The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, this debate has been every bit as rigorous and illuminating as I expected and I thank your Lordships for approaching the Bill in a thoroughly constructive and thoughtful manner. We have had many useful contributions during the afternoon and evening. Some I would characterise as sighting shots, and we had a few opening barrages. I thank in particular the noble Lord, Lord O’Donnell, for his characteristically clear, focused and constructive maiden speech, which certainly contained a number of well aimed rifle shots.
I was delighted that my noble friends who are former Chancellors welcomed the Bill. I was also pleased that at the start of the debate the noble Lord, Lord Eatwell, said that the fundamental thinking behind the Bill was well founded. Noble Lords who have direct experience of operating within the current structure, including the noble Lords, Lord Myners and Lord Burns, recognised that the tripartite system had not lived up to expectations, to use their measured terms. We have a major piece of legislation in front of us, the importance of which is widely recognised.
Before I get into the detail of some of the points that have been made, I wish to say a few words about the form of the Bill, as speakers, including the noble Lord, Lord Turnbull, and the noble Baroness, Lady Cohen of Pimlico, questioned the way in which it had been written as amending legislation as opposed to a wholesale rewrite of FSMA and other legislation. We thought about this approach very carefully. I appreciate that the Bill in its present form is not easy for any of us, but it is an approach that has been widely supported by consultation respondents and will minimise the extent to which regulated firms and other users of FSMA have to deal with legislative change. It should also allow for more focused scrutiny in this House and by stakeholders of the key changes in the regulatory regime. However, as I am sure noble Lords are aware, the Government have published a consolidated version of FSMA to help to show explicitly what the legislation will look like once it is amended by this Bill. That is available on the Treasury website.
I wish to make one other preliminary remark before we get into the content of the Bill. I noted the very interesting suggestion made by the noble Lord, Lord O’Donnell, of having a standing Joint Committee to assess the new framework. It is an interesting idea but it is for Parliament and not the Government to decide how best to organise its scrutiny activities. However, I repeat that the quality of the Joint Committee’s work in scrutinising the new arrangements underlines the noble Lord’s point. It was good to hear from members of that committee in the debate, such as my noble friend Lady Wheatcroft, the noble Baroness, Lady Drake, and the noble Lord, Lord McFall of Alcluith. However, I am very sorry, as I am sure is the whole House, that we have been robbed of the wisdom of my former noble friend Lord Maples, who would have very much enriched today’s debate.
The hour is late. I will not take this opportunity to read a fully formed speech highlighting again why the Bill is so important to protect the UK financial services sector and the wider economy. I could reiterate the arguments, but I will use the time to answer as many of the points that have been brought up as I can. I will have to leave many others on the table for future discussion or letters as appropriate.
I have tried to group together the points. First, I shall pick up some of the issues on the overall architecture and the cross-cutting issues. Then I will address some of the points on the Bank of England, the FPC objectives and bank governance, and another area where many important points were raised concerning access to financial services, as well as one or two of the international issues that were raised.
On the overall architecture and some of the cross-cutting issues in the Bill, a point that was very clearly made by a number of noble Lords, including my noble friends Lord Lawson of Blaby and Lord Lamont of Lerwick, is the question of judgment and culture—architecture versus institutions. Many speakers have made the point that the culture of regulators is more important than institutional architecture. I agree of course that culture is vital but, as the noble Baroness, Lady Cohen of Pimlico, noted, architecture also matters. That is precisely why we are implementing these reforms to put in place an institutional framework that will allow a culture of focused expertise and judgment to flourish separately and distinctively within the new PRA and the FCA. That is reinforced in the Bill by, for example, imposing the legal duty to supervise firms, which will require the two bodies to develop and promote a culture of supervisory judgment.
