Financial Services (Banking Reform) Bill
(10 years, 8 months ago)
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Lord Newby
“Part 6Special Administration for operators of certain infrastructure systemsFinancial market infrastructure administration
This Part— (a) provides for a procedure to be known as FMI administration, and(b) restricts the powers of persons other than the Bank of England in relation to the insolvency of infrastructure companies.”
Lord Newby (LD)
My Lords, these amendments establish a special administration regime that will apply to operators of recognised interbank payment systems, operators of securities settlement systems and crucial service providers to those operators.
The establishment of this new administration regime, to be known as financial market infrastructure—FMI—administration, is the latest in a series of measures that this Government are bringing forward to ensure that the failure of a single financial institution is not allowed to put UK financial stability at risk.
Underpinning the financial sector are a number of critical pieces of infrastructure that, if allowed to fail, could severely disrupt markets and the normal functioning of the wider economy. The need to ensure that some of these systemically important pieces of infrastructure continue to operate in times of crisis has already been addressed in legislation passed by this Government. However, there remain other pieces of systemically important market infrastructure that have not yet benefitted from statutory provision designed to ensure continuity of service in times of crisis. With that in mind, the amendments forming Part 6 have been tabled in order to ensure the continuity of service provision of recognised interbank payment systems, which facilitate or control the transfer of money between banks and building societies, and securities settlement systems, which enable the title to units of securities to be transferred electronically. These systems are integral to the efficient operation of the financial system, processing transactions worth hundreds of billions of pounds a day. As things stand, in the event that the operator of an interbank payment system or securities settlement system was to become insolvent, it would be likely to enter the normal administration procedure. In such cases, the administrator would be under a duty to look after the interests of the company’s creditors, without concern for implications for the wider economy. In these circumstances, the continued operation of crucial payment and settlement services could be threatened.
Part 6 introduces a special administration regime, known as FMI administration, which prioritises continuity of critical service provision during administration. The key features of this administration are the appointment of a special administrator, who will have an overarching objective to continue critical services during administration; the Bank of England’s ability to apply to a court to place a relevant company into FMI administration with the court appointing the FMI administrator—no one else will be able to institute insolvency proceedings against one of these firms without giving the Bank prior notice; the Bank of England’s power of direction over the FMI administrator; the availability of powers allowing for the property, rights and liabilities of the relevant company to be transferred; and restrictions on early termination of third party contracts.
In addition to operators of relevant systems, FMI administration will also be available in respect of companies that the Treasury designates as crucial service providers to the operators of the relevant systems. Service providers will be designated if the Treasury is satisfied that an interruption in the provision of services would have a serious adverse effect on the effective operation of the relevant system. Insolvency rules made under the powers in Part 6 will be made in due course. These will prescribe certain procedural details relating to the conduct of FMI administration. Different rules will be made in respect of England and Wales, Scotland and Northern Ireland. Any rules made under this power that apply to England and Wales will need to be cleared by the Insolvency Rules Committee before the Lord Chancellor may proceed to make them.
We believe that the likelihood of these powers ever being needed is extremely small. However, if an interbank payment system did get into financial difficulty, it would clearly be in the interests of financial stability that it was able to continue in operation as its financial problems were resolved. The special administration provisions in these amendments would allow this to happen, and I therefore commend them to the House.
Lord Eatwell (Lab)
My Lords, I believe that these measures are valuable as an ultimate backstop, as the noble Lord has suggested. I just wonder, as I intimated earlier, whether there is some confusion in ultimate authority, as between the discussions of the payments systems regulator, and the role here, involving the Bank of England and the Treasury, given that the payments regulator will lie outwith both.
Lord Newby
My Lords, I will write to the noble Lord on that point. My officials do not believe there is such confusion in reality, but we will seek to clarify this before Report.
Lord Newby
“Interpretation: infrastructure companies
(1) In this Part “infrastructure company” has the meaning given by this section.
(2) “Infrastructure company” means a company which is—
(a) the operator of a recognised inter-bank payment system, other than an operator excluded by subsection (3),(b) approved under regulations under section 785 of the Companies Act 2006 (provision enabling procedures for evidencing and transferring title) as the operator of a securities settlement system, or(c) a company designated by the Treasury under subsection (4).(3) But a company is not an infrastructure company if it is a recognised central counterparty, as defined by section 285 of FSMA 2000.
(4) The Treasury may by order designate a company for the purposes of subsection (2)(c) if—
(a) the company provides services to a person falling within subsection (2)(a) or (b), and (b) the Treasury are satisfied that an interruption in the provision of those services would have a serious adverse effect on the effective operation of the recognised inter-bank payment system or securities settlement system in question.(5) An order under subsection (4) must specify the recognised inter-bank payment system or securities settlement system in connection with which the company is designated.
(6) Before designating a company under subsection (4), the Treasury must consult—
(a) the company to be designated,(b) the person within subsection (2)(a) or (b) to whom the company provides services,(c) the Bank of England,(d) if the company is a PRA-authorised person, the PRA and the FCA, and(e) if the company is an authorised person other than a PRA-authorised person, the FCA.”
“Interpretation: other expressions
(1) In this Part—
“company” means a company registered under the Companies Act 2006;
“operator”, in relation to a recognised inter-bank payment system, is to be read in accordance with section 183 of the Banking Act 2009;
“recognised inter-bank payment system” means an inter-bank payment system, as defined by section 182 of the Banking Act 2009, in respect of which a recognition order under section 184 of that Act is in force;
“the relevant system” means—
(a) in relation to an infrastructure company falling within subsection (2)(a) of section (Interpretation: infrastructure companies), the recognised inter-bank payment system, (b) in relation to an infrastructure company falling within subsection (2)(b) of that section, the securities settlement system,(c) in relation to a company designated under subsection (4) of that section, the recognised inter-bank payment system or securities settlement system falling within paragraph (b) of that subsection;“securities settlement system” means a computer-based system, and procedures, which enable title to units of a security to be evidenced and transferred without a written instrument, and which facilitate supplementary and incidental matters.
(2) Expressions used in the definition of “securities settlement system” in subsection (1) are to be read in accordance with section 783 of the Companies Act 2006.”
“FMI administration orders
(1) In this Part “FMI administration order” means an order which—
(a) is made by the court in relation to an infrastructure company, and(b) directs that, while the order is in force, the affairs, business and property of the company are to be managed by a person appointed by the court.(2) A person appointed as mentioned in subsection (1)(b) is referred to in this Part as an FMI administrator.
(3) The FMI administrator of a company must manage its affairs, business and property, and exercise and perform the FMI administrator’s functions, so as to achieve the objective in section (Objective of FMI administration).”
“Objective of FMI administration
(1) Where an FMI administrator is appointed in relation to the operator of a recognised inter-bank payment system or a securities settlement system, the objective of the FMI administration is—
(a) to ensure that the system is and continues to be maintained and operated as an efficient and effective system,(b) where the operator of the system is also a clearing house falling within section 285(1)(b)(ii) of FSMA 2000 (recognised clearing house that is not a recognised central counterparty), to ensure that the protected activities continue to be carried on, and(c) to ensure by one or both of the specified means that it becomes unnecessary for the FMI administration order to remain in force for that purpose or those purposes.(2) Where an FMI administrator is appointed in relation to a company designated under subsection (4) of section (Interpretation: infrastructure companies), the objective of the FMI administration is—
(a) to ensure that services falling within that subsection continue to be provided, and(b) to ensure by one or both of the specified means that it becomes unnecessary for the FMI administration order to remain in force for that purpose.(3) The protected activities referred to in subsection (1)(b) are such activities as the Bank of England may from time to time direct, which must be—
(a) regulated activities falling within section 285(3)(a) or (b) of FSMA 2000, or(b) related activities which are necessary for the efficient carrying on of any of those regulated activities.(4) The specified means are—
(a) the rescue as a going concern of the company subject to the FMI administration order, and(b) transfers falling within subsection (5).(5) A transfer falls within this subsection if it is a transfer as a going concern—
(a) to another company, or(b) as respects different parts of the undertaking of the company subject to the FMI administration order, to two or more different companies,of so much of that undertaking as it is appropriate to transfer for the purpose of achieving the objective of the FMI administration.(a)The administrator must obtain the approval of the Bank of England to any proposals under sub-para. (1).(b)Treat the reference in sub-para. (2)(b) to the objective mentioned in para. 3(1)(a) or (b) as a reference to the objective in section (Objective of FMI administration) of this Act.(c)Ignore sub-para. (3)(b).(a)Before making an application in reliance on this paragraph the FMI administrator must give notice to the Bank of England, which is to be entitled to participate in the proceedings.(b)In making directions the court must have regard to the objective in section (Objective of FMI administration) of this Act.(a)Ignore sub-paras. (1) and (3).(b)The Bank of England may apply to the court for the variation or revocation of any directions given by the court.()“(2) Where a company is in FMI administration, a creditor or member of the company may apply to the court claiming that the FMI administrator is conducting himself or herself in a manner preventing the achievement of the objective of the FMI administration as quickly and efficiently as is reasonably practicable.”()“(1) On an application made by a person mentioned in sub-paragraph (2), the court may provide for the appointment of an FMI administrator of a company to cease to have effect from a specified time.()(2) The persons who may apply to the court under sub-paragraph (1) are—()(a) the Bank of England;()(b) with the consent of the Bank, the FMI administrator.”(a)Para. 91(1) applies as if the only person who could make an application were the Bank of England.(b)Ignore para. 91(2).(a)in accordance with directions of the Bank of England, and(b)if the Bank is satisfied that they will not prejudice the objective in section (Objective of FMI administration) of this Act.(a)In considering making an order in reliance on section 241 the court must have regard to the objective in section (Objective of FMI administration) of this Act.(b)Ignore subsections (2A)(a) and (3) to (3C).(6) The means by which transfers falling within subsection (5) may be effected include, in particular—
(a) a transfer of the undertaking of the company subject to the FMI administration order, or of part of its undertaking, to a wholly-owned subsidiary of that company, and(b) the transfer to a company of securities of a wholly-owned subsidiary to which there has been a transfer falling within paragraph (a).(7) The objective of the FMI administration may be achieved by transfers falling within subsection (5) only to the extent that—
(a) the rescue as a going concern of the company subject to the FMI administration order is not reasonably practicable or is not reasonably practicable without such transfers,(b) the rescue of that company as a going concern will not achieve that objective or will not do so without such transfers, or(c) such transfers would produce a result for the company’s creditors as a whole that is better than the result that would be produced without them.”
“Application for FMI administration order
(1) An application for an FMI administration order may be made to the court by the Bank of England.
(2) An application must nominate a person to be appointed as the FMI administrator.
(3) The infrastructure company must be given notice of an application, in accordance with rules under section 411 of the 1986 Act (as applied in relation to FMI administration).”
