The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I am pleased to have the opportunity to debate the Government’s proposals for financial services regulation. We have an impressive list of speakers today, including former Chancellors, government Ministers and Cabinet Secretaries, so I am sure that it is going to be a lively and interesting afternoon and evening. I am sure that, like me, noble Lords will be particularly looking forward to hearing from the noble Lord, Lord O’Donnell, my esteemed former boss, who will be giving his maiden speech today.
A thriving financial services sector is vital to the prosperity of the United Kingdom, and we can be justifiably proud of the country’s position as a world leader in financial services. As your Lordships are well aware, though, the UK financial system is emerging from the most serious financial crisis in more than 100 years. The Government are determined to learn the lessons from that crisis, which is why we have initiated a fundamental and wide-ranging reform of the financial services sector. That reform will be delivered not only through important changes to the regulatory system contained in the Bill; on Thursday the Government will publish a White Paper setting out how we plan to implement the recommendations of the Independent Commission on Banking. We are also shaping the international response to the crisis with our counterparts in Europe and elsewhere.
The causes of the financial crisis were many and diverse. Certainly it is clear that financial institutions took on risks that they did not understand or effectively manage. As a result our banks became among the most heavily leveraged in the world. Northern Rock was offering 120% mortgages, with an excessive reliance on wholesale funding, and the Royal Bank of Scotland’s acquisition of ABN AMRO was plainly very risky. It was a deal described by the next RBS chairman as,
“the wrong price, the wrong way to pay, at the wrong time and the wrong deal”.
However, the regulators also failed to act on the risks that were building up, both in individual institutions and across the system as a whole.
Let me be clear: the UK’s financial regulatory system was not fit for purpose. The tripartite system, made up of the Financial Services Authority, the Bank of England and the Treasury, failed. This was because no one had the single responsibility to monitor the financial system and address the causes of financial instability.
I was part of the system, as a Treasury official, from the end of 2002 to the end of 2005 and even then, in benign markets, some of the deficiencies of the tripartite were clear. The private sector was already asking who would be in charge in a crisis. When the financial crisis hit, this lack of clarity in responsibility initially meant that there was an inadequately orchestrated response. The FSA, the UK’s monolithic financial service regulator, was asked to do too much. On the one hand, it was required to assess the prudential viability of financial services firms; on the other, it was required to police the conduct of those firms. Because of the wide remit of the FSA, process too often became valued above judgment and box-ticking above informed regulation and supervision. This is why the changes contained in this Bill are vital. We are creating a framework based on clarity of responsibility for regulators. This Bill puts the judgment of expert supervisors at the heart of the new system. Instead of dividing responsibility for financial stability, we are putting the Bank of England clearly in charge.
I will now briefly outline several key themes of the Bill. First, the Bill addresses the widely acknowledged shortcomings of the arrangements in times of financial crisis. This Bill will give the Bank primary operational responsibility for financial crisis management, but the Chancellor of the Exchequer will retain responsibility for any decisions that require the use of public funds. In cases where there is a serious threat to financial stability which puts public funds at risk, the Chancellor will have the power to direct the Bank.
In order to oversee and address systemic risk throughout the entire financial sector, the Bill creates a powerful new macroprudential body in the Bank of England, the Financial Policy Committee or FPC. The Bill gives Parliament the power to bestow important new macroprudential tools on the FPC so that it can act to address the risks it identifies. The FPC will promote a healthy financial system, but not a zero-risk system. It will be a system that can both thrive on and withstand appropriately managed risk. As my right honourable friend the Chancellor of the Exchequer has said, the FPC should not seek to achieve the “stability of the graveyard”, so the Bill recognises that in pursuing a stable financial system, the FPC must not impact on the ability of the financial sector to contribute to sustainable growth in the medium or long term. I know, of course, that the way this is dealt with in the Bill was the subject of some debate in another place.
