Banking published a leaked copy of the report. In the words of Kevin Hollinrake MP, the report
“alleges that senior managers within the bank were aware of the fraud prior to the takeover and the £14 billion Lloyds and HBOS rights issues, yet they took clear, deliberate and documented action to conceal it. Let us be clear: if this is true, it could potentially make the rights issues and the takeover fraudulent”.—[Official Report, Commons, 10/5/18; col. 968.]
That is a very serious failure by the FCA. After dragging its feet and doing nothing for more than a decade, in June 2019 the FCA fined the Bank of Scotland £45.5 million for its failure
“to alert the regulator and the police about suspicions of fraud at its Reading branch.”
Not a penny of this fine went to the Thames Valley commissioner, which is a clear disincentive for any regulator or police force to take any action. The saga of the HBOS frauds is still unresolved. Many of the victims are in their 70s and may not even live long enough to receive compensation. That is a huge failure.
The finance industry continues to engage in abusive practices. Numerous financial products, including pensions, endowment mortgages, precipice bonds, split capital investment trusts, interest-rate swaps, mini-bonds and payment protection insurance have been mis-sold to create misery for many and profits for a few. Financial frauds have been rife in this industry for years, as shown by RBS, HBOS, Lloyd’s of London, BCCI, Barings, Barlow Clowes, Dunsdale and Levitt, to mention just a few. Financial enterprises have rigged interest and exchange rates and engaged in bribery, corruption, tax avoidance, money laundering and sanctions-busting on a huge scale. Lax regulation gave us the 2007-08 financial crash. Financial scandals have destroyed businesses, jobs, savings and investments, and many have been bankrupted on forged documentation, as I referred to earlier.
Research by Professor Andrew Baker of the University of Sheffield estimated that the UK finance industry made a negative contribution of £4,500 billion to the UK economy during the period 1997-2015. That is a staggering negative contribution, yet the regulators are not moved. The occasional puny sanctions from friendly regulators have not secured qualitative change. The typical response of the Government to scandals is to rearrange the regulatory deckchairs by replacing the Bank of England with the Financial Services Authority, which is then replaced by the FCA and the PRA. However, the same regulatory failures continue. We now need a sea change.
The FCA needs to be helped by an independent assessment of its shortcomings and failures. An investigation by the Treasury Committee provides this help by taking stock of the failures and providing guidance to the new or returning FCA CEO as to the challenges ahead. I have not even mentioned the challenge of shadow banking, which is excluded from this Bill but deserves to be debated. Importantly, the mechanism I have outlined—of scrutiny by the Treasury Committee —gives the victims a chance to speak. It is vital that the people’s cry for justice be heard by Parliament. There is hardly any other mechanism which enables that cry to be heard. I commend Amendment 71 to the Committee.
My Lords, that was a powerful speech by the noble Lord, Lord Sikka, and clearly, a lot must be addressed. I served on the EU Financial Affairs Sub-Committee and the Treasury Select Committee, and currently serve on the EU Services Sub-Committee. Therefore, I am well aware of the contribution the sector makes across the UK.
The UK helped to shape the regulations and rules for the EU, but we have now left. The sector has consistently argued that a reputation for high standards and effective regulation is important to the confidence the world expresses in the UK’s financial institutions—notwithstanding the failures that have occurred. The combination of the European Parliament and the UK Parliament ensured that regulators have been accountable. I do not claim to be a technical expert on what is a complicated sector, but I recognise the dangers of regulation becoming an unaccountable closed book.
I support the case for a properly resourced specialist joint committee to ensure that regulators are held accountable, not so much on technical detail but in terms of a prudential framework and overall direction. That would be in the interests of the regulators and government Ministers as well as those who depend on a well-regulated and reliable sector. I share the concern that what the Government are trying to do will ultimately bite back if there has been no proper parliamentary oversight in a future scandal. The Government and the regulators will have nowhere to hide, but that will be very little comfort to people who may suffer from regulation failures.
Financial services are distributed throughout the economy. People often refer to the City of London, but we know that jobs and activities are distributed throughout the UK and have been growing in all the devolved Administrations. Edinburgh is the UK’s most important financial centre and one of the most important in Europe. According to TheCityUK, financial services contribute £13 billion, or 9.4% of GVA, to the Scottish economy. More than 160,000 people are employed in financial and related professional services, which is nearly 6% of Scotland’s national employment. The sector includes banking, fund management, insurance, life assurance and pensions, asset servicing and professional services.
Interestingly, Scotland accounts for 24% of all UK employment in life assurance and 13% of all banking employment. Given that Scotland has 8.5% of the population of the UK, this is clearly disproportionately important. According to Scottish Development International, there are more than 2,000 financial services businesses, supported by 3,650 professional services firms. Scotland’s financial and professional services exports account for 40% of all Scottish services exports.
Having said that about Scotland, tens of thousands are employed in the sector in Wales and thousands in Northern Ireland, and the number is growing in all the devolved areas. My Amendment 137 takes this into account and seeks to ensure that the devolved Administrations are consulted about any proposed changes in financial services regulations. It is clearly in the interest of the sector to have clear and common regulations across the United Kingdom, which is why this amendment looks for consultation only. It merely seeks to ensure that any factors of particular importance to a devolved Administration are, as far as possible, accommodated. I can see no conceivable advantage to financial services companies to diverge from UK regulation. After all, as the figures I cited show, a significant part of the financial services sector in Scotland is serving the whole UK market. The last thing it needs is a distracting push separating it from its customers, either by erecting barriers at the border or by promoting an alternative Scottish currency, which would undermine the raison d’être of serving the UK from Scotland, or a “sterlingisation” agenda that would put huge pressure on the public finances in Scotland.
My amendment seeks to avoid any unintended negative consequences. It is not intended to cause delay or to encourage special pleading. Given the particular importance of Scotland’s role in delivering life assurance and banking, it is surely right that any changes being considered to regulations affecting these sectors are not proceeded with until appropriate consultation has taken place.
That said, it is also important to recognise the role of professional support services, given Scotland’s distinctive legal system and, for example, accounting qualifications. The expertise that exists in Scotland should in any case surely be drawn on to inform regulations if and when changes are being considered. I share concerns that the Government are proceeding to build an architecture that lacks an adequate parliamentary dimension. It is perfectly reasonable to ask the legislatures of the devolved Administrations to be involved in contributing to the shaping of regulations, at least in their broad prudential thrust.
I look forward to hearing what the Minister has to say. I hope he will recognise the force of the arguments put by noble Lords about the need for a significant and effective parliamentary dimension and a recognition that the devolved Administrations, especially Scotland, should be able to contribute constructively and positively to that outcome.
My Lords, one of the joys of being at the end of such a large group of amendments and a long speakers’ list is that very much of what needs to be said has already been said, so I will be brief.
The contributions from across your Lordships’ Committee, from the noble Baronesses, Lady Noakes and Lady Bowles, and my noble friend Lord Davies, outlined the importance of parliamentary and democratic oversight and the different levels and ways of delivering it. The contribution of the noble Lord, Lord Holmes, on the right levels of oversight also helped move the debate on.
The balance between regulatory authorities’ powers and those of Parliament is critical. My noble friend Lord Sikka clearly outlined in detail many of the failures of the regulators and of the FCA, so getting the levels right is critical. I add my support for those amendments that I am pushing forward. I look forward to the Minister’s response and to how we move this forward to Report and Third Reading.
The right reverend Prelate the Bishop of St Albans has withdrawn, so I call the next speaker, the noble Baroness, Lady Kramer.
My Lords, we have, sadly, become used to skeleton primary legislation, with policy embedded in statutory instruments that cannot be amended and cannot be voted down without threats of a constitutional crisis. But at least statutory instruments can be brought before Parliament, and Ministers must then make the case.
This Bill is a new low—skeleton primary legislation, elimination of secondary legislation and policy set in regulators’ rules with no meaningful accountability to Parliament. The accountability set out in the Bill, which largely mirrors proposals in the future regulatory framework review, provides, in essence, just for a bit more explanation by the regulator, the existing right of a parliamentarian to submit evidence to any consultation, and the existing right for committees such as the Treasury Select Committee and the Economic Affairs Committee to question the regulator from time to time. This will be the policy framework shaping a sector of the economy that will fundamentally impact our national prosperity, jobs and public spending.
The Minister was kind enough to meet us, so I can perhaps anticipate some of the arguments that the Government are likely to make. They will argue that the Bill is just a stopgap while consultation takes place, but the consultation under way has multiple stages and will stretch the whole process out for 18 months or two years. By then the horse will have long bolted and procedures will largely have been set in stone. Perhaps the Minister would spell out the timetable—because the Bill looks to me like a template, not a stopgap.
Secondly, the Minister will say that only part of financial regulation is covered by the Bill. But, since it includes all of Basel III, the Bill actually covers almost everything that matters in prudential regulation. I have also heard from parts of industry that a second financial services Bill is on its way. I do not know that; I have not heard it from the Government—but if so, it will have come and gone before the new framework legislation is finalised. Perhaps the Minister would comment on that. It is absolutely clear that what happens with this Bill genuinely matters.
I value consultation—real consultation—but I am saddened because consultation has become a cynical tool to sideline Parliament. “Just give us a free hand now, because we’re doing a consultation.” Colleagues who cover other areas of policy tell me that this is a pattern, and are now concluding that it is cynically being used with a wide range of legislation, to make sure that Parliament is sidestepped.
I suspect that the Minister will argue that the powers being given to the regulators in this Bill, with minimal accountability, are necessary so that the UK can respond to changing events. After all, we have left the European Union and times are going to change. I regard that as nonsense. We are in changing times, but we have proved in the last year that fast-track procedures exist when they are genuinely needed.
I very much welcome the amendments tabled by the noble Baroness, Lady Noakes, also signed by my noble friend Lady Bowles, and the noble Baroness, Lady Bennett. They are tough: they would prevent Schedules 2 and 3 coming into effect before the accountability deficit is sorted. That, I suggest, is what the circumstance warrants.
This group of amendments was revised from Monday, so it now includes proposals detailing how accountability can be structured. We have heard a whole series of brilliant speeches in this debate, so I want to make only some limited comments.
The noble Lords, Lord Tunnicliffe and Lord Eatwell, have tabled a number of amendments laying out process and timetable. I find that extremely constructive. By contrast, the noble Lord, Lord Blackwell, has tabled an amendment that covers similar territory, but with such a light touch that—I hope he does not take this wrongly—I think it will be read as cosmetic. The industry needs to recognise the importance of proper scrutiny and understand that scrutiny in name only will, in the end, do the industry itself no long-term good.
In addition to the procedural amendments, my noble friend Lady Bowles has tackled an equally crucial but often overlooked element of oversight—one that goes to the heart of the matter. It is the need for the regulator to provide the detailed information to Parliament to fully understand and evaluate the evidence, reasoning and consequences of changes to rules. For years this has been done for us within the oversight process of the European Parliament, which has expert resources in depth. My noble friend, in her role in that Parliament, was able to use the information to improve proposals for rules and make them more effective. We have now lost that capacity, and nothing in the Bill or the framework consultation replaces it.
My noble friend Lady Bowles has also proposed amendments that would put this oversight on a regular basis, not just an ad hoc one, and would bring in an independent expert panel to do some of the heavy lifting. As the noble Lord, Lord Holmes, referred to, recently the All-Party Parliamentary Group on Financial Markets and Services addressed similar concerns. I quote from its February report, The Role of Parliament in the Future Regulatory Framework for Financial Services:
“Regardless of the format, the level of technical support available to Parliamentarians in this policy area will be key.”
The APPG goes on to propose secondments from the Treasury to the relevant parliamentary committees to bolster institutional capacity. I personally regard that as the wrong approach—that would be letting foxes into the henhouse—but it makes the point that proper parliamentary oversight requires new expert capability to replace that lost with Brexit. We have expertise within the regulator but we must have it for oversight of the regulator.
Before I finish, I want to refer to Amendment 137, tabled by my noble friend Lord Bruce, which would require the Government to consult on rule changes with the devolved Administrations. It is quite shocking to me that the devolved Administrations are overlooked in the Bill. Scotland is a major player in financial services and that needs to be recognised.
I will listen to the Minister’s response. I hope he will not repeat the airy dismissal that the Economic Secretary in the Commons deigned to give as his response. Voices on all Benches in this House are capable of coalescing around a set of viable amendments on Report that would at least remedy the worst in the Bill. The Government ought to be coming forward with the best.
My Lords, in due course I will speak to the amendments in the name of my noble friend Lord Tunnicliffe and myself, which, as many noble Lords have commented, would introduce operational proposals that would address the problem of adequate parliamentary scrutiny.
Before I turn to those practicalities, though, I wish to speak to the amendments tabled by the noble Baroness, Lady Noakes, supported by the noble Baroness, Lady Bowles, and the noble Lord, Lord Holmes, which deal with the principles at stake. As we might expect from the noble Baroness, Lady Noakes, her amendments are precise and direct and go to the heart of the matter: the inadequacy of parliamentary scrutiny.
I regret that I was unable to attend the Second Reading debate on the Bill. On reading the report of that debate, it is evident that an overwhelming sentiment in your Lordships’ House was that the procedures suggested by Her Majesty’s Government for the future development of the regulatory powers display a serious lack of appropriate parliamentary scrutiny. The fears expressed at Second Reading can only have been further reinforced by the note entitled “Meeting between the Economic Secretary, Peers, the Financial Conduct Authority and the Prudential Regulatory Authority: Background Briefing for Peers”, and by the document Financial Services Future Regulatory Framework Review Phase II Consultation, published by Her Majesty’s Treasury in October last year. Both documents advocate a degree of parliamentary scrutiny that may at very best be described as minimalist. Seldom can two documents have made the case so eloquently for the adoption of a policy entirely at odds with that which they propose.
The central thrust of government thinking is spelt out in the phase 2 consultation document to which I have just referred. It may help if I quote the relevant passage:
“The Financial Services and Markets Act 2000 (FSMA), and the model of regulation introduced by that Act, continue to sit at the centre of the UK’s regulatory framework. The government believes that this model, which delegates the setting of regulatory standards to expert, independent regulators that work within an overall policy framework set by government and Parliament, continues to be the most effective way of delivering a stable, fair and prosperous financial services sector. The model maximises the use of expertise in the policy-making process by allowing regulators with day-to-day experience of supervising financial services firms to bring that real-world experience into the design of regulatory standards. It also allows regulators to flex and update those standards efficiently in order to respond quickly to changing market conditions and emerging risks. The FSMA model was readily adapted to address the regulatory failings of the 2007-08 financial crisis.”
Commenting further on the manner in which this model was readily adapted to address the regulatory failings of the 2007-08 financial crisis, the authors of this document declare:
“The financial crisis of 2007-08 revealed serious flaws in the UK’s system of regulation, particularly in the allocation and co-ordination of responsibilities across the ‘tripartite’ institutions – HM Treasury, the Bank of England and the FSA … The post-crisis framework reforms were therefore focused primarily on institutional design and allocation of responsibilities.”
So the problem that led to massive regulatory failure and to a regulatory system that failed to protect UK citizens and firms from a near-existential breakdown in the financial system, that heralded a sharp downturn in real income and higher unemployment, and that led inexorably to the disastrous austerity policy was a problem of
“institutional design and allocation of responsibilities”.
There is no mention of the failed analysis, no mention of the pernicious groupthink that infected the analysis of the FCA and the Bank of England, no mention of the fact that warnings from distinguished commentators in academia and in the financial services industry were airily dismissed, and no acknowledgement that our regulators participated in the creation of a procyclical regulatory model that actually made the crisis worse than it otherwise might have been.
If anyone has any doubt that allowing regulators to bring that real-world experience into design of regulatory standards was the foundation of that massive failure, they should consider the words of Alan Greenspan, then head of the US Federal Reserve system—essentially, the western world’s senior regulator—speaking to the banking committee of the US House of Representatives in October 2008. He said:
“This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.”
Where in this document is the recognition that the intellectual edifice collapsed? Where is the acknowledgement that those with real-world expertise did not understand the systemic risks in the industry that they were supposed to be regulating?
All this was clearly set out in the Turner review, published by the FSA in 2009 and seemingly unread by the authors of this document. The review advocated a shift from microprudential regulation that focuses attention on the risks facing individual firms to macroprudential regulation focusing on the risks inherent in the operation of the system as a whole. It is entirely true that implementing that change has proved more difficult than the noble Lord, Lord Turner, could have anticipated. Basel III, the regulatory system lauded in this Bill, was supposed to do the job, but as Professor Hyun Shin, chief economist of the Bank for International Settlements, the home of Basel III, has commented:
“Under its current … form, Basel III is almost exclusively micro-prudential in its focus, concerned with the solvency of individual banks, rather than being macro-prudential, concerned with the resilience of the financial system as a whole. The language of Basel III is revealing in this regard, with repeated references to greater ‘loss absorbency’ of bank capital.”
When we turn to the impact assessment published by Her Majesty’s Treasury to accompany the Bill, we again find many references to the virtues of bank capital, its loss absorbency and the resilience of individual firms. There is, however, absolutely nothing about the attempt to deal with systemic risk using liquidity rules, resolution regimes and comprehensive supervisions. The authors of this document have been rewriting history. They have also failed to learn from history.
What, then, do Her Majesty’s Government propose for the parliamentary scrutiny of the work of the independent regulators? HMG’s proposals are neatly set out in the document that was the background briefing for Peers. The Bill, it is argued, establishes an accountability framework to provide appropriate strategic policy input and democratic oversight from government and Parliament. That sounds good, but what does it amount to? It consists of the regulators having a legal obligation to explain the rules and, specifically, how they have considered the matters contained in the Financial Services Bill. The regulators have a legal obligation to consult stakeholders and to do so in a manner that will best bring them to the attention of the public. They must also take into account and publish an account of representations made during consultation and their response to these. That is it—that is the accountability framework.
What of Parliament? There is a role for Parliament: in line with current practice, a relevant Select Committee can call witnesses, gather evidence and make recommendations at any time and on any relevant subject, including draft rules under consultation by the regulators. Her Majesty’s Treasury therefore takes confidence that proper mechanisms exist to allow Select Committees to scrutinise and comment as they see fit, right and proper.
On that, I have two observations. First, in several documents accompanying this Bill, the Treasury refers to the Treasury Select Committee of another place as playing the key parliamentary role by means of
“Select committee inquiries … Regular hearings to scrutinise the work of the financial services regulators… Appointment hearings for key senior leadership positions in the financial services regulators”.
I have considerable admiration for the work of the Treasury Select Committee, but the repeated emphasis in these documents on the central role of a committee already overloaded with work scrutinising the many other areas of Treasury responsibility does not give me confidence that the authors are filled with enthusiasm for parliamentary scrutiny. Secondly, while the regulators must take account of parliamentary comments, including those of the Treasury Select Committee, there is not a hint that they should have regard to them.
This leads me inexorably to recognise the worth of the principles behind the amendments proposed by the noble Baroness, Lady Noakes, and supported by the noble Baroness, Lady Bowles, and the noble Lord, Lord Holmes. I am not suggesting that there necessarily exists in either House the level of detailed expertise and/or experience that would lead Parliament to second-guess the regulatory experts—though, in fact, I suspect that such expertise is present in your Lordships’ House. But this is not the role that I would expect parliamentary scrutiny to play. Instead, I would rely on the fact that parliamentarians have a tendency to challenge, to ask what are often the devastating, idiot boy questions: “I don’t understand, guv’nor, would you explain?”, “How can you be sure?” or “How do you expect that the measure will actually work once the markets turn their collective minds to devising ways to circumvent it?”
Parliamentarians have it in their DNA to take nothing at face value. This does not mean that they will be always right or even approximately right, but it does mean that the regulators will always need to be on the alert for the vigorous, even decisive, challenge. That is why a different eye is necessary in the form of a structure of parliamentary scrutiny significantly more systematic than that suggested by the Treasury’s proposals.
I wonder whether Her Majesty’s Government have taken on board the recent proposals referred to by noble Lords and advanced by the All-Party Parliamentary Group on Financial Markets and Services. Of course, it is not for a government Bill to instruct Parliament in what to do—what committees should be established and which procedures followed—but it would assist the Grand Committee if, in replying, the Minister at least mused a little about what he would consider a desirable parliamentary response.
I turn to the amendments in my name and that of my noble friend Lord Tunnicliffe—at last, the Committee may feel. They seek to establish an operational framework for parliamentary scrutiny that is incisive and practical and does not expose the regulator to inordinate delay in implementing measures that might otherwise be held up by parliamentary procedures. The essential thrust of the amendments is that there should be scrutiny by a parliamentary committee, or committees, and that the regulators should have regard to the consequent findings. The committees’ findings would also be an important source of information and insight for Parliament when dealing with affirmative resolutions.
However, the period in which parliamentary scrutiny should take place is limited to 20 sitting days of this House or the other place, whichever falls on the later date. This important safeguard is missing from some other amendments in this group, ensuring that the regulator is not hamstrung by parliamentary delay. A number of noble Lords have expressed concern about how the time taken by scrutiny—even this short time—might inhibit the regulator from acting quickly. A little constructive imagination could easily solve this problem; perhaps the chairs of the relevant committees could be delegated to provide leave to the regulators to act promptly in an emergency, subject to subsequent consideration of their actions.
On reflection, the amendments as drafted do not take proper account of parliamentary recess, as the noble Lord, Lord Blackwell, noted. They need to be corrected in that respect. That said, I commend the practical procedure advocated in these amendments to Her Majesty’s Government as a constructive way of responding to the strongly expressed wishes on all sides of the House.
My Lords, parliamentary accountability is a subject that has clearly brought out considerable strength of feeling across the Committee; the Government agree that it is vital.
Parliament, particularly this House, has had a central role in shaping critical financial services legislation over recent decades. In many cases, that legislation has served as a blueprint for global reforms. First and most fundamentally, there was the passage of the Financial Services and Markets Act 2000, or FiSMA, which endures as the framework around which all other financial services legislation is based. Following the financial crisis, Parliament led a number of important reforms to make our regulatory framework stronger and, of course, there is the important work of the Parliamentary Commission on Banking Standards, which spearheaded important reforms such as the creation of the senior managers and certification regime.
I assure noble Lords that this Government recognise the important role that Parliament must continue to have in shaping the financial services regulatory landscape. I say that because I cannot agree with the suggestions I have heard of late that there is simply no parliamentary accountability for the UK regulators and that the Bill somehow seeks to sidestep Parliament.
I listened carefully to what the noble Baroness, Lady Kramer, said about the order-making powers contained in the Bill. I refer her to the report of your Lordships’ Delegated Powers and Regulatory Reform Committee, which, perhaps unusually for the committee, raised no concerns about the inclusion of those powers.
The FCA, as I shall go on to explain, is accountable to the Treasury, to Parliament and to the public, including for the economy, efficiency and effectiveness with which it uses resources. There are a number of features in the legislation which support this accountability, as I shall explain.
The noble Baroness, Lady Kramer, argued that the Bill’s scope is too wide. I say to her that the Bill is designed to resolve immediate outstanding policy issues resulting from our exit from the European Union and to meet the UK’s international obligations in the short term. Its scope is limited to ensuring that we uphold our international commitments.
The noble Baroness, Lady Bowles, asked me whether there will be another financial services Bill before the FRF is complete. The Government have not made decisions about legislation in future Sessions. The FRF review is a high priority and essential for establishing the model for all future legislation.
The noble Lord, Lord Eatwell, asked me where in the Bill is there any focus on macroprudential issues. The Financial Policy Committee of the Bank of England is, as he knows, the UK body responsible for identifying and managing systemic risks to financial stability. Its remit is not affected by the Bill. It publishes a Financial Stability Report twice a year. This work compliments the Basel reforms and neither, clearly, is a replacement for the other.
I will set out where the Government stand on this important issue. I begin by focusing on the prudential measures: the investment firms prudential regime and the Basel framework. Implementing these rules in a timely manner is critical to the UK’s reputation as a responsible and responsive global financial centre. The Basel Committee on Banking Supervision is the primary global standard setter for the prudential regulation of banks. In response to the financial crisis the Basel committee significantly overhauled and strengthened its standards, in a package now known as Basel III. Since that time, the Basel committee has continued to refine that framework to ensure that it is robust and to guard against the serious failures that led to the financial crisis.
Due to the interconnectedness of the global financial system and the fact that large financial institutions operate across the globe, the UK Government remain committed to the development and implementation of a common set of standards on prudential regulation and supervision. With regard to Basel III, the UK is committed to implementing those standards for 1 January 2022, and firms have been planning on this basis.
My noble friend Lord Trenchard asked whether I could confirm the treatment of software assets in the implementation of Basel by the PRA. The PRA is currently consulting on a proposal to disallow software assets from counting as regulatory capital, which is contrary to the approach being taken in the EU.
For the investment firms prudential regime, any delay would put the UK at a significant disadvantage compared to the EU. Investment firms in the EU will be subject to a more proportionate prudential regime from the end of June 2021.
I will set out the accountability arrangements relating to these measures. The first thing to remember is that these measures in the Bill sit within the existing framework of FiSMA. As my noble friend Lord Agnew stated at Second Reading, the FiSMA model as updated after the financial crisis is considered world leading. Through it, Parliament has established the appropriate split of responsibilities between the different regulators and has ensured that those regulators have the appropriate statutory objectives to guide their work. It also ensures that Parliament and other interested parties have the information needed to scrutinise the work of the regulators and hold them to account.
FiSMA confers broad rule-making powers on the regulators to ensure that they are able to fulfil their statutory objectives, recognising that it is appropriate for expert and independent regulators to make the detailed technical judgments about how financial services firms should be regulated in a way that delivers the outcomes that Parliament wants. I appreciate this is different from the European model we have been operating under, but it is a return to the UK model. It is evolutionary, not revolutionary. It brings us more into line with other key international peers whose regulators take the lead in the detailed firm requirements.
FiSMA requires the regulators to undertake consultations before making rules, except where specific exceptions apply. These consultations must include a draft of the proposed rules, an explanation of them and a cost-benefit analysis. FiSMA also requires an annual report to be made by the PRA and FCA, explaining how they have discharged their functions and the extent to which their objectives have been advanced. This report is made to the Chancellor, who must then lay it before Parliament.
The Bill goes beyond the requirements in FiSMA by introducing a specific accountability framework for the prudential measures. It requires the FCA, when making Part 9C rules implementing the investment firms prudential regime, to have regard to any relevant standards set by an international standards-setting body and the likely effect of the rules on the relative standing of the UK as a place for internationally active investment firms to be based or carry on activities: that is, the competitiveness of the UK. The PRA, when making rules to implement Basel, will be required to have regard to those same issues—although it is the attractiveness of the UK for international credit institutions and investment firms in this case. It is also required to consider the likely effect of its rules on the ability of relevant firms to continue to finance the real economy. This is one of the key reasons why having a strong financial services sector is beneficial to the UK.
The Bill requires the regulators to set out publicly, at consultation stage and final rules, how they have considered these issues. This will allow for effective scrutiny by Parliament, which will be able to review and challenge how the regulators have fulfilled this obligation. The PRA’s consultation is currently under way and the FCA’s closed on 5 February. The PRA is currently consulting on a draft set of rules to implement Basel III, running to over 300 pages. As the Economic Secretary set out in the other place, on these specific areas covered by the Bill, the regulators are willing and able to engage with relevant Select Committees on their consultations and rules. They are already sending them to the Treasury Select Committee. I hope this demonstrates some of the scrutiny mechanisms which already exist, in this Bill and beyond, as well as how seriously the Government take this question.
Amendments 19 and 39 would effectively grant Parliament a veto on the regulators’ rule-making, should either House disagree with their rules. I have been clear about the importance of parliamentary scrutiny of the work of the independent regulators, but the Government cannot accept any form of veto.
Amendments 10 and 26 seek to delay the commencement of parts of the Bill until bespoke “accountability arrangements” are approved by Parliament. My noble friend Lady Noakes has been quite open about the fact that it is not clear when these arrangements would be in place, what they would involve or how they would be agreed. I heard what my noble friend said about this but, however one looks at it, the consequence of what she advocates would be to delay this legislation from coming into force and therefore delay the regulators’ ability to amend their rules in order to deliver the important updates to the prudential framework. Any such delay would be damaging to the UK’s reputation as a responsible global financial services centre, and cause disruption to firms.
Amendments 20, 21, 40 and 41 seek to require the regulators to lay before Parliament their draft rules in relation to the prudential measures in the Bill, and to prohibit them from making them until Parliament has either reported on them or a period of 20 sitting days has elapsed. If Parliament raises any objections, the regulators must respond to those. I must admit that I have studied these amendments with some interest. However, the problem with them is that they could still delay important and potentially urgent rules coming into force until after both Houses have had 20 sitting days to scrutinise them, and the regulators have, of course, already started to conduct some of their consultations. So I say again that we would not want to take any action that might prevent them delivering the first wave of prudential reforms for 1 January 2022.
Turning to Amendment 22, I recognise the intention of the noble Lord, Lord Sharkey: he wishes to ensure that parliamentarians have sufficient sight of the rules before they are enacted. I would just say to him and the Committee that many of these rules will be highly technical and not suitable for detailed debate. For example, the PRA’s consultation on Basel rules, which is out for consultation at the moment, contains regulations that, as I have mentioned, are more than 300 pages long, with many technical mathematical formulae. I accept that the power to delete by SI is quite unusual, but the power is limited to the retained EU capital requirements. The rules that will replace the EU legislation being deleted are already available in draft form. The regulators and the Treasury are working to ensure that final rules are published ahead of the debate on the relevant SIs, which have also been published in draft.
In any case, this amendment would have the effect of fixing in statute those rules presented to Parliament at one point in time. That would make it difficult to amend these rules to reflect any changes in market conditions, as they will already have been approved by Parliament. The flexibility that comes from this regulator-led model is one of the key advantages of the approach taken in the Bill. It could also lead to legal uncertainty as to which rules have effect at a point in time, once the PRA begins to update its rules using its FSMA powers.
Amendments 38 and 18 would oblige the regulators to inform Parliament of the matters discussed between themselves and the Treasury with regard to the effect of their rules on relevant equivalence decisions. Public reporting on the effect of the regulators’ rules on relevant equivalence decisions could impact delicate conversations between the UK and other jurisdictions. There are existing carve-outs in other legislation which prevent the publication of information that could undermine UK interests internationally.
I now turn to amendments that deal with regulatory accountability, but which seek to make changes which go well beyond the prudential measures covered by the Bill. I have already set out the requirement in FSMA that the FCA and PRA must prepare annual reports and have them laid before Parliament for scrutiny. Extending this obligation to include, for example, quarterly reports, would be unnecessarily burdensome and in my submission would not meaningfully increase parliamentary oversight.
The independence of the regulators is vital to their role. Their credibility, authority and value would be undermined if it were possible for Parliament to intrude in the detail of their operations or rule-making processes. Again, I think it is important to remind ourselves of the future regulatory framework review—the FRF review—which is currently exploring how our framework needs to adapt to reflect our new position outside the EU. As part of this, the Government are welcoming views on the current arrangements for accountability and scrutiny. That first consultation closed just last week and officials have started to consider the responses received. These are not matters that we should seek to answer through this Bill; rather, we should give them the full and careful consideration that they deserve. Against that background, the changes outlined in Amendment 27 would offer little in terms of enhancing parliamentary scrutiny, but would impose an outsized burden on the regulators’ resources and their independence.
Amendment 85 envisages Select Committees reviewing all regulator rules. Under this model, Parliament would need to routinely scrutinise vast amounts of detailed new rules, as well as the implementation of existing rules, on an ongoing basis. This is very different from the model that Parliament has previously put in place for the regulators under FSMA. That said, there is currently nothing preventing a Select Committee from either House reviewing the FCA’s rules at consultation, taking evidence on them and reporting with recommendations to influence their final form. The current framework therefore already allows Parliament to play a strategic role in interrogating, debating and testing the overall direction of policy for financial services, while allowing the regulators to set the detailed rules for which they hold expertise.
Amendment 71 would require the Treasury Select Committee to conduct an assessment of the conduct of the FCA prior to a new chief executive taking up post. The change proposed under this amendment mirrors powers that are already available to Select Committees and, in my submission, adds an unnecessary step to an appointment process that already includes measures to ensure proper parliamentary scrutiny.
Finally, I respect the intent of Amendment 137, tabled by the noble Lord, Lord Bruce of Bennachie, which is clearly to ensure that the devolved Administrations are properly consulted on matters which affect them. Financial services are a reserved policy area under each of the devolution settlements, and it is consistent with this that the responsibility under the Bill for making regulations in the area of financial services sits with UK Ministers. However, I listened with care and interest to all that was said about Edinburgh, in particular, as a vital financial centre in the UK, and I can assure the Committee that the Government are working closely with Scotland, Wales and Northern Ireland to seek the necessary consents on areas where the Bill deals with devolved or transferred matters and, of course, generally work very closely with the devolved Administrations on areas of mutual interest.
I have spoken at length, but I hope that what I have said has been helpful in setting out the Government’s position on these important issues. In particular, let there be no room for doubt that the Government take the question of parliamentary accountability in financial services rule-making very seriously. The noble Lord, Lord Eatwell, invited me to muse on what might be an appropriate set of scrutiny arrangements. It is the Government’s view, I say again, that the Bill allows for proper parliamentary scrutiny, and on that basis I ask my noble friend to withdraw her amendment and for the others in the group not to be moved. Having said that, I say to all noble Lords who have spoken in this debate that I recognise the strength of feeling expressed and I am very happy to continue this conversation with noble Lords between now and Report.
I have received a single request to speak after the Minister; I call the noble Lord, Lord Holmes of Richmond.
My Lords, I thank the Minister for his very clear and thoughtful response. I have three brief questions for clarification. First, what plans, if any, are there for a Financial Services (No. 2) Bill? Any information on that would be helpful to the deliberations of the Committee today, and to the approaches noble Lords may choose to take as we move through further stages of the Bill.
Secondly, will he say what the Government’s position is on the timeliness of such scrutiny? Does it err more towards rear-view rather than real-time? Thirdly, in the light of the debate that we have just had, will he consider discussions potentially to lead to government amendments coming forward on Report? I think that noble Lords would agree that, on scrutiny and accountability, if the Bill is passed as currently drafted that would be at least somewhat unfortunate.
My Lords, I intended the Committee to take some reassurance from the final sentences in my winding up when I said that I was very happy to continue the conversation with noble Lords on this theme between now and Report. I hope that noble Lords will take that as a signal that the door is not closed as regards a potential tweak to this part of the Bill.
My noble friend invites me to speculate on whether there might be further arrangements that consist of real-time scrutiny or, alternatively, a rear-view mirror type of scrutiny. I am not going to speculate on that issue, if he will forgive me, because that begs the question that I adumbrated on the matters that I would like to discuss with noble Lords over the coming days.
My noble friend’s first question was about whether the Government have any plans for a second financial services Bill. I endeavoured to answer the same question put to me by the noble Baroness, Lady Bowles. I said that the Government have not made any decisions about legislation in future Sessions, but I indicated that the Future Regulatory Framework Review—FRF—is a high priority for the Government and we regard it as an essential basis for establishing the model for future legislation in this area.
My Lords, I thank all noble Lords who have taken part in this debate and those who have supported my amendments. It has been a very thoughtful debate with contributions from all parts of the Committee, which sees this as a real issue that needs to be solved. On a personal basis, I welcome back the noble Lord, Lord Eatwell, to our consideration of financial services matters. We should remember that he has unique experience among noble Lords, having been a financial services regulator, so we must listen very carefully to what he has to say on many of these things.
One overriding theme has come out of our debate this afternoon. There is unanimity on the need for good parliamentary involvement in financial services. My noble friend Lord Howe affirmed the Government’s commitment to parliamentary accountability. The difference comes in how we define what form that accountability could take. The Minister made a case for going back to the FiSMA model, which he seemed to forget was brought in in the context of the existing EU arrangements for scrutiny and did not exist pre-EU scrutiny, so going back to that is not saying anything at all. Now that we are out of the EU, we are trying to see what can be done to deal with the changes that we need to accommodate within our system and to ensure that there is proper accountability for that. FiSMA may, or may not, provide an adequate basis for that, and I suspect not.
My noble friend also talked about the need for timeliness. I am sure that the Basel III implementation needs to be done on a timely basis, and it is not beyond the bounds of possibility that we could get that right with parliamentary scrutiny in this Bill. However, the implementation of Basel III does not need to be done by the PRA; it could as easily be done by a statutory instrument introducing it. I am not afraid of 300 pages of detail. I have seen the formulae on risk rating. I do not relish the opportunity to do it again, but one could do so if one needed to, so it is not necessary for us.
I get the impression that this is a rubber-stamp Bill. The Government have made up their mind. The PRA and the FCA will be roaring ahead as if they have all the powers and we are now just being invited to rubber -stamp it. I think we are saying back to the Government that we do not find that a satisfactory state of affairs.
The noble Baroness, Lady Kramer, rightly said that this is not a party-political issue, and there is a commonality of views across the Committee on this. The fact that there is different detail in our amendments today does not rule out the possibility that we can coalesce around a good solution to this. I was pleased to hear my noble friend the Minister say that he was keen to maintain a dialogue with noble Lords after Committee. That would be extremely helpful; obviously, we would prefer to move in step with the Government and not against them.
I think the Minister needs to recognise that we do not find convincing the narrative that the existing framework with a few tweaks in the Bill gives an adequate accountability framework for the additional powers that are being transferred to the regulators under the Bill. I look forward to continuing the dialogue outside Committee and I hope that that will be fruitful before we get to Report. With that, I beg leave to withdraw the amendment.
Amendment 10 withdrawn.
Clause 2 agreed.
Schedule 2: Prudential Regulation of FCA Investment Firms
11: Schedule 2, page 62, line 9, at end insert—
“(ca) the climate-related financial risks to which FCA investment firms are exposed,”Member’s explanatory statement
The purpose of this amendment is to require the FCA, in exercising its power to make general rules, to have specific regard to the climate related financial risks to which FCA investment firms are exposed.
My Lords, I declare my interests as chair of the advisory committee of Weber Shandwick UK, as set out in the register. In moving Amendment 11 in my name and the names of my noble friend Lady Kramer and the noble Baroness, Lady Hayman, I will also speak to the other amendments in this group. Before doing so, I put on record my thanks to a number of organisations for their briefing and patient answers to the many and often ignorant questions that I have posed to them in preparing for the Bill, particularly Finance Watch, Positive Money and Carbon Tracker.
I am also grateful to the City Corporation and the APPG for Financial Markets and Services for the helpful information they provided, and, of course, to the noble Earl, Lord Howe, and his ministerial colleagues for meeting to discuss the Bill and, if not immediately signing up to all our climate amendments, at least recognising the seriousness of the issues that they raise. I hope that over the course of Committee we will be able to convince the noble Earl and his colleagues of the urgency of acting through this legislation.
There are essentially three categories of amendment in this group. The first addresses the rule-making powers of the regulators, requiring them when making the rules to take account of the climate-related financial risks to which the entities they regulate are exposed. This issue is dealt with in Amendments 11 and 12.
The second category requires regulators when making rules to have regard to the UK’s national and international climate change objectives and obligations. Amendments 13, 14, 15, 16, 17, 23, 34, 35, 36 and 37 address this issue in a number of different ways.
Finally, Amendments 48, 75, 76, 89 and 98 fall into a third category, which tackles disclosure and governance issues as they relate to climate change.
Turning to the first category, the objective of Amendments 11 and 12 is simply to ensure that the prudential regulation of FCA investment firms under Schedule 2 is fit for purpose; that is, that it properly takes account of and seeks to manage and control the risk exposure of the firms it regulates. It is hard to understand on any accepted definition of prudential regulation how it can be regarded as such if it fails to take account of exposure to climate risks, given the potential threat they pose, not only to individual firms but to the financial system as a whole.
There are those who argue that it is premature to take this approach, because the sector is in the process of working out how to measure climate risk, which is undoubtedly a complex matter, given the myriad interrelationships that exist and the fact that there is no precedent for measuring such dynamic risks. While I acknowledge that we do not have a perfect understanding of climate risk, we cannot wait for a perfect solution. We cannot accept that a potentially enormous risk exists for FCA investment firms, but, because it is difficult to measure its exact scale, we are going to act as if it does not exist at all. That is not prudential regulation; it is wantonly reckless negligence.
I hope that the Government will look at this matter very carefully and that the Minister will be able to give us some comfort that, if they will not accept our amendments, they will at least bring forward proposals to ensure that prudential regulation of FCA investment firms does not continue to ignore what is likely to be the most significant risk to which they are exposed over the coming decades.