“Powers of court
(1) The court may make an FMI administration order in relation to an infrastructure company if satisfied—
(a) that the company is unable to pay its debts,(b) that the company is likely to be unable to pay its debts, or(c) that, on a petition presented by the Secretary of State under section 124A of the 1986 Act (petition for winding up on grounds of public interest), it would be just and equitable (disregarding the objective of the FMI administration) to wind up the company. (2) The court may not make an FMI administration order on the ground set out in subsection (1)(c) unless the Secretary of State has certified to the court that the case is one in which the Secretary of State considers (disregarding the objective of the FMI administration) that it would be appropriate to petition under section 124A of the 1986 Act.
(3) On an application for an FMI administration order, the court may—
(a) grant the application;(b) dismiss the application;(c) adjourn the application (generally or to a specified date);(d) make an interim order;(e) treat the application as a winding-up petition and make any order which the court could make under section 125 of the 1986 Act;(f) make any other order which the court thinks appropriate.(4) An interim order under subsection (3)(d) may, in particular—
(a) restrict the exercise of a power of the company or of its directors;(b) make provision conferring a discretion on the court or on a person qualified to act as an insolvency practitioner in relation to the company.(5) For the purposes of this section a company is unable to pay its debts if it is treated as being so unable under section 123 of the 1986 Act (definition of inability to pay debts).”
“FMI administrators
(1) The FMI administrator of a company—
(a) is an officer of the court, and(b) in exercising and performing powers and duties in relation to the company, is the company’s agent.(2) The management by the FMI administrator of a company of any of its affairs, business or property must be carried out for the purpose of achieving the objective of the FMI administration as quickly and efficiently as is reasonably practicable.
(3) The FMI administrator of a company must exercise and perform powers and duties in the way which, so far as it is consistent with the objective of the FMI administration to do so, best protects—
(a) the interests of the company’s creditors as a whole, and(b) subject to those interests, the interests of the company’s members as a whole.”
“Continuity of supply
(1) This section applies where, before the commencement of FMI administration, the infrastructure company had entered into arrangements with a supplier for the provision of a supply to the infrastructure company.
(2) After the commencement of FMI administration, the supplier—
(a) must not terminate a supply unless—(i) any charges in respect of the supply which relate to a supply given after the commencement of FMI administration remain unpaid for more than 28 days,(ii) the FMI administrator consents to the termination, or(iii) the supplier has the permission of the court, which may be given if the supplier can show that the continued provision of the supply would cause the supplier to suffer hardship, (b) must not make it a condition of a supply that any charges in respect of the supply which relate to a supply given before the commencement of FMI administration are paid, and (c) must not do anything which has the effect of making it a condition of the giving of a supply that any charges within paragraph (b) are paid.(3) Where, before the commencement of FMI administration, a contractual right to terminate a supply has arisen but has not been exercised, then, for the purposes of this section, the commencement of FMI administration causes that right to lapse and the supply is only to be terminated if a ground in subsection (2)(a) applies.
(4) Any provision in a contract between the infrastructure company and the supplier that purports to terminate the agreement if any action is taken to put the infrastructure company in FMI administration is void.
(5) Any expenses incurred by the infrastructure company on the provision of a supply after the commencement of FMI administration are to be treated as necessary disbursements in the course of the FMI administration.
(6) In this section—
“commencement of FMI administration” means the making of the FMI administration order;
“supplier” means the person controlling the provision of a supply to the infrastructure company, and includes a company that is a group undertaking (as defined by section 1161(5) of the Companies Act 2006) in respect of the infrastructure company;
“supply” means a supply of any of the following—
(a) computer hardware or software used by the infrastructure company in connection with the operation of the relevant system;(b) financial data; (c) infrastructure permitting electronic communication services;(d) data processing;(e) access to secure data networks used by the infrastructure company in connection with the operation of the relevant system.”
“Power to direct FMI administrator
(1) If the Bank of England considers it necessary to do so for the purpose of achieving the objective of an FMI administration, the Bank may direct the FMI administrator to take, or refrain from taking, specified action.
(2) In deciding whether to give a direction under this section, the Bank of England must have regard to the public interest in—
(a) the protection and enhancement of the stability of the financial system of the United Kingdom, and(b) the maintenance of public confidence in that system.(3) A direction under this section must not be incompatible with a direction of the court that is in force under Schedule B1 to the 1986 Act.
(4) The Bank of England must, within a reasonable time of giving the direction, give the FMI administrator a statement of its reasons for giving the direction.
(5) A person listed in subsection (6) has immunity from liability in damages in respect of action or inaction in accordance with a direction under this section.
(6) Those persons are—
(a) the FMI administrator;(b) the company in FMI administration;(c) the officers or staff of the company.(7) Immunity conferred by this section does not extend to action or inaction—
(a) in bad faith, or(b) in contravention of section 6(1) of the Human Rights Act 1998.(8) This section does not limit the powers conferred on the Bank of England by section 191 of the Banking Act 2009 (directions) in relation to a recognised inter-bank payment system.”
“Conduct of administration, transfer schemes etc.
(1) Schedule (Conduct of FMI administration) (which applies the provisions of Schedule B1 to the 1986 Act about ordinary administration orders and certain other enactments to FMI administration orders) has effect.
(2) Schedule (Financial market infrastructure transfer schemes) (which makes provision for transfer schemes to achieve the objective of an FMI administration) has effect.
(3) The power to make rules conferred by section 411(1B) of the 1986 Act (rules relating to bank administration) is to apply for the purpose of giving effect to this Part as it applies for the purposes of giving effect to Part 3 of the Banking Act 2009 (and, accordingly, as if the reference in section 411(1B) to that Part included a reference to this Part).”
“Restriction on winding-up orders and voluntary winding up
(1) A petition by a person other than the Bank of England for a winding up order in respect of an infrastructure company may not be determined unless—
(a) the petitioner has notified the Bank of England that the petition has been presented, and(b) the period of 14 days beginning with the day on which the notice is received by the Bank has ended.(2) A resolution for the voluntary winding up of an infrastructure company may not be made unless—
(a) the infrastructure company has applied to the court under this section,(b) the company has notified the Bank of England that the application has been made, and(c) after the end of the period of 14 days beginning with the day on which the notice is received by the Bank, the court gives permission for the resolution to be made.”
“Restriction on making of ordinary administration orders
(1) This section applies where an ordinary administration application is made in relation to an infrastructure company by a person other than the Bank of England.
(2) The court must dismiss the application if—
(a) an FMI administration order is in force in relation to the company, or(b) an FMI administration order has been made in relation to the company but is not yet in force.(3) Where subsection (2) does not apply, the court, on hearing the application, must not exercise its powers under paragraph 13 of Schedule B1 to the 1986 Act (other than its power of adjournment) unless—
(a) the applicant has notified the Bank of England that the application has been made, and(b) the period of 14 days beginning with the day on which the notice is received by the Bank has ended.(4) On the making of an FMI administration order in relation to an infrastructure company, the court must dismiss any ordinary administration application made in relation to the company which is outstanding.
(5) “Ordinary administration application” means an application under paragraph 12 of Schedule B1 to the 1986 Act.”
“Restriction on enforcement of security
A person may not take any step to enforce a security over property of an infrastructure company unless—(a) notice of the intention to do so has been given to the Bank of England, and(b) the period of 14 days beginning with the day on which the notice was received by the Bank has ended.”
“Loans
(1) This section applies where an FMI administration order has been made in relation to an infrastructure company.
(2) The Treasury may, out of money provided by Parliament, make loans to the company for achieving the objective in section (Objective of FMI administration).
(3) A loan under this section may be made on such terms as the Treasury think fit.
(4) The Treasury must pay into the Consolidated Fund sums received by them as a result of this section.”
“Indemnities
(1) This section applies where an FMI administration order has been made in relation to an infrastructure company.
(2) The Treasury may agree to indemnify persons in respect of one or both of the following—
(a) liabilities incurred in connection with the exercise of powers and duties by the FMI administrator;(b) loss or damage sustained in that connection.(3) The agreement may be made in whatever manner, and on whatever terms, the Treasury think fit.
(4) As soon as practicable after agreeing to indemnify persons under this section, the Treasury must lay before Parliament a statement of the agreement.
(5) If sums are paid by the Treasury in consequence of an indemnity agreed to under this section, the infrastructure company must pay the Treasury—
(a) such amounts in or towards the repayment to them of those sums as the Treasury may direct, and(b) interest, at such rates as they may direct, on amounts outstanding under this subsection.(6) Subsection (5) does not apply in the case of a sum paid by the Treasury for indemnifying a person in respect of a liability to the infrastructure company.
(7) Where a sum has been paid out by the Treasury in consequence of an indemnity agreed to under this section, the Treasury must lay a statement relating to that sum before Parliament—
(a) as soon as practicable after the end of the financial year in which that sum is paid out, and?(b) (except where subsection (5) does not apply in the case of the sum) as soon as practicable after the end of each subsequent relevant financial year.(8) In relation to a sum paid out in consequence of an indemnity, a financial year is a relevant financial year for the purposes of subsection (7) unless—
(a) before the beginning of that year, the whole of that sum has been repaid to the Treasury under subsection (5), and(b) the infrastructure company is not at any time during that year subject to liability to pay interest on amounts that became due under that subsection in respect of that sum.(9) The power of the Treasury to agree to indemnify persons—
(a) is confined to a power to agree to indemnify persons in respect of liabilities, loss and damage incurred or sustained by them as relevant persons, but(b) includes power to agree to indemnify persons (whether or not they are identified or identifiable at the time of the agreement) who subsequently become relevant persons.(10) For the purposes of this section each of the following is a relevant person—
(a) the FMI administrator;(b) an employee of the FMI administrator;(c) a member or employee of a firm of which the FMI administrator is a member; (d) a member or employee of a firm of which the FMI administrator is an employee;(e) a member or employee of a firm of which the FMI administrator was an employee or member at a time when the order was in force;(f) a body corporate which is the employer of the FMI administrator;(g) an officer, employee or member of such a body corporate.(11) For the purposes of subsection (10)—
(a) the references to the FMI administrator are to be read, where two or more persons are appointed to act as the FMI administrator, as references to any one or more of them, and(b) the references to a firm of which a person was a member or employee at a particular time include references to a firm which holds itself out to be the successor of a firm of which the person was a member or employee at that time.(12) The Treasury must pay into the Consolidated Fund sums received by them as a result of subsection (5).”
“Interpretation: general
(1) In this Part—
“the 1986 Act” means the Insolvency Act 1986;
“business”, “member”, “property” and “security” have the same meaning as in the 1986 Act;
“company” has the meaning given by section (Interpretation: other expressions);
“the court” means—
(a) in England and Wales and Northern Ireland, the High Court;(b) in Scotland, the Court of Session;“FMI administration order” and “FMI administrator” are to be read in accordance with section (FMI administration orders);
“infrastructure company” has the meaning given by section (Interpretation: infrastructure companies);
“operator”, in relation to a recognised inter-bank payment system, has the meaning given by section (Interpretation: other expressions);
“recognised inter-bank payment system” has the meaning given by section (Interpretation: other expressions);
“regulated activity” has the same meaning as in FSMA 2000;
“the relevant system” has the meaning given by section (Interpretation: other expressions);
“securities settlement system” has the meaning given by section (Interpretation: other expressions).
