Financial Services (Banking Reform) Bill
(Limited Text - Ministerial Extracts only)
Read Full debate22:36 - Division on Amendment 22 - Ayes: 100 / Noes: 163 - Amendment 22 disagreed.
Lord Deighton
The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, this amendment brings forward the timetable of the independent review to be held of ring-fencing. As the House will recall, the Government previously amended the Bill to provide for an independent review of ring-fencing, once the ring-fence has come into force. Following the recommendation of the Parliamentary Commission on Banking Standards, our original amendment provided that the review be conducted no later than four years after the ring-fence had come into effect. This was to allow the ring-fence time to bed down before being reviewed.
The Government have, however, listened to arguments from the Opposition that the review should be held sooner. Two years is a long enough period over which to observe the operation of the ring-fence, and assess its effects. The knowledge that ring-fencing will soon be reviewed may also be a further encouragement to banks to comply faithfully with the ring-fence.
This amendment therefore requires that the independent review of the ring-fence be held within two years of the ring-fencing taking effect, rather than four years. This is a sensible change and one that we hope illustrates the Government’s constructive approach to reasonable suggestions from all sides.
Lord Eatwell (Lab)
My Lords, everyone in the House has from time to time expressed the view that this is a great experiment. We are not quite sure how the ring-fence will work and therefore it is appropriate that that it be monitored promptly and on a regular basis. I think this is a very sensible amendment—I would do, since I moved a version of it earlier—and I urge the House to support the Government.
Lord Deighton
“PRA review of proprietary trading
(1) The PRA must carry out a review of proprietary trading engaged in (whether or not as a regulated activity) by relevant authorised persons, for the purpose of considering whether further restrictions on any kind of proprietary trading ought to be imposed.
(2) The review must begin before the end of the 12 months beginning with the first day on which section 142G of FSMA 2000 is fully in force.
(3) On completion of the review, the PRA must make a written report to the Treasury on—
(a) the extent to which relevant authorised persons engage in proprietary trading;(b) whether proprietary trading engaged in by relevant authorised persons gives rise to any risks to their safety and soundness;(c) whether any kinds of proprietary trading are particularly likely to give rise to such risks;(d) anything done by the PRA to minimise risks to the safety and soundness of relevant authorised persons arising from proprietary trading engaged in by them;(e) any difficulties encountered by the PRA in seeking to minimise such risks.(4) The report must include an assessment by the PRA of each of the following—
(a) whether the PRA’s powers under FSMA 2000 are, and might be expected to continue to be, sufficient to enable it to advance its objectives in relation to relevant authorised persons who engage in proprietary trading;(b) the effectiveness of restrictions imposed in countries or territories outside the United Kingdom on proprietary trading by banks (so far as experience in those countries or territories appears to the PRA to be of relevance to the United Kingdom). (5) The report must be made within 9 months of the beginning of the review.
(6) The Treasury must lay a copy of the report before Parliament.
(7) The PRA must publish the report in such manner as it thinks fit.
(8) The functions of the PRA under this section are to be taken for the purposes of FSMA 2000 to be functions under that Act.
(9) This section is to be read with the interpretative provisions in section (Reviews of proprietary trading: interpretation).”
Lord Deighton
My Lords, these amendments require the PRA to review proprietary trading by UK banks and PRA-regulated investment companies and prepare a report to the Treasury. That will be followed by an independent review of the issue. The PRA must consider in its report the extent to which regulated firms engage in proprietary trading. It will then have to assess whether that risks their safety and soundness.
As the Parliamentary Commission on Banking Standards showed, proprietary trading can take many forms. That is why we are requiring the PRA to look into what particular risks different forms of proprietary trading can pose to the safety of the firm.
To help to give a full picture to the Treasury and to Parliament, the PRA must also report on steps it has taken to deal with risks from proprietary trading and whether it encountered any difficulties when it tried to tackle those risks. Building on that, the PRA must then give an assessment of whether it believes the tools it has to tackle proprietary trading are appropriate, given the risks that may exist at that time and in future. It must also consider whether restrictions imposed on proprietary trading in other countries have been effective. The experience of the United States in relation to the Volcker rule, which banned proprietary trading by banks, will be particularly relevant.
That review will take place within a year of the ring-fence coming into force. The Government have committed to ring-fencing being implemented in 2019, so this will take place in 2020. In Committee, there was some discussion about the appropriate timing of the review. The Government returned to the original PCBS recommendation, which said that the review must include,
“an assessment of the impact of the ring-fencing rules on proprietary trading by banks”.
To do that, the ring-fence must be in place for at least some time to consider such issues. While the ring-fence and proprietary trading are in many ways distinct issues, they will of course interact. Therefore we think it is right to allow the PRA to consider the impact of risks from proprietary trading on ring-fenced banks and whether the safeguards in place are sufficient for the particular requirements for the safety of ring-fenced banks. I know that members of the PCBS have been very concerned about that in the past, and I want to make sure that this review looks at this important area.
Following the PRA’s report to the Treasury and to Parliament, the Treasury will set up an independent review panel. The first task for that panel will be to consider the evidence that the PRA gathered and come to a view on its findings. It will then have to make recommendations about whether future measures to deal with risks from proprietary trading are necessary. The independent review will be able to make any recommendations in relation to proprietary trading that it considers appropriate. It will not be constrained, and like the PRA review, will be able to consider the experience other countries have had with restrictions on proprietary trading, such as in the US with the Volcker rule. By the time of the review, I imagine that a wealth of information and views will be available to help the independent panel come to its conclusions. The independent review panel must make its recommendations in a report to the Treasury and to Parliament.
As I have said previously, the PCBS heard in evidence that proprietary trading does not currently pose a large risk for the UK financial system, but it can do little harm to keep this area under review, should risks emerge in the future.
As noble Lords have seen when we debated other parts of the Bill, and, indeed, through this Government’s willingness to set up and listen to the ICB in the first place, we are in favour of independent reviews. Therefore we are persuaded that proprietary trading is an area where an independent review in future can add value. These reports will give a future Parliament all the information it needs to assess whether future safeguards are necessary. I beg to move.
Lord Lawson of Blaby
My Lords, once again I would like to thank the Government and, in particular, my noble friend Lord Deighton, for moving this amendment. It is in response to a strong recommendation that was encapsulated in a specific report on this subject among the five reports from the Parliamentary Commission on Banking Standards.
Just as in the previous amendment, which concerned the review of the ring-fence, initially the Government were prepared to look at it only from the point of view of whether an individual banking institution had been gaming the ring-fence. They have now agreed to look at the system as a whole, and I am grateful for that. Again, initially the Government said, “No way should there by a review of proprietary trading”, but they have now come round to saying, “Yes, the parliamentary commission was right and there should be a review”. I am extremely grateful to my noble friend for that. He said that there is no risk at the moment. That is because proprietary trading has, for the time being, stopped to all intents and purposes. Yet at its peak it was for many banks up to 30% of their total business. One must imagine that that is quite likely to occur again in future. I do not know whether it will but it is clearly possible. But if I might say so to my noble friend, it is not simply a question of risk—although risk is obviously an important factor.
There was an important debate on Thursday last week on the five reports of the Parliamentary Commission on Banking Standards. Unfortunately, I was unable to attend but I read the Hansard report. It was introduced by a magisterial speech by the most reverend Primate the Archbishop of Canterbury and there were a number of good speeches—it read very well. In particular, I was impressed by the speech by my noble friend Lord Deighton, in which he gave us a little autobiographical counter. He spoke a little bit about his own experience as a banker. One thing I noted in particular. He said he was always conscious of the importance in banking of, “putting the customer first”. That is a very important aspect of banking culture. Indeed, banking culture was one of the most important things that the parliamentary commission was set up to look into.
However, in proprietary trading there is of course no question of putting the customer first—because there is no customer. It is the bank trading on its own behalf. That involves a totally different culture and mindset. If you want to preserve in banking—as I think we should—the culture that my noble friend believes in, as he said on Thursday, then you should ban proprietary trading by banks altogether. It is fine for hedge funds. It is an excellent activity for them and they can do it very well. I am not suggesting that it should be made an illegal activity, but banks should not do it. Most of us on the commission—though clearly not all—came to that conclusion. We called for a review because we were unsure about the practicalities. There is some difficulty in defining the sort of proprietary trading that should be banned for banks because there is a need for market-making. The line between market-making and proprietary trading is very clear in the minds of those doing it, but whether it is clear in law is another matter. We thought it useful to look at the American experience.
Finally on this, I say to my noble friend that we should look at the American experience but not too much at the American legislation. The complexity and detail of the American legislation was simply appalling. It is a problem across the legislative system that they have in the United States. My noble friend quite rightly referred to the Volcker rule because Paul Volcker insists that there should be a ban—for cultural reasons, above all. He also told us, when he gave evidence to the commission, that the legislation introduced in Congress was certainly not the sort he had in mind.