The second set of amendments seek in different ways to ensure that the FCA and the PRA must have regard in rule-making to our net-zero target and our wider international obligations on climate change and biodiversity. Amendment 23 in my name, with the support of my noble friend Lady Kramer and the noble Baronesses, Lady Hayman and Lady Bennett of Manor Castle, would prevent the Treasury from using its power under Clause 3 to evoke capital requirement regulations unless the effect of the new regulation was compliant with the UK’s net-zero target.
Amendment 13 to Schedule 2 and Amendment 34 to Schedule 3 require the FCA and PRA, when making rules, to have regard to the
“the likely effect of the rules on the relative standing of the United Kingdom as an international leader in combatting climate change”.
Amendments 16 and 37 to Schedules 2 and 3 respectively require that, in considering that likely effect on the UK’s standing, the FCA and PRA have regard to our commitments under the Paris Agreement. This includes our nationally determined contribution of a 68% reduction in emissions from 1990 levels by 2030 and the UK’s net-zero target under the Climate Change Act 2008, as amended in 2019. Amendment 17 in the name of the noble Baroness, Lady Bennett of Manor Castle, adds the United Nations Convention on Biological Diversity to that list of “have regards”.
In these amendments, I have deliberately replicated existing language in the Bill’s rule-making clauses, which require the FCA and PRA to have regard to
“the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active investment firms to be based”.
That is an undoubtedly an important consideration, but it needs to be specifically supplemented by a requirement that takes into account the UK’s standing as a leader on climate change. This will force the regulators to raise their sights and ensure that we have the rules in place to cement the UK’s position as the leading financial centre in tackling climate change and providing green finance.
On an earlier group on Monday, my noble friend Lord Sharkey quoted the Barclays CEO Jes Staley, who said when asked which amendment he would like to burn now we had left the EU:
“I wouldn’t burn one piece of regulation.”
He went on to say:
“I would continue pushing the climate agenda, trying to make London a centre of innovation around financing climate and transitioning to a net zero economy by 2050”.
That might be a pretty brilliant idea and we agree with him, but we need an adequate system in place to allow it to happen. In the last 15 years, Governments in which all the main parties have been represented have ensured that the UK has established and retained international standing as a leader on climate issues. We need to ensure that leadership is reflected not just in our politics and Government, but across industry and society as a whole. Nowhere will this be more important than in the most significant sector of our economy.
If our financial services industry and its regulators show leadership on climate, the industry will not only have the opportunity to gain a clear market advantage in the years ahead but will help to address the current climate emergency. If they do not, instead of playing a key role in averting climate catastrophe, that same industry will be a key contributor to it. That is what is at stake here.
Amendments 14 and 35 tabled by the noble Baroness, Lady Hayman, have a similar objective although I must admit that they are a little more concise than my version. They would require the FCA and PRA, in making rules, to have regard to
“the likely effect of the rules on the United Kingdom meeting its international and domestic commitments on tackling climate change”.
Amendments 15 and 36 in the name of the noble Baroness, Lady Jones of Whitchurch, have a similar objective again but focus specifically on the net-zero target under the Climate Change Act, as amended. I put my name to both these sets of amendments because the purpose of all our amendments is a common one: the essential task of ensuring that our regulators take account of the most significant threat that faces the financial services industry, and indeed every one of us on this planet—the climate emergency. The intent of these amendments has support across the Committee, so I hope that the Minister will recognise the need to act and the Government will either accept a version of these amendments or bring forward one of their own. If they are unwilling to do so, I think the spirit of the House will be to come together on a joint amendment on these matters on Report.
The final category of amendments relates to disclosure and governance. The purpose of my Amendment 48, which has cross-party support, is to bring forward from 2025 to 2023 a mandatory requirement for climate-related disclosure consistent with the recommendations of the final report of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. The TCFD’s final report was published in June 2017. Five and a half years should be plenty of time for the industry to get its head round these issues. Let us remember, after all, that these requirements are about not mitigating climate-related risk, just disclosing it—the absolute minimum requirement so that investors can make informed decisions, regulators can understand risk exposure, and the risk can be priced appropriately. The financial services industry has to wake up and understand that its glacial pace in addressing these issues is unsustainable. Climate change is not waiting on their prevarication; it is advancing because of it.
I am also pleased to support Amendment 75 in the name of the noble Baroness, Lady Hayman, which would require the appointment of a member of the FCA governing body with specific responsibility for climate change. As I indicated previously, the financial services industry’s progress on climate change has been far too slow. A dedicated member of the FCA governing body charged with that responsibility will help to drive the sense of urgency that is so obviously lacking and is desperately needed.
Amendment 76 in the name of the noble Baroness, Lady Hayman, would establish a duty for the PRA to report on climate risk. Amendment 98, also in her name, would establish a climate-related financial risk objective for the FCA. These are key issues that the Government will need to address. It is not sustainable for them to acknowledge the significant risks posed by climate change—whether its actual physical effects, the disruptive impact of transition or the liability costs that it will impose—but then fail even to charge our regulators with properly assessing and reporting on such risks.
Finally, I am pleased to support Amendment 89 in the name of the noble Baroness, Lady Jones. It would amend the Financial Services and Markets Act to place a duty on the Treasury, the FCA and the PRA to have “due regard” to the contribution of financial services to climate change targets, and would require the Treasury to
“lay before Parliament a strategy outlining the policies Her Majesty’s Government will pursue to ensure financial services operating within the United Kingdom make a positive contribution to climate change targets.”
The amendments in this group address in different ways the stark fact that, in the year in which we will be the president of COP 26, the Government have presented to Parliament a Bill that relates to the sector that will have perhaps the single most profound influence on whether we act fast enough to ensure that we can manage the impacts of climate change or tip into climate-driven systemic collapse, but which contains no mention of climate change—not one word, despite the fact that finance-fuelled climate change poses a fundamental threat to us all and, in turn, to the stability of the financial system itself. That could set off a catastrophic cascade which we must avoid. This Bill should be the place where we start doing that.
I hope that the Government are listening and will work with Peers on all sides of the House during the remaining stages of the Bill to ensure that we address these vital issues effectively. I beg to move.
My Lords, I declare my interests as set out in the register. It is a pleasure to follow the noble Lord, Lord Oates, who, both at Second Reading and today, has argued passionately and cogently about the need to remedy the absence from the Bill of any reference to the risks and opportunities that climate change presents to the financial services industry. I have tabled Amendments 14, 35, 75, 76 and 98 and added my name to Amendments 11, 12, 23, 48 and 89 in the names of the noble Lord, Lord Oates, and the noble Baroness, Lady Jones of Whitchurch.
As the noble Lord, Lord Oates, said, all the amendments in this group seek to put a climate change lens on the provisions of the Bill. There are various approaches, but the amendments focus, as he said, on ensuring that the regulators take into account climate-related risks when they are making the new rules and regulations proposed in the Bill. They seek to address the remit of the regulators and thus ensure that climate risk is considered at a systemic level.
The increase in firms reporting on such risks at an individual level is both necessary and welcome; however, there is a widely recognised and existential threat to our entire financial system from climate change. Last year, the Governor of the Bank of England, Andrew Bailey, said:
“Compared to the financial crisis and the pandemic, the risks from climate change are even bigger and more complex to manage.”
We need to ensure that those with the responsibility for financial stability at a macro level are assessing and reporting systemic climate risk as a core function.
On numerous occasions, the Government have recognised the integral role of our financial services industry in driving the change to a green economy, with an urgent focus on aligning investment with the objectives of the Paris Agreement and the Climate Change Act. Our amendments would put that into reality. The Chancellor spoke on 9 November about
“putting the full weight of private sector innovation, expertise and capital behind the critical global effort to tackle climate change and protect the environment”.—[Official Report, Commons, 9/11/20; col. 621.]
Yet, as has been said, this crucial piece of financial industry legislation remains totally silent, hence the importance of our debate on this group of amendments and the urgency, in this year of COP26 when our own domestic performance will be integral to the success of our global leadership, of making progress before the Bill leaves this House.
Turning to individual amendments, I have tabled Amendment 14, which, as the noble Lord, Lord Oates, says, addresses the same issues as his Amendments 11 and 12, but in a slightly less detailed way. The intention of Amendments 14 and 35 is to ensure that the FCA makes new prudential regulations for investment firms and that, before the PRA makes any new rules in relation to the capital requirements regulations, these regulators must have regard to the likely effect of those rules on the UK meeting its net-zero commitments. “Having regard” is an important issue and one to which, when this was debated in the other place, I sensed that the Government were not completely antagonistic, but took rather a St Augustine view—being happy to be made green, “but not yet”.
I see no reason whatever for awaiting the consultation on this issue, especially because when one reads the consultation document, apart from a few words in the foreword by the Minister, there is no reference to climate change and no request for views on it. Given the importance of the issue, this is something on which we should be making progress straightaway.
I am grateful for the support of the noble Lord, Lord Oates, and the noble Baronesses, Lady Altmann and Lady Bennett, for Amendment 75, which focuses on the current remit and governance provisions of the regulator. It proposes amending Schedule 1ZA to the Financial Services and Markets Act 2000, which deals with the constitution of the governing body of the FCA, and provides for the appointment of a board member with direct responsibility for climate change issues. This would enable a focused and strategic approach to be taken to climate change across the sector at the highest level of the regulator.
Essentially, the amendment requires the regulators to do what they have asked of the sector itself, because those are the same provisions that they now require financial institutions to comply with, and they replicate the senior management regime, which requires those institutions to appoint a board member responsible for identifying and managing financial risk from climate change, and reporting on it.
As part of the process to embed climate risk and the net-zero transition into investment and supervisory decisions, institutions are asked to
“embed the consideration of the financial risks from climate change in their governance arrangements”
“demonstrate an understanding of the distinctive elements of the financial risk from climate change and a sufficiently long-term view of the financial risks that can arise, beyond standard business planning horizons.”
That long-term view is particularly important, and there is no reason for the FCA not to take on this responsibility. The Bank of England itself has appointed an executive sponsor for climate-related risks, who is responsible for recommending to the governors the Bank’s strategy for addressing the risks that climate change poses to its objectives, and overseeing the implementation of that strategy. So I hope that, when he winds up, the Minister will be able to respond positively to this very limited but still important amendment.
Amendment 76 deals with the need to ensure that the regular mandatory reporting mechanisms for a sector-wide climate risk assessment provide for FSMA to be amended; the need for the PRA to provide a regular report on how it has evaluated exposure to climate risk; and the impacts that it would have on the stability of the United Kingdom financial system. That could form part of the annual reporting that the regulators are required to provide to the Treasury, and to Parliament via the Treasury Select Committee.
The amendment also provides that, as part of the reporting process, the PRA must seek advice from the climate change committee. It is important that we join the dots between the different bits of government, and ensure that a statutory body such as the climate change committee is integrated into the advice received by regulators and those responsible for economic stability.
My final amendment in this group is Amendment 98, which seeks to amend the Financial Services and Markets Act to insert a new FCA climate-related financial risk objective. While the regulators are moving forward with approaches necessary to address climate-related financial risks, such as through the UK Climate Financial Risk Forum, their statutory remit does not currently include a duty to consider the impact of climate change on the stability of the financial sector overall.
The theme running through this group of amendments is to seek to embed climate risk and the net-zero obligation into the financial system. This is one critical step towards doing that, by ensuring that they are embedded within the scope and remit of the regulators at every level.
In the interests of time, I shall not speak to the other amendments to which I have put my name, because many different approaches are encompassed by the group of amendments that we are discussing and I am by no means precious about how we can best approach these issues. However, all have a common purpose: to ensure that we do not miss the opportunity that this Bill gives us to recognise the crucial importance of risk and opportunity inherent in the financial services industry in relation to climate change and to recognise that not just in ministerial speeches but in legislative reality, which leads to real progress. I look forward to the Minister’s response and hope for constructive discussions with him and his team before Report, not on the principle of introducing issues of climate change into the Bill but on the most appropriate ways to do so.
My Lords, it is a great pleasure to follow the noble Baroness, Lady Hayman, who is such a champion of climate and other environmental issues in your Lordships’ House. As she said, it is astonishing that the Bill, in the year 2021, presented by the Government with the responsibility of chairing COP 26, who talk so often about being “world-leading” on climate, could have got so far without any mention of the climate emergency.
The noble Baroness and, in introducing the amendment, the noble Lord, Lord Oates, have set out extensively the detail of the range of climate amendments and the need for their incorporation in the Bill, so I shall focus the bulk of my words on Amendment 17 in my name. It is distinct in that, while all the others address the climate emergency, this is the only amendment that also brings in the crucial issue of our nature crisis, and the collapse in biodiversity and bio-abundance that is obviously of concern to the Treasury given its commissioning of the recently-released Dasgupta Review.
I doubt that many noble Lords taking part in the debate on this group need an outline of it, but it is important to highlight that the Dasgupta Review identifies nature as “our most precious asset”. It says that we need vastly more protection for our scant remaining natural world—on this, one of the planet’s most nature-depleted lands—which means making sure that money is not going into destructive actions. That should be of concern to the Financial Conduct Authority. It says too that we should begin to implement large-scale and widespread investments that address biodiversity loss—again, a matter for the Financial Conduct Authority.
While it is great to see in the Dasgupta Review these critical issues to all of our futures expressed in terms that even mainstream economics can understand, being comfortable for those whose philosophy is embedded in growth-orientated, 19th-century politics, it falls down in trying to apply the same unrealistic, abstract mathematical models, driven by financial calculations, to provide tools to guide what to do. We have so little left of biodiversity and bio-abundance, with 50% of our species in decline and 15% at imminent risk of extinction, that we cannot be calculating what we can afford to destroy or write off in this land. We have to preserve everything that is left, while acknowledging that the destruction that we have wrought has given us an insecure, poverty-stricken society that is frighteningly short on resilience, as the Covid-19 pandemic has demonstrated and, as we have just seen on the global scale in Texas, precious little ability to endure the climate shocks inevitably coming our way.
I point noble Lords and the Government to the recent, crucial United Nations Environment Programme report, Making Peace with Nature. In his foreword to it, the UN Secretary-General, António Guterres, says that
“our war on nature has left the planet broken”.
That is where we are. The often piecemeal response to the climate crisis, biodiversity loss and pollution is
“not going to get us to where we want”,
according to Inger Andersen, executive director of the United Nations Environment Programme.
Just considering the remit of our international climate obligations as a central part of the FCA’s responsibilities is not nearly enough, as crucial as that is. Adding our equally binding and important obligations through the Convention on Biological Diversity is a significant improvement, and I give notice to your Lordships’ House that this is an issue that I intend to pursue strongly at the next stage of the Bill. I will listen carefully to today’s debate, and any responses we get from the Government, and consider where best to place this amendment among the range of amendments, although I hope that the Government will pre-empt any need for me to do that.
Yet this is still not nearly enough, as the UNEP is highlighting. We also need to consider pollution as a key concern, and a circular economy, on which the European Union is leading. We need a systems thinking approach—a complete view of how we stop treating this planet as a mine and a dumping ground and treasure its immensely complex systems of life, of which we still have so little understanding. Of course, we also have to consider the billions of people—millions in the UK alone—whose basic needs are not being met while we trash our planet. As a species we are using the resources of 1.6 planets every year; in the UK, our share is three planets.
This morning I was present at a briefing about New Zealand’s modern, 21st-century living standards framework, on which there has been wide public and expert consultation. It provides a guide for Treasury decision-making on all government spending. That is truly world-leading, and I hope that the UK Treasury is looking urgently at developing a similar system. In the meantime, however, the inclusion in this Bill of our climate emergency and nature crisis—the understanding that our financial sector is 100% contained within it—is at least progress.
The other place has before it the Climate and Ecological Emergency Bill, which could help to create a framework for such a structure. Given that it is “oven-ready”—to quote a once-familiar phrase—and the continuing delays to the Environment Bill, the Government should be looking at a rapid delivery of whatever emergency steps could be taken—as many as have been taken over Covid.
I revert to the Bill before us. I was told that the 2020 Pension Schemes Bill was the first financial legislation in British history to contain a reference to climate change—no doubt the first to refer to the natural world. Listening closely to the briefing that I referred to earlier, I sense that the Government are at least prepared not to step backwards in this 2021 Bill, and to include some reference to climate change. But if it is to progress it also needs to include biodiversity.
In concluding this section of my comments, I ask the Committee to listen to a short quote:
“Obviously it is right to focus on climate change, obviously it is right to cut CO2 emissions, but we will not achieve a real balance with our planet unless we protect nature as well”.
That was a quote from Prime Minister Boris Johnson’s speech of 11 January as he announced that £3 billion of UK climate finance was to be spent on supporting nature. I ask the Minister how, given the Prime Minister’s words, he could not have included an amendment such as Amendment 17, in addition to one or more climate change amendments.
Allowing money to pump the systems that are wrecking the natural world is, to put it mildly, not a good idea. It is something that should be considered in every action and every regulation of every government body, particularly the Financial Conduct Authority, given the extreme financialisation of our economy, whereby almost every element is now regarded as a potential profit source. Those profits, which go to the few, must not be at the expense of the living future of all of us.
I turn briefly to the other amendments to which I have attached my name, the first of which is Amendment 23, in the name of the noble Lord, Lord Oates, also signed by the noble Baronesses, Lady Kramer and Lady Hayman. This amendment simply ensures that regulation is compliant with the amended Climate Change Act and the Government’s much-trumpeted 2050 net-zero target. That is a bare, indeed inadequate, minimum, because it fails to acknowledge the need for urgent action now to achieve major cuts in emissions in the 2020s. Not waiting but acting now should be at the forefront of every government action.
I backed Amendment 75, in the name of the noble Baroness, Lady Hayman, and supported by the noble Baroness, Lady Altmann, because of the need for expertise in these issues within the FCA. Its many failings in traditional areas were powerfully outlined earlier by the noble Lord, Lord Sikka. It certainly needs a specialist, expert voice at its heart to address environmental issues.
I also attached my name to Amendment 98, in the name of the noble Baroness, Lady Hayman, and also signed by the noble Baroness, Lady Jones of Whitchurch, which focuses particularly on climate risk. I would suggest that this falls, in the terms of the Paris climate agreement, in the areas of both climate mitigation and adaptation. The need for mitigation is a risk in itself. We heard the astonishing news this week that local government pension funds still hold £10 billion in fossil fuel investments, despite large numbers of local councils having declared climate emergencies. That is astonishing in terms of money being invested in trashing the climate in ways already hitting close to home—flooding, heatwaves and biodiversity damage—but it is also as though the term “carbon bubble” had never been invented. Perhaps we cannot blame local government for the oversight when our current Government have continued to put money into fossil fuel assets and to subsidise the operation of existing ones to the tune of billions. These are issues that certainly need to be considered.
However, there is also adaptation. I do not feel like I need to stress so much—as the Green Party has for years—that the climate emergency is a current reality, not a problem for future generations. I think, finally, the Government and even parts of industry and finance have got that fact. I note that, today, Fitch Ratings warned that the rising cost of natural catastrophes arising from climate change could mean that insurers withdraw from the market, leaving it to Governments to pick up the pieces. Amendment 98 would be a modest step towards ensuring that the FCA has rules fit for operating in such an environment.
My Lords, I am delighted to follow the noble Baroness, Lady Bennett of Manor Castle, and pay tribute to her green credentials and the work that she and her colleague, the noble Baroness, Lady Jones of Moulsecoomb—both my friends—have done, as have so many others who have contributed to this debate so far today. I look forward to the other contributions.
This group of amendments has much to commend itself, as do many of the individual amendments. It helps to green-proof, if I may say that, the provisions of the Bill. I am sure that my noble friend Lord Howe will tell me if I am wrong when he comes to reply, but I cannot find anything else in the Bill that covers the provisions set out in these amendments. I pay tribute to the noble Lord, Lord Oates—I celebrate, again, the fact that we joined the House together; I always look forward to debates in which he and I contribute—and to the noble Baronesses, Lady Hayman and Lady Bennett. My slight concern with this group is that while the focus and main thrust of their amendments is on climate change I am slightly confused that they have chosen that form of words—as they also have in other amendments—because so much progress has been made in investment generally. I personally believe that that should extend to banking and financial services as well as other investments, but there is general recognition now of ESG investments. The Wikipedia encyclopaedia tells us that:
“Environmental, Social, and Corporate Governance”
are generally recognised as measuring
“the sustainability and societal impact of an investment in a company or business.”
It goes on to say that:
“Threat of climate change and the depletion of resources has grown, so investors may choose to factor sustainability issues into their investment choices.”
We are increasingly seeing a move in general investments towards individual small shareholders buying very small, limited shareholdings in a company precisely for the purpose of raising these issues at the AGM. I think we will see this trend continue. This must extend, as I said earlier, to banking and financial services as well. I believe that there should be a place for ESG provisions and regulation by the FSA in the Bill, and these amendments identify where they should go.
However, I am mindful of the fact that ESG covers all sorts of possibilities, such as climate change, greenhouse gas emissions, biodiversity, waste management and water management, so I put to the authors and to my noble friend the Minister that ESG provisions would encapsulate this and would perhaps be a neater—and recognised—way of introducing this into the Bill.
In many instances, particularly in all the work that we have done on rural affairs, we rural-proof legislation as it goes through and I am very keen that we green-proof new legislation as it comes online. I therefore welcome the main thrust of these amendments. I repeat to my noble friend the Minister that if this is an omission, these amendments, or something along the lines of ESG terminology, should find a place in the Bill and a role for the regulators specified in it to follow. If these amendments do not fit the Government’s thinking or should we follow more of an ESG terminology, will he consider coming forward with amendments of his own at the next stage?
My Lords, it is always a pleasure to speak after the noble Baroness, Lady McIntosh. We are often in agreement. The point that she raises about ESG is pertinent and, sadly, it is not mandatory. We are seeing a continued increase in the billions of pounds and dollars being spent on fossil fuel infrastructure.
The young people whose futures will be mostly affected by what we do today are increasingly calling for action across all sectors, as demonstrated by the worldwide UNDP poll of 1.2 million people that I cited at Second Reading. I should also put on record that the poll carried out by YouGov last October at the behest of Global Witness showed that two-thirds of the British public want the UK to be a world leader on climate change. In fact, the highest percentage of those was recorded in Scotland at 69%.
The Bill depicts the landscape that will drive the investment of billions of pounds at a crucial juncture in our country’s history to reshape our future financial services post Brexit. The legislation will form the basis of how investment decisions will be regulated as we spend massive amounts of taxpayer money to build back better post Covid. Serendipitously, the Bill also comes at a time when we will be in pole position to provide global leadership through COP 26 and the G7. Italy, our co-host for COP 26, will then host the G20. We have an opportunity to showcase the route map presented to us by the Climate Change Committee’s recent report to get us to net zero by 2050, while steering a course to meeting the Paris goals. What an opportunity.
The Covid-19 pandemic has focused minds on what can happen when we push natural ecosystems too far, and I agree with every word of the contributions of the noble Baroness, Lady Bennett. However, the timeframes to get innovative technological solutions engineered to scale to tackle climate change are substantially longer than those needed for vaccines—and they were long enough and overturned by human endeavour, hopefully just in time. Decisions have to be taken now if we are to reach net zero by 2050, and we have to get it right because we are in the last chance saloon.
Governments do not have the sums that will be needed, so we need private sector money too, and pots of it. However, business needs certainty and absolute clarity about which way the wind is blowing politically.
It is getting clarity from one quarter. Here is an extract from the letter sent by BlackRock CEO Larry Fink in 2021 to client CEOs. I remind the Committee that BlackRock’s assets under management come to, give or take, $7 trillion. This is what he said:
“BlackRock is a fiduciary to our clients … This is why I write to you each year, seeking to highlight issues that are pivotal to creating durable value—issues such as capital management, long-term strategy, purpose, and climate change.”
He went on to remind client CEOs:
“In January of last year, I wrote that climate risk is investment risk.”
I repeat: climate risk is investment risk, says the CEO of BlackRock. He went on to issue what can only amount to a stark warning: if you risk saddling your investors with stranded assets, with no demonstration of how you are moving to de-climate risk your operations, there will be consequences.
The writing is on the wall. The Prime Minister knows this. Here are his words from last November:
“This 10-point plan will turn the UK into the world’s number one centre for green technology and finance, creating the foundations for decades of economic growth.”
He went on to describe his 10-point plan as
“a global template for delivering net zero emissions”,
ahead of the UK hosting the COP 26 climate summit in Glasgow this year. Someone should tell the Prime Minister that his Government are attempting to put through a Financial Services Bill, in 2021, which is devoid of the words “green”, “net zero” or “climate”.
I was delighted last December when the Prime Minister announced that the UK will end all support to overseas fossil fuels projects. How could I not be, when it is one of the asks in my Private Member’s Bill, the Petroleum (Amendment) Bill? The Prime Minister should know that then to allow 17 fossil fuel projects to be railroaded through to beat an arbitrary deadline before COP 26 is not really showing that he gets it. For example, there was a headline in the Telegraph on 6 February this year:
“Major Brazilian oil and gas project could get UK backing despite promised end to fossil fuel funding”.
Are we really going to allow UK Export Finance support for the east Africa crude oil pipeline? These investments, using UK taxpayers’ money today to fund what will amount to stranded assets tomorrow, are nothing short of immoral.
As if those examples of the abuse of UK taxpayers’ money on fossil fuel projects abroad were not bad enough, we still have the threat of the go-ahead for the first deep coal mine in the UK for 30 years, in Cumbria. How is that “powering past coal”? These examples alone, if they are allowed to go ahead, show a deplorable lack of fiduciary duty on the part of our Government. These amendments, which refer to climate risk, are sorely needed.
A good number of them are about mandating the FCA and the PRA, and strengthening their structures to ensure that all investment organisations that fall under their jurisdiction have regard to climate-related financial risk and protect Britain’s international reputation by having regard to her international and domestic commitments. I support the intent behind them and look forward to the movers bringing them back on Report, in amalgamated form. There is cross-party support for many of these amendments.
I single out Amendment 48, in the name of my noble friend Lord Oates and the noble Baronesses, Lady Hayman, Lady Jones of Whitchurch and Lady Altmann, as important. Bringing forward by two years the date by when the recommendations of the final report of the task force on climate-related financial disclosures come into force, to 2023, will send the right signals.
Amendment 17 in the name of the noble Baroness, Lady Bennett, amends Amendment 16 to include the United Nations Convention on Biological Diversity. I have every sympathy with the intent behind the amendment, especially in light of the recent excellent Dasgupta review, The Economics of Biodiversity, but I agree with the noble Baroness, Lady Bennett, that this is such an important issue that it might be better tabled as a stand-alone amendment.
In conclusion, if one looks at the first page of NASA’s “Vital Signs of the Planet” fact page—and I urge noble Lords to have a look at it—it tells us that we are hurtling towards disaster unless we transition away from burning fossil fuels to power our way of life. Vulnerable communities and developing nations, many of them already exposed to the worst physical impacts of climate change, can least afford the economic shocks of a poorly implemented transition. We must implement the changes we need in a way that delivers the urgent change that these communities need without worsening their dual burden. We have alternatives proven to deliver at scale, so let us use the opportunity presented by the Bill to address the urgent need to unlock private sector finance and give the actors therein the confidence to accelerate the investment needed to deliver net zero by 2050.
My Lords, I draw attention to my interests in the register, specifically the directorship of a research company that has published extensively on environmental, social and governance matters. I am also chairman of the Conservative Party’s investment committee. We are currently shortlisting fund managers for our long-term funds, and I reassure noble Lords that ESG rigour will be a key factor in our decision-making.
This is my first outing in Grand Committee, so I crave a little forbearance. I will make a few general points before turning to the specific. First, as regards climate change and full disclosure, the industry is moving in the right direction anyway, and I think that that needs to be acknowledged. For example, I read that the Investment Association, which represents 250 members managing £8.5 trillion, intends to quiz companies at their AGMs on the quality of their climate-related reporting and will relate any of those inadequacies to their members. This is partly a commercial imperative: customer attitudes have shifted materially and will no doubt continue to do so. For example, assets under management at ESG ETFs—that is, exchange traded funds—rose from $54 billion in November 2019 to $174 billion a year later. Those are not large amounts of money in the broad investment sphere, but they show the direction of travel.
Therefore, I was very pleased that this Government have committed to the highest of standards. On 9 November last year, the Chancellor of the Exchequer was unequivocal on this. He said that he wants
“an open, attractive and well-regulated market”
which will continue
“to lead the world in pioneering new technologies and shifting finance towards a net zero future.”
I welcome that and, referring back to some of the work that my company has done in areas such as fast fashion and marshalling scarce water resources—and here I echo the noble Baroness, Lady McIntosh—I believe that these standards should be applied not just to carbon emissions but across the ESG piece.
I also agree with the noble Lord, Lord Oates, and his quote from Jes Staley that the industry absolutely should push the climate agenda. However, in order to build the open, attractive and well-regulated market that the Chancellor described, I believe that we need to be very careful with some of the proposed climate change-related amendments at this stage. I have considerable sympathy with the argument of the noble Baroness, Lady Hayman, about embedding the principles into the Bill, particularly those amendments that the noble Lord, Lord Oates, grouped together in his second group, including Amendment 14. A series of well-meaning amendments at the margin perhaps do not seem individually onerous, but they may end up being counterproductive, and I would like to try to explain why.
The worry we should have is that, if we overcomplicate this at this stage, the rules are more likely to be honoured in the breach than in the observance and/or work to the benefit of other regulatory regimes. I would not like to see the difficult issues we are debating here shifted into other jurisdictions. As always, the main beneficiaries of that would be compliance departments; it would naturally favour larger players and ultimately, as I said earlier, end up being counterproductive, partly by stifling innovation. This is also an important consideration in the context of equivalent discussions with the EU.
To move to the specific, I believe that Amendment 48 falls into this category—I fear I will disappoint the noble Lord, Lord Oates, as I will argue that it is premature. I note that the noble Baroness, Lady Sheehan, made the point that business requires certainty, but this amendment seeks to bring forward the mandatory imposition of the task force on climate-related financial disclosures from 2025 to 2023. The Government have already committed to the 2025 date and, in doing so, we would become the first country in the world to impose this. The problem here is not the intent but the quantification of the risks defined by the task force.
For example, portfolio managers are very aware that they need to focus much more attention on matters such as scope 3, on emissions, and category 15, investments. Scope 3 relates to indirect emissions at an upstream and downstream level and category 15 basically tries to capture the carbon footprint of an investment portfolio. There are quite a few initiatives seeking to calculate these, and some good work is being done by the likes of the Partnership for Carbon Accounting Financials, but the reality is that it is extremely complex and still in its relative infancy. In many cases, the relevant data does not even necessarily exist yet. Unfortunately, that is the case in much of the ESG world.
The law of unintended consequences seems to be a risk; it would suggest that, if well-publicised timetables are compressed in the way that this amendment proposes, corners will end up being cut, which would lead to other sorts of financial risk, such as “greenwashing” in managed portfolios. There are already examples of companies with limited sales that operate in promising areas such as hydrogen and are trading at stratospheric valuations. This harks back to the dotcom boom; it may well be that they deserve to trade at these levels, as they offer what a particularly gifted salesman once described to me as an “option on an addressable market”, but it may equally be that purchasing such stocks adds a little superficial virtue to a portfolio.
To take another example from the corporate world, on Monday the Financial Times carried a story about “creative accounting” in the biomass industry. Apparently this is perfectly legitimate under the current rules, but clearly these rules require review. Speaking of unintended consequences, the FT yesterday carried a fascinating article that should worry us all: the highest-rated companies on an ESG basis pay less tax than those that are lower rated. According to the study, AAA-rated ESG members of the US-based Russell 1000 Index paid, on average, 18.4%, while CCC-rated companies paid 27.5%. Microsoft is an ESG exemplar with a human rights policy, a biodiversity policy and a plan to be carbon-negative by 2030, yet it pays an effective tax rate of only 16%. Here I think one might argue that you should be very careful what you wish for—well done Microsoft for being ahead of the curve, but do we really want to encourage investors to sell companies with lots of employees to buy those with lots of robots which are good at seamlessly shifting their revenues across borders?
I have given considerable thought to the wording in Amendments 11 and 12, and I confess to being a little confused about their intent. My problem is with the wording “climate-related financial risk”; I understand climate-related risk and financial risk, but I am not sure I understand them when combined in this way. I therefore looked to Amendment 98, which has a stab at defining them but, to be honest, I am still struggling to understand. I appreciate that Amendment 98 attempts three definitions, but I do not think any of them makes anything particularly clearer.
The first definition relates to specific weather events and longer-term shifts in the climate. How on earth is the FCA supposed to regulate for risks associated with specific weather events before the fact? Recent events in Texas, which have been referred to by other noble Lords, would suggest that is largely impossible—and anyway, were not climate change deniers always being told that they should not conflate weather and climate?
The second amendment is more comprehensible in that it seeks to judge transitional risks resulting from the process of adjustment towards a low-carbon economy. However, I would argue again that forecasting the nature of those risks, never mind the specifics, would be nigh on impossible at this stage. For example, there would be plenty of transitional risks associated with our move to a fleet of electric vehicles. It is generally accepted that in the UK, we are going to need to generate an additional 25% electricity and, apparently, that can be done with renewables and other exciting new technologies. But these new technologies might not work. As has been said many times before, the wind might not blow, people’s behaviour may not change in predictable ways, investment in grid capacity may not be adequate, et cetera. I am not saying that all of those things are going to happen, but how is the FCA supposed to anticipate them in order to regulate for them? There are myriad possible outcomes here; it seems unbelievably complex and would, in many ways, require a crystal ball.
The last definition makes even less sense. It specifies that the liability risks arising from parties who have suffered loss seeking to recover those losses from those they deem responsible. I ask again: how is the FCA supposed to judge who might, on one unspecified day in the future relating to some unspecified event, be deemed responsible for such losses?
By these amendments, the FCA would be obliged to make rules that impose prudential requirements, but I believe that these attempts at definition are imprecise. As many noble Lords in this debate and at Second Reading have noted, the FCA is stretched enough as it is, and has not had a particularly commendable run of late. Are we now suggesting that the FCA and PRA should provide their own definitions on such critical issues?
I would note that a more straightforward amendment on climate change was defeated in the other place. The Minister stated that it was not necessary as the Government would,
“carefully consider adding climate change as an issue to which the regulator should have regard, in the future.”—[Official Report, Commons, 13/1/2021; col. 364.]
However, any such addition needs careful consideration and consultation on how it can best be framed. The conclusion as regards the climate-related financial risk amendments must be right. This should be done. My argument is not that this is wrong, but that it is premature. It should be done in the future when all the teething problems that I have highlighted, along with the issues over data collection and reporting and, yes, the likely unintended and broader societal consequences, have been thought through and solved. On that point, noble Lords might like to join a Bankers for NetZero event to be held on 15 March, which will look at some of these issues.
Owing to the complexity and the necessity of getting this right, which can happen only with industry participation and support, it would be wrong to burden the Bill with amendments that are a little imprecise and may therefore keep the lawyers busy for years, but are unlikely to produce the desired outcomes. The Chancellor and the Minister have been clear that change is coming and that business expects and welcomes it. But society deserves this to be carefully calibrated in a way that I think this group of amendments fails to deliver. We have an opportunity to lead the world here, which we have done consistently with regard to climate change, and to do so in a way that enhances the UK’s competitiveness.
On that point, I agree with my noble friend Lord Howe, that, as he noted earlier, in practice, good regulations are exported. We have an opportunity to craft some good regulations here and I do not believe that these amendments achieve that aim.
My Lords, I support all the amendments in this group. It is a pleasure to follow my noble friend Lord Sharpe, but we may have slightly different views on some of the issues he has mentioned. I also support the wide-ranging aims of the amendments in this group to ensure that our financial services sector and its regulation faces stronger requirements to take responsibility for, and consider its role in addressing, and hopefully managing and mitigating, climate change risks.
I congratulate the noble Lord, Lord Oates, on his excellent introduction to the amendments in this group and his comprehensive summary of the issues. These amendments, or a version of them, are in my view essential to the success of our financial services sector and its role as a global leader. This is not a party-political matter. It straddles the role of our country and its financial system in saving the planet from the clear and catastrophic risks faced by humanity across the globe. I declare an interest in this issue as a member of the cross-party group, Peers for the Planet, and the Conservative Environment Network.
I share the view of the noble Lord, Lord Oates, and other noble Lords that it is astonishing to see that this Financial Services Bill makes no mention of assessing, encompassing and managing the risks from climate change that have the potential to undermine the financial system. Failing to require any regulatory oversight or demands on such existential risks is surely a failing in this legislation. The noble Lord is correct that difficulties in measuring these risks cannot justify simply ignoring them. The risks are real and rising.
I understand the point just made that we cannot anticipate the weather or other climate matters before the fact, but the financial industry is surely well used to anticipating risks that have not yet arisen. I argue that the regulators can indeed require firms to conduct scenario analysis with reasonable assumptions about the risks of certain rises in temperature or other activities that are threats to the planet, just as financial firms are already required to do for interest rate or demographic and other risks.
I have added my name alongside that of the noble Lord, Lord Oates, to Amendments 14 and 35 in the name of the noble Baroness, Lady Hayman, and I thank her for all the excellent work that she has been doing in this area as well. The amendments seek to ensure that the FCA and the PRA must have regard to both our international and domestic climate change commitments. I also support Amendments 11, 12 and 13 in the name of the noble Lord, Lord Oates, supported by the noble Baroness, Lady Kramer, and I have added my name to Amendment 75, which seeks to have a board member of the FCA with responsibility for climate change by amending FiSMA 2000. As other noble Lords have said, that is already required by the SMCR, with firms having to have board members taking long-term views of risks such as climate change, so it seems eminently sensible to propose that the FCA itself has that too.
I have also added my name to Amendment 48 in the name of the noble Lord, Lord Oates, which seeks to bring forward the 2017 TFCD recommendations to 2023, accelerating the climate-related disclosures rather than waiting until 2025. Again, I accept that the industry needs certainty, and this would be a change. However, I hope that having a bolder ambition can still be justified. This is of course a probing amendment, but I hope my noble friend will consider the issue. Indeed, I believe that the Covid-19 global pandemic, along with leaving the EU, offers an opportunity and potentially an obligation to take climate risks more seriously and recognise that there are issues that can be more important than short-term profit and quarterly reporting.
Businesses have been asked to forgo their operations and invest massive amounts in changing their practices at short notice, and have been forced to accept that they cannot continue as they have done in the past. This shows that previously unimaginable changes can be thrust on the global economy and on industries, sectors and individual firms to which they simply must adjust. I hope we can build on that to realise that forcing financial firms to live up to expectations on climate change, planetary temperature rise and associated biodiversity risks, as the noble Baroness, Lady Bennett, mentioned, is possible, even if painful. The asset management, pensions and banking industries can be encouraged to take more responsibility for driving climate-friendly operations, and regulatory oversight surely can—indeed, in my view, must—direct firms to improve their operations in these areas. So do the Government indeed intend to introduce the issue of climate change into the legislation to ensure that financial services are asked to operate more in the interests of long-term economic and climate sustainability?
Climate risk is inevitably investment risk, both to markets globally and to human beings, who are, after all, the customers of firms across the planet. Surely we have a responsibility to override the externalities that have hitherto prevented individual countries taking direct actions. So will my noble friend comment on some of these issues and the Government’s appetite to address what is clearly a view from across the House that these issues are important?
I also want to ask my noble friend one particular question. He may not be able to respond to it immediately, but perhaps he can come back to me. What is the Government’s position on the issue of cryptocurrencies such as Bitcoin, Zcash and many others? They seem to pose a threat to our financial system, as well as causing environmental damage with the massive energy use which is involved in cryptocurrency mining and trading. As we prepare for G7 and COP 26 this year, can my noble friend comment on how the Bill might consider investigation of the trading and creation of cryptocurrencies and their potential threat to energy use and self-sufficiency across the globe?
If we really want to put financial services at the heart of green growth—and I hope we do—I also hope that my noble friend will take back to the department the strong view from this House that this group of amendments needs in some way to be incorporated into the Bill.
My Lords, I will not speak on the substance of most of the amendments in this group. In general terms I do not believe that alterations are required to legislation governing the PRA and the FCA, in view of the enthusiastic work that they have already commenced to embed climate-related financial risks in their work and in the work of the institutions that they regulate. Neither the FCA nor the PRA needed any alteration to their statutory powers and duties to start this process, and I do not believe they need anything in statute to carry on their work.
My noble friend Lord Sharpe of Epsom said that he was worried about the meaning of “climate-related financial risk”. In practical terms, the sectors of the financial services industry have an understanding of what is meant by climate-related financial risk in relation to them, and that will inevitably evolve over time. If you take banks, it is fundamentally a credit risk problem; you can track almost all the issues back to credit risk. If you take an investment company, it is an investment risk problem, as I think the noble Baroness, Lady Sheehan, said in an earlier contribution. With insurance, we are talking about something like the shifting nature and scale of conventionally insured risks in that sector. I am sure that other parts of the financial services sector will have an understanding of climate-related financial risk. So I am not concerned about the definition of that; I am just not sure that it is necessary to find its way into legislation, because it is already being done.