(2) In this Part references to the FMI administrator of a company include a person appointed under paragraph 91 or 103 of Schedule B1 to the 1986 Act, as applied by Schedule (Conduct of FMI administration) to this Act, to be the FMI administrator of a company.
(3) In this Part references to a person qualified to act as an insolvency practitioner in relation to a company are to be read in accordance with Part 13 of the 1986 Act, but as if references in that Part to a company included a company registered under the Companies Act 2006 in Northern Ireland.”
“Northern Ireland
(1) This section makes provision about this Part in its application to Northern Ireland.
(2) Any reference to any provision of the 1986 Act is to have effect as a reference to the corresponding provision of the Insolvency (Northern Ireland) Order 1989.
(3) Section (Interpretation: general)(3) is to have effect as if the reference to Northern Ireland were a reference to England and Wales or Scotland.”
Lord Newby
“Part 7MiscellaneousFunctions of FCA under competition legislation
Schedule (Functions of FCA under competition legislation) (which contains provision conferring on the FCA functions under competition legislation) has effect.”
Lord Newby
My Lords, the Government want to see a competitive banking sector that delivers good outcomes for consumers and are taking steps to make that happen. Much has happened already.
We worked with the banking industry to secure from it a new seven-day current account switching service. This service, which launched last month, has made it easier, simpler, safer and faster to switch accounts, and will help to stimulate competition between providers. We also asked the regulators to undertake a review of barriers to entry and expansion in the banking sector. The review, published in March, introduced a range of changes to capital and liquidity requirements and to the authorisations process to make it easier for new banks to enter the market and for smaller banks to compete.
In addition to this, as noble Lords will be aware, we are introducing a ring-fence to remove the competitive advantage that big banks have received, we are creating a new independent payments regulator, and we have already put competition at the centre of the Financial Conduct Authority’s responsibilities by making competition one of its three objectives and giving it a separate competition duty.
However, we believe that more can be done. In addition to giving the PRA a secondary competition objective, we will provide the FCA with new competition powers. These new powers include Competition Act 1998 enforcement powers that are used to address restrictive practices which are engaged in by companies operating in the UK that distort, restrict or prevent competition—for example, ordering that offending agreements or conduct be stopped. They also include power under the Enterprise Act 2002 to carry out market studies and make references to the Competition and Markets Authority for a decision on whether action should be taken.
The FCA wrote to the Chancellor to request those powers. Since being given a competition objective last year, the FCA has worked hard to increase its technical, legal and economic skills and expertise on competition, building its capacity to identify and address competition issues in the financial services markets. The Government are therefore confident that such powers will strengthen the FCA’s ability to ensure competitive banking markets that deliver good consumer outcomes. These changes, which bring the FCA in line with other sector regulators, will enhance the credibility of the FCA and make it easier for it to persuade firms to alter their behaviour voluntarily.
Finally, the changes will enable the FCA to become a member of the European Competition Network, leaving it much better placed to engage with regulatory issues at a European level. In short, giving the FCA these powers is another step taken by this Government that is good for competition. I beg to move.
Lord Eatwell
My Lords, I am grateful to the Minister for introducing these amendments. However, can we reflect a little on the rush towards competition? A competitive system, if it is working effectively, is likely to result in the elimination of institutions from time to time, a process that was famously described as “creative destruction”. That sort of process can be seen quite clearly in countries that have large numbers of relatively small banks. Banks fail regularly in the United States—it is quite a common process. The process is, of course, managed effectively because these banks are relatively small. Has some thought been given to the relationship between the size of banking institutions in Britain and the effectiveness of competition? If competition were truly enhanced, one bank managed to eliminate another and both were relatively large, that could be extremely disruptive. This is not to argue against a competitive process but simply to say that it should not be regarded as an exclusive guideline with respect to what are desirable policies. Has the FPC been consulted on these clauses, and what is its view?
Lord Phillips of Sudbury (LD)
My Lords, there is an assumption that competition is essentially and necessarily good and that more competition is better. We have had manifest evidence in the past six years in the City—and indeed much longer than that— that there is a point at which competition turns in on itself. Indeed, the values of out-and-out aggressive competition are inimical to the values of integrity and honesty. I want to strike a note of caution, because this word is overdone in terms of its necessary public benefit.
Lord Newby
My Lords, we spent the first part of the afternoon talking about how we get more diversity and competition into the sector. Obviously there is a danger that this can go too far. It is important, however, to realise what these powers do. There are two principal powers. First, Competition Act enforcement powers deal with restrictive practices. Most people would agree that, almost by definition, restrictive practices are not a good thing. The second power is the ability to carry out market studies and make references to the Competition and Markets Authority for a decision on whether action should be taken. Earlier we were discussing the need for the Competition and Markets Authority potentially to do just that. These are not powers that are going to force the FCA to put competition at all costs, at any price, ahead of everything else. They are relatively limited and I think we will find that they are beneficial.
Lord Newby
“Competition as a secondary objective of the PRA
(1) For section 2H of FSMA 2000 substitute—
“2H Secondary competition objective and duty to have regard to regulatory principles
(1) When discharging its general functions in a way that advances its objectives (see section 2F), the PRA must so far as is reasonably possible act in a way which, as a secondary objective, facilitates effective competition in the markets for services provided by PRA-authorised persons in carrying on regulated activities.
(2) In discharging its general functions, the PRA must also have regard to the regulatory principles in section 3B.”
(2) In section 3B (regulatory principles to be applied by both regulators), in subsection (1), for “2H(1)(a)” substitute “2H(2)”.
(3) In Schedule 1ZB to FSMA 2000 (the Prudential Regulation Authority)—
(a) in paragraph 19 (annual report), in sub-paragraph (1)—(i) after paragraph (b) insert—“(ba) how it has complied with section 2H(1),”, and(ii) in paragraph (c), omit the words from “and of” onwards, and(b) in paragraph 20 (consultation about annual report), in sub-paragraph (1)(c), for the words from “and the PRA” onwards substitute “and the PRA has facilitated effective competition in accordance with section 2H and has considered the regulatory principles in section 3B”.”
Lord Newby
My Lords, this group of amendments proposes changes to the statutory objectives of the PRA and FCA, following the recommendations of the PCBS. The Government recognise the importance of getting the objectives of the regulators right. They have carefully considered the PCBS recommendations. We agree with the PCBS on the need for competition in banking and have made changes to the PRA’s objectives to reflect the important role it can play in this regard. We did not agree, however, with the conclusion to drop the FCA’s strategic objective and so I will start by explaining that.
During the progress through Parliament of the previous Financial Services Bill we listened to concerns expressed as part of the consultation process and made quite substantial changes to the FCA’s objectives as a result. On the strategic objective, the Government took note of calls by the ICB and others that the objective proposed in the draft Bill which was,
“protecting and enhancing confidence in the UK’s financial system”,
needed to be changed. So the FCA was given the strategic objective of,
“ensuring that the relevant markets function well”.
This change has been broadly welcomed by the ICB and by consumer and industry stakeholders alike.
Of course, the FCA is now up and running and the strategic objective does what it was meant to do by acting as a high level mission statement that brings together the diverse aspects of the FCA’s work in to a single focus. We have considered the arguments that the strategic objective makes the FCA’s remit too complex and risks diverting the FCA from its operational objective.
The three operational objectives of consumer protection, effective competition and market integrity are the matters which the FCA must seek to advance, and in doing so it must bear it in mind that ultimately this should be done in a way that ensures that markets function well, rather than being damaged or undermined. This seems straightforward and there are no reports of the strategic objective causing confusion or problems in practice.
There is also a concern, previously raised by the Treasury Select Committee, that because the FCA’s actions have to be compatible with the strategic objective, this objective can trump the other objectives. The structural requirement to pay heed to the strategic objective would only really create a problem if the content of the strategic objective were in conflict with the operational objective. However, the strategic objective of ensuring markets function well reflects the values in the operational objectives and does not undermine them. That is quite deliberate. So the Government do not agree that the FCA’s strategic objective creates a genuine problem.
It is absolutely appropriate that the mission statement of the FCA should be enshrined in statute. And we agree with the ICB and others that it is equally important that the FCA has an overarching aim of making markets work well. So, on balance, we propose that the FCA’s strategic objective should not be removed.
I turn to the second amendment. Strong competition in financial markets is essential for getting good outcomes for consumers. One impact of the financial crisis has been an increase in concentration in core banking markets to levels where they are almost certainly harming competition. The Government are doing a lot to address this. The account switching service, the payment systems regulator and the existing regulators have a role to pay in ensuring a competitive banking market. That is why we have given the FCA a competition objective and duty, and are giving it strong competition powers so that it has the right tools to get the job done.
The PRA’s main responsibility is towards a safe and stable financial sector, and this is right; but prudential regulation, while vital, can run the risk of securing the position of dominant incumbents in the market, deterring new entrants, and hampering innovation. Therefore, it is crucial that the PRA gives close consideration to competition when going about its duties. We believe that the PRA can take a more active role in facilitating competition in banking markets than under the current requirement to have regard to adverse effects on competition. This would build on the important changes made to capital and liquidity requirements and to the authorisation process as a result of the barriers to entry and expansion review in March this year. The Parliamentary Commission on Banking Standards was also of this view; it suggested the PRA be given a secondary competition objective, and the Government have accepted this recommendation.
I therefore welcome the intention behind the amendment tabled by noble Lords, but I regret that I am unable to accept the amendment as drafted, preferring instead the amendment which stands in my name. I suspect that this will come as no surprise to the noble Lord. However, I assure him that the objective behind the two amendments is a shared one. The noble Lord’s amendment is intended to make the competition objective subject to safety and soundness, but I am not convinced that it has this effect in all contexts, and it does not make competition subordinate to policyholder protection when the insurance objective is in play.
There are various functions of the PRA that are exercisable for the purposes of advancing any of its objectives. By including competition in the definition of objectives in Section 2F, the PRA would be able, for example, to impose a requirement on a firm under Section 55M of FSMA solely for competition reasons, and it might be seen as required to do so. That is not, I think, what the PCBS intended by its recommendation for a secondary objective. To require the PRA to create rules and codes solely to advance competition, as I think the noble Lord’s amendment does, would mean the PRA becoming a competition regulator and would risk distracting it from its primary role as a prudential regulator, which is to ensure the safety and soundness of firms.
The Government amendment ensures that the PRA, in the exercise of its general functions such as making rules, must facilitate effective competition while not compromising its vital role in ensuring the safety and soundness of firms. The PRA will remain the watchdog for stability. It requires the PRA to facilitate effective competition, while maintaining the integrity of the two regulators’ clearly defined roles. Our expectation is that this secondary objective will see the PRA staffing up with greater competition knowledge and expertise and embedding a pro-competition mentality throughout the organisation. The PRA will need to ensure that competition will always be a fundamental consideration when making new rules, or determining its policies and procedures, and the PRA will need to use this expertise to keep its prudential rules and regulations under review to see whether changes can be made to provide a better environment for competition.