Since the Bank of England will be taking on a more powerful role, it is right to consider the robustness of its accountability mechanisms. I want to take this opportunity to highlight the work of the Treasury Committee, which engaged constructively with this Bill in a range of areas, not least the governance of the Bank. We welcome the commitment of the Court of the Bank of England to enhance the Bank’s governance arrangements in line with the recommendations of the Treasury Select Committee. As my honourable friend the Financial Secretary to the Treasury set out in another place, the Government will seek to amend the Bill in your Lordships’ House to put these enhanced arrangements on to a statutory footing. I will be listening carefully to your Lordships’ views on Bank governance as we finalise our thoughts on the appropriate amendments to put forward.
The Bill also provides for two focused financial regulatory bodies: the Prudential Regulation Authority and the Financial Conduct Authority. I will take each one in turn. This Bill will establish the Prudential Regulation Authority—the PRA—as a subsidiary of the Bank of England bringing together macroprudential policy and microprudential regulation under the Bank. In its role as a microprudential regulator, the PRA will regulate and supervise firms that manage significant risks on their balance sheets. This includes not only banks but insurers and the more significant investment banks. Crucially, the PRA will be required to take a strong, judgment-led approach. Indeed, it will have a specific duty to supervise to ensure that it actively engages with businesses, scrutinises their business models and carries out forward-looking risk assessments.
The Bill will also establish the Financial Conduct Authority as a focused conduct-of-business regulator. The Bill is good news for consumers of financial services. The FCA will be proactive in securing better outcomes for consumers, with a new competition objective and a new power to ban or impose requirements on products that could cause consumer detriment, enabling the FCA to intervene earlier, before there is evidence of widespread harm. This means that the FCA will be better equipped than the FSA to deal with mis-selling scandals, such as that of payment protection insurance. This morning the Government announced the appointment of John Griffith-Jones as the chair-designate of the FCA. Mr Griffith-Jones is currently UK chairman of KPMG and a professional with many years’ experience of the financial sector. His appointment marks an important step forward in the continuing establishment of the FCA.
The Bill enables responsibility for consumer credit regulation to be transferred from the Office of Fair Trading to the FCA. This transfer will ensure that the consumer credit market also benefits from the FCA’s focused remit, proactive approach and wider powers. However, we are clear that securing effective competition in financial services markets will lead to better outcomes for consumers. That is why the FCA will have an objective to promote effective competition in the interests of consumers. It will also have a duty to seek competition-led solutions to conduct issues when pursuing its other operational objectives. For example, the FCA will consider barriers to entry, encouraging switching, increasing transparency and focusing more on the requirements for information of different consumers, including those who are vulnerable or marginalised.
We are confident that these reforms will make the UK a more attractive place in which to do business. They will help maintain the UK’s position as the leading global financial services centre. A more stable and sustainable financial sector will undoubtedly be a more competitive one. However, markets in financial services are not contained by national boundaries. That is why the Bill contains extensive arrangements to ensure that the new regulators co-operate fully with each other in their dealings with international regulatory bodies.
The Bill’s introduction to Parliament was preceded by an intensive process of policy development. It included three separate public consultation exercises, all of which served to improve the legislation now before the House. I take this opportunity to pay tribute to the valuable work of the Joint Committee on the draft Bill, which included a number of noble Lords who will contribute to today’s debate. They made valuable contributions during pre-legislative scrutiny and I look forward to hearing them share their expertise today. I look forward to working closely with your Lordships during the Bill’s consideration in this House and I welcome the informed scrutiny and expertise that will no doubt be offered.
The Bill comprehensively addresses the failings of the current financial regulatory system. It makes it clear that the Bank will be responsible for monitoring and ensuring the financial stability of the system as a whole. It makes it clear who leads in the event of a financial crisis. Never again will people ask, “Who is in charge?”. It creates two new focused regulators, placing judgment at the heart of microprudential and conduct-regulation. The PRA will be empowered to use its judgment to challenge the excessive and inappropriate risk-taking that led to a run on Northern Rock and the government interventions in RBS and Lloyds TSB. The FCA will be empowered to take proactive steps to regulate conduct in financial markets, preventing detriment to consumers of financial services. I am pleased to present the Bill for noble Lords’ consideration. I beg to move.