Grand Committee

Wednesday 24th February 2021 Grand Committee

Wednesday 24 February 2021

The Grand Committee met in a hybrid proceeding.

Financial Services Bill

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 24th February 2021 Grand Committee

Committee (2nd Day)

14:30

[The Deputy Chairman of Committees (Baroness Healy of Primrose Hill) (Lab)]

My Lords, the hybrid Grand Committee will now begin. Some Members are here in person, respecting social distancing, while others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.

I will call Members to speak in the order listed. During the debate on each group, I invite Members, including Members in the Grand Committee Room, to email the clerk if they wish to speak after the Minister, using the Grand Committee address. I will call Members to speak in order of request. The groupings are binding.

Leave should be given to withdraw amendments. When putting the Question, I will collect voices in the Grand Committee Room only. I remind Members that Divisions cannot take place in Grand Committee. It takes unanimity to amend the Bill, so if a single voice says “Not Content” an amendment is negatived, and if a single voice says “Content” a clause stands part. If a Member taking part remotely wants their voice accounted for if the Question is put, they must make that clear when speaking on the group. We will now begin.

Clause 2: Prudential regulation of certain investment firms by FCA rules

Amendment 10

Moved by

[Baroness Noakes]

10: Clause 2, page 2, line 28, at end insert—
“(2) Schedule 2 does not come into effect until each House of Parliament has approved accountability arrangements for the powers conferred on the FCA in that Schedule.(3) Accountability arrangements under subsection (2) include arrangements for—(a) draft rules to be laid before each House of Parliament;(b) final rules to be laid before each House of Parliament;(c) opportunities for each House of Parliament to take evidence on the draft or final rules and to express an opinion on them;(d) the consequences of an expression of opinion by either House of Parliament.”Member’s explanatory statement
This amendment would mean that the rule making powers given to the FCA in Schedule 2 can be exercised only when Parliament has agreed how accountability for those powers will be exercised by Parliament.

[Baroness Noakes (Con)]

My Lords, this is my first day in Committee and I place on record my interests as declared in the register, particularly my shareholdings in financial services companies.

I am very grateful to the Committee for going so slowly on Monday and not reaching Amendment 10. As I think noble Lords are aware, I was in the Chamber and could not have moved it myself. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, and my noble friend Lord Holmes of Richmond; not only have they added their names to my amendments in this group but they were standing by to deal with them without me on Monday. Normal service is resumed and I can move my amendment myself. I shall also speak to Amendment 26 in this group.

This is a fairly large group of amendments but its underlying theme is a search for the right balance between letting the specialist regulators get on with the job of regulatory rule-making and the role of Parliament in overseeing those regulators. My Amendment 10 to Clause 2 says that Schedule 2 to the Bill, which amends FiSMA to create rule-making powers for the FCA to undertake prudential regulation of investment firms, will not come into effect until each House of Parliament has approved accountability arrangements for those powers.

Amendment 26 is drafted in identical terms but relates to the rule-making powers conferred on the PRA by Schedule 3, which deals with the capital requirements regulation rules.

I make no attempt in these amendments to say what form of parliamentary accountability arrangements should be put in place, although the second part of my amendment says that accountability arrangements should include a number of things: arrangements for drafting the final rules being laid before Parliament; taking evidence on a draft of final rules and, importantly, Parliament expressing an opinion on them; and the consequences of any expression of opinion. On reflection, the drafting of my amendment is perhaps not clear enough as I was not intending to suggest that Parliament had to, for example, have the laying of draft rules as part of the accountability arrangements. I merely intended to indicate that it could have that as part of the arrangements.

My amendments are predicated on a belief that we should not grant significant new rule-making powers to the regulators without sufficient checks and balances in the system. Had the Government retained the rule-making powers repatriated from the EU, it would have been pretty clear that Parliament would have had an involvement. I am clear that passing these powers to the regulators should not allow the Government to write Parliament out of the picture. I am not, however, of a settled view as to what Parliament should do, which is why my amendment says that these new rule-making powers can go to the FCA and the PRA only when Parliament’s involvement is settled by Parliament itself. I am very conscious that it is not correct—or at least not normal—for legislation to cover the precise arrangements for parliamentary scrutiny. Those arrangements are for Parliament itself to determine, and I have tried to respect that.

Other amendments in this group seek to fill the void of what Parliament should do in practice, and I shall comment briefly on some of them. The noble Lords, Lord Tunnicliffe and Lord Eatwell, in their Amendments 20, 21, 40 and 41, have set out involvement, with time limits, for each House of Parliament reporting on draft rules, with the ability to report on them but no power of veto. I can certainly see the merits of these amendments, as they strike a balance, giving Parliament an opportunity to give its views on new regulations but without allowing it to overrule our independent regulators. They should allow Parliament to take evidence on the impact of proposed new regulations, for example, on different parts of the financial services sector. This could deal well with concerns about, for example, the impact of regulations on both small and large players in parts of the financial services sector, and whether regulations create new barriers to entry. I am not sure, however, that the amendments sit easily with a need to make new regulations rapidly, which I believe is necessary from time to time.

On the other hand, many in the financial services sector are fearful of regulators gold-plating regulations and imposing unnecessary costs on whole sectors. At the end of the day, costs get passed on to consumers, even though there is often no direct correlation between a rule or regulation and any particular increase in consumer costs. That would not necessarily be well dealt with by the amendments in the names of the noble Lords, Lord Tunnicliffe and Lord Eatwell.

Some elements of Amendment 27 in the names of the noble Baronesses, Lady Bowles of Berkhamsted and Lady Kramer, would allow more thematic or cumulative reviews. I particularly like the elevation of the statutory panels of the FCA and the PRA, though I do not believe that those panels should include Members of either House of Parliament. I know that these panels could be more effective voices for industry concerns. I have in mind, in particular, the PRA’s practitioner panel, which the PRA certainly did not want when it was set up by the Financial Services Act 2012, and has had no discernible impact since then. On the other hand, other elements of Amendment 27, for example Parliament’s involvement in the regulators’ meetings with the Basel Committee or IOSCO, seem to me to go beyond what it would be reasonable for Parliament to do.

My noble friend Lord Blackwell has an amendment with yet another variant with scrutiny of rules by parliamentary committees, but with any results being passed to the Secretary of State for action. My concern with that is that the only action that could in practice be taken, once the power to make rules has been passed to the FCA and the PRA, would be more primary legislation. That seems a sledgehammer to crack a nut and would, in practice, not really act as a restraint, a check or a balance on the undesirable use by the regulators of their powers.

The issue of the nature of parliamentary involvement is discussed in the Treasury’s future regulatory framework review. The consultation on part 2 of that process, started last October, has just closed—my noble friend the Minister may want to say something about where we are with that process. I thought the section on accountability in that consultation was not strong and that reliance on the existing committee structures of both Houses was the wrong direction of travel. Whatever our views on that, a longer-term overhaul of accountability structures will not help us; we will have to find a solution that works for this Bill and until any changes emerge from the framework review. That is the challenge before us. I beg to move.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, my name is on eight amendments in this enlarged group. They cover different aspects of parliamentary accountability, although a common thread is Parliament’s right to information. Whether Parliament chooses a regime that scrutinises everything in detail or one which picks points of contention, and however it may develop over time, timely access to background and information is relevant.

My Amendment 18 and its counterpart, Amendment 38, relate to keeping Parliament informed about the discussions between the Treasury and the regulator concerning equivalence. In Schedules 2 and 3 this Bill establishes that, when making rules, the FCA or PRA may consult the Treasury about the likely effect of the rules on relevant equivalence decisions.

Parliament should be sighted of these considerations because they may affect the content and strength of rules and, as explained in the Government’s consultation, equivalence decisions may result in requirements being embedded in statutory instruments. Just as we used to have EU requirements in regulations, we may end up having equivalence requirements. There is nothing complicated about my amendment; it just says, “keep Parliament informed”. Unless Parliament establishes that right now, it will not exist.

To illustrate this, I quote from the recent FCA consultation on investment firms which, like this Bill, front-runs the Treasury consultation. Paragraph 9.68 states:

“we have discussed with HM Treasury the rules’ likely effect on relevant equivalence decisions. We are not expected under our new public accountability requirements to provide further detail on this.”

I think we need to know something, and I hope the Minister will appreciate that too.

I turn to my Amendments 19 and 39, which specify the level of detail that regulators’ explanations concerning compliance with statutory requirements should contain. I was provoked into tabling these amendments on reading the FCA’s explanations in its consultation. Although they gave a reasonable but qualitative explanation of its general approach to the Financial Services Bill, the statutory accountability statements were poor, containing nothing quantitative or illustrative. They consisted of “trust and believe me” statements littered with phrases such as “proportionality”, “business specific”, “bespoke” and “flexible”; no attempt was made to identify or quantify how that was done. Information would have to be extracted from the rest of the consultation and rules, if it were there at all; or—and this is the nub—we have to swallow that, as paragraph 9.71 states, it is left up to the

“investment firms and supervisors to focus on the core business model indicators of financial resilience relevant to each firm”.

There are no examples given.

The statutory explanations are an important part of accountability. They should be elaborated on as a stand-alone justification, perhaps to spoon-feed the non-skilled reader, but not just through assertions. We need more than assertions that supervisors cosying up with firms can decide how to get it right. That is not accountability. These statements should be written more like justifying a case in court and less like how to pander to industry. They should inform on the toughness of the regime and capital calculations.

My amendment proposes that the explanations

“must include specific, detailed and quantitative elaboration, with worked examples”,

and that Parliament may reject rules that are accompanied by inadequate explanation. By way of comparison, when I checked the PRA’s front-running consultation which came out on 12 February, it seems to have done a rather better job and included examples.

14:45

I turn now to the amendments on the broader parliamentary oversight regime. The amendment in the name of the noble Baroness, Lady Noakes, which I signed, lays out the starting principles. My Amendment 27 is about the middle game and draws attention to the regularity of, and entitlement to, information necessary to keep abreast of what regulators are doing and to acquire knowledge for effective scrutiny of the regulators’ rule-making, rather than having to accept a regulator’s say-so.

The amendment of the noble Lord, Lord Tunnicliffe, deals with the endgame approval. The noble Baroness, Lady Noakes, has explained her amendments, which are a treasure of drafting, each point carrying a strong message. The first is, do not take Parliament for granted and legislate a new regulatory architecture that is only at the consultation stage without Parliament having its share in the new process. It is therefore reasonable that the schedules do not come into effect until Parliament has determined its share.

The second message is that Parliament wishes to hold regulators to account and to be included properly and explicitly in consultation. I am really pleased to see recognition that Parliament must be consulted on draft rules as well as final rules. Put simply, it is not possible to get to grips with what is going on just at the very end.

The third message is that there must be opportunity for each House to take evidence and express an opinion. I understand the expression “opportunity” to cover both significant and adequate time and significant and adequate access to information; otherwise, it is a fake opportunity.

The fourth message is that there must be consequences when Parliament raises concerns. That might mean modifying rules; it might mean more explanation and that checking data is required; it might mean delay in implementation. That is for Parliament to choose, but I would certainly put delay in the toolbox.

At the end of the day, however, the regulator must take responsibility for the rules and a parliamentary sign-off does not remove that responsibility. We need discussion of how much Parliament desires to check. The rules that Parliament will look at over time are extensive, ultimately encompassing and replacing all the policy and hard benchmarking that previously existed in statutory instruments from onshored EU legislation. It is not the Government’s intention to replace that layer in any substantive way. A few instances of “have regard” are the examples in the Bill, just like the suggestion in the HMT consultation, and some equivalence matters may creep into SIs. That format may technically be under consultation, but the Bill front-runs it, the regulators’ consultations front-run it and we know that it is going to happen. What we negotiate in the Bill will fix the path, so it is not the time to be faint-hearted or live on a promise. Parliament’s rights must be established.

Coming to my Amendment 27, I have drawn attention to a range of things which do not all have to be done all the time if Parliament wishes to target, rather than be comprehensive, but the rights should be there. Proposed new subsection (1) concerns the quarterly provision of regulators’ reports and, as the noble Baroness, Lady Noakes, observed, before and after meetings of international standard-setting bodies. I put that in because that is how a lot of policy will be made—in the international standard-setting bodies—and then we will incorporate it under that cover. We will not have learned anything on the way about the thinking behind the policy.

Proposed new subsection (1)(d) gives an entitlement to seek other reports, including the data necessary both to pursue incidents and to understand how rules have been calibrated. At present, neither industry nor Parliament has access to that calibration data. We may not want it all the time but on contentious points it should be possible to obtain it.

Proposed new subsection (2) provides for appearance before committees when requested in connection with those reports, and that, where necessary, there can be confidential sessions. There are times, when a lot is happening, when meetings may need to be more frequent than at other times. This was the case in the EU when the whole tsunami of legislation and technical standards following the financial crisis was going on. I am a little concerned that there may be such a tsunami in the UK as the regulators absorb the onshored EU legislation currently in statutory instruments and convert it into rulebook form. That will need scrutiny, because it is the point at which most of the hard benchmarks for holding regulators to account that currently exist in legislation will disappear and be replaced by regulators’ own policy, and their own variable ideas.

Proposed new subsection (3) provides for regulators seeking the views of Parliament before launching a consultation, when making rules, and regarding their business plan, new market activity and the regulatory perimeter.

Proposed new subsection (4) covers the statutory panels of the regulators, and suggests some changes that might be helpful to make them more independent and less influenced by the regulators, who currently choose the members, set their remits and keep control of the information. Changes are necessary in the interests of transparency, and there should also be a dialogue between those panels and Parliament, and maybe with others.

Finally, proposed new subsection (5) covers obtaining data, assistance from the NAO or other public office, including on impact assessments, assessments of regulatory burdens, and an ability for the committees to require a pause in implementation of rules for up to three months to allow further scrutiny. Parliament needs to have a grasp of what the regulators of our largest and most systemic industry are doing. It is a matter reported in international literature that financial services regulators tend to be the most captured of any regulators—which, along with their importance to the UK, is why greater attention is merited.

The amendments tabled by the noble Lord, Lord Tunnicliffe, contain provisions about Parliament giving opinions. These opinions must have weight, but they cannot be given without sufficient prior knowledge and information. I do not think that 20 days is sufficient for scrutiny of a large set of rules, or if many sets come along at once. People in industry, who do this all the time, normally get three months, and Parliament should not be squeezed to less. What might have happened in earlier stages of consultation is relevant, but I would still argue for the possibility of extension or delay, otherwise the timing will always be organised so that there is not time, and urgency can be claimed. I am aware of limitations on parliamentary capacity to do everything all the time so, to finish, I reiterate the point that information rights need to exist, even if they are used selectively.

My name is also on the amendment tabled by the noble Lord, Lord Sikka, which I support, but in the interests of time, I will leave it at that.

[Lord Davies of Brixton (Lab) [V]]

My Lords, before getting to the substance of the debate, I must express some puzzlement; obviously, I have much to learn about this House’s mysterious ways. The specific issue that concerns me is the grouping of amendments. We are sternly told that groupings are not to be changed, but here we have a significant change: what was two groups on Monday is now a single group. The issues are not that disparate, but it makes a big difference to the time we have available.

The main point I wish to make relates particularly to Amendments 10 and 71. The latter was tabled by my noble friend Lord Sikka. If I had been a bit more alert, I would have added my name.

The issue here is to whom the FCA should be accountable, given the well-established phenomenon of regulatory capture, as the previous speaker mentioned. It is worth emphasising the point that regulatory capture is where an industry regulator such as the FCA comes to be dominated by the industry it is charged with regulating. The result is that the agency that is meant to be acting in the public interest instead works in ways that benefit the industry. The important point to understand is that this does not happen because inadequate or ineffective people are running the regulator. It is certainly not about corruption. It is an institutional, not individual, problem.

It is important to understand why it happens. The reasons are manifold but I will emphasise three. First, the regulated industry has a keen and immediate interest in influencing the regulator, whereas the customers are less motivated; they have their lives to live and are engaged only for relatively brief periods anyway. Secondly, we know that industries are prepared to devote substantial resources to influencing the regulator. Thirdly, there is the inevitable commonality of work and social life for the individuals on both sides of the process.