Finally, the PRA will need to work with the FCA, which has a strong focus on competition, to ensure a cohesive strategy for competition in financial services. I beg to move.
Lord Turnbull (CB)
I speak to Amendments 89 and 90 in my name. A recurrent theme in the reforms to which we have come back several times this afternoon and this evening has been to increase competition in the banking system. This should engage not just the banks but their regulators too. We tabled these two amendments, Amendment 89 relating to the FCA and Amendment 90 relating to the PRA.
The proposal for the PRA is to add an additional objective to promote competition in a way that is as far as possible consistent with its main duty of providing financial stability. The difference between the amendment tabled by the Government and my amendment is sufficiently small that I think we can accept their measure as taking us forward on that front. However, the parliamentary commission also believed that a change was needed to the architecture of the FCA’s objectives. I wish to put the other side of the case. A fear, which many in the financial world share, is that the FCA will give too much emphasis to bringing about change through enforcement, will wait until something goes wrong and then intervene heavily. However, the FCA, when properly directed, can be a very powerful force for improving competition.
As the Minister has set out, the present architecture has the overall strategic objective of ensuring that relevant markets function well, and has three operational objectives below that: namely, the appropriate degree of protection for consumers; enhancing the integrity of the UK financial system; and promoting competition in the interests of consumers. We queried whether the strategic objective did anything or even whether it could be unhelpful and could be used to trump or confuse the clarity of the operational objectives. Our preferred solution was to drop the strategic objective and promote the other three to primary objectives by deleting the word “operational”, thus ensuring that the competition objective comes into the front rank along with the other two. I am rather surprised that the Government have not supported this, particularly as they accepted the pro-competition logic in the PRA case. I was not convinced by the Government’s response with regard to providing a mission statement. My riposte to that is that the chief executive of the FCA thought the strategic objective,
“added little or nothing to the three operational objectives”.
He continued:
“You could argue that promoting effective competition in the interest of consumers and the market, enhancing the integrity of the system and ensuring an appropriate degree of protection encompass everything that is in the phrase ‘ensuring markets work well’”.
Therefore, if you can achieve something in fewer words and with fewer objectives, and the other one is largely redundant, I would dispose of it.
In my view the aspect of FCA culture that most people feel needs to be bolstered is competition. The current architecture is weaker in that respect than the proposed amendment. We have heard the opposing view from the Minister, but that is the logic behind the position which the commission took.
Lord Eatwell
My Lords, I remember discussing this at length during the passage of the previous Financial Services Bill. At that time, I commented that one could often detect whether a proposition made any sense by proposing a negative outcome. If we suppose that the duty is to make the markets work badly, that does not make any sense at all. Therefore, it seems to me that the strategic objective is entirely redundant and serves no useful purpose. Indeed, the idea of changing what were previously operational objectives into prime objectives places competition at that prime level and achieves the objectives which the Government themselves have argued are necessary. For some reason, this issue was never satisfactorily explained previously and has not been satisfactorily explained now. We should apply Occam’s razor and take it out.
Lord Newby
My Lords, I am sorry that the noble Lord does not think that the matter has been satisfactorily explained. All I can say is that it has been explained and was debated at great length when we took the Financial Services Bill through the House. Martin Wheatley made it clear that the operational objectives are the key drivers for the FCA’s actions. After taking legal advice, the FCA has subsequently written and confirmed that it is happy with the strategic objective. On that basis, we are happy that the FCA is happy and wish to retain it.
Lord Newby
“Power of FCA and PRA to make rules applying to parent undertakings
(1) After section 192J of FSMA 2000 insert—
“Rules applying to parent undertakings of ring-fenced bodies192JA Rules applying to parent undertakings of ring-fenced bodies
(1) The appropriate regulator may make such rules applying to bodies corporate falling within subsection (2) as appear to the regulator to be necessary or expedient for the group ring-fencing purposes.
(2) A body corporate falls within this subsection if—
(a) it is incorporated in the United Kingdom or has a place of business in the United Kingdom, (b) it is a parent undertaking of a ring-fenced body, and(c) it is not itself an authorised person.(3) The “group ring-fencing purposes” are the purposes set out in section 142H(4).
(4) “The appropriate regulator” means—
(a) in relation to the parent undertaking of a ring-fenced body that is a PRA-authorised person, the PRA;(b) in any other case, the FCA.Rules requiring parent undertakings to facilitate resolution192JB Rules requiring parent undertakings to facilitate resolution
(1) The appropriate regulator may make rules requiring a qualifying parent undertaking to make arrangements that would in the opinion of the regulator allow or facilitate the exercise of the resolution powers in relation to the qualifying parent undertaking or any of its subsidiary undertakings in the event of a situation arising where all or part of the business of the parent undertaking or the subsidiary undertaking encounters or is likely to encounter financial difficulties.
(2) The “resolution powers” are—
(a) the powers conferred on the Treasury and the Bank of England by or under Parts 1 to 3 of the Banking Act 2009, and(b) any similar powers exercisable by an authority outside the United Kingdom.(3) The arrangements that may be required include arrangements relating to—
(a) the issue of debt instruments by the parent undertaking;(b) the provision to a subsidiary undertaking (“S”) or a transferee by the parent undertaking, or by any other subsidiary undertaking of the parent undertaking, of such services and facilities as would be required to enable S or the transferee to operate the business, or part of the business, effectively.(4) In subsection (3)(b) “transferee” means a person to whom all or part of the business of the parent undertaking or the subsidiary undertaking could be transferred as a result of the exercise of the resolution powers.
(5) “Debt instrument” has the same meaning as in section 142Y.
(6) “The appropriate regulator” means—
(a) where the subsidiary undertakings of the qualifying parent undertaking include a ring-fenced body that is a PRA-authorised person, the PRA;(b) where the subsidiary undertakings of the qualifying parent undertaking include one or more PRA-authorised persons but do not include any authorised person that is not a PRA-authorised person, the PRA;(c) where the subsidiary undertakings of the qualifying parent undertaking do not include any PRA-authorised person, the FCA;(d) in any other case, the PRA or the FCA.”(2) In section 192K of FSMA 2000 (power to impose penalty or issue censure)—
(a) in subsection (1), after “section 192J” insert “or 192JB”, and(b) after that subsection insert—“(1A) This section also applies if a regulator is satisfied that a person (“P”) who is or has been a parent undertaking of a ring-fenced body has contravened a provision of rules made by that regulator under section 192JA.””
Lord Newby
(b) after “213(1A),” insert “234I(2),”.”
Lord Turnbull
“Court of directors to become board of directors
(1) The court of directors of the Bank of England shall become the board of directors of the Bank of England.
(2) Accordingly, in the Bank of England Act 1998—
(a) in sections 1(1), (2) and (4), 2(1), 4(2), (3) and (4), 9A(1), (4) and (5), 9B(1), 9G(2), paragraphs 8 to 12A and 13(1) and (3A) to (6) of Schedule 1 and paragraphs 5 and 14 of Schedule 3, for “court” substitute “board”,(b) in section 2(2) to (4) for “court’s” substitute “board’s”, and(c) in paragraph 14(2) of Schedule 1, for “court” substitute “board of directors, or former members of the court of directors,”;and any reference to the court in any other enactment or instrument is to be read as (as appropriate) being or including a reference to the board.”
Lord Turnbull
I shall speak also to Amendments 84, 85 and 86. I believe that my colleague, the noble Lord, Lord Lawson, may speak to Amendment 87.
For those who took part in proceedings on the Financial Services Bill in 2012 these clauses will be Groundhog Day—fighting old battles all over again. The arguments about accountability are familiar, were set out in great detail in the Treasury Committee’s report Accountability of the Bank of England, and rehearsed again in the report of the banking commission. This is not surprising, given the overlap in membership of the two groups.
The dispute can be briefly summarised. The Bank of England’s responsibilities have been hugely enhanced, and its accountability has changed—one has to concede that—but not kept pace. Not only has the scope of the Bank’s responsibilities grown but so has its nature. It is now not just responsible for generic policies such as monetary policy or financial stability; it also has powers over the lives and livelihoods of individual citizens and individual businesses. It is therefore important that its accountability keeps pace with those changes.
Just as important as the Bank of England’s accountability to Parliament is its ability to be self-critical. This is the key feature about which people were dissatisfied. The Bank should be ready to review what it has done, consider how successful it has been and draw lessons from that. One can see that at some time in the not-too-distant future, the Bank will need to review the whole exercise of QE, which involves the spending of billions and billions of pounds, and be able to review the policy candidly, even when the results may not be entirely satisfactory or the Bank thinks that it can make improvements.
Amendment 84 would abolish the Court of the Bank of England and replace it with a board of directors. This is the most eye-catching measure—after all, the court has existed for 319 years—but not the most important. In a sense, it is what you would do last, having made the other changes to signify that the Bank’s governance had conclusively changed. The court has some desirable features, which were noted in earlier discussions. It is a unitary board and is no longer chaired by the governor. When I worked for the Treasury, I had to recommend appointments to the court. However, it has come a long way from the old 16-member court, which was like an in-house focus group on which every region or interest imaginable was represented. It has been replaced by a 14-member court with five executives and nine non-executives.
The Financial Services Act 2012 genuflected in the direction of improving internal review by creating an oversight committee of non-executives. I would contend that that still does not go far enough. The central recommendation in Amendment 86 is not about whether the court should be a supervisory board or a board of directors; it concerns the abolition of the oversight committee and the transfer of its responsibilities from a committee of non-executives to the whole board—as I will call it—of the Bank.
We are seeking this change because we believe that the responsibility to be self-critical should not reside solely with the non-executive directors but should be fully embraced by the whole board, including the governor and deputy governors. Looking critically at one’s own work should be something that the governors embrace enthusiastically and not have imposed on them. It is illogical to praise the court for being a unitary board but with regard to this particular function —the function of review—to assign self-examination to the non-executive directors.
I should make it clear that, as with the oversight committee, it is not implied that the commissioning of a review is to be done internally. The board should determine in each case how best to conduct it—whether it is to be done internally with help or to be done externally.
The next important element of the amendments relates to expertise. The chairman of the Bank has hitherto been a highly experienced, highly respected, all-purpose FTSE chairman with an industrial rather than a financial background. Amendment 84 requires that whoever is appointed should have experience in financial matters and financial markets. However, looking at the advertisement that has just been issued for the new chair, I wonder whether it has really caught up with the change in the nature of the work that the Bank is now involved in. The words “prudential” and “macro” do not appear in the advertisement; nor do the words “central bank” or “knowledge of central bank work” or “knowledge of international financial policy”—for example, familiarity with the work of the Financial Stability Board. It still looks pretty old fashioned. Therefore, we are trying to change the nature of the people who are appointed to this organisation to reflect the new, wider role that it is taking on.