There were questions about what is characterised as twin-peaks regulation. I do not like that tag but let me now use it for simplicity. The importance of co-ordination between the PRA and the FCA has been stressed by my noble friend Lady Kramer and others. We agree that this is important. That is why we have proposed cross-membership of the boards of the PRA and the FCA, and it is why there is a statutory duty to co-ordinate the requirement to prepare a memorandum of understanding. These issues have been thought about.
Let us be clear on another issue of co-ordination, which relates to crisis management and particularly the involvement of the Treasury. That issue was raised by the noble Lords, Lord Eatwell and Lord Burns, my noble friend Lady Noakes, and others. The Bill places the Bank under a hard legal duty to notify the Treasury of a risk to public funds. It is a duty that applies regardless of the amount at risk or the Bank’s opinion on what should be done. That is at odds with what I heard from some noble Lords who addressed this point. The MoU also makes it clear that, if there is any doubt, the Bank must notify. The MoU also allows the Treasury to require the Bank to consider making a notification in response to a specific risk or situation.
On one or two other cross-cutting issues, the importance of cost control and proportionality was raised by a significant number of speakers, including my noble friends Lord Flight and Lord Naseby, and the noble Lord, Lord Bilimoria. The Government agree that cost control and proportionality are fundamental. The PRA and the FCA are required to have regard to proportionality. Both regulators are of course required to carry out cost-benefit analyses and to consult on their rules, as one would expect, but there are a number of areas in which the Bill goes further than previous practice. For example, for the first time, the financial services regulators are subject to National Audit Office audit, and the NAO is able to conduct value-for-money studies. That is something new in the structure to be introduced.
There were one or two specific questions on the scope of regulation. My noble friend Lord Flight asked about life companies and observed that they are very different from banks. I certainly agree with my noble friend on that, and it is precisely why we have a different insurance objective for the PRA and explicit provision covering the PRA’s duties in the regulation of with-profits policies. My noble friend Lord Teverson raised a question on rating agencies. The reason why they are not addressed directly in the Bill is that they are now a European competence, and the lead is taken by one of the three European bodies—ESMA—with the Commission.
Two other important areas concerning scope were raised. A number of speakers, including the noble Lord, Lord McFall of Alcluith, my noble friends Lord Lawson of Blaby and Lady Wheatcroft, and others, talked about bank auditors. As with other topics, I cannot do this justice this evening. I simply remind the House that responsibility for looking after auditors and their regulation remains with the Financial Reporting Council, and so it is not part of the Bill. The FRC is doing a significant amount of work around the scope of audit. I was pleased that my noble friend recognised that we had picked up one important issue, going back to his legislation. The practice of dialogue between auditors and regulators, which needs to be addressed, is now in the code of practice, although I heard the suggestion that it might be embodied in the legislation.
Lastly in this area, the question of central counterparty clearing houses—another important issue—was raised by my noble friend Lady Kramer. I remind the House that there is an important European directive coming in this area—the so-called EMIR, the European Market Infrastructure Regulation—which aims to reduce systemic risk in the OTC derivatives space. We want to make sure that what we are doing in the UK fits with the architecture of EMIR, which will itself be directly applicable in the UK. I suggest that we do not want to fall into the trap of super-equivalence. On the other hand, there are provisions in the Bill for rules to be made that fit within the developing architecture of EMIR.
I turn to some of the issues concerning the Bank of England’s FPC bank governance. First, on the question of the FPC and its objective, the Government recognise that the pursuit of financial stability needs to be balanced against the wider contribution of the financial system to economic growth. As I explained at the outset, the Bill seeks to provide this balance by requiring the FPC to have regard to the proportionality of its actions and by preventing it taking any action that would have a significant adverse impact on sustainable economic growth. Having said that, I listened very carefully to the significant number of noble Lords who pointed out that there should be more recognition of growth in the FPC objective. I have already mentioned many of the speakers who addressed that point but the others included the noble Lord, Lord Mawson, who did so in his characteristic way. I cannot promise any amendments in this area. I listened very carefully but I certainly cannot promise one that directs the FPC to have specific regard to the interests of the Lower Lea Valley, although I think that the House heard very clearly all the great things that are going on there. However, I listened to the points that were made.