I would also caution people who want change overnight in this area that a huge amount of work is needed to implement, for example, measuring the carbon intensity of a bank’s balance sheet, or indeed an investment company’s balance sheet. These are not simple things to do but require huge amounts of new data and new ways of manipulating it, and the industries need to work out how efficiently to do that. I know a little about insurance companies and I am sure that there are similar challenges to overcome there too. I make a plea to leave it to the regulators to determine the pace of change that is required and not to impose additional duties on them. They must judge themselves how best to achieve the aims which I believe they share with the people who have tabled and moved this amendment.
I have a couple of comments on two of the amendments. Amendment 48 would bring forward the timing of the disclosures from the task force on climate-related disclosure to the end of next year, with the draconian penalty of not allowing companies to continue to operate in the UK if they have not made the disclosures. Are the proposers of this amendment seriously saying that they will stop a FTSE 100 company from doing business in the UK if its disclosures are not quite in line with the recommendations? Are they prepared for UK employees to lose their jobs because of technical disclosures? I do not believe that the amendment does anything to advance substantive climate change measures, only disclosures in annual reports which, at the end of the day, very few people actually read. This is not a real-world amendment, in my view, and it seems to be drafted in a disproportionate way.
My main reason for putting my name down to speak on this group is Amendment 75, which provides for the appointment of a member of the FCA board to have responsibility for climate change. This contains a fundamental misunderstanding of the nature of boards, whether of public bodies such as the FCA or of private sector companies. Boards are there for governance purposes. They set strategy and hold chief executives to account for delivering against that strategy. They should review performance against what is required of them by statute and what they themselves set. They do not make operational decisions and should not get involved in day-to-day activities. That is why the FCA, like most major organisations, has to have a majority of non-executives on its board.
The amendment is silent as to whether this board member is to be an executive or a non-executive but I believe that either would be wrong. A non-executive should not have responsibility for particular activities within an organisation. This distracts from the core function of a non-executive which is around strategy, oversight and accountability. If the amendment is intended to create an executive board member with responsibility for climate change, that is misconceived as it implies that climate change is not the responsibility of the chief executive. The only way for any policy—whether it is climate change, diversity, social purpose or whatever—to gain traction in an organisation is through its leadership and that is sourced in the chief executive. I believe that the amendment is wrong, likely to be counterproductive or both.
I want to pick up on something that the noble Baroness, Lady Hayman, said. She said that this would bring it in line with the requirements of the senior managers and certification regime, which requires—I think she said—a board member to be responsible for climate change. That is not what the SMCR requires. It requires only the identification of a senior manager, as defined within the SMCR, who has to have identified responsibility. It is absolutely not required that it is a member at board level, so that is not an appropriate precedent to cite in aid of this amendment.
My Lords, listening to today’s really outstanding speeches, I think most of us can agree that tackling climate change is not an optional extra. It is necessary to the survival of a liveable and civilised world, and it is urgent. The noble Lord, Lord Sharpe of Epsom, seemed rather the stand-out among the speeches. If I understand him correctly, he shares the general principles but would like them parked in some very long grass for a very long time. That fails to recognise the real urgency that we face. We are past the point where long grass is an appropriate place to put concerns.
This is a substantial group of amendments. It looks to the financial regulators, influencing the financial sector as they do, to become part of the solution. The amendments break roughly into three parts—a cluster of “have regards” and “considerations” that would influence the FCA and the PRA in shaping the rules to support the net-zero target; disclosure and reporting requirements; and the setting of a climate change objective for the FCA, together with appointment to the governing board of an individual responsible for climate change. Here, I disagree with the noble Baroness, Lady Noakes. I think there should be an individual with particular responsibility at the highest level to make sure that things happen in organisations.
I almost wonder that we are having to discuss disclosure, because, in American terminology, it seems to me a slam dunk. Andrew Bailey, in his Mansion House speech last November, called for “data and disclosure”, and repeated that time-honoured but real truism:
“What we cannot measure we cannot manage”.
The other measures proposed are equally straightforward —it is a very straightforward set of amendments. I have my name to many of them, but the range of names on various amendments underscores the cross-party nature of the concern and the determination of this House to use the Bill to leverage change. I join others in saying, that if you cannot tackle the issue of climate change in a financial services Bill, it is going to be hard to tackle it at all.
The hour moves on, so I do not want to repeat the brilliant discussion, except to say that speaker after speaker detailed the urgency of acting on climate change and the necessity that it become a priority for this sector. My message to the Government is carpe diem, because this House will if the Government will not. If the UK is to be a leader—and of all the years in which we wish to show leadership, it must be this one—it must break new ground.
There will be more to say on the next group of climate change amendments, which I consider more powerful and radical. They deal with risk and capital requirements. I very much hope that we receive a strong response from the Minister. I can understand that someone looking at the Bill and a template of previous financial services Bills may not have thought that climate change had a place. By now, Ministers surely must. Included among this group of amendments are so many that are exceedingly reasonable and, frankly, quite uncontroversial. I hope that the Government will begin to shape some amendments of their own, drawing on the content so very firmly placed before them.
My Lords, I am pleased to respond to this substantial group of amendments, several of which are in my name and all of which address the need for better regulation to ensure financial services meet their climate change obligations and the associated financial risk. These amendments correct a fundamental failure of the Bill to address those obligations.
As was pointed out at Second Reading, we find ourselves entangled in an argument from the Minister that these issues are not covered in the Bill, and therefore amendments inserting climate change obligations are inappropriate for it. We reject that argument; it makes nonsense of the scrutiny and revising process that we are here to enact. If we find an omission, it is perfectly proper that we seek to correct it by tabling amendments to the Bill.
That is why we regret that the Government did not bring forward their own amendments, following the excellent arguments put forward by my shadow Minister colleague, Pat McFadden, and others in the Commons. As he pointed out there, and as others have pointed out today, the Chancellor set out green goals for the UK financial services industry back in November. Therefore, the Bill was an ideal vehicle to set out an accountability framework to underpin those goals. Every sector of our economy will have to play its part in delivering the climate change net-zero target—whether it is in energy, transport, housing or agriculture—and all these changes will require large-scale financial investment. Financial institutions will thus have to play a central role in delivering it, and it is right that we use this opportunity to spell out how it should be done in practice.
During the Commons debate, the Minister, John Glen, also argued that this issue would be dealt with elsewhere as part of a separate review—again, reference was made to this today. This cannot wait for another review or consultation. We are already falling dangerously behind, and as the climate change committee has made clear, we are not on track to meet the net-zero 2050 target. We need action now to galvanise both public and private finance to step up to the mark and to be accountable for the promises made. The noble Lord, Lord Sharpe, said that we were in danger of complicating regulation, but I do not think our asks do anything like that. Our asks are simple: they set out core principles that we expect the regulators to embrace, but we leave them to sort out the detail of how to follow that through and enact it. That is the right way to go about it.
Why are these amendments important? First, they would ensure a level playing field across the sector. It is not good enough that more progressive companies take action now while others drag their feet. Of course, we welcome the recent statements of significant investment managers such as BlackRock setting out how net zero will deliver a historic investment opportunity for their clients. However, this needs to be balanced against the fact that none of the world’s biggest oil and gas companies is on track to meet its climate goals. Many continue to bury their heads in the sand regarding the ensuing environmental disaster that faces us. A strong regulatory framework to ensure compliance with Paris would address this inconsistency between the good guys and the bad guys.
Secondly, a recent survey by ClientEarth showed that, although 50% of FTSE 100 companies disclosed some form of net zero target in their annual reporting last year, the strategies that they set out and are developing to reach those targets often lack credibility and priority. The noble Baroness, Lady McIntosh, talked about ESG, but, as she recognised, these standards are not underpinned by regulations in any way. If we are serious about ESG, it needs to be spelled out and companies need to be held to account.
Sadly, greenwashing is all too common. We saw that with the ill-fated BP adverts, which it was eventually forced to withdraw, and the action against HSBC by shareholders who saw that its continued investment in fossil fuel assets was at odds with the bank’s hollow promises on addressing climate change. However, it should not be left to individual groups to police these actions; that is why transparent targets and methodology are required by the regulators as key to reforms.
Thirdly, the institutions that are dragging their feet on climate change risk damaging consumer confidence in the sector as a whole. There will undoubtedly be further shareholder and customer demands for reduced investment in fossil fuels; they need to be reassured that the Government have the means to take action against transgressors.
Finally, and perhaps most importantly, the reason why Mark Carney and now Andrew Bailey at the Bank of England have become more vocal on climate change is that they understand the micro and macro risks that could occur if institutions continue to invest in dying sectors such as fossil fuels. This could result in stranded assets, which damage institutional resilience and have an adverse impact on the global economy. As the noble Baroness, Lady Altmann, said, institutions are already expected to conduct scenario planning, so all we are asking them to do is add an extra risk to the process that they are already expected to undergo.
We believe that this Bill should be amended to deliver a consistent approach to the regulation of financial institutions to underpin all Paris-aligned strategies, which in turn would strengthen our economy. Our Amendment 15 would require the Financial Conduct Authority to have regard to the climate change targets as set out in the climate change legislation when applying the Part 9C rules. Our Amendment 36 would require the Prudential Regulation Authority to have similar regard to the climate change legislation in carrying out its duties. We believe that these are necessary to spell out that not just the Government but the agencies acting on their behalf have obligations to abide by the Paris treaty.
This is in parallel to the obligations on pension investment fund trustees that the Government helpfully added to the recent pensions Bill. I would say to the noble Lord, Lord Sharpe, that the Pension Schemes Act already contains obligations to address risks arising from climate change. There has not been the cause for confusion or anger among pension regulators that he fears; they have just got on with the work.
Our Amendment 89 would place a requirement on government to draw up within 12 months
“a strategy … to ensure financial services … make a positive contribution to climate change targets”.
This would be put together in conjunction with key stakeholders including the FCA, the PRA and the Committee on Climate Change.
We also support other amendments in this group which would, respectively, broaden the FCA’s responsibility to address climate-related financial risk, bring forward the date by which organisations must make disclosures in line with the report of the Task Force on Climate-related Financial Disclosures, and add a new objective to the FCA’s responsibilities to address climate change-related financial risks.
As the noble Baroness, Lady Hayman said, we are not precious about our wording—we have had a diverse debate today and a diverse set of wording in the amendments—but we believe that this package of amendments is essential to deliver robust and meaningful financial regulation on institutional climate change targets which would be fair, consistent, transparent and measurable. It would also ensure that the regulators were accountable to Ministers and Parliament for delivering these objectives—this point was made powerfully in the previous debate.
We believe these changes are timely and urgent. I hope the Minister will feel able to reflect on them and we would welcome further discussions about how they can be achieved. Failing any progress, we intend to return to this issue on Report. I hope that the Minister can hear what we say with some sympathy and avoid that scenario. I therefore look forward to his response.
My Lords, I have indeed listened, and I welcome the opportunity to talk about the crucial role played by the financial services sector in supporting the Government’s climate change objectives. Given the strong levels of interest in this topic and the number of amendments we are considering, I hope noble Lords will forgive me if I speak at some length.
Green finance was one of the cornerstones of my right honourable friend the Chancellor’s vision for financial services, as he set out in November in the other place. The Government want to put the full weight of private sector innovation, expertise and capital towards tackling climate change and protecting the environment. Real change requires embedding our climate change goals across all sectors of the economy, including the financial services sector. As my noble friend Lady Noakes has pointed out, the regulators are able to do this already under their current statutory objectives.
I would like to set out a small amount of detail about how the Government are delivering on this agenda. In 2019, the Government set out our vision in the Green Finance Strategy. This strategy also set out the Government’s commitment to use “remit letters” to set ambitious recommendations relating to climate change for the PRA and FCA. These letters will be issued at the next opportunity.
Late last year, the Chancellor announced our intention to make disclosures aligned with the Taskforce on Climate-related Financial Disclosures, or the TCFD, mandatory in the UK across the economy by 2025, with a significant portion of mandatory requirements to be in place by 2023. The Government also published the UK TCFD’s interim report and road map, which set out a clear pathway to achieving that ambition. As my noble friend Lord Sharpe highlighted, the UK expects to be the first country to make TCFD-aligned disclosures mandatory across the economy. The UK is also planning to issue a green gilt, subject to market conditions, to help fund projects to tackle climate change, finance much-needed infrastructure investment and create green jobs across this country.
I understand noble Lords’ appetite to go further and faster, and this is the motive behind many of the amendments we are debating. We are all in agreement that the financial services sector plays a role in meeting our commitments, but the thinking on how this should be factored into legislation and regulations in specific areas such as capital requirements and other prudential standards is still in its infancy. While we are certainly committed to remaining world leaders in this area, it is important that we act carefully and rationally, consult appropriately with interested parties and therefore make progress in the right way.
Before I cover the amendments, I hope my noble friend Lady Altmann will allow me to write to her on the Government’s approach to cryptocurrencies. I shall also write to the noble Baroness, Lady Sheehan, on government funding for fossil fuel projects overseas.
Amendment 23 seeks to prevent the Treasury revoking provisions of the retained UK capital requirements regulation, or CRR, where the rules made by the PRA are not aligned with the UK’s target to achieve net-zero emissions by 2050. Lest we forget, the changes the Bill enables serve to implement a number of vital reforms following the financial crisis. These reforms reinforce the safety and soundness of the UK financial system. This amendment would prevent us giving effect to updated prudential rules and thereby undermine our ability to uphold our G20 commitment to the full, timely and consistent implementation of the Basel standards. There is no evidence that “greener” means “prudentially safer”, at least not yet, and therefore it is not clear that a regulator whose primary objective is the safety and soundness of financial institutions could meet such a requirement now.
Amendments 12, 13, 14, 15, 16, 17, 34, 35, 36 and 37 are all similar in nature. Specifically, they would insert an additional consideration into the accountability frameworks of the FCA and the PRA. In essence, their intention is to require the regulators to take climate change, biodiversity and related issues into consideration when implementing the prudential regimes. Amendments 11 and 12 are also similar, but arguably go further and would impose a duty, rather than a “have regard”, on the FCA to make prudential rules for FCA investment firms and their parent undertakings to manage the climate-related financial risk to which they are exposed.
I agree with the principle that the regulators should have regard to our climate change commitments. I believe that the goal—if I am interpreting the amendments correctly—is to make the regulators consider how to channel private financing towards greener investments. I agree with this goal, but there are some very real challenges to note. First, to hold the regulators to account and achieve what we want, we need to be able to define what we mean by “green”. A programme of work is under way domestically and internationally to achieve that through a green taxonomy; that is, agreeing how we classify what is “green” and ensure consistent standards on that. There is also the important matter of understanding the financial risk of such green investments and the extent to which changing prudential requirements according to the greenness of the investment is justified. Again, work is ongoing on how to capture climate change risks in prudential regulation, both within the Bank of England and by the Basel committee task force, which is leading work to understand how climate risk is transmitted, assessed and measured. This is a significant undertaking and the evidence will take some time to examine. I note the excellent points made by my noble friend Lord Sharpe on some of the complexities in this area.
While the UK is committed to being a world leader in this area, given the global nature of the climate change threat and the interconnectedness of financial markets, this means bringing other jurisdictions with us and, while being bold, it also requires careful thought and robust evidence. These are global discussions and global consensus takes time. Any amendment or “have regard” introduced now would therefore naturally be a stopgap until fuller definitions have been established. In the short-to-medium term, there could well be minimal changes to the prudential framework as a result of this have-regard until the appropriate capital treatment is established.
Secondly, there is a time constraint. We are committed to implementing these Basel standards, the first batch of which the Government aim to implement by the end of this year, lest we risk damaging our international reputation. Further, if we do not implement the investment funds prudential regime by the end of the year, we will have a more burdensome regime than the EU.
The noble Lord, Lord Oates, the noble Baroness, Lady Hayman, and other noble Lords asked why we cannot include some kind of green “have regard” in the accountability framework to start with. There is a very simple answer to that: as I said, both the Government and the regulators see climate change as a priority in financial services across the piece, but the current “have regards” in the Bill are those the Treasury found immediately and specifically relevant to the implementation of two prudential regimes with specific aims. I emphasise that this is not a case of the Government dragging their feet or wanting to hide in the long grass. As I have tried to argue, it is unclear what integrating climate risks into prudential requirements would look like, so Parliament would be giving the regulators responsibility for important public policy without a good understanding of what it is asking the regulators to do, or what impact that might have. I suggest that that would be deeply unwise.
I hope I have succeeded in setting out some of the different questions that this set of amendments has raised. However, I am aware that this is an important topic. We have spoken at length about the prudential regimes in the Bill, but I will now focus on the amendments which relate to financial services policy more generally. Amendment 75 would require the appointment of a member of the FCA board with responsibility for climate change. Amendment 98 adds a new statutory objective for the FCA to consider climate-related financial risk. In a similar way, Amendment 89 would require the PRA, the FCA and the Treasury to have regard to the net-zero target and international climate change treaties when conducting their functions.
I have already set out a number of actions that the Government are taking to address climate change in financial services. I will return to this point in a moment, but I want to say a little more about what the FCA and the PRA are doing in particular. We work closely with regulators on a variety of green finance issues and have established effective mechanisms to advance areas. We clarified these roles and responsibilities in the Green Finance Strategy and through a regulators’ joint statement. In June 2020, the FCA announced the Climate Financial Risk Forum, established jointly with the FCA and the PRA, reflecting the importance of climate change to their respective strategic objectives, with the aim to build capacity and share best practice across the industry, to advance the sector’s responses to the risks presented by climate change. Therefore, I am content that the FCA and the PRA are aware of, and currently determining, how best to respond to the risks presented by climate change.
On Amendment 75, no other FCA board roles are appointed by the Treasury with specific instruction as to their focus. I am grateful to my noble friend Lady Noakes for what she said in that connection. It would be inappropriate for the Government to dictate the responsibilities of members of an independent board. On that basis, I ask that that amendment is not moved.
Amendment 48 seeks to introduce a blanket requirement for specified firms to disclose in line with the recommendations of the task force on climate-related disclosures by 2023. The UK was one of the first countries to endorse the TCFD recommendations in 2017. As I have mentioned, in his Statement to the House of Commons last November, the Chancellor announced the UK’s intention to make TCFD-aligned disclosures mandatory in the UK across the economy by 2025—becoming, as I said, the first major economy to commit to fully mandatory disclosures, going beyond “comply or explain” or “as far as able” approaches taken elsewhere. The TCFD framework will be a powerful tool, but only if implemented properly. The recommendations do not, on their own, contain the requisite level of prescription to elicit disclosures that are comparable, consistent and decision-useful to end-users, including retail and wholesale investors. Robust implementation will be crucial to enabling investors and businesses to better understand the financial impact of their exposure to climate change and ensuring that financial markets appropriately price climate-related financial risks and opportunities.
The UK TCFD taskforce interim report and road map, published alongside the Chancellor’s announcement, outlines a co-ordinated, fit-for-purpose and proportionate regime, with requirements that are appropriate in a UK context. This regime takes account of cross-cutting issues such as interdependencies, capability and capacity across market participants, as well as practical issues around implementation, supervision and enforcement across the UK economy.
The proposed amendment does not contain the requisite level of prescription, supervision and enforcement mechanisms to mandate meaningful disclosure. It also does not take into account sectoral data, capacity and capability challenges, which must be addressed before disclosure can be required on a mandatory basis from all relevant firms, as well as legislation lead-in times and legal obligations to consult and carry out cost-benefit analysis.
As outlined in the road map, we have proposed an ambitious timeline, according to which the bulk of mandatory requirements should be introduced by 2023, without compromising on our commitment to ensuring that proposals contain the requisite level of prescription, supervision and enforcement mechanisms to mandate meaningful disclosure. Significant progress towards achieving that ambition has already been made. As such, while I agree with the noble Lord’s push for TCFD-aligned disclosures to be published as quickly as possible, we believe that our co-ordinated approach represents the most ambitious pathway to implementing the TCFD recommendations in a way that will actually elicit meaningful disclosure across the whole UK economy.
Amendment 76 would amend the PRA’s annual reporting requirements to make it report on how it has evaluated exposure to climate-related financial risks and the impact of such risks on the stability of the UK financial system. In conducting this evaluation, the amendment requires the PRA to seek input from the Committee on Climate Change and to publish the advice that it receives.
I believe that this amendment seeks to do three things that I am happy to confirm that the PRA already does. First, it wants the PRA to take steps to preserve the safety and soundness of financial institutions and ensure that climate change risks are included in that. The PRA is already taking steps to do this through its climate change stress test, which will build our understanding of the risks posed to the financial system by climate change so that we can develop policies for managing them.
Secondly, the amendment aims to bring such analysis to the attention of the Government or the public. In addition to its work on the stress tests, the PRA participates in the UK’s Task Force on Climate-Related Financial Disclosures and the Climate Financial Risk Forum, as well as the research papers that they have developed.
Finally, the amendment seeks to ensure that the PRA engages experts. The climate change stress tests that I just mentioned will be based on scenarios developed and published by the Network for Greening the Financial System, which brings together eight central banks and supervisors with a purpose to size the risks from climate change to the financial system and the macroeconomy.
I am aware that, once again, I have spoken at length, but I trust the Committee will agree that this is a crucial topic that should be considered in detail. I hope I have explained what the Treasury and the regulators are doing to tackle climate change and address green issues, and I hope it is apparent to the Committee that it is an ambitious programme of work. However, this is an area where we must continue to be ambitious, and I hope the noble Baroness, Lady Hayman, will forgive me if I do not allow myself to be drawn on the challenge that she issued at the conclusion of her remarks. I simply say that I have listened to the ideas that have been put forward, and I welcome noble Lords’ engagement on the issues that we have debated, which I am sure we will return to throughout our scrutiny of the Bill. On that basis, I ask noble Lords not to press their amendments.
I have received one request to speak after the Minister from the noble Baroness, Lady Bennett of Manor Castle, who I now call.
My Lords, I thank the Minister for his comprehensive answer, although I ask again, how can the Government justify having included climate change considerations in the then Pension Schemes Bill last year, but not in this far larger, more significant Bill in 2021?
I want to respond to what the Minister said: that there is no evidence that greener means prudentially safer. I hope I am quoting him accurately. I refer specifically to the fossil fuel companies that the noble Baroness, Lady Sheehan, mentioned earlier, as well as to mining companies with a substantial role in environmental destruction. As the UNEP report to which I referred earlier said, this is unlikely to continue to be tolerated on the international stage. Surely the Government are aware and are taking account of the Carbon Tracker Initiative, which is responsible for popularising the term carbon bubble, if not for inventing it. The excess of carbon beyond climate limits is termed unburnable carbon, some of which is owned by listed companies. This has the financial implication of potentially creating stranded assets and destroying significant shareholder value.
The Carbon Tracker Initiative says that valuations tend to be based on near-term cash flows, which are less likely to be affected by climate-related factors. However, exposure varies, and some companies will be in a far worse position than others, as the demand for fossil fuels and the ability to burn them reduces. Surely, this is a potential concern and a risk that the greening of companies can tackle.
My Lords, I failed to cover the Pension Schemes Act. I apologise to the noble Baroness. The Act provides a power to bring forward regulations, placing various obligations on pension schemes relating to climate change risks. The provisions in the prudential package of the Financial Services Bill do something slightly different. They place a duty on the regulators to have regard to certain matters and to explain how they have been considered, given that the Bill imposes duties on the regulators to make rules relating to Basel and the IFPR. I reassure the noble Baroness that my officials and I have considered these provisions carefully, as we have the other amendments discussed today.
As regards her main question, my point was simple. As yet, there is no international agreement on what the term “green” means. Therefore, we cannot say with certainty that greener means prudentially safer. I do not say that we will never be able to, but it is not possible at present.
My Lords, I am grateful to all noble Lords for their thoughtful contributions to the debate. I thank and pay particular tribute to the noble Baroness, Lady Hayman, for her important leadership on these issues through Peers for the Planet which is recognised across the Committee. I also thank all noble Lords who signed or spoke in favour of amendments for their co-operative, cross-party approach.
In quoting the Government’s approach, the noble Baroness, Lady Hayman, paraphrased St Augustine: “Lord, make me greener, but not yet”. I thank the Minister for his comprehensive response and characteristic courtesy, but it felt a little complacent. One could also quote from St Paul—that it was about “the good that I would I do not”. There is no doubt about the Government’s intentions, ambitions and targets. We welcome and are impressed by them, but it is now reaching the point where we have to act.
However, perhaps the most appropriate quotation would be from Martin Luther King in a different context, where he spoke about what he called,
“the fierce urgency of now”,
and warned against,
“the tranquilizing drug of gradualism”.
The threat that is posed both by climate change and, as the noble Baroness, Lady Bennett, rightly pointed out, the ecological emergency—the threats to nature—is now aptly described in that phrase,
“the fierce urgency of now”.
The IPCC has warned that, if we do not get this issue under control, we could see between 4 and 7 degrees of warming by the end of the century. That is in the lifetime perhaps not of me but certainly of children who are nieces and nephews. This matter has to be acted on now. I did not get that sense of urgency.
There was much talk about acting cautiously and consulting widely on all the various things that we have to take into account. What we have to take into account is that we face a unique, existential threat, both to the financial system and to all of us alive on the planet. The noble Lord, Lord Sharpe of Epsom, talked about the difficulties of measurement, which was reflected by the noble Earl the Minister. I commend to both noble Lords the excellent report that Finance Watch has published, entitled Breaking the Climate-Finance Doom Loop. It makes the point that
“The lack of prudential action so far is grounded in a paradox: policy-makers recognise the near-impossibility of modelling climate-related risks but say that they need such modelling to be done before intervening.”
We do not have time, and we have to act now.
We cannot say that the regulators of the financial services sector—which is, after all, the vector through which we finance much of the action, either to the good or, unfortunately at the moment, very much to the bad —do not even have to have regard to issues of climate change. The Minister said that the Treasury had looked at the “have regards” in the Bill and put in those that it felt were most relevant and appropriate, but it has not put in those that are most important and critical.
We have had a long debate and I will not detain the Grand Committee longer. I am grateful to the Minister for listening and being willing to talk. I hope that we can go on talking. However, I would say to him that what cannot be acceptable to the House is the approach taken by the Economic Secretary to the Treasury, referred to by the noble Lord, Lord Sharpe. The Economic Secretary, in Committee in the House of Commons, conceded that there might be a case for a green “have regard” but that
“The Bill grants the Treasury a power to specify further matters in the accountability framework at a later date, which could be used to add a requirement to explicitly have regard to green issues in the prudential framework”.—[Official Report, Commons, Financial Services Bill Committee, 24/11/20; col.157.]
Wherever one comes down on this issue, whether one is in favour or against that sort of “have regard”, it is surely a matter for Parliament and not the Treasury to decide.
I hope that we can work with the Minister and find a way in which to amend the Bill in co-operation and advance these goals. But if we cannot do so, as I said earlier, the spirit of the House is that we will come together on some consolidated amendments, which will be put down for Report.
Amendment 11 withdrawn.
Amendments 12 to 21 not moved.
Schedule 2 agreed.
Clause 3: Transfer of certain prudential regulation matters into PRA rules
Amendments 22 and 23 not moved.
We now come to the group beginning with Amendment 24.
24: Clause 3, page 4, line 14, leave out “adequately replaced by” and insert “replicated or otherwise reflected in”
Member’s explanatory statement
This probing amendment aims to understand the degree of flexibility that the Treasury will allow the PRA when it replaces provisions of the CRR via general rules.
My Lords, I shall speak also to Amendment 25. This is a Christmas tree Bill with many attractive decorations, to which the Committee has tried to add. They have all been important issues, but in my view Clause 3 is the most important clause in the Bill.
Clause 3 takes away a system of regulation without a clear replacement and, if we get it wrong, it could create another crisis. We have all started to forget the crisis of 2008-09 and we do not recall, I fear, just how close that crisis came to being a catastrophic worldwide crisis. We were saved by a number of very small margins, and I think many Members of the Committee have sensed this. That is why we spent the first part of the day addressing what, at Second Reading, the noble Baroness, Lady Noakes, called “the accountability deficit”. I hope the Government heard the debate and we can come to a satisfactory consensus. I draw some comfort from the Minister’s closing remarks that that is, indeed, his intention.
Amendments 24 and 25 address the Clause 3 problem from a different direction. What should replace what Clause 3 takes out? This particularly relates to the “have regard” provisions. If we look at the history of legislation in this area, it starts with the now unrecognisable FSMA 2000. That was the original Act, but 2012 brought significant change and created the FCA and the PRA. The model was supposed to be that the Government and Parliament would create a framework and the regulators would invent the rules. However, in many ways, that was overtaken by the European Union capital requirements regulation. It is worth noting that, while we were a rule-taker in that regard, the EU regulation went through a significant democratic scrutiny process in the EU Commission and, particularly, the EU Parliament. The noble Baroness, Lady Bowles of Berkhamsted, may be able to assure us of that, since she took a considerable part in that scrutiny.
Then came 1 January 2021, and the effect of the European Union (Withdrawal) Act 2018 was effectively to translate the regulation into UK primary legislation. Clause 3 revokes the regulation, so the real question is, what is to replace it? One has to delve quite deeply into the Bill to find out.
The Bill inserts new Section 144C,
“Matters to consider when making CRR rules”
into the now-famous FSMA 2000. Subsection (1) states:
“When making CRR rules, the PRA must, among other things, have regard to … (a) relevant standards recommended by the Basel Committee on Banking Supervision from time to time.”
As far as I know, there is no democratic input to the Basel Committee on Banking Supervision. I believe that UK interests are represented not by a politician or by government but by the Governor of the Bank of England. It seems that we are to be a rule-taker yet again.
Subsection (1) has three other paragraphs: paragraphs (b) and (c)—which I did not understand when I read them; I gather from a reference during an earlier debate that they are probably something to do with competition—and (d), which refers to
“any other matter specified by the Treasury by regulations”.
About the only good thing that can be said about that is that it has a parliamentary process and is subject to an affirmative statutory instrument. At first sight, it is the only democratic control in the regulations.
What has all this got to with Amendments 24 and 25? They are an attempt to prescribe what goes into the “have regard” section. Clause 3(4) of the Bill states:
“The Treasury may only make regulations under subsection (1) or (3) revoking a provision if they consider that … (a) the provision has been, or will be, adequately replaced by general rules made, or to be made, by the Prudential Regulation Authority.”
The weakness of this provision is that it is not at all clear what “adequately replaced” means, hence we propose that it be substituted by
“replicated or otherwise reflected in”.
That would mean that every provision in Clause 3(2) would have to be considered and replaced. The exception is in subsection (4)(b), which states
“consider that … it is appropriate for the provision not to be replaced”.
We cover that in Amendment 25, which would insert:
“Where the Treasury makes regulations in reliance on subsection (4)(b), the Treasury must, when laying a draft of the regulations before Parliament, also lay before Parliament a statement explaining why, in the Treasury’s opinion, there are good reasons for revoking the provision.”
The constraints which our amendments propose would mean that the initial, “have regard” rules would be at least as comprehensive as those they replace. I hope that the Government will consider with care these two modest amendments and accept them or incorporate their essence into their own proposals to achieve consensus on Clause 3. I beg to move.
My Lords, I thank the noble Lord, Lord Tunnicliffe, for his clear and incisive introduction to this group, and the identification of the problem of Clause 3, which I am proposing in a probing amendment should not stand part of the Bill. Amendments 24 and 25 seek to improve Clause 3 and appear to do so, but this group is crucial for debating the very issues that the noble Lord has raised. He reflected some of the concerns that I expressed in the first day of the debate: namely, that the language we are hearing from the Government and some Members of this Committee closely resembles that of 2006, most notably in the then Chancellor Gordon Brown’s infamous Mansion House speech.
Clause 3 transfers certain prudential regulation matters into PRA rules. The Treasury may by regulation revoke provisions of capital requirement regulations relating to the matters listed—a list that then amounts to a couple of pages. This Bill is often presented as primarily simply a matter of transferring and translating technical regulations from Basel and the EU into UK statute. Many of us have spent much of the last year in this Room working on just such statutory instruments. However, when considered more deeply, vesting such powers in the Treasury would seem to be a kind of discretionary deregulatory charter. It has been described to me as potentially a clause allowing Singapore-on-Thames to run riot.
I would not care to take an examination on the detail of what Clause 3 does, but I am being advised by someone who could set that exam, and I take great heart from the earlier expression of support from the noble Baroness, Lady Kramer, for this probing amendment—for Clause 3 potentially hands quite substantial discretionary powers to the Treasury to get more involved in PRA matters. It could be used to soften up or undermine the PRA. I can already predict some of the answer that I may hear from the Minister, that “Our intentions are good”. But, as we go around this merry-go-round again and again, what matters is what is written on the face of the Bill, not whatever the current Minister or Government’s intention might be.
My question, to which I would appreciate an answer now and perhaps in more detail later, is: does the Bill as currently written—perhaps improved by Amendments 24 and 25, but certainly without them—hand too much discretionary power to the Treasury and should the wording not be tightened to specify more precisely the circumstances in which the Treasury would involve itself in these matters of the PRA?
My Lords, as the noble Lord, Lord Tunnicliffe, intimated when he introduced his amendments, Clause 3 is very important to prudential regulation and the banks and financial institutions concerned. However, we must make progress with this Bill, so I will speak briefly. I look forward to the Minister’s explanation of what is intended here and why, and what the safeguards will be for those entities regulated by the PRA in terms of purpose, consultation, impact, cost benefit and so on. I do not read it in the same way as the noble Baroness, Lady Bennett of Manor Castle.
I would like to understand the competitive position. My son works in London for a French investment bank regulated primarily in Paris rather than London, under the equivalence arrangements that we have granted. I suspect that the local branch here may be part of a legal entity based in Paris. How would such an EU bank be affected by the proposed changes in Clause 3 and whatever replaces the revoked regulations? Is there a level playing field?
My Lords, the noble Lord, Lord Tunnicliffe, has reminded us that this is the clause where the legislation on the CRR gets waived away into rules without any legislative replacement. This follows the pattern that the Government proposed in their consultation: once there are rules from the regulators, the statutory instruments are revoked.
Paragraph 2.25 of the Financial Services Future Regulatory Framework Review states:
“The default approach would be for any retained EU law provision that is in scope of the regulators’ FSMA rule-making powers to be taken off the statute book to become the responsibility of the appropriate regulator.”
Therefore, although there may be consultations on replacement rules at the point of revoking the SIs, there are no checks further down the track, so at some time further on all the rules could be revoked too. As a practical matter, that will not happen, but it is possible that for some things big changes could happen. It is probably more of a worry when it is happening to the wider generality of financial services legislation than with standards that are underpinned by Basel provisions, but I make this point because the Minister said on Monday at the start of Committee that everything is being listened to in the context of the consultation, although I must say that his replies so far do not inspire too much confidence.
It may seem convenient to have a more flexible arrangement of having regulators doing everything and not bothering Parliament with statutory instruments, and the view being pushed by the Government seems to be that Parliament should not become too bothered by rules because they contain frightening Greek letters such as Σ that really just indicate some very simple sums that could easily be explained in a sentence. Underlying that is that there should not really be challenge, only fig leaves and what the noble Lord, Lord Holmes, called the rear-view mirror.
Even though I have no great love of statutory instruments as a measure for showing parliamentary consent, there is a qualitative difference compared with rules, and I want to flag up that this clause is where the notion that we will no longer have any firm policy against which to hold the regulator accountable is endorsed. From here on, the regulator makes the policy, and there is no policy guidance between the regulator’s rules and the simple objectives, have-regards clauses and perhaps a few generalised statements, such as supporting UK economic growth. I do not like this sparseness, and it is ridiculous to suggest that rules are constantly, rapidly needing change. That is not true and not internationally sustainable.
To some extent the Government acknowledge this, otherwise there would not be the statement in the consultation that some things may have to be put into SIs as a consequence of equivalence decisions. So other countries can measure our standards, but not Parliament. How embarrassing. I heard what the Minister said in reply to my equivalence information point in the first group today. He said that such things may have to stay out of the public domain—at least until they become a statutory instrument—but I never suggested that they be public, just that there should be some sharing with Parliament about the policy direction. I am pretty sure that the EU will take the view that regulator rules alone are not enough and are potentially too transient when it comes to such a large financial centre as London, not least when it comes to looking at the lavish use of “bespoke”, which was always one of Brussel’s most hated words because it thought, and I tend to agree, that it was tailoring cut to flatter and trick the eye. That is fine for clothes, but not so good for financial services rules.
As I want to mark resistance to this passing of all policy to the regulators so they end up held accountable only to their own rules, I support the noble Baroness, Lady Bennett, in the suggestion that Clause 3 does not stand part.
My Lords, I understand the purpose of Amendments 24 and 25, in the name of the noble Lord, Lord Tunnicliffe, but do they suggest that he would like to stick with the enormously detailed and prescriptive provisions of the CRR as they are in retained EU law? The Government’s intention to transfer most of the provisions of the CRR into more flexible rules is right. The PRA will be able to react more quickly if it needs to change particular rules, and this should reduce the risk of failure of banks in the future.
The Government have been clear that the UK’s regulators are the right people to set the detailed, firm-level rules to implement the remaining Basel standards. Of course, as discussed in previous debates, and supported by noble Lords on all sides of the Committee, we need proper parliamentary oversight of the PRA before it starts to use its new powers. The wording in the noble Lord’s amendments suggests that he wishes to reduce the degree of flexibility that the Treasury will grant the PRA, but I think that that might be counterproductive. Does he not accept that, as we move to a simpler, more flexible, outcomes-based regulatory framework, there should be less detailed prescriptive rules?
The noble Baroness, Lady Bennett of Manor Castle, wants to retain all the CRR rules in legislation. I cannot agree with her approach, which might damage the attractiveness of the City as a financial centre. She referred to Singapore-on-Thames, which is becoming a fashionable way to describe a light-touch regulatory regime, but is she not aware that Singapore is one of the best and most strictly regulated centres in the world? It is strict, yes, but much simpler and less cumbersome and bureaucratic. Does the Minister agree that we need to return to a simpler, different, more flexible and agile regulatory style?
My Lords, I do not have a great deal to say but there are a couple of points that I would like to make. First, the two probing amendments from the noble Lords, Lord Tunnicliffe and Lord Eatwell, make a great deal of sense to me, so I hope that the Government will pay attention to them and provide some substantial answers.
However, what struck me more than anything else was that this was an opportunity to comment on Clause 3. That suddenly dawned on me as I looked at the language both in the Bill and in two amendments which appear in later groups. One I have added my name to and the other is in my name only at this point in time. The first, in the name of my noble friend Lord Oates, looks at capital adequacy ratios for investments in fossil fuel relating to exploitation and exploration. The other amendment, which stands in my name and is in what could loosely be called a regulatory group, deals with MREL thresholds for medium-sized banks.
It occurred to me that this is the last time that we will be able to raise issues such as these in government time in this House if the Bill passes with Clause 3 in it. All the rules issues detailed in Clause 3, which are in effect fundamental to policy, will be transferred to the book of the regulator. Were I to look for an opportunity to raise these issues, which I shall follow up on in later debates on the Bill, the Government would say to me either, “You’re out of scope”, or, “Those are dealt with by the regulator, so wait a year or two and the regulator might do a consultation on one of these issues, then you can make your opinions heard.” They might say to me, “Write a letter to the Treasury Select Committee and see whether it considers the issue important enough to take up its very precious time, in dealing with its very heavy workload, by picking up your issue as part of one of its broader consultations.”
If ever we needed a graphic illustration of the loss of authority of Parliament and the loss of accountability to it, this is the time to illustrate and say it. I am really curious to hear from the Minister how he feels that that is justified and why he will explain to me that the amendments we have tabled are such an irritant to him that he is quite determined that never again will they fall into the scope of a debate on government time.
My Lords, perhaps it will be helpful if I take as my starting point Clause 3, which enables the Treasury to revoke provisions in retained EU law to enable the PRA to implement the remaining Basel standards. As I discussed in an earlier debate, the UK Government are committed to the Basel prudential standards as a member of the G20. While a member of the EU, our adoption of the latest Basel standards was achieved through EU legislation. The capital requirements regulation implemented the previous set of Basel reforms in the EU and, therefore, in the UK. However, regulation is not static: it must continually evolve to mitigate emerging threats and respond to developments in the financial markets.