Having said that, I wish the Government well in this. It will be an important review, for the reasons that I have outlined. I commend the Government for repenting, if slightly belatedly—but as the right reverend Prelates on the Bishops’ Benches will know, better “the sinner that repenteth”, et cetera. Thank you very much.
Lord Phillips of Sudbury (LD)
My Lords, I ask whether the independent review under Amendment 3 is on the same basis as the review carried out by the PRA under Amendment 2. Amendment 2 specifically refers to the risk factors that proprietary trading embraces, but there is no reference to that in Amendment 3 with regard to the independent review of proprietary trading. Is the second, independent review to be undertaken on a wider basis than the PRA review? Will it be able to look at some of the broader cultural aspects of proprietary trading by banks? I hope that question is not too late in the day for the Minister.
Lord Deighton
I thank noble Lords for those questions. In response to my noble friend Lord Higgins, with respect to proprietary trading and international collaboration and co-operation, that is the approach that we shall be espousing. On consolidation, this is structured so as to be integrated into existing legislation, thereby ending up with a consolidated result.
With respect to the question of my noble friend Lord Phillips, I confirm that the independent review of proprietary trading will not be constrained in what it can examine.
Lord Deighton
“Independent review of proprietary trading
(1) The Treasury must, after receiving the report of the PRA under section (PRA review of proprietary trading) but before the end of the initial period, appoint one or more persons (“the review panel”) to carry out a review of proprietary trading engaged in (whether or not as a regulated activity) by relevant authorised persons.
(2) The initial period is the period of 2 years beginning with the first day on which section 142G of FSMA 2000 is fully in force.
(3) The members of the review panel must be persons—
(a) who appear to the Treasury to be independent of the PRA, the FCA, the Bank of England and the Treasury, and (b) who do not appear to the Treasury to have any financial or other interests that could reasonably be regarded as affecting their suitability to serve as members of the review panel.(4) In appointing the members of the review panel, the Treasury must have regard to the need to ensure that the review panel (considered as a whole) has the necessary experience to undertake the review.
(5) Before appointing the members of the review panel, the Treasury must consult the chair of the Treasury Committee of the House of Commons.
(6) The reference in subsection (5) to the Treasury Committee of the House of Commons—
(a) if the name of that Committee is changed, is a reference to that Committee by its new name, and(b) if the functions of that Committee (or substantially corresponding functions) become functions of a different Committee of the House of Commons, is to be treated as a reference to the Committee by which the functions are exercisable;and any question arising under paragraph (a) or (b) is to be determined by the Speaker of the House of Commons.(7) If the review panel consists of two or more members, the Treasury must appoint one of them to be the chair of the panel.
(8) The review panel must, within a reasonable time after the end of the initial period, make a written report to the Treasury—
(a) stating whether the panel agrees with the conclusions reached by the PRA in its report under section (PRA review of proprietary trading),(b) stating whether the panel recommends any further restrictions on any kind of proprietary trading in relation to relevant authorised persons, and(c) making such other recommendations as the panel thinks fit.(9) The Treasury must—
(a) lay a copy of the report before Parliament, and(b) publish the report in such manner as they think fit.(10) Any expenses reasonably incurred in the conduct of the review are to be paid by the Treasury out of money provided by Parliament.
(11) This section is to be read with the interpretative provisions in section (Reviews of proprietary trading: interpretation).”
Lord Deighton
Lord Deighton
“(a) enable the Bank of England, for the purpose of enabling it to exercise in relation to the business of a building society any of the powers exercisable as a result of the amendments made by this Part—(i) to convert the building society into a company, or(ii) to transfer the business of the building society to a company which immediately before the transfer is owned by the Bank or by a person of a description specified in the order;(b) enable the Bank of England, in connection with the exercise of a power conferred by virtue of paragraph (a), to cancel membership rights or shares in the building society;(c) provide for any power exercisable as a result of the amendments made by this Part to be exercisable in relation to the company—(i) into which the building society is converted, or(ii) to which the business of the building society is transferred;(d) enable the Bank of England, in a case where it has transferred the business of a building society by virtue of paragraph (a)(ii), to dissolve the building society at any time after the transfer;(e) confer functions on the Treasury, the Bank of England, the FCA, the PRA or a bail-in administrator;(f) make further amendments of Part 1 of the Banking Act 2009;(g) amend or modify the effect of the Building Societies Act 1986 or”
Lord Deighton
My Lords, the amendments in this group are minor and technical amendments to Clause 14 and Schedule 2 that will help to ensure that the bail-in powers can be used as intended in order to deal effectively with the failure of a financial institution.
First, they clarify the scope of the Treasury’s power to make an order applying the bail-in provisions to building societies. Since introducing this clause, we have had the opportunity to consider further what provisions may be necessary and are therefore in a position to specify this in the Bill.
Moving to Schedule 2, minor amendments are made to new Section 44B. They permit supplemental property transfer instruments to make special bail-in provision. This is consistent with the situation for resolution instruments and will further assist in combining bail-in with the bridge bank stabilisation option. They amend new Section 48R which, without this amendment, applies only to resolution instruments that do not transfer securities. As special bail-in provision may relate to things that are not transferred, it is appropriate that the new Section 48R power applies irrespective of whether securities are transferred. By broadening the Section 48R power in this way, we can then remove the amendment to Section 21, which makes similar provision, as no longer necessary.
Paragraph 15 of Schedule 2 is amended to address situations where a resolution instrument does not transfer securities, such as shares. Paragraph 15 amends the power to make continuity provision conferred by Section 18 of the Banking Act. This change will allow, for example, supplemental resolution instruments which do not transfer securities to make ancillary provision relating to an earlier transfer of securities. There are also some minor amendments to the compensation provisions.
Where bail-in is combined with the bridge bank stabilisation option, the Treasury needs to make a resolution fund order. Some minor amendments are made to Section 52 and new Section 60A to ensure that the compensation arrangements for special bail-in provision will work with full effect in this context. Minor amendments are also made to Section 53 to ensure that the Treasury may make compensation orders under Section 53 whenever any form of supplemental order or instrument is made to effect a stabilisation option. Finally, we have brought the compensation provisions for bail-in further into line with the other stabilisation options by making it optional for the Treasury to make a further compensation order following a supplemental resolution instrument. I commend these amendments to the House.
Lord Deighton
““bail-in administrator” is to be read in accordance with section 12B of the Banking Act 2009 (as inserted by paragraph 2 of Schedule 2);”
Lord Newby
“Vetting by relevant authorised persons of candidates for approval
After section 60 of FSMA 2000 insert—“60A Vetting of candidates by relevant authorised persons
(1) Before a relevant authorised person may make an application for a regulator’s approval under section 59, the authorised person must be satisfied that the person in respect of whom the application is made (“the candidate”) is a fit and proper person to perform the function to which the application relates.
(2) In deciding that question, the authorised person must have regard, in particular, to whether the candidate, or any person who may perform a function on the candidate’s behalf—
(a) has obtained a qualification,(b) has undergone, or is undergoing, training,(c) possesses a level of competence, or(d) has the personal characteristics,required by general rules made by the regulator in relation to persons performing functions of the kind to which the application relates.(3) For the meaning of “relevant authorised person”, see section 71A.””
Lord Newby (LD)
My Lords, these amendments do two things. First, and most obviously, they implement the changes that have been agreed with members of the Parliamentary Commission on Banking Standards to implement the commission’s recommendations for a licensing regime.
The Government’s amendments in Committee put in place the key element of those recommendations, the pivot on which the commission’s concept of a licensing regime rests, giving the regulators the ability to make rules for employees who were not senior managers, but commission members were concerned that the Government’s amendments did not give sufficient visibility or, as I put it, “full weight and impetus”, to the commission’s proposals and we undertook to bring forward amendments at this stage which will, as I said in Committee,
“put beyond doubt the determination which we all share to see real change in this area”.—[Official Report, 26/11/13; col. 1343.]
In brief, these amendments make explicit the requirement on banks to certify staff and enforce banking standards in the first instance. Amendment 12 delivers the commitment to require banks and PRA-regulated investment firms to verify that people are fit and proper before appointing them to functions in which they could do significant harm to the firm. It also requires firms to review that assessment annually. This gives effect to the commission’s recommendations in paragraph 634 of its final report. Indeed, the Government have gone further. Amendments 9 and 11 impose similar obligations on firms in respect of senior managers and other persons who have been approved by the regulators.