With regard to the new arrangements, this proposal is not meant to trample over current operations. The review work would always take place at a time when the operation was no longer critical, so there would be a clear difference between reviewing performance in the past and day-to-day operations.
Finally, the Treasury Committee and the parliamentary commission recommended that the board, or whatever it is called, should be smaller than the current one of 14 members. It was recommended that there should be a board of eight, including three internal members—the governor and two deputy governors—and four external members. Although the governance of the Bank has moved somewhat, my contention is that it still does not fully reflect the change in the nature of the work that it has to do.
Lord Eatwell
My Lords, we had a considerable discussion about the creation of the rather unfortunately named oversight committee, given the dual meaning of the word “oversight”, during the passage of the Financial Services Bill, now an Act. I am broadly in sympathy with the argument that the noble Lord, Lord Turnbull, has made, which carries through the logic from the ICB or the Treasury Committee—I cannot remember which had the initial discussions—through the banking commission, looking at the overall problem of Bank of England governance in the 21st century, particularly now, given its greater responsibilities.
I should like to make only one major point, which the noble Lord, Lord Turnbull, and his colleagues, including the noble Lord, Lord Lawson, might like to consider, and that is the business of expertise. I entirely agree that the chairman should be a non-executive with considerable experience of prudential or financial matters. That is fine. However, Amendment 84 then says:
“The persons appointed to be non-executive members of the Bank must have—
(a) experience in the running of large organisations and financial institutions”.
That would exclude a lot of people who would be highly desirable. It would exclude Sir John Vickers, for example, and that seems to me to be undesirable. I am very much in favour of academics being in these organisations, such as Sir John Vickers, and I would not like that area of expertise to be ruled out.
Baroness Noakes (Con)
My Lords, I shall not take much of the Committee’s time. Most of these amendments are pretty marginal to this Bill, and, as the noble Lord, Lord Turnbull, said, it feels as if we are refighting the battles that we so much enjoyed on the previous Financial Services Bill.
I should like to make a small contribution on the expertise point. I believe that it is a matter of principle; it is not good to specify in legislation the characteristics that holders of particular offices should have. Things change over time and rapidly become out of date. They are useful things to debate but not in the context of writing legislation. In particular, the non-executive community should be a balance of skills and expertise. To follow the formula here, they have all to be this impossible person in having experience of running large organisations and financial institutions, and expertise in prudential policy. The gene pool is pretty limited on those, and to write that into legislation is a recipe for not being able to fill the posts as they come vacant. I am sure that it is really enjoyable to go back over all those debates that we had and to relive the points that have been raised by the Treasury Select Committee in another place, but for my purposes they are not necessary for this Bill.
Lord Newby
My Lords, as noble Lords have said, the governance of the Bank of England was debated at great length just a year ago during the passage of the Financial Services Act. As a result of those debates, the Government accepted that the additional responsibilities for financial stability transferred to the Bank would put strain on its governance structures, and as a result we provided for a powerful new oversight committee, which has been established as a sub-committee of the Bank’s court.
These changes were introduced as recently as April this year and should be allowed time to develop. Making further changes now would serve only to introduce uncertainty into the Bank’s governance at a time of significant change in its senior management. It would also prevent the new system having time to prove itself. Moreover, it is the Government’s view that the amendments would weaken rather than strengthen the Bank’s governance structures.
I shall deal with the amendments in turn. Amendment 83 proposes that the name of the governing body should change from the court to the board of directors. Our view is simple: changing the name of the court would make no difference to how it operates in practice. Indeed, in substance the court now operates along the same lines as a modern plc board. It has a clear division between the role of the chief executive and non-executive chair; it is made up of a majority of independent non-executive directors; and there are formal, transparent appointment procedures for executive and non-executive directors alike.
Amendment 84 proposes that the number of non-executive directors should be reduced from nine to four and would require the appointment of a non-executive chairman. The reduction in the number of non-executive directors would drastically alter the balance of membership of the Bank’s governing body, resulting in an equal number of executive and non-executive members. It is our view that this would significantly reduce the level of independent advice and challenge available to the governors and increase the risk of decision-making becoming dominated by a small group. The court already has a non-executive chair, so we believe this proposal is unnecessary.
Amendments 85 and 86 propose abolishing the new oversight committee and rolling its powers into the proposed new board of directors. This would be a backward step for the accountability of the Bank. The oversight committee, which is made up exclusively of non-executives, was established to provide stronger challenge to the Bank’s executive. It has a clear remit to monitor the Bank’s performance against its objectives and strategy, including the Bank’s monetary and financial policy objectives. In order to deliver these responsibilities, the committee has the power to appoint any person to review any matter. These powers cover not only the Bank’s operational performance but also its policy decisions. These responsibilities are very important to the accountability of the Bank, and the Government believe they must continue to be carried out by a non-executive body independent from the policy-making process. These amendments would transfer the powers of the oversight committee to a board of directors whose membership included the governor and three deputy governors of the Bank. It cannot be right for the governors to have a role in scrutinising the policy processes that they themselves are responsible for administering, especially when the processes in question are of such vital national importance.
These amendments also seek to introduce more specific legislation to govern how the performance of the Bank’s policy functions are monitored. This is unnecessary. The oversight committee already has wide-ranging powers to review the Bank’s performance in relation to any matter, including specific provision to review the procedures of the MPC and Financial Policy Committee. The Government also believe that it is unnecessary to introduce legislation covering requests for information. The current arrangements are effective, and historically the Bank has been very co-operative with both the Treasury and Parliament. Moreover, Parliament already has wide-ranging powers to hold public authorities to account, including the power to call any witnesses to appear in front of any of its committees, as the governors of the Bank of England know only too well.
Amendment 87 would require the Chancellor to appoint an additional external member to the FPC with experience of financial crises. The FPC’s objectives—
Lord Newby
I believe it is in this group. I hope that noble Lords will not mind if I deal very briefly with it, and we will come back to it if that is the wish of the House. Amendment 87 would require the Chancellor to appoint an additional external member with experience of financial crises. The FPC’s objectives are to exercise its functions with a view to contributing to the achievement of the Bank of England’s financial stability objective and, subject to that, support the economic policy of Her Majesty’s Government, including their objectives for growth and employment. The Government agree with the commission on the importance of ensuring that the FPC has the necessary expertise and experience to understand and draw lessons from history. The current membership of the FPC equips it to do so. In the Government’s response to the PCBS we will take this into account, alongside other relevant factors, when making future appointments to the FPC. However, I do not think it is either necessary or desirable to include a provision of this nature in legislation. It risks constraining the Government’s flexibility, as the noble Baroness, Lady Noakes said, to appoint the best candidates by placing particular emphasis on only one of a number of criteria relevant to the appointment process.
I am also not persuaded that the balance of the FPC should be changed by the addition of a fifth external member. The current composition strikes the right balance between ensuring that there is sufficient input from the Bank, as executive, and internal Bank of England expertise, while supporting the role of the external non-executives in providing a challenge to members’ thinking. Furthermore, the oversight committee, a sub-committee of the Court of Directors consisting of the non-executive directors of the Bank, is able to undertake or commission reviews of the FPC’s performance, ensuring that it is held to account for its decisions. The oversight committee also monitors the processes of the FPC to ensure that all members have the required information and to tackle any emergence of groupthink. In view of these arguments, I hope the noble Lord will withdraw his amendment.
Lord Lawson of Blaby
My Lords, my noble friend the Minister has just pathetically addressed Amendment 87. None of his arguments stack up. We are saying here that it would be desirable—I cannot understand why the Government are opposing this—that there should be an additional external member who would have great knowledge and he might even be an academic, which would enormously please the noble Lord, Lord Eatwell. However, he need not be an academic; he could be someone who had a great knowledge of past financial and banking crises.
I think it was the philosopher Immanuel Kant who first observed that the only lesson of history is that no one ever learns the lessons of history. Financial crises are not unique; there have been a series of them over the years, both in this country and in the western world more generally. We commissioned a study of past financial crises. It was conducted by an excellent man, Mr John Sutherland of the Bank of England. It is remarkable how the same mistakes were made time and again. Everyone knows now about the crisis of 2008, but the time will come when that generation will have learnt the lessons of their own lifetime but not of the past, and it would be extremely useful to have someone on the Financial Policy Committee with such knowledge and expertise. It may not prevent a further substantial crisis but it will, at trivial cost, reduce the risk significantly. I cannot understand why the Government object to this.
My noble friend the Minister said that there should not be this guidance; that the Government should be able to appoint the best people. In other words, they should be able to appoint people who have no knowledge of past financial crises. Why do they want to do that? Why on earth is the reason they should want to do that when they have been given this opportunity to buttress all the other excellent measures in the Bill with someone on the FPC who has some knowledge and understanding of previous financial crises? Such knowledge is not widespread among the great majority of people. I have known this neck of the woods for a long time and there is very little knowledge of previous financial crises, yet there is a lot to be learned from them. It seems to me that the Government could easily accept having someone on the FPC who has this knowledge and I cannot understand why they do not do so.
Lord McFall of Alcluith (Lab)
My Lords, I support the noble Lord, Lord Lawson, on that point. The historical issue is extremely important. If all MPC members had a copy of Adam Smith’s The Wealth of Nations—Adam Smith was a professor of moral philosophy in Glasgow University 250 years ago—we would not be in this crisis. If we could give them something from the 20th century, it would be John Kenneth Galbraith’s treatise. As he said, all financial crises have leverage at their core. In many ways, as the City historian David Kynaston said, the banking community has to come into the rest of society; it has been an island apart from it.
I remember when I was chairman of the Treasury Select Committee and Sir Richard Lambert was appointed to the Monetary Policy Committee. All flutters were let loose because he was not an economist and therefore could not know about or have an intelligent opinion on the MPC. He proved that he was efficient and in fact the banking community is now calling on him to chair a committee so that it can re-engage with the rest of society.
I remember when Professor Danny Blanchflower was appointed to the Monetary Policy Committee. He was resident professor of economics at Dartmouth College but those with the closed-shop mentality did not want such an individual because he was in America. However, we were in the jet age and he came across every couple of months for the MPC. He gave us an insight into the US labour market and US housing.
My plea to the Minister is to get rid of the mentality that it is only economists and those who are in the system who understand it. This crisis has had a hugely detrimental effect on society. If the economists again do not engage with society, then that is where problems will arise.
Professor Larry Summers, who was a contender for the Treasury Secretary’s job and is the Charles W Eliot Professor at Harvard, said:
“The financial crisis has made me rethink everything about economics”.
That is what he has done. The link between economics and society is so important. Let us get rid of the elitism; let us get rid of the closed shop; let us let in people with experience who understand society and can impart to people who have the great gift of economics the knowledge that they are part of society and that the consequences to society will be dire if they do not have a wide perspective on the implications of their actions.