As I set out in earlier remarks, the most recent set of internationally agreed Basel standards now needs to be implemented in the UK. The capital requirements regulation, or CRR, forms part of retained EU law in the UK and therefore continues to form the basis of the UK’s prudential framework for credit institutions. In order to comply with the latest Basel standards, the CRR needs to be updated. The EU is updating its own standards through the second capital requirements regulation, CRR2. Rather than implementing the new provisions through detailed primary legislation to amend the retained CRR, Clause 3 gives the Treasury a power to revoke relevant provisions of the CRR that need to be updated in order to comply with the latest Basel standards. This then allows the PRA to make rules implementing the latest standards.
As I have already set out, the Government stand by the delegation of the responsibility for implementing those standards to the PRA but with an enhanced accountability framework. In that general context, and in response to the noble Lord, Lord Tunnicliffe, and for that matter the noble Baroness, Lady Bennett, I might usefully repeat something that I said in an earlier debate: the rules that will replace the EU legislation being deleted are already available in draft form. The regulators and the Treasury are working to make sure that the final rules are published ahead of the debate on the relevant statutory instruments, which have also been published in draft.
It is the PRA that has the technical expertise to implement these essential post-crisis reforms. This is a novel approach, so the Bill ensures that there are checks and balances in place. First, Clause 3 ensures that we transfer only some elements of the CRR to the PRA. The extent of the Treasury’s powers to delete will be confined to those areas of the CRR that are necessary to ensure that the UK upholds its international commitments. It is for the PRA to write the rules. The Treasury’s involvement is merely to enable the rules to be updated by deleting old rules that no longer meet international standards.
Secondly, the clause ensures that the deletions the Treasury makes take place only when it is clear that adequate provision has been made by the PRA to fill the space. Deletions will be subject to the draft affirmative procedure, providing the proper opportunity for scrutiny. The clause also allows the Treasury to make consequential, supplementary and incidental deletions to parts of the CRR. This is to ensure a coherent regime across the CRR and PRA rules, which are critical to industry.
Furthermore, Clause 3 gives the Treasury power to make transitional and savings provisions to prevent firms facing cliff edges from the deletion of a provision in the UK CRR. This will allow the Treasury to save, for example, permissions to modify capital requirements that have already been granted to firms under the CRR and avoids the need for firms to reapply for those permissions under the new PRA rules.
Amendment 24 would remove the requirement on the Treasury to ensure the PRA’s rules “adequately replace” revoked parts of the CRR. It would replace this requirement with ensuring that the rules “replicate or otherwise reflect” them. I understand that the intention of this amendment is to probe the degree of flexibility allowed by the current drafting. The intention is not for the new PRA rules to completely mirror the CRR provisions that they will replace. The PRA rules will update the CRR provisions they replace to achieve compliance with the revised Basel standards, and the language of “adequately replaced by” is intended to allow for this.
The wording in the Bill— “adequately replaced”—is also phrased to ensure that the rules are written in a language appropriately tailored to the PRA’s rulebook, which is specifically for the UK sector, and that the regime remains coherent. The amendment replaces this with the word “replicated”, which suggests that the language of the EU CRR is copied over exactly into the rulebook. This may not be the most suitable language for the UK’s rulebook and may prevent the PRA making the necessary changes to ensure compliance with the latest Basel standards.
In response to the noble Baroness, Lady Bowles, the EU—as I am sure she will recognise with her immense experience—is an outlier in the extent to which it specifies these matters in the equivalent of primary legislation. The approach taken in the Bill will bring us more into line with other major financial centres. This means that the EU is used to assessing rules set in the equivalent of regulator rules.
Amendment 25 would bind the Treasury into setting out why it thinks it is appropriate for the rules not to be replaced before laying the relevant regulations before Parliament. Clause 5 already provides for the PRA to prepare a document setting out whether its rules correspond to the revoked provision and, if so, how. The Government’s view is that that should be the primary document to explain why a CRR provision is not being replaced to provide a coherent explanation. If that document does not reflect a revocation where the CRR rule is not being replaced, this can be explained by the Treasury in the Explanatory Notes accompanying the statutory instrument revoking the rules. The amendment is therefore unnecessary, and I hope noble Lords will feel able not to press it.
I have received no requests to speak after the Minister, so I call the noble Lord, Lord Tunnicliffe.
My Lords, I thank all Members who have taken part in this debate. The statement of the noble Baroness, Lady Bowles, that Clause 3 waives away a whole series of rules, without any clarity about how they are replaced, is very prescient. She rightly made the point that it may not be helpful in our aspiration to achieve EU equivalence.
The noble Viscount, Lord Trenchard, asked if I want the old. No—I want the old to be used to test whether the new is equally as comprehensive. He also spoke about simplicity. As someone who has been involved in rules in all sorts of environments, I know that they are not usually complex because people want them to be but rather because, in the operation of simple rules, questions come up and teach you that you need more complex ones. What impact will that have in this situation? The probability is that the apparent rules will be simple and the complex ones will be hidden from us in a series of rules that we do not see, which the PRA will inevitably have to create to make its supervision practical.
Furthermore, we had the comment that we are looking for light-touch regulation. In 2008 and 2009, we discovered light-touch regulation. This was not solely a British mistake but one made almost throughout the western world. However, the consequence was very close to disastrous. I find it interesting that, in his response, the noble Earl said that we have the Basel standards and already know what they are. This suggests that they are a system of rules ready-made for this purpose; if that is true, where is this flexibility that everyone praises so much?
Finally, we were told to rely on the checks and balances. We had a long debate at the beginning of today’s session, in which many people around this table, to a greater or lesser degree, were not at all convinced that the processes we are being asked to adopt have sufficient checks and balances. I will have to consider whether I want to bring this further forward on Report but, in the meantime, I beg leave to withdraw Amendment 24.
Amendment 24 withdrawn.
Amendment 25 not moved.
Clauses 3 and 4 agreed.
Clause 5: Prudential regulation of credit institutions etc by PRA rules
Amendment 26 not moved.
Clause 5 agreed.
Amendment 27 not moved.
That concludes the work of the Committee this afternoon. The Committee stands adjourned, and I remind Members to sanitise their desks and chairs before leaving the Room.
Committee adjourned at 7.13 pm.
Committee (1st Day)
My Lords, the hybrid Grand Committee will now begin. Some Members are here in person, respecting social distancing, and others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded, or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
I will call Members to speak in the order listed. During the debate on each group, I invite Members, including Members in the Grand Committee Room, to email the clerk if they wish to speak after the Minister, using the Grand Committee address. I will call Members to speak in order of request. The groupings are binding. Leave should be given to withdraw amendments. When putting the Question, I will collect voices in the Grand Committee Room only.
I remind Members that Divisions cannot take place in Grand Committee. It takes unanimity to amend the Bill, so if a single voice says “Not Content”, an amendment is negatived; if a single voice says “Content”, a clause stands part. If a Member taking part remotely wants their voice accounted for if the Question is put, they must make this clear when speaking on the group. We will now begin. I call the noble Lord, Lord Sharkey.
We cannot hear the noble Lord, Lord Sharkey, so I will have to adjourn the Committee for a few minutes while we sort this out technically.
I call the noble Lord, Lord Sharkey, again.
1: Before Clause 1, insert the following new Clause—
“Duty of the FCA to make rules introducing a duty of care
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 137C, insert the following new section—137CA FCA general rules: duty of care (1) The power of the FCA to make general rules includes the power to introduce a duty of care owed by authorised persons to consumers in carrying out regulated activities under this Act. (2) “Duty of care” means an obligation to exercise reasonable care and skill when providing a product or service.(3) “Consumer” has the meaning given in section 2(3) of the Consumer Rights Act 2015.”(3) The FCA must make rules in accordance with section 137CA (FCA general rules: duty of care) of the Financial Services and Markets Act 2000 which come into force no later than six months after the day on which this Act is passed.”Member’s explanatory statement
This amendment would impose on financial services providers a general duty of care to their clients.
Amendment 1 would require the FCA to
“make rules introducing a duty of care … owed by authorised persons to consumers in carrying out regulated activities”
under FSMA 2000. The Government understand the value of a duty of care; they are about to introduce exactly that in the forthcoming online harms Bill. They understand the immense harm that can be done to consumers without this duty, especially in complex and asymmetric environments.
We have already seen too many examples of the immense harm inflicted by our financial services industry on ordinary consumers—I am thinking here of PPI, which was a product sold to consumers at an 87% commission rate. The scandal ended up costing £53.8 billion in redress and administration costs. I am also thinking of mis-sold interest-rate hedging products and the general and widespread unfair treatment of small businesses in financial difficulty. There was also the long-running saga of overcharging for overdrafts and of leaving loyal customers languishing in poor-value products.
The existing rules did not prevent any of these things, which is not a surprise. There is no explicit requirement in FSMA or in the FCA’s principles for business for firms to prevent harms to customers. The FCA’s “treating customers fairly” business principle is substantially weakened by the legal principle in FSMA that consumers should
“take responsibility for their decisions”.
This fails to take into account the imbalance in power and information between firms and their customers.
Things are not getting any better. Recent examples of misbehaviour include the banks’ response to the authorised push payment fraud, inadequate assessment of affordability by payday lenders, the scandal in Woodford Investment Management, sales of risky investment products on the boundary of the FCA’s perimeter and the outrageous behaviour of some insurers during the pandemic trying to welsh on their business interruption policies.
The Minister will be aware of the Banking Standards Board’s annual survey of 29 member banks’ behaviour and competence. There was some welcome improvement in these areas between 2016 and 2017 but none since. In 2019, 13% of employees of these banks said that they had seen instances of unethical behaviour being rewarded and 14% felt that it was difficult to make career progression without flexing their ethical standards.
The FCA knows all this, of course, and has occasionally acted. However, within the existing legal framework it often takes many years for the FCA to respond to firms’ harmful practices. An example of this is the treatment of loyal general insurance customers, which the FCA is only just beginning to tackle.
Then there is the question of the high-cost short-term credit sector. Wonga may have gone, thanks largely to pressure from this House, and after intense pressure from Parliament there is now a price cap on rent to own. But problems persist with, for example, doorstep lending, guarantor loans and new, automated overdraft products.
The FCA tackles unacceptable practices slowly and piecemeal, allowing harm to persist for many years. It was particularly late in spotting the rapid growth of buy now pay later and its potential for harm. I believe that the Government have said that they intend to address this problem and I hope that they will use this Bill as an opportunity to do that. I would be pleased if that were to be the case, but the slow and cumbersome engine of primary legislation would not have been necessary had a duty of care extended over the sector.
The FCA has published eight papers in the last five years dealing wholly or in part with the question of duty of care, but it still has not developed a clear view or a recommendation. In its consultation feedback paper of April 2019, the FCA noted:
“Most respondents consider that levels of harm to consumers are high and there needs to be change to better protect them.”
It then sat on the fence about what this change should be, reporting that none of the financial service providers favoured a duty of care. Mandy Rice-Davies would have known what to say to that.
In any case, as the FCA’s consumer panel noted,
“Much of the debate on a duty of care has centred on legalistic arguments about whether there is a ‘gap’ in protection. What matters is whether consumers get the treatment they want and expect from their financial services providers.”
The consumer panel commissioned Populus to ask individual and small business customers about their experiences. The research showed that the customer is not at the heart of business decisions and that 92% of respondents were in favour of a duty of care in financial services.
While sitting on the fence, the FCA has also managed to hit the ball into the long grass. It promised to initiate yet another consultation on the issue, initially due last year but now postponed. In the meantime, levels of financial vulnerability grow. The FCA’s latest Financial Lives survey, published 11 days ago, makes grim reading. It notes that Covid-19 has reversed the previous positive trend in vulnerability. Between March and October last year, the number of adults with characteristics of vulnerability increased by 3.7 million to 27.7 million. That means that over half of all adults are financially vulnerable—a truly alarming figure.
The same survey also notes that unsolicited approaches have increased during the pandemic, increasing the risk of fraud and scams. Over a third of adults say that they have received at least one such approach and 1.4 million say that they have paid out money as a result of a possible Covid scam. Unsurprisingly but regrettably, people with characteristics of vulnerability have been the more susceptible: 12% paid out money, compared with 1% of the non-vulnerable. None of this will get any better when the furlough and business support arrangements come to an end. Financial pressures and desperation will inevitably increase; vulnerable people will be disadvantaged, treated unfairly and scammed.
Dealing with all this would be made significantly easier if the FCA were to impose a duty of care on service providers. The idea has widespread support. In May 2019, the Treasury Select Committee published its report on the inquiry into consumers’ access to financial services. Paragraph 210 of the report says:
“All retail financial services, no matter which sector of the industry they operate in, should be acting in their customers’ best interests at all times. If the FCA is unable to enforce such behaviour in firms under its current rule book and principles, the Committee would support a legal duty of care, analogous to that in the legal industry, creating a legal obligation for firms to act in their customers’ best interests.”
The FCA’s own financial services consumer panel, responding to the FCA’s discussion paper, said:
“A new duty is required to improve the position of all consumers … including those who need more support.”
The Money and Pensions Service said:
“MaPS remains convinced that a formal ‘duty of care’ on financial firms could provide a better balance between firm and consumer responsibilities and help deliver extra protection and better treatment to vulnerable consumers.”
StepChange is in favour, as is Fair by Design, and so are many organisations with direct and in-depth experience of the financial catastrophes that can be visited on the poor and the vulnerable. I am grateful for the explicit support and encouragement in pressing for a duty of care from Age UK and the Alzheimer’s Society and I am especially grateful to Macmillan Cancer Support for its unfailing help and advice. I am also indebted to the former chair of the FCA’s consumer panel, Sue Lewis, for her support.
Despite all this support, the Government will no doubt resist the idea of introducing a formal duty of care. When this issue was raised at Report in the Commons, John Glen addressed it by saying simply:
“As the FCA is already taking steps to ensure that financial services firms exercise due care and regard when offering products, services and advice, a statutory duty of care, as proposed by new clause 21, is not necessary.”—[Official Report, Commons, 13/1/21; col. 366.]
He did not say what these steps were or make any assessment of their actual or likely effectiveness. Today the Government may add to John Glen’s reasons for rejecting a duty of care and may advance the argument that they need to wait to give the SMCR time to work. Surely five years is long enough—five years in which there has been just one successful conviction. The FCA’s consumer panel points out that this is essentially a category error and notes:
“The SMCR is primarily a supervision tool—it will be a valuable mechanism to ensure that firms are complying with a new duty.”
The Minister may also pray in aid the reinforced, better-resourced and more active FOS. It is true that FOS dealt with around 250,000 cases in 2019-20. In these cases overall, one-third of judgments were in the consumers’ favour. This is evidence enough of large-scale misbehaviour, but the figures are much worse for products aimed at the financially vulnerable: 89% for guarantor loans, 84% for doorstep loans and 78% for logbook loans.
This is not—absolutely not—evidence of successful regulation. Every one of these judgments is evidence of a failure to sell the right product to the right individual or small business, to explain it clearly or to handle a complaint properly. The FCA’s current rules and principles are failing to stop this tidal wave of mis-selling, malfeasance and malpractice. We need a new approach that focuses on prevention of harm and delivers extra protection and better treatment for vulnerable customers. We need a duty of care and I beg to move.
My Lords, I declare my interests as in the register. I support all the amendments in this group and what has already been expertly said by my noble friend Lord Sharkey. I will comment on the duty of care later, but first I will introduce my Amendment 72, which calls for warnings relating to non-regulated activity.
The issue here is one where firms that are authorised in respect of regulated activity also conduct unregulated activity, and customers are misled by the fact that the firm is authorised for some activity into thinking that the authorisation is some kind of guarantee of quality. It is what Dame Elizabeth Gloster called in her report “the halo effect”, and about which she said again to the Treasury Select Committee a couple of weeks ago that something should be done.
One thing that is done by the Bill is enabling unused authorisations to be more easily cancelled, but that does not solve the problem when there are still used authorisations. This is a problem that has long been known about and does not affect only unscrupulous businesses. Therefore, the amendment aims to make it quite clear to consumers what the situation is in three ways.
First, authorisation must not be referenced in any communication, including on letterheads or websites, as a reputational guarantee regarding non-regulated activity. In practice that should mean the ending of straplines. Secondly, when non-regulated activity is being conducted, that must be made clear, together with an explanation that it means that access to the Financial Ombudsman Service and/or Financial Services Compensation Scheme is not available. Thirdly, it would be an offence to imply that a non-regulated activity is covered by an authorisation.
The first two provisions relate to authorised firms aiming to stop the halo effect in as far as that is possible. I do not expect firms to write to clients saying, “This is the rogue side of our business”, but I hope that clients will be more aware that that might be so. The third point is a general point and would apply beyond regulated firms, but my aim is to catch passive implications, so that active steps to inform have to be taken.
The amendment has been drafted to make the point clear, rather than as a perfect draft to weave in among other regulatory provisions, and I hope that the Minister will take up the idea and recognise that reducing a problem by eliminating surplus authorisations does not reduce the problem to its smallest possibilities.
Turning now to the duty of care, I want to add that a duty of care should apply to the regulators as well. Of course, they say that they act in the public interest, but they are every bit as aggressive about protecting themselves—of all things from the public and from liability—as the firms that they supervise. My view of this is simple: “If you don’t live by it, you don’t really understand it”.
If one examines the responses to the FCA’s discussion paper in July 2019, the majority were in favour, two of the main reasons being that it was critical to triggering a fundamental culture change away from asking “Is this within the regulations?” and into “Is this right?” Secondly, it would give a duty to avoid harm that would incentivise firms to evaluate consumer risk at every stage.
What is not to like in that? It seems that just a handful of respondents did not want any more than was already in those principles about treating customers fairly. But they were very much in the minority and, sadly, it seems that some of those in favour of a duty of care are not in favour of it being actionable. I am in favour of a duty of care, I am in favour of it being actionable and I am in favour of it applying to regulators as well, because something is going wrong all round and, frankly, I find the FCA’s hesitancy a matter of serious concern.
That takes me to the amendment of the noble Lord, Lord Tunnicliffe, which I also signed and which additionally incorporates a general principle of non-exploitation, which overlaps with my Amendments 5 and 73 that come later in another group: we have been borrowing from one another in these amendments in a constructive way. We have seen bad behaviour elaborated in the Promontory report in the GRG case and the excruciating way in which the FCA wriggled to excuse itself, claiming that it did not have power to intervene in commercial contracts.
The difference between my amendments, when we come to them, and that of the noble Lord, Lord Tunnicliffe, is that I have included small businesses as well as consumers in protection from exploitation. That may be his intention, as other amendments would change the definition of “consumer”, and I will have other things to say later in the third group about abuse of unequal power. Both duty of care and non-exploitation of vulnerabilities are matters that mark out quality regulation and, unfortunately, we know that, unless things are explicitly elaborated in legislation, there will be those who fall below the high standards and get away with it.
My Lords, it is a pleasure to take part in this first group of amendments, and I congratulate the noble Lord, Lord Sharkey, on the way he introduced it. There could barely be a better amendment to start Committee.
In 2017, during the passage of the Financial Guidance and Claims Bill, now enacted, there was much discussion of, and amendments tabled around, a duty of care, with support from all sides of the House. The response then was that the time was not right: we had to get through Brexit and then look at financial rules and regulators in the round. Four years on, with Brexit done, I think the time is more than now to consider duty of care in all its manifestations, as the noble Baroness, Lady Bowles of Berkhamsted, set out.
In saying that, like other noble Lords I am extremely grateful for the briefings and unstinting hard work undertaken by many organisations in this area. It is invidious to single out two, but I will, not least the Money Advice Trust and Macmillan Cancer Support. Duty of care was an issue in 2017; it was an issue way before that. The Covid crisis has not brought about the need for a duty of care; it has merely shone the brightest and starkest of spotlights on the issues right across the financial services sector.
It is difficult to put it any clearer than this, from a client of Macmillan Cancer Support in one of her darkest moments: “It felt like I was fighting my bank as well as fighting cancer”. Fighting my bank as well as fighting cancer—that is a more than good enough reason to think extremely carefully about how to bring about a duty of care. That one individual speaks for hundreds of thousands.
My Amendment 129 in this group seeks to introduce rights of action for SMEs for breaches of the FCA handbook. I believe the amendment would bring clarity and consistency to how the handbook operates. These rights of action are currently available only to private persons but, when we consider this in the round, not least in the world of FS when we think of fintech founders, are the “Ss” of SMEs—micro-businesses—essentially that different from private persons? Of course I understand the concept of the corporate veil and limitation in all its forms but, in essence, when it comes to operating in a regulatory framework, as we currently have, are micro-businesses that different from private individuals, who currently have this right of action?
Imagine this: currently, a micro-business has only the letter of the contract to take action against the bank. This seems wholly unsatisfactory and more than a little asymmetric. The nature of the relationship between a small business and a bank should be much more effectively reflected in the rulebook. Need I suggest some of the ways this may have helped in the past, with Libor, forex, the GRG, and Lloyds/HBOS activities in Reading? In particular, RBS’s global restructuring group was one of the most shameful episodes in this country’s banking history.
Fundamentally, the amendment can be summed up in a simple line: in reality, how can an SME or micro-business take a bank to court? Amendment 129 offers the appropriate level of support and clarity to our SMEs, and consistency in the operation of the rulebook. Our SMEs are the beating heart of our economy. I suggest we use the amendment to put some head alongside that heart.
My Lords, at this stage I have not put my name to any amendments, but I will speak in support of Amendment 4, tabled by my noble friend Lord Tunnicliffe, and make a few relevant points. Before I start, I make the Grand Committee aware of my financial interests as set out in the Lords’ register and echo the point from the noble Lord, Lord Sharkey, about the imbalance of power between the lender and the individual—a critical point that I am sure we will come back to in Committee.
Low financial resilience and overindebtedness are huge problems for individuals and the country. UK households have nearly £250 billion of outstanding consumer credit debt and more than 42.5 million people have used consumer credit. Those are the figures for 2019, pre Covid. In 2020 and into 2021 the problem has only worsened. The FCA recently found that the number of people suffering from low financial resilience increased by one-third to 14.2 million people in October 2021. That is nearly one-quarter of the UK adult population.
We know that low financial resilience is not just about overindebtedness. It can be caused by a combination of low savings and erratic family income. Erratic income and low levels of savings are not issues that the FCA can solve—government intervention and education are required to tackle those. However, overindebtedness is an issue that the FCA can help to address. Amendment 4 and a number of the other amendments in this group, as well as the later Amendment 8, would give the FCA some of the tools to do so.
As set out by the Government, the FCA has three key functions: protecting consumers, keeping the industry stable and promoting healthy competition between financial service providers. Of those three critical functions, I would like to concentrate on the first, of protecting consumers. Amendment 4 takes that current responsibility and would add to the Bill a clause which would give the Financial Conduct Authority a duty of care and, later, under Amendment 8,
“rules … to promote financial wellbeing”.
These would enhance the FCA’s powers to protect consumers—something which I am sure we all agree is necessary.
Christopher Woolard, chair of the recent Woolard review, said:
“Most of us will use credit at some point in our lives. So, it’s vital that we have a fair market that works for everyone. New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty”.
The Woolard report sets out 26 recommendations to the FCA, some on working with government and other bodies to make unsecured credit markets fit for the future. I hope that the Minister and Her Majesty’s Government will look at the amendments tabled and, where those issues and recommendations raised by Woolard align with them, we will see some government amendments or an acceptance of the amendments laid to the Bill.
This is specifically pertinent in relation to “buy now, pay later” products. On 13 January in the other place, Stella Creasy moved an amendment that would have required the BNPL industry to be regulated by the FCA. The proposal was defeated by the Government, by 355 votes to 265. The Woolard review makes the point, on the regulation of the unregulated “buy now, pay later” sector:
“BNPL products which are currently exempt from regulation should be brought within the regulatory perimeter as a matter of urgency. The use of BNPL products nearly quadrupled in 2020 and is now at £2.7 billion, with 5 million people using these products since the beginning of the coronavirus pandemic”.
The report continues by stating that
“more than one in ten customers of a major bank using BNPL were already in arrears. Regulation would protect people who use BNPL products and make the market sustainable.”
Seeing the light, the Minister, John Glen, agreed that Her Majesty’s Government need to act and bring BNPL into the scope of FCA regulation. I was hoping to see a government amendment to this effect, as the noble Lord, Lord Sharkey, said earlier, but I am sure it will be forthcoming at later stages of the Bill.
I also bring to the Committee’s attention an article in the Observer yesterday, Sunday 21 February, entitled “High-cost lenders ‘exploit NHS workers on pandemic frontline’”. The article highlighted a number of individual cases, as well as the alarming and eye-watering interest rates of over 1,300% being charged by some high-cost credit providers.
The article is based on a University of Edinburgh Business School research report, which makes it evident that the signs of financial vulnerability within the NHS workforce are being ignored by high-cost lenders on an industry-wide basis. Overindebted NHS workers are now struggling with unaffordable loans. They did not receive them from unlicensed backstreet lenders: more often than not, they got them through FCA-licensed and regulated high-cost lenders. This is why Amendment 4 is so important in stating
“the general principle that firms should not profit from exploiting a consumer’s vulnerability, behavioural biases or constrained choices”.
The reason this is so important is that many who turn to the unsecured loan sector have those constrained choices. Those constraints can come from a poor credit history and poor credit scores, often received by an individual years before. Protecting those individuals is even more vital.
Further analysis in the recent University of Edinburgh Business School report reveals that many NHS workers have little access to affordable high-street credit. This forces them to take out multiple high-cost credit loans or rely on persistent overdraft usage, often with exorbitant fees. In too many cases, high-street banks are failing to make affordable-term facilities and are instead trapping individuals in a cycle of persistent overdrafts.
In conclusion, the FCA currently has the power to ensure that all lenders advance only loans that are affordable and sustainable. This is clearly not happening, with so many individuals defaulting or becoming overindebted. The Woolard review touches on this, but, again, the argument is made that the reason that loans become unaffordable or unsustainable is that individuals’ circumstances change after the loan has been agreed. I do not believe that this is always—or even most often—the case. In fact, that is why the Financial Ombudsman Service has adjudicated time and time again against providers and in favour of individuals. Unaffordable and unsustainable loans are being forwarded all too often. Amendment 4 will help strengthen the FCA and hopefully rectify this issue.
My Lords, I am delighted to follow the noble Lord. I would like to support the case for introducing a duty of care and look forward to hearing from my noble friend as to why in the Government’s view it may not be needed.
I will focus my remarks on Amendment 72, so ably moved by the noble Baroness, Lady Bowles, and in particular on subsection (2) of the proposed new clause. It concerns me greatly that there is still a huge area of unregulated provision of financial services here, in particular in the case of young people who, after they have graduated and are looking to pay off their student loans, will be relying on their banking facilities. It does seem that we need either a duty of care or, as the noble Baroness, Lady Bowles, set out in subsection (2) of the proposed new clause, some means by which we indicate to potential consumers and customers exactly what the situation is. I find that this area is compellingly in need of greater regulation—or, if not that, then the pointing of actual customers or potential future customers towards acting in this regard.
I find it extraordinary what information is provided to any of us, and in particular to young people. The noble Lord, Lord Sharkey, did a great service in setting out not just PPI but a number of other irregularities—at the very least—that have come to light in the last five or 10 years that need some form of redress in order to close this particular loophole.
We are in an extraordinary situation where there are a number of non-regulated financial services. In particular, Amendment 72 would seek to redress this. But also, Amendments 1 and 4 imposing a duty of care have many strengths to commend them. I look forward to my noble friend in summing up giving the reaction of the Government to the proposal for such a duty of care in the circumstances set out therein.
I am very pleased indeed to join in this important debate. The noble Lord, Lord Sharkey, set out the situation in the macro field extremely well and I am pleased to support the speeches that have already been made by a number of noble Lords.
I will concentrate on two things. The first is the issue of protection from exploitation with the development of cybercrime. I hope we will be able to come back to this in Committee and on Report with respect to the risks that people are put into because of the lack of care within the whole of the financial services sector. Secondly, very small businesses and partnerships are excluded from redress, as the noble Baroness, Lady Bowles, mentioned. This is also is relevant to Amendment 129, moved by the noble Lord, Lord Holmes of Richmond.
On the first issue, in relation to cybersecurity, there is a growing trend that those who are affected keep quiet rather than reveal what has happened. This is a real danger. If, as I hope, we come out of the present dip in relation to financial services globally because of Brexit, we will be able to present to the world a marketplace which is both effective and forward looking—and is also secure. A duty of care to both individual customers and to small and medium-sized enterprises is a critical element in taking this Bill forward and strengthening the measures that exist there. I will not egg the measures that I think are necessary this afternoon, because there will an opportunity to come back to them. But I will just say that this is a growing area of real concern. An improved mandate for those operating in the financial services sector from the FCA would be very welcome indeed.
On the issue of small and medium-sized businesses and small partnerships, and the relationship between them and individual consumer, it is little known that access to the Financial Ombudsman is confined to individuals rather than small businesses and partnerships. What was said by the noble Lord, Lord Holmes, and also the noble Baroness, Lady Bowles, was highly relevant here. It backs up the need for clarity in terms of how we deal not only with prevention but with redress.
I give one small example, which I took up the with the noble Lord, Lord O’Shaughnessy, when he was at the Department of Health. To his credit, he saw the wisdom of trying to bring about change. As the noble Lord, Lord Holmes, has described, it was not received well at the time because of the struggle that was going on post the Brexit referendum and because of the difficulties the Government were facing. We have dealt with banks and financial services, but we need to concern ourselves with insurance as well. Perhaps now is an opportune moment to deal with the situation where an insurance company is taken over and the new provider offers a slightly revised agreement which is sent out without highlighting the key changes that have been made.
For instance, in cover for physical ailments and physical damage because of accident, there is no change, but in terms of absence from work and insurance by a partnership with more than 10 partners insuring together, the mental health clauses are changed to make any payment dependent on having to gain, within 12 weeks, the sign-off of a psychiatrist and a clinical psychologist. Anyone with any knowledge of this area will know that that is an impossible ask. Had it been highlighted to the partnership, it would have been able to look elsewhere for an insurer that was not going to exploit the market as this company did.
The partnership could not go to the ombudsman. It would have been entitled to if each individual partner had insured themselves, but because there were more than 10 of them signed up to the insurance contract, that was not possible. We need to put right nonsense of this kind and ensure that those making enormous amounts of money, which they will continue to do, do not do so at the expense of individuals or small and medium-sized enterprises.
My Lords, it is a pleasure to follow the noble Lord, Lord Blunkett. I very much support his call for a financial sector that is secure, that does not threaten the security of all of us and that does not exploit people who are forced to use its services.
I speak chiefly to Amendment 1 in the name of the noble Lord, Lord Sharkey, also signed by the noble Baroness, Lady Kramer, and me. It was ably introduced by the noble Lord. I speak to this amendment because it is a subject close to my heart and one that I referred to at length in my speech at Second Reading. This group fits together nicely when we look also at Amendments 72 and 129, which I also support. We are talking about a huge imbalance of power in the interactions between the financial sector and its customers. As the noble Lord, Lord Sharkey, said in his introduction, when talking about this we often focus on banks, but we have seen some truly outrageous behaviour from insurance companies during the Covid-19 pandemic, something that I have referred to previously in the House.
When thinking about this amendment I reflected on being a 19 year-old in Australia, many years ago, buying a studio flat. It was cheaper then to have a mortgage than to pay rent. My father stood as guarantor and met the local bank manager—they knew each other personally. This was before the financial deregulation that allowed the massive boosting of prices, as the excellent 2016 New Economics Foundation report The Financialisaton of UK Homes laid out. That was what made it possible.
However, the banking sector then was no ideal model. It was undoubtedly paternalistic, patriarchal and discriminatory, against people from BAME and certain socioeconomic backgrounds and on the basis of gender. I am not sure whether my father was forced to be guarantor because I was a single female and a strange type of person to be taking out a loan, or just because of my youth, but there was in the local bank manager an individual knowledge and understanding, and the hope that if something went wrong, an individual would know your circumstances and do their best to help you.
That is not the situation that we have now. We have a “computer says no” approach. Anyone with a problem can expect to encounter an endlessly changing rota of call centre staff reading from scripts. We could hope for a locally based institution serving the needs of local communities, something that other parts of the world, such as Germany, still expect from their financial sector. That would be a financial sector that served as a utility, not as a generator of maximum profit. Care would then be built in and we might not need an amendment such as the duty of care amendment, but we have to start from where we are.
The amendment would lay on the financial services sector a legal responsibility to behave like a support for, not a parasite on, our economy, our environment and our individual lives. As a former newspaper editor, I am perhaps speaking against my former interests, since these amendments, particularly Amendment 1, address the circumstances that fill many pages of newsprint and screens of websites from financial consumer champions. What is notable if you read those columns is how often financial institutions apologise and provide recompense as soon as their behaviour is exposed, implicitly, if not explicitly, acknowledging their failure to deliver on a duty of care that the public reasonably expect. Since financial institutions are not doing this, it is incumbent on your Lordships’ House and on this Committee to act. This would look after the most vulnerable, only a limited number of whom can ever reach the pages of those consumer champions. Everyone needs the protection that they provide.
In his introduction, the noble Lord, Lord Sharkey, noted the work of Macmillan Cancer Support and other campaigners in driving this amendment forward, but we need to realise that this is not just for the few; it is for the many, for all of us. We need to create some equity and equality in our society and this amendment would go some way towards delivering that.
My Lords, I understand the motives of these amendments and sympathise with a lot of what has been said. However, I will be a dissenting voice on whether the form of the amendments is proportionate and practical in meeting the objectives set out.
As we all recognise, financial services have a social purpose. They play a critical role in society and in people’s lives and they have to recognise that in their responsibilities. There are clearly still failures in the way the industry operates, some unintended and some still involving bad behaviour, and, as many noble Lords have pointed out, there is a problem in the unregulated sector. However, most of the major institutions now exercise their responsibilities carefully, trying to do so in the best interests of their customers. I do not recognise in some of the comments made the tens of thousands—in fact, over 100,000—ordinary bank workers who go into their branches or call centres every day and try desperately to do their best for customers, motivated by the most genuine service obligations. In the way that the banks have operated in providing basic bank accounts and the responsibilities that they have shown in their lending practices, the industry is by and large showing how it can evolve and act responsibly.
There are, of course, failures, as there will always be in any industry, but these can be dealt with under the existing FCA principles, reinforced as they are now by the SMCR regime. There has to be a boundary on what is reasonable to expect of the duty of care. We cannot expect financial services to take on the duties of the state as a social service for those who need extended financial support. Yes, it has obligations, but there is a limit to what the financial services sector can do for those in financial need.
My issue with the general duty of care is that it has no clear boundaries setting out when a financial service company has reached the limits of what it is reasonable to do under that duty of care. We have to recognise the reality that any intervention to increase customer support or protection has a cost. The direct costs of subsidising support to customers in financial need are now covered, as in utilities, through cross-subsidies—higher charges on other customers to pay for the extended credit or basic bank accounts for those customers in need. It is accepted within the industry and within society that a measure of cross-subsidy within the financial services sector is part of being a universal provider.
However, the indirect costs of compliance are more damaging; they may disadvantage those that they are meant to help. The more questions you need to ask your customers, the more detailed information you have to ensure they have understood and the more you have to penetrate into their lives, the more banks and insurance companies are forced to rely on formulaic compliance bureaucracy that erects barriers to simply understanding and addressing customers’ issues. People spend more time ticking the boxes than they do just listening and trying to provide a genuine real-world answer to the issues in front of the customer.
The danger is that, despite the best intentions of helping to ensure that people get good advice, there is an increase in costs and risks to compliance to the point where, as happened with the retail distribution review that took place some years ago, financial services companies simply withdraw from offering any services to those customers because they cannot take the risks and costs and the compliance burden pushes customers out of access to financial services.
Not having boundaries around what that duty of care comprises opens up the risks to financial services companies of court judgments and CMC claims that continually push the obligations and costs of compliance far beyond what is reasonable for a financial services company to do—one doing its best to offer financial products and serve its customers—and what is reasonable for the customer to take on, in terms of their responsibilities in setting out their needs.
I believe that, despite the motives behind this, it is much better to be prescriptive about what obligations there are for reasonable behaviour, as set out in the current FCA principles, which include the obligation to treat customers fairly and fairly communicate the information they require. These considerations require a high level of care and compliance, not always correctly done—but there are penalties when they are not done correctly. The SMCR regime is reinforcing that. As such, despite my sympathy for the motives behind these amendments, I believe that the intent behind them, however good, would not result in a proportionate or practical improvement in regulation and carries many dangers and risks both to financial services companies and, more importantly, to the customers whom we seek to protect.
My Lords, I agree with much of what has been said and it is not necessary to repeat it. I support the objective of the amendments—in particular, I support my noble friend’s Amendment 4—and I look forward to the Minister’s reply. It is difficult to see how the principle of these amendments can be refused.
However, it is necessary to make an overarching point, which I base on my experience over 50 years as a close observer of the financial services industry. The truth is that the industry has a systemic tendency to malfeasance. This is not an attack on the great many good people who work within the industry, as the last contribution mentioned, in banks and insurance companies, who only wish to do a good day’s work. However, the unremitting succession of scandals involving finance is not just a series of unfortunate one-offs; it is built into its very nature. This is a big issue, but I emphasise two simple reasons. First, there is an inevitable asymmetry of information. As Amendment 4 highlights, there are
“a consumer’s vulnerability, behavioural biases or constrained choices”.
This situation is bound to create the sort of problem that we have seen. The second, even simpler, reason, using the classic but apocryphal words of Willie Sutton, is because it is “where the money is”. People seek to gain money from where there is lots of it and there is lots of it in the finance industry.
There is much to be done to solve this problem. It is systemic but it still needs to be addressed because people need help. However, what is in these amendments seems to me simply a minimum of what might be done to address the problems that the industry so clearly incorporates.
My Lords, I simply do not understand the resistance we find from the Government and the FCA to the duty of care amendment moved by my noble friend Lord Sharkey, and supported by my noble friend Lady Bowles and the noble Baroness, Lady Bennett, and to the almost identical Amendment 4 proposed by the noble Lord, Lord Tunnicliffe, and supported by the noble Lord, Lord Eatwell, and again by my noble friend Lady Bowles. I am not going to repeat the saga of abuse that many noble Lords have described. That has been done incredibly well and is exceedingly powerful. I will say though that this issue keeps happening. I notice the headline in today’s Times:
“City regulator ‘slow to act’ against car leasing firm”.
Every time we think that we are perhaps past a period of abuse, another one comes along. To me, it is utterly unacceptable, as I hope it is to everyone in this House.
What makes me particularly angry is that the regulator has largely known, very early on thanks to whistleblowers, when the financial institutions that it regulates are treating customers badly. However, again and again, the regulator takes years to react, reacts minimally at first, initiates a lengthy review—often several—asks the organisation to review itself and then does too little, too late. I want to pick up one issue in illustration: the treatment of payday lenders.
Many people in this House will remember the experience of trying to pass legislation to get a cap on the interest rates that payday lenders could levy. I bring up this issue because it deals with the difference between treating customers fairly and a duty of care. The FCA took a very strong position that customers were being treated fairly so long as they knew the terms of the contract. There were, perhaps, some constraints such as a limited number of rollovers. The FCA did not look at the far deeper issue of the way that people were being abused by payday lenders and the extraordinary level of interest rates. That is why the duty of care is very much more powerful. As my noble friend Lord Sharkey said, treating customers fairly is undermined in the FiSMA legislation by the caveat emptor parts of the FCA’s rules.
I am not a bit surprised that the noble Lord, Lord Blackwell, objects to these duty of care amendments. When I sat for nearly two years on the Parliamentary Commission on Banking Standards, the industry objected to almost every measure that would have constrained the abuse which created the crisis in 2008, such as the Libor crisis and PPI. The saga was endless. I say to the noble Lord, Lord Blackwell, that in a later group of amendments I will be referring to the HBOS Reading case, another example of fraud perpetrated between 2003 and 2007. A number of bankers went to prison but today, in 2021, victims of that fraud still have not received fair compensation.
Dame Elizabeth Gloster’s damning report of last November on the FCA’s regulation of London Capital & Finance Plc said:
“The root causes of the FCA’s failure to regulate LCF appropriately were significant gaps and weaknesses in the policies and practices”.
That is simply true across the board. It is piecemeal, as my noble friend Lord Sharkey described.
Misbehaviour keeps happening and delayed redress is the normal pattern. To quote Einstein:
“The definition of insanity is doing the same thing over and over again and expecting different results.”
It is time to make a step change to protect consumers, and I hope very much that the Government do so in this Bill.
My Lords, in considering this Bill, we are all placed in a somewhat odd position. The Treasury is, right now, conducting a financial services future regulatory framework review. Indeed, phase 2 of consultation on that review concluded just last Friday. While I fully understand that some parts of the Bill before us are associated directly with the UK having left the European Union, other parts are not associated in that way. It is quite likely that we will be back here in a few months’ time debating the same issues all over again when the Treasury decides on its response to the consultation and brings forward legislation to implement the future regulatory framework.