Points were also raised concerning co-ordination. On the one hand, the Bill is solving the co-ordination problems by making the Bank and the governor responsible for what some characterised as everything; on the other hand, that presents challenges not only for the person of the governor but for bankers and institutions—something that my noble friend Lord Tugendhat and others brought up. Of course, I certainly accept that monetary policy, financial stability policy and prudential regulation are intimately connected. That is why having these responsibilities under one roof is the best way to ensure that co-ordination. Within that framework, in each role the governor does not act alone but is supported by external and non-executive members and others.
There were other points made by the right reverend Prelate the Bishop of Durham and others on Bank of England governance. I said again at the outset that this is an area in which the Government recognise the need to go further, and I have listened to what has been said tonight. I was grateful to my noble friend Lord Stewartby for pointing out some of the lessons from the Board of Banking Supervision and for recognising that we cannot expect to pick up exactly what it was. However, I believe that the lessons from that experience have been picked up in the design of the PRA board. On the power of direction, I heard speakers say that they believed it to be too constrained. I do not believe that that is the case in relation to the scope that it has in special support operations and the provision of emergency liquidity in relation to the special resolution regime, but I am sure that this is something that we will come back to.
Let me turn to a few remarks about issues on access to financial services. I will be unable to do them full justice, but there were issues around diversity of provision—specifically on mutuals. The coalition agreement makes clear the Government’s commitment on mutuals. The Bill requires regulators to analyse the effect of their rules on mutuals, which is a new measure that will help to ensure the fair treatment that we want. The noble Lord, Lord Whitty, and the right reverend Prelate raised questions about the inclusion and universal provision of financial services. They are very important questions but they are essentially questions of social policy, so are for the Government and not directly for the regulatory structure. On SME lending and questions asked by my noble friend Lord Sharkey and others, the Government are taking significant action, which we have discussed before, outside the framework of this legislation to ensure the flow of lending to SMEs. That work will continue.
In another related area, my noble friend Lord Hodgson of Astley Abbotts talked about the importance of social impact investors. I agree with that but I question the role of the legislation that we are talking about in that area. On consumer credit regulation—important points were made again from my noble friend Lord Hunt of Wirral and others—the Government are committed to designing a proportionate model of FCA regulation for the sector. The Government will consult on this and detailed proposals will come forward early in 2013. My noble friend raised the question of self-regulation. I agree with him that self-regulation which is credible, transparent and effective is an important complement to statutory regulation. The FSA is at the moment looking at different industry codes in the credit industry considering whether, and if so, how they can be incorporated into the new FCA regime.
On payday loans, which was addressed by the noble Lord, Lord Mitchell, the right reverend Prelate, and others, we are awaiting the research being done by Bristol University’s Personal Finance Research Centre at the impact on consumers and business of introducing a cap on the total cost of credit—not an easy topic. The final report is on course to be published this summer.
Finally in this area, I will address briefly the question of peer-to-peer lending raised by my noble friend Lord Lucas and others. The Government do not think that statutory regulation is appropriate at this point. The sector is very small and such regulation would be a barrier to new entrants and innovation. However, this is a matter that we will keep under review, and I am grateful to my noble friend for raising it.
On confidential information and its disclosure, I was asked by the noble Baroness, Lady Drake, about the FSA review. If the FSA concludes as a result of the review that changes to primary legislation are needed, we will consider the proposals very carefully and bring forward legislation as appropriate. It is an important issue.
A couple of points were made on the international front, which clearly is highly relevant. The first concerned the mismatch between the architecture in the UK and the developing architecture in Europe. I say to the noble Baroness, Lady Valentine, that this House probably would not want to abolish imperial measures. Certainly I do not want to abolish them. On financial supervisory architecture, we must design something that is appropriate to the UK. I draw the attention of the noble Baroness, Lady Hayter of Kentish Town, to the broad consensus in the evidence given to the Joint Committee that having a different regulatory structure to that of the European supervisory authorities would not present any issues for the UK authorities either in representing UK interests or in the way that firms in the UK are regulated.