Amendment 12 also imposes the obligation on these institutions to issue certificates to persons performing functions in which they could cause significant harm to the firm to confirm that the fitness and properness checks have been carried out. As I explained on Report, it would not be appropriate to describe these documents as licences—the commission’s preferred term—but it is quite in order to call them certificates and they fulfil the same function. The amendment also imposes obligations on banks and PRA-regulated investment firms to maintain records of persons who have been issued with certificates. It is not, of course, necessary to require firms to keep lists of senior managers as their appointments will have been approved by the regulators and they are included in the financial services register kept by the FCA.
Amendment 14 requires banks and PRA-regulated investment firms to notify the regulators of disciplinary action that they take against any of their staff, not just senior managers and persons who have been issued certificates. I can assure the House that notifiable disciplinary actions will not include verbal ticking-off, for example, for turning up late to work. Only formal disciplinary action, such as a written warning, need be notified and only if it is for reasons specified by the regulators in their rules. This gives the regulators the ability to check up on how firms are policing the conduct of individuals and it delivers on the recommendations in paragraph 642 of the commission’s report.
Amendment 13 requires banks and PRA-regulated investment firms to notify individuals that banking standards rules apply to them. This delivers on recommendations in paragraph 643 of the commission’s report. Amendment 13 also requires banks and PRA-regulated investment firms to ensure that the individuals concerned understand their obligations under banking standards rules. This includes by providing suitable training. Amendments 9 and 12 also provide that, in checking that someone is fit and proper, firms must have regard to whether someone has a qualification or has undergone training prescribed by the regulator in its rules.
As your Lordships would expect, the Government will seek to ensure that Clause 15 is removed when the Bill returns to the other place. The amendments I have just explained do, however, deliver what the parliamentary commission recommended and, indeed, go further in some places. Clause 15 would simply not deliver what the commission recommended, or anything like it. As we will explain in the other place, there are a number of areas in which Clause 15 is incompatible with the recommendations of the PCBS. First, it would retain but re-label the approved persons regime, which the PCBS sought as far as possible to remove. Secondly, it would impose on the regulator an obligation to check fit and properness annually, while the PCBS emphasised that it should be the bank, first and foremost, that took responsibility for maintaining standards. However, I hope the noble Lord, Lord Eatwell, will feel that the inclusion of material on training and professional qualifications in Amendments 9, 12 and 13 clearly shows that his underlying concerns on those points have been met.
Finally, I turn to Amendments 17, 18 and 25. These amendments were tabled to address an essentially consequential issue which arose from the other amendments. Branches of foreign banks and investment firms operate in London. Often international banks will have both branches and subsidiaries. A branch is not a separate legal entity unlike a subsidiary company. However, it is likely that there will be staff working in branches in the UK who should be covered by the senior managers regime or the certification regime and so be subject to banking standards rules. Amendments 17 and 18 therefore give the Treasury the power to extend the senior managers, certification and banking standards regime to the UK branches of foreign banks and investment firms by order, after undertaking appropriate consultation. This will mean that branches and subsidiaries can be treated identically. Amendment 25 ensures that the order can be made only if approved by both Houses under the affirmative procedure so any such order will benefit from proper parliamentary scrutiny.
The amendments here complete the implementation of the parliamentary commission’s recommendations for what it called a licensing regime. They provide a comprehensive regime for raising standards of conduct in banking and demonstrate our determination to see that change really does happen. I beg to move.
Lord Eatwell
My Lords, I am glad to see that the introduction of Clause 15 on Report has at last seen the Government take the recommendations of the Parliamentary Commission on Banking Standards seriously in this matter and introduce these amendments that capture most, though not all, of the recommendations. What we have left, as the noble Lord, Lord Turnbull, has pointed out, is something of a tripartite muddle because we now have three different regimes affecting persons working within banks. I am afraid that this is characteristic of so many parts of this Bill and will need to be sorted out in future.
I would like to ask some questions about Clause 17 which, as was pointed out, brings branches into part of this aspect of regulation. As the House will be aware, in recent months the Prime Minister has significantly weakened Britain’s regulatory protections of its banking system by encouraging the establishment of branches in this country. Previously, the regulatory authorities had strongly discouraged this because they are not then regulated by British regulators but by their home regulator. The Prime Minister has chosen to weaken this protection particularly by encouraging the establishment of Chinese branch banks, which will be regulated by the Chinese authorities.
However, what is particularly interesting about Clause 17 is that it brings some branches possibly within some British regulatory ambit. I say possibly because according to this clause the Treasury may by order provide that authorised persons falling within any of the descriptions are relevant authorised persons. Relevant authorised persons, for those who have not participated in these debates before, are actually banks. The Treasury can choose which branches will be brought into the ambit. It is enormously important that the branches should be. The noble Lord, Lord Newby, was absolutely right in this respect. I hope the Prime Minister will not undermine this legislation by instructing the Treasury to exclude particular branches, perhaps those emanating from Chinese banks, from this regulation.
Lord Newby
My Lords, I am very grateful to noble Lords for the general welcome that they have given these provisions. I have some sympathy with the noble Lord, Lord Turnbull, and the tripartite system of regulation which we now find ourselves with but the approved persons regime is still needed, in our view, not least for people responsible for money-laundering. At some point we may want to see whether it is possible to rationalise all these provisions but I do not think at this stage it would be sensible to attempt it.
The noble Lord, Lord Flight, asked about banks in Crown dependencies and referred to the discussions that he had with the Financial Secretary on this. I will take his concerns back to the Financial Secretary and ensure that we bring some clarity to these discussions so that people in the Crown dependencies and banks can be clear of their position.
The noble Lord, Lord Brennan, asked about the role of directors and responsibility for the enforcement of the standard. One of the key things we are trying to achieve here is to put the responsibility on the banks to ensure that their staff on appointment have and continue to follow adequate standards. The alternative is to say to the regulator, “You have a look at all these people and make sure that they are behaving in a responsible way and have the appropriate qualifications”. We believe that the banks should not be able to duck out of that and that it is for directors and the board to ensure that they follow the rules and do not hide behind the regulator.
The noble Lord, Lord Eatwell, asked whether it would be possible for the Treasury to choose certain categories of branches and treat them in a different way from other categories: in other words, whether it would be possible to deal with Chinese banks in a different way. Your Lordships’ House has spent many a happy hour discussing the meaning of “may”. My belief and understanding is that in the situation we are discussing “may” means that the regulators will adopt rules in respect of branches and will treat all branches equally.
Lord Eatwell
That is very helpful, but will the noble Lord therefore explain why proposed new Subsection (3B) begins with the word “If” rather than “When”?
Lord Deighton
“Determination of applications for approval
In section 61 of FSMA 2000 (determination of applications), in subsection (2)—(a) omit the “or” at the end of paragraph (b), and(b) after paragraph (c) insert “or(d) has the personal characteristics,”.”
Lord Deighton
“64B Rules of conduct: responsibilities of relevant authorised persons
(1) This section applies where a regulator makes rules under section 64A (“conduct rules”).
(2) Every relevant authorised person must—
(a) notify all relevant persons of the conduct rules that apply in relation to them, and(b) take all reasonable steps to secure that those persons understand how those rules apply in relation to them.(3) The steps which a relevant authorised person must take to comply with subsection (2)(b) include, in particular, the provision of suitable training.
(4) In this section “relevant person”, in relation to an authorised person, means—
(a) any person in relation to whom an approval is given under section 59 on the application of the authorised person, and(b) any employee of the authorised person.(5) If a relevant authorised person knows or suspects that a relevant person has failed to comply with any conduct rules, the authorised person must notify the regulator of that fact.
(6) In this section “employee”, in relation to an authorised person, has the same meaning as in section 64A.
(7) For the meaning of “relevant authorised person”, see section 71A.””
Lord Deighton
Lord Deighton
“(3A) The Treasury may by order provide that authorised persons falling within any of the following descriptions are “relevant authorised persons” for the purposes of this Part—
(a) non-UK institutions (or non-UK institutions of a specified description) that are credit institutions;(b) non-UK institutions that are investment firms of a specified description.“Specified” means specified in the order.(3B) If the Treasury propose to make an order under subsection (3A) they must consult—
(a) the FCA,(b) the PRA, (c) any organisations that appear to them to be representative of interests substantially affected by the proposals, and(d) any other persons that they consider appropriate.”
Lord Flight
My Lords, perhaps I may make the point that I made last time this matter came up for debate—a point that is staring at us. The problem is with parts of the world where corruption, drugs and political corruption are rife. Much more demanding anti-money-laundering requirements are needed when accounts are opened for individuals or organisations from such parts of the world.
We already have a factfile that grades different countries around the world according to the extent of their corruption—so there is, if you like, a textbook. If those standards were required, it would, apart from anything else, discourage banks from potentially getting involved. Also, rather than imposing greater demands on everybody—I do not think anyone is suggesting that the average Mr and Mrs Brown from Dorking is engaged in money-laundering—much more demanding standards would be applied when dealing with organisations and individuals from parts of the world where there are the real money-laundering problems.