It would be comforting if the Minister could assure us that we are not wasting our time but, of course, she cannot do that, because none of us knows what the final outcome of the regulatory framework review will be. None the less it would be helpful if, when she sums up, the Minister could assure the Grand Committee that the Treasury will treat debates on this Bill as, at the very least, an enhanced consultation to which the Treasury will have full regard when reaching its final conclusions.
Let us get down to business on the amendments in the names of my noble friend Lord Tunnicliffe, the noble Baroness, Lady Bowles, and myself. Every first-year student of financial markets knows that markets in retail products—financial products sold to individuals, households and small businesses—are seriously inefficient. One important reason why they are inefficient is due to asymmetric information, as the noble Lord, Lord Davies, said just now. To put it simply, the seller of the product typically knows much more about the risks involved in making a particular investment or other financial transaction than does the hapless investor. An extreme example of this is to be found when the chief economist of the Bank of England, Andy Haldane, confessed that he did not understand the pension that had been sold to him.
As the Committee will be aware, if it is the FCA’s strategic objective to ensure that the relevant markets function well, to do so in the presence of asymmetric information it has two broad operational options. Either it should regulate each individual financial product to ensure that the investor is properly informed or it could adopt the principle of Amendment 4—and, indeed, Amendment 1—and make general rules, including the power to introduce a duty of care owed by the authorised persons to consumers. Up to now, the FCA has adopted the former option and dealt with each issue as it arises. By its own admission, this has not gone very well. From its consultation entitled Our Future Approach to Consumers in 2017 through to the feedback statement published in April 2019, the FCA has wrestled with the issue of duty of care, and is still wrestling today. Yet it still persists with its failing approach of regulating each product, and that simply cannot go on.
Action is really imperative, for two main reasons: first, because of the persistent appearance of new products, such as the buy-now, pay-later schemes, which we will discuss later—persistent innovation, which the FCA meets with persistent delay. It is always playing catch-up to introduce the new rules, after taking time for appropriate consultation and so on, to deal with the new threats to the consumer.
The second reason is the now-ubiquitous sale of financial products via the internet, as referred to by my noble friend Lord Blunkett. How many of the Committee have ticked the box verifying that they have read the terms and conditions of internet sales, without a thought of ever doing so? It is the dense and incomprehensible text of those terms and conditions that is so often the electronic embodiment of asymmetric information: the very factors ensuring that the relevant markets do not function well and that the FCA does not perform its strategic objective.
Amendment 4 provides the FCA with the means to end this failure to meet the strategic objective. The enactment of the power to introduce a duty of care would place the responsibility of ensuring that markets function well firmly on the shoulders of those who have the information required to attain that goal. As my right honourable friend Pat McFadden put it when discussing the Bill in another place, with the enactment of a duty of care, financial services providers would necessarily ask themselves the question, “Is this right?” rather than what they ask themselves today, which is, “Is this legal?” That would create a real shift in how business is done. I say to the noble Lord, Lord Blackwell, that this has nothing to do with subsidies and subsidising. It is doing what is right. If the FCA had the power to introduce a duty of care, it could begin to live up to its strategic objective.
I am quite prepared to believe that our drafting of Amendment 4 contains petty infelicities. So what? What is important is the principle that the amendment embodies. I am confident that Treasury officials can always find the appropriate wording. But we are all aware that too many consumers are being treated inappropriately, whether by the mis-selling of products, denial of rights or obstructionist responses to complaints and so on. I am certain that Her Majesty’s Government wish to improve on the consumer protections previously enshrined in EU legislation. The introduction of a duty of care is a safe and sure way forward: a way to ensure that markets function well.
I regret that I cannot agree with the noble Baroness, Lady Bowles, that the duty of care should be extended to the regulator itself. That is unreasonable because it suggests that the regulator should be looking over the shoulder of the participants in every single transaction. That would require regulatory omniscience, and I think it is truly unreasonable. But I would like to say a few words in hearty support of the noble Baroness’s Amendment 72 in this group. Anyone who has laboured as a financial services regulator, as I have, will be well aware of the abuse addressed by this amendment: an abuse that has disfigured the promotion of financial products for far too long.
The failure to deal with this abuse was an important component of Dame Elizabeth Gloster’s investigation into the FCA’s regulation of London Capital & Finance plc. The abuse of promoting non-regulated activities while identifying the promoter—albeit correctly—as a regulated entity must also be addressed by the holistic evaluation of regulated entities, taking into account both regulated and unregulated activities, because, typically, the culture of a firm is not divisible. So, while I support Amendment 72 from the noble Baroness, Lady Bowles, I note that there is more to be done to implement Dame Elizabeth’s recommendations.
My Lords, I will start with a word of reassurance to the noble Lord, Lord Eatwell, and others that the Government will consider all the contributions to the debates on the Bill carefully, and in terms of the work they are doing on the future regulatory framework review and the broader regulation of financial services. That is an important point when we discuss these amendments. As the noble Lord just set out, the amendment to introduce a duty of care could be interpreted as quite a different fundamental approach to financial services regulation, which, with that scale of change, might be better considered as part of the future regulatory framework review. However, much work has been done on this subject and I turn to it now.
I will speak first to Amendments 1 and 4, which seek to introduce a statutory requirement for the FCA to make rules requiring authorised persons to adhere to a duty of care when providing a product or service. Amendment 4 would also require the FCA to have explicit regard for vulnerable consumers when discharging its consumer protection objective.
I am grateful to the noble Lords who put forward these amendments, which give the Committee the opportunity to discuss this important issue. I know that it was also discussed during the passage of the Financial Guidance and Claims Act, and the Government pay tribute to the work undertaken by Macmillan, whose “Banking on Change” campaign includes the proposal for a statutory duty of care. I agree with the charity that
“Money worries should be the last thing”
on a person’s mind when they are dealing with cancer, but I emphasise that the FCA is already taking steps to ensure that financial services firms exercise due care and regard when offering products, services and advice to consumers. A statutory duty of care does not add to the FCA’s existing powers in this area, and there are likely to be difficulties in applying a single duty consistently and proportionately to the wide variety of products and relationships in financial services. The Government do not believe that an additional statutory duty of care, as proposed by these amendments, is necessary.
Financial services firms’ treatment of their customers is governed by the FCA through its principles for business, as well as specific requirements in the handbook. The principles for business require firms to conduct their business with due skill, care and diligence, and to pay due regard to the interests of their customers and treat them fairly. The FCA has recourse to disciplinary action against firms that breach these principles.
The FCA has also announced that it will undertake work to address any potential deficiencies in consumer protection, in particular by reviewing its principles for business. The coronavirus pandemic has caused the FCA to delay the next formal stage of this work to allow firms to focus on supporting their customers during this difficult period. However, it remains committed to progressing this work and has announced that it aims to consult in the first quarter of this year.
I reassure the Committee that the Government believe that the FCA already has the necessary powers to ensure that sufficient protections are in place for consumers, and has the will to act, without the need for a statutory duty of care or expansion of the consumer protection objective. The Government will continue to work closely with the FCA to keep the issue under review.
Before I turn to Amendment 72, I reiterate the Government’s sympathy for London Capital & Finance bondholders. In May 2019, the Government directed the FCA to launch an independent investigation into the events relating to the FCA’s regulation and supervision of LCF. Dame Elizabeth Gloster’s investigation was provided to the FCA on 23 November 2020. It concludes that the FCA did not effectively supervise and regulate LCF during the period. She makes nine recommendations for the FCA, focusing on how it should improve its internal authorisation and supervision processes. The Government laid the report, along with the FCA’s response, before Parliament on 17 December. In that Written Ministerial Statement, the Government welcomed the FCA’s apology to LCF bondholders and its commitment to implement all of Dame Elizabeth’s recommendations. Dame Elizabeth also made four recommendations for the Treasury, which the Government have accepted in full.
Turning to the specifics of the amendment, through its rules and guidance the FCA already requires financial promotions to be clear, fair and not misleading. As part of those rules, authorised firms are specifically required to ensure that if they refer to their authorised status in the context of any communications relating to unregulated activities, they make it clear that those specific activities are not regulated. Misleading statements by a firm may involve a breach of the FCA’s existing rules and the FCA has broad powers to enforce against such breaches. Depending on the severity of the breach, it may also be an offence under Part 7 of the Financial Services Act 2012.
The Treasury has committed to keeping the legislative framework underpinning the regulation of financial promotions under review. As part of this, the Treasury is actively working with the FCA to consider whether paid-for advertising on online platforms should be brought into the scope of the financial promotions regime.
In addition, action taken through Clause 28 and the associated Schedule 11, as the noble Baroness, Lady Bowles of Berkhamsted, noted, gives the FCA enhanced powers to quickly remove a firm’s permission when it appears to the FCA that it is no longer carrying on the regulated activity for which it has permission. I also reiterate that Dame Elizabeth’s investigation found that the FCA had the right powers and rules in place with regards to LCF’s financial promotions.
Turning finally to Amendment 129, the Government are committed to regulating only where there is a clear case for doing so. This is to avoid putting additional costs on lenders that could lead to higher costs of borrowing for businesses—which are ultimately passed on to consumers—and to keep the rulebook as simple as possible to assist customers in understanding their rights.
The amendment, tabled by my noble friend Lord Holmes of Richmond, has legitimate aims and seeks to protect small businesses by allowing for rights of action against breaches of the FCA handbook. This is sought to be accomplished by requiring the Secretary of State to make regulations bestowing on SMEs a right to bring a complaint for an alleged breach of the FCA handbook.
Although I support the intention, there does not seem to be a clear case for such a power. The Government have given the FCA a strong mandate to prevent inappropriate behaviour in financial services and it has a wide range of enforcement powers—criminal, civil and regulatory—to protect a wide range of small businesses that have taken out a regulated financial product or service. For example, as of April 2019, the FCA expanded the remit of the Financial Ombudsman Service to allow more SMEs to put forward a complaint. This now covers 97% of SMEs in the UK.
The FOS complaints procedures are available to SME customers who have taken out a regulated product or service if the business believes conduct has fallen below an acceptable standard, which could include a breach of the FCA handbook. The FOS can also consider complaints about unregulated products if the provider has voluntarily signed up to the FOS. The FOS provides a free independent dispute resolution service, and is designed to be an alternative to resolution of cases through the courts, which can be expensive and take time.
In addition, all the major SME lenders are signed up to the standards of lending practice, which contain clear guidance on best practice. As industry standards and codes of conduct are taken into account by the FOS, the lending standards practice code is also considered by the FOS when deciding what is fair and reasonable in adjudicating. Moreover, with the recent launch of the Business Banking Resolution Service, medium-sized businesses now have access to an independent, non-governmental body which will provide dispute resolution for businesses, addressing historical cases for small and medium-sized businesses from 2000, as well as future complaints from medium-sized businesses outside of the FOS’s remit.
Given these factors, the Government do not believe that there is a case for the amendment, as there would be a number of direct and indirect costs and a replication of existing protections. These changes could in turn impact on additional bureaucracy and affect the price or availability of credit for small businesses, which is not a desirable outcome. I hope these answers have been sufficiently satisfactory that noble Lords feel able not to press their amendments.
My Lords, I declare my interests as stated in the register. I apologise to the Minister and the Committee for failing to get my name on the speakers’ list for this group on time and appreciate been given a chance to speak after the Minister. In the circumstances, I will confine my remarks to Amendment 1, introduced by the noble Lord, Lord Sharkey, with whom I often agree. However, on this occasion I strongly agree with what my noble friend Lord Blackwell said.
On the duty of care, the FCA has itself, as other noble Lords said, consulted on this question and provided feedback in November 2019. Many respondents thought that, rather than further complicating the FCA’s responsibilities, with the commensurate risk of increased litigation, it would be better to let the newly introduced senior managers and certification regime settle down.
I suggest that there is already evidence of cultural change in many regulated companies as a result of this, and that those who think we should not at this time bring in changes likely to make the FCA more cautious in the exercise of its functions are correct. It surprised me that while many respondents thought that the FCA should be given a duty of care, most of them thought that the duty should not be enshrined in law because it would lead, inter alia, to duplication of existing obligations, the loss of regulatory agility, and costs, delay and the stress of litigation for consumers. Even the adoption of a non-statutory duty of care would have many of the same effects. Surely the thing we most want to avoid, to ensure that the City retains its position as one of the two leading global financial centres, is a loss of regulatory agility.
My Lords, I believe that contribution has put another side of the argument. It is the balance between these two perspectives that the Government seek to strike. We also think the FCA is in the right position to strike it, with its obligations to protect consumers and its detailed understanding of the markets that it regulates.
My Lords, I thank all noble Lords who have spoken on this group and I note a largely positive view of a duty of care. I thank the Minister for her response. Her counterpart in the Commons took 58 words to respond to a similar proposition; the noble Baroness took more than that, but notwithstanding the length of her response I was not convinced by any of her arguments. Many of them seemed much like medium to long grass.
The case for a duty of care still seems clear and urgent. Essentially there are, as we said, five key reasons for adopting the duty. The first is that FSMA does not protect consumers adequately; the second is that the FCA is always playing catch-up. The third reason is that poor behaviour by firms continues, as I set out in my opening remarks. The fourth is that getting redress after the event is time-consuming and very stressful, and the fifth is the incentive for real and lasting cultural change in our financial services industry. All these seem to be conclusive arguments in favour of a duty of care.
The Minister’s arguments against seem to have a strange Alice in Wonderland quality to them. They amount to saying that it is not in the consumer’s best interests that financial services firms should be obliged to act in the consumer’s best interests. That simply cannot be right. We will return to this issue on Report but, in the meantime, I beg leave to withdraw the amendment.
Amendment 1 withdrawn.
2: Before Clause 1, insert the following new Clause—
“Competitiveness as an FCA and PRA objective
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) In section 1B (the FCA’s general duties), after subsection (1)(b) insert “and—(c) supports the standing and competitiveness of the United Kingdom as a leading global financial centre with high market standards.”(3) In section 2B (the PRA’s general objective), in subsection (1) at end insert “, while supporting the standing and competitiveness of the United Kingdom as a leading global financial centre with high market standards.”(4) In section 2C (insurance objective), after subsection (1)(b) insert—“(c) which supports the standing and competitiveness of the United Kingdom as a leading global financial centre with high market standards.””
My Lords, Amendment 2 is in the name of my noble friend Lord Bridges, who gives his apologies that he is unable to be present this afternoon and has asked me to move the amendment in his place. It seeks to introduce the international competitiveness of financial services as part of the general duties of the PRA and FCA. I would have thought that the amendment is unexceptional and uncontroversial, in the sense that it is difficult to imagine how one could sustain the opposite view: that it is not desirable for the UK to maintain its standing and competitiveness as a global financial centre, or for the regulators not to have regard to that. I am sure that this is already implicit in the approach to regulation taken by the Bank of England, as in that taken by Her Majesty’s Treasury, but it is not formalised in the remit of the PRA and the FCA. This amendment would remedy that deficiency.
I do not need to labour the Committee with facts and figures about the huge importance of financial services to the UK economy and the wealth created by its global trading activities. If this were any other industry of major economic importance, for example the automotive industry or telecommunications, the need for international competitiveness would be taken as given. For financial services, the nature of the industry means that the regulators have, of course, been tasked to oversee other important objectives: the maintenance of prudential standards to avoid financial collapse and, as we have just been talking about, the protection of consumers in complex and life-changing financial transactions.
The amendment does not seek to override those. It would simply add to the general duties of the PRA and the FCA the need to have regard to the aim of supporting the standing and competitiveness of the United Kingdom as a global financial centre in the way those regulators carry out their specific objectives. To avoid any suggestion that this would mandate a drive to lower standards as a way of becoming more competitive, the amendment is clear that the mandate is for a global financial centre with high market standards. I believe it is widely accepted in this House, and in the industry at large, that our standing and competitiveness as a global financial centre can be maintained in the long run only by maintaining confidence in the soundness and integrity of the UK’s financial markets.
In practice, the amendment would mean that the regulators, in considering the design and implementation of regulations and rules, would consciously have regard to ways of achieving the desired outcomes with minimum unnecessary overhead costs and market restrictions. For example, in implementing the measures in this Bill for the regulation of investment firms under the investment firms prudential regime, the implementation of remaining Basel III banking standards and, more generally, reviewing the imported EU MiFID regulations, the regulators would have an explicit concern to pursue the simplification and streamlining of those regulations, moving to the UK’s preferred model of regulating through principles and outcomes to achieve the required standards for a more efficient regulatory approach that improves our international competitiveness.
The Bill in fact goes part way there already in new Section 143G, as introduced by Schedule 2, in which the FCA is required, in applying regulations to investment firms, to have regard to the likely impact of the rules
“on the relative standing of the United Kingdom as a place for internationally active investment firms to be based”.
However, this is applied only to this one limited area of regulation, rather than as a general duty.
If there were seen to be a conflict between international competitiveness and other objectives on some specific measure, it is surely right that this should be identified and an explicit trade-off decision made on the most appropriate priority, which may of course override the competitiveness concern. However, in most cases, efficient regulation, high standards and international competitiveness go hand in hand, rather than conflict.
Take, for example, the current consultation on the Bank of England’s proposal to remove the capitalisation of software from the calculation of banks’ regulatory capital. This is contrary to the practice adopted in the EU and in the US. At first sight that could look like it would put UK banks at a competitive disadvantage. However, not only is that change a sensible way to maintain the integrity of the prudential standard, but doing so would reinforce the UK as a leading global financial centre with high market standards, and, therefore, its competitiveness. The notion that these would often lead to conflict is mistaken: competitiveness can complement high standards.
In proposing the amendment, alongside my noble friend Lord Bridges, I believe that the arguments, including support for international competitiveness in the regulators’ general duties, are important and incontrovertible. I hope my noble friend the Minister will find some way to accommodate this in the remaining stages of the Bill or, if not, give a clear indication of how it will be addressed in other measures that the Government intend to bring forward. I beg to move.
My Lords, Amendment 3 in my name and that of my noble friend Lord Sharkey is an amendment to Amendment 2 and probes what is meant by “high market standards”. Could these mean, “no lower than current standards”, and what are they measured by? Are they just rules, which we hear a lot about, or do they also include enforcement? Regrettably, we also hear about that when it has all gone wrong, with the Gloster and Connaught reports being the latest examples of that. Like a taster menu, our amendment then leads on to the connection between standards and oversight of regulatory performance with respect to both rule-making and enforcement, and suggests that there should be regular independent reviews every three years. For clarification, that would not be instead of whatever Parliament decides it wants to do; it would be additional.
I will put my cards on the table and say that I am nervous about any introduction of competitiveness as a general duty, even with the qualification, or as a bidding, to consider ranking. If one thing was learned from the FSA’s demise and the financial crisis it is that giving a financial services regulator a competition duty can lead to disaster through creating incentives to balance industry profit against safety and consumer protection. It can potentially lead the regulator astray from its essential objective of safety and soundness. If there is such a remit it will inevitably lead to calls from parts of industry that do not want fetters, or even from shareholders that want profits. If competition appears as a duty there will be pressures to go just a little bit lighter touch, then just a little bit more, with arguments that this is all okay because it is among experienced market participants.
Unfortunately, light touch in one part of a market that may seem remote from retail consumers does not prevent contagion. Let us not forget the investment bank “slice and dice” of subprime mortgages, which fuelled the financial crisis by stimulating yet more subprime lending—what gets made gets sold and invested in. Later amendments deal with what happens nowadays with regulated mortgages that are sold on to unregulated entities, so let us not kid ourselves that different parts of the market are in self-isolation or lockdown.
However phrased, a competition mandate is different from a proportionality mandate, which the regulators already have. I am all for regulators making it much clearer how they categorise activity as part of proportionality and transparency. I wish they would do more of it—it can aid competitiveness too—but put in an additional competitiveness mandate and what does that mean, other than to go lighter than proportionality requires?
On the other hand, it is necessary to recognise that regulation is a good way to end up with a closed shop, preventing new entrants and new products, and there can be incentives on regulators to seek the stability of the graveyard. I can think of areas where I would lay that charge, such as fixation on gilts and sluggishness around approving new banking models. However, I do not see a primary competitiveness mandate solving that, even alongside a “high market standards” statement.
This takes us back to what is meant by high market standards. Who sets those? Whatever they are, I am sure they will be lauded as “world beating” even before the rest of the world has been looked at. However, I think that a regular, expert independent assessment can check and report on all aspects—the standard of rules, whether they are gold plated, how good enforcement and operational systems are and, yes, what can be learned by comparison with elsewhere. However, I do not think it is for the regulators to advise on whether they are better at doing things than elsewhere. I already know their answer.
The final part of my amendment suggests that the regulators pay for the reviews—so it is rather like a Section 77 review. Then it says that the review must be published without modification, because there was a certain amount of photoshopping of the Promontory report about GRG and it was made public only via the Treasury Select Committee publishing a leaked copy.
However, there are other ways that regular independent reviews could be done—more like an independent person FiSMA Section 1S review that the Treasury can require—or through an oversight body led by a handful of skilled individuals, as the Australians are now doing. It seems to me that, if you want assurance on high standards, which I do, that is the way to do it, in line with what looks like becoming the new best practice, and that is where the UK should be.
My Lords, I will speak to Amendments 6 and 7 in my name and that of my noble friend Lord Trenchard, who has a lifetime of experience in the financial services sector and understands the whole issue of competitiveness and UK influence from banking for many years in Japan. I am so sorry that because of procedural changes he is now unable to speak to these amendments.
I refer to my interests in the register, particularly as a non-executive director of Secure Trust Bank plc in Solihull and of Capita plc and as a member of this House’s EU Financial Affairs Sub-Committee. I was especially sorry to miss Second Reading of this very important Bill.
These amendments—like the one moved by my noble friend Lord Blackwell and those in the name of my noble friend Lord Bridges—introduce a competitiveness objective for the FCA and PRA. My Amendment 7 also applies to the Bank of England itself. My amendments differ because they spell out aspects of competitiveness that I know are important from a lifetime in business and from nearly three years as UK Minister attending the Competitiveness Council in Brussels.
Of course, consumer protection, stability and standards are important, but they are very well looked after in the structure of financial services regulation, even if the regulators do not always deliver or enforce properly, as we have heard from the noble Baroness, Lady Bowles. I come from a different perspective. Those of us with an understanding of economics know that needless red tape, inefficiency and lack of care for UK interests end up hurting UK consumers with prices that are higher than they need to be, delays that frustrate, and a failure to get things right first time. These also hamper innovation and productivity growth, two of the best ways to both benefit consumers—and I come from a consumer background—and stay ahead internationally.
This matters today even more than in the past. Financial services are the leading sector in the British economy, not only in London but in many other areas of the UK: Edinburgh, Cardiff, Newcastle and Birmingham, to name but a few. In the wake of coronavirus, Brexit and international competition, we need to treasure and enhance our leading position. France, the Netherlands, Germany, Ireland and Luxembourg are trying to steal our lead—but ineffectively, as this hurts their business and consumers and encourages investors and services to move to New York or Singapore. As Mr Barney Reynolds has argued, we must look again at the legacy of EU law, and I know my noble friend Lord Trenchard will have more to say on his ideas on another day.
We must not forget one point: small and entrepreneurial businesses are the backbone of this country. Everyone should remember that the big, powerful multinationals find it relatively easy to adapt to new regulations, rules and requirements, and to lobby for arrangements that suit their interests.
We must also create a benign climate for innovation, which is a vital part of improving efficiency. There is one great example: the Financial Conduct Authority’s so-called “sandbox”—clear, simple and easy regulation for fintech. Thanks for this are due to the current Governor of the Bank of England, but Mr Bailey and I were promoting this as good practice in India four years ago. It is dispiriting that there are not more such initiatives.
As my amendment states, we need “efficiency” and “competitiveness” in the interests of UK plc to feature in the purview of our regulators. A competition objective is not enough; indeed, it can sometimes harm smaller players, driving them bankrupt and causing problems for their customers, as bigger institutions mop up and take over their client base. Competitiveness is sometimes wrongly associated with bad aspects of globalisation. That is wrong: UK competitiveness is what this country now needs to strive for to support the UK base, rather than encouraging the sale of wonderful companies such as Arm to overseas interests. Alex Brummer has argued this forcefully in a series of books, and I agree with him.
While we come at the issue from different angles, I really do want my noble friend the Deputy Leader to listen to those of us who are seeking a change to the Bill to bring in considerations of “competitiveness”. So I will finish with the word’s dictionary definition:
“1. Possession of a strong desire to be more successful than others … 2. The quality of being as good as or better than others of a comparable nature.”
What could be better than that?
My Lords, Amendment 2, in the names of the noble Lords, Lord Bridges and Lord Blackwell, and the noble Viscount, Lord Trenchard, provides an opportunity to reopen an issue that was settled in 2012 by Parliament deciding against adopting a version of what their Lordships now propose.
Their amendment does not come as a surprise, not just because this Bill provides an obvious vehicle for its proposals but because it fits into the usual timescale of loss of institutional memory. Prior to 2012, we had a “have regard” on competitiveness built into FiSMA 2000; it required the FSA to have regard to
“the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom”.
This “have regard” was widely seen as contributing to the financial crash of 2007-08, which is why FiSMA was amended in 2012 to remove it.
During the discussion around and preceding its removal, there were some very forceful observations; three deserve particular attention. The first was from the Treasury, which, in its 2010 report, A New Approach to Financial Regulation: Judgement, Focus and Stability, said that there was strong evidence that
“one of the reasons for regulatory failure leading up to the crisis was excessive concern for competitiveness leading to a generalised acceptance of a ‘light-touch’ orthodoxy, and that lack of sufficient consideration or understanding of … complex new financial transactions and products was facilitated by the view that financial innovation should be supported at all costs.”
When he gave evidence in 2010 to the Future of Banking Commission, the noble Lord, Lord Turner, said:
“I’m not sure at all that a regulator should have regard to the competitiveness. Now let’s be clear, that is something different from the quality of competition … I think that it can be a legitimate aim of a regulator because competitive intensity is a reasonable tool, but I think when you start saying that the role of a regulator is to help, as it were, the competitiveness of a location or of the nationally registered firms, I think that can in a subtle way create a conflict of interest.”
In its final report in the same year, the Future of Banking Commission concluded that giving regulators specific duties to promote international competitiveness risks creating conflicts of interest and that:
“International competitiveness is best served by ensuring that domestic banks are able to compete effectively, without subsidy or special treatment. Promoting the success of British industry is a job for the … industry trade bodies, not for the regulator.”
Two years later, during Committee stage of the Financial Services Bill 2012, the then Financial Secretary to the Treasury told the Commons:
“We only have to turn to the FSA report on the failure of the Royal Bank of Scotland to see what use has been made of the requirement to have regard to competitiveness. On page 29, the report refers to ‘a strong focus on the importance of the “competitiveness” of the UK financial services sector and so of avoiding “unnecessary” regulation. This focus reflected in part the FSMA requirement to have regard to competitiveness issues.’”
He went on to say that the Government did not consider that a competitiveness objective would be a desirable feature in FiSMA. He explained:
“We do not consider that a requirement to have regard to competitiveness is necessary to achieve the right balance between over-regulation and under-regulation, or to ensure that proper consideration is given to the needs of the financial services industry or the wider economy”,
“To include a requirement to have regard to international competitiveness in this Bill would send completely the wrong signal about the nature of the regulatory regime in the UK.”—[Official Report, Commons, Financial Services Bill Committee, 1/3/12; cols. 228-29.]
That was true for that Bill and is true for this. All these objections are still valid. We should show more confidence in the City and our regulators, as Jes Staley recently suggested when he said that
“in a funny way we’ve gotten pretty good at working inside the regulatory framework that is here. It protects the financial industry … as we learn how to deal with this regulation, and it makes the bank safer.”
I think he was referring to his bank, not the Bank. He also said that he “wouldn’t burn one regulation” to achieve the aim of competing with New York and Singapore.
Our amendment to the rather swashbuckling amendment from the noble Lord, Lord Bridges, is a non-regression provision. If, by some lapse in judgment, the Government were prepared to accept the noble Lord’s proposal, our amendment would ensure that our current high standards are not lowered in pursuit of any competitiveness objective. Our amendment, as my noble friend Lady Bowles so eloquently explained, would also require a regular independent review of the standards of governance of the regulators in relation to their rules and the enforcement of those rules.
We do not believe that the amendment from the noble Lord, Lord Bridges, or others with similar intent are desirable or necessary. We appear to have more confidence than the noble Lord in the City’s ingenuity, creativity, sheer expertise and professionalism, and in our world-class regulators and current regulatory framework.
My Lords, this is the first time I have spoken in Committee, so I draw the Committee’s attention to my entry in the register. I will speak to my two amendments in this group. Amendment 87 is broadly drafted and follows on from the line of discussion and approach taken by my noble friend Lord Blackwell. By contrast, Amendment 106 is a highly specific focused proposal for improving the UK’s regulatory regime, on which I seek the Government’s response.
To take these in order, the purpose of Amendment 87 is to require the FCA and the PRA to take into account the impact on the UK’s competitiveness of any regulatory measures they seek to impose, and in particular, under proposed new subsection (2)(b), to assess the overall cost-benefit ratio of the UK’s compliance regime.
I know that even raising this issue risks one being labelled the money launderer’s or financial criminal’s friend. I plead not guilty to that, but I seek to ensure that our compliance regime is and remains cost effective. As evidence that I am not soft on financial crime, I draw the Committee’s attention to the fact that I have put my name to Amendment 84 in the name of the noble Baroness, Lady Bowles, which seeks to make failure to prevent financial crime a criminal offence, which we will discuss at a later date.
First, I want to consider culture. For too long it has tended to be argued that any money spent on compliance is money well spent. As business practices evolve so to, and quite rightly, should compliance practices, but no one has the responsibility to step back and consider whether some of the requirements of an earlier age remain effective and are still needed—so one has ever-increasing layers of regulation. Regulators are, by their very nature, risk averse. But somehow we have to create a climate in which we can find the right balance between a financial services industry which on the one hand might be seen as a system like the wild west, driving business away, and, on the other hand, a system so muscle-bound by regulation that the consequent time, expense and administrative hassle have an equally deterrent effect. It is to establish a formal mechanism to address this challenge that I have tabled Amendment 87.
We may well be told by my noble friend when he replies to this debate that the regulators are now well aware of this challenge. Of course, that is to be welcomed, but I question how far down that organisation this new mood or culture or approach has spread—and, no less importantly, how far it has spread into the compliance departments of the regulated firms. Too often, waving the regulatory stick has come to be seen as some sort of virility symbol.
The professional body, the Office for Professional Body Anti-Money Laundering Supervision, or OPBAS, in its latest annual report in March last year pointed out, in terms of disapproval, that 41% of professional bodies being supervised did not take any kind of enforcement action. No attempt was made to suggest what target figure was the right one; there was just the impression that not enough was being done and efforts and money spent must be increased. However, if you look at the list of professional bodies being supervised, it is not clear why many of them would need to take enforcement action except on the rarest of occasions. For example, one body being supervised is the Faculty Office of the Archbishop of Canterbury. I doubt that enforcement by the most reverend Primate the Archbishop of Canterbury needs to be a frequent event.
The second general point is that, too often, the attitude among regulators is, “What I have, I hold.” The House will have heard me before on several occasions speak about the poor cost-benefit ratio of the present suspicious activity report regimes, or SARs. Every year the number of SARs rises; in 2019, it reached 573,085, about 2,300 per working day. What use is made of these? The cost of all this to the regulated entities and so to consumers and clients is huge. Let us suggest that each SAR costs £250; that would create a total cost of £143 million for the sector, its customers and clients. Interestingly enough, that is almost exactly the same figure as the total money recovered by the National Crime Agency, cited in the same report, which was £150 million. Therefore, there is equality of cost, and there really seems little benefit at present.
However, to suggest that the system needs an overhaul and pandemonium breaks out. As the NCA report says,
“SARs intelligence has been instrumental”—
note the word “instrumental”—
“in locating sex offenders, tracing murder suspects, identifying subjects suspected of being involved in watching indecent images of children online and showing the movement of young women being trafficked into the UK to work in the sex industry.”
There is no mention at all of financial crime, but the clear inference is that if you wish to challenge the SARs regime, you are abetting these appalling crimes. No wonder that people are nervous about challenging the status quo.
Finally, all this feeds into the compliance departments of regulated firms. For the past 14 years, I have been the treasurer of the All-Party Group on Extraordinary Rendition. I remain extremely supportive of the group, but I would ask for a change, and I am pleased to say that the noble Baroness, Lady Kramer, has kindly agreed to take over. Accordingly, she will take over the bank account of the group and will assume signing authority. The fact that we are both politically exposed persons—PEPs—is causing enormous difficulty. It could be argued that the noble Baroness and I could use the APPG’s bank account for money laundering and financial crime generally, but the fact that we have fewer than 20 transactions per annum would suggest a limited scale for what we are going to do. However, it is clear that the noble Baroness and I will be faced with a paper trail of considerable proportions. It is this sort of mindless form filling and box ticking that is being repeated millions of times over and somebody, somewhere, needs to be charged with addressing this problem.
I turn finally to Amendment 106. It has the specific purpose of trying to improve London’s competitive position by removing, wherever possible, the obvious inequities, unfairnesses and inappropriateness of a one-size-fits-all approach by the regulators and creating in its place a regulative framework that is appropriate and effective as regards those to be regulated.
This amendment concerns the insurance sector, which is a key part of the UK’s financial services industry, and I have been helped with the wording of this amendment by the London Market Group. The group brokers in the main deals of sophisticated corporate clients, who have professional advisers at their disposal. As the FCA’s own wholesale insurance broker market study in 2019 demonstrated, these clients seek the services of a London market broker not because they are want to manage issues caused by information asymmetry—something that we have heard about already this afternoon—but because they recognise that the advanced expertise housed within broking firms can assist them in reaching the optimal outcome for their risk-management programmes. They are not consumers, but they need protection in the way that individual or less sophisticated corporate customers may do.
However, the FCA makes almost no distinction between the way it supervises the London market broker, active in the specialty markets in London, and the way it supervises a retail insurance broker dealing with an individual’s domestic and motor insurance requirements. Amendment 106 is drafted to ensure that that there are no regulatory loopholes that the mal-intentioned can exploit by those with malefic intentions. Proposed new subsection (2)(c) makes clear the distinction between retail and professional clients, while subsection (2)(d) asks whether the client has professional advisers and whether they are PRA or SCR regulated; and importantly, subsection (2)(e) covers any potential impact on the UK’s financial stability.
This amendment does not break new ground because the concept of the experienced investor is already well established. Those who qualify in this category can be offered opportunities to participate in new issues and refinancings with the minimum of fuss. Such a minimalist approach would never be appropriate for the general public. That is the approach the amendment adopts as regards the insurance industry. It makes a clear distinction between the different requirements of the professional and the general client. I hope that my noble friend will be able to give this amendment a fair wind.
My Lords, in participating with pleasure in this group of amendments, I declare my interests as set out in the register. I congratulate my noble friend Lord Blackwell on how he introduced the group and I agree with everything that he said—and indeed what is contained in the amendment tabled by my noble friend Lord Bridges.
I also endorse what my noble friend Lord Blackwell said on our view of the Basel framework, not least in terms of the issue of software. This is an excellent example of our move towards standards which really deliver, rather than standards which are perceived to be but are not necessarily higher or greater than other regulatory frameworks.
I entirely agree with the comments of my noble friend Lady Neville-Rolfe on the competitive approach that the FCA has taken to the regulatory sandbox. No greater compliment could be paid to that sandbox than the fact that it has been replicated more than 80 times around the world. We need to push forward in this vein of competitiveness and enable that sandbox to be there all the time for all comers, and similarly push forward on the need for a growth box—more of which in later amendments in forthcoming days.
I also encourage my noble friend Lord Trenchard: if I can tempt him to speak after the Minister, I think the Grand Committee would benefit from and welcome hearing from him, with his vast experience over many decades.
I turn to my amendments in this group: first, to Amendment 113, the review of financial services regulations. It seems an opportune time to look across financial services regulations and the totality of the rulebooks of the regulators, not least the FCA and PRA. I have not suggested an exhaustive list of the regulations and rulebooks that should be reviewed, but I thought it would be helpful to give a number of examples of where it seems sensible to conduct a review post Brexit and as we move to our own regulation of our financial services industry.
First, there should be proportionality. It should be a general rule—any regulatory framework should stack up to this, not just in financial services—that regulation should do exactly what it is intended to do and no more. Economic growth should always be implicit within regulation as well. If there needed to be a greater illustration of this, the current Covid crisis is most certainly it: a horrific health crisis alongside an economic crisis. We will need economic growth wherever it comes from. It is not just about preventing regulations stymying economic growth; they should be considered in the light of everything they can do to encourage, enable and unleash economic growth.
Finally, in some ways the most important element of my amendment is proposed new subsection (2)(c) on innovation and competition. The competition point has been eloquently and extensively made by most previous speakers. I included innovation because of the environment which we are currently in: the foothills of the fourth industrial revolution. We have fabulous competitive advantages in areas such as artificial intelligence, distributed ledger technology, the internet of things, data and so on. Regulations need to be understanding of this environment, enabling it and empowering all those elements of the fourth industrial revolution. If we needed any greater example, although not a direct comparator, we should look at the approach taken to regulation in the mobile telephony market and the positive results for the UK that came out of it; there are many learnings within that.
Amendment 114 is largely a probing amendment to unpack the whole issue of the payments market and to look at what can be done—again, in many ways, harking to the technologies of the fourth industrial revolution—for strong customer authentication, not adding increasing compliance burdens but starting from a position of what is required, what attributes one would need to rely on and what is the optimal way of achieving them. It should be in a way where it can all be done in real time, rather than, as all too often in the current system, a payment being made without necessarily knowing much, if anything, about where it is going—and, indeed, to whom.
Similarly, I would welcome my noble friend the Minister’s comments on the capital and liquidity requirements of the entities at the two ends of the payments landscape. As I say, this is a probing amendment at this stage, but there is a large potential for transformation in this world, putting together what has already been said about competitiveness, the economic opportunity for the UK and all the elements of the fourth industrial revolution that we have to bring to bear. Yes, that applies to financial services but, again, it also applies right across our economy.
My Lords, Amendments 2, 6, 7 and 87 seek variously to urge the FCA, the PRA and the Bank of England to take into account the competitiveness of the United Kingdom. This is a dangerous concept that can only harm Britain and our collective national security and well-being. Competition implies people winning and losing, trying to beat down others to push ahead of them, taking risks and cutting corners. We all know where that ended up in 2008.
Instead, we should aim for a more secure financial sector that provides more useful, effective and safe services to individuals and the real economy. That would have a global benefit. If we have a decent financial sector with good standards across the globe, everyone wins. If we treat this as a zero-sum game, we lose and the world loses.
The noble Lord, Lord Hodgson of Astley Abbotts, spoke—complained, it would be fair to say—about regulators being, by their nature, risk-averse. Well, I, like many other Britons seeking to avoid a replay of 2008, applaud that existing risk aversion and seek to strengthen, not weaken, it. Competitiveness has been, and continues to be in the calls of many, exactly comparable to downgrading. That includes relaxing capital requirements for financial institutions; reducing enforcement of criminal behaviour by financial actors, creating tax loopholes for billionaires or multinational corporations; and having weak competition policy that allows a small number of firms to dominate markets and exploit British consumers, workers and taxpayers. This all reflects the model of free ports that the Government seem so keen on.
The winners in this race are plutocrats and giant multinationals. This kind of competitiveness is fundamentally anti-democratic and profoundly destabilising in its contributions to inequality. Trickle-down economics have long been discredited; financial services that concentrate money in the hands of the few only harm the rest of us. I note that Amendment 3 in the name of the noble Baroness, Lady Bowles, tries to provide a form of insurance, as she outlined, but the best answer, as the noble Lord, Lord Sharkey, said, is not to insert “competitive” into the Bill at all.
The last global financial crisis was substantially the fruit of competitive financial deregulation in Britain and elsewhere, as Britain and other countries increasingly relaxed rules to attract capital, thus allowing financial actors to take highly profitable risks at the great expense of the rest of us. Separately, Britain has abjectly failed to prosecute money laundering via the City of London. Non-enforcement is a deliberate competitive strategy used by many tax havens. This corrupts our institutions and gives potentially hostile secret actors leverage over our economy and politics.
In short, we need an upgraded financial system, with tighter controls and a demand that it meets the needs of individuals and the real economy, as our debate on the first group of amendments focused on. This would support the financial integrity of our systems and benefit the UK economy, particularly our security and ability to meet everyone’s basic needs. A system driven by competitiveness benefits a few at society’s expense—that is, at the expense of small and medium-sized enterprises, even larger enterprises, and the vast majority of individuals.