I am sure that we will come back at length to the question of international competitiveness that was raised by my noble friend Lord Trenchard and others. The Government’s position is that it is what the regulators—the FCA and the PRA—do that will make the difference in determining whether the UK is or is not a competitive place in which to do business, not having a statement about competitiveness. It will be the high regulatory standards and the stability of the financial sector to which these will contribute—the reliability, fairness and consistency of regulation—that will be important in maintaining and driving forward the attractiveness and competitiveness of London. It is those issues that will address the substance of the point.
A challenge was thrown down at a number of points in the debate. The noble Lords, Lord Bilimoria, Lord Barnett and Lord Burns, asked whether this structure would have prevented the recent crisis. In my opening remarks I did not mean to say—and did not say—that the structure was the direct cause of the crisis. Of course the principal cause was the behaviour of firms. However, I was in the structure between 2003 and 2005, and I know that that behaviour contributed to the severity of the impact of the crisis in the UK. No one had the responsibility, the authority or the tools to monitor the system as a whole in the way that will be provided for in the FPC. I sat in the monthly meetings of the tripartite deputies at which the stability side of the Bank, which was being significantly reduced, nevertheless came forward with very good analyses of some of the problems that were welling up.
This was in 2005; I did not have the benefit of seeing what happened in 2006 or 2007. However, the analysis was brought forward but the Bank did not take it upon itself to do anything with it, and the FSA did not take away the lessons from the analysis. The deputy governor of the Bank and his team were doing very good work but it went nowhere. The FSA had insufficient focus on its roles as the microprudential regulator and the conduct regulator. This is why the Bill creates two new focused regulators. There was also a lack of clarity in the run-up to the crisis and the way in which it hit.
This has been a wide-ranging debate, for which I am very grateful. The provisions in the Bill have already undergone a great deal of scrutiny—three rounds of public consultation, pre-legislative scrutiny, the attention of the Treasury Committee and its passage through another place. The Government have already shown that they are flexible and committed to making the Bill as good as it can be by amending it in response. It is already strong legislation, but I look forward to the further informed challenge that I know I will get from your Lordships in Committee and to the opportunity to improve the Bill still further. However, for now, I ask the House to give the Bill a Second Reading.
Lord Northbrook
Will the Minister write to me and the other Members who asked about strengthening the powers of the Court of the Bank of England and of non-executive members on the regulatory bodies?
Lord Sassoon
I have already said that we will go through the whole debate and respond on a range of issues that have not been picked up in my response.
Lord Sassoon
My Lords, I beg to move that this Bill be committed to a Grand Committee.
Lord Hamilton of Epsom
My Lords, this Bill is of major importance—this is not my idea; it comes from the Minister—and is very significant indeed. However, for some reason the Minister wants to shuffle it off into the Grand Committee Room. The Bill needs close scrutiny and will bring forth the exquisite qualities of your Lordships’ House. There is a massive amount of expertise here that can make positive comment on the Bill and make it better than it is today. It would be quite wrong if we were to vote for the Bill to go into the Grand Committee Room. It should be debated in Committee on the Floor of the House and I hope that the committal Motion will be negatived by the House.
Baroness Liddell of Coatdyke
My Lords, this should not go into Grand Committee, not least because of the historic significance of the past four years and what has happened to financial services—against the background of financial services as a major industry for this country—but also because this is a classic opportunity to showcase the wide range of expertise that is available in your Lordships’ House. This is not a Bill to be put into a corner and forgotten about. It deserves—and the public deserve to see us give—the kind of detailed scrutiny that legislation of this importance merits.