Lord Higgins (Con)
My Lords, we are clearly getting a proliferation of Bank of England committees. We have both the Monetary Policy Committee and the Financial Policy Committee. Can the Minister say briefly precisely what the responsibilities will be of the Financial Policy Committee?
Lord Newby
My Lords, I will answer that question. The principal role of the Financial Policy Committee and its principal area of responsibility is to maintain the stability of the financial system. That is very different from any of the other committees established by the Bank. As for people on the FPC who have any understanding of financial crises, at the moment, Dr Donald Kohn, for example, clearly falls into the category of people with that ability. The former governor believed that he had extensive knowledge of financial history, and therefore there was and is no lack of it on the relevant committees, even without the provision on the face of the Bill.
Lord Turnbull
I listened to the responses to my intervention and divide them into two categories. One is points made by the noble Lord, Lord Eatwell, the Minister and the noble Baroness, Lady Noakes, on specifying expertise and skill. I can see some force in those points. If we are going to have the opportunity, I will try to improve on it. My main area of disagreement is that I just do not agree with the idea that the oversight committee—the repository of who is responsible for reviewing what the Bank has done—should be hived off to a committee of non-executive directors. It should be built into the DNA of the whole organisation. However, I can see I am not going to be able to persuade noble Lords of that, so—
Lord Lawson of Blaby
Before the noble Lord withdraws the amendment, I would like to correct the Minister on what he said before about the noble Lord, Lord King—the former Sir Mervyn King. He is a very old friend of mine, and I can assure the House that in advance of this crisis, he had no knowledge whatever: it was not his interest. He was interested in two things: monetary policy and microeconomics. He was very good at microeconomics, but he had no knowledge or interest in past financial crises at all. He mugged it up later, of course, after the crisis broke. Of course he mugged it up: he is a clever man and able to do so, but I am afraid that the Minister was briefed by his officials to say something totally false and misleading.
Lord McFall of Alcluith
The noble Lord, Lord King, whom I know as well and for whom I have tremendous respect, told me on many occasions that he attended MIT for his PhD. He shared an office with Ben Bernanke, who was an historian of financial crises in the 1930s. He assured me that he learned quite a lot in those three years.
Lord Newby
“Building societies
Schedule (Building societies) (which contains provision about building societies) has effect.”
Lord Newby
My Lords, this amendment modernises building societies legislation and enables them to compete on more of a level footing with banks.
In the Government’s founding document, the coalition agreement, we set out our commitment to,
“promote mutuals and foster diversity in financial services”.
This commitment underscores the importance that we attach to the contribution that mutuals make to the economy and shows our determination to support them.
Building societies play a central role in the mutual sector. They provide vital services for their members, taking savings deposits and providing mortgages. Indeed, the sector has come through the financial crisis in good health, and has been responsible for much of the new mortgage lending and lending to first-time buyers in the UK in recent years. Building societies also regularly outperform the other retail banks in terms of customer satisfaction.
The Government are keen to ensure that the sector continues to play an integral role in our financial services sector. That is why, in last year’s consultation The Future of Building Societies, the Government asked the building society sector whether there were any changes to the Building Societies Act which would remove unnecessary limitations or barriers to growth, while preserving the distinctive and traditional building society model. Following that consultation, the Government now propose to make several amendments to the Building Societies Act.
The amendments will, first, make it easier for building societies to communicate with their members electronically rather than by paper. This is obviously in line with what banks can do. Secondly, they will allow societies to create floating charges. At the moment, societies can create fixed charges, but are not permitted to grant security over fluctuating assets. This causes practical difficulties, because floating charges are commonplace in financial services. The ban was originally introduced in 1997 to prevent holders of floating charges taking control of a building society, but due to changes in insolvency law this threat no longer exists.
Thirdly, the amendments will change the classification of small business deposits for the purposes of calculating the proportion of a building society’s funding from wholesale sources. Under the Building Societies Act, no more than 50% of a building society’s funding can be wholesale funding. This amendment will mean that a certain amount of small business deposits will no longer count as wholesale funding. The amendment will give societies greater freedom to source wholesale funding, and creates a bigger incentive for societies to compete for small business deposits.
Fourthly, the amendments will allow owners of deferred shares, which are a type of mutual capital instrument, to be eligible to receive shares or cash payment on a demutualisation, irrespective of how long they have held the shares. This will provide an exception to the existing rule that shareholders must have held shares in the society for at least two years. This exception is necessary to remove the risk that deferred shares which are categorised as tier 1 capital would be degraded to tier 2 capital on a demutualisation, because the holder was not able to be given shares. Fifthly, I should add that our new provision makes it clear that the restriction applies to any right to acquire shares by members, and not just rights to acquire shares in priority to others, as is currently the case. The existing provision has not worked as intended and the amendments also correct that.
Sixthly, the amendments will allow building societies to change their financial year to any day in the year, not just 31 December. That is in line with banks. Seventhly, they will remove the requirement for building societies to provide new members with a copy of the latest summary financial statement. There is no equivalent requirement for banks, and this will have cost benefits. Eighthly, they will remove the requirement for societies to disclose information in their annual business statement about officers who are not directors. Such disclosure is excessive, time-consuming and costly, and there is no equivalent requirement for banks.
Taken together, these amendments provide significant modernisations to the legislative framework for building societies, and I commend them to the House.
Lord Eatwell
My Lords, in general these are desirable and beneficial changes, although they do not really represent the great boost to the growth of the mutual sector which we might have expected. However, I want to raise just two major issues. The increase in the use of electronic communication, particularly given the typical customer profile of building societies, raises the possibility that certain members will be disadvantaged with respect to the availability of regular information and of course the summary financial statement, which they should be able to receive in order to understand the overall status and security of their building society. Is the noble Lord content, and can he reassure the House, that there are suitable safeguards so that those who do not have ready access to electronic communication receive appropriate paper copies?
Turning to the issue of owners of preferred shares, can the noble Lord reassure me that the definition of ownership is the same as for those who have held shares for two years? The noble Lord may remember that initially when building societies were demutualised this caused problems, because if Mr and Mrs Smith held a joint account, in fact only Mr Smith was deemed to be the owner. If Mr Smith happened to die within the two-year period, Mrs Smith did not then gain mutualisation advantages. In a Private Member’s Bill which I helped take through the House, we changed that regulation so that in that circumstance both Mr and Mrs Smith would have the advantage if one of them was deceased. Even young Jimmy Smith would have the same advantage if his parents were killed in a car accident. Does the definition of ownership in this case have that broad scope that was specifically created for the demutualisation efforts—in other words, the owners are not the first-named person on the account but can include both a spouse or a partner and a first child?
Lord Higgins
As I understand it, the Government are proposing to remove the provision that on demutualisation people had to have held the shares for two years beforehand. Is there not some argument in favour of that? Otherwise, if it seems possible that a demutualisation will take place, there will be a sudden rush for people to benefit and obtain a purely short-term gain, as against those who have invested in the mutual for some time.
Baroness Noakes
My Lords, I am probably one of the few Members of your Lordships’ House who does not wear rose-tinted spectacles when it comes to the mutual sector. I am usually filled with slight horror when people tell me that they are going to modernise this wonderful sector and I am not particularly interested in the fact that it was in the coalition agreement. That is because we have seen a major failure of the mutual sector in recent years—namely, in relation to the Co-op Bank—and the history of the building society sector is one of failed building societies. However, many of the things in these amendments are not terribly important. Electronic versions of documents and the like may well help to reduce the cost of servicing very large member bases. My only concern is the liberalisation of the amount of funding that building societies can have, which potentially exposes the sector to greater risks. I would want to be assured by my noble friend the Minister that the Prudential Regulation Authority has no intention of relaxing its normal prudential approach to building societies, as there is no evidence that given greater freedoms they will use them wisely.
Lord Newby
My Lords, the noble Lord, Lord Eatwell, asked me two questions. The first one was about electronic communications and the age profile of members of building societies. This is a permissive amendment, and if members wish to be given paper copies of documents then building societies in future will still be required to provide them in paper form. In terms of the owners of preferred shares, I believe that preferred shares are typically owned within the financial services sector, so they are rather different from personal shares. It is obviously a highly technical point, and I will write to the noble Lord about it.
The noble Lord, Lord Higgins, asked whether we were changing the two-year bar in terms of shareholders and votes on demutualisation. No, we are not. For ordinary, individual shareholders in building societies, the rules do not change. There are never more than a very small number of preferred shareholders because they are providing a specific form of financial instrument to building societies. The concern is, as I said, that unless there was an exception to the existing rule, there is a possibility that deferred shares would move from tier 1 to tier 2 if a building society demutualised. There is no prospect of the number of deferred shareholders swaying a result on demutualisation because they are not the same people as the ordinary people who have a retail account at the building society.
As for the point made by the noble Baroness, Lady Noakes, the Co-op Bank is of course not a mutual; it is a straightforward plc. It was originally owned 100% by the Co-operative Group but it is no longer, so to the extent that there may be problems with the Co-op Bank, the mutuality issue is not particularly relevant. However, there is no major relaxation in these provisions regarding the amount of funding. The suggestion that deposits held by small businesses should be treated in the same way as those held by private individuals is just common sense. It does not have a very significant impact on the funding position. I assure the noble Baroness that there is no suggestion that the PRA should reduce the rules around building societies because although many of us are fond of building societies, nobody can claim that they were immune from some of the excesses of the late noughties.
Lord McFall of Alcluith
“Independent Banking Regulatory Decisions Committee of the FCA
(1) After section 1L of FSMA 2000 insert—
“1LA Independent Banking Regulatory Decisions Committee
(1) There is to be a Banking Regulatory Decisions Committee of the FCA (“the Committee”).
(2) The members of the Committee are to be appointed jointly by the FCA and the PRA and hold office in accordance with the terms of their appointment.
(3) The person appointed to chair the Committee must have experience of acting in a senior judicial capacity.
(4) A majority of the members of the Committee must be persons appearing to the FCA and the PRA to have (and to have had) no professional connection with the provision of financial services.
(5) The remaining members of the Committee must include persons appearing to the FCA and the PRA to have extensive experience in senior roles in banking.
(6) The function of the Committee is to exercise the banking regulatory decisions function of the FCA and the PRA.
(7) “Banking regulatory decisions function” means the function of taking decisions for enforcing compliance with relevant requirements, within the meaning of Part 14, in cases where the authorised person is a bank.
(8) The banking regulatory decisions function of the FCA and the PRA is delegated to the Committee; and references in this Act to the FCA and the PRA in relation to that function are to be construed accordingly.
(9) The FCA shall meet the reasonable costs of the Committee in discharging its function but the Committee—
(a) is not subject to direction by the FCA or the PRA as to the exercise of its function, (b) is not accountable to the FCA or the PRA for the exercise of its function, and(c) may appoint its own officers and staff.(10) At least once a year the Committee must make a report to the Treasury on the discharge of its function.