Lord Deighton
My Lords, I think that I can safely say that every Member of this House will agree with the noble Lords, Lord Brennan, Lord Watson of Invergowrie and Lord McFall of Alcluith, about the importance of the fight against money-laundering and other financial crime and about the importance of ensuring that the banks discharge their responsibilities in this area properly—absolutely no question. I hope therefore that the statement that I am making now will reassure them, more than my letters have done, that anti-money-laundering compliance in banks will be fully covered in the new senior managers regime. I can assure noble Lords that anti-money-laundering compliance in a bank will always ultimately fall within the responsibilities of a senior manager in that bank. The FCA will also have extensive powers to ensure that banks are clear about where these responsibilities lie.
First, under the new senior managers regime, the regulator will specify senior management functions in its rules. These will cover such roles as the chief executive and the finance director and may extend to any function that involves an individual managing aspects of a firm’s business that could have serious consequences for the firm or the wider economy. The total number of individuals covered by the new regime is likely to be smaller than those currently performing functions of significant influence in banks. In line with the recommendations of the PCBS, all the senior decision-takers—the most senior people in banks who take important decisions—will be covered by the senior managers regime.
Secondly, under the senior managers regime provisions that are now in the Bill, there will have to be statements of responsibility in respect of each senior manager. The banks will have to supply a statement with each application to the regulator for approval of the appointment of a new senior manager. The bank will have to update a statement whenever there is a significant change in a senior manager’s responsibilities. The regulators will also have the power to set out the form that the statements should take. They will also be able to require banks to verify the information in the statements in a way that they direct. As a result, the regulators will be able to tell who is responsible for anti-money-laundering compliance in a bank. They will also be able to detect any gaps in the responsibilities by comparing the statements of the senior managers in a bank. Senior management is always ultimately responsible for ensuring that the bank complies with all applicable legal requirements, including anti-money-laundering law. It is inconceivable that a senior manager will not be responsible in this area. Beneath senior management level there will, of course, be other staff involved in anti-money-laundering compliance work and these will include money-laundering reporting officers. In addition, the Government have deliberately retained the power for the regulator to pre-approve individuals performing key roles below senior management level, such as money-laundering reporting officers, even if those roles are not senior management functions. I am sure your Lordships would agree that this is a sensible measure.
We are also introducing, in line with the recommendations of the parliamentary commission, a certification and banking standards regime, applying to all employees of banks. As a result of those changes, the FCA will be able to set standards of conduct for all bank employees who may come into contact with money-laundering or other financial crime. Banks will have to certify annually that people performing particular functions are fit and proper to do them. These are roles in which an individual could do significant harm to the bank or its customers, such as trading or compliance roles or, of course, roles that involve preventing financial crime. The Government’s measures will ensure that senior managers in banks can be held to account for discharging their responsibilities in relation to anti-money-laundering compliance. The regulators will know who has those responsibilities and what those responsibilities are.
No one doubts the importance of the fight against money-laundering and financial crime. The Government’s reforms will ensure that banks and their senior managers will take their responsibilities in this area seriously and will start to discharge them properly. I hope therefore that, in the light of the assurances that I have given, the noble Lord, Lord Watson, will feel able to withdraw his amendment.
Lord Watson of Invergowrie
My Lords, I thank the Minister for that clearly considered response and I note what he says. Certainly there is great value in having clearly on the record in Hansard that it will be very senior people who are required to be responsible. That is all to the good and I welcome that, but I am still disappointed that the Minister has not gone a bit further. He talked about the regulator having powers. That is fine, but the regulator may or may not choose to exercise those powers in a particular way. As my noble friend Lord Brennan said, if the word “must” can be used in other amendments to the Bill, why cannot it be used in this one?
Lord Newby
“Duty of FCA to make rules restricting charges for high-cost short-term credit
(1) In section 137C of FSMA 2000 (FCA general rules: cost of credit and duration of credit agreements), after subsection (1) insert—
“(1A) The FCA must make rules by virtue of subsection (1)(a)(ii) and (b) in relation to one or more specified descriptions of regulated credit agreement appearing to the FCA to involve the provision of high-cost short-term credit, with a view to securing an appropriate degree of protection for borrowers against excessive charges.
(1B) Before the FCA publishes a draft of any rules to be made by virtue of subsection (1)(a)(ii) or (b), it must consult the Treasury.”
(2) In Schedule 1ZA to FSMA 2000, in paragraph 11 (FCA’s annual report), in sub-paragraph (1), after paragraph (h) insert—
“(ha) any rules that it has made as a result of section 137C during the period to which the report relates and the kinds of regulated credit agreement (within the meaning of that section) to which the rules apply,”.(3) The FCA must ensure any rules that it is required to make as a result of the amendment made by subsection (1) are made not later than 2 January 2015 and apply (at least) to agreements entered into on or after that date.”
Lord Newby
My Lords, I turn to the Government’s amendments on high-cost, short-term—or payday—lending. The Government are committed to action to protect borrowers from the harm that these lenders cause. We have already taken decisive action to overhaul regulation of the payday lending sector, with the Financial Conduct Authority taking on its broad new powers in relation to consumer credit from April.
The FCA has already set out tough proposals to clamp down on the key causes of consumer detriment, including capping the number of rollovers and curbing the misuse of continuous payment authorities. However, the Government have agreed to do more. We want to put an end to the unfair and extortionate cost of borrowing from payday lenders and to prevent the spiralling costs faced by those struggling to repay their loans.
There is a growing evidence base, including lessons from other countries, that a cap on the costs is the right way forward for consumers. Of course, we are not just talking about an interest rate cap, which evidence shows is likely to be far less effective. A cap should include all fees and charges which may be incurred in relation to a payday loan, including default charges and rollover fees.
FCA powers are already sufficiently broad to ensure that charges of all kinds can be covered in the cap. This Bill presents the ideal opportunity to ensure swift action to protect consumers from unfair and spiralling costs and to give the FCA a definitive parliamentary mandate to act now. That is why the Government are introducing this amendment to require the FCA to impose a cap on the cost of payday loans. Under this new duty, the FCA must use the powers given to it by the Government in the Financial Services Act 2012 in relation to such loans.
In Committee, noble Lords asked about the framework within which the cap will be designed, and I will explain a little how this amendment delivers that framework. Designing a cap on the cost of credit is not a job for government; nor is it right that the detail of a cap should be enshrined in primary legislation, given that the industry it is intended to bind is so fast-moving and innovative. That is why the cap must be set by the independent and expert regulator, which has flexible powers to ensure that the cap remains effective. The FCA must be allowed to design a cap that works in UK consumers’ interests and fits the UK market.
However, the amendment makes clear the FCA’s overarching objective in this endeavour: it must make rules to impose a cap to protect consumers from excessive charges imposed by high-cost, short-term lenders. This language echoes the FCA’s consumer protection objective. The FCA must make rules to advance one or more of its operational objectives—consumer protection, market integrity and competition. This applies to the rules to implement the cap, just as it does to all FCA rule-making. The FCA’s competition duty also applies. It must consider how the rules affect the ability of the market to serve consumers’ interests.
Introducing a cap is not without risks or potential adverse consequences, including reducing access to credit for some individuals who are in financial difficulty. The FCA will not be able to eliminate those risks but it will seek to manage them. It will be important that the FCA strikes the right balance in designing and setting the cap. That is why it must publish a cost-benefit analysis on the impact of its proposals and undertake a consultation. The amendment specifically requires that the FCA must consult the Treasury before it publishes and consults on any draft rules. To reflect the importance of keeping the rules current and effective, the FCA must report on any rules it makes under Section 137C, including rules imposing a cap on loan costs, in its annual report.
Finally, I should point out why it is not worth defining payday lending in great detail in primary legislation. Putting a narrow definition in primary legislation could lead to unintended consequences. Lenders may just try to circumvent the definition. The amendment therefore allows the FCA to specify precisely which types of high-cost, short-term loans are captured when it makes its rules to effect the cap.
I now turn to the matter of timing, which is the subject of the amendment proposed by the noble Lords, Lord Eatwell and Lord Mitchell, and the noble Baroness, Lady Grey-Thompson, which proposes to bring the timetable for implementing a cap forward to 1 October next year. I fully support the intention to bring the cap into force as soon as possible in order to protect consumers. That is precisely why the Government are taking this opportunity to bring forward legislation to require the FCA to impose a cap, so that the FCA can get on with implementation as quickly as possible. Introducing this new duty on the regulator ensures its efforts are focused on implementing the cap rather than on having to spend time and resources making the case for using its cost-capping powers in the first place.