Given that the phenomenon of regulatory capture is acknowledged and widely understood, what do we do about it? The first step is acknowledging the issue and recognising and addressing the challenge. The next step is making the regulator as accountable as possible. There are many ways of doing this, but we can leave those for another day. What we have here are Amendments 10 and 71. Under Amendment 10, the involvement of both Houses in considering draft and final rules would be valuable in itself, given the expertise available. However, it is also valuable because of the additional exposure that it brings to the workings of the regulator, which will have to make its case. In the same way, Amendment 71 would bring greater exposure to the work of the FCA, forcing it to expound on its performance and its objectives in public and in an expert forum.

There is much more to do on making the FCA fully accountable, but these amendments are a start and have my support.

[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, it is a pleasure to follow the noble Lord, Lord Davies of Brixton. He addressed in useful detail the risks of industry capture of regulators, to which the financial sector is particularly prone and which is addressed by Amendment 71 in the name of the noble Lord, Lord Sikka. Like the noble Baroness, Lady Bowles of Berkhamsted, and the right reverend Prelate the Bishop of St Albans, I have attached my name to that amendment. I associate myself particularly with the remarks of the noble Baroness, who stressed that these amendments are about the rights of Parliament and access to data and detailed information—necessary for the kind of expert work at which your Lordships’ House excels.

As the noble Lord, Lord Davies, covered the need for Amendment 71 in some depth and its author—the noble Lord, Lord Sikka—is yet to speak, I will confine myself to general remarks about how all the amendments in this large group reflect the great degree of concern on all sides of the House about, given how the Bill is currently constituted, the lack of parliamentary oversight of the actions of both the regulators and the Treasury. The noble Baroness, Lady Noakes, explained this point in her highly informative introduction to the group.

This morning, thanks to their kind indulgence, I was able to join Cross-Benchers in a briefing on the Bill, where we heard how the formalisation of the relationship between regulators, Parliament and the Treasury is “on the way”. The future regulatory framework consultation closed on Friday. We heard that the Bill is not the final word on that, and that the responses to the consultation will not be ready in time for the Bill. So, yet again, we hear that democratic controls and the details of government plans will be included in future legislation and regulation. Your Lordships’ House has heard this so often on so many subjects; perhaps we could enlist the Lords spiritual in assisting us in putting it in some kind of musical form. It simply is not good enough.

We know that, despite the long run-in time, the Government were not ready for Brexit at the end of the transition period and that civil servants, through no fault of their own, are trapped in a huge scramble to catch up with the massive backlog of government inaction and indecision—the tsunami to which the noble Baroness, Lady Bowles, referred. But what we have here are sensible proposals from experienced, expert Members of your Lordships’ House. I hope that the Government will acknowledge the urgency and importance of ensuring democratic oversight and that they will take at least some of these amendments on board at the next stage of the Bill, particularly, given the arguments already made, Amendment 71. There is no need to wait. Democratic oversight should be a given, not an extra, later addition.

15:00

[Lord Holmes of Richmond (Con) [V]]

My Lords, it is a pleasure to take part in day two in Committee on the Financial Services Bill. In doing so, I declare my interests as set out in the register.

I speak on this group to support my noble friend Lady Noakes’s Amendments 10 and 26. I shall not detain the Grand Committee too long. I have written an extensive article on this subject—if anyone is interested, it is at lordchrisholmes.com. All the amendments in this group seek to answer a straightforward question: who watches the financial watchdogs? If I had had a more expensive education, I could do the Latin for that, but fortunately I simply had an expansive education.

It seems to me that the start point is not whether we need more or less scrutiny and accountability but what the right level of accountability is. What are we seeking to achieve? In the EU/UK process, the debate has been characterised as being between principles and prescription. That seems a somewhat false characterisation. For me, the start point of purpose would make a lot more sense. What are we trying to achieve via our regulatory approach—to the FCA and the PRA—to enable it to be to that extent and no more? We also hear of proportionality. I support the two amendments in the name of my noble friend Lady Noakes because they are elegant and leave space for detailed thinking to be done rather than for it needing to be rushed through in the Bill.

Some of that thinking needs to rest around the three Cs of capacity, consistency and co-ordination. Does any potential scrutiny have the right people, the right skills, the right experience and the right amount of time to undertake the task? On consistency, are the scrutinisers and the regulators there all the time, day in, day out, not merely when there is a significant regulatory failure or something that seems of particular political significance? Co-ordination speaks for itself, each regulator being a constituent part of a greater sector in terms of financial services and beyond that across the whole family of regulators, inspectors and ombudsmen.

In any solution that may come out of this, the greatest amount of energy seems to be around the Treasury Select Committee and a potential sub-committee. This has a great deal to recommend it, but even if we consider the first C of capacity, there would seem to be at least a challenge on this.

A similar argument, but with the addition of the right level of expertise, in my view, has been put forward in an excellent report from the All-Party Parliamentary Group on Financial Markets and Services, which was published on 18 February. It argues that a sub-committee of the Treasury Select Committee, supported by an expert panel, could be effective in this space. As has been said, it is not for the Government to prescribe what approach Parliament takes but, in this Financial Services Bill, the opportunity should be taken to provide that space and those options for such a scrutinising body to be constructed.

We have the opportunity to move a million miles away from part of the parliamentary scrutiny that we currently have—the annual report to Parliament via the Minister. We can move towards doing effective scrutiny in the 21st century in real time, rather than via the rear-view mirror: Parliament partnering with academia, the private sector and all the relevant expertise, deploying all the necessary elements of technology to enable effective and efficient scrutiny of our financial regulators for the benefit of us all.

[Lord Sharkey (LD) [V]]

My Lords, many of the amendments in this group share the aim of increasing or providing for the first time proper parliamentary scrutiny of some financial services regulatory regimes and of those who enforce them. Some amendments deal with the problem of absent or insufficient scrutiny on a grand scale and I strongly support their intent. This Government often seem to think that parliamentary scrutiny is best avoided or diluted. Our DPRRC, SLSC and Constitution Committee have regularly warned the Government against using skeleton Bills, against behaving as though consultation is a substitute for real parliamentary scrutiny and against using rule-making as camouflage legislation.

This Bill contains a particularly alarming example of the evasion of scrutiny in allowing the Treasury to revoke rules by SI by giving the regulator the power to make legally binding rules without any parliamentary involvement. That is completely unacceptable, as the Government must know. I strongly support Amendments 10 and 26, tabled by the noble Baroness, Lady Noakes, as a means of restoring some proper scrutiny. As the noble Baroness clearly explained, these amendments are not prescriptive as to the form of parliamentary scrutiny needed; they simply set out the principles that must guide construction of the scrutiny mechanisms. This is the equivalent of making an invitation to the Government that they should not refuse. It is an invitation to serious and substantive discussion about the way forward and it rightly, given the serious and far-reaching consequences, gives an appropriate incentive to resolve the issue quickly and collectively. I urge the Government to begin immediate cross-party talks on the issue.

By contrast with some of the amendments in this group, our Amendment 22 has modest and narrowly defined ambitions. As the Bill stands, Clause 3 lists the provisions of the CRR that the Treasury may revoke by regulation. There are 42 of these categories of provisions, all of them significant. Clause 3(4) makes these revocations conditional on their being or having been adequately replaced by general rules made, or to be made, by the PRA, or to be replaced by nothing at all if the Treasury thinks that that is okay. The Treasury appears to be the sole judge of what may or may not be an adequate replacement. In any event, Parliament is completely bypassed in this system. But all this means is that the Treasury can revoke provisions by SI before it has published the replacement rules or even decided what they will be. This sounds like a perfect recipe for disorderliness and uncertainty and it means that Parliament will have no opportunity to consider these new rules in a legislative setting. We get to see what has been dropped, but not necessarily what the replacement rules may be. This is another example of making law by making rules that Parliament has not been able to scrutinise.

Our amendment proposes a simple way round this. It would require any revoking SI to carry not only full details of what was being revoked but the full text of the replacing rules, except, of course, where no replacement was envisaged. These new rules can and will reshape important parts of our financial services regulatory regimes, and it is quite wrong that Parliament should be unable to scrutinise them.

I hope the Minister will be able to accept our amendment or to give us an assurance that revoking SIs will contain the full text of any replacement rules.

[Lord Blackwell (Con) [V]]

My Lords, in addressing this group of amendments, I want to speak also to Amendment 85 in my name. As I set out at Second Reading, I should draw attention to the fact that I was chairman of a regulated bank until the beginning of the year, although my interests now are solely as a shareholder.

I agree with other speakers that parliamentary accountability for the regulators is important now that the UK has its own regulatory agenda outside the European Union, and it is missing from this Bill. However, the regulators have been established by Parliament to enable independent expert bodies to exercise delegated powers, and we need to be careful that in providing for the necessary parliamentary oversight we do not create structures that impinge on the political independence of the regulators and their ability to take a considered, apolitical view, undermine their expertise or turn Parliament effectively into the day-to-day regulatory body if it is required to approve every rule in advance. That would make the regulators simply a working body for Parliament rather than independent regulators in their own right.

A number of speakers have talked about regulatory capture. From my experience over many years, it has not felt like the regulators have been captured by the industry, but neither have they always been right, so scrutiny is important. My amendment seeks to strike the right balance of delegation and oversight by suggesting parliamentary scrutiny of rules after the event—ex post—rather than it trying to second-guess the regulator ex ante by approving rules in advance. I therefore take a different view from my noble friend Lady Noakes on Amendment 10 and some of the other amendments. If Parliament sought to approve every rule in advance, the regulators would lose their independence, and we would lose the benefits of speed and expertise. We need to recognise that, often, rules need to be made to fix a problem, and if that problem needs fixing, the regulators need to act rapidly. They obviously need to consult as far as is possible, but to set in process a whole session of approvals by Parliament would handicap them in taking action when they needed to, and it would jeopardise their political independence.

Under my amendment, if a parliamentary committee felt that the rules were inappropriate or not working properly, it could make its views known to the regulator, and I suspect that in many cases the regulator would sensibly take note of that. Ultimately, it would be up to the Secretary of State to propose changes to regulations if the regulator was not acting in accordance with the framework that Parliament set out and intended. The point was made that that might need primary legislation; my understanding is that, under this Bill, Her Majesty’s Treasury can enact a lot of changes in regulations through secondary legislation, which can be done much more rapidly.

As my noble friend Lady Noakes said, what the amendment cannot signify is exactly what the form of parliamentary scrutiny will be and therefore that cannot be written into the Bill, but, since we are having this debate, I would advocate that the scrutiny function when Parliament comes to that is best carried out by a Joint Committee of both Houses, with appropriate technical support.

Experience suggests that a Joint Committee is the best way to avoid politicising the debate. It can draw on the experience in this House while enabling the elected Members in the other place to have their legitimate role in parliamentary oversight. As and when it is appropriate to decide on the form of parliamentary scrutiny, I hope that this can be taken into account.

I know that these matters are still under consultation. I look forward to my noble friend the Minister’s response, but I support the weight of the speakers so far that this is a matter that needs to be dealt with, if at all possible, during the course of this Bill.

15:15

[Viscount Trenchard (Con)]

My Lords, I declare my interests as stated in the register. I support both Amendments 10 and 26 in the name of my noble friend Lady Noakes. They do not mean that Parliament would be seeking to usurp the role of the regulators, or to attempt to rewrite MiFID II which, according to Forbes Magazine, has required 30,000 pages to explain its regulations.

It is right that the Bill enables our regulators to act quickly and flexibly to respond to changes in the markets or the introduction of new financial products. However, without the scrutiny formerly carried out by the European Parliament of each and every detail of regulations and directives, it is necessary that Parliament should have oversight of the regulators’ work. My noble friend is right that we need to agree the optimum balance and how this will be done before the powers conferred upon the PRA and FCA are made available for them to use.

Amendments 18 and 19 in the name of the noble Baroness, Lady Bowles of Berkhamsted, are motivated by a desire to continue to align to EU regulation, even though there are no expectations that the EU will make any further significant equivalence declarations in the short term. Amendment 19 places a large, poorly defined burden on the FCA to show where and how its draft rules have been influenced. It is clear that the FCA will consider many external factors in drafting its rules. As your Lordships know, it is intended to agree a basis on which both regulators will be made accountable to your Lordships’ House and another place for the way in which they carry out their work. Accordingly, I think it would be too restrictive on the FCA if this amendment were supported. It would also create uncertainty over the Bank of England’s ability to act quickly as necessary in exercising its macroprudential responsibilities.

Similarly, Amendment 20 seeks to allow committees of your Lordships’ House and another place to publish a report on proposed Part 9C rules. It is not clear which committees these will be in the future. It would slow down changes that the FCA will want to make quickly, which could be damaging to the standing and competitiveness of the City. Perhaps my noble friend can tell the House how the Government intend to amend the Bill in order to provide for the necessary scrutiny of acts of the regulators. I am not sure that that would be the effect of Amendment 22, in the name of the noble Lord, Lord Sharkey. The Government’s intention, which I support, is that we should move away from the cumbersome, codified nature of rules. I would expect the PRA to try to make rules that are shorter and clearer than the regulations they replace. It would not always be appropriate for them to include the full text of the general rules to be replaced.

Amendment 27, in the name of the noble Baroness, Lady Bowles, seems to place a very heavy demand on Parliament to become closely involved in what our regulators do at international conferences, in a way that might be too restrictive on their freedom to participate fully at those conferences. This would be likely to weaken British influence on the outcomes of discussions and decisions made at such conferences.

In Amendment 38, the noble Baroness, Lady Bowles, seeks to duplicate other arrangements which will be made to institute the necessary parliamentary accountability and again appears motivated by a desire to continue to align to EU rules. If the Government can bring forward an amendment to increase the attention that the PRA is required to give to the competitiveness of the markets, as strongly proposed by several noble Lords on Monday, I would suggest that Amendment 38 might be unnecessary.

While considering this matter, can the Minister confirm that it remains the Treasury’s intention to advise the Bank of England not to adopt a similar measure to the EBA to permit banks to capitalise software investments for the purpose of stress testing? This is one example of where, instead of equivalence, we will have higher standards than the EU, although regulatory standards are often not two-dimensional, high or low.

The effect of Amendment 39 is surely to transfer back to Parliament the detailed rule-making powers. Quite apart from the fact that neither your Lordships’ House nor another place is equipped to carry out such detailed, line-by-line scrutiny, the amendment would seriously slow down rule-changing, removing agility and flexibility from the regulators.

Amendment 40 in the name of the noble Lord, Lord Tunnicliffe, does not remove the ultimate power to change rules from the regulator but introduces a cumbersome process involving the issuance of reports by committees of both Houses. Does the noble Lord intend these committees to be new standing committees, and how will they be resourced? I also note that in the case of a draft being laid, say, a week before Parliament rises in July, it might be three months before 20 sitting days of either House have elapsed.

I do not understand the intention of the noble Lord, Lord Sikka, in introducing Amendment 71—a requirement separately for the Treasury Committee in another place to assess the FCA’s conduct prior to the appointment of a new chief executive.

My noble friend Lord Blackwell’s Amendment 85 makes an interesting proposal as to how the regulators should be made accountable to Parliament. Does my noble friend Lord Howe think that, as far as your Lordships’ House is concerned, scrutiny would come from an existing or soon to be established Select Committee, such as the strangely named Industry and Regulators Committee, or whether a new standing committee should be set up to exercise these functions?

The noble Lord, Lord Bruce of Bennachie, in his Amendment 137 seeks to place a statutory duty to consult the devolved Administrations over a reserved matter. We await with bated breath the publication of the Dunlop review, which should inform us of how the Government intend to manage relations with the devolved Administrations in the future, including on reserved matters. However, I cannot support the noble Lord’s amendment, which is unnecessary and provocative to certain elements within the devolved authorities.

I look forward to other noble Lords’ contributions and the Minister’s reply.

[Lord Sikka (Lab) [V]]

My Lords, I will speak to Amendment 71, which is in my name and supported by the noble Baronesses, Lady Bennett of Manor Castle and Lady Bowles of Berkhamsted, and the right reverend Prelate the Bishop of St Albans.