There is also an important regional aspect to this inequality. A competitive financial system will benefit wealthy parts of London while harming Britain’s struggling regions. A better, upgraded financial system, spread out around the country, with local banks meeting local needs securely and safely, would be a significant improvement indeed.
The idea of competitiveness ensures that costs are spread across the majority of the UK population, with lost tax revenues and financial crises, while the benefits are realised in corporate headquarters mostly in the wealthy parts of London, overseas and, very often, offshore. No strategy that seeks to level up the regions based on a “competitiveness of the financial sector” agenda can possibly succeed.
We will come later to my Amendment 123, which starts from an extensive analysis of the “finance curse” and calls for an impact report on the costs of the financial sector—something I do not believe the Government have any kind of handle on, despite the hard work of a small number of underfunded campaigners and academics. A large body of cross-country evidence from such radical organisations as the IMF and the Bank for International Settlements shows that there is an optimal size for a country’s financial sector, where it provides the services that an economy and population need. Expansion beyond this size causes damage, increases inequality, boosts criminal behaviour and creates many other ills. We need a safe, balanced financial sector that does not suck in skills, resources and capital, taking them away from the businesses that need our essential—and currently often badly served—needs, whether food security or construction, public transport or care.
We are not Tudor buccaneers, whatever some members of our governing party might think. We live in an unstable, insecure world buffeted by environmental, economic and social shocks. We are seeking a new place in the world—we have much talk of global Britain —so it is worth thinking for a second about what the world sees when it looks at the UK financial sector. I looked through a report from the Tax Justice Network in 2019, which noted:
“The UK with its ‘corporate tax haven network’ is by far the world’s greatest enabler of corporate tax avoidance”.
I note figures out just overnight from the Jubilee Debt Campaign, which show that of the debt owed by 73 countries eligible for debt relief under the G20 initiative, 30% is owed to private lenders in the UK. If we want a respected, admired place in the world—something that could be only to our benefit—then an outsized financial sector, one “competing hard”, will cost us dear.
I will speak briefly to Amendment 102 in the name of the noble Lord, Lord Tunnicliffe, which importantly promotes transparency about how the Government seek to direct our international oversight and financial governance. I also express very strong support for Amendment 121 in the name of the noble Baroness, Lady Bowles of Berkhamsted, which refers to country-by-country reporting. We know that giant multinational companies shuffle money around like a fast-moving, shady casino dealer, making their profits in one place but seeking to shift them to places competing—we are back to that word again—on the basis of minimal regulation and taxation. Who then pays for the schools and hospitals their customers need? Who pays for the maintenance of roads, the police, the courts? They take their profits and run, and the rest of us pay.
The noble Baroness, Lady McIntosh of Pickering, has scratched from this group so I now call the next speaker, the noble Lord, Lord Mountevans.
My Lords, I support Amendment 2. The strength and robustness of the UK’s regulatory regime is vital to the health of our financial services sector. High-quality regulation is part of the attractiveness of the UK for inward investment and is crucial for enabling access to other markets; it is a competitive strength. It would be helpful for the Bill to signal an ambition in line with the Chancellor’s Statement in the other place on 9 November 2020 for the UK to become more globally competitive and have a long-term, ambitious strategy for financial services. The Chancellor’s Statement was a welcome signal of the kind of direction the industry is seeking.
The Bill should not be considered in isolation. The UK is undergoing broad developments in regulation: the Treasury’s future regulatory framework review, for example, will shape the UK regulatory framework for financial services and indicate how the sector needs to adapt to the UK’s new position outside the EU. This review is an important stage in the redesign of the UK’s regulatory regime and will play a key part in making the UK more globally competitive and attractive to international firms.
The review, and the Bill, are part of a much larger range of activities which require scrutiny. The development of the UK’s regulatory regime should be done holistically, taking account of a range of competitiveness drivers. The addition of a competitiveness factor will help to ensure that our regulators have regard to the effects of their regulation, as well as giving them flexibility to react to developing trends and help make the UK’s regulation robust, as well as globally attractive.
Global regulatory coherence and co-operation is more important than ever. It is through the development and implementation of global standards that the industry can support the global economic recovery from Covid-19 and enable investment into priority areas such as green finance and digitisation. A global and co-ordinated approach to regulation makes risks easier to manage and supports greater financial stability. The UK’s new regulatory regime must maintain the highest of global standards to maintain the sector as a strategic national asset and ensure robust capital markets. Strong standards attract business to the UK and give UK businesses better access overseas. The noble Lord, Lord Blackwell, elected to avoid rehearsing the statistics, which I hope we are all familiar with, so I will do the same. However, the facts speak for themselves about the need to ensure that the UK remains globally competitive in this sector.
Some in the House will know that I served a year as Lord Mayor of London. During that time, acting as an ambassador for British business of all types, the challenges to the UK’s position as a centre for financial services, as well as the undoubted opportunities which that position provides, were clear. Other centres have a constant eye to their global competitiveness. The noble Lord, Lord Holmes of Richmond, noted the significance of innovation; I am focused on the importance of innovation and am pleased to report that research published this month by the City shows the UK is a global leader in this area. The same research indicates that in terms of having an enabling regulatory and legal environment, the UK comes in third place, after Singapore and Hong Kong. Now is the right time to ensure that the UK has competitiveness hardwired into its regulatory arrangements.
On SMEs, in November Mr Sam Woods, the Bank of England’s deputy governor for prudential regulation and, as your Lordships will know, chief executive officer of the PRA made a Mansion House speech—or rather, since we are living in the era of Covid, a Mansion House-labelled e-speech—in which he highlighted the importance of designing a proportionate “strong and simple” prudential regime for small firms. Moves such as this are important because they show that regulators have an eye to their rules working in a way that supports competition, which I detect as the underlying theme of this clause.
My Lords, I draw attention to my interests as set out in the register. I recognise that these are probing amendments, but I exhort my noble friend the Minister not to underestimate either the strength of feeling on the question of international competitiveness or its importance to a sector vital to our economic recovery, as my noble friend Lady Neville-Rolfe stressed in her impressive speech earlier in this debate. The foundation stone for the regulation of financial services is still FiSMA—the Financial Services and Markets Act 2000—albeit in a form substantially amended by subsequent legislation. As the noble Lord, Lord Eatwell, reminded us, the regulatory structure is currently subject to a fundamental review.
The financial services future regulatory framework review and phase 2 consultation closed at the end of last week. The early indications of a general direction of travel are welcome. The original version of FSMA set out those four clear objectives for the new Financial Services Authority, the FSA: market confidence; public awareness; the protection of consumers; and the reduction of financial crime. In addition, the FSA was required to have regard to a number of other considerations, which included such obvious factors as efficiency, proportionality and innovation. They also included, as the noble Lord, Lord Sharkey, reminded us—and I quote verbatim
“the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom”
“the need to minimise the adverse effects on competition that may arise from anything done in the discharge of those functions”.
As other speakers have reminded us, after the crash of 2008, the incoming coalition Government inherited a severe recession and an unstable and untenable financial situation. They therefore undertook a deep consideration of regulation. In the debates in another place on what became the Financial Services Act 2012, concerns were repeatedly expressed to the effect that regulation under the FSMA had been not so much light touch as soft touch. Since 2012, the entire financial services sector, broad and diverse as it is, has effectively been punished—put into the naughty corner, as it were —almost entirely because of the alleged failures of the banks. The regulatory brush used was simply too broad and therefore not fit for purpose. The requirement to take account of international competitiveness was jettisoned because, it was argued, it might dilute the robustness of regulation.
I have also taken a close look at the Second Reading debate on the then Financial Services Bill, on 11 June 2012, in which one colleague after another raised this question of competitiveness, including my noble friends Lord Trenchard, Lord Hodgson and Lady Noakes. So this is a “Groundhog Day” debate, but I hope no less persuasive for that. My noble friend Lord Trenchard certainly wins a prize for consistency and constancy, because he eloquently argued that day:
“Some of us believed that competition and the competitiveness of our financial markets should have been made an objective of the FSA rather than merely one of the principles to which it had to have regard. I welcome the fact that the FCA is given a competition objective in the Bill, but it is inadequate in that it falls short of a responsibility to maintain or enhance the competitiveness of the UK’s financial markets”.—[Official Report, 11/6/12; col. 1245.]
As both the Association of British Insurers and the London Market Group have rightly pointed out, promoting the international competitiveness of the UK financial services sector to nurture its contribution to our economic strength must now be restored to the objectives of the regulators. This would bring our regulators into line with other, competitor jurisdictions, such as Hong Kong, the United States, Singapore and Australia. In its phase 2 consultation paper, the Government explicitly acknowledge:
“A gap in the original FSMA model is that, while it set high-level general objectives and principles, it did not provide for government and Parliament to set the policy approach for specific areas of financial services regulation.”
A move towards increasingly activity-specific regulatory principles is helpfully adumbrated, as my noble friend Lord Blackwell pointed out, ahead of the outcome of the FRF consultation, in Schedule 3 to the Bill. This would require the PRA, when considering capital requirements regulation, to have regard to
“the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities.”
This seems a welcome step back towards an old principle and, quite possibly, a Rubicon of significance crossed—or, more accurately, re-crossed. On that basis the Bill, while welcome in its own terms, is merely the beginning of a vital process which will determine the character of the post-Brexit UK financial services sector, potentially for a generation or more.
Once the results of the consultation have been digested, I hope to see far more acknowledgement in regulation of the great differences that exist between different elements of financial services, along with an explicit recognition that our international competitiveness matters. It is entirely spurious to claim that a regulator mindful of international competitiveness is likely to be a weak regulator. It could and should be a very effective one indeed.
As the noble Lord, Lord Mountevans, has just pointed out, our competitiveness relies on our strength. Our greatest strength is surely our reputation for providing the best advice and the best products at the best price, something no regulatory race to the bottom could ever deliver. If we really have the ambition to become the global centre for insurance and financial services—a realistic ambition, I argue, if we work together to deliver upon it—then we simply must get this right. I very much hope that the Bill does not go down as a missed opportunity.
My Lords, inevitably with so many amendments to one Bill, this group is something of an omnibus collection. I have some sympathy with some of them—for example, the country-by-country reporting amendment tabled by the noble Lord, Lord Tunnicliffe. While I disagree very much with the noble Lords, Lord Hodgson and Lord Holmes, on their overall support for an international competitiveness objective in other areas, they are pointing out a need for the regulator to look again at issues such as proportionality and how to adapt to the new digital world. However, that does not seem to need to be put into law. This is really advice to the regulator, and I hope that they will take a great deal of that good advice on board.
I want to reply to the noble Lord, Lord Hunt, because he echoed an opinion raised by the noble Lord, Lord Blackwell, but very effectively countered by my noble friend Lady Bowles. He talked about activity-specific regulation creating the opportunity for some significant divergence in the regulatory environment. The lesson of 2008 was that the financial services sector is linked systemically. As my noble friend Lady Bowles pointed out, the crash in 2008 started with largely fake and junk mortgages in the United States. It worked its way into various securities instruments that were sold to people in the UK who did not understand them, but should have.
The underpinning consequences of risk were also completely misunderstood. The way that derivatives were traded and structured created a potential risk of losing liquidity overnight. This is exactly what happened with the high street banks in the UK. They became competitive with others in the financial sector to develop the kinds of profits that they saw being made by rival companies, pushed their credit standards to the point where, frankly, they were no longer standards, and chose methods of funding themselves that made them vulnerable to any volatility in the overnight markets. This is not an industry in which we can separate the different pieces into silos. They are all interlinked and that must underpin any form of regulation that we have.
Like others, I and my colleagues remain deeply suspicious of any amendments that put an obligation on the financial regulator to support an international competitiveness objective. When the change was made in 2012 to remove the relevant “have regard” it was not done lightly. It was done because one could trace the impact that that had had on regulatory decision-making and, indeed, some regulatory deference. It was removed because it was a threat to financial stability in the UK and to the role of the regulator, which surely has to put financeability first and above all else.
I ask this Committee not to indulge in short memories, since this country is particularly vulnerable to failures in financial services. No other country depends for so much of its economic prosperity, its jobs and its tax revenue on the financial services sector. We saw that graphically in 2008 and the years that followed: we were hit the hardest by far. Risk for us has far greater consequences than it might do in many other countries.
I am sure that if the noble Lord, Lord Blackwell, were able to respond and if the noble Lord, Lord Bridges, were here—I understand perfectly that he has a very good reason for not being present—they would probably say that the industry learned its lesson after 2008 and changed its culture. They might argue that the regulator now has many more powers. To some degree that is, indeed, true. But I am very conscious, and I know that I sometimes refer to it too often, that those two years on the Parliamentary Commission on Banking Standards really scarred my mind and my thinking. Leading figure after leading figure in banking came before that commission—anyone is welcome to go back and read the verbatim testimony—and sought to escape any form of personal responsibility. They pretty much argued against any remedy, whether it was around the issue of personal responsibility, higher capital requirements or ring-fencing. It was absolutely clear that they and those who would follow them into those institutions would seek to undo any constraint as soon as they thought they could manage it—as soon as memory faded.
I want to point to something that the noble Lord, Lord McNicol, said in a previous cluster of amendments: that so much money washes through the financial sector that the temptation to push boundaries is palpable. It does not mean that there are not good people in the industry; of course there are, and we are all very grateful for that. However, over time, charismatic and seemingly short-term successful individuals have a long history of being able to take the industry to a point of risk that no one would ever have accepted had they sat down and explicitly defined where it all was going.
We do not have a good history of regulators standing up to the big institutions. Again, go back and look at that testimony: it is underpinned by deference. On the previous set of amendments I believe that the noble Baroness, Lady Penn, talked warmly of the tool that the FCA has in the form of the senior managers and certification regime. She is right: if that were used properly, it would be some tool. However, if we look at the ways in which the FCA has chosen to use that, it is so rare for it to turn and exercise the standard of “fit and proper” which in effect removes a chief executive from office because of regulatory failure. Within the industry, that standard is now regarded as essentially non-threatening. It is not that the regime does not do some good things—it pushes various institutions to create some internal systems that, one hopes, make risk more explicit and deal with issues around whistleblowing but, in terms of having the authority that I think so many of us hoped it would have, that is now long gone.
This is still true. One of the most damning descriptions I ever heard of UK regulators—in contrast with, for example, the US regulator—is that when a US regulator comes to an institution, that institution is in fear; when a UK regulator comes to an institution, people go and make tea. It has not proved the strong resource we all hoped for in disciplining the industry.
I take very strongly the position that we must not put any regulator, even a strong one, in a position where it is basically being told by the objectives that it can, without parliamentary intervention, set out regulations to match the weakest practice evident internationally. We also have to remember the other recommendations for accountability the Bill puts forward. A lowest common denominator strategy is not acceptable. Very unfortunately, this language, combined with the lack of parliamentary accountability in other parts of the Bill, would allow one to happen. We have to take a very strong stand.
My Lords, I will begin by speaking to Amendment 102 in my name and that of my noble friend Lord Tunnicliffe. It is a probing amendment and seeks to persuade Her Majesty’s Government to spell out their priorities as a participant in international discussions on the direction and detail of financial services regulation. After all, at the very heart of the Bill is legislation covering a wide range of aspects of international financial regulation.
Her Majesty’s Government being clear about their priorities would greatly assist the Committee. After all, the Bill is about incorporating the conclusions of the Basel Committee on Banking Supervision into UK legislation. What could be more international than that: submitting British law to the decisions of a committee of which Her Majesty’s Government are not a member? That is a rather exotic interpretation of taking back control. It is also about the travails of equivalence and, as amendments in the group testify, the relationship between financial regulation and international competitiveness.
Yet we lack a clear statement of Her Majesty’s Government’s approach to international financial regulation, particularly on its future now that the UK has left the European Union. What are the Government’s regulatory priorities? What are their future plans? In the documents associated with the regulatory framework review, we are given some insights into the Government’s goal for the institutional responsibilities for regulation, but what is the policy framework, not the institutional structure, that will guide their proposed reforms? This probing amendment provides Her Majesty’s Government with the opportunity to clear some of the fog. If noble Lords are to scrutinise satisfactorily the Bill and the outcome of the regulatory framework review when it comes before the House, they need this comprehensive insight into the Government’s thinking.
If we look for the core of Her Majesty’s Government’s international regulatory policy, it is obvious from the Bill that much is to be found in the analysis developed by the Basel Committee. Yet, as is well known, it is European Union directives that most closely follow Basel proposals—exactly those directives from which the Government declare independence and their desire to diverge. However, divergence from EU directives will inevitably involve divergence from Basel. So what is it to be: acceptance or divergence? It would be hugely helpful if the Minister, in summing up, could clarify the position.
Then there is the role of the G7. Ever since the G7 Halifax summit in 1995, following the Mexican financial crisis of the winter of 1994, financial regulation has been an ever-present item on the agendas of G7 meetings. By the way, it is Halifax, Nova Scotia, just in case the people of Yorkshire think they missed something. Given that the UK is to chair the G7 this year, how will Her Majesty’s Government approach questions of post-pandemic regulatory reform now that the UK has an independent voice in these matters? What lead will Her Majesty’s Government provide as chair to our G7 partners on financial regulation?
The issue of country-by-country reporting referred to in the amendment is primarily a question of the taxation of large multinational entities, but there is an important echo of the country-by-country issue in the section of this Bill that deals with insider dealing and money laundering. At the heart of the problem of financial crime is the question of beneficial ownership: an area of regulatory policy within which, as the noble Lord, Lord Callanan—the Minister for Climate Change and Corporate Responsibility—admitted, our framework is “attractive to exploitation”. He is right. Knowledge of beneficial ownership is as fundamental to the prevention of money laundering as it is to the prevention of tax avoidance and evasion. I will return to this issue later in our deliberations. The important point that arises at this time is that this is but one more example among many of the lack of clear policy perspective on behalf of Her Majesty’s Government. I hope that the Minister will be able to respond to the probing amendment and outline that policy perspective.
I now turn to Amendments 2, 3, 6, 7 and 8, all of which deal with the relationship between regulation and international competitiveness. I find myself somewhat out of sympathy with these amendments, primarily because the manner in which the issue of international competitiveness is addressed in the current version of FSMA is about right. In it, competitiveness is already an operational objective of the PRA and the FCA. Given the performance of the City of London over the past 20 years, this objective would seem to have been comprehensively achieved. It may be that the proposers of these amendments fear that the competitive position of our financial services industry will be undermined by the UK having left the European Union, and they are now desperately trying to repair the damage. Let us all hope that they are mistaken. Of course, the key point in FSMA is that competitiveness is subordinate to ensuring that markets function well, as in the case of the FCA, and subordinate to the promotion of the safety and soundness of PRA-authorised persons, as in the case of the PRA. That is surely right.
Similarly, with respect to the attempt by the noble Baroness, Lady Neville-Rolfe, to insert by means of Amendment 7 a competitiveness objective into the Bank of England Act, I cannot agree that Her Majesty’s Government should be ready to rank competitiveness equally with the bank’s statutory objective: to protect and enhance the stability of the financial system of the United Kingdom. Should they be happy to pursue international competitiveness while putting family finances at risk? Should they be happy to pursue international competitiveness by putting the soundness of our financial institutions at risk? I believe not. The current hierarchy of regulatory objectives signals clearly where this country’s regulatory priorities lie.
Let us remember that one of the most overpowering advantages that can accrue to any international financial centre is the reputation that it is well and securely regulated. That is an accolade not to be sacrificed. As has been said already, the danger in these amendments is that of the lowest common denominator. For all the reference to high standards, it is international competitiveness that will be a primary statutory objective, equal to or even above the stable operations of the money markets or the financial risks to which the British people are exposed. That would be unwise.
I regret that I also have little sympathy for Amendment 87, proposed by the noble Lord, Lord Hodgson of Astley Abbotts. Benchmarking is in fashion these days. We are regularly told that one or other government service is world-leading or world-class; what we are not told is whether standards in the rest of the world are good, decent or disreputable, and whether our world-class performance is just a little bit better than good, decent or disreputable. Benchmarking the UK’s financial system against others that are seriously deficient is no goal at all. Why should we settle for a deficient regulatory system? Why not have one that is sound and successful on its own terms?
However, Amendment 106, also in the name of the noble Lord, Lord Hodgson, is worthy of careful consideration. It calls for recognition of the nature of financial products and clients within the regulatory framework. The key point that I believe the noble Lord wishes to incorporate in the Bill is that different financial activities carry different risks and hence should be regulated differently. This is the main point of Clause 1, of course, which excludes certain investment firms from the capital requirements regulation.
This amendment incorporates a widely held view. However, it goes a bit too far. Financial services are, by their nature, highly fungible. As the noble Baroness, Lady Kramer, pointed out, regulatory arbitrage is a fact of daily life. Activities that carry different risks one day carry the same risks the next. Even the customary distinction between retail and wholesale activities is far more permeable that its common use would suggest. After all, all transactions ultimately impinge on the well-being of some households somewhere. So although the amendment raises matters that must always be kept in mind, raising the differentiation of regulatory approaches to the status of an objective is a step too far.
Finally, the amendments in this group in the name of the noble Lord, Lord Holmes of Richmond, call for reviews of financial services regulation and the regulations relating to financial payments. Although the matters of concern raised by the noble Lord are worthy of consideration, I hope that they are just the sorts of issues being addressed in the current regulatory framework review.
This is an important group of amendments since most of them challenge the Minister to clarify the Government’s thinking following the UK’s exit from the European Union. I am sure that we all await the Minister’s comprehensive reply with considerable interest.
My Lords, I am grateful to all noble Lords who spoke in this debate, which has opened up an extremely important set of issues relating to the competitiveness of our financial services sector. I am sure we all recognise that the UK has long been a global leader in financial services; I am the first to agree that, as we adapt to our new position outside the EU and the opportunities that it brings, it is essential that we continue to provide the right environment to support a stable, innovative and world-leading financial services sector. That is why I embrace this opportunity to speak about this vital industry’s place in the world.
First, I remind the Committee of my right honourable friend the Chancellor’s speech last November. He was clear about the Government’s commitment to ensuring that the UK continues to be the most open, competitive and innovative place to conduct financial services anywhere in the world. I say in response to the noble Baroness, Lady Bennett, that the Chancellor could not have been clearer about the huge value of our financial services sector to the entire UK economy, including nearly £76 billion in tax receipts in the last financial year and more than 1 million jobs. At the very heart of this vision are the UK’s world-leading regulators: the Financial Conduct Authority, or FCA, and the Prudential Regulation Authority, or PRA. They are respected across the world for their expertise and thought leadership on the regulation of financial services.
I will now address the proposals that the amendments invite us to consider. Amendments 2 and 6 would introduce a statutory objective for the FCA and PRA to support the standing and competitiveness of the UK as a global financial centre. Amendment 7 would introduce a similar competitiveness objective for the Bank of England relating to financial conduct and prudential regulation. Amendment 87 has a similar purpose and would require the regulators to take international competitiveness issues into account when making rules, as well as reporting to Parliament on this and benchmarking the UK against other international financial hubs. The supplementary Amendment 3 seeks to explore what is meant by “high market standards” and to instigate a formal review of regulator activity every three years.
I listened with interest to the many good arguments from noble Lords in favour of including competitiveness as an element of the regulators’ statutory objectives. I have also listened to other contributions, including those from the noble Baronesses, Lady Kramer, Lady Bowles and Lady Bennett, and the noble Lord, Lord Sharkey, which reminded us of the need to be cautious. They also reminded us of the paramount importance of protecting the safety and soundness of our financial system, the integrity of financial markets, and of protecting consumers, as reflected in the regulators’ existing objectives.
Those two facets of the debate point up the critical balance that needs to be struck and the arguments that are necessary to build a consensus on the right approach for the UK’s financial services sector. This is a delicate calibration that needs a great deal of thought, which is why I say to the Committee that these are not arguments for today. The Government’s future regulatory framework review is considering how the UK’s financial services regulatory framework must adapt to reflect our future outside of the EU. That has to be the right place to consider issues such as the regulators’ objectives.
The noble Lord, Lord Eatwell, asked me for a few further details on the Government’s approach to an overall policy framework. Their proposed approach will involve putting new policy framework legislation in place for key areas of regulation and moving regulatory requirements from the UK statute book to regulator rulebooks. Parliament will have the final say on the approach adopted and how it is applied through legislation. The Government will bring forward further detail on our approach to implementation, and invite stakeholder views on this, in due course. We expect that applying the FRF approach to the full body of onshored EU legislation will take several years to deliver.
We are committed to full, timely and consistent implementation of the Basel regime. I refer the noble Lord to the Governor of the Bank of England’s recent speech, which I am sure that he has already read, which sets out examples of some departures from the EU approach that we are contemplating, one of which is to exclude the value of software assets in the valuation of bank capital.
In saying that, it is worth recognising that a competitiveness objective for the regulators would not be a silver bullet to maintain and enhance the UK’s competitiveness; it is also not necessary in order to develop it. A range of factors determine the attractiveness of our financial ecosystem and make the UK a leading financial hub. This includes access to highly skilled talent, access to a broad international investor base, and dynamism and innovation to give us a leading position in the markets of the future, including fintech and green finance.
In fact, I reassure the Committee that the Government are already taking action now to ensure that competitiveness is a core consideration in our approach to financial services, and a consideration of the regulators. In the prudential measures in this Bill, for example, the UK’s competitiveness is one of the issues that the regulators must have regard to when making rules in these areas. We really are not standing still in this space.
The Government have also kicked off a wide range of activity seeking to seize the opportunities presented by having left the EU. This includes the review of the noble Lord, Lord Hill, into listings to make the UK a more attractive location for companies to list and trade in, and the UK funds regime review, which is considering tax and regulatory opportunities to make the UK more attractive for funds. The long-term asset fund will encourage investment in long-term investment opportunities. The Solvency II review is seeking views on how to tailor the prudential regulatory regime to support the UK’s insurance sector. Ron Kalifa OBE is leading an independent strategic review to identify opportunities to support further growth in the UK fintech sector. The payments landscape review is seeking to ensure that the UK maintains its status as a country at the cutting edge of payments technology. The consultation on cryptoassets and stablecoins seeks to understand how the UK can harness the benefits of new technology and support innovation while mitigating risks to consumers and stability. The call for evidence on the current overseas framework seeks to ensure that our regime is coherent, fair and easy to navigate. I should also mention the independent ring-fencing review, which will consider the rules separating retail and investment banking activities and any impact that they may have on banking competition and competitiveness. I hope that this long list assures noble Lords that the Government are absolutely committed to protecting and promoting the competitiveness of our financial services sector as we seek to ensure that the UK continues to be the most open, competitive and innovative place to do financial services anywhere in the world.
Amendment 33 looks at this question from the other side of the debate. It seeks to probe the legal effect of the obligation placed on the PRA to “have regard” to the UK’s international competitiveness when making its CRR rules. I have already spoken about the UK’s status as a global financial services hub and the work that we are doing to maintain it. The Government want to ensure that the PRA has specific regard to those ambitions when implementing its Basel rules because, while the Government and the regulators remain committed to the full and timely implementation of Basel, now that we are outside the EU, we have the opportunity to implement these standards in a way that takes account of the specificities of the UK market.
That does not mean a regulatory race to the bottom. This requirement is entirely subordinate to the PRA’s existing primary and secondary objectives of promoting safety and soundness, and effective competition, respectively. Amendment 106 in the name of my noble friend Lord Hodgson would require the PRA and the FCA to consider when developing new rules the nature of a product or service being provided, the level of risk this entails for UK consumers and the level of sophistication of a client. This is a sentiment with which it is hard to disagree, but I do not agree that an amendment to this effect is necessary or would significantly alter our current approach to regulation.
When exercising their functions, both the FCA and the PRA are currently obliged to consider proportionality under their regulatory principles. For instance, one of the core measures in the Bill enables the introduction of a tailored prudential regime for investment firms. This regime—the IFPR—will account for differences in the size and business models of investment firms at its very heart. Only non-systemic investment firms will be put on this new FCA-regulated regime, while those that are of systemic importance will remain regulated by the PRA.
Given the size, complexity and global nature of our financial system, we must of course make sure that customers understand the risks of the financial services products that they use. Having left the EU, the Government believe that there may be opportunities for responsibly applying more proportionate regulation in some areas. For example, Sam Woods, CEO of the PRA, made the case last year for a “strong and simple” approach to the regulation of small banks.
I hope that noble Lords will take from these remarks that the Government are committed to exploring and embracing the opportunities we now have to enhance the UK’s competitiveness while remaining committed to the highest international standards of regulation.
Amendment 102 considers international co-operation on country-by-country reporting and other topics. It would require a report on the Government’s priorities as a participant in international discussions on the direction and detail of financial services regulation. The Government have set out the clear principles that define our international strategy. We believe in quality regulation based on international standards, and we believe in deference to the regulatory regimes of other jurisdictions where appropriate—that is, recognising that different regulatory regimes can achieve similar outcomes. This is the best way to deliver for all market participants. The Government want to ensure that our legislative and regulatory framework for cross-border financial services achieves the goal of attracting liquidity and activity to the UK while supporting financial stability and upholding our principle of openness in financial markets.
In relation to the co-ordination of regulatory efforts to tackle financial crime and its facilitation, the Financial Action Task Force is an intergovernmental body that develops the international standards for combating money laundering and the financing of terrorism and proliferation. The UK is a founding member of the FATF and is committed to following and upholding its standards.
This Government have championed tax transparency through initiatives at the international level and through domestic action such as the requirement for groups to publish tax strategies. In relation to public country-by-country reporting, the Government continue to believe that only a multilateral approach would be effective in achieving transparency objectives and avoiding disproportionate impacts on the UK’s competitiveness or distortions regarding group structures.
I turn now to Amendment 113, which would require a review of all financial services regulations, and Amendment 114, which would require a review of payment services. Although I am supportive of their objectives, the amendments tabled by my noble friend Lord Holmes of Richmond would duplicate a significant amount of work that this Government are already taking forward to take advantage of our new freedoms and ensure that our financial services regulation is fit for purpose—some of which I mentioned earlier in my remarks.
On payments, as I touched on earlier, the Treasury is presently conducting a payments landscape review that aims to ensure that the UK maintains its status at the cutting edge of payments technology. A call for evidence has already closed and the Treasury will respond to this in due course. The call for evidence set out the key drivers of new payment systems and services, including the broader trend towards new service providers and payment chains, and asked questions about the opportunities and risks they create and the next steps that the UK should take to ensure that it maintains its position as a world leader in payments networks. Given the significant work already under way on regulatory reforms in the financial services sector, and this Government’s commitment to continue to assess and review these regulations now that we have the left the European Union, I ask my noble friend not to move his amendment when we reach it.
I have given a long answer, but I hope that it has been helpful to the Committee. As I hope I made clear, I have some sympathy with many of the issues raised in this debate. Later, we will debate a group of amendments focusing on innovations in financial services so there will be an opportunity to return to the broad theme of this debate, but noble Lords should be in no doubt that the Government are committed to promoting the UK’s competitiveness and seizing the opportunities that Brexit can bring us—but doing so in a responsible and measured way. For these reasons, I ask my noble friend Lord Blackwell to withdraw his amendment at this stage.
I have received requests to speak after the Minister from the noble Viscount, Lord Trenchard, and the noble Baroness, Lady Neville-Rolfe. I call first the noble Viscount, Lord Trenchard.
My Lords, I am grateful to the Committee for once again permitting me to speak after the Minister. Even though I have my name to two amendments in this group, I had not realised that the procedural change that the House is about to approve at 8 o’clock this evening—which I think is rather strange—now prevents one from doing so unless one takes an additional step, in a narrow window, of specifically putting one’s name down to individual groups as well.
I had wanted to speak in support of Amendment 2 in the name of my noble friend Lord Bridges of Headley, as moved so ably by my noble friend Lord Blackwell, and to Amendment 6, ably moved by my noble friend Lady Neville-Rolfe. I thank my noble friend Lord Holmes of Richmond for his kind words, and most heartily thank my noble friend Lord Hunt of Wirral both for what he said and for quoting from my 2012 speech on this subject.
Your Lordships may wonder why I have added my name to two different amendments which seek to achieve approximately the same result. This is because there are many ways to raise the importance of competition and the competitiveness of markets, and I have in my mind some further variations of the theme. In any case, I strongly believe that we must move quickly to maximise the attractiveness of London’s markets to be sure that the City, including our wider financial services industry, will remain one of the truly leading global financial centres, with all that that means for our prosperity as a nation.
I had wanted to speak properly and fully within this debate but am now hesitant to do so, as I am sure my noble friend the Minister will appreciate. I had wanted to make several points, and wished to explain why I think the noble Lord, Lord Sharkey, the noble Baroness, Lady Bennett of Manor Castle, and, indeed, the noble Baroness, Lady Kramer, are so wrong in believing that the FSA’s having regard to competitiveness was a cause of the financial crisis, or that competitiveness, of itself, heightens inequality. Either Amendment 2 or Amendment 6 would be an improvement to this Bill. I would like to ask my noble friend the Minister which of the two he prefers, because they are not precisely the same. In any case, as my noble friends Lord Mountevans and Lord Hunt have said, there is strong expectation and hope that the Government will do more to secure the City’s future in relation to improving the competitiveness of the markets.
My Lords, I am grateful to my noble friend Lord Trenchard, and sorry that he was not able to enter the main list of speakers for the reasons that he stated. I hope that we will hear more from him in later debates but I also hope that he will take some encouragement from the actions that the Government are already taking to promote the competitiveness of our financial services independently of any conclusions reached from the FRF review. Those are proof of the Government’s commitment and intent to put actions where our words have been. I very much look forward to debating his ideas further in the course of these Committee proceedings.
I thank my noble friend the Deputy Leader for his full and courteous responses, which I shall read very carefully before returning to the issue at Report, as I think that there may be something missing in the Bill and that it would not be wise to defer the whole matter of the next set of financial services reforms. What in my noble friend’s long and helpful list assists smaller financial services businesses, which do not necessarily want to list on the stock exchange yet suffer the full cost and burden of FCA and PRA regulation as they struggle to do a good job for consumers and their clients?
My Lords, I can probably expand this answer to advantage in writing. The Government fully understand the disproportionate effect of some of our regulation on small firms, which is why we are looking critically at whether a more proportionate approach is available to us. It is probably best if I spell out our thoughts in a letter, which I would be happy to copy to all Peers in this debate.
I have received one additional request to speak after the Minister, and I call the noble Baroness, Lady Bennett of Manor Castle.
My Lords, I thank the noble Lord the Deputy Leader for his full response in our previous discussion, but there was one figure that he raised in that response that I wanted to ask him about the source of and justification for. That was the claim that the financial sector contributed £76 billion in tax receipts. I am basing this question on work done by a fellow Member of your Lordships’ House, the noble Lord, Lord Sikka, who may not be joining us until later—so I wanted to raise this point now. I understand from his work that this figure comes from a report prepared by PricewaterhouseCoopers and includes £42 billion borne by customers in the form of VAT and paid by employees in the form of income tax and national insurance contributions. The remaining £33 billion is an estimate, and the report says that PwC
“has not verified, validated or audited the data and cannot therefore give any undertaking as to the accuracy”.
Could the Minister tell us what further justification the Government have for that figure?
My Lords, I thank all who have spoken in this debate, and the Minister for the extensive replies. As he said, we have heard a lot of views, a lot of which I felt coincided with one another, at least in terms of what was said, more perhaps than appears in the amendments. Ultimately, a lot of the things that were complained against could be dealt with through proportionality. Yes, it is not competitive if the actions of the regulator are not proportionate—be that in rules or supervision. Therefore, I think there is less need to give a specific competitiveness mandate, because that confuses whether you are seeking something else on top. I refer to what the noble Lord, Lord Blackwell, said in introducing his amendment, when he said that these things were probably taken into account but not formally, or they would be taken as given in any other industry.
Who is assuming that they are not taken as given within this industry? The Government have the possibility of giving remit letters in the consultation that is ongoing. There is the proposal that there may be more remit letters. It is the place of government to say what it thinks of the economic position of competitiveness, but without binding the regulators. I think that probably is about right, while we continue to explore what has already been said is a new and more adaptive system, because it is only for the UK, where more proportionality can be exploited. We know that the regulators do not get it right and the noble Lord, Lord Hodgson, was able to seize the opportunity to remind us all of the politically exposed persons regime—with which we are all, unfortunately, very familiar—as an example of where the requirements in some instances greatly exceed what is necessary.
It has been a useful debate. The Minister reminded us that there are numerous sectoral reviews. I agree that those are necessary, but my amendment had something slightly different. It was saying that there should more oversight of what the regulators are getting up to on a regular basis rather than from time to time when things have gone bad. For now, I will withdraw my amendment. I do not expect to repeat this amendment but, as Members will already know, other amendments are coming up around review where I will wish to pursue that point further. I beg leave to withdraw my amendment.
Amendment 3, as an amendment to Amendment 2, withdrawn.
My Lords, I thank my noble friend the Minister for his very fulsome responses and other noble Lords for their contributions. In many of the contributions there was agreement that competitiveness was important for the financial services industry. I cannot agree with the noble Lord, Lord Sharkey, that because the House reached one view 10 years ago, we cannot learn the lessons and think again about this issue. Neither can I agree with the noble Baroness, Lady Bennett, that a smaller financial services industry that created less wealth would be beneficial for the UK.
However, I was very struck by the contributions from my noble friend Lord Holmes and others about the importance of innovation in the area of payments, among others. I am reminded that you cannot have innovation without some element of risk. This is an example of where, if there were no consideration of international competitiveness, there might be no reason for the regulators to allow any risk into the system. They would play completely safe, whereas a measured management of risk to allow innovation is important. You cannot innovate without risk. Financial services is not about eliminating risk but about managing risk. If it were about eliminating risk, no bank would ever grant any loan and no insurance company would ever issue any insurance policy. I think that is a good example of how innovation is an important part of competitiveness.
I was grateful to the noble Baroness, Lady Bowles, for her amendment on the definition of “standards”, on which we had a constructive debate. This is not about the lowest common denominator; it is about high standards, and she challenged how we define that. It cannot be about keeping every rule exactly as it is now; it has to be about outcomes, and I think everyone would agree that high standards must mean maintaining or improving standards of outcomes.
However, if you take the example that was given on the impact of SARs regimes or, indeed, the way MiFID is implemented, there will be many opportunities to improve the effectiveness of regulation to produce better outcomes. This will not necessarily involve keeping exactly the same rules and regulations; it will involve improving them. This comes back to the point made by my noble friends Lady Neville-Rolfe and Lord Hodgson: this is about the efficiency of regulation and doing it better, which is, and should be, the driving force for a more competitive regulatory regime.
I was grateful for the Minister’s acknowledgement that the Government support promoting the competitiveness of financial services. I note his comments that this needs to be balanced against other objectives; I simply say that it is not balanced if the objective is completely missing—it has to be there so that it can be balanced. He made the point that, rather than introducing this measure now, he would like time to consider it in the policy framework. I and other noble Lords will need to reflect on that and what words of assurance he can give us, as the Bill passes, that there will be a commitment to do something about competitiveness as an objective. However, in the meantime, I beg leave to withdraw Amendment 2.
Amendment 2 withdrawn.
Amendment 4 not moved.
5: Before Clause 1, insert the following new Clause—
“Non-exploitation of consumers or small businesses
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) In section 1C (the consumer protection objective), after subsection (2)(e) insert—“(ea) the general principle that firms should not exploit a consumer’s or small business’s vulnerability, behavioural biases or constrained choices;”.(3) After subsection (2) insert—“(3) Exploitation under subsection (2)(e) includes, but is not limited to, situations where—(a) there is a system of conduct, or pattern of behaviour, that relies upon unequal power between the parties to impose disadvantage on consumers or small businesses or gain advantage for the larger party;(b) notice or other compliance terms are imposed which make it impractical for consumers or small businesses to comply;(c) there is use of notice terms to coerce consumers or small businesses into unfavourable contracts;(d) conduct by a supplier causes a consumer or small business to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; or(e) there are risks that the supplier should have foreseen would not be apparent to the customer or small business.In this section, “small business” is as defined in Part 15 of the Companies Act 2006 (accounts and reports).””Member’s explanatory statement
This amendment is to protect consumers and small businesses from exploitation.
My Lords, Amendment 5 builds upon Amendment 4, tabled by the noble Lord, Lord Tunnicliffe, which was discussed within the first group and in turn built upon Amendment 1, moved by my noble friend Lord Sharkey. I will not revisit the “duty of care” part of the amendment, as it has already been well discussed, but the point about Amendment 5 and the similar Amendment 73 is to bring small businesses within the non-exploitation principle—defined by the noble Lord, Lord Tunnicliffe, in his amendment—and to highlight some things that regularly happen in contractual terms and which can be exploitative. Amendment 73 is more explicit and would allow the FCA to intervene where there is “Unconscionable conduct”, even if a consumer or small business has entered into a contract.