(11) The Treasury must lay before Parliament a copy of each report received by them under subsection (10).
(12) In this section “bank” has the meaning given by section 2 of the Banking Act 2009.”
(2) The FCA and the PRA must carry out a review of the operation of the Banking Regulatory Decisions Committee of the FCA.
(3) The review must be completed before the end of 2018.
(4) The FCA and the PRA must give the Treasury a report of the review.
(5) The report must include an assessment of whether the function of the Banking Regulatory Decisions Committee would be better discharged by a body that was entirely independent of the FCA and the PRA.
(6) The Treasury must lay a copy of the report before Parliament and publish it in such manner as they think fit.”
Lord McFall of Alcluith
My Lords, this amendment is about the regulatory decisions committee that the Parliamentary Commission on Banking Standards proposed, giving responsibility for banking enforcement decisions taken by the FCA and the PRA to a new, statutory autonomous body within the FCA. Unfortunately, to date the Government have rejected that proposal.
In our evidence sessions we took evidence from a number of bodies, such as the medical and legal professions. In these established professions, a number of steps are taken to separate disciplinary functions from the supervision of professional development. In the legal profession, for example, the Solicitors Disciplinary Tribunal is totally separate from the Solicitors Regulation Authority and has a mixture of lay and professional members. The SRA has no say in its composition. It is in effect a prosecutor before a tribunal.
We took evidence from Sir Peter Rubin, who chairs the General Medical Council, who described similar recent developments in the medical profession. He told us that following the Shipman inquiry, it was pointed out to the GMC that its previous arrangements, whereby it was the police, the Crown Prosecution Service, the judge, jury and everything else, in his words, were incompatible with Section 6 of the Human Rights Act. Essentially, no one should adjudge their own cause so last year, as he told us, they hived off the adjudication process under which cases against doctors are heard to a separate body in a separate building. It is still funded by the GMC but, crucially, a judge now runs the adjudication process. It is now petitioning Parliament to give the GMC the power to appeal when it does not agree with one of its findings. In his opinion, that would really get the complete separation going.
In our deliberations the commission noted that an entirely separate statutory body for enforcement could be a solution but we recognised that there were a number of obstacles to that, not least because it would generate a new regulatory body that could be a source of confusion and conflict. An independent enforcement body would still be reliant on supervisors for many referrals that could in effect result in fewer cases if there were any problems co-operating with the FCA and the PRA. The body that we mentioned should be chaired by someone with senior judicial experience.
We also recommended a joint review by the regulators of their enforcement arrangements in 2018 but to date the Government have been silent on that issue. In the debate in the House of Commons, our chairman Andrew Tyrie made the point that the Government have rejected the need to wind up United Kingdom Financial Investments, and that the regulatory reforms to provide statutory autonomy for the decisions committee are especially regrettable. I would like the Government to give us their views on that joint approach by 2018.
We are seeking a body to be appointed by agreement between the boards of the PRA and the FCA with a majority of members with a non-banking or financial services background, containing several members with extensive and senior banking experience. It should be chaired by a person with senior judicial experience. In that way, it could publish a separate annual report of its activities and of the lessons for banks that emerged from its decisions.
When the FCA representatives were giving us evidence, Tracey McDermott, the director of enforcement, told us that the FSA had still not solved the problem of ensuring that senior figures were properly subject to the enforcement process. She said:
“The focus on senior management is something that we have talked about a lot in the FSA but we have found it very difficult to bring home the responsibility, particularly in larger firms, to those who are further up because of confused lines of accountability and because of confused responsibility”.
I would ask the Minister to keep in mind that there is an inherent tension between the role of real-time regulators and the enforcement function that can involve reaching judgments on which matters supervisors were involved in at the time, and that regulators are focused on the big picture, such as maintaining financial stability. Again, from experience I have witnessed the enforcement process being devalued in that area. There were a number of areas where the FSA at the time should have been on to enforcement procedures, particularly in the 2004-06 period of the financial crisis. It avoided those areas.
The proposal that we are making here is quite a modest one. It is for a statutory autonomous body within the FCA, and in 2018 there should be a review. I hope that Government will take those propositions seriously, reflect on them and come back to us. I beg to move.
Lord Eatwell
My Lords, I was a member of the first regulatory decisions committee established under the Financial Services Authority. It was established at that time because it was felt that the FSA’s procedures would run counter to the Human Rights Act, in the sense that those procedures were both judge and jury. The role of the committee was to act as an independent assessor of the regulatory and enforcement proposals put forward by the FSA.
It worked reasonably well, at least from the perspective of a member of the committee, but not from the perspective of the FSA; we tended to give it a rather difficult time when we felt that its cases were ill prepared and ill focused. It played a particular role for a short period. Then, after a particular dramatic case was lost by the FSA in the tribunal, the FSA decided that it did not like the RDC being foisted upon it, and the role of the RDC was slowly downgraded. I think that was unfortunate—obviously I do, because I participated in the early days when I thought it was working rather well, but be that as it may.
The role here is slightly different from the challenge role that the RDC played. Will the Minister address the question of whether any effective enforcement role for a regulator is compatible with the Human Rights Act?
Lord Newby
My Lords, we have considered extremely carefully all the recommendations from the PCBS. They contain a number of observations about the importance of banking expertise, accountability, clarity of responsibility and consistency of decision-making, which we certainly agree with.
I shall explain how the current arrangements already deliver all those things in a way that is tailored to the regulators’ individual approaches. First, on expertise, the call to create a separate decisions committee solely for the banking sector partly reflects concerns about the level of banking expertise on the RDC. At the FCA, the regulatory decisions committee is responsible for taking enforcement decisions. Its remit extends beyond banking, but that does not mean that it does not contain banking expertise. Indeed, the FCA has recently addressed the balance of expertise on the RDC through the appointment of two new members with banking expertise. At the PRA, of course there is no lack of banking expertise on its decision-making committees.
Secondly, on clarity of roles and responsibility, Section 395 of FiSMA provides for the separation of supervision from disciplinary decision-making. Under the current arrangements, there is also a clear separation of the function of making enforcement decisions from that of judicial consideration of the issue.
I do not accept the argument that the fact that the PRA does not have an RDC gives rise to human rights concerns. We do not believe that there is a problem on that front. The prospect of decisions being appealed to the Upper Tribunal means that the system already provides an independent judicial challenge function to the decision-making process for all financial services cases. The proposed requirement for regulatory decisions to be made by a committee chaired by a person with senior judicial experience, on the other hand, would appear to give this new committee a quasi-judicial role more suitable for an external review tribunal than an internal decision-making body.
On consistency of decision-making, I understand that a key part of the recommendation was to encourage a greater consistency of decision-making across the PRA and the FCA. Unfortunately, I believe that the creation of an additional statutory committee for banks would create only new inconsistency. The new committee relates only to banking, so any enforcement decisions relating to a building society, insurer or investment firm would be made under the existing framework and the FCA would have to maintain the existing RDC. This would mean one body dealing with the breach of a rule by a bank and a different body dealing with the same breach of the same rule by a building society, with potentially different outcomes, which seems undesirable. While I think that the PCBS report contains some useful observations in this area, I believe that the current, flexible arrangements are the right ones. On that basis, I would be grateful if the noble Lord withdrew his amendment.
Lord Lawson of Blaby
“Excessive lobbying by banks
(1) If the Governor thinks that the way in which banks are lobbying about regulation or policy is creating a risk to the stability or effective regulation of the banking sector, the Governor must lay a report before Parliament.
(2) In subsection (1) “lobbying” means activities designed to influence Her Majesty’s Government, the FCA or the Bank of England.
(3) In this section “bank” has the meaning given by section 2 of the Banking Act 2009.”
Lord Lawson of Blaby
My Lords, I shall be brief; the hour is getting late. Like the amendment that I spoke to earlier about the desirability of having somebody on the Financial Policy Committee who had some knowledge of past financial crises, which I regret that the Government have not accepted, this amendment is also a proposal of the Parliamentary Commission on Banking Standards. It is about lobbying. The context of this applies to all bank lobbying, but it is particularly important in the context of what we were discussing last week in Committee, namely the ring-fence. We were very concerned, as my noble friend the Minister will recall, that this should be strengthened and kept under review. We had various proposals to that end.
In the United States, the parallel was the separation through the Glass-Steagall Act of 1933. That, as my noble friend the Minister will be aware, was gradually eroded over time. It was eroded in two ways. First, the banks found ways round it to some extent. More importantly, by extensive lobbying, the banks were able to get the Government of the day to do a little amendment here and a little amendment there, which created loopholes which did not previously exist. We know that, following the recommendation for the ring-fence in the Vickers commission and report, the banks only accepted it with gritted teeth. They were not happy; they accepted it very reluctantly. They will clearly be seeking any way they can, including through lobbying, to get a change here and a change there over time which will enable them to undermine the ring-fence. That is natural; they feel it to be in their interest.
Times have changed. When I became Chancellor 30 years ago, the Bank of England had no responsibility for monetary policy, which was my responsibility. It did however have the dual responsibility of the regulation and supervision of the banking sector, and being the sponsoring department for banks, representing the interests of the banks to the Chancellor of the day. If the banks had points to make in those days, they would go first and only to the Governor of the Bank of England. The governor would assess whether he felt there was merit in what they were saying, and if there was he would go and see the Chancellor and put the banks’ points to him. That has all changed. Now, the banks go directly to the Government of the day. Indeed it is no secret that the carpets in Number 10 and Number 11 Downing Street have been worn almost threadbare by the lobbying of the banks. That caused great concern to the previous Governor of the Bank of England, and we had some concern about it in the commission. We felt that the best remedy was encapsulated in this amendment: that if the Governor of the Bank of England of the day feels concerned, he should be able to flag it up in a public way. The hope is that that deterrent will keep the amount of lobbying within reasonable bounds. There is the opportunity to do that, and indeed there is a requirement to do that.
That is what we are suggesting in this amendment. Even though the hour is late, I hope that my noble friend will reflect seriously on this proposal and the merit of accepting it.
Lord Newby
My Lords, I agree with my noble friend that the Governor of the Bank of England should never hesitate to speak out should he have concerns about the influence of lobbying by the financial services industry. However, we do not believe that there is a problem. Indeed, I fully expect that the governor would raise the alarm to both the Government and Parliament if he believed that any particular factor or circumstances, including lobbying by a bank, seriously put at risk the Bank’s ability to meet its objectives.
However, the Government do not believe that it is either necessary or desirable for this specific requirement to be placed on the statute book. The Financial Services Act 2012 brought together responsibility for all aspects of financial stability within the Bank of England group. As a result, the Bank has a statutory objective to protect and enhance the stability of the financial system. The Government are confident that the governor will act appropriately if he believes that excessive lobbing is impeding the Bank’s ability to meet that objective, which would obviously be the case if there was lobbying with the intention of undermining the ring-fence. Indeed, the Bank has already committed to raising the alarm in such circumstances in its response to the Commission on Banking Standards.