The amendment seeks to strengthen the effectiveness of financial regulation and calls for scrutiny of the FCA’s conduct by the Treasury Committee prior to the appointment or reappointment of its chief executive. It effectively calls on the committee to act as a guide dog to the watchdog. We all know that effective regulation is a necessary condition for protecting people from malpractices, holding miscreants to account and promoting confidence in the finance industry.

The FCA has failed to deliver robust and effective enforcement and it needs to be helped. Its failures are documented everywhere. The recent report by Dame Elizabeth Gloster on the collapse of London Capital & Finance noted that the FCA did not discharge its functions in respect of LCF in a manner that enabled it to effectively fulfil its statutory objectives and that there were significant gaps and weaknesses in its practices. From my perspective, even more damning was the revelation that FCA staff were not even trained to read financial information to recognise unusual or suspicious transactions.

Another report on the scandal-ridden Connaught Income Fund concluded that the FCA’s regulation of the entities and individuals was not appropriate or effective. We are still awaiting the report on the Woodford Equity Income Fund, when thousands of investors are trapped. Regrettably that is not an independent investigation, but we await the outcome with considerable interest.

The FCA failed to act in the case of Carillion, a company that collapsed in January 2018. Carillion inflated its balance sheet and profits through aggressive accounting practices. These included the use of mark-to-market accounting, enabling the company to leave at least £1.1 billion-worth of worthless contracts on its balance sheet. It failed to amortise £1.57 billion of good will, which was effectively worthless. The company was disseminating that misleading information to the markets but the FCA took no action whatever. Curiously, on 18 September 2020, nearly 21 months after Carillion’s collapse, the FCA issued a warning notice saying that the company and some of its directors had recklessly misled markets and investors over the deteriorating state of its finances before the company collapsed. Where was the FCA for all the earlier years while Carillion was publishing that misleading information? It was nowhere to be seen.

There is now considerable public evidence that the banks have been forging customers’ signatures to alter key documents and repossess customers’ businesses and homes, and that evidence has been published in the mainstream media. I understand that there are over 500 documented cases and the FCA has not even started any investigation. A senior Metropolitan Police fraud officer wrote to the Treasury Select Committee in 2017, stating that the executive boards of some of the most prominent banks were “serious organised crime syndicates”, yet that has not resulted in any action by the FCA.

The bank RBS has systematically defrauded its customers but the FCA has been dragging its feet, often pushed by parliamentary committees and others to do its job. In November 2013 a 20-page report prepared by Lawrence Tomlinson summarised this abuse of bank customers and small businesses at RBS’s global restructuring group, or GRG. The Tomlinson report stated that rather than nurturing small businesses, the bank actually pulled the financial rug and sent them to premature bankruptcy. GRG operated from 2005 to 2013, and at its peak handled 16,000 companies with total assets of around £65 billion. A proportion of those companies were not viable but a great number were and had never defaulted on loans. The FCA’s approach was to bury its own Section 166 report on the RBS frauds. In February 2018, the Treasury Committee ignored the FCA’s reluctance and published the report. The committee said:

“The treatment of vast numbers of SME customers placed in RBS’s Global Restructuring Group was nothing short of scandalous.”


In June 2019 the FCA published what it described as its final report on the investigation into RBS’s treatment of small and medium-sized businesses. The co-chair of the All-Party Parliamentary Group on Fair Business Banking and Finance said:

“This report is another complete whitewash and another demonstrable failure of the regulator to perform its role.”


The timidity of the FCA is also evident from the long-running HBOS frauds, which show no sign of resolution. In 2013, a report codenamed “Project Lord Turnbull” was published by Sally Masterton, Lloyds senior manager in credit risk oversight in the regulation and governance section of its risk division. It was prepared in response to inquiries made during Thames Valley Police’s investigation into the frauds at the Reading branch of HBOS, and also covered the period before the 2007-08 banking crash and bailouts and the subsequent takeover of HBOS by Lloyds Banking Group. The report noted that HBOS executives had “concealed” asset-stripping frauds at its Reading branch ahead of the bank’s takeover by Lloyds in 2008. The FCA did nothing to bring fraudsters to book.

15:30

In 2017, a group of six financiers, including two ex-HBOS bankers, were jailed for 47 years for frauds that took place over a decade earlier, prior to the takeover by Lloyds in 2008. The credit for these convictions goes to the Thames Valley police and crime commissioner, Anthony Stansfeld, who spent £7 million of the police budget to collect evidence. He said:

“The fraud was denied by Lloyds Bank for 10 years, in spite of it being apparent that senior members of the bank were aware of it at least as far back as 2008.”

On 8 February 2019, Anthony Stansfeld told the London Evening Standard:

“I am convinced the cover-up goes right up to Cabinet level. And to the top of the City.”

Such a public statement by a senior law enforcement officer should have formed the basis of a parliamentary investigation, but it did not.

Despite the high-profile convictions and leaks, neither the FCA nor Lloyds published the Turnbull report. Eventually, on 21 June 2018, the All-Party Parliamentary Group on Fair Business Banking published a leaked copy of the report. In the words of Kevin Hollinrake MP, the report

“alleges that senior managers within the bank were aware of the fraud prior to the takeover and the £14 billion Lloyds and HBOS rights issues, yet they took clear, deliberate and documented action to conceal it. Let us be clear: if this is true, it could potentially make the rights issues and the takeover fraudulent”.—[Official Report, Commons, 10/5/18; col. 968.]

That is a very serious failure by the FCA. After dragging its feet and doing nothing for more than a decade, in June 2019 the FCA fined the Bank of Scotland £45.5 million for its failure

“to alert the regulator and the police about suspicions of fraud at its Reading branch.”

Not a penny of this fine went to the Thames Valley commissioner, which is a clear disincentive for any regulator or police force to take any action. The saga of the HBOS frauds is still unresolved. Many of the victims are in their 70s and may not even live long enough to receive compensation. That is a huge failure.

The finance industry continues to engage in abusive practices. Numerous financial products, including pensions, endowment mortgages, precipice bonds, split capital investment trusts, interest-rate swaps, mini-bonds and payment protection insurance have been mis-sold to create misery for many and profits for a few. Financial frauds have been rife in this industry for years, as shown by RBS, HBOS, Lloyd’s of London, BCCI, Barings, Barlow Clowes, Dunsdale and Levitt, to mention just a few. Financial enterprises have rigged interest and exchange rates and engaged in bribery, corruption, tax avoidance, money laundering and sanctions-busting on a huge scale. Lax regulation gave us the 2007-08 financial crash. Financial scandals have destroyed businesses, jobs, savings and investments, and many have been bankrupted on forged documentation, as I referred to earlier.

Research by Professor Andrew Baker of the University of Sheffield estimated that the UK finance industry made a negative contribution of £4,500 billion to the UK economy during the period 1997-2015. That is a staggering negative contribution, yet the regulators are not moved. The occasional puny sanctions from friendly regulators have not secured qualitative change. The typical response of the Government to scandals is to rearrange the regulatory deckchairs by replacing the Bank of England with the Financial Services Authority, which is then replaced by the FCA and the PRA. However, the same regulatory failures continue. We now need a sea change.

The FCA needs to be helped by an independent assessment of its shortcomings and failures. An investigation by the Treasury Committee provides this help by taking stock of the failures and providing guidance to the new or returning FCA CEO as to the challenges ahead. I have not even mentioned the challenge of shadow banking, which is excluded from this Bill but deserves to be debated. Importantly, the mechanism I have outlined—of scrutiny by the Treasury Committee —gives the victims a chance to speak. It is vital that the people’s cry for justice be heard by Parliament. There is hardly any other mechanism which enables that cry to be heard. I commend Amendment 71 to the Committee.

[Lord Bruce of Bennachie (LD) [V]]

My Lords, that was a powerful speech by the noble Lord, Lord Sikka, and clearly, a lot must be addressed. I served on the EU Financial Affairs Sub-Committee and the Treasury Select Committee, and currently serve on the EU Services Sub-Committee. Therefore, I am well aware of the contribution the sector makes across the UK.

The UK helped to shape the regulations and rules for the EU, but we have now left. The sector has consistently argued that a reputation for high standards and effective regulation is important to the confidence the world expresses in the UK’s financial institutions—notwithstanding the failures that have occurred. The combination of the European Parliament and the UK Parliament ensured that regulators have been accountable. I do not claim to be a technical expert on what is a complicated sector, but I recognise the dangers of regulation becoming an unaccountable closed book.

I support the case for a properly resourced specialist joint committee to ensure that regulators are held accountable, not so much on technical detail but in terms of a prudential framework and overall direction. That would be in the interests of the regulators and government Ministers as well as those who depend on a well-regulated and reliable sector. I share the concern that what the Government are trying to do will ultimately bite back if there has been no proper parliamentary oversight in a future scandal. The Government and the regulators will have nowhere to hide, but that will be very little comfort to people who may suffer from regulation failures.

Financial services are distributed throughout the economy. People often refer to the City of London, but we know that jobs and activities are distributed throughout the UK and have been growing in all the devolved Administrations. Edinburgh is the UK’s most important financial centre and one of the most important in Europe. According to TheCityUK, financial services contribute £13 billion, or 9.4% of GVA, to the Scottish economy. More than 160,000 people are employed in financial and related professional services, which is nearly 6% of Scotland’s national employment. The sector includes banking, fund management, insurance, life assurance and pensions, asset servicing and professional services.

Interestingly, Scotland accounts for 24% of all UK employment in life assurance and 13% of all banking employment. Given that Scotland has 8.5% of the population of the UK, this is clearly disproportionately important. According to Scottish Development International, there are more than 2,000 financial services businesses, supported by 3,650 professional services firms. Scotland’s financial and professional services exports account for 40% of all Scottish services exports.

Having said that about Scotland, tens of thousands are employed in the sector in Wales and thousands in Northern Ireland, and the number is growing in all the devolved areas. My Amendment 137 takes this into account and seeks to ensure that the devolved Administrations are consulted about any proposed changes in financial services regulations. It is clearly in the interest of the sector to have clear and common regulations across the United Kingdom, which is why this amendment looks for consultation only. It merely seeks to ensure that any factors of particular importance to a devolved Administration are, as far as possible, accommodated. I can see no conceivable advantage to financial services companies to diverge from UK regulation. After all, as the figures I cited show, a significant part of the financial services sector in Scotland is serving the whole UK market. The last thing it needs is a distracting push separating it from its customers, either by erecting barriers at the border or by promoting an alternative Scottish currency, which would undermine the raison d’être of serving the UK from Scotland, or a “sterlingisation” agenda that would put huge pressure on the public finances in Scotland.

My amendment seeks to avoid any unintended negative consequences. It is not intended to cause delay or to encourage special pleading. Given the particular importance of Scotland’s role in delivering life assurance and banking, it is surely right that any changes being considered to regulations affecting these sectors are not proceeded with until appropriate consultation has taken place.

That said, it is also important to recognise the role of professional support services, given Scotland’s distinctive legal system and, for example, accounting qualifications. The expertise that exists in Scotland should in any case surely be drawn on to inform regulations if and when changes are being considered. I share concerns that the Government are proceeding to build an architecture that lacks an adequate parliamentary dimension. It is perfectly reasonable to ask the legislatures of the devolved Administrations to be involved in contributing to the shaping of regulations, at least in their broad prudential thrust.

I look forward to hearing what the Minister has to say. I hope he will recognise the force of the arguments put by noble Lords about the need for a significant and effective parliamentary dimension and a recognition that the devolved Administrations, especially Scotland, should be able to contribute constructively and positively to that outcome.

[Lord McNicol of West Kilbride (Lab) [V]]

My Lords, one of the joys of being at the end of such a large group of amendments and a long speakers’ list is that very much of what needs to be said has already been said, so I will be brief.

The contributions from across your Lordships’ Committee, from the noble Baronesses, Lady Noakes and Lady Bowles, and my noble friend Lord Davies, outlined the importance of parliamentary and democratic oversight and the different levels and ways of delivering it. The contribution of the noble Lord, Lord Holmes, on the right levels of oversight also helped move the debate on.

The balance between regulatory authorities’ powers and those of Parliament is critical. My noble friend Lord Sikka clearly outlined in detail many of the failures of the regulators and of the FCA, so getting the levels right is critical. I add my support for those amendments that I am pushing forward. I look forward to the Minister’s response and to how we move this forward to Report and Third Reading.

[The Deputy Chairman of Committees (Baroness Healy of Primrose Hill) (Lab)]

The right reverend Prelate the Bishop of St Albans has withdrawn, so I call the next speaker, the noble Baroness, Lady Kramer.

15:45

[Baroness Kramer (LD)]

My Lords, we have, sadly, become used to skeleton primary legislation, with policy embedded in statutory instruments that cannot be amended and cannot be voted down without threats of a constitutional crisis. But at least statutory instruments can be brought before Parliament, and Ministers must then make the case.

This Bill is a new low—skeleton primary legislation, elimination of secondary legislation and policy set in regulators’ rules with no meaningful accountability to Parliament. The accountability set out in the Bill, which largely mirrors proposals in the future regulatory framework review, provides, in essence, just for a bit more explanation by the regulator, the existing right of a parliamentarian to submit evidence to any consultation, and the existing right for committees such as the Treasury Select Committee and the Economic Affairs Committee to question the regulator from time to time. This will be the policy framework shaping a sector of the economy that will fundamentally impact our national prosperity, jobs and public spending.

The Minister was kind enough to meet us, so I can perhaps anticipate some of the arguments that the Government are likely to make. They will argue that the Bill is just a stopgap while consultation takes place, but the consultation under way has multiple stages and will stretch the whole process out for 18 months or two years. By then the horse will have long bolted and procedures will largely have been set in stone. Perhaps the Minister would spell out the timetable—because the Bill looks to me like a template, not a stopgap.

Secondly, the Minister will say that only part of financial regulation is covered by the Bill. But, since it includes all of Basel III, the Bill actually covers almost everything that matters in prudential regulation. I have also heard from parts of industry that a second financial services Bill is on its way. I do not know that; I have not heard it from the Government—but if so, it will have come and gone before the new framework legislation is finalised. Perhaps the Minister would comment on that. It is absolutely clear that what happens with this Bill genuinely matters.

I value consultation—real consultation—but I am saddened because consultation has become a cynical tool to sideline Parliament. “Just give us a free hand now, because we’re doing a consultation.” Colleagues who cover other areas of policy tell me that this is a pattern, and are now concluding that it is cynically being used with a wide range of legislation, to make sure that Parliament is sidestepped.

I suspect that the Minister will argue that the powers being given to the regulators in this Bill, with minimal accountability, are necessary so that the UK can respond to changing events. After all, we have left the European Union and times are going to change. I regard that as nonsense. We are in changing times, but we have proved in the last year that fast-track procedures exist when they are genuinely needed.

I very much welcome the amendments tabled by the noble Baroness, Lady Noakes, also signed by my noble friend Lady Bowles, and the noble Baroness, Lady Bennett. They are tough: they would prevent Schedules 2 and 3 coming into effect before the accountability deficit is sorted. That, I suggest, is what the circumstance warrants.

This group of amendments was revised from Monday, so it now includes proposals detailing how accountability can be structured. We have heard a whole series of brilliant speeches in this debate, so I want to make only some limited comments.

The noble Lords, Lord Tunnicliffe and Lord Eatwell, have tabled a number of amendments laying out process and timetable. I find that extremely constructive. By contrast, the noble Lord, Lord Blackwell, has tabled an amendment that covers similar territory, but with such a light touch that—I hope he does not take this wrongly—I think it will be read as cosmetic. The industry needs to recognise the importance of proper scrutiny and understand that scrutiny in name only will, in the end, do the industry itself no long-term good.

In addition to the procedural amendments, my noble friend Lady Bowles has tackled an equally crucial but often overlooked element of oversight—one that goes to the heart of the matter. It is the need for the regulator to provide the detailed information to Parliament to fully understand and evaluate the evidence, reasoning and consequences of changes to rules. For years this has been done for us within the oversight process of the European Parliament, which has expert resources in depth. My noble friend, in her role in that Parliament, was able to use the information to improve proposals for rules and make them more effective. We have now lost that capacity, and nothing in the Bill or the framework consultation replaces it.