The amendment provides a backstop date for implementation. The cap must be in place by at least 2 January 2015. Noble Lords should be in no doubt that, if the FCA can deliver sooner, it will. But there are a number of steps that must be taken before the cap is to be implemented. All of these are important. If rushed, they could put consumer protection at risk for the sake of speed. As I have already said, the risks of getting the cap wrong are also high—reducing credit for individuals or potentially pushing them into the arms of less regulated lenders.
Perhaps it would be helpful if I set out the FCA’s proposed timetable. The FCA’s current timetable for implementing a cap is ambitious but deliverable, and crucially allows the FCA to draw on the Competition Commission’s rigorous investigation of the market, which is currently underway. The FCA has already made good progress on background research on capping the cost of credit. It will start its detailed analysis phase in the new year, including drawing on the evidence the Competition Commission has already collected, through existing statutory information gateways between the two organisations, and where necessary, seeking information from firms.
The Government are bringing forward secondary legislation to allow the FCA to gather information from the industry as soon as possible to help it design the cap. The FCA will consult in the spring on its draft proposals, at around the same time as the Competition Commission is due to publish its provisional findings. It will have to publish the cost-benefit analysis when it consults. Consultation will take place over the summer, and the FCA plans to make the rules in the autumn. Again, this is likely to be around the same time as the Competition Commission’s final report. Lenders will have the rest of the year to update their systems and processes to ensure they comply with the new requirements, and the cap will come into effect at the beginning of January.
Were a 1 October implementation date adopted, the FCA would be so far out of sync with the Competition Commission’s work that it would not get the full value from the Competition Commission’s insight into the market to ensure the cap helps to secure the best outcomes for consumers. Such an early date would mean that important components of the FCA’s rule-making processes would need to be jettisoned, be that evidence-gathering in preparation of a cost-benefit analysis, consultation with interested parties on the proposals, or preparation time for the lenders to get their systems and processes in order to meet the new requirements and become responsible, compliant lenders. Noble Lords opposite may laugh at this, but if we were not proposing to do this, they would be the first to criticise the Government for not properly doing every single phase of what I have just described.
These processes are vital to ensuring that the cap works in the best interests of consumers and avoids the risks and unintended consequences I described earlier. Difficult though this choice is, the Government are not prepared to compromise the process, and I hope that noble Lords will agree. I am grateful to noble Lords for putting the spotlight on the timetable, but I hope that I have been able to persuade them that the risk to borrowers of rushing the design and implementation of a cost cap is simply too great and that the FCA is committed to implementing the cap as quickly as is reasonably possible. This, I trust, provides sufficient reassurance to convince them not to move the amendment.
I turn now to the amendment of the noble Lord, Lord Sharkey, who has spoken so passionately during the Bill about the lessons we can learn from the way in which the state of Florida has approached regulation of payday lenders. His amendment aims to ensure that the FCA must impose restrictions on the number of loans an individual may have and the times a loan may be rolled over at the same time as it makes rules imposing a cap on the cost of payday loans. The Government fully agree that regulatory action is necessary to tackle both of these issues. The FCA has already proposed to curb rollovers. The noble Lord is, I know, convinced of the need for an outright ban, as in Florida. I have considerable sympathy with that conviction, but I have not seen robust evidence to show that a ban is the right approach for UK consumers. The ability to roll over a loan—for instance, if an unexpected expense crops up one month—offers a flexibility which is valued by some consumers.
In its consultation published on 3 October, the FCA has suggested a limit of two rollovers but has specifically also sought views on permitting one rollover only. This is a significant advance on the industry’s own codes of practice—which limit rollovers to three—with which, sadly, far too few lenders comply. The consultation period has just closed and the FCA is currently considering responses. Legislating to ban rollovers now could prejudge that consultation and evidence-gathering exercise. I am sure the noble Lord will agree that the outcome should be guided by the evidence.
Of course, a cap on the cost of payday loans, which will include rollover charges, will be a key factor in undercutting lenders’ reliance on rollovers as a generator of profits. I am confident that a cap on the cost of the loan and a cap on the number of rollovers, as the FCA has proposed, should help stop the cost of rolled over loans spiralling while still meeting borrowers’ needs.
The noble Lord also proposes that the FCA must curb multiply sourced simultaneous loans. I again have great sympathy with his intention here but in this case, too, the FCA is committed to taking action. The FCA is approaching the solution differently from the noble Lord but the effect is the same. Rather than limiting irresponsible borrowing, as the noble Lord proposes—particularly as this could have the side-effect of restricting choice and flexibility for consumers who are able to repay—the FCA has focused on restrictions to tackle irresponsible lending. It has proposed to put strict new requirements on firms to undertake affordability assessments to ensure that a borrower can afford to make sustainable repayments. This will include looking at other loans a borrower has outstanding.
However, the FCA is not stopping there. The quality and value of lenders’ affordability assessments clearly relies to a significant degree on the nature of the data available on an individual’s borrowing. The Government and the FCA have real concerns that data sharing is not working to support responsible lending and consumers’ interests. The FCA has already warned the industry that it must improve and that, if it fails to improve, the regulator will take action. The FCA has committed to exploring the best way to improve data sharing and thereby lending decisions. I will ask the FCA to keep noble Lords updated on this work.
I hope the noble Lord has been reassured that the FCA is committed to taking decisive action to curb rollovers and multiply sourced simultaneous loans. It will take action as soon as it assumes its regulatory responsibilities for this sector in April, so it is not necessary to expand the FCA’s cost-capping responsibilities to include these areas. I am very grateful to him, however, for drawing these issues to the House’s attention and highlighting the lessons we, and in particular the FCA, can learn from Florida. I trust that he will feel able not to move his amendment.
Lord Eatwell
My Lords, my noble friend Lord Mitchell in speaking to his amendment on the proposed date referred to 90 days. One might ask how 90 days can make a difference. Surely when the Government need something to be done they can get it done. The idea that somehow the whole process is so darn elaborate that they cannot do it in a period of time which saves 90 days on their side is, in the true meaning of the word, incredible. On the other hand, for the borrower 90 days includes Christmas Day 2014. That is a big issue, because this is the period when short-term borrowing is at its peak. That is why it is incumbent on this Government to take swift action. They have been dragging their feet on this issue for four years. It is incumbent on them to take swift action and that is why Amendment 22 is so important.
The noble Lord, Lord Sharkey, has raised a crucial and frightening point—that payday lenders within the European Economic Area could lend within the UK. I hope the Minister will be able to tell us that we are not wasting our time completely this evening—because that is what that would mean we would be doing—and that the noble Lord’s fears are unfounded.
Swift action is so important that when this amendment is called I intend to test the opinion of the House.
Lord Newby
My Lords, noble Lords have raised a number of issues and questions. I shall do my best to answer. The noble Baroness, Lady Oppenheim-Barnes, discussed the way in which the total cost of the loan, as opposed to the interest rate, is portrayed, and of course many people do not understand interest rates. The Government are discussing with the European Commission the relative prominence of the total cost of the loan. This discussion is taking place in the context of the Commission’s review of the consumer credit directive, so I hope we are well on top of that.
My noble friend Lord Sharkey asked a raft of questions. I hope that I managed to write them all down. He asked whether the FCA understood the particular problems of multiply sourced simultaneous loans. I can assure him that that is within its remit. My noble friend talked about rollovers and asked whether the FCA would look at one or none as part of this review. I can give him that assurance. He asked whether he could see a draft regulation in a timely manner. We will try to do that. Of course, if we are going to consult on draft regulations, things such as the odd 90 days here and there make a lot of difference. Our ability to consult properly at any point in this process requires us to follow something like the timetable that I set out earlier. He asked whether data sharing is being considered as part of the FCA’s remit. I can assure him that the FCA is looking at that.
My noble friend asked for a definition of “excessive” and why it was not in the Bill. The FCA will be looking at existing definitions of excessive, including that in Florida. Different people in different places who cap payday loans have different definitions of excessive. There is no single definition that is uniquely right. It has to be taken in the context of all the other factors and the overall design of the scheme. The FCA will be looking at international definitions as part of that work.
My noble friend asked whether there will be an opportunity and time in Parliament for debate on the publication of the draft rules. That partly goes to the speed with which we do that. If, as I set out, the FCA publishes a consultation paper by the end of May, it will be perfectly possible for Parliament to debate it. There are a number of ways in which that could be done. In your Lordships’ House, it is now very easy for individual Members to get a debate on an issue within a very few weeks, even if no other formal debate was allowed. I would be very happy to raise that issue in the usual channels. Finally, my noble friend asked whether the FCA will consider the limit to cover both the amount and the term of the loan. I can give him that assurance.
The noble Lord, Lord Higgins, asked why we do not refer to interest in the Bill. The provision covers every aspect of the cost of a payday loan, of which interest is only one part. The definition in the Bill subsumes interest.
Lord Higgins
Would it not be better none the less at line 9 of the amendment to say “against excessive rates of interest and charges” as the rate of interest is quantifiable whereas charges are much more amorphous?