The issues that are highlighted as wrong behaviour, although within an exemplary list, are: patterns of conduct that rely “upon unequal power”; terms of notice
“or other compliance … which make it impractical … to comply”;
“of notice terms to coerce … unfavourable contracts”;
compliance terms that are “not reasonably necessary”; and risks that the larger supplier should have realised would not have been
“apparent to the customer or small business”.
This is not a random list of points—there are rather more in my Private Member’s Bill on the same subject—but a key list of matters that were used by GRG in the exploitation of small businesses, and which the FCA said it could do nothing about because they were outside the regulatory perimeter.
Once more I must look to other countries to see how we compare, and once more I find that Australia has tried harder. It has a general law of unconscionable conduct in commerce that deals with all these issues and more, and which extends to not only consumers but business to business. I do not know how many noble Lords read the various detailed contracts that one is forced to sign as an individual or small business to access almost anything nowadays. In the earlier group, these were similarly referred to by the noble Lord, Lord Eatwell. I have seen barely one that is reasonable. It is only getting worse as everything becomes a leased service rather than a product.
With these amendments I make the point for small businesses as well as individuals, and in the context of financial services, which are among the most fundamental of services, that bullying contracts must stop. They must be within the regulatory perimeter and the FCA must be prepared to intervene. Excuses about GRG and what the FCA did not do there hold no power. We saw what happened; we need strong measures that mean it must not happen again and that imitations of it must not be tolerated in day-to-day operations. I beg to move.
My Lords, I find myself in some sympathy with the noble Baroness, Lady Bowles, on Amendment 5 because this is a grey area where small businesses are perhaps not well served. My noble friend Lord Howe claimed, in his full and comprehensive response to the last debate, that this was not the right time or place to look at the regulatory objectives, as this would better take place under the Government’s future regulatory framework review. I would argue, in support of the noble Baroness, Lady Bowles, that small businesses are not well served by the current provisions. If you look at some of the work of the Financial Ombudsman Service, which the Committee has referred to, I would not hold out much hope for a small business claiming redress and a decision under that agreement. I would be delighted if my noble friend were to prove me wrong in summing up this debate.
Amendment 5, in particular, has strengths to commend it and I would very much like to lend it my support. I look forward very much indeed to hearing what my noble friend will say and whether the Government might look favourably on it, a lacuna having been identified in the regulatory framework.
I call the next speaker, the noble Baroness, Lady Bennett of Manor Castle. Baroness Bennett? We appear to have lost the noble Baroness, so if—
Apologies, my Lords, but I have sorted the problem out now. I speak briefly in support of Amendments 5, 73 and 95, in the names of the noble Baronesses, Lady Bowles, Lady Altmann and Lady Kramer. Although not a generalisation that is 100% true, the gender division of the people on various sides speaking on the Bill is interesting. It made me reflect back to the financial crash of 2007-08 and the role that the extreme gender imbalance in the financial sector was seen to have played within it.
When I thought to look at these issues about exploitation, unconscionable conduct, and legal protection against mis-selling, I went to the website moneysavingexpert.com. In a previous contribution, I referred to the role of such commentators who, using the power of public opinion, often seem to be a stronger check on the behaviour of the financial sector than the Government. But, of course, they are able to work only after the fact. Just looking down the list, we are talking about payment protection insurance, mis-sold ID fraud insurance, the mis-selling of package bank accounts and excessive charges on bank accounts—and that is just talking about individual consumers. A similar list would come up for small business. It is a long tale of woe that has caused a great deal of suffering and harm to individuals and small businesses, the operators of which have often put their whole heart and soul into the business.
What we seem to have now is a strategy of shutting the stable door sometime after the horse has bolted, and after a long delay for debate and inquiry. All three of these amendments are a very strong bolt that we should be sliding home now to protect consumers and small businesses from the overweening, immense power of the financial sector.
My goodness, this has moved fast. My Lords, let me start by addressing Amendment 95, because it is in my name. It would give SMEs the right to sue in respect of all regulated financial services, not just banking. It would—and this is an important example—entitle them to sue for breaches of the rules relating to insurance, otherwise known as COBS, in respect of business interruption insurance policies.
Another big practical implication relates to the cross-selling of regulated products or services as part of the add-ons to a loan. In the swaps mis-selling scandal—I believe my noble friend Lord Sharkey mentioned this in his earlier list, when talking about a duty of care—over 40,000 swaps were sold to SMEs. The banks had broken the regulatory requirements in over 90% of cases. It is almost impossible to imagine that having happened if the banks’ legal departments knew that the banks would be sued by their customers as a result.
None of the SMEs that have taken swaps cases all the way to court have won. Judges have repeatedly said that, had the customer been able to sue for breach of the COBS rules, that would have made all the difference. The evidence is there in Green & Rowley v RBS, Crestsign Ltd v NatWest, London Executive Aviation Ltd v RBS, and Fine Care Homes Ltd v NatWest. Those cases and the other swap cases that failed at trial show that—even where a judge is convinced that the customer did not understand the product they were buying and even where the bank salesperson knew that the customer was relying on them to explain the product—the common law fails to provide the customer with a remedy. I realise that the swaps scandal is, hopefully, in the past but, without the amendment proposed, there is nothing to stop banks from perpetrating similar behaviour in future.
My amendment addresses only part of the issue of the limitations of the regulatory perimeter, which both my noble friend Lady Bowles and the noble Baroness, Lady Bennett, have discussed, and it is why I support Amendments 5 and 73 in the name of my noble friend. I find it ridiculous that the regulatory perimeter treats small businesses as, in effect, akin to multinationals in their capacity to understand financial products and fight on an equal footing with big institutions.
My noble friend Lady Bowles has cited the case of RBS GRG. For those not familiar with this case, GRG was the turnaround unit of RBS. A number of firms were persuaded to allow themselves to go into the turnaround unit even though they were both viable and paying their loans on time; but RBS believed that under the terms of their loan agreement they were at risk because the value of their assets had declined, which created a covenant default. In a remarkable number of cases, those companies that were viable and paying on time were made bankrupt, their assets were stripped after having been assessed at very low market values and—surprise, surprise—the bank was able some time later to sell those assets for a much higher value, thereby generating profits. It was indeed not just a turnaround unit but a profit centre.
After great pressure from Vince Cable, the FCA initiated an investigation. It asked a group called Promontory to produce a two-stage report: one to look at the case and the other to make recommendations. However, after the first phase of the report was complete, the FCA explained that it could not publish it as it contained commercially sensitive information, and it therefore produced a summary. Miraculously, the original report made its way into the hands of the Treasury Select Committee. This, to me, is almost the worst part of the story: the summary that had been provided by the FCA and the report itself did not match. There was essentially a whitewash of the conclusions of Promontory. The FCA may have disagreed with the report that it received, but that would have been a very different declaration.
We have talked before about the senior management and certification regime; the FCA could have used that regime to try to deal with senior management who had been involved in this entire process, but it chose not to. That, I am afraid, is the history of the use of the senior management and certification regime. However, my noble friend Lady Bowles could equally well have cited the HBOS Reading fraud perpetrated between 2003 and 2007, which I mentioned earlier. Six bankers ended up in jail for that fraud, but we are now in 2021 and fair compensation has not yet been paid to the victims. This is now a Lloyds problem and has been for some time.
We have been through multiple reviews and are now awaiting the work of yet another review of compensation, the Foskett panel, which hopefully will make sure the compensation is appropriate—but, as I said, it is 2021. There have been issues; for example, a whistleblower who examined who knew what and when has been compensated twice by Lloyds for retaliation against her. There is currently a review by Dame Linda Dobbs into who in senior management knew or ought to have known what was going on.
This kind of history is simply not acceptable, and it is a consequence of this extraordinary regulatory perimeter. My amendment does not deal with all that: Amendments 5 and 73 help that circumstance, but there is a fundamental issue at play here. The FCA has looked into the perimeter and will say that it has decided to treat micro-businesses like consumers. However, I believe, as do many others, that it needs to go much farther. It is particularly important at this time, as we are looking to many people as entrepreneurs and starters of small businesses to drive the recovery from Covid. Surely they ought to have the kind of protection that is necessary against a financial services institution that does not always have their interests at heart. As I argued at the beginning, they are far more akin to consumers than they are to multinationals, and that needs to be embedded in the way in which they are treated by the regulator. Of course, the financial services ombudsman can look at many of these cases but, by the time we get to that point, the mischief and damage has been done, and this is not the way to handle this underlying problem.
My Lords, faced with speaking on this group, I looked at the Bill as a whole and, to a surprising extent, there is little reference to consumers or people who depend on the banking sector. The failure to contain these areas was brought out by the first group of amendments, where there was a very strong thrust to require the sector to exercise a duty of care.
This group, which I support, seeks to isolate a singular problem and address it directly. It is a problem that is not just unfair but evil, and one we find across many sectors—the problem of bullying. In many sectors, size is an advantage, and because of that, a small number of firms grow to a large size. The problem with size is that it enables bullying; you find it in many sectors, including airlines and supermarkets and with Amazon and Facebook. The problem with bullying is that, used skilfully and ruthlessly, it enhances profit and, because it enables profit, it is pursued, often covertly. It is the classic example of why benign regulation is so important in our economic and financial landscape.
These amendments are a bold move to add to that benign regulation by directly addressing the evil of bullying. This will be good for individuals but also—and this is a very important point—for SMEs. I was at the large end of the scale, and we were able to see off any attempt at bullying because we were big enough and ugly enough to be able to fight the problem with an equality of arms. The problem with an SME—and often we are talking about individuals—is that the concept of equality of arms in the courts is almost impossible; they can easily use up their revenue for a whole year on one court case. These amendments address the issue together.
I know the Government are likely to say, “Not now. We will do it later. We are looking at another area.” That just cannot go on, and I urge the Government to think about these ideas and work out some way to introduce this. The banking industry, in particular, has an appalling reputation. The evil things it has done over the years are frightening. It is difficult to believe, in a sense, that those evils were done by malice; but it is very easy to understand how the opportunities present themselves to behave in this way and generate more profit, more praise and more reward.
My Lords, Amendments 5, 73 and 95 relate to the protection of consumers and small businesses against misconduct. The Government are committed to ensuring that consumers and businesses can use financial services and products with confidence and that there are appropriate protections in place.
Before I comment on the specific amendments, I want to take a moment to set out the wider context. The Government have given the FCA a strong mandate to prevent and take action against inappropriate behaviour in financial services, and it has a wide range of enforcement powers to protect consumers and small business. Noble Lords will appreciate that the majority of business lending is unregulated—that is what the amendments test and probe—but the Government are committed to providing appropriate safeguards for SMEs in accessing financial services, while seeking to avoid driving up the costs of lending and unnecessarily reducing affordable credit options.
In the UK, loans of less than £25,000 to small businesses are treated as regulated consumer credit agreements for the purposes of the Financial Services and Markets Act 2000. This means that most small businesses already receive regulatory protection. In addition, in April 2019, the remit of the Financial Ombudsman Service was expanded to allow more SMEs to put forward a complaint. This covers 99% of small businesses in the UK. If a complaint is upheld, the FOS could make an award of up to £350,000 in relation to acts or omissions that took place on or after 1 April 2019, when its remit was expanded.
Small and medium-sized businesses also now have access to the Business Banking Resolution Service, an independent, non-governmental body which will provide dispute resolution for businesses which meet the eligibility criteria. The BBRS will address historic cases from 2000 which would now be eligible for FOS but were not at the time, and which have not been through another independent redress scheme. It will address future complaints from businesses with a turnover between £6.5 million and £10 million.
It is with that context in mind that I turn to the specific amendments. Amendment 5 seeks to protect consumers and small businesses from certain types of exploitation by financial services firms providing services to those groups. It proposes imposing new obligations on the FCA when it exercises its general functions. However, it risks putting up the cost of borrowing and limiting the availability of products and services. For example, it could require the FCA to make rules creating additional safeguards designed to ensure that exploitation, as defined by the amendment, does not occur. Given the different levels of financial sophistication of different small businesses, the rules may need to be designed to protect those with minimal levels of sophistication. Given the potential complexity of such new rules, financial institutions may be more reluctant to lend to small businesses.
Amendment 73 would duplicate similar existing protections that I have previously outlined, in a way that could be confusing to consumers, SMEs and lenders. On the issue of unconscionable conduct, in response to the banking crisis and significant conduct failings, Parliament passed legislation leading to the FCA and PRA applying the senior managers and certification regime. The regime aims to reduce harm to consumers and govern market integrity by making individuals more accountable for their actions.
Amendment 95 would broaden the scope of those parties who can seek action for damages related to mis-selling of financial services. However, I argue that these changes are unnecessary, as businesses already have robust avenues for pursuing financial services complaints, which I have already set out.
The Government are committed to regulating only where there is a clear case for doing so. This is to avoid putting additional costs on lenders that could ultimately lead to higher cost for businesses; these would likely be passed on to consumers and could restrict access to affordable finance—a key Government priority.
The Government’s view is that each of these amendments risks duplicating the existing protections that I have set out, while also making lending to SMEs more complex, which could make it harder for them to access affordable credit. Our view is that the existing protections get the balance right between protecting consumers and small businesses and not unduly restricting access to affordable credit options. For these reasons, I ask that these amendments be withdrawn.
I have received one request to speak after the Minister from the noble Viscount, Lord Trenchard, who I now call.
My Lords, again, I am grateful to the Committee for allowing me to speak after the Minister. I will speak only to Amendment 73 because it introduces another subjective concept: “unconscionable conduct”.
I searched for instances of “unconscionable” on the FCA’s website and found only one: John Griffith-Jones, the former chairman of the FCA, for whom I have the highest regard, said in a 2014 speech:
“In 1951 in the Money Lenders Act we described a 48% interest rate as ‘unconscionable’.”
It occurs to me that, as recently as 2018, the main banks were charging 1p per £7 borrowed per day for arranged overdrafts. This was about 50% per annum, but it was not disclosed; indeed, when the banks stopped telling people what their APR was and instead started telling them what the fee per £7 borrowed per day was, this was welcomed by the FSA, which thought that requiring to tell consumers the real interest rate was unhelpful because they would not understand it.
Now that the banks have reverted to informing customers of real annual interest rates, albeit in very small print, the cost of an arranged overdraft has gone down from around 50% to around 40%, which is possibly still unconscionable in today’s world of negative interest rates. As such, I certainly do not think that we should rely on the FCA to decide what is and is not unconscionable. Does the Minister agree that the banks should make clearer what real interest rates on overdrafts are?
My Lords, clarity around all terms and conditions is, of course, to be welcomed. I agree with my noble friend that one challenge with these amendments is potentially introducing new concepts, which might need to be defined through regulation, where we think that there are existing protections in place and the effect could be duplicative.
My Lords, I thank all those who have taken part in this debate; it has been short but interesting, and I thank those who have supported the concept that I am trying to elaborate. What the noble Viscount, Lord Trenchard, has just said is probably true to some extent—why should we rely upon the FCA for this? It is true that this probably should be more of a general legal offence of unconscionable conduct, which is what they have in Australia. So there is no point trying to argue that, in a common law country with a similar kind of legal system, you cannot work out how it happens and whether it is effective: I can tell you that it is.
As the Minister elaborated, the problem with having a subjective measure—as the noble Viscount, Lord Trenchard, called it—is that you then have to put a whole load of rules around it. That is exactly the problem with the FCA. It has done it with the senior managers regime, something that I always understood Parliament wanted to be a subjective measure—that is, if you behaved badly and something happened on your watch, you were responsible. That has now been tied up with contracts approved between the regulator and the employees in the businesses. Instead of capturing the people at the top, it has pushed responsibility down the chain. The same has happened with “fit and proper”. The FCA has chosen to redefine what that means so it will catch only very extreme cases rather than bad behaviour.
I hear that the Government are unwilling to do something that really is just saying, “Behave yourself”. It should not be too expensive to make companies behave themselves. It should not be too expensive to make sure that there is a conscience and that you ask the questions we got to when we were discussing the duty of care: “Is this right? Is it within the rules? Can I pull a fast one here?” I am very disappointed by the Government’s attitude on this. I am grateful that some small remedies have been introduced but they are really not sufficient. They do not deter bad behaviour. It is still worth taking the chance, taking the risk and making the profit. However, for now, I withdraw my amendment.
Amendment 5 withdrawn.
Amendments 6 and 7 not moved.
We now come to the group beginning with Amendment 8. I call the noble Lord, Lord Stevenson of Balmacara.
8: Before Clause 1, insert the following new Clause—
“Duty of the FCA to make rules promoting financial wellbeing
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 137C, insert—“137CA FCA general rules: financial wellbeing(1) The power of the FCA to make general rules includes the power to require authorised persons to promote financial wellbeing of consumers in carrying out regulated activities under this Act.(2) The FCA must make rules in accordance with this power which come into force no later than 6 April 2022.””Member’s explanatory statement
This new Clause would introduce a duty to promote financial wellbeing for the FCA which would strengthen the FCA’s consumer protection objective and empower the FCA to introduce rules for financial services firms informed by that duty.
My Lords, with this amendment, we come to the end of the group of amendments that precede the Bill. This is another slightly detached issue that I hope will get a response from the Government. Amendment 8 is supported by the noble Lord, Lord Holmes of Richmond; I am very grateful to him for his support. His amendments on financial inclusion, which are also in this group, raise many similar issues. I look forward to hearing his comments and to the subsequent debate.
I declare my interest as a former chair of StepChange, the debt charity. Amendment 8 would place on the FCA
“a duty to promote financial wellbeing”—
a new term—
“which would strengthen the FCA’s consumer protection objective and empower the FCA to introduce rules for financial services firms informed by that duty.”
As I have already said, this is a probing amendment, seeking at this stage what I would describe as a high-level response from the Government. I am not looking for detail at this stage; it is really a question of whether there is merit in further work being done on this concept. If there is, I am looking for some pointers about how the Government would like it to go forward.
The background to this amendment is a suggestion from the Money and Pensions Service that there is a case for giving the FCA the power to nudge—its term, not mine—financial services firms to underpin their activities with regard to the financial well-being of their customers and to go beyond current considerations of consumer protection or vulnerability, which I think they have already adopted to some extent. The intention is to remove any asymmetry of knowledge, expertise and capacity between the service providers and their clients. It is a very ambitious goal and would take a lot of work across many sectors not normally involved in the consideration of financial competence.
During my time as the chair of StepChange, we used the term “financial inclusion” to cover the need to have a society where everyone felt that they were knowledgeable enough to be secure and in control of their financial affairs; indeed, we have used the term since then. However, if we change that to “financial well-being”, we go much further. We could say that the aim would be to have the knowledge, confidence and resilience for all in society to pay bills as they fall due, cope with unexpected shocks and plan across our assets and income over time for a healthy financial future right through to well after retirement.
It is a very ambitious and much wider term than “financial inclusion” or any amount of financial education. The importance of the term is that it better captures a life cycle approach to the modern needs for economic health, generating confidence and empowerment within the population at scale coupled with a financial services industry that goes well beyond just designing and delivering good products and excellent services—which we accept they do, of course. It all should be backed by a regulatory system with a holistic overview and the powers to match.
Is this just smoke and mirrors, or is it a realistic vision of the way that things might be? Whatever the case, it is a good time to ask the question. As we discussed earlier today, the FCA’s 2020 Financial Lives survey found that just over half of UK adults—24.1 million people, in its figures—display one or more of the characteristics of vulnerability to their financial situation: a health condition, negative life events, low financial capability or low resilience. Other surveys have already been mentioned. The Salad Projects’ report was mentioned by my noble friend Lord McNicol, and hopefully will be again when he comes to speak on this group. It shows the reality of coping with low incomes and why a shortage of low-cost credit is such a major issue for so many citizens who, even when in regular employment and often with blameless credit references, cannot find appropriate ways to cope with even the basic costs of living, let alone saving for a rainy day and retirement.
The Government are currently consulting on a phase 2 review that includes financial inclusion on the levelling-up agenda, but we also have some other material. As has been mentioned already, The Woolard Review: A Review of Change and Innovation in the Unsecured Credit Market is a major contribution to the understanding of this area; it will come up again in later amendments. There is a lot going on. With this probing amendment, I seek a sense from the Government of whether they accept the case for a broader approach to financial well-being being championed by the Money and Pensions Service and by some firms such as NatWest and Nationwide. In particular, do they accept that, whether or not a formal duty of care is placed on financial service firms—I would support this—the forms of regulation in this area need to be expanded to deliver what the FCA calls
“fairer outcomes for consumers, including support for customers with poor financial well-being that might extend well beyond simple commercial transactions”?
Thirdly, would they consider taking this one step further and seeing what would be required from other partners and agencies?
If we really want a system capable of helping consumers to develop the skills and confidence to interact with financial service providers, people must be secure in the expectation that, if they need help in managing their decisions on their finances, they will not be ripped off and that there will be quality support for them. We must also ensure that education, advice, debt counselling services and other things focus on helping all citizens to develop the skills and confidence to interact effectively with financial service providers—not only providing the products that they need over the life cycle but developing their skills and confidence about their financial well-being and empowering them to take control and plan what they want to maximise their resources.
This is a big agenda that probably also needs action on many other issues such as low-cost credit sources. However, at this stage, we need a clear signal from the Government about how far this issue can go and on what terms they would like to see further work done.
I beg to move.
My Lords, it is a pleasure to speak on this group of amendments. I congratulate the noble Lord, Lord Stevenson of Balmacara, on the excellent way in which he introduced the group. The concept of financial well-being is a growing area and there is a lot for us all to reflect on. I thank him for all that he has done in this whole area of financial well-being, not least during his excellent time at the helm of StepChange.
We should thank all the organisations involved in financial inclusion, not least Macmillan Cancer Support and the Money Advice Trust. They go to people who are at the sharpest end of financial exclusion, and their commitment and the briefings that they provide to parliamentarians are a credit to everybody involved in that space.
I turn to my Amendment 9 in this group, which would place a duty on the Financial Conduct Authority to work toward the objective of financial inclusion. In doing this, I seek to raise the whole level of financial inclusion across our regulators. The context has moved on significantly during the Covid crisis. People who, fortunately, have never had to think about financial inclusion or have never been at a loss as to where the next bill payment will come from find themselves very much at the sharp end of financial difficulty. Fortunately, in many of those instances, the Government have stepped in through the furlough scheme and the self-employed and business loan schemes.
The reality is that, in a broad sense, these are enablers of continued financial inclusion. I would argue that, in this new world, it is difficult to consider the concept of financial stability while we still have such issues around financial inclusion. Financial exclusion has dogged our society for decades. It ruins lives, paralyses potential and corrodes communities. This amendment would give the FCA the objective of considering the barriers, blockers and bias that continue to mean that people are shamefully excluded from mainstream financial products.
Similarly, in the second point in my amendment, I want to place a requirement on organisations
“to report on their use of financial technology to increase financial inclusion.”
Not for one minute do I believe that fintech is the silver bullet—I am well aware of the issues around financial and digital exclusion—but fintech must be part of the solution and must be turbocharged at all levels of financial services. It must be understood much better by HMT, as well as the role it can play in varying degrees across financial services. This was proven at the beginning of the Covid crisis when, in a matter of hours, various fintechs came up with innovative solutions to address some of the issues that then rolled out as the crisis developed.
Having a financially inclusive nation makes sense. Having a financial inclusion objective within the scope of the FCA makes complete sense. I hope that this amendment will add to all the extraordinarily good work that everybody involved in financial inclusion is currently undertaking.
My Lords, I thank the noble Lord, Lord Stevenson, and my noble friend Lord Holmes of Richmond for tabling these amendments and for the important debate that they have initiated this evening. Both have considerable expertise in the field; I am only sorry that we are not all here together physically and able to debate the issues in our Pugin corridors.
I accept that financial inclusion is important, given the difficulties that a failure to understand finances can cause anyone, and indeed everyone. However, to my mind, this ought not to be a matter for the FCA, which should focus its efforts on providing a good, strong, unbureaucratic regulatory regime that allows those providing financial services to flourish and serves consumers well. Rather, a basic understanding of financial matters should, in my view, be inculcated first in school. We all need to understand the basics of loans, interest, probability and risk, how to manage budgets and pay our bills, the risk of fraud, what to watch out for, the value of a pension and many other things.
We do good work on teaching children about climate change and digital, but financial education, economics and risk have a back seat, with a brief reference in the citizenship curriculum for 11 to 16 year-olds. They should be a central part of the curriculum. They could also be a focus in work-experience schemes. Employers can help through their training schemes throughout the life cycle, since skills in financial matters are important to well-being, and therefore to a successful and happy workforce. This is the logic of the earlier points.
In the 2019 Conservative manifesto, the Prime Minister said he wanted to ensure that every child had access to a great state school and that every pupil gets the qualifications they need for a prosperous future, while learning in an environment where they are happy and fulfilled. Some of that investment needs to go into educating our nation in financial matters.
I am not averse to financial services firms helping through their social responsibility programmes, but I believe these amendments take us down the wrong road. I have less concern about Amendment 134, which provides for a review. But, if that were to proceed, it would need to take proper account of the role of schools in financial education and financial inclusion.
My Lords, I will be brief, as I set out many of my concerns and issues when speaking earlier on the first group.
I support Amendment 8, proposed by my noble friend Lord Stevenson of Balmacara. Before I start, I would like to make the Grand Committee aware of my financial interests, as set out in the Lords register.
As touched on in Amendment 4 earlier, low financial resilience and overindebtedness are a huge problem for both individuals and the country at large. We should all do all that we can, especially under the current circumstances, to push back against those issues.
Either we are saying that there is a problem and we need to do something about it, or we are saying that there is not a problem and we just carry on as before. With the figures and the personal stories of overindebtedness and unaffordable, unsustainable financial predicaments, I believe that there is a problem that does need resolving.
The FCA recently found that the number of people suffering from low financial resilience had increased by one-third to 14.2 million people. That is one-quarter of the UK adult population. |In earlier amendments, we heard a number of noble Lords, and a little from the noble Baroness, Lady Neville-Rolfe, saying that any increase in regulations, bringing in a duty of care or a duty to promote financial well-being, was either not the responsibility of the FCA or, in some earlier comments, would put more costs on individuals in increased fees and on businesses with increased administration. I do not believe that that is the case with the amendment as laid out by the noble Lord, Lord Stevenson. If you look at the text of it—and I understand it is a probing amendment—you see that the power of the FCA to make general rules includes a power to require authorised persons to promote the financial well-being of consumers in carrying out regulated activities under this Act.
I am very new to this sector and I may be a little naive, but I believe that one of the most significant drivers of costs to the industry is from non-repayment or defaulting on loans. We need financial well-being and literacy to be increased. The noble Baroness, Lady Neville-Rolfe, is right that it needs to start in schools and carry on through employment and employers, but that should not preclude the Financial Conduct Authority being able to step in and help. There is a benefit to businesses as well. If financial well-being can be increased, the number of defaults from people falling into indebtedness or failing to pay reduces, thus increasing profitability of a product, then in turn reducing the cost of that product to individuals and businesses. There is a lot in where the amendment proposed by my noble friend Lord Stevenson is trying to take us.
We touched a little on the Woolard review and its 26 proposals, and I hope that we will see a bit more of those. The noble Lord, Lord Holmes, touched on fintech. With the increase in open banking and the ability to look at individuals’ accounts, better and more detailed decisions can be made on how a product or a business moves on. My noble friend Lord Stevenson referred to the University of Edinburgh Business School report, which it carried out for Salad Projects, looking at the health and well-being of NHS workers who had applied for a loan. The report provides a unique insight into their financial lives, based on millions of individual transactions. What came out of that was information about their low financial resilience—the ability of those working in the NHS to deal with a financial shock to their lives. Often it was just a small shock, but they were unable to tap into the bank loans that many of us can take; they were forced into the high-cost credit loans market.
If we have the development and promotion of financial well-being, I hope we will see a reduction in those who are driven into that sector. This amendment will help to deliver that, but it does not preclude delivering that in schools or the workplace. The FCA is a powerful body that can help push it even further.
My Lords, I am delighted to support this group of amendments. I take this opportunity to pay tribute to the noble Lord, Lord Stevenson, and my noble friend Lord Holmes for their huge contribution to this field of financial inclusion. I single out the noble Lord, Lord Stevenson, not just for his role on the Front Bench but previously in chairing StepChange. He will be greatly missed from his Front-Bench responsibilities, and I am sure it will not be long before we see him return.
I also congratulate my noble friend Lord Holmes on being indefatigable in his campaigning for financial inclusion and bringing our attention to fintech. I join the authors of these amendments in identifying a need to address this issue, and I hope that my noble friend, in summing up, will answer this point. The noble Lord, Lord Stevenson, has asked for a high-level response, and I shall use that expression later—I like it. Perhaps we might get something more from my noble friend.
No less of an authority than “You and Yours”, of which I am an avid listener—I think there are two compulsory programmes we should listen to, one is that and the other, I have momentarily forgotten what it is, is the one that gives us all the figures and responses—spent the best part of a programme looking at credit ratings. What struck me is that often it is through no fault of an individual that they find that their credit rating has been so badly affected that they can no longer qualify for any credit. It can take months, if not years, to redress this.
I am concerned that if my understanding is correct Expedia is no longer acting for the Government in this regard. Can my noble friend confirm that we are down to two credit rating agencies? Do the Government share my concern that we should address this area of financial inclusion, financial awareness and each of us being aware of what our credit worthiness and credit ratings are? Amendments 8, 9 and 134 have identified issues that are worthy of attention in this Bill and I look forward to the response from the Minister.
My Lords, I have a lot of sympathy for the importance of inclusion. Financial services are clearly important to everyone, and I endorse the comments from my noble friend Lady Neville-Rolfe about the critical importance of financial education in achieving that. However, I have some difficulties with Amendment 8 on the definition of and requirement to consider financial well-being. Those reservations are similar to the ones that I expressed on Amendment 1 on the general duty of care.
Of course, the objective of well-run financial services companies is, and should be, to promote financial well-being. That is what their business is. That is the purpose of financial products. Financial services firms lend in order to allow people to buy houses and cars and to spread the purchases out over time. They help people to save in order to cover emergencies and to provide pensions in old age. They support businesses to help them create wealth. Financial well-being is the business of financial services companies. However, to impose a regulatory requirement to promote financial well-being runs the risk of extending the boundaries of what a regulated individual might be expected to do beyond what is reasonable to expect.
Despite the comments from the noble Lord, Lord McNicol, I am afraid that the amendment would create huge compliance costs and complexity. Of course, we need rules and regulations that protect consumers from unscrupulous firms that seek to exploit customers, but we should do that—as we do—through penalties for improper behaviour rather than by extending a general obligation on financial well-being. Having said that, I understand the motive behind it and I certainly support the objective of improving financial well-being through the financial services industry.
My Lords, I find the thrust of all three amendments in this group really interesting and worthy of thought. I would particularly have added my name, had I been fast enough, to Amendment 9 in the name of the noble Lord, Lord Holmes. I think that is a strong and very positive amendment. Parliament, financial institutions, regulators and civic society have been discussing financial inclusion for years, and all of us recognise that there has been some progress. The Government’s financial inclusion report of 2019 identified 1.23 million people without even a basic bank account. That is half of what it was about 15 years earlier, but I think we all know that it is still unacceptably high. I will say more about basic bank accounts in an amendment in my name in a later group, as I think there are some real issues there.
Debt management advice has significantly improved and much of our thanks is owed there to the noble Lord, Lord Stevenson, as other noble Lords have said. We will discuss amendments that would strengthen that in another group. The FCA has made changes to the high-cost credit market. Many of those changes both in the debt advice arena and the high-cost credit arena were not actually initiated by the regulator. They were driven by this House, and I think that this House deserves to take credit for recognising that need and for driving through what has been real and effective action.
However, the progress falls far short of expectations. The credit union sector in this country has not grown as hoped, and neither have the CDFIs—community development financial institutions. These two sectors are the backbone of financial inclusion in other countries around the world. A number of groups are seeking to implement new socially driven mutual banks, others are proposing fintech solutions, but the surge in new services once anticipated to eliminate financial exclusion is moving at a snail’s pace.
With Covid, the problem has become more acute. The FCA’s excellent Financial Lives 2020 survey, published recently, showed us how the problem is being aggravated. In February 2020, 10.7 million people were classed as having “low financial resilience”, down from 11.6 million three years earlier. However, by October 2020, that number had risen again—turning in the wrong direction—by an additional 3.5 million, and there were millions of others with limited financial resilience. The situation must be even worse today than in last October, and it will get worse as Covid pushes forward the switch to digital banking and bank branch closures accelerate—at least two have closed in my neighbourhood, and this must be true almost everywhere else. If you are financially excluded in today’s world, your options to improve your life and the lives of your family are constantly constrained.
The FCA has taken the view that, where financial businesses come up with new ideas to tackle financial inclusion, it will make sure that its regulation is appropriate. This is a difficult but important standard. However, the FCA has also taken the view that it is not its job to stimulate or incentivise new players to enter the market or to persuade existing players to initiate new approaches. The FCA would say—and I have had this conversation on multiple occasions—that that is the Treasury’s role.
I argue, as does the amendment from the noble Lord, Lord Holmes, that the FCA should be more proactive. Nobody is better placed than the FCA to drive the industry to close gaps in provision, especially in financial inclusion. We have seen regulators do it in the United States with the Community Reinvestment Act, which was originally a civil rights Bill but has had an extraordinary effect in making sure that there are community banks targeted at disadvantaged communities right across the United States. Numerous proposals have been put to the FCA over the years. I am not trying to fix on any one solution, but that change from passive to proactive really is necessary, and action is needed now.
My Lords, the noble Baroness, Lady McIntosh, mentioned that my noble friend Lord Stevenson has retired from the Front Bench, much to my personal disgust—because we are short of talent and he has a great deal of it. However, it is my duty to point out that the amendment he has proposed has the full support of the Labour Front Bench, although it touches on a subject that has terrified me for most of my life, although for no good reason.
The idea of poverty is very remote to most of us. When you think of the number of people who live in poverty, particularly in this crisis, in the areas where the support schemes have not worked properly, it is terrifying and difficult to understand how people survive. The problem with poverty is that the individuals involved lose their equity in society—they get to a point of having nothing to lose, and then we worry about the fact that they do not behave in the way we would like them to.
I was brought up in—how can I put it?—a low-income household, where we had probably the equivalent of the living wage, but it was not nearly as bad as today. First, I believe there is more financial inequality today. Secondly, employment among the working class in my youth and that of my parents was much more secure. Finally, it was a cash society. Whatever else you might say about cash, it is very easy to understand. In the non-cash society that we are drifting into—indeed, we are largely already in it—you can barely survive without a bank account. Creating basic bank accounts is very important but, whether we like it or not, many people will not understand the mechanisms. The situation of not working in cash means that it so much easier to spend money and to lose control of what your liabilities and payments are. Much as we may deride the jam-jar approach to running a domestic budget, it was easy to understand and, therefore, easy to manage.
Anyway, what can we do about inequality and security? That, of course, is the big issue in society; it has been in the past, it is particularly bad now, and it is something that we will probably be working on for the rest of our lives. However, we can do something about understanding society. I agree with the noble Baroness, Lady Neville-Rolfe, that this should start in school. I am a great believer that the curriculum on what one might loosely call citizenship should be much wider in many ways, and there is no question but that financial literacy and understanding should be part of it. This curriculum cannot be completed in school because you only really learn when you come across real-life challenges; so, after school, a concept of financial well-being is needed that will be part of the future world. I believe that these amendments could lead us strongly towards that better future.
My Lords, I welcome the opportunity presented by this group of amendments to discuss the importance of financial well-being and inclusion. The Government are proud of our strong record, and I know that making progress on these issues is a personal priority for both the Economic Secretary to the Treasury and the Minister for Pensions and Financial Inclusion. However, I recognise, of course, that there will be people who are struggling with their finances and need further support, particularly at this challenging time.
Given that these are probing amendments and given the invitation, at least from some, for a high-level response, I thought it would be helpful to set out briefly the Government’s approach, working closely with the FCA as well as a wide range of stakeholders, to promote financial inclusion and financial well-being in the UK. The Government produce an annual financial inclusion report; the most recent of these was published in November 2020, outlining our response to the Covid-19 pandemic as well as the progress we have made on issues such as access to affordable credit, support for credit unions and enhancing the use of financial technology. Since 2018, the Government have convened the biannual Financial Inclusion Policy Forum, bringing together key leaders from industry, charities, consumer groups and the FCA, as well as government Ministers, including the Economic Secretary to the Treasury, who was responsible for the passage of this Bill through the other place.
The Government also work with a number of stakeholders to promote people’s financial well-being. This includes engaging closely with the Money and Pensions Service, an arm’s-length body of government, which published its national financial well-being strategy in January last year. The strategy sets out its five agendas for change to improve the UK’s financial well-being over the next 10 years. This includes goals to increase the number of children and young people receiving financial education, to encourage saving, to reduce the use of credit to pay for essentials, to enhance access to affordable credit, to increase the number of people receiving debt advice and to support people to plan for later in life. Delivery plans will be published by the Money and Pensions Service later in the spring and the Government are supportive of this work.
The Government also work with Fair4All Finance, an independent organisation funded by £96 million from the government-backed dormant assets scheme, which was founded to improve the financial well-being of vulnerable consumers through increased access to fair and affordable financial products. To date, Fair4All Finance has focused on affordable credit and developed an affordable credit scale-up programme to help the sector develop a sustainable model for serving people in vulnerable circumstances.
The Government also work closely with the FCA, and I reassure the noble Lord, Lord McNicol, that the FCA is committed to improving the way that regulated firms treat vulnerable consumers. It is one of the FCA’s key areas of focus in its current business plan. Its rules ensure that the fair treatment of vulnerable consumers is required by firms and embedded into its policies and processes. I will give a couple of practical examples, as mentioned in previous groups. First, the FCA’s consultation on the fair treatment of vulnerable consumers closed in September 2020 and the FCA intends to publish further guidance on this matter imminently. Secondly, as discussed in the context of the amendments on a proposed duty of care, the FCA has announced that it will undertake further work to address any potential deficiencies in consumer protection, particularly by reviewing its principles for business. While the FCA delayed this work because of the pandemic, it aims to consult in the first quarter of 2021. I also assure the noble Lord that a number of other matters that he raised, such as the issue of buy now, pay later, will be discussed in subsequent groups of amendments.
I understand that these are probing amendments. I hope that noble Lords will take reassurance, from the measures that I have set out so far, of the Government’s commitment to this area and the commitment by the FCA from the work under way. However, as my noble friend Lady Neville-Rolfe has argued, the Government do not believe that further statutory duties on the FCA in this area is the right approach.
On the challenge of the noble Lord, Lord Stevenson, the Government see the value of considering the broader concept of financial well-being to include access to affordable credit and consumer protection, as well as financial education, as an important area for future work by the Government, the FCA and associated stakeholders.
I hope that the Government have demonstrated their commitment to taking this work forward, working closely with the FCA and a wide range of stakeholders, and that this provides sufficient reassurance to noble Lords of the Government’s commitment on this topic for them to withdraw their amendments.
I have received no requests to speak after the Minister, so I call the noble Lord, Lord Stevenson of Balmacara.
My Lords, I thank all noble Lords who have contributed to this debate. I am deeply embarrassed by all the personal comments and blushed to my roots, which I hope was not too obvious on screen. The noble Lord, Lord Holmes, rightly pointed out the excellent work being carried out by many other agencies and bodies in this area as well as StepChange. I completely endorse his comments; there is a lot of good work going on.
I normally find myself aligned very closely with the noble Baroness, Lady Neville-Rolfe—sometimes rather embarrassingly, given our respective party positions—but this time I seem to have completely confused her, for which I apologise. The noble Lord, Lord Blackwell, was right that there are two quite separate tracks here, as my noble friend Lord McNicol picked up on. One is setting up a regulatory environment within which more good behaviour and activity by firms enhances the overall capacity of the system to work well in terms of financial capability and well-being. The other is hoping for the wider context that is necessary for all this to happen—particularly starting with education, which is always a hard nut to crack. As the noble Lord rightly said, this could be picked up by employers, trade unions, wider agencies, anybody with an interest in seeing a holistic society using the non-cash elements that my noble friend Lord Tunnicliffe was so scared of but yet so sprightly embraced in his unique style.
We all must learn how to operate with new technologies and new operations. My children do not use cash; they have not used cash for 10 years. They are all flashing out ridiculously brightly coloured cards and seem to have a much better track on what they are spending and how well they are doing than I ever did. I completely admit that. However, that is no excuse for me—I must get up there and be part of that process. But there is a role for Government, there is definitely a role for the FCA and the regulator; there is a role for companies that want to go down that track and have the capacity to do so, but there is no fixed agenda for that yet.
I wanted to hear a high-level endorsement by the Minister that this was something worth exploring and working for. She has given that, and I am very grateful. We can see this as a burgeoning programme of work which might well surprise us all in terms of where it might reach and what it might do. We are all rightly trying to support it in a way that will be most appropriate. With that, I beg leave to withdraw the amendment.
Amendment 8 withdrawn.
Amendment 9 not moved.
Clause 1 agreed.
Schedule 1 agreed.
I remind Members to sanitise their desks and chairs before leaving the room.
Committee adjourned at 7.31pm.
My Lords, as set out in the register of interests, I declare shareholdings in Close Brothers, Hampden & Co and Ovington Investments—the last of which I have significant control over.
The financial services sector drives growth and generates millions of jobs in every corner of our country. It has secured our reputation as a dynamic and world-leading financial centre and it contributes vast sums to the public purse—money that has helped this Government support millions of individuals and business through the pandemic.
Now that we have left the European Union and begin our recovery from Covid-19, we commence a new chapter in the sector’s story. As the Chancellor set out in his wider vision for the UK’s financial services sector in November, we remain committed to ensuring that the UK maintains the highest regulatory standards and remains an open and dynamic global financial centre. This is even more important now that we have left the European Union. Having left, the UK must assume full responsibility for its financial services regulation. The Economic Secretary has assured the other place—as I can assure noble Lords—that this will be underpinned by an unwavering commitment to high-quality, agile and responsive regulation, with a focus on safe and stable markets.
There will inevitably be some areas where the UK will take an approach which better suits our markets. To capitalise on this opportunity, we will fundamentally review our financial services regulatory framework to ensure that it is fit for the future. A consultation on this is open as we speak. The Financial Services Bill should, therefore, be understood as a key part of a wider process—the important first step in taking back control of our financial services regulation. It does so in a way that delivers our international commitments, is consistent with the highest standards of regulation and provides certainty and clarity for this important sector.
The Bill has three overarching objectives: first, to enhance the UK’s world-leading prudential standards; secondly, to promote openness to international markets; and, thirdly, to maintain the effectiveness of the financial services regulatory framework and sound capital markets. I will briefly set out each of the Bill’s measures, and how they contribute to these objectives. Much of the content is highly technical. I will do my best to explain each measure, but we have provided detailed explanations of each measure in the Explanatory Notes.
The Bill intends to enhance the UK’s world-leading prudential standards and to protect financial stability. Clauses 1 and 2, together with Schedules 1 and 2, empower the Financial Conduct Authority—the FCA—to create a tailored prudential regime for investment firms. Investment firms are currently part of the same prudential regime as banks, even though they do not typically provide banking services and therefore do not pose the same risks to financial stability. This Bill will allow the FCA to set prudential requirements which are more appropriate for investment firms. The reforms are similar to changes being taken forward in the EU, which the UK strongly supported while we remained a member.
The UK’s financial services regulators have the technical expertise and market understanding necessary to set complex rules for firms. I thank the Delegated Powers and Regulatory Reform Committee for its work in scrutinising the Bill’s approach to the delegation of powers and welcome its conclusion that there was nothing necessary to draw to the attention of the House.
The regulators will also be guided by the statutory objectives established in the Financial Services and Markets Act. Their independence ensures that they will not be swayed by political considerations. This Bill introduces a new accountability framework. It will require the FCA to consider the most significant public policy issues relevant to the regime, including the UK’s international competitiveness, and publicly report on how consideration of these factors has affected its rules. In addition to the existing accountability mechanisms in the Financial Services and Markets Act, this will allow Parliament to scrutinise the work of the regulators.
This approach aligns with suggestions made by the EU Financial Affairs Sub-Committee to the Chancellor in March last year, when it recommended giving the UK’s regulatory regime more flexibility. However, I can reassure noble Lords that systemically important investment firms and all banks will remain subject to internationally agreed prudential standards, namely the Basel banking standards. Clauses 3 to 7, along with Schedules 3 and 4, will enable the prudential regulatory regime for these firms to be updated in line with the latest Basel standards, endorsed by the G20. This will build on the existing regime and increase the UK’s resilience to economic shocks, meeting our international commitments to protect the global financial system. In a similar way to the prudential regime for investment firms, responsibility for making the detailed firm-facing rules will be delegated, in this case to the Prudential Regulation Authority. This will also be subject to a new accountability framework.
As noble Lords will be aware, promoting financial stability goes wider than prudential regulation. The Libor benchmark is referenced in upwards of $400 trillion-worth of contracts across the financial system and beyond—from complex derivatives to household mortgages. I am sure that noble Lords will recall the Libor scandal of 2012, which saw many banks attempt to manipulate the Libor benchmark for their own gain. Since then, significant improvements have been made to the administration of the Libor benchmark by its administrator, and to the regulation of benchmarks in the UK. This is in part due to the important work of the Parliamentary Commission on Banking Standards, which includes a number of Members of this House.
The Financial Stability Board—the international body that monitors the health of global financial markets—has made it clear that the continued use of certain interest rate benchmarks such as Libor represents a potentially serious source of systemic risk. The decline of the inter-bank lending market has meant that Libor and other similar benchmarks are increasingly reliant on the judgments of panel banks, rather than on actual transactions. The FCA’s voluntary agreement with the Libor panel banks, requiring them to continue contributing to the benchmark, so preventing the premature collapse of Libor, will expire at the end of this year. After this point, there is a risk that Libor will become unrepresentative, which may cause disruption. Clauses 8 to 19, and Clause 21, along with Schedule 5, give the FCA the powers it needs to oversee the orderly wind-down of critical benchmarks—including Libor—thereby reducing significant risks to market stability. This includes powers to provide for the continuity of Libor for those contracts which are unable to transition away from it. Alongside this, clause 20 will extend the transitional period for benchmarks with non-UK administrators from the end of 2022 to the end of 2025.
I turn to the Bill’s second objective: to promote openness to overseas markets. Clauses 22 and 23, together with Schedules 6 to 8, establish a framework to provide and effectively maintain long-term market access between the UK and Gibraltar for financial services firms, now that we have both left the EU. This delivers on a ministerial commitment made to Gibraltar and recognises our special, historic relationship. The arrangements will preserve Gibraltar’s regulatory autonomy and enable it to choose where it wishes to access the UK market, on a basis of alignment and co-operation.
Clauses 24 to 26, together with Schedule 9, simplify the process under which overseas investment funds obtain permission to be marketed in the UK. These changes will supplement the current regime, which requires the FCA to assess every individual fund. The changes will introduce a system under which the Treasury can determine whether a specific category of funds from another country has equivalent regulatory standards to those in the UK. This means that funds in this group wishing to market in the UK can undergo a simpler process, due to the confidence provided by the equivalent regulatory standards of their home country. This will increase choice for UK investors and maintain the UK’s position as a centre of asset management. The current regime will remain in place for overseas funds located in countries which have not been found equivalent. Clause 27 and Schedule 10 amend markets in financial instruments regulations to update the equivalence provisions for investment firms based outside the UK.
The Bill’s third objective is to maintain the effectiveness of the financial services regulatory framework and sound capital markets. Clause 28 introduces a streamlined process for the FCA to remove an inactive firm’s authorisation and position on the public register. This will improve the accuracy of the register and reduce the risk of fraud. Clause 29 will make small changes to market abuse regulations to make the regime more effective while reducing some of the administrative burden on firms. Clause 30 raises the maximum sentence for criminal market abuse from seven to 10 years, bringing it into line with other economic crimes.
I would like to pause at Clauses 31 and 32, along with Schedule 12. These clauses were added by the Government by amendment in the other place.
It has recently become clear that some provisions in the Proceeds of Crime Act 2002 are creating challenges for some e-money institutions and payment institutions, such as Revolut, Worldpay and TransferWise. They currently need to submit a defence against money laundering request to the National Crime Agency to seek consent before proceeding with any transaction where there is suspicion of money laundering, however small. Standard banks do not have this administrative burden. In certain circumstances they are exempt from submitting a request for transactions under £250.
The £250 threshold exemption was originally introduced to allow those with frozen accounts to pay for their day-to-day living expenses. While the transactions may be under suspicion, these low-value reports provide little useful information for law enforcement, so processing them is not a good use of resources. E-money and payment institutions must submit a large number of these requests for low-value transactions. This is burdensome and, again, a poor use of law enforcement’s time and resources. This Bill therefore equalises the treatment of banks and payment and e-money institutions in this respect. Importantly, e-money and payment institutions will still be required to submit reports of suspicious activity to law enforcement.
Similarly, we have expanded the scope of account freezing and forfeiture powers in the Proceeds of Crime Act 2002 and the Anti-Terrorism, Crime and Security Act 2001 to include accounts held at payment and e-money institutions. This will ensure that law enforcement agencies are able to quickly and effectively freeze, and activate forfeiture of, the proceeds of crime and terrorist property when held in payment and e-money institution accounts; this mirrors their existing powers with banks.
Clause 33 will ensure the continuation of existing powers assigned to HMRC to access information on who really owns and benefits from overseas trusts with links to the UK. The Government are also taking proportionate and effective action elsewhere to prevent the misuse of these trusts, including recent changes expanding the requirement for non-UK trusts to register with the HMRC trust registration service.
The Bill underlines the Government’s commitment to helping people in debt rebuild their finances. Clause 34 gives the Government the full range of powers they need to effectively implement statutory debt repayment plans, part of the Government’s breathing space debt respite scheme. These changes will mean creditors can be compelled to accept different repayment terms. They will also allow for the administration of the scheme and repayment plans to be funded by a charging mechanism and will allow debts owed to the Government to be included in a statutory debt repayment plan. This will support the Government’s work to ensure that those in problem debt can make repayments to a manageable timetable.
Clause 35 relates to the Help to Save scheme, which supports those on low incomes to build up savings. Help to Save accounts have a four-year term, during which the Government pay a bonus of 50% on up to £50 of monthly savings. At the end of the four years, customers will be asked to provide instructions about where they want their savings transferred to. This clause gives the Government the power to introduce successor accounts for Help to Save customers who do not provide instructions in future, where this is necessary. For now, the Government propose to support these disengaged customers by transferring their savings into the same account where the bonus has been paid, reuniting these customers with their savings.
Clause 36 makes amendments to the packaged retail and insurance-based investment products regulation, known as the PRIIPS regulation. This EU regulation has been widely criticised for its potential to mislead consumers. The Bill will allow the FCA to clarify the scope of the regulation, addressing significant uncertainty that exists now, along with some other helpful changes.
Clause 37 finalises reforms to the European market infrastructure regulation, which the UK supported as a member state. Clause 38 confirms the legal effectiveness of the financial collateral arrangements regulations and makes associated amendments to the Banking Act 2009. Finally, Clause 39 will make the appointment of the chief executive of the Financial Conduct Authority subject to a fixed five-year term, able to be renewed once. This is in line with other high-profile roles in the financial services regulation field.
In summary, this Bill is a necessary and important step in ensuring that our financial services regulatory framework delivers for the UK now that we have left the European Union and the transition period is over. It forms part of a wider programme of regulatory reform that will be guided by what is right for the UK’s financial services industry. It will support economic prosperity across the country, ensure financial stability, market integrity and consumer protection. It will ensure that the UK remains a world-class financial centre. I beg to move.
My Lords, I thank the Minister for his remarks. I do not oppose the principle behind the Bill, because, like all noble Lords, no doubt, I recognise the need for post-Brexit stability in financial regulation. The Bill is a mass of detail and the Minister has gone to some lengths to go through it. I confess that it does remind me somewhat of a Christmas tree, with little packages all over the place, some of them no doubt previously stored in various government departments—particularly the Treasury —waiting for an appropriate legislative tree on which to hang them.
Leaving that aside, the Bill occurs, as the Minister said, at an important moment for the country’s economy and our financial services industry. As the Minister in the Commons said:
“Our financial services sector is critical to our national effort to recover from the impacts of Covid-19 and move towards a resilient, open and sustainable future for the UK economy.” [Official Report, Commons, 13/1/2; col. 357.]
I agree with that, but he stressed the pandemic and we all know that it is more than just a response to Covid. As the Minister said, the Bill is an essential part of the effort to improve the UK’s regulatory framework for financial services following the end of the Brexit transition period.
As regards our future post-Brexit development, only time will tell, but the early signs do not augur well. Only this month, we approved the post-Brexit trade and co-operation agreement, but, for financial services, this is basically a no-deal agreement. Within a few days of the agreement, £6 billion-worth of euro- denominated share trading shifted from London to European exchanges.
Of course, the express intention of the Government is to secure a memorandum of understanding on financial services by March, and the ambition for regulatory alignment where appropriate. We should have no illusions how difficult that might prove. Only this week, the noble Lord, Lord Hill, a former EU Financial Services Commissioner and a former Minister leading the Government’s review into the City, has confirmed what many of us have long known. He warned that Brussels is targeting London’s position as a global financial services centre and predicted that the EU will not grant British-based firms the highly prized access they are seeking to the European market. It was not in Brussels’ interests, he said, to allow London to continue to dominate the European financial market in the way it did before Brexit. He continued:
“Given that their strategy is to build up the EU, why on earth would they?”
Why, indeed? We should not be surprised then that, so far as we now know, Brussels has granted the UK time-limited equivalence on only two of the roughly 40 different financial areas where London is seeking market access. The EU has, of course, given no further indication on when it will take more equivalence decisions.
I am afraid that the way the Government approached the Brexit negotiations means that there is now no incentive for the EU to agree equivalence arrangements, because their absence means jobs and trading formerly done in London migrating to the EU. Why do I mention this? Herein lies the paradox: the Bill is part of a process aimed at increasing our competitive edge, including vis-à-vis the European Union, but in our present, post-Brexit circumstances any move by the UK to enhance the City’s competitive edge is likely to lessen the chances of progress on equivalence in the EU and the market access that comes with it.
There are, of course, aspects of the Bill that we welcome. I welcome the preliminary agreement between Gibraltar, the UK and Spain, which the Minister mentioned, and look forward to further detail following review by the European Commission. This is of importance to our whole financial sector, not least to our insurance industry.
I also welcome the moves that have been made to tighten up the fight against crime, money laundering and fraud, but equally I wonder, despite the passage of this legislation, how that struggle against criminality will have been affected by the loss of 400,000 records from our criminal database. That has been a disaster that will overrule many of the measures in this Bill.
There are some strange and disappointing omissions from the Bill. I will mention only one, but it is significant. The UK financial services sector has a key role to play in empowering the changes that we need to make to preserve the planet for future generations. But the Bill, which empowers the regulators in so many other ways, is totally silent on that critical issue. The Government say they want the UK to be the centre for green finance globally. Why then, in their first major piece of legislation on this sector since we left the EU, do they say nothing about instructing the regulators to make that a part of their objectives? I hope that the Minister can respond to this.
Of course, the private investment sector is making strong moves towards greater environmental investing, and there is growth in public demand for these products. But this cannot be done by the private sector alone. It will take both the private sector and the public sector working together and pulling in the same direction. I wish the Bill well in its intent, but I fear that it will fall far short of its aims.
My Lords, I shall focus my remarks chiefly on Clauses 3 and 5, and on Schedule 3. Before I do so, I should congratulate the Government on the speed with which they are addressing the matter of Gibraltar’s financial services industry. The Bill has 183 pages, and over 50 of them are devoted to Gibraltar.
With two important and welcome exceptions—debt respite and Help to Save—the rest of the Bill deals with technical and complex matters. In doing so, it raises profound questions about parliamentary scrutiny and the desirability of embodying an international competitive element in our financial services regimes.
Clauses 3 and 5 contain provisions to allow the PRA and the FCA effectively to make law by making rules without any parliamentary scrutiny. Clause 3 lists the provisions of the CRR that the Treasury may revoke by regulation. The list runs to 42 items, all of them significant. Clause 3(4) makes these revocations conditional on their being or having been adequately replaced by general rules made or to be made by the PRA, or to be replaced by nothing at all if the Treasury thinks that is okay. As things stand, it looks as though the Treasury is the sole judge of what may or may not be an adequate replacement. In any event, Parliament is bypassed. There is no provision for parliamentary scrutiny of these new rules, which have the force of law, but these rules can and will reshape critically important parts of our financial services regimes. Clause 5 takes the same lawmaking-by-rule approach to the regulation of credit institutions. Again, there will be no parliamentary scrutiny of these rules.
The Government have acknowledged the need for a discussion about the role of parliamentary scrutiny in the post-Brexit repatriation of powers previously exercised by the EU directly to our regulators without stopping en route at our Parliament. In March of last year, the EU Sub-Committee on financial services, of which I was chair, wrote to the Government about the issue, as the Minister has mentioned. In his response, the Economic Secretary to the Treasury noted that we had highlighted that
“delegating more powers to the financial regulators will require enhanced parliamentary oversight of their activities.”
There is now an open Treasury consultation on the future of financial services. The call for evidence in this consultation contains 17 key questions. Three of these relate to the issue of parliamentary scrutiny. They are: through what legislative mechanism should new financial regulations be made?; what role does Parliament have to play in influencing new financial services regulations?; how should new UK financial regulations be scrutinised? The consultation closes on 18 February. In practice, it means that the Bill will have left this House by the time the consultation results are available to us. In any case, HMT has indicated that the results will inform yet another consultation, later in 2021, in which the Government will set out a package of proposals. By that time, of course, the provisions in this Bill will have become law and there will no longer be an opportunity for real parliamentary scrutiny of the legally binding rules they will generate.
The Minister emphasised in his closing remarks on Report in the Commons that this Bill is
“just one part of the wider long-term strategy for financial services.”—[Official Report, Commons, 13/1/2021; col. 398.]
Given the narrow and technical scope of the current contents of this Bill, I was glad to hear that, and take it to mean that a second and more comprehensive financial services Bill is in prospect. But the fact is that, by the time we get round to that, the “making laws by rulemaking” procedure will have passed into law. Parliamentary scrutiny of the new rules as laws will have been avoided. We will want to return at later stages to the question of what we can do about this bypassing of Parliament in such critical areas.
I turn briefly to Schedule 3 and the insertion of new Part 9D into the already overloaded and much-amended FSMA 2000, and in particular to new subsection 1(b) of Clause 144C. This seemingly innocuous subsection could bring about radical change in our regulatory regimes. It introduces as a “have regard” in the PRA’s making of CRR rules the notion of international competitiveness for our regimes. This is a highly contested area and the idea has been opposed by many leading figures, including from the party opposite, as being likely to promote conflicts of interest. We will want to examine this in detail at later stages.
During the passage of the Bill through the Commons, there was some discussion of more directly consumer-facing measures. These included imposing a duty of care on the financial services industry and providing significantly more relief for those mortgage prisoners trapped by the Treasury’s dereliction and carelessness in selling on mortgage books to unregulated entities. We will want to return to these issues later in our consideration of the Bill.
We will also want to discuss extending the FCA’s perimeter to take in more of the SME lending market. This is particularly urgent given the terrible position that many SMEs find themselves in as a result of Brexit and Covid-19. We will also want to debate the issue of preserving access to cash in the Covid and post-Covid world. I look forward to the Minister’s reply and to our future debates.
My Lords, I draw attention to my directorship of OakNorth International and my membership of the international advisory board of Nomura, both of them banks.
It is a privilege to address your Lordships’ House for the first time. It may be only 100 yards from the other place, but it is a very different place. I am extremely grateful to the officers and staff of the House and to my supporters, my noble friends Lord Moynihan and Lord Barwell, for their welcome and assistance as I navigate the customs and practices—and indeed the corridors—of this place. I am delighted to be making this speech from the Government Benches, having momentarily mislaid the Conservative whip during the last few weeks of my 22-year career in the Commons.
The title of Lord Hammond of Runnymede may speak to the wider world of the ancient roots of our democracy and of the origins of the rule of law, but, for me, it will always recall the privilege of representing the people of Runnymede and Weybridge, sharing their problems, challenges and triumphs over more than two decades.
My Back-Bench career in the other place was short. The year 1997 was rather like the day after the battle of the Somme in the parliamentary Conservative Party. The general staff was in disarray, the officer corps decimated and new recruits like myself were being promoted in the field; thus began my 12-year apprenticeship on the Opposition Front Bench, before entering the Government in 2010, where I had the privilege to lead four great departments of state, each remarkable in its own different way.
I arrived at the Department for Transport with a single clear instruction: get HS2 built. As an immediate former shadow Chief Secretary, I approached this task with a degree of scepticism, but quickly became a convert to the potential of high-speed rail to change the facts of economic geography, as the original railway had changed Victorian England, and to play a key role in rebalancing the UK economy.
I moved on to defence in the dying days of the Libya campaign of 2011. The MoD is an extraordinary place, a military headquarters as well as a department of state. It is shaped by its unique blend of civilian and uniformed staff and the ethos of the Armed Forces that pervades it. It was an enormous privilege to work with it through a period of managed withdrawal from Afghanistan and majoring restructuring at home as we reconfigured the department and delivered a balanced Budget for the first time in a decade.
In July 2014, my next move was across the road to the grandeur of the FCO and by far the best office in Whitehall. I say to noble Lords that it is not for nothing that successive Foreign Secretaries have gone to extraordinary lengths to ensure that Prime Ministers do not enter that room. In two years as Foreign Secretary, I made 104 overseas visits to 78 countries, gaining an invaluable insight into how others see us and our contribution to their histories—for better or for worse, there are remarkably few in whose histories we have not played a role of some kind. What I learned is how much importance our many friends attach to the characteristics, structures and institutions that define our nation and of which we sometimes appear to be so careless.
In July 2016, my final move was to No. 11. As the guardian of Britain’s economic and fiscal interests, it is hardly surprising that, whatever the political arguments, the Treasury saw Brexit primarily as a threat to the UK’s economic success story. With storm clouds gathering over the economy and uncertainty rife, I set myself a four-point plan: first, to complete the rebuilding of our public finances as a bulwark against the next crisis, little guessing that the next crisis would come so soon; secondly, to soften the economic blow of exiting the single market by securing a transition period, which is uncontroversial now but was a heretical notion in the Brexit-intoxicated days of autumn 2016; thirdly, to shift the balance of public spending, albeit gently, from consumption to investment as part of a plan to unlock the productivity riddle that has bedevilled the British economy since the Second World War; and, finally, to protect our vital financial services industry, which despite the Treasury’s sometimes expansive view of its role is actually the only sector for which it has direct responsibility. That brings me neatly to the Bill.
I strongly support all the objectives that the Government have set out for the Bill, making it an ideal vehicle for a maiden speech by someone who has so recently recovered the Whip. I want to take the opportunity to note the importance of financial services not just to London but to the whole UK economy—it provides 7% of our GDP, 11% of tax revenues and millions of jobs across the length and breadth of Britain—to plead, even at this late stage, for a greater focus on it in our ongoing discussions with the EU and to suggest the inclusion of a duty on our regulators to promote competitiveness as some other countries have done. I hope that it will be the first of many measures designed to reinforce the stability and competitiveness of UK financial services as they absorb the challenge of what, for them, is a no-deal Brexit and the inevitable, albeit gradual, loss of EU business.
I enjoyed every minute of my nine years in Cabinet and I learned much from the many extraordinary people I encountered on my journey. I hope that the experience that I have gained leading four great departments of state will qualify me to contribute to your Lordships’ debates over the years to come.
My Lords, I first draw attention to my interests as set out in the register and I congratulate my noble friend Lord Hammond of Runnymede on a maiden speech of great breadth and insight, which served to underline what a considerable asset he is going to be to these Benches in particular and to this House more widely. As my noble friend reminded us, he has served with distinction in a number of departments, culminating in his time as Chancellor of the Exchequer. How right he was to point out huge sectors of our economy, in particular financial services, where we are not in the business of finessing a new relationship with the European Union but are yet to ensure that there are any arrangements at all. When my noble friend speaks on economic matters, he does so with rare authority and I look forward to hearing much more from him.
There is one specific point that I would like to develop in my remarks today. The Financial Services and Markets Act 2000—FiSMA—set out four objectives for the Financial Services Authority, the FSA, as it then was: market confidence, public awareness, the protection of consumers and the reduction of financial crime. In addition, the FSA was required to have regard to a number of other factors, including efficiency, proportionality, innovation and
“the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom.”
The Financial Services Act 2012, in response to the 2008 banking crisis, removed that requirement because it was argued that it had served to dilute the robustness of regulation. This argument was founded on an entirely false dichotomy between effective regulation and international competitiveness, for the truth is that a robust, respected and proportionate regulatory regime is an intrinsic part of the UK’s competitive advantage in financial services. We now have the future regulatory framework review. In its phase 2 consultation paper, which I happen to have with me, the Government acknowledged this:
“A gap in the original FiSMA model is that, while it set high-level general objectives and principles, it did not provide for government and Parliament to set the policy approach for specific areas of financial services regulation.”
A partial move towards more activity-specific regulation is seemingly adumbrated in Schedule 3 to the Bill, which has been referred to by the noble Lord, Lord Sharkey. This would require the PRA, when considering capital requirements regulation, to have regard to
“the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities.”
A similar obligation is to be imposed on the FCA when making Part 9C rules in relation to internationally active investment firms. So competitiveness is edging slowly and surely back into the picture sector by sector and it is a process that I believe many of us want to see accelerate in the months ahead. I also hope that the Government will now come forward with a clear action plan to establish the UK not only as the world centre for broking—that is to say, the selling of insurance and reinsurance—but as the natural home for insurers and reinsurers.
I warmly welcome the Bill because it suggests a direction of travel that will deliver the high-quality, agile and responsive regulation that we need, putting the UK at the forefront of the world market in terms of competitiveness, consumer protection and innovation.
My Lords, I declare my interest as an ambassador and former president of the Money Advice Trust, the charity which runs National Debtline and Business Debtline. I, too, congratulate the noble Lord, Lord Hammond, on his excellent maiden speech, and look forward later on to the second maiden speech in this debate, from my noble friend Lady Shafik.
I comment first on Clause 34 in relation to the debt respite scheme and, in particular, statutory debt repayment plans. I am delighted that the first element of the debt respite scheme, Breathing Space, is coming into force on 4 May this year. This will give people in debt much needed protection while they seek debt advice. But it is vital now that the Government prioritise the introduction of the second element of the scheme, which is statutory debt repayment plans—SDRPs. They have never been more needed than now, in the wake of Covid-19, and I hope the Government will set out a clear timetable for their implementation.
After all, there is a great deal of agreement on their merits. They will ensure that people who are repaying their debts in full, but who need to do so in an affordable way over a manageable period, will receive binding, legal protection from creditor action and from having additional interest, fees and charges added to their debts. Crucially, public sector creditors—including local authorities and central government—are included in the scheme, and I commend the Government for taking this step. When the Government first consulted on introducing SDRPs in 2018, no one could have foreseen where we would be today, in 2021, facing the severe financial impact of a pandemic, but it is clear now that SDRPs can be a key part of helping households to recover from the financial impact of the outbreak.
I would like to illustrate with one very quick example. Imagine a couple, with two children—one of them furloughed, the other with their hours cut. They struggle to cover their bills and miss a few council tax payments. Being at home with the children more than usual means their energy bill is higher than expected, so arrears build up. They have a mortgage and some outstanding consumer credit debts too. Despite getting an initial payment break on these, this has now expired. Fast forward a few months and, promisingly, they have returned to work and their income has stabilised. They can afford to make some payments towards their debts every month, but not enough to meet their obligations in full. As a result, the council starts enforcement proceedings to recover the arrears, and the energy company wants paying too. This couple will be able to repay their debts in full, but they need time. They need an option to do so affordably without being chased for more than they can pay or having extra fees or charges added. This is exactly what a statutory debt repayment plan would offer them, and it would stop their temporary financial difficulty growing into a bigger debt problem.
Of course, it is understandable that some time will be needed to pass regulations and ensure the necessary infrastructure is in place to introduce these repayment plans, but I hope that the Minister can assure the House that this will be an absolute priority for the Treasury. I ask the Minister to ensure that the Government set out a firm timetable for introducing the new plans.
I turn very briefly now to another important issue that I hope the Government will consider as the Bill progresses through this House. The Bill considers future regulation and rightly highlights the importance of maintaining high consumer protection standards. One area of current concern is that of “imposter” or “clone” websites which pose as legitimate free debt advice charities. Of course, the National Debtline or StepChange actually are free debt advice charities, but these imposter websites can be highly convincing and can mean individuals end up thinking they are speaking to a free debt advice charity when they are not. They may end up in inappropriate debt solutions or being charged significant fees. Will the Government use the Bill to close the regulatory loophole that allows this to happen by bringing forward an amendment to bring the activity of introducing an individual to a debt advice or debt solution service within the FCA’s regulatory remit?
Given the financial impact of Covid-19, it is more important than ever that people are offered safe routes out of debt, and I hope the Government will continue to make this a priority, through this Bill and elsewhere.
My Lords, it is right to underline the importance of the financial services sector in our country and the huge contribution it makes. There are many laudable things in this Bill: the strengthening of money laundering regulations; encouraging saving; and the creation of parity between white collar crimes, such as market manipulation, and general fraud by extending the maximum sentence.
I was disappointed, however, to hear that the Commons amendment exploring the whole issue of ethical investment with reference to genocide did not make it into the Bill. I understand the Government’s reservation—they do not want to politicise the FCA. Nevertheless, I hope that “global Britain”, as laid out by the intentions of the Bill, will also be very much “ethical Britain” as we place ourselves in the world under the new freedoms that we have. I also note, with other noble Lords, the concern that there seems to be so little clarity on the question of parliamentary scrutiny. I am sure we will return to this as the Bill passes through your Lordships’ House. Of course, fundamental to this whole future is that the FCA is adequately resourced to fulfil its task.
I touch on just one major issue, which takes up a major part of the Bill: the Gibraltar authorisation regime. The issue of Gibraltar’s lower corporation tax rate of 10% was raised during the Commons Report stage as a significant issue, and it is one that warrants raising again. During his evidence session, the Minister said that corporation tax rate was not a factor in relocation to Gibraltar. While I recognise that relocation can be costly and that operating in London has many benefits not offered by Gibraltar, nevertheless there are significant tax advantages.
This has become all too clear in another area of work that I have raised repeatedly in your Lordships’ House—the issue of the tax avoidance of many companies, including gambling firms, which are a particular focus I have had. For example, in 2019, the Daily Mail revealed that 32Red, based in Gibraltar, paid just £812,000 in corporation tax over a 10-year period—an effective UK tax rate of 3%. William Hill, with its six subsidiaries in Gibraltar, is expected to pay 12% in corporation tax in 2020. Ladbrokes Coral is not required to disclose its tax rate, but one of its two licences to operate in the UK is registered in Gibraltar. While these relate particularly to a very focused area of my interests, of course this mechanism applies equally to financial firms.
These arrangements predate our departure from the EU and, given the likelihood that Gibraltar continues to be used in this matter, I am not placing the blame on this new Financial Services Bill. However, during the progress of this Bill, there will be an opportunity to examine again what the appropriate rules would be, particularly within the financial sector, to prevent Gibraltar being simply a place where firms and companies are reducing their tax bill. Will the UK Government commit to publishing an annual report assessing the consequences of the Gibraltar authorisation regime on tax receipts from the financial industry, as well as outlining how they intend to work with the Gibraltarian authorities to ensure there is a fair tax settlement for both territories?
My Lords, it is a great pleasure indeed to welcome my noble friend Lord Hammond of Runnymede to this House and to congratulate him on his excellent speech. Runnymede is, of course, a place where a bunch of irate barons got together, incensed by high levels of tax they were having to pay to fund the war with France. Disgruntled Peers, cross about the impact that relations with Europe were having on their nation—not much changes, does it?
I turn to the matter in hand and draw your Lordships’ attention to my entry in the register of interests. As has been said, the Bill arrives in this House at a key juncture for the UK’s financial services sector. In the post-Brexit world, it is more critical than ever that we keep our financial services competitive, as others have said, and remain a globally competitive financial centre. Some may think that the best way to do that is to ensure that our regulations remain, as far as possible, aligned to the EU’s. That approach overall would be unwise and unrealistic. It would be unwise because it is in our national interest to chart our own course for our financial services sector—a goose that lays so many of our golden eggs. The approach would be unrealistic because the EU wants to build up its own financial services and therefore, in the words of my noble friend Lord Hill, whom the noble Lord, Lord Reid, quoted a moment ago, the EU will not seek to do us any favours. We would soon find out that our interests and those of our EU friends would be at odds.
Instead, we need to have the confidence that comes from the City being—to quote Mark Carney—the EU’s investment banker and a global financial epicentre that existed well before the European Union was dreamt of. We need to look to a future that is green, a future that is digital and a future that is full of opportunities. We must strengthen our position in this new world. To achieve that, Ministers and regulators must focus on how our regulatory system can help to strengthen our competitiveness. As my noble friend Lord Hunt has just said, competitiveness was one of the regulator’s objectives but was removed after the financial crash and, as has been mentioned, the Government are now consulting on whether to reinsert competitiveness as an objective. It is a pity that that consultation is still underway, given its relevance to the Bill. I will be pressing the Minister on that point.
Of course—let me make this very clear—we should not forget the lessons that we learnt from 2008, nor should we race to the bottom in terms of regulations. Robust regulation is the bedrock of strong financial services but we must not get trapped in the past and regulate entirely via the rear-view mirror. Look overseas: regulators’ objectives have been adjusted since the financial crisis but without abandoning competitiveness altogether. Australia, Singapore, Hong Kong, Japan and Malaysia have competitiveness or growth as a regulatory objective or principle.
We need to look ahead and plan ahead. We must properly balance the need for stability with the need to be competitive so that the UK is innovative, dynamic and a great place to do business. I do not agree with the false choice contained in the Government’s consultation, which states that,
“a new competitiveness objective could distract from or dilute the key stability, market integrity and consumer protection objectives.”
We can and should strive to be both competitive and stable as a financial centre. Nor is the new so-called accountability framework sufficient. Requiring the PRA to consider the impact of its actions on competitiveness is no substitute for making competitiveness a core objective.
That brings me to the issue of accountability and scrutiny. Our regulators are getting more power and the Government are perfectly open about that. They have stated that they are,
“delegating a very substantial level of policy responsibility to the UK financial services regulators.”
If regulators are being given additional powers, there should surely be a commensurate increase in scrutiny. I therefore argue and agree with others that we need to look carefully at how regulators will be scrutinised by Parliament. Of course, getting the balance right is critical but we do not want Ministers or Parliament micromanaging regulators. There are questions as to whether enough is being done to hold unelected regulators to account.
That brings me back to where I began. The best way for Parliament to make regulators accountable is for elected MPs to set unelected regulators very clear objectives. At the moment, those objectives will not achieve our aim to strengthen our competitiveness. That needs to be addressed.
My Lords, I congratulate the noble Lord, Lord Hammond, on his maiden speech. I particularly welcome his entry to the House because I am also an unapologetic fan of spreadsheets. The Bill is necessary, of course, consequent on leaving the European Union. To a large extent, it is intended simply to replace what we had before but it provides the opportunity to go further, as we have been promised. I shall mention a couple of points that I hope we can pursue in more detail in Committee.
First, there is the Financial Conduct Authority. I do not have enough time at this stage to go into any detail but I want to put down a marker, that the FCA has failed too often in the past and simply has to do better in future. In the Bill, Clause 39 deals with the appointment of the chief executive. What is required here is clearer and greater accountability, and I would argue that Parliament has a crucial role there.
Secondly, Clause 34 relates to the debt respite scheme. I support debt respite, particularly given the situation in which we find ourselves, and I support the remarks of the noble Baroness, Lady Coussins. However, the proposals in the Bill totally lack ambition, given the scale of the problems we face. We need to understand that while debt has a personal impact, ruining lives and leading to much misery, it also affects us all by acting as a drag on the economy and the recovery that is so desperately needed.
There should be a modern debt jubilee—that is, a comprehensive package of debt cancellations targeted at the household sector. We need, in effect, a debt write-off for households, broadly along the lines established for the financial sector 12 years ago. We were told then that some banks were too big to fail because of the harm that it would cause to the economy. I argue that the failure of individuals because of debt means as much, or even greater, harm for us all.
That is not such a radical proposal. The ancient kings, under the Mosaic law, would announce debt forgiveness for their people so that they could start anew. Traditionally, that would be every 50 years, hence the jubilee. It is crucial to understand that those rulers were not being idealistic or kind in forgiving debts; in fact, they were being very practical. If the economic imbalance was not reset, there was a danger that their kingdom would fall. The main argument for such a scheme, therefore, is that in addition to relieving much individual misery it would provide a direct and targeted macroeconomic boost to the economy, exactly where it is needed. Relieving household debt would generate economic growth in the same way as a tax cut would, but it would be better targeted, allowing people to keep more of their income as pounds in their pockets. The money would flow into consumption, savings or investment, rather than into debt repayment.
There will, of course, be concern that cancelling any debts, even those debts long-abandoned by the lender, will punish the prudent and reward the profligate. That is to misunderstand how the credit system functions and how retail financial markets operate. It is hard to believe that a debt write-off will cause greater harm to those who are unaffected by indebtedness than it will benefit those who are already struggling. The beneficial effects will come to us all. Abolishing household debt, starting with the most pernicious and harmful, will generate gains that are generalised and distributed across the people of the UK as a whole.
As noble Lords will be aware, plans are already being made to celebrate one jubilee next year. Let us also plan a jubilee that will assist not just those among us who are the hardest pressed in our society but all of us. How far we can go towards such an objective in the context of the Bill, I hope we can explore in Committee.
My Lords, it is a pleasure to take part in this Second Reading. I declare my interests as set out in the register. It is greater pleasure to congratulate my noble friend Lord Hammond of Runnymede on his exquisite maiden speech. In it, I think the whole House heard that he is so much more than the misnomic “Spreadsheet Phil”. We have a real heavyweight in our midst, and I very much look forward to his future contributions on economic matters and so much more.
I would like to cover the areas of financial technology, or fintech, financial inclusion, or fininc, and the international perspective. Fintech is a great British success story, but we are slipping. The FCA sandbox was world-leading in its time and its great success demonstrated in how it has been copied around the world. Does the Minister agree that we need to update the sandbox to enable it to be available to all comers at all times rather than just those who are first in class? Does he agree that, in a sense, we need to industrialise the sandbox? Does he also agree that we need, for want of a better phrase, a growth box to address the scale-up challenge facing our fintechs? Does he have some early learnings from the City of London and FCA’s proof of concept around the digibox? It is early, I know, but there may be learnings that we can take into Committee and Report of this Bill.
Similarly, I would like to touch on crypto. The UK could be a world leader in crypto assets. Are we going to look to emulate MICA, do more than MICA or do something different? Similarly, we could be a world leader in setting the taxonomy for global crypto assets. Is that part of the plan? We have a fintech industry ripe for solving so many problems and driving so much economic growth. Does the Minister agree?
Another example is a central bank digital currency. If we looked at a hybrid model, we would be a world leader in rolling that out. If we do not, what about the challenge from Libra, now Diem, with the private sector potentially taking a huge influence over our macroeconomic policy? Look at what has happened with social media. If even a fraction of that happened with a digital currency, it would have not just an economic but a social impact—an impact on our very polity.
I turn to financial inclusion. Macmillan Cancer Support, which has done so much in this area, is pushing for a duty of care. I agree. Does the Minister? Similarly, with the SDRP regime, what is the timetable for bringing it into being? When we are looking at the breathing-space clauses, which are welcome, do they need further review against the backdrop of the Covid crisis? Similarly, can the Minister say whether bailiffs are being stopped from doorstepping people during this lockdown, as they were during the first one? It is not clear right now whether that is the case.
I turn to the international perspective, like other noble Lords I welcome the action in relation to Gibraltar. Will there be moves to enable Gibraltar to be part of a free-trade area with the UK?
When we look at the Basel framework, how does that work in terms of some of the international contexts? I would like to see a lot more British involvement in the continent of Africa, but African assets and investments are currently highly weighted from a risk perspective. Is that prudential or protectionist?
Does the Minister agree that when we look at technology and financial technology across the piece it would seem to make sense that we need a unit, a centre within government, maybe within the Treasury—for want of a better expression, a “fourth industrial revolution delivery unit”—to bring policy problems to private and public sector practical solutions?
In the Bill I believe we have the opportunity to reflect and consider what financial services are for. If they are for anything, they must be about enabling, empowering and unleashing individuals, institutions, innovations, neighbourhoods and nation states in a connected, interoperable and economic globe.
In the other place the Economic Secretary to the Treasury, the right honourable John Glen, called the Bill a “portfolio”—right enough. I hope noble Lords will be able to persuade the Minister during the passage of this Bill through your Lordships’ House that we can turn it into a portmanteau—a portmanteau to carry us, our economy and our society better through 2021 and well beyond.