My noble friend Lady Bowles has also proposed amendments that would put this oversight on a regular basis, not just an ad hoc one, and would bring in an independent expert panel to do some of the heavy lifting. As the noble Lord, Lord Holmes, referred to, recently the All-Party Parliamentary Group on Financial Markets and Services addressed similar concerns. I quote from its February report, The Role of Parliament in the Future Regulatory Framework for Financial Services:

“Regardless of the format, the level of technical support available to Parliamentarians in this policy area will be key.”


The APPG goes on to propose secondments from the Treasury to the relevant parliamentary committees to bolster institutional capacity. I personally regard that as the wrong approach—that would be letting foxes into the henhouse—but it makes the point that proper parliamentary oversight requires new expert capability to replace that lost with Brexit. We have expertise within the regulator but we must have it for oversight of the regulator.

Before I finish, I want to refer to Amendment 137, tabled by my noble friend Lord Bruce, which would require the Government to consult on rule changes with the devolved Administrations. It is quite shocking to me that the devolved Administrations are overlooked in the Bill. Scotland is a major player in financial services and that needs to be recognised.

I will listen to the Minister’s response. I hope he will not repeat the airy dismissal that the Economic Secretary in the Commons deigned to give as his response. Voices on all Benches in this House are capable of coalescing around a set of viable amendments on Report that would at least remedy the worst in the Bill. The Government ought to be coming forward with the best.

[Lord Eatwell (Lab)]

My Lords, in due course I will speak to the amendments in the name of my noble friend Lord Tunnicliffe and myself, which, as many noble Lords have commented, would introduce operational proposals that would address the problem of adequate parliamentary scrutiny.

Before I turn to those practicalities, though, I wish to speak to the amendments tabled by the noble Baroness, Lady Noakes, supported by the noble Baroness, Lady Bowles, and the noble Lord, Lord Holmes, which deal with the principles at stake. As we might expect from the noble Baroness, Lady Noakes, her amendments are precise and direct and go to the heart of the matter: the inadequacy of parliamentary scrutiny.

I regret that I was unable to attend the Second Reading debate on the Bill. On reading the report of that debate, it is evident that an overwhelming sentiment in your Lordships’ House was that the procedures suggested by Her Majesty’s Government for the future development of the regulatory powers display a serious lack of appropriate parliamentary scrutiny. The fears expressed at Second Reading can only have been further reinforced by the note entitled “Meeting between the Economic Secretary, Peers, the Financial Conduct Authority and the Prudential Regulatory Authority: Background Briefing for Peers”, and by the document Financial Services Future Regulatory Framework Review Phase II Consultation, published by Her Majesty’s Treasury in October last year. Both documents advocate a degree of parliamentary scrutiny that may at very best be described as minimalist. Seldom can two documents have made the case so eloquently for the adoption of a policy entirely at odds with that which they propose.

The central thrust of government thinking is spelt out in the phase 2 consultation document to which I have just referred. It may help if I quote the relevant passage:

“The Financial Services and Markets Act 2000 (FSMA), and the model of regulation introduced by that Act, continue to sit at the centre of the UK’s regulatory framework. The government believes that this model, which delegates the setting of regulatory standards to expert, independent regulators that work within an overall policy framework set by government and Parliament, continues to be the most effective way of delivering a stable, fair and prosperous financial services sector. The model maximises the use of expertise in the policy-making process by allowing regulators with day-to-day experience of supervising financial services firms to bring that real-world experience into the design of regulatory standards. It also allows regulators to flex and update those standards efficiently in order to respond quickly to changing market conditions and emerging risks. The FSMA model was readily adapted to address the regulatory failings of the 2007-08 financial crisis.”


Commenting further on the manner in which this model was readily adapted to address the regulatory failings of the 2007-08 financial crisis, the authors of this document declare:

“The financial crisis of 2007-08 revealed serious flaws in the UK’s system of regulation, particularly in the allocation and co-ordination of responsibilities across the ‘tripartite’ institutions – HM Treasury, the Bank of England and the FSA … The post-crisis framework reforms were therefore focused primarily on institutional design and allocation of responsibilities.”


So the problem that led to massive regulatory failure and to a regulatory system that failed to protect UK citizens and firms from a near-existential breakdown in the financial system, that heralded a sharp downturn in real income and higher unemployment, and that led inexorably to the disastrous austerity policy was a problem of

“institutional design and allocation of responsibilities”.

There is no mention of the failed analysis, no mention of the pernicious groupthink that infected the analysis of the FCA and the Bank of England, no mention of the fact that warnings from distinguished commentators in academia and in the financial services industry were airily dismissed, and no acknowledgement that our regulators participated in the creation of a procyclical regulatory model that actually made the crisis worse than it otherwise might have been.

If anyone has any doubt that allowing regulators to bring that real-world experience into design of regulatory standards was the foundation of that massive failure, they should consider the words of Alan Greenspan, then head of the US Federal Reserve system—essentially, the western world’s senior regulator—speaking to the banking committee of the US House of Representatives in October 2008. He said:

“This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.”


Where in this document is the recognition that the intellectual edifice collapsed? Where is the acknowledgement that those with real-world expertise did not understand the systemic risks in the industry that they were supposed to be regulating?

All this was clearly set out in the Turner review, published by the FSA in 2009 and seemingly unread by the authors of this document. The review advocated a shift from microprudential regulation that focuses attention on the risks facing individual firms to macroprudential regulation focusing on the risks inherent in the operation of the system as a whole. It is entirely true that implementing that change has proved more difficult than the noble Lord, Lord Turner, could have anticipated. Basel III, the regulatory system lauded in this Bill, was supposed to do the job, but as Professor Hyun Shin, chief economist of the Bank for International Settlements, the home of Basel III, has commented:

“Under its current … form, Basel III is almost exclusively micro-prudential in its focus, concerned with the solvency of individual banks, rather than being macro-prudential, concerned with the resilience of the financial system as a whole. The language of Basel III is revealing in this regard, with repeated references to greater ‘loss absorbency’ of bank capital.”


When we turn to the impact assessment published by Her Majesty’s Treasury to accompany the Bill, we again find many references to the virtues of bank capital, its loss absorbency and the resilience of individual firms. There is, however, absolutely nothing about the attempt to deal with systemic risk using liquidity rules, resolution regimes and comprehensive supervisions. The authors of this document have been rewriting history. They have also failed to learn from history.

16:00

What, then, do Her Majesty’s Government propose for the parliamentary scrutiny of the work of the independent regulators? HMG’s proposals are neatly set out in the document that was the background briefing for Peers. The Bill, it is argued, establishes an accountability framework to provide appropriate strategic policy input and democratic oversight from government and Parliament. That sounds good, but what does it amount to? It consists of the regulators having a legal obligation to explain the rules and, specifically, how they have considered the matters contained in the Financial Services Bill. The regulators have a legal obligation to consult stakeholders and to do so in a manner that will best bring them to the attention of the public. They must also take into account and publish an account of representations made during consultation and their response to these. That is it—that is the accountability framework.

What of Parliament? There is a role for Parliament: in line with current practice, a relevant Select Committee can call witnesses, gather evidence and make recommendations at any time and on any relevant subject, including draft rules under consultation by the regulators. Her Majesty’s Treasury therefore takes confidence that proper mechanisms exist to allow Select Committees to scrutinise and comment as they see fit, right and proper.

On that, I have two observations. First, in several documents accompanying this Bill, the Treasury refers to the Treasury Select Committee of another place as playing the key parliamentary role by means of

“Select committee inquiries … Regular hearings to scrutinise the work of the financial services regulators… Appointment hearings for key senior leadership positions in the financial services regulators”.

I have considerable admiration for the work of the Treasury Select Committee, but the repeated emphasis in these documents on the central role of a committee already overloaded with work scrutinising the many other areas of Treasury responsibility does not give me confidence that the authors are filled with enthusiasm for parliamentary scrutiny. Secondly, while the regulators must take account of parliamentary comments, including those of the Treasury Select Committee, there is not a hint that they should have regard to them.

This leads me inexorably to recognise the worth of the principles behind the amendments proposed by the noble Baroness, Lady Noakes, and supported by the noble Baroness, Lady Bowles, and the noble Lord, Lord Holmes. I am not suggesting that there necessarily exists in either House the level of detailed expertise and/or experience that would lead Parliament to second-guess the regulatory experts—though, in fact, I suspect that such expertise is present in your Lordships’ House. But this is not the role that I would expect parliamentary scrutiny to play. Instead, I would rely on the fact that parliamentarians have a tendency to challenge, to ask what are often the devastating, idiot boy questions: “I don’t understand, guv’nor, would you explain?”, “How can you be sure?” or “How do you expect that the measure will actually work once the markets turn their collective minds to devising ways to circumvent it?”

Parliamentarians have it in their DNA to take nothing at face value. This does not mean that they will be always right or even approximately right, but it does mean that the regulators will always need to be on the alert for the vigorous, even decisive, challenge. That is why a different eye is necessary in the form of a structure of parliamentary scrutiny significantly more systematic than that suggested by the Treasury’s proposals.

I wonder whether Her Majesty’s Government have taken on board the recent proposals referred to by noble Lords and advanced by the All-Party Parliamentary Group on Financial Markets and Services. Of course, it is not for a government Bill to instruct Parliament in what to do—what committees should be established and which procedures followed—but it would assist the Grand Committee if, in replying, the Minister at least mused a little about what he would consider a desirable parliamentary response.

I turn to the amendments in my name and that of my noble friend Lord Tunnicliffe—at last, the Committee may feel. They seek to establish an operational framework for parliamentary scrutiny that is incisive and practical and does not expose the regulator to inordinate delay in implementing measures that might otherwise be held up by parliamentary procedures. The essential thrust of the amendments is that there should be scrutiny by a parliamentary committee, or committees, and that the regulators should have regard to the consequent findings. The committees’ findings would also be an important source of information and insight for Parliament when dealing with affirmative resolutions.

However, the period in which parliamentary scrutiny should take place is limited to 20 sitting days of this House or the other place, whichever falls on the later date. This important safeguard is missing from some other amendments in this group, ensuring that the regulator is not hamstrung by parliamentary delay. A number of noble Lords have expressed concern about how the time taken by scrutiny—even this short time—might inhibit the regulator from acting quickly. A little constructive imagination could easily solve this problem; perhaps the chairs of the relevant committees could be delegated to provide leave to the regulators to act promptly in an emergency, subject to subsequent consideration of their actions.

On reflection, the amendments as drafted do not take proper account of parliamentary recess, as the noble Lord, Lord Blackwell, noted. They need to be corrected in that respect. That said, I commend the practical procedure advocated in these amendments to Her Majesty’s Government as a constructive way of responding to the strongly expressed wishes on all sides of the House.

[Earl Howe (Con)]

My Lords, parliamentary accountability is a subject that has clearly brought out considerable strength of feeling across the Committee; the Government agree that it is vital.

Parliament, particularly this House, has had a central role in shaping critical financial services legislation over recent decades. In many cases, that legislation has served as a blueprint for global reforms. First and most fundamentally, there was the passage of the Financial Services and Markets Act 2000, or FiSMA, which endures as the framework around which all other financial services legislation is based. Following the financial crisis, Parliament led a number of important reforms to make our regulatory framework stronger and, of course, there is the important work of the Parliamentary Commission on Banking Standards, which spearheaded important reforms such as the creation of the senior managers and certification regime.

I assure noble Lords that this Government recognise the important role that Parliament must continue to have in shaping the financial services regulatory landscape. I say that because I cannot agree with the suggestions I have heard of late that there is simply no parliamentary accountability for the UK regulators and that the Bill somehow seeks to sidestep Parliament.

I listened carefully to what the noble Baroness, Lady Kramer, said about the order-making powers contained in the Bill. I refer her to the report of your Lordships’ Delegated Powers and Regulatory Reform Committee, which, perhaps unusually for the committee, raised no concerns about the inclusion of those powers.

The FCA, as I shall go on to explain, is accountable to the Treasury, to Parliament and to the public, including for the economy, efficiency and effectiveness with which it uses resources. There are a number of features in the legislation which support this accountability, as I shall explain.

The noble Baroness, Lady Kramer, argued that the Bill’s scope is too wide. I say to her that the Bill is designed to resolve immediate outstanding policy issues resulting from our exit from the European Union and to meet the UK’s international obligations in the short term. Its scope is limited to ensuring that we uphold our international commitments.

The noble Baroness, Lady Bowles, asked me whether there will be another financial services Bill before the FRF is complete. The Government have not made decisions about legislation in future Sessions. The FRF review is a high priority and essential for establishing the model for all future legislation.

The noble Lord, Lord Eatwell, asked me where in the Bill is there any focus on macroprudential issues. The Financial Policy Committee of the Bank of England is, as he knows, the UK body responsible for identifying and managing systemic risks to financial stability. Its remit is not affected by the Bill. It publishes a Financial Stability Report twice a year. This work compliments the Basel reforms and neither, clearly, is a replacement for the other.

I will set out where the Government stand on this important issue. I begin by focusing on the prudential measures: the investment firms prudential regime and the Basel framework. Implementing these rules in a timely manner is critical to the UK’s reputation as a responsible and responsive global financial centre. The Basel Committee on Banking Supervision is the primary global standard setter for the prudential regulation of banks. In response to the financial crisis the Basel committee significantly overhauled and strengthened its standards, in a package now known as Basel III. Since that time, the Basel committee has continued to refine that framework to ensure that it is robust and to guard against the serious failures that led to the financial crisis.

Due to the interconnectedness of the global financial system and the fact that large financial institutions operate across the globe, the UK Government remain committed to the development and implementation of a common set of standards on prudential regulation and supervision. With regard to Basel III, the UK is committed to implementing those standards for 1 January 2022, and firms have been planning on this basis.

My noble friend Lord Trenchard asked whether I could confirm the treatment of software assets in the implementation of Basel by the PRA. The PRA is currently consulting on a proposal to disallow software assets from counting as regulatory capital, which is contrary to the approach being taken in the EU.

For the investment firms prudential regime, any delay would put the UK at a significant disadvantage compared to the EU. Investment firms in the EU will be subject to a more proportionate prudential regime from the end of June 2021.

I will set out the accountability arrangements relating to these measures. The first thing to remember is that these measures in the Bill sit within the existing framework of FiSMA. As my noble friend Lord Agnew stated at Second Reading, the FiSMA model as updated after the financial crisis is considered world leading. Through it, Parliament has established the appropriate split of responsibilities between the different regulators and has ensured that those regulators have the appropriate statutory objectives to guide their work. It also ensures that Parliament and other interested parties have the information needed to scrutinise the work of the regulators and hold them to account.

FiSMA confers broad rule-making powers on the regulators to ensure that they are able to fulfil their statutory objectives, recognising that it is appropriate for expert and independent regulators to make the detailed technical judgments about how financial services firms should be regulated in a way that delivers the outcomes that Parliament wants. I appreciate this is different from the European model we have been operating under, but it is a return to the UK model. It is evolutionary, not revolutionary. It brings us more into line with other key international peers whose regulators take the lead in the detailed firm requirements.

16:15

FiSMA requires the regulators to undertake consultations before making rules, except where specific exceptions apply. These consultations must include a draft of the proposed rules, an explanation of them and a cost-benefit analysis. FiSMA also requires an annual report to be made by the PRA and FCA, explaining how they have discharged their functions and the extent to which their objectives have been advanced. This report is made to the Chancellor, who must then lay it before Parliament.

The Bill goes beyond the requirements in FiSMA by introducing a specific accountability framework for the prudential measures. It requires the FCA, when making Part 9C rules implementing the investment firms prudential regime, to have regard to any relevant standards set by an international standards-setting body and the likely effect of the rules on the relative standing of the UK as a place for internationally active investment firms to be based or carry on activities: that is, the competitiveness of the UK. The PRA, when making rules to implement Basel, will be required to have regard to those same issues—although it is the attractiveness of the UK for international credit institutions and investment firms in this case. It is also required to consider the likely effect of its rules on the ability of relevant firms to continue to finance the real economy. This is one of the key reasons why having a strong financial services sector is beneficial to the UK.