Lord Newby
Charges are also quantifiable. The aim, as we have set out very clearly, is to cover all components of the total cost of the loan.
The noble Lord, Lord Higgins, asked about the high charges that high street banks sometimes impose. Issues there can be investigated by the FCA and no doubt it may well wish to do so.
The noble Lord, Lord Mitchell, asked a number of questions. I first congratulate him and my noble friend Lord Sharkey on the persistence with which they have pursued this issue, bringing before the House evidence of what is really happening in the market and helping everyone involved in the process to gain a better understanding of the scale of the problem. I can confirm that the government amendment does what it says in that the FCA will not have any option but to make rules. It has to do it. The “must” is a real “must”. In terms of the powers that the Treasury will have, the purpose here is to ensure that the Treasury has an input into the consultation and development of the policy by the FCA. However, we have been very clear that the primary responsibility must rest with one body and that the appropriate body is the FCA. I will come back to the noble Lord’s point on timing in a moment.
The noble Baroness, Lady Cohen, said that she wished that credit unions could be more like payday loan companies. I think many noble Lords would share that view but, sadly, they have some way to go before they get into that position.
Lord Sharkey
Before the noble Lord sits down, perhaps I may prompt him to address the question of payday loan companies operating outside the UK but in the EEA trading in this country. Do they or do they not? Will they be subject to the cap or not?
Lord Newby
My Lords, this is a complicated area that we have just begun to start looking at. In order to minimise the extent to which overseas operators might be able to operate in this area, we need to take our time and do the job properly. It is another contributory argument for doing the job in a deliberative manner.
Lord Sharkey
My Lords, I am grateful for the answers that the Minister has given, with the possible exception of the last one. I should be grateful if, as these deliberations take place, he would consider writing to us to tell us the latest position on these people trading from outside the country in the country. If that turns out to be possible, we need a radical rethink of exactly what we are about today. Leaving that to one side, I am reassured by the answers that my noble friend the Minister has given but I particularly want to stress that absolutely critical to this working at all is a real-time database. This is not about data sharing or the old system of batch processing. It will work only if real-time data processing and real-time lending information are available to the regulator and the lending companies. I hope that as the FCA proceeds it will come to an understanding that that is absolutely the case and an absolutely necessary requirement. Having said all that, I beg leave to withdraw the amendment.
Lord Newby
“Role of FCA Consumer Panel in relation to PRA
In section 1Q of FSMA 2000 (the Consumer Panel), after subsection (5) insert—“(5A) If it appears to the Consumer Panel that any matter being considered by it is relevant to the extent to which the general policies and practices of the PRA are consistent with the PRA’s general duties under sections 2B to 2H, it may communicate to the PRA any views relating to that matter.
(5B) The PRA may arrange to meet any of the FCA’s expenditure on the Consumer Panel which is attributable to the Panel’s functions under subsection (5A).””
Lord Newby
My Lords, I now turn to an amendment which will better position the PRA to take account of consumer interests by drawing on the views of the FCA’s Consumer Panel. This follows the debate at Lords Report stage where the noble Lord, Lord Eatwell, proposed amendments which would have created a role for the Consumer Panel by creating a duty on the PRA to consider representations made to it by the panel and to publish its responses, equivalent to the duty on the FCA.
We have considered the issues carefully, as I said we would on Report, and have proposed alternative arrangements which are more proportionate to the PRA’s prudential remit, but deliver, we believe, the essence of the noble Lord’s amendment. Our amendment will confer a role on the panel by allowing it to raise issues it is considering with the PRA; for example, through meetings or in correspondence. It will also enable the PRA to meet the expenses of the Consumer Panel when the Consumer Panel discharges this function. This will ensure that the PRA can benefit from the expertise of the panel without the undue burden on either the PRA or the Consumer Panel of a binding requirement on the PRA to consult the panel each time the PRA changes its rules or policies.
I have no doubt that this amendment, which has been welcomed and supported by the chair of the Consumer Panel, will strengthen the voice of consumers at the PRA, and I am pleased to add it to the list of improvements we have been able to make as a result of constructive debate and scrutiny in your Lordships’ House. I beg to move.
Lord Eatwell
My Lords, I welcome this amendment, which will add important coherence to the consideration of consumer affairs within the regulatory structure.
Lord Deighton
“Duty to meet auditors of certain institutions
(1) Part 22 of FSMA 2000 (auditors and actuaries) is amended as follows.
(2) After section 339A insert—
“339B Duty to meet auditors of certain institutions
(1) The FCA must make arrangements for meetings to take place at least once a year between—
(a) the FCA, and(b) the auditor of any PRA-authorised person to which section 339C applies.(2) The PRA must make arrangements for meetings to take place at least once a year between—
(a) the PRA, and(b) the auditor of any PRA-authorised person to which section 339C applies.(3) The annual report of each regulator must include the number of meetings that have taken place during the period to which the report relates between the regulator and auditors of PRA-authorised persons to which section 339C applies.
(4) In subsection (3) “the annual report” means—
(a) in relation to the FCA, every report which it is required by paragraph 11 of Schedule 1ZA to make to the Treasury, and(b) in relation to the PRA, every report which it is required by paragraph 19 of Schedule 1ZB to make to the Treasury.(5) In this section “auditor” means an auditor appointed under or as a result of a statutory provision.
339C PRA-authorised persons to which this section applies
(1) This section applies to a PRA-authorised person which—
(a) is a UK institution,(b) meets condition A or B,(c) is not an insurer or a credit union, and(d) is, in the opinion of the PRA, important to the stability of the UK financial system.(2) Condition A is that the person has permission under Part 4A to carry on the regulated activity of accepting deposits.
(3) Condition B is that—
(a) the person is an investment firm that has permission under Part 4A to carry on the regulated activity of dealing in investments as principal, and (b) when carried on by the person, that activity is a PRA-regulated activity.(4) In this section—
(a) “UK institution” means an institution which is incorporated in, or formed under the law of any part of, the United Kingdom;(b) “insurer” means an institution which is authorised under this Act to carry on the regulated activity of effecting or carrying out contracts of insurance as principal;(c) “credit union” means a credit union as defined by section 31 of the Credit Unions Act 1979 or a credit union as defined by Article 2(2) of the Credit Unions (Northern Ireland) Order 1985.(5) Subsections (2), (3) and (4)(b) are to be read in accordance with Schedule 2, taken together with any order under section 22.”
(3) The italic cross-heading before section 339A becomes “General duties of regulator”.”
Lord Deighton
We now turn to the proposal to put in the Bill new requirements on regulators to meet the auditors of banks. This issue has been subject to extensive debate. The Government have been clear throughout that the regulators should carry the full responsibility for managing an effective relationship with the auditors of banks they supervise, and be held to account for how well they deliver it.
The reasons for this are strong. Before the crisis, regulators neglected their engagement with auditors while the auditors themselves signed off on the accounts of banks which we now know were, in some cases, in dire straits. The Government took action. There is now a requirement in the Financial Services and Markets Act for the PRA to lay its code of practice on auditor engagement before Parliament, meaning that the regulators will be held accountable for how well they deliver on the requirement to engage with the auditors of banks.
However, it has become clear how strongly the PCBS valued the opportunity to go further and specify the number of meetings in statute, to ensure auditors’ insights are used. For those reasons the PCBS is clear that, over time, this dialogue between auditors and regulators must not be allowed to lapse. The proposed amendment therefore includes two provisions to ensure that this crucial dialogue is preserved.
First, the regulators must disclose in their annual report the number of meetings they have held with the auditors. This allows Parliament to hold the regulators to account for the frequency of meetings. Secondly, the regulators must meet at least once per year with the auditors of firms that the PRA, the leading prudential regulator, considers to be important to the stability of the United Kingdom economy. This is a minimum requirement. The Government believe that it is right to place the duty on the regulator to determine how many more meetings are required with the auditors of firms of particular types, consistent with its risk-based, judgment-led approach. This allows the regulators to focus their resources where the risks are highest.
Some noble Lords may argue that the minimum requirement should be higher. The Government do not agree. The Government have said that the regulators must meet with any firm that may be important to the financial system at least once per year, but within this group, there will be firms of major and firms of minor significance.
For firms of major significance, once may be too little; for firms of minor significance, once may be sufficient. For example, under the PRA’s current code, for banks that could have the most significant impact on financial stability, the PRA code mandates at least three meetings a year. For other firms whose failure could still materially impact the UK financial system, the PRA code mandates at least one bilateral a year. The FCA meets at least twice per year with the auditors of the most significant banks and at least once per year with those in the next largest category.
The Government believe that it is right that Parliament does not seek to specify this level of detail in legislation. To do so would risk misaligning the PRA’s resources with the risks the financial system faces. The Government therefore believe that this amendment arrives at a suitable compromise between the desire to specify in the Bill a minimum number of meetings, to prevent meetings between auditors and regulators from lapsing entirely, and an approach that requires regulators to take responsibility for pursuing proportionate and high-quality engagement, and enhanced mechanisms for accountability. I commend these amendments to the House.
Lord Lawson of Blaby
My Lords, once again, I am extremely grateful to my noble friend Lord Deighton and his colleagues in the Treasury for agreeing to bring forward this amendment. As he pointed out, it is in response to a recommendation of the Parliamentary Commission on Banking Standards. Hitherto the Treasury has been reluctant to accept this, but it has now done so and it is in the Bill. Incidentally, this was also a recommendation of your Lordships’ Economic Affairs Committee, in its report on the auditors a little while back. This provision is needed in the Bill because we have been here before. The Banking Act 1987—I introduced the Bill that led to that—enabled these meetings to take place, and for a number of years they did. However, in the run-up to the great banking crisis and meltdown they had ceased. That is why we on the commission felt that this time it was necessary to have this provision in the Bill, and I am grateful to my noble friend for that.
I know that the hour is getting late but I should mention another matter that relates to a recommendation of the commission. There was lamentable failure of these meetings to take place and the fact that the auditors were in front of the crisis—the dog that never barked—was partly because of the lack of meetings and was largely the fault of the regulators at the time. It was their responsibility above all to seek such meetings. However, there was also the lamentable inadequacy of the accounting system at the time, IFRS. It is probably an inadequate system in general but it is particularly flawed when it comes to the auditing of banks. That is increasingly recognised within the accountancy profession. It is too late for me to go into the details, and I have explained the specific failings in previous debates and I will not go over the ground again.
When the commission addressed this issue it said that since we cannot change IFRS because the “I” represents an international agreement—although it is, in fact, a European agreement because the Americans have made it clear that they do not want to have any part of it—the PRA must require the major systemic banks to produce a second set of accounts that satisfies the needs of prudential regulation and supervision. That involves a small extra cost to achieve a considerable objective.
When this matter was discussed in Committee, my noble friend Lord Deighton said that there was no need to put such a provision in the Bill because the PRA had the power to do so—and I very much hope that it will do so. It is up to the Treasury Committee in another place to keep the PRA up to the mark. I hope that the present chairman of that committee will do that. Andrew Tyrie, the Member of Parliament for Chichester, outstandingly chaired the work of the Parliamentary Commission on Banking Standards and he secured its important and unanimous report. However, I was slightly alarmed in Committee when the Minister said that the regulators already have power,
“to make rules requiring banks to prepare additional accounts, to the extent that this is permissible under EU law”.—[Official Report, 23/10/13; col. 1022.]
While I thank him for the amendment, I must ask him: if the PRA wishes a systemically important bank to present a set of accounts in a way that it feels is necessary for proper prudential supervision, what will it be prevented from doing under EU law? The House needs to know that.
Lord McFall of Alcluith
My Lords, I will be very brief in supporting the comments of the noble Lord, Lord Lawson. I have been interested in the relationship between the auditors and the regulator ever since Northern Rock went down in 2007. The question that the regulator should be keeping in mind in discussions with auditors on a yearly basis is, what is the point of an audit? The auditors tell us that it is to have a backward look at what has happened in a company, but there is a need to have a forward look at the risks that are happening, to issues like low risk and low probability, low risk and high probability, high risk and low probability, or high risk and high probability. These scenarios need to be included, because the auditors came to all the committees, the Treasury Committee in the past and the Treasury Committee now, and said that it was their business to look at the audit at that particular time. That is insufficient and there needs to be a greater engagement between the regulator and the auditors.
I reminded the Minister that previously the regulator did not look at the business models of companies. They had nothing to do with them. Thankfully, the new chief executive, Martin Wheatley, has said that the business models are very appropriate for regulators to look at because the business models that were ignored let the PPI mis-selling scandal go for 18 years. There is a lot of work to do between the auditor and the regulator—and the question that I repeat again is for the regulator to say, what is the point of an audit? Auditors can come up to the mark and not just have a backward look or even a present look at the business model of a company but can ensure that there is also a forward look.
Lord Deighton
With respect to the question asked by my noble friend Lord Lawson about what constraints the EU law would put on the PRA getting the information in the form that it requests, this is merely tying it into what comes out of the capital requirement directive IV, just to make sure that it is consistent. I am not aware of a particular constraint, but I am aware that there will be additional disclosure responsibilities that come along with that. We really just want to integrate it, but I do not believe that it is a constraint; it should actually help with disclosure.
Lord Lawson of Blaby
I am most grateful, but will my noble friend agree to look further into this and, if there is a constraint, to write to me?
Lord Deighton
Of course, I would happy with that undertaking. I fully accept the observation from the noble Lord, Lord McFall, that an audit needs to have the context of the business model behind it to have a proper understanding of where the business is going. We will certainly encourage the regulator to ensure that the dialogue with the auditor takes into account what is really happening in the business and does not just look at the numbers in isolation.
Lord Deighton
(a) after “55C,” insert “71A(3A),”, and(b) ”
Lord Newby
“Recovery of expenditure incurred by Office for Legal Complaints
(1) The Schedule to the Compensation Act 2006 (claims management regulations) is amended as set out in subsections (2) and (3).
(2) The provision in paragraph 7 becomes sub-paragraph (1) of that paragraph.
(3) In paragraph 7, after sub-paragraph (1) insert—
“(2) The fees that may be charged by the Regulator by virtue of sub-paragraph (1) include fees in respect of costs incurred by the Regulator for the purposes of meeting any leviable OLC expenditure.“Leviable OLC expenditure” has the meaning given by section 173(7) of the Legal Services Act 2007.”
(4) The Legal Services Act 2007 is amended as set out in subsections (5) and (6).
(5) After section 174 insert—
“OLC expenditure relating to claims management services174A OLC expenditure relating to claims management services
(1) This section has effect at any time when no person is designated under section 5(1) of the Compensation Act 2006 (the Regulator in relation to claims management services).
(2) In determining the leviable OLC expenditure for the purposes of section 173, any expenditure incurred, or income received, by the OLC in connection with the exercise of its functions in relation to claims management services is to be disregarded.
(3) The Lord Chancellor may by regulations charge periodic fees for authorised persons for the purposes of meeting any costs incurred by the Lord Chancellor in respect of relevant OLC expenditure.
(4) “Relevant OLC expenditure” means the difference between—
(a) any expenditure of the OLC incurred in connection with the exercise of its functions in relation to claims management services, and(b) the aggregate of the amounts which the OLC pays into the Consolidated Fund under section 175(1)(g), (h) or (n), so far as relating to the exercise of its functions in relation to such services.(5) Regulations made under subsection (3) may, in particular—
(a) permit the charging of different fees for different cases or circumstances (which may, in particular, be defined wholly or partly by reference to turnover or other criteria relating to an authorised person’s business);(b) enable the person exercising functions of the Regulator under section 5(9) of the Compensation Act 2006 to collect fees on behalf of the Lord Chancellor;(c) specify the consequences of failure to pay fees (which may include anything which could be specified in regulations under section 9 of that Act as a consequence of a failure to pay fees charged under those regulations).(6) In this section “authorised person” and “claims management services” have the same meaning as in Part 2 of the Compensation Act 2006 (see section 4 of that Act).”
(6) In section 206 (Parliamentary control of orders and regulations), in subsection (4), after paragraph (o) insert—
“(oa) section 174A(3) (power to charge fees on persons providing claims management services);”.”
Lord Newby
My Lords, I turn finally to the amendments that deal with claims management companies and the Office for Legal Complaints. It is essential that a new route of redress is available to consumers who feel that they have received a poor service from those providing claims management services, commonly referred to as claims management companies, or CMCs. It is also right that the claims management industry bears the cost of providing this new route of redress. I thank the noble Baroness, Lady Hayter of Kentish Town, for raising this issue at Report stage and I am delighted that she has put her name to this amendment.
Section 161 of the Legal Services Act 2007 already makes provision for bringing complaints about regulated CMCs under the jurisdiction of the Office for Legal Complaints. Once commenced, this will give consumers greater scope for redress against regulated CMCs, including awards for financial compensation. Before Section 161 can be commenced, however, the correct mechanisms need to be put in place to ensure that the costs incurred by the OLC in relation to complaints about CMCs can be recouped. It is also necessary to ensure that these costs are borne by the claims management industry. It is right that costs associated with complaints about CMCs are paid for by the industry which creates them. It is also right to prevent the legal profession having to foot the bill for these costs or benefit from any income generated from recouping these costs.
Turning to the detail of the amendments, it is usual practice for the designated regulator to recoup the costs of redress from those it regulates. In this case, the Claims Management Regulator, or CMR, is the designated regulator. The Legal Services Board, or LSB, will then levy the regulator for the OLC’s costs and reimburse the OLC. To ensure that the Claims Management Regulator can recoup the OLC’s costs, these amendments change the Compensation Act 2006 to enable the Secretary of State to make regulations to allow the Claims Management Regulator to charge CMCs, as part of their fees, for the OLC’s costs associated with CMC complaint-handling. The Legal Services Act 2007 already provides for a levy on the Claims Management Regulator, if one is designated. This enables the LSB to levy the regulator for costs incurred by the OLC in relation to claims management costs.
That mechanism is applicable only when there is a designated person as the Claims Management Regulator. When no person is designated as the Claims Management Regulator, as is currently the case, this role falls to the Secretary of State. The mechanism does not operate in this situation as the Secretary of State cannot be levied. To address this, amendments to the 2007 Act are needed. They will change the Act to give the Lord Chancellor a new power to make regulations to allow him to recover the OLC’s costs associated with CMCs. These powers allow the Lord Chancellor to charge a periodic fee on regulated CMCs.
Finally, in this situation further amendments are needed to address cross-subsidisation. The amendments will change the levy mechanism in the Legal Services Act 2007 to ensure that the calculation of the OLC’s expenditure which is leviable on the legal profession excludes both its costs and its income in relation to CMCs.
These amendments are an important step in improving the redress system for consumers who have suffered from poor service from the claims management industry. It is right that consumers who have been treated unfairly are able to access this new route for redress through the OLC. I beg to move.
Lord Brennan
My Lords, these final amendments allow me to raise a point of general importance about the Bill. The amendments create yet a different and welcome addition to the commission’s original proposals.
The Bill came to this House at 30 pages long. With today’s amendments, it is going to be about 200 pages long, with about 150 clauses. I suggest to the House that it is incumbent on all of us—but on the Government, in particular—to assist public understanding of where the Bill is now at. It is going back to the Commons, where most of it will not have been debated, and the strain on people in this House over the past few weeks has been immense. Therefore, I suggest to the Government two measures that they might consider taking.
The first—although it sounds remarkable, it is of utility—is to prepare a set of Explanatory Notes on the Bill as it now is when it goes back to the Commons and when it is considered, as it will be, by the City of London in general and by the banking community and the lawyers in particular. The second point is that, from page 50 onwards, the Government’s response to the commission’s report of July 2013 very helpfully sets out 114 proposals with notes against them and proposed action. The Government have taken different positions on some of those, and there are additions to that list. It would be a great help if the list were revised, bringing it up to date to reflect what has actually happened.
I do not want to appear tedious but the fact is that this is a major Bill and we need to do everything we can to make it as well understood as it can be.
Lord Eatwell
My Lords, I am delighted to support Amendment 26, which stands in the names of the noble Lord, Lord Deighton, and of my noble friend Lady Hayter of Kentish Town. She is very sorry she cannot be in her place this evening to say this herself, but she is very grateful to the Government not only for accepting the essence of her amendment, moved at Report, but also for turning in some far better drafting than she could have done. This was done under some tight time pressures, for which we are grateful to both of the Ministers concerned and to their staff. My noble friend cannot be here to thank the Government herself because she is at a Labour Party fundraising event to help fund the campaign to expel the Government from office, but in the mean time she does sincerely want her appreciation for the help to be recorded.
The impact of the amendment is that, in future, consumers with complaints against claims management companies will be able to take these to the Legal Services Ombudsman to be resolved. They will therefore get redress when there is judgment in their favour. This will also help to drive up standards. By reporting repeat offenders to the regulator, it will help to get some of the CMC sharks out of the business. So congratulations to both to the noble Baroness, Lady Hayter, and to the Government for accepting the essence of her amendment.
Lord Deighton
My Lords, I know it is getting late, but as this group of amendments draws to a close, I hope you will permit me to spend a few moments reflecting on the changes that this Bill has undergone since it first arrived in this House, and to thank all those who have contributed to it in that time. On Second Reading in July, my noble friend Lord Newby remarked that the great strength of this legislation was due in no small part to the intense degree of scrutiny that it had undergone on its journey to this House, and the constructive spirit in which those of all political colours had contributed to it. This is surely even more true of the Bill that leaves this House today.
My first thanks must go to the members of the Parliamentary Commission on Banking Standards, represented in this House by the noble Lords, Lord Turnbull, Lord McFall and Lord Lawson, the noble Baroness, Lady Kramer, and the most reverend Primate the Archbishop of Canterbury. The central role that they have played in shaping this legislation is one of the things that has made this Bill so unique; indeed, the great majority of the amendments that it has undergone in this House directly implement the recommendations of the Commission’s final report on professional standards and culture in the banking industry. These measures are not only the crowning achievements of this piece of legislation, but the final piece in this Government’s ambitious four-stage programme of reform for the banking sector.
Many of the noble Lords in this Chamber today will have contributed to the first stage of that reform, the Financial Services Act 2012, which recast the regulatory architecture for financial services. This Bill, as it was introduced in another place, made provision for the second stage of that reform, the implementation of Sir John Vickers’s recommendations on structural reform of the banking sector, and the Bill that leaves this House today puts in place the two final pillars of that legislative programme, overhauling the culture of the banking industry, and driving out competition to improve outcomes for consumers. Of course, the Government’s commitment to implement the recommendations of the Commission’s final report through this Bill has meant that the task of scrutinising these incredibly important measures has fallen largely to this House.
I shall respond to the noble Lord, Lord Brennan. As I understand it the explanatory notes have already been written for the amendments, and they will be published tomorrow. As always, my officials are a little bit ahead of the game, but we absolutely take on board the need to communicate this effectively, both to the other place and more broadly to the City.
All these changes are a challenge to which this House has ably risen, but I must thank all noble Lords for their patience in giving such careful consideration to this wide-ranging and important set of provisions, particularly with the number of amendments that have been introduced, the speed with which drafts have been turned around, and the speed with which noble Lords have been asked to absorb so much information. In particular I must thank the opposition Front Bench, led by the noble Lord, Lord Eatwell, for its thoughtful and constructive contributions to the debate. I thank my noble friend Lord Newby for his support, without which it would not have been possible to provide the House with the level of response that it deserves, and my officials for their consistent hard work. Special thanks must go to parliamentary counsel for their heroic efforts in drafting amendments with such speed and precision.
The Bill that leaves this House today is completely transformed from the one that arrived here five months ago, and it is hard to imagine how it could have reached its present state without the contribution of those that I have but briefly mentioned. It is a vital addition to the statute book, whose importance is hard to overstate. I beg to move.
Lord Deighton
Lord Deighton
Lord Deighton
Lord Deighton
“This is subject to subsection (2).
(2) The amendments made by the following sections have the same extent as the enactments amended—
(a) section 10 (preferential debts: Great Britain),(b) section 129 (power to impose penalties on persons providing claims management services), and(c) section (Recovery of expenditure incurred by Office for Legal Complaints) (recovery of expenditure incurred by Office for Legal Complaints).”
Lord Deighton
section (Duty of FCA to make rules restricting charges for high-cost short-term credit), and”
Lord Deighton
Lord Deighton
Lord Lawson of Blaby
My Lords, it is incumbent on us to respond to the very kind words of my noble friend Lord Deighton. As he said, the Bill has been completely transformed. I have been a Member of this House for a very long time now but I cannot recall a Bill—let alone a Bill as important as this one—to have been so totally transformed for the better. It is not only a great deal bigger but also a great deal better as a result of its passage through your Lordships’ House. I am extremely grateful and the nation will be extremely grateful.
There has been a lot of nonsense talked about the excessive size of the banking sector in this country. Some people have been even as foolish as to talk about a monocrop economy. The fact of the matter is that banking accounts for a little over 5% of this country’s GDP; it is nothing like a monocrop economy. However, it is a supremely important sector and one in which we are world class.
There is a size problem—I have not got time to go into it now and it would not be proper to do so—with individual institutions. As the former Governor of the Bank of England said, if an institution is too big to fail, it is too big. The size of the sector is a great strength of this country. As the present governor, Mr Carney, said recently, it is a great strength of the United Kingdom that we are prominent and world class in this growing and supremely important industry. We want it to grow further, which I hope it will. It is our great strength. It is what economists call the law of comparative advantage—you should do what you are best at—and this is a sector in which we are very good. However, if it is going to get bigger and bigger, which I think it will and should, it has to be both clean and robust. The purpose of the Parliamentary Commission on Banking Standards was to try to ensure that it would be both clean and robust. That is what the Bill is about.
I say again how grateful I am to the Government, and particularly to my noble friend Lord Deighton, for having implemented so many of the recommendations of the parliamentary commission to ensure that the Bill leaves this House in an infinitely better state than when it arrived here.