Lord Sassoon
My Lords, I am a little surprised by this discussion, not because I do not think it is an important debate but there have been one or two interventions from noble Lords who unfortunately were not here to hear this point addressed during the debate.
First, this was not a decision of mine. I will do whatever the House wants. I was not asked whether I wanted to do it one way or another and I see arguments for doing it either in Grand Committee or on the Floor of the House. This was discussed through the usual channels. I have not seen this sort of discussion in anything I have been involved in. I believe that the usual channels go through these things very carefully, and they came up with an agreement on this that I certainly am prepared to accept.
I also heard the noble Lord, Lord Eatwell, and the noble Lord, Lord Barnett, who is not in his place at the moment, arguing during the debate that the Grand Committee was a better place to take this legislation. I think the noble Lord, Lord Eatwell, referred to the detailed scrutiny of the Bill establishing the Office for Budget Responsibility, on which I had the pleasure and the responsibility of leading. Indeed, that Bill was given very thorough, detailed scrutiny. It was a Bill of great importance—not as big as this Bill but it showed in a related area how effective the Grand Committee can be.
The Welfare Reform Bill can hardly be said to have been an unimportant Bill. What Bill of greater importance has this House considered in the past two years? Everything I have heard suggests that the scrutiny it got in Grand Committee actually worked extremely well, notwithstanding the understandable doubts there were about it.
I do not want to withdraw the Motion. It has been agreed by the usual channels, in which all these matters will have been debated, and I believe that we should stick with what the usual channels have agreed.
Lord Lamont of Lerwick
My Lords, I ask my noble friend to think again about this. This may have been agreed by the usual channels but it is not the usual channels that should entirely count on this; it is the will of the House. Almost all the people who have spoken in the debate are present now and a large number of them have expressed the view that this would be an unsatisfactory way of proceeding. The view has been put that this is comparable to the OBR. With great respect, I suggest that this is a much, much more important measure than the OBR.
Secondly, the Grand Committee is a much more restricted form of scrutiny in that you cannot actually vote on amendments; you cannot have a Division. I know that it is the practice of the House that we do not have too many Divisions in Committee on the Floor of the House. None the less, the pressure on Ministers to give a clear explanation to pointed amendments when there is a threat of a Division is much greater and it makes for a much sharper and more lucid Committee when there is the possibility of a Division. Just to have debates in which there are no Divisions and there are many more Divisions on Report does not seem the best and the most satisfactory way of proceeding. I strongly urge the Minister to reconsider.
Lord Foulkes of Cumnock
The Minister has said that he personally does not mind whether the Bill is dealt with on the Floor of the House or in Grand Committee, which is very helpful. He founds his argument principally on an agreement through the usual channels—and I have great respect for the usual channels. However, I fear that, because of the recess, the usual channels may not have worked as efficiently and effectively as otherwise. If the Minister were to agree to withdraw the Motion, which would be preferable to a Division, we could have a few days to have further discussion and consultation. By that time, the groups will have met; the Cross-Benchers will have had an opportunity to meet; and we can consider this matter again. All we are doing is suggesting that this matter be postponed for three or four days.
Lord Sassoon
My Lords, I have every faith in the ability of the usual channels to work these things out very thoroughly, recess or no recess. We should do what is customary and stick with what the usual channels have agreed.
Baroness Noakes
Perhaps I may challenge the suggestion made by the noble Baroness, Lady Kramer. While officials sit rather nearer to the Ministers in Grand Committee, I think that they take no active part. All we have is that the same number of officials sit rather closer to the Minister, so it makes very little difference in terms of determining government policy. In practice, because no decisions are made in Grand Committee, or at least they are made very rarely there, the proximity of officials is of no account whatever.
Lord Sassoon
My Lords, I hear the opposition to this Motion loud and clear. Rather than put ourselves through the agony of going through the Division Lobbies at this late hour, let me withdraw the Motion and let some more discussions go ahead.