The Bill requires the regulators to set out publicly, at consultation stage and final rules, how they have considered these issues. This will allow for effective scrutiny by Parliament, which will be able to review and challenge how the regulators have fulfilled this obligation. The PRA’s consultation is currently under way and the FCA’s closed on 5 February. The PRA is currently consulting on a draft set of rules to implement Basel III, running to over 300 pages. As the Economic Secretary set out in the other place, on these specific areas covered by the Bill, the regulators are willing and able to engage with relevant Select Committees on their consultations and rules. They are already sending them to the Treasury Select Committee. I hope this demonstrates some of the scrutiny mechanisms which already exist, in this Bill and beyond, as well as how seriously the Government take this question.

Amendments 19 and 39 would effectively grant Parliament a veto on the regulators’ rule-making, should either House disagree with their rules. I have been clear about the importance of parliamentary scrutiny of the work of the independent regulators, but the Government cannot accept any form of veto.

Amendments 10 and 26 seek to delay the commencement of parts of the Bill until bespoke “accountability arrangements” are approved by Parliament. My noble friend Lady Noakes has been quite open about the fact that it is not clear when these arrangements would be in place, what they would involve or how they would be agreed. I heard what my noble friend said about this but, however one looks at it, the consequence of what she advocates would be to delay this legislation from coming into force and therefore delay the regulators’ ability to amend their rules in order to deliver the important updates to the prudential framework. Any such delay would be damaging to the UK’s reputation as a responsible global financial services centre, and cause disruption to firms.

Amendments 20, 21, 40 and 41 seek to require the regulators to lay before Parliament their draft rules in relation to the prudential measures in the Bill, and to prohibit them from making them until Parliament has either reported on them or a period of 20 sitting days has elapsed. If Parliament raises any objections, the regulators must respond to those. I must admit that I have studied these amendments with some interest. However, the problem with them is that they could still delay important and potentially urgent rules coming into force until after both Houses have had 20 sitting days to scrutinise them, and the regulators have, of course, already started to conduct some of their consultations. So I say again that we would not want to take any action that might prevent them delivering the first wave of prudential reforms for 1 January 2022.

Turning to Amendment 22, I recognise the intention of the noble Lord, Lord Sharkey: he wishes to ensure that parliamentarians have sufficient sight of the rules before they are enacted. I would just say to him and the Committee that many of these rules will be highly technical and not suitable for detailed debate. For example, the PRA’s consultation on Basel rules, which is out for consultation at the moment, contains regulations that, as I have mentioned, are more than 300 pages long, with many technical mathematical formulae. I accept that the power to delete by SI is quite unusual, but the power is limited to the retained EU capital requirements. The rules that will replace the EU legislation being deleted are already available in draft form. The regulators and the Treasury are working to ensure that final rules are published ahead of the debate on the relevant SIs, which have also been published in draft.

In any case, this amendment would have the effect of fixing in statute those rules presented to Parliament at one point in time. That would make it difficult to amend these rules to reflect any changes in market conditions, as they will already have been approved by Parliament. The flexibility that comes from this regulator-led model is one of the key advantages of the approach taken in the Bill. It could also lead to legal uncertainty as to which rules have effect at a point in time, once the PRA begins to update its rules using its FSMA powers.

Amendments 38 and 18 would oblige the regulators to inform Parliament of the matters discussed between themselves and the Treasury with regard to the effect of their rules on relevant equivalence decisions. Public reporting on the effect of the regulators’ rules on relevant equivalence decisions could impact delicate conversations between the UK and other jurisdictions. There are existing carve-outs in other legislation which prevent the publication of information that could undermine UK interests internationally.

I now turn to amendments that deal with regulatory accountability, but which seek to make changes which go well beyond the prudential measures covered by the Bill. I have already set out the requirement in FSMA that the FCA and PRA must prepare annual reports and have them laid before Parliament for scrutiny. Extending this obligation to include, for example, quarterly reports, would be unnecessarily burdensome and in my submission would not meaningfully increase parliamentary oversight.

The independence of the regulators is vital to their role. Their credibility, authority and value would be undermined if it were possible for Parliament to intrude in the detail of their operations or rule-making processes. Again, I think it is important to remind ourselves of the future regulatory framework review—the FRF review—which is currently exploring how our framework needs to adapt to reflect our new position outside the EU. As part of this, the Government are welcoming views on the current arrangements for accountability and scrutiny. That first consultation closed just last week and officials have started to consider the responses received. These are not matters that we should seek to answer through this Bill; rather, we should give them the full and careful consideration that they deserve. Against that background, the changes outlined in Amendment 27 would offer little in terms of enhancing parliamentary scrutiny, but would impose an outsized burden on the regulators’ resources and their independence.

Amendment 85 envisages Select Committees reviewing all regulator rules. Under this model, Parliament would need to routinely scrutinise vast amounts of detailed new rules, as well as the implementation of existing rules, on an ongoing basis. This is very different from the model that Parliament has previously put in place for the regulators under FSMA. That said, there is currently nothing preventing a Select Committee from either House reviewing the FCA’s rules at consultation, taking evidence on them and reporting with recommendations to influence their final form. The current framework therefore already allows Parliament to play a strategic role in interrogating, debating and testing the overall direction of policy for financial services, while allowing the regulators to set the detailed rules for which they hold expertise.

Amendment 71 would require the Treasury Select Committee to conduct an assessment of the conduct of the FCA prior to a new chief executive taking up post. The change proposed under this amendment mirrors powers that are already available to Select Committees and, in my submission, adds an unnecessary step to an appointment process that already includes measures to ensure proper parliamentary scrutiny.

Finally, I respect the intent of Amendment 137, tabled by the noble Lord, Lord Bruce of Bennachie, which is clearly to ensure that the devolved Administrations are properly consulted on matters which affect them. Financial services are a reserved policy area under each of the devolution settlements, and it is consistent with this that the responsibility under the Bill for making regulations in the area of financial services sits with UK Ministers. However, I listened with care and interest to all that was said about Edinburgh, in particular, as a vital financial centre in the UK, and I can assure the Committee that the Government are working closely with Scotland, Wales and Northern Ireland to seek the necessary consents on areas where the Bill deals with devolved or transferred matters and, of course, generally work very closely with the devolved Administrations on areas of mutual interest.

I have spoken at length, but I hope that what I have said has been helpful in setting out the Government’s position on these important issues. In particular, let there be no room for doubt that the Government take the question of parliamentary accountability in financial services rule-making very seriously. The noble Lord, Lord Eatwell, invited me to muse on what might be an appropriate set of scrutiny arrangements. It is the Government’s view, I say again, that the Bill allows for proper parliamentary scrutiny, and on that basis I ask my noble friend to withdraw her amendment and for the others in the group not to be moved. Having said that, I say to all noble Lords who have spoken in this debate that I recognise the strength of feeling expressed and I am very happy to continue this conversation with noble Lords between now and Report.

[The Deputy Chairman of Committees (Lord Duncan of Springbank) (Con)]

I have received a single request to speak after the Minister; I call the noble Lord, Lord Holmes of Richmond.

[Lord Holmes of Richmond (Con) [V]]

My Lords, I thank the Minister for his very clear and thoughtful response. I have three brief questions for clarification. First, what plans, if any, are there for a Financial Services (No. 2) Bill? Any information on that would be helpful to the deliberations of the Committee today, and to the approaches noble Lords may choose to take as we move through further stages of the Bill.

Secondly, will he say what the Government’s position is on the timeliness of such scrutiny? Does it err more towards rear-view rather than real-time? Thirdly, in the light of the debate that we have just had, will he consider discussions potentially to lead to government amendments coming forward on Report? I think that noble Lords would agree that, on scrutiny and accountability, if the Bill is passed as currently drafted that would be at least somewhat unfortunate.

[Earl Howe (Con)]

My Lords, I intended the Committee to take some reassurance from the final sentences in my winding up when I said that I was very happy to continue the conversation with noble Lords on this theme between now and Report. I hope that noble Lords will take that as a signal that the door is not closed as regards a potential tweak to this part of the Bill.

16:30

My noble friend invites me to speculate on whether there might be further arrangements that consist of real-time scrutiny or, alternatively, a rear-view mirror type of scrutiny. I am not going to speculate on that issue, if he will forgive me, because that begs the question that I adumbrated on the matters that I would like to discuss with noble Lords over the coming days.

My noble friend’s first question was about whether the Government have any plans for a second financial services Bill. I endeavoured to answer the same question put to me by the noble Baroness, Lady Bowles. I said that the Government have not made any decisions about legislation in future Sessions, but I indicated that the Future Regulatory Framework Review—FRF—is a high priority for the Government and we regard it as an essential basis for establishing the model for future legislation in this area.

[Baroness Noakes (Con)]

My Lords, I thank all noble Lords who have taken part in this debate and those who have supported my amendments. It has been a very thoughtful debate with contributions from all parts of the Committee, which sees this as a real issue that needs to be solved. On a personal basis, I welcome back the noble Lord, Lord Eatwell, to our consideration of financial services matters. We should remember that he has unique experience among noble Lords, having been a financial services regulator, so we must listen very carefully to what he has to say on many of these things.

One overriding theme has come out of our debate this afternoon. There is unanimity on the need for good parliamentary involvement in financial services. My noble friend Lord Howe affirmed the Government’s commitment to parliamentary accountability. The difference comes in how we define what form that accountability could take. The Minister made a case for going back to the FiSMA model, which he seemed to forget was brought in in the context of the existing EU arrangements for scrutiny and did not exist pre-EU scrutiny, so going back to that is not saying anything at all. Now that we are out of the EU, we are trying to see what can be done to deal with the changes that we need to accommodate within our system and to ensure that there is proper accountability for that. FiSMA may, or may not, provide an adequate basis for that, and I suspect not.

My noble friend also talked about the need for timeliness. I am sure that the Basel III implementation needs to be done on a timely basis, and it is not beyond the bounds of possibility that we could get that right with parliamentary scrutiny in this Bill. However, the implementation of Basel III does not need to be done by the PRA; it could as easily be done by a statutory instrument introducing it. I am not afraid of 300 pages of detail. I have seen the formulae on risk rating. I do not relish the opportunity to do it again, but one could do so if one needed to, so it is not necessary for us.

I get the impression that this is a rubber-stamp Bill. The Government have made up their mind. The PRA and the FCA will be roaring ahead as if they have all the powers and we are now just being invited to rubber -stamp it. I think we are saying back to the Government that we do not find that a satisfactory state of affairs.

The noble Baroness, Lady Kramer, rightly said that this is not a party-political issue, and there is a commonality of views across the Committee on this. The fact that there is different detail in our amendments today does not rule out the possibility that we can coalesce around a good solution to this. I was pleased to hear my noble friend the Minister say that he was keen to maintain a dialogue with noble Lords after Committee. That would be extremely helpful; obviously, we would prefer to move in step with the Government and not against them.

I think the Minister needs to recognise that we do not find convincing the narrative that the existing framework with a few tweaks in the Bill gives an adequate accountability framework for the additional powers that are being transferred to the regulators under the Bill. I look forward to continuing the dialogue outside Committee and I hope that that will be fruitful before we get to Report. With that, I beg leave to withdraw the amendment.

Amendment 10 withdrawn.

Clause 2 agreed.

Schedule 2: Prudential Regulation of FCA Investment Firms

Amendment 11

Moved by

[Lord Oates]

11: Schedule 2, page 62, line 9, at end insert—
“(ca) the climate-related financial risks to which FCA investment firms are exposed,”Member’s explanatory statement
The purpose of this amendment is to require the FCA, in exercising its power to make general rules, to have specific regard to the climate related financial risks to which FCA investment firms are exposed.

[Lord Oates (LD)]

My Lords, I declare my interests as chair of the advisory committee of Weber Shandwick UK, as set out in the register. In moving Amendment 11 in my name and the names of my noble friend Lady Kramer and the noble Baroness, Lady Hayman, I will also speak to the other amendments in this group. Before doing so, I put on record my thanks to a number of organisations for their briefing and patient answers to the many and often ignorant questions that I have posed to them in preparing for the Bill, particularly Finance Watch, Positive Money and Carbon Tracker.

I am also grateful to the City Corporation and the APPG for Financial Markets and Services for the helpful information they provided, and, of course, to the noble Earl, Lord Howe, and his ministerial colleagues for meeting to discuss the Bill and, if not immediately signing up to all our climate amendments, at least recognising the seriousness of the issues that they raise. I hope that over the course of Committee we will be able to convince the noble Earl and his colleagues of the urgency of acting through this legislation.

There are essentially three categories of amendment in this group. The first addresses the rule-making powers of the regulators, requiring them when making the rules to take account of the climate-related financial risks to which the entities they regulate are exposed. This issue is dealt with in Amendments 11 and 12.

The second category requires regulators when making rules to have regard to the UK’s national and international climate change objectives and obligations. Amendments 13, 14, 15, 16, 17, 23, 34, 35, 36 and 37 address this issue in a number of different ways.

Finally, Amendments 48, 75, 76, 89 and 98 fall into a third category, which tackles disclosure and governance issues as they relate to climate change.

Turning to the first category, the objective of Amendments 11 and 12 is simply to ensure that the prudential regulation of FCA investment firms under Schedule 2 is fit for purpose; that is, that it properly takes account of and seeks to manage and control the risk exposure of the firms it regulates. It is hard to understand on any accepted definition of prudential regulation how it can be regarded as such if it fails to take account of exposure to climate risks, given the potential threat they pose, not only to individual firms but to the financial system as a whole.

There are those who argue that it is premature to take this approach, because the sector is in the process of working out how to measure climate risk, which is undoubtedly a complex matter, given the myriad interrelationships that exist and the fact that there is no precedent for measuring such dynamic risks. While I acknowledge that we do not have a perfect understanding of climate risk, we cannot wait for a perfect solution. We cannot accept that a potentially enormous risk exists for FCA investment firms, but, because it is difficult to measure its exact scale, we are going to act as if it does not exist at all. That is not prudential regulation; it is wantonly reckless negligence.

I hope that the Government will look at this matter very carefully and that the Minister will be able to give us some comfort that, if they will not accept our amendments, they will at least bring forward proposals to ensure that prudential regulation of FCA investment firms does not continue to ignore what is likely to be the most significant risk to which they are exposed over the coming decades.

The second set of amendments seek in different ways to ensure that the FCA and the PRA must have regard in rule-making to our net-zero target and our wider international obligations on climate change and biodiversity. Amendment 23 in my name, with the support of my noble friend Lady Kramer and the noble Baronesses, Lady Hayman and Lady Bennett of Manor Castle, would prevent the Treasury from using its power under Clause 3 to evoke capital requirement regulations unless the effect of the new regulation was compliant with the UK’s net-zero target.

Amendment 13 to Schedule 2 and Amendment 34 to Schedule 3 require the FCA and PRA, when making rules, to have regard to the

“the likely effect of the rules on the relative standing of the United Kingdom as an international leader in combatting climate change”.

Amendments 16 and 37 to Schedules 2 and 3 respectively require that, in considering that likely effect on the UK’s standing, the FCA and PRA have regard to our commitments under the Paris Agreement. This includes our nationally determined contribution of a 68% reduction in emissions from 1990 levels by 2030 and the UK’s net-zero target under the Climate Change Act 2008, as amended in 2019. Amendment 17 in the name of the noble Baroness, Lady Bennett of Manor Castle, adds the United Nations Convention on Biological Diversity to that list of “have regards”.

In these amendments, I have deliberately replicated existing language in the Bill’s rule-making clauses, which require the FCA and PRA to have regard to

“the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active investment firms to be based”.

That is an undoubtedly an important consideration, but it needs to be specifically supplemented by a requirement that takes into account the UK’s standing as a leader on climate change. This will force the regulators to raise their sights and ensure that we have the rules in place to cement the UK’s position as the leading financial centre in tackling climate change and providing green finance.

On an earlier group on Monday, my noble friend Lord Sharkey quoted the Barclays CEO Jes Staley, who said when asked which amendment he would like to burn now we had left the EU:

“I wouldn’t burn one piece of regulation.”


He went on to say:

“I would continue pushing the climate agenda, trying to make London a centre of innovation around financing climate and transitioning to a net zero economy by 2050”.


That might be a pretty brilliant idea and we agree with him, but we need an adequate system in place to allow it to happen. In the last 15 years, Governments in which all the main parties have been represented have ensured that the UK has established and retained international standing as a leader on climate issues. We need to ensure that leadership is reflected not just in our politics and Government, but across industry and society as a whole. Nowhere will this be more important than in the most significant sector of our economy.