Therefore, while we fully accept that one of the roles of the governor is to raise the alarm if he believes that bank lobbying or indeed anything else creates a risk of undermining the stability or regulation of the banking sector, it is simply not necessary to have such a requirement in the Bill.
Lord Lawson of Blaby
I have heard what my noble friend has said and I am slightly reassured. I hope that the present Governor of the Bank of England will read those words and will realise that, without it being on the statute book, he has been charged by the Government with a duty to raise the alarm if there is any case of excessive lobbying. I am very glad to have that on the record, and I beg leave to withdraw the amendment.
Lord Phillips of Sudbury
“Review of the exemption of certain business gaming contracts from the Gaming Acts
(1) The Treasury must institute a review of the effects of certain business gaming contracts having been made enforceable by the repeal of certain provisions of the Gaming Acts pursuant to the Financial Services Act 1986 (as amended).
(2) “Effect” shall include the social, cultural and ethical effects.
(3) The Treasury may appoint one or more persons to undertake the review after consultation with the Bank of England, the PRA, the FCA and such others as it decides on such terms as it shall think fit.
(4) The review shall culminate in a report to the Treasury within two years of the coming into force of this Act.
(5) The Treasury must lay the report before Parliament and thereafter publish the same.”
Lord Phillips of Sudbury
My Lords, after 10.20 pm and with less than a dozen of us still hanging on, I shall be remarkably brief in moving this amendment, which I hope has the advantage of self-clarity.
My starting point is the Financial Services Act 1986, which, as noble Lords will remember, ushered in big bang. Section 63 of and Schedule 1 to the 1986 Act exempted certain City dealing contracts from the effects of the Gaming Acts 1845 and 1892. Up until that time those contracts—which were purely gaming contracts—were unenforceable. Since then, the exemptions have been extended, first by the Financial Services and Markets Act 2000 and further by the Gambling Act 2005.
It is a matter of considerable debate, within the City in particular, about just what the impact of this extremely fast-growing market has been over the years, because fast-growing it has been. I suppose that among all the types of City dealing that have benefited most from exemption from the Gaming Acts there would be much hedge fund activity, which now runs into trades worth trillions of pounds.
It would be beneficial for all concerned to have a review, simply set up and in the hands of the Treasury. The disadvantages of this type of market may be few; they may be beneficial. Many consider that they are a dangerous element in our economic life, because they exaggerate swings and drive markets to extremes. I am afraid that they are susceptible to corruption, in particular, and the most famous or notorious summation of these markets, depending on your point of view, was when Adair Turner—the noble Lord, Lord Turner of Ecchinswell—described them as “socially useless”. I seem to remember from when I was at Cambridge reading economics, ploughing through John Maynard Keynes’s General Theory, that there was one very striking comment in there. I have not quite got it word for word, but the gist is that when the operation of the markets becomes akin to that of a casino, the job is likely to be ill done.
This amendment carries no pre-judgment, but will allow us a cool and collected—and, some would say, overdue—look at the impact of this particular market, the gambling market as you might call it, and see just how it stands. Noble Lords will note in particular that when saying that the Treasury must institute a review of the effects of these gaming contracts, in proposed new subsection (2) of Amendment 91B “effect” is defined as including the,
“social, cultural and ethical effects”,
of this type of gaming business.
As I say, the framework I have provided is a light one. The Treasury will appoint the members of the review committee and describe its terms of reference within the constraints I have put down. In deciding who is going to be part of the review, the Treasury has to consult the Bank of England, the PRA and the FCA. Then there is simply an obligation for the review committee to report within two years of the Act coming into force, and for the Treasury to lay the report before Parliament and then publish more widely. I hope that this will commend itself to the House. I beg to move.
Lord Newby
My Lords, this amendment proposes that the Treasury should be required to undertake a review into the effects, including the social, cultural and ethical effects, of exempting certain gaming contracts from the rule which used to provide that no gaming contract or wager can be enforced in a court of law. That exemption applied to certain categories of financial contracts, such as derivative contracts like contracts for differences, which could be regarded as gaming contracts within the meaning of the Gaming Acts because of their characteristics. Only those transactions which were subject to regulation under Financial Services legislation, such as the Financial Services Act 1986, and more recently the Financial Services and Markets Act 2000, ever benefited from the exemption.
However, the law has changed significantly in this area. Since the Gambling Act 2005 came into force, gaming contracts and wagers are now enforceable through the courts, except in Northern Ireland, and the effect of the exemption is therefore limited to Northern Ireland. In the rest of the United Kingdom, there is no difference in the enforceability of derivative investments and other gaming contracts and wagers. Much of the purpose of the review proposed has therefore, in the Government’s view, gone.
It is also unclear what action could be taken following such a review. Trading in financial instruments is subject to European law, and in particular the markets in financial instruments directive. This limits the extent of the action this country could take in relation to financial instruments falling within the scope of the directive. It is unclear what benefits such a review could bring and we suggest that the noble Lord withdraws his amendment on the basis that it is not proportionate or objectively justified.
Lord McFall of Alcluith
My Lords, I am surprised that the Minister is saying that we do not know what benefit this could bring. After all this is a derivatives market. We are talking about a derivatives market globally with $66 trillion or more. Not only is there a complexity in that market but there is a total opaqueness. Warren Buffett called derivatives weapons of mass financial destruction. So there is benefit in looking at this issue. Given that the parliamentary banking standards commission’s remit was to look at culture and standards, I would like the Minister to reflect on that issue with culture. In my opinion, culture is about behaviour and ethics is about conflicts of interest. In an opaque market, there are many conflicts of interest, and therefore it would do the Government good to open up this market and see what benefits could result.
The noble Lord, Lord Phillips, has done the Committee a service in this matter. We know that the market will not change overnight, but we must understand what is in the market, particularly the derivatives market. I would like the Government to take this a bit more seriously than the Minister has taken it in saying that we cannot learn anything at all from this.
Lord Newby
My Lords, I would not want the noble Lord to think that the Government were being complacent at all about this issue. In particular, I would not want him to think that we were being complacent about the issue of culture. Of necessity, today we have been talking about legislative change but, as we said at an earlier stage, and as the most reverend Primate reminded us at an earlier stage in this debate, the whole question of culture is as important as legislation.
What constitutes culture is a broad, almost philosophical question, but one key thing that is already evident is that some of the more senior managers of some of the bigger banks have recognised that, if we are to get the kind of banking system that the population as a whole is looking for, they need to change their ways. The chief executive of Barclays set out his stall when he was appointed. The way in which he has sought to instil a new culture through the organisation is very impressive. But one challenge that he has, no doubt—we see this not just in the banks but across the world, whenever there is any big change in the way things happen—is how to get a cultural change trickling down the organisation. It is not just a matter of the chief executive, for whom making a statement about culture is relatively straightforward, making that statement; that is happening, to a very acceptable degree. But how can we ensure that the culture that we require of everybody in the banks changes?
One way in which that is going to happen is, one hopes, through the new statement of principles of banking practice that we discussed earlier. If everybody knows when they go into a bank that they are expected to behave in a different way than possibly they thought in the past and they know that, unless they follow a whole series of principles there on a piece of paper, they are liable for disciplinary procedure, they are likely to behave in a more acceptable manner. I am sure that that would be welcome across the country.
The other big thing that we believe can help in terms of culture is the promotion of the mutuals sector that we were talking about earlier. The Nationwide Building Society has always been at the top of the list for customer satisfaction levels, and that shows no sign of diminishing. To the extent that the building society movement continues to grow, so will the culture improve across the system as a whole.
I realise that I have strayed slightly from where the noble Lord started out in terms of derivatives contracts. But for most of the population, it is at the retail end that culture affects them.
The Archbishop of Canterbury
My Lords, I am slightly surprised that the Minister should be resistant to what seems to me a very reasonable amendment. One of the dangers that we have faced in the markets over many years is that of parallel markets. The derivatives markets are, as we know, opaque, as has already been remarked on, and we examined them in some detail in the banking standards commission. The computer-driven markets are also very opaque. We examined those markets and remarked that they would constitute the next great crash. When you have these gambling markets on the side that no one quite understands or knows who is participating in them, and which often take place offshore, it seems to me that at the very least there are grounds to hold an inquiry into the effect they are having on market prices through their impact on the shadow market—we should also examine the psychology of the dealers—and on those involved directly in the more regulated market.
One of the great lessons learnt from the events of 2008 was the ineffectiveness of the clearing system for over-the-counter derivatives, which there was no means of settling. That has been one of the major problems for the liquidators of Lehmans. The gambling markets have much the same problem. We are setting up mechanisms—they are being set up internationally—to deal with the settlement of derivatives contracts, but nothing is being done in this parallel market. The noble Lord, Lord Phillips, has made a very useful point, albeit that the hour is late and it is almost 10.40 pm, which may enable this issue to become slightly clearer in terms of understanding what can be done.
Lord Phillips of Sudbury
My Lords, I am grateful to the most reverend Primate and to the noble Lord, Lord McFall. However, I am not so grateful to my noble friend the Minister, as I thought that he rather missed the point. The fact that Tom, Dick and Harry can go down to the betting shop or the local casino, run up a debt and be sued for it has nothing whatever to do with the amendment that I propose tonight. As noble Lords have commented, and as is obvious, we are dealing here with huge sums of our money which are gambled, often to the excessive benefit of the gamblers. We do not know how they function and have not looked carefully and closely, as we should, at the impact of this. I refer not so much to the economic impact, although it may be found that the destabilising effects of this market are greater than we realise, but to the ethical, cultural and social effects. For the life of me, I cannot see why a liberal-minded Government should want to staunch such an investigation. I see no downside to it; it would not be expensive and would be simple to operate. It would all be within the purview of the Treasury and it might yield some surprising and valuable results. I therefore hope that the Minister will give this a little further thought, as I am very inclined to bring this back on Report.
Lord Newby
My Lords, I am extremely grateful to my noble friend for clarifying exactly what lies behind his amendment. I am sorry if I in any way misconstrued it. The issues that he raises about the social and broader consequences of some aspects of the “socially useless” parts of the financial services world are obviously important. I am somewhat less certain about whether the kind of inquiry that he is seeking would produce any decisive results.
I wonder whether he may wish to consider between now and Report whether there is another means of achieving the same result because these issues are very much in the public domain. A dry inquiry might not get us to the answer that he wanted. I wonder whether there might be some broader inquiry, bringing together groups of people with expertise and concern, possibly moderated by a think tank or charity, to look at some these issues. The membership of such an inquiry would be important in determining the result. Too narrow a membership would tend to produce a series of dry, probably useless, recommendations, whereas a broader group operating in a relaxed and unconstrained manner might produce more wide-ranging and socially useful conclusions.
Lord Phillips of Sudbury
I am not sure whether I am supposed to say any more to the Minister except, “Thank you”. I thought that at the end he was arguing my case rather better than I was. I will certainly think between now and next time, and talk with him. I beg leave to withdraw the amendment.