If our financial services industry and its regulators show leadership on climate, the industry will not only have the opportunity to gain a clear market advantage in the years ahead but will help to address the current climate emergency. If they do not, instead of playing a key role in averting climate catastrophe, that same industry will be a key contributor to it. That is what is at stake here.

Amendments 14 and 35 tabled by the noble Baroness, Lady Hayman, have a similar objective although I must admit that they are a little more concise than my version. They would require the FCA and PRA, in making rules, to have regard to

“the likely effect of the rules on the United Kingdom meeting its international and domestic commitments on tackling climate change”.

Amendments 15 and 36 in the name of the noble Baroness, Lady Jones of Whitchurch, have a similar objective again but focus specifically on the net-zero target under the Climate Change Act, as amended. I put my name to both these sets of amendments because the purpose of all our amendments is a common one: the essential task of ensuring that our regulators take account of the most significant threat that faces the financial services industry, and indeed every one of us on this planet—the climate emergency. The intent of these amendments has support across the Committee, so I hope that the Minister will recognise the need to act and the Government will either accept a version of these amendments or bring forward one of their own. If they are unwilling to do so, I think the spirit of the House will be to come together on a joint amendment on these matters on Report.

16:45

The final category of amendments relates to disclosure and governance. The purpose of my Amendment 48, which has cross-party support, is to bring forward from 2025 to 2023 a mandatory requirement for climate-related disclosure consistent with the recommendations of the final report of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. The TCFD’s final report was published in June 2017. Five and a half years should be plenty of time for the industry to get its head round these issues. Let us remember, after all, that these requirements are about not mitigating climate-related risk, just disclosing it—the absolute minimum requirement so that investors can make informed decisions, regulators can understand risk exposure, and the risk can be priced appropriately. The financial services industry has to wake up and understand that its glacial pace in addressing these issues is unsustainable. Climate change is not waiting on their prevarication; it is advancing because of it.

I am also pleased to support Amendment 75 in the name of the noble Baroness, Lady Hayman, which would require the appointment of a member of the FCA governing body with specific responsibility for climate change. As I indicated previously, the financial services industry’s progress on climate change has been far too slow. A dedicated member of the FCA governing body charged with that responsibility will help to drive the sense of urgency that is so obviously lacking and is desperately needed.

Amendment 76 in the name of the noble Baroness, Lady Hayman, would establish a duty for the PRA to report on climate risk. Amendment 98, also in her name, would establish a climate-related financial risk objective for the FCA. These are key issues that the Government will need to address. It is not sustainable for them to acknowledge the significant risks posed by climate change—whether its actual physical effects, the disruptive impact of transition or the liability costs that it will impose—but then fail even to charge our regulators with properly assessing and reporting on such risks.

Finally, I am pleased to support Amendment 89 in the name of the noble Baroness, Lady Jones. It would amend the Financial Services and Markets Act to place a duty on the Treasury, the FCA and the PRA to have “due regard” to the contribution of financial services to climate change targets, and would require the Treasury to

“lay before Parliament a strategy outlining the policies Her Majesty’s Government will pursue to ensure financial services operating within the United Kingdom make a positive contribution to climate change targets.”

The amendments in this group address in different ways the stark fact that, in the year in which we will be the president of COP 26, the Government have presented to Parliament a Bill that relates to the sector that will have perhaps the single most profound influence on whether we act fast enough to ensure that we can manage the impacts of climate change or tip into climate-driven systemic collapse, but which contains no mention of climate change—not one word, despite the fact that finance-fuelled climate change poses a fundamental threat to us all and, in turn, to the stability of the financial system itself. That could set off a catastrophic cascade which we must avoid. This Bill should be the place where we start doing that.

I hope that the Government are listening and will work with Peers on all sides of the House during the remaining stages of the Bill to ensure that we address these vital issues effectively. I beg to move.

[Baroness Hayman (CB) [V]]

My Lords, I declare my interests as set out in the register. It is a pleasure to follow the noble Lord, Lord Oates, who, both at Second Reading and today, has argued passionately and cogently about the need to remedy the absence from the Bill of any reference to the risks and opportunities that climate change presents to the financial services industry. I have tabled Amendments 14, 35, 75, 76 and 98 and added my name to Amendments 11, 12, 23, 48 and 89 in the names of the noble Lord, Lord Oates, and the noble Baroness, Lady Jones of Whitchurch.

As the noble Lord, Lord Oates, said, all the amendments in this group seek to put a climate change lens on the provisions of the Bill. There are various approaches, but the amendments focus, as he said, on ensuring that the regulators take into account climate-related risks when they are making the new rules and regulations proposed in the Bill. They seek to address the remit of the regulators and thus ensure that climate risk is considered at a systemic level.

The increase in firms reporting on such risks at an individual level is both necessary and welcome; however, there is a widely recognised and existential threat to our entire financial system from climate change. Last year, the Governor of the Bank of England, Andrew Bailey, said:

“Compared to the financial crisis and the pandemic, the risks from climate change are even bigger and more complex to manage.”


We need to ensure that those with the responsibility for financial stability at a macro level are assessing and reporting systemic climate risk as a core function.

On numerous occasions, the Government have recognised the integral role of our financial services industry in driving the change to a green economy, with an urgent focus on aligning investment with the objectives of the Paris Agreement and the Climate Change Act. Our amendments would put that into reality. The Chancellor spoke on 9 November about

“putting the full weight of private sector innovation, expertise and capital behind the critical global effort to tackle climate change and protect the environment”.—[Official Report, Commons, 9/11/20; col. 621.]

Yet, as has been said, this crucial piece of financial industry legislation remains totally silent, hence the importance of our debate on this group of amendments and the urgency, in this year of COP26 when our own domestic performance will be integral to the success of our global leadership, of making progress before the Bill leaves this House.

Turning to individual amendments, I have tabled Amendment 14, which, as the noble Lord, Lord Oates, says, addresses the same issues as his Amendments 11 and 12, but in a slightly less detailed way. The intention of Amendments 14 and 35 is to ensure that the FCA makes new prudential regulations for investment firms and that, before the PRA makes any new rules in relation to the capital requirements regulations, these regulators must have regard to the likely effect of those rules on the UK meeting its net-zero commitments. “Having regard” is an important issue and one to which, when this was debated in the other place, I sensed that the Government were not completely antagonistic, but took rather a St Augustine view—being happy to be made green, “but not yet”.

I see no reason whatever for awaiting the consultation on this issue, especially because when one reads the consultation document, apart from a few words in the foreword by the Minister, there is no reference to climate change and no request for views on it. Given the importance of the issue, this is something on which we should be making progress straightaway.

I am grateful for the support of the noble Lord, Lord Oates, and the noble Baronesses, Lady Altmann and Lady Bennett, for Amendment 75, which focuses on the current remit and governance provisions of the regulator. It proposes amending Schedule 1ZA to the Financial Services and Markets Act 2000, which deals with the constitution of the governing body of the FCA, and provides for the appointment of a board member with direct responsibility for climate change issues. This would enable a focused and strategic approach to be taken to climate change across the sector at the highest level of the regulator.

Essentially, the amendment requires the regulators to do what they have asked of the sector itself, because those are the same provisions that they now require financial institutions to comply with, and they replicate the senior management regime, which requires those institutions to appoint a board member responsible for identifying and managing financial risk from climate change, and reporting on it.

As part of the process to embed climate risk and the net-zero transition into investment and supervisory decisions, institutions are asked to

“embed the consideration of the financial risks from climate change in their governance arrangements”

and

“demonstrate an understanding of the distinctive elements of the financial risk from climate change and a sufficiently long-term view of the financial risks that can arise, beyond standard business planning horizons.”

That long-term view is particularly important, and there is no reason for the FCA not to take on this responsibility. The Bank of England itself has appointed an executive sponsor for climate-related risks, who is responsible for recommending to the governors the Bank’s strategy for addressing the risks that climate change poses to its objectives, and overseeing the implementation of that strategy. So I hope that, when he winds up, the Minister will be able to respond positively to this very limited but still important amendment.

Amendment 76 deals with the need to ensure that the regular mandatory reporting mechanisms for a sector-wide climate risk assessment provide for FSMA to be amended; the need for the PRA to provide a regular report on how it has evaluated exposure to climate risk; and the impacts that it would have on the stability of the United Kingdom financial system. That could form part of the annual reporting that the regulators are required to provide to the Treasury, and to Parliament via the Treasury Select Committee.

The amendment also provides that, as part of the reporting process, the PRA must seek advice from the climate change committee. It is important that we join the dots between the different bits of government, and ensure that a statutory body such as the climate change committee is integrated into the advice received by regulators and those responsible for economic stability.

My final amendment in this group is Amendment 98, which seeks to amend the Financial Services and Markets Act to insert a new FCA climate-related financial risk objective. While the regulators are moving forward with approaches necessary to address climate-related financial risks, such as through the UK Climate Financial Risk Forum, their statutory remit does not currently include a duty to consider the impact of climate change on the stability of the financial sector overall.

The theme running through this group of amendments is to seek to embed climate risk and the net-zero obligation into the financial system. This is one critical step towards doing that, by ensuring that they are embedded within the scope and remit of the regulators at every level.

17:00

In the interests of time, I shall not speak to the other amendments to which I have put my name, because many different approaches are encompassed by the group of amendments that we are discussing and I am by no means precious about how we can best approach these issues. However, all have a common purpose: to ensure that we do not miss the opportunity that this Bill gives us to recognise the crucial importance of risk and opportunity inherent in the financial services industry in relation to climate change and to recognise that not just in ministerial speeches but in legislative reality, which leads to real progress. I look forward to the Minister’s response and hope for constructive discussions with him and his team before Report, not on the principle of introducing issues of climate change into the Bill but on the most appropriate ways to do so.

[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, it is a great pleasure to follow the noble Baroness, Lady Hayman, who is such a champion of climate and other environmental issues in your Lordships’ House. As she said, it is astonishing that the Bill, in the year 2021, presented by the Government with the responsibility of chairing COP 26, who talk so often about being “world-leading” on climate, could have got so far without any mention of the climate emergency.

The noble Baroness and, in introducing the amendment, the noble Lord, Lord Oates, have set out extensively the detail of the range of climate amendments and the need for their incorporation in the Bill, so I shall focus the bulk of my words on Amendment 17 in my name. It is distinct in that, while all the others address the climate emergency, this is the only amendment that also brings in the crucial issue of our nature crisis, and the collapse in biodiversity and bio-abundance that is obviously of concern to the Treasury given its commissioning of the recently-released Dasgupta Review.

I doubt that many noble Lords taking part in the debate on this group need an outline of it, but it is important to highlight that the Dasgupta Review identifies nature as “our most precious asset”. It says that we need vastly more protection for our scant remaining natural world—on this, one of the planet’s most nature-depleted lands—which means making sure that money is not going into destructive actions. That should be of concern to the Financial Conduct Authority. It says too that we should begin to implement large-scale and widespread investments that address biodiversity loss—again, a matter for the Financial Conduct Authority.

While it is great to see in the Dasgupta Review these critical issues to all of our futures expressed in terms that even mainstream economics can understand, being comfortable for those whose philosophy is embedded in growth-orientated, 19th-century politics, it falls down in trying to apply the same unrealistic, abstract mathematical models, driven by financial calculations, to provide tools to guide what to do. We have so little left of biodiversity and bio-abundance, with 50% of our species in decline and 15% at imminent risk of extinction, that we cannot be calculating what we can afford to destroy or write off in this land. We have to preserve everything that is left, while acknowledging that the destruction that we have wrought has given us an insecure, poverty-stricken society that is frighteningly short on resilience, as the Covid-19 pandemic has demonstrated and, as we have just seen on the global scale in Texas, precious little ability to endure the climate shocks inevitably coming our way.

I point noble Lords and the Government to the recent, crucial United Nations Environment Programme report, Making Peace with Nature. In his foreword to it, the UN Secretary-General, António Guterres, says that

“our war on nature has left the planet broken”.

That is where we are. The often piecemeal response to the climate crisis, biodiversity loss and pollution is

“not going to get us to where we want”,

according to Inger Andersen, executive director of the United Nations Environment Programme.

Just considering the remit of our international climate obligations as a central part of the FCA’s responsibilities is not nearly enough, as crucial as that is. Adding our equally binding and important obligations through the Convention on Biological Diversity is a significant improvement, and I give notice to your Lordships’ House that this is an issue that I intend to pursue strongly at the next stage of the Bill. I will listen carefully to today’s debate, and any responses we get from the Government, and consider where best to place this amendment among the range of amendments, although I hope that the Government will pre-empt any need for me to do that.

Yet this is still not nearly enough, as the UNEP is highlighting. We also need to consider pollution as a key concern, and a circular economy, on which the European Union is leading. We need a systems thinking approach—a complete view of how we stop treating this planet as a mine and a dumping ground and treasure its immensely complex systems of life, of which we still have so little understanding. Of course, we also have to consider the billions of people—millions in the UK alone—whose basic needs are not being met while we trash our planet. As a species we are using the resources of 1.6 planets every year; in the UK, our share is three planets.

This morning I was present at a briefing about New Zealand’s modern, 21st-century living standards framework, on which there has been wide public and expert consultation. It provides a guide for Treasury decision-making on all government spending. That is truly world-leading, and I hope that the UK Treasury is looking urgently at developing a similar system. In the meantime, however, the inclusion in this Bill of our climate emergency and nature crisis—the understanding that our financial sector is 100% contained within it—is at least progress.

The other place has before it the Climate and Ecological Emergency Bill, which could help to create a framework for such a structure. Given that it is “oven-ready”—to quote a once-familiar phrase—and the continuing delays to the Environment Bill, the Government should be looking at a rapid delivery of whatever emergency steps could be taken—as many as have been taken over Covid.

I revert to the Bill before us. I was told that the 2020 Pension Schemes Bill was the first financial legislation in British history to contain a reference to climate change—no doubt the first to refer to the natural world. Listening closely to the briefing that I referred to earlier, I sense that the Government are at least prepared not to step backwards in this 2021 Bill, and to include some reference to climate change. But if it is to progress it also needs to include biodiversity.

In concluding this section of my comments, I ask the Committee to listen to a short quote:

“Obviously it is right to focus on climate change, obviously it is right to cut CO₂ emissions, but we will not achieve a real balance with our planet unless we protect nature as well”.


That was a quote from Prime Minister Boris Johnson’s speech of 11 January as he announced that £3 billion of UK climate finance was to be spent on supporting nature. I ask the Minister how, given the Prime Minister’s words, he could not have included an amendment such as Amendment 17, in addition to one or more climate change amendments.

Allowing money to pump the systems that are wrecking the natural world is, to put it mildly, not a good idea. It is something that should be considered in every action and every regulation of every government body, particularly the Financial Conduct Authority, given the extreme financialisation of our economy, whereby almost every element is now regarded as a potential profit source. Those profits, which go to the few, must not be at the expense of the living future of all of us.

I turn briefly to the other amendments to which I have attached my name, the first of which is Amendment 23, in the name of the noble Lord, Lord Oates, also signed by the noble Baronesses, Lady Kramer and Lady Hayman. This amendment simply ensures that regulation is compliant with the amended Climate Change Act and the Government’s much-trumpeted 2050 net-zero target. That is a bare, indeed inadequate, minimum, because it fails to acknowledge the need for urgent action now to achieve major cuts in emissions in the 2020s. Not waiting but acting now should be at the forefront of every government action.

I backed Amendment 75, in the name of the noble Baroness, Lady Hayman, and supported by the noble Baroness, Lady Altmann, because of the need for expertise in these issues within the FCA. Its many failings in traditional areas were powerfully outlined earlier by the noble Lord, Lord Sikka. It certainly needs a specialist, expert voice at its heart to address environmental issues.

I also attached my name to Amendment 98, in the name of the noble Baroness, Lady Hayman, and also signed by the noble Baroness, Lady Jones of Whitchurch, which focuses particularly on climate risk. I would suggest that this falls, in the terms of the Paris climate agreement, in the areas of both climate mitigation and adaptation. The need for mitigation is a risk in itself. We heard the astonishing news this week that local government pension funds still hold £10 billion in fossil fuel investments, despite large numbers of local councils having declared climate emergencies. That is astonishing in terms of money being invested in trashing the climate in ways already hitting close to home—flooding, heatwaves and biodiversity damage—but it is also as though the term “carbon bubble” had never been invented. Perhaps we cannot blame local government for the oversight when our current Government have continued to put money into fossil fuel assets and to subsidise the operation of existing ones to the tune of billions. These are issues that certainly need to be considered.

However, there is also adaptation. I do not feel like I need to stress so much—as the Green Party has for years—that the climate emergency is a current reality, not a problem for future generations. I think, finally, the Government and even parts of industry and finance have got that fact. I note that, today, Fitch Ratings warned that the rising cost of natural catastrophes arising from climate change could mean that insurers withdraw from the market, leaving it to Governments to pick up the pieces. Amendment 98 would be a modest step towards ensuring that the FCA has rules fit for operating in such an environment.

[Baroness McIntosh of Pickering (Con) [V]]

My Lords, I am delighted to follow the noble Baroness, Lady Bennett of Manor Castle, and pay tribute to her green credentials and the work that she and her colleague, the noble Baroness, Lady Jones of Moulsecoomb—both my friends—have done, as have so many others who have contributed to this debate so far today. I look forward to the other contributions.

This group of amendments has much to commend itself, as do many of the individual amendments. It helps to green-proof, if I may say that, the provisions of the Bill. I am sure that my noble friend Lord Howe will tell me if I am wrong when he comes to reply, but I cannot find anything else in the Bill that covers the provisions set out in these amendments. I pay tribute to the noble Lord, Lord Oates—I celebrate, again, the fact that we joined the House together; I always look forward to debates in which he and I contribute—and to the noble Baronesses, Lady Hayman and Lady Bennett. My slight concern with this group is that while the focus and main thrust of their amendments is on climate change I am slightly confused that they have chosen that form of words—as they also have in other amendments—because so much progress has been made in investment generally. I personally believe that that should extend to banking and financial services as well as other investments, but there is general recognition now of ESG investments. The Wikipedia encyclopaedia tells us that:

“Environmental, Social, and Corporate Governance”


are generally recognised as measuring

“the sustainability and societal impact of an investment in a company or business.”

It goes on to say that:

“Threat of climate change and the depletion of resources has grown, so investors may choose to factor sustainability issues into their investment choices.”


We are increasingly seeing a move in general investments towards individual small shareholders buying very small, limited shareholdings in a company precisely for the purpose of raising these issues at the AGM. I think we will see this trend continue. This must extend, as I said earlier, to banking and financial services as well. I believe that there should be a place for ESG provisions and regulation by the FSA in the Bill, and these amendments identify where they should go.

However, I am mindful of the fact that ESG covers all sorts of possibilities, such as climate change, greenhouse gas emissions, biodiversity, waste management and water management, so I put to the authors and to my noble friend the Minister that ESG provisions would encapsulate this and would perhaps be a neater—and recognised—way of introducing this into the Bill.

In many instances, particularly in all the work that we have done on rural affairs, we rural-proof legislation as it goes through and I am very keen that we green-proof new legislation as it comes online. I therefore welcome the main thrust of these amendments. I repeat to my noble friend the Minister that if this is an omission, these amendments, or something along the lines of ESG terminology, should find a place in the Bill and a role for the regulators specified in it to follow. If these amendments do not fit the Government’s thinking or should we follow more of an ESG terminology, will he consider coming forward with amendments of his own at the next stage?

17:15

[Baroness Sheehan (LD) [V]]

My Lords, it is always a pleasure to speak after the noble Baroness, Lady McIntosh. We are often in agreement. The point that she raises about ESG is pertinent and, sadly, it is not mandatory. We are seeing a continued increase in the billions of pounds and dollars being spent on fossil fuel infrastructure.

The young people whose futures will be mostly affected by what we do today are increasingly calling for action across all sectors, as demonstrated by the worldwide UNDP poll of 1.2 million people that I cited at Second Reading. I should also put on record that the poll carried out by YouGov last October at the behest of Global Witness showed that two-thirds of the British public want the UK to be a world leader on climate change. In fact, the highest percentage of those was recorded in Scotland at 69%.

The Bill depicts the landscape that will drive the investment of billions of pounds at a crucial juncture in our country’s history to reshape our future financial services post Brexit. The legislation will form the basis of how investment decisions will be regulated as we spend massive amounts of taxpayer money to build back better post Covid. Serendipitously, the Bill also comes at a time when we will be in pole position to provide global leadership through COP 26 and the G7. Italy, our co-host for COP 26, will then host the G20. We have an opportunity to showcase the route map presented to us by the Climate Change Committee’s recent report to get us to net zero by 2050, while steering a course to meeting the Paris goals. What an opportunity.

The Covid-19 pandemic has focused minds on what can happen when we push natural ecosystems too far, and I agree with every word of the contributions of the noble Baroness, Lady Bennett. However, the timeframes to get innovative technological solutions engineered to scale to tackle climate change are substantially longer than those needed for vaccines—and they were long enough and overturned by human endeavour, hopefully just in time. Decisions have to be taken now if we are to reach net zero by 2050, and we have to get it right because we are in the last chance saloon.

Governments do not have the sums that will be needed, so we need private sector money too, and pots of it. However, business needs certainty and absolute clarity about which way the wind is blowing politically.

It is getting clarity from one quarter. Here is an extract from the letter sent by BlackRock CEO Larry Fink in 2021 to client CEOs. I remind the Committee that BlackRock’s assets under management come to, give or take, $7 trillion. This is what he said:

“BlackRock is a fiduciary to our clients … This is why I write to you each year, seeking to highlight issues that are pivotal to creating durable value—issues such as capital management, long-term strategy, purpose, and climate change.”


He went on to remind client CEOs:

“In January of last year, I wrote that climate risk is investment risk.”


I repeat: climate risk is investment risk, says the CEO of BlackRock. He went on to issue what can only amount to a stark warning: if you risk saddling your investors with stranded assets, with no demonstration of how you are moving to de-climate risk your operations, there will be consequences.

The writing is on the wall. The Prime Minister knows this. Here are his words from last November:

“This 10-point plan will turn the UK into the world’s number one centre for green technology and finance, creating the foundations for decades of economic growth.”


He went on to describe his 10-point plan as

“a global template for delivering net zero emissions”,

ahead of the UK hosting the COP 26 climate summit in Glasgow this year. Someone should tell the Prime Minister that his Government are attempting to put through a Financial Services Bill, in 2021, which is devoid of the words “green”, “net zero” or “climate”.

I was delighted last December when the Prime Minister announced that the UK will end all support to overseas fossil fuels projects. How could I not be, when it is one of the asks in my Private Member’s Bill, the Petroleum (Amendment) Bill? The Prime Minister should know that then to allow 17 fossil fuel projects to be railroaded through to beat an arbitrary deadline before COP 26 is not really showing that he gets it. For example, there was a headline in the Telegraph on 6 February this year:

“Major Brazilian oil and gas project could get UK backing despite promised end to fossil fuel funding”.


Are we really going to allow UK Export Finance support for the east Africa crude oil pipeline? These investments, using UK taxpayers’ money today to fund what will amount to stranded assets tomorrow, are nothing short of immoral.

As if those examples of the abuse of UK taxpayers’ money on fossil fuel projects abroad were not bad enough, we still have the threat of the go-ahead for the first deep coal mine in the UK for 30 years, in Cumbria. How is that “powering past coal”? These examples alone, if they are allowed to go ahead, show a deplorable lack of fiduciary duty on the part of our Government. These amendments, which refer to climate risk, are sorely needed.

A good number of them are about mandating the FCA and the PRA, and strengthening their structures to ensure that all investment organisations that fall under their jurisdiction have regard to climate-related financial risk and protect Britain’s international reputation by having regard to her international and domestic commitments. I support the intent behind them and look forward to the movers bringing them back on Report, in amalgamated form. There is cross-party support for many of these amendments.

I single out Amendment 48, in the name of my noble friend Lord Oates and the noble Baronesses, Lady Hayman, Lady Jones of Whitchurch and Lady Altmann, as important. Bringing forward by two years the date by when the recommendations of the final report of the task force on climate-related financial disclosures come into force, to 2023, will send the right signals.

Amendment 17 in the name of the noble Baroness, Lady Bennett, amends Amendment 16 to include the United Nations Convention on Biological Diversity. I have every sympathy with the intent behind the amendment, especially in light of the recent excellent Dasgupta review, The Economics of Biodiversity, but I agree with the noble Baroness, Lady Bennett, that this is such an important issue that it might be better tabled as a stand-alone amendment.

In conclusion, if one looks at the first page of NASA’s “Vital Signs of the Planet” fact page—and I urge noble Lords to have a look at it—it tells us that we are hurtling towards disaster unless we transition away from burning fossil fuels to power our way of life. Vulnerable communities and developing nations, many of them already exposed to the worst physical impacts of climate change, can least afford the economic shocks of a poorly implemented transition. We must implement the changes we need in a way that delivers the urgent change that these communities need without worsening their dual burden. We have alternatives proven to deliver at scale, so let us use the opportunity presented by the Bill to address the urgent need to unlock private sector finance and give the actors therein the confidence to accelerate the investment needed to deliver net zero by 2050.

[Lord Sharpe of Epsom (Con)]

My Lords, I draw attention to my interests in the register, specifically the directorship of a research company that has published extensively on environmental, social and governance matters. I am also chairman of the Conservative Party’s investment committee. We are currently shortlisting fund managers for our long-term funds, and I reassure noble Lords that ESG rigour will be a key factor in our decision-making.

This is my first outing in Grand Committee, so I crave a little forbearance. I will make a few general points before turning to the specific. First, as regards climate change and full disclosure, the industry is moving in the right direction anyway, and I think that that needs to be acknowledged. For example, I read that the Investment Association, which represents 250 members managing £8.5 trillion, intends to quiz companies at their AGMs on the quality of their climate-related reporting and will relate any of those inadequacies to their members. This is partly a commercial imperative: customer attitudes have shifted materially and will no doubt continue to do so. For example, assets under management at ESG ETFs—that is, exchange traded funds—rose from $54 billion in November 2019 to $174 billion a year later. Those are not large amounts of money in the broad investment sphere, but they show the direction of travel.

Therefore, I was very pleased that this Government have committed to the highest of standards. On 9 November last year, the Chancellor of the Exchequer was unequivocal on this. He said that he wants

“an open, attractive and well-regulated market”

which will continue

“to lead the world in pioneering new technologies and shifting finance towards a net zero future.”

I welcome that and, referring back to some of the work that my company has done in areas such as fast fashion and marshalling scarce water resources—and here I echo the noble Baroness, Lady McIntosh—I believe that these standards should be applied not just to carbon emissions but across the ESG piece.

I also agree with the noble Lord, Lord Oates, and his quote from Jes Staley that the industry absolutely should push the climate agenda. However, in order to build the open, attractive and well-regulated market that the Chancellor described, I believe that we need to be very careful with some of the proposed climate change-related amendments at this stage. I have considerable sympathy with the argument of the noble Baroness, Lady Hayman, about embedding the principles into the Bill, particularly those amendments that the noble Lord, Lord Oates, grouped together in his second group, including Amendment 14. A series of well-meaning amendments at the margin perhaps do not seem individually onerous, but they may end up being counterproductive, and I would like to try to explain why.

The worry we should have is that, if we overcomplicate this at this stage, the rules are more likely to be honoured in the breach than in the observance and/or work to the benefit of other regulatory regimes. I would not like to see the difficult issues we are debating here shifted into other jurisdictions. As always, the main beneficiaries of that would be compliance departments; it would naturally favour larger players and ultimately, as I said earlier, end up being counterproductive, partly by stifling innovation. This is also an important consideration in the context of equivalent discussions with the EU.

17:30

To move to the specific, I believe that Amendment 48 falls into this category—I fear I will disappoint the noble Lord, Lord Oates, as I will argue that it is premature. I note that the noble Baroness, Lady Sheehan, made the point that business requires certainty, but this amendment seeks to bring forward the mandatory imposition of the task force on climate-related financial disclosures from 2025 to 2023. The Government have already committed to the 2025 date and, in doing so, we would become the first country in the world to impose this. The problem here is not the intent but the quantification of the risks defined by the task force.

For example, portfolio managers are very aware that they need to focus much more attention on matters such as scope 3, on emissions, and category 15, investments. Scope 3 relates to indirect emissions at an upstream and downstream level and category 15 basically tries to capture the carbon footprint of an investment portfolio. There are quite a few initiatives seeking to calculate these, and some good work is being done by the likes of the Partnership for Carbon Accounting Financials, but the reality is that it is extremely complex and still in its relative infancy. In many cases, the relevant data does not even necessarily exist yet. Unfortunately, that is the case in much of the ESG world.

The law of unintended consequences seems to be a risk; it would suggest that, if well-publicised timetables are compressed in the way that this amendment proposes, corners will end up being cut, which would lead to other sorts of financial risk, such as “greenwashing” in managed portfolios. There are already examples of companies with limited sales that operate in promising areas such as hydrogen and are trading at stratospheric valuations. This harks back to the dotcom boom; it may well be that they deserve to trade at these levels, as they offer what a particularly gifted salesman once described to me as an “option on an addressable market”, but it may equally be that purchasing such stocks adds a little superficial virtue to a portfolio.

To take another example from the corporate world, on Monday the Financial Times carried a story about “creative accounting” in the biomass industry. Apparently this is perfectly legitimate under the current rules, but clearly these rules require review. Speaking of unintended consequences, the FT yesterday carried a fascinating article that should worry us all: the highest-rated companies on an ESG basis pay less tax than those that are lower rated. According to the study, AAA-rated ESG members of the US-based Russell 1000 Index paid, on average, 18.4%, while CCC-rated companies paid 27.5%. Microsoft is an ESG exemplar with a human rights policy, a biodiversity policy and a plan to be carbon-negative by 2030, yet it pays an effective tax rate of only 16%. Here I think one might argue that you should be very careful what you wish for—well done Microsoft for being ahead of the curve, but do we really want to encourage investors to sell companies with lots of employees to buy those with lots of robots which are good at seamlessly shifting their revenues across borders?

I have given considerable thought to the wording in Amendments 11 and 12, and I confess to being a little confused about their intent. My problem is with the wording “climate-related financial risk”; I understand climate-related risk and financial risk, but I am not sure I understand them when combined in this way. I therefore looked to Amendment 98, which has a stab at defining them but, to be honest, I am still struggling to understand. I appreciate that Amendment 98 attempts three definitions, but I do not think any of them makes anything particularly clearer.

The first definition relates to specific weather events and longer-term shifts in the climate. How on earth is the FCA supposed to regulate for risks associated with specific weather events before the fact? Recent events in Texas, which have been referred to by other noble Lords, would suggest that is largely impossible—and anyway, were not climate change deniers always being told that they should not conflate weather and climate?

The second amendment is more comprehensible in that it seeks to judge transitional risks resulting from the process of adjustment towards a low-carbon economy. However, I would argue again that forecasting the nature of those risks, never mind the specifics, would be nigh on impossible at this stage. For example, there would be plenty of transitional risks associated with our move to a fleet of electric vehicles. It is generally accepted that in the UK, we are going to need to generate an additional 25% electricity and, apparently, that can be done with renewables and other exciting new technologies. But these new technologies might not work. As has been said many times before, the wind might not blow, people’s behaviour may not change in predictable ways, investment in grid capacity may not be adequate, et cetera. I am not saying that all of those things are going to happen, but how is the FCA supposed to anticipate them in order to regulate for them? There are myriad possible outcomes here; it seems unbelievably complex and would, in many ways, require a crystal ball.

The last definition makes even less sense. It specifies that the liability risks arising from parties who have suffered loss seeking to recover those losses from those they deem responsible. I ask again: how is the FCA supposed to judge who might, on one unspecified day in the future relating to some unspecified event, be deemed responsible for such losses?

By these amendments, the FCA would be obliged to make rules that impose prudential requirements, but I believe that these attempts at definition are imprecise. As many noble Lords in this debate and at Second Reading have noted, the FCA is stretched enough as it is, and has not had a particularly commendable run of late. Are we now suggesting that the FCA and PRA should provide their own definitions on such critical issues?

I would note that a more straightforward amendment on climate change was defeated in the other place. The Minister stated that it was not necessary as the Government would,

“carefully consider adding climate change as an issue to which the regulator should have regard, in the future.”—[Official Report, Commons, 13/1/2021; col. 364.]

However, any such addition needs careful consideration and consultation on how it can best be framed. The conclusion as regards the climate-related financial risk amendments must be right. This should be done. My argument is not that this is wrong, but that it is premature. It should be done in the future when all the teething problems that I have highlighted, along with the issues over data collection and reporting and, yes, the likely unintended and broader societal consequences, have been thought through and solved. On that point, noble Lords might like to join a Bankers for NetZero event to be held on 15 March, which will look at some of these issues.

Owing to the complexity and the necessity of getting this right, which can happen only with industry participation and support, it would be wrong to burden the Bill with amendments that are a little imprecise and may therefore keep the lawyers busy for years, but are unlikely to produce the desired outcomes. The Chancellor and the Minister have been clear that change is coming and that business expects and welcomes it. But society deserves this to be carefully calibrated in a way that I think this group of amendments fails to deliver. We have an opportunity to lead the world here, which we have done consistently with regard to climate change, and to do so in a way that enhances the UK’s competitiveness.

On that point, I agree with my noble friend Lord Howe, that, as he noted earlier, in practice, good regulations are exported. We have an opportunity to craft some good regulations here and I do not believe that these amendments achieve that aim.

[Baroness Altmann (Con) [V]]

My Lords, I support all the amendments in this group. It is a pleasure to follow my noble friend Lord Sharpe, but we may have slightly different views on some of the issues he has mentioned. I also support the wide-ranging aims of the amendments in this group to ensure that our financial services sector and its regulation faces stronger requirements to take responsibility for, and consider its role in addressing, and hopefully managing and mitigating, climate change risks.

I congratulate the noble Lord, Lord Oates, on his excellent introduction to the amendments in this group and his comprehensive summary of the issues. These amendments, or a version of them, are in my view essential to the success of our financial services sector and its role as a global leader. This is not a party-political matter. It straddles the role of our country and its financial system in saving the planet from the clear and catastrophic risks faced by humanity across the globe. I declare an interest in this issue as a member of the cross-party group, Peers for the Planet, and the Conservative Environment Network.

I share the view of the noble Lord, Lord Oates, and other noble Lords that it is astonishing to see that this Financial Services Bill makes no mention of assessing, encompassing and managing the risks from climate change that have the potential to undermine the financial system. Failing to require any regulatory oversight or demands on such existential risks is surely a failing in this legislation. The noble Lord is correct that difficulties in measuring these risks cannot justify simply ignoring them. The risks are real and rising.

I understand the point just made that we cannot anticipate the weather or other climate matters before the fact, but the financial industry is surely well used to anticipating risks that have not yet arisen. I argue that the regulators can indeed require firms to conduct scenario analysis with reasonable assumptions about the risks of certain rises in temperature or other activities that are threats to the planet, just as financial firms are already required to do for interest rate or demographic and other risks.

I have added my name alongside that of the noble Lord, Lord Oates, to Amendments 14 and 35 in the name of the noble Baroness, Lady Hayman, and I thank her for all the excellent work that she has been doing in this area as well. The amendments seek to ensure that the FCA and the PRA must have regard to both our international and domestic climate change commitments. I also support Amendments 11, 12 and 13 in the name of the noble Lord, Lord Oates, supported by the noble Baroness, Lady Kramer, and I have added my name to Amendment 75, which seeks to have a board member of the FCA with responsibility for climate change by amending FiSMA 2000. As other noble Lords have said, that is already required by the SMCR, with firms having to have board members taking long-term views of risks such as climate change, so it seems eminently sensible to propose that the FCA itself has that too.

I have also added my name to Amendment 48 in the name of the noble Lord, Lord Oates, which seeks to bring forward the 2017 TFCD recommendations to 2023, accelerating the climate-related disclosures rather than waiting until 2025. Again, I accept that the industry needs certainty, and this would be a change. However, I hope that having a bolder ambition can still be justified. This is of course a probing amendment, but I hope my noble friend will consider the issue. Indeed, I believe that the Covid-19 global pandemic, along with leaving the EU, offers an opportunity and potentially an obligation to take climate risks more seriously and recognise that there are issues that can be more important than short-term profit and quarterly reporting.

Businesses have been asked to forgo their operations and invest massive amounts in changing their practices at short notice, and have been forced to accept that they cannot continue as they have done in the past. This shows that previously unimaginable changes can be thrust on the global economy and on industries, sectors and individual firms to which they simply must adjust. I hope we can build on that to realise that forcing financial firms to live up to expectations on climate change, planetary temperature rise and associated biodiversity risks, as the noble Baroness, Lady Bennett, mentioned, is possible, even if painful. The asset management, pensions and banking industries can be encouraged to take more responsibility for driving climate-friendly operations, and regulatory oversight surely can—indeed, in my view, must—direct firms to improve their operations in these areas. So do the Government indeed intend to introduce the issue of climate change into the legislation to ensure that financial services are asked to operate more in the interests of long-term economic and climate sustainability?

Climate risk is inevitably investment risk, both to markets globally and to human beings, who are, after all, the customers of firms across the planet. Surely we have a responsibility to override the externalities that have hitherto prevented individual countries taking direct actions. So will my noble friend comment on some of these issues and the Government’s appetite to address what is clearly a view from across the House that these issues are important?

17:45

I also want to ask my noble friend one particular question. He may not be able to respond to it immediately, but perhaps he can come back to me. What is the Government’s position on the issue of cryptocurrencies such as Bitcoin, Zcash and many others? They seem to pose a threat to our financial system, as well as causing environmental damage with the massive energy use which is involved in cryptocurrency mining and trading. As we prepare for G7 and COP 26 this year, can my noble friend comment on how the Bill might consider investigation of the trading and creation of cryptocurrencies and their potential threat to energy use and self-sufficiency across the globe?

If we really want to put financial services at the heart of green growth—and I hope we do—I also hope that my noble friend will take back to the department the strong view from this House that this group of amendments needs in some way to be incorporated into the Bill.

[Baroness Noakes (Con)]

My Lords, I will not speak on the substance of most of the amendments in this group. In general terms I do not believe that alterations are required to legislation governing the PRA and the FCA, in view of the enthusiastic work that they have already commenced to embed climate-related financial risks in their work and in the work of the institutions that they regulate. Neither the FCA nor the PRA needed any alteration to their statutory powers and duties to start this process, and I do not believe they need anything in statute to carry on their work.

My noble friend Lord Sharpe of Epsom said that he was worried about the meaning of “climate-related financial risk”. In practical terms, the sectors of the financial services industry have an understanding of what is meant by climate-related financial risk in relation to them, and that will inevitably evolve over time. If you take banks, it is fundamentally a credit risk problem; you can track almost all the issues back to credit risk. If you take an investment company, it is an investment risk problem, as I think the noble Baroness, Lady Sheehan, said in an earlier contribution. With insurance, we are talking about something like the shifting nature and scale of conventionally insured risks in that sector. I am sure that other parts of the financial services sector will have an understanding of climate-related financial risk. So I am not concerned about the definition of that; I am just not sure that it is necessary to find its way into legislation, because it is already being done.

I would also caution people who want change overnight in this area that a huge amount of work is needed to implement, for example, measuring the carbon intensity of a bank’s balance sheet, or indeed an investment company’s balance sheet. These are not simple things to do but require huge amounts of new data and new ways of manipulating it, and the industries need to work out how efficiently to do that. I know a little about insurance companies and I am sure that there are similar challenges to overcome there too. I make a plea to leave it to the regulators to determine the pace of change that is required and not to impose additional duties on them. They must judge themselves how best to achieve the aims which I believe they share with the people who have tabled and moved this amendment.

I have a couple of comments on two of the amendments. Amendment 48 would bring forward the timing of the disclosures from the task force on climate-related disclosure to the end of next year, with the draconian penalty of not allowing companies to continue to operate in the UK if they have not made the disclosures. Are the proposers of this amendment seriously saying that they will stop a FTSE 100 company from doing business in the UK if its disclosures are not quite in line with the recommendations? Are they prepared for UK employees to lose their jobs because of technical disclosures? I do not believe that the amendment does anything to advance substantive climate change measures, only disclosures in annual reports which, at the end of the day, very few people actually read. This is not a real-world amendment, in my view, and it seems to be drafted in a disproportionate way.

My main reason for putting my name down to speak on this group is Amendment 75, which provides for the appointment of a member of the FCA board to have responsibility for climate change. This contains a fundamental misunderstanding of the nature of boards, whether of public bodies such as the FCA or of private sector companies. Boards are there for governance purposes. They set strategy and hold chief executives to account for delivering against that strategy. They should review performance against what is required of them by statute and what they themselves set. They do not make operational decisions and should not get involved in day-to-day activities. That is why the FCA, like most major organisations, has to have a majority of non-executives on its board.

The amendment is silent as to whether this board member is to be an executive or a non-executive but I believe that either would be wrong. A non-executive should not have responsibility for particular activities within an organisation. This distracts from the core function of a non-executive which is around strategy, oversight and accountability. If the amendment is intended to create an executive board member with responsibility for climate change, that is misconceived as it implies that climate change is not the responsibility of the chief executive. The only way for any policy—whether it is climate change, diversity, social purpose or whatever—to gain traction in an organisation is through its leadership and that is sourced in the chief executive. I believe that the amendment is wrong, likely to be counterproductive or both.

I want to pick up on something that the noble Baroness, Lady Hayman, said. She said that this would bring it in line with the requirements of the senior managers and certification regime, which requires—I think she said—a board member to be responsible for climate change. That is not what the SMCR requires. It requires only the identification of a senior manager, as defined within the SMCR, who has to have identified responsibility. It is absolutely not required that it is a member at board level, so that is not an appropriate precedent to cite in aid of this amendment.

[Baroness Kramer (LD)]

My Lords, listening to today’s really outstanding speeches, I think most of us can agree that tackling climate change is not an optional extra. It is necessary to the survival of a liveable and civilised world, and it is urgent. The noble Lord, Lord Sharpe of Epsom, seemed rather the stand-out among the speeches. If I understand him correctly, he shares the general principles but would like them parked in some very long grass for a very long time. That fails to recognise the real urgency that we face. We are past the point where long grass is an appropriate place to put concerns.

This is a substantial group of amendments. It looks to the financial regulators, influencing the financial sector as they do, to become part of the solution. The amendments break roughly into three parts—a cluster of “have regards” and “considerations” that would influence the FCA and the PRA in shaping the rules to support the net-zero target; disclosure and reporting requirements; and the setting of a climate change objective for the FCA, together with appointment to the governing board of an individual responsible for climate change. Here, I disagree with the noble Baroness, Lady Noakes. I think there should be an individual with particular responsibility at the highest level to make sure that things happen in organisations.

I almost wonder that we are having to discuss disclosure, because, in American terminology, it seems to me a slam dunk. Andrew Bailey, in his Mansion House speech last November, called for “data and disclosure”, and repeated that time-honoured but real truism:

“What we cannot measure we cannot manage”.


The other measures proposed are equally straightforward —it is a very straightforward set of amendments. I have my name to many of them, but the range of names on various amendments underscores the cross-party nature of the concern and the determination of this House to use the Bill to leverage change. I join others in saying, that if you cannot tackle the issue of climate change in a financial services Bill, it is going to be hard to tackle it at all.

The hour moves on, so I do not want to repeat the brilliant discussion, except to say that speaker after speaker detailed the urgency of acting on climate change and the necessity that it become a priority for this sector. My message to the Government is carpe diem, because this House will if the Government will not. If the UK is to be a leader—and of all the years in which we wish to show leadership, it must be this one—it must break new ground.

There will be more to say on the next group of climate change amendments, which I consider more powerful and radical. They deal with risk and capital requirements. I very much hope that we receive a strong response from the Minister. I can understand that someone looking at the Bill and a template of previous financial services Bills may not have thought that climate change had a place. By now, Ministers surely must. Included among this group of amendments are so many that are exceedingly reasonable and, frankly, quite uncontroversial. I hope that the Government will begin to shape some amendments of their own, drawing on the content so very firmly placed before them.

[Baroness Jones of Whitchurch (Lab) [V]]

My Lords, I am pleased to respond to this substantial group of amendments, several of which are in my name and all of which address the need for better regulation to ensure financial services meet their climate change obligations and the associated financial risk. These amendments correct a fundamental failure of the Bill to address those obligations.

As was pointed out at Second Reading, we find ourselves entangled in an argument from the Minister that these issues are not covered in the Bill, and therefore amendments inserting climate change obligations are inappropriate for it. We reject that argument; it makes nonsense of the scrutiny and revising process that we are here to enact. If we find an omission, it is perfectly proper that we seek to correct it by tabling amendments to the Bill.

That is why we regret that the Government did not bring forward their own amendments, following the excellent arguments put forward by my shadow Minister colleague, Pat McFadden, and others in the Commons. As he pointed out there, and as others have pointed out today, the Chancellor set out green goals for the UK financial services industry back in November. Therefore, the Bill was an ideal vehicle to set out an accountability framework to underpin those goals. Every sector of our economy will have to play its part in delivering the climate change net-zero target—whether it is in energy, transport, housing or agriculture—and all these changes will require large-scale financial investment. Financial institutions will thus have to play a central role in delivering it, and it is right that we use this opportunity to spell out how it should be done in practice.

During the Commons debate, the Minister, John Glen, also argued that this issue would be dealt with elsewhere as part of a separate review—again, reference was made to this today. This cannot wait for another review or consultation. We are already falling dangerously behind, and as the climate change committee has made clear, we are not on track to meet the net-zero 2050 target. We need action now to galvanise both public and private finance to step up to the mark and to be accountable for the promises made. The noble Lord, Lord Sharpe, said that we were in danger of complicating regulation, but I do not think our asks do anything like that. Our asks are simple: they set out core principles that we expect the regulators to embrace, but we leave them to sort out the detail of how to follow that through and enact it. That is the right way to go about it.

18:00

Why are these amendments important? First, they would ensure a level playing field across the sector. It is not good enough that more progressive companies take action now while others drag their feet. Of course, we welcome the recent statements of significant investment managers such as BlackRock setting out how net zero will deliver a historic investment opportunity for their clients. However, this needs to be balanced against the fact that none of the world’s biggest oil and gas companies is on track to meet its climate goals. Many continue to bury their heads in the sand regarding the ensuing environmental disaster that faces us. A strong regulatory framework to ensure compliance with Paris would address this inconsistency between the good guys and the bad guys.

Secondly, a recent survey by ClientEarth showed that, although 50% of FTSE 100 companies disclosed some form of net zero target in their annual reporting last year, the strategies that they set out and are developing to reach those targets often lack credibility and priority. The noble Baroness, Lady McIntosh, talked about ESG, but, as she recognised, these standards are not underpinned by regulations in any way. If we are serious about ESG, it needs to be spelled out and companies need to be held to account.

Sadly, greenwashing is all too common. We saw that with the ill-fated BP adverts, which it was eventually forced to withdraw, and the action against HSBC by shareholders who saw that its continued investment in fossil fuel assets was at odds with the bank’s hollow promises on addressing climate change. However, it should not be left to individual groups to police these actions; that is why transparent targets and methodology are required by the regulators as key to reforms.

Thirdly, the institutions that are dragging their feet on climate change risk damaging consumer confidence in the sector as a whole. There will undoubtedly be further shareholder and customer demands for reduced investment in fossil fuels; they need to be reassured that the Government have the means to take action against transgressors.

Finally, and perhaps most importantly, the reason why Mark Carney and now Andrew Bailey at the Bank of England have become more vocal on climate change is that they understand the micro and macro risks that could occur if institutions continue to invest in dying sectors such as fossil fuels. This could result in stranded assets, which damage institutional resilience and have an adverse impact on the global economy. As the noble Baroness, Lady Altmann, said, institutions are already expected to conduct scenario planning, so all we are asking them to do is add an extra risk to the process that they are already expected to undergo.

We believe that this Bill should be amended to deliver a consistent approach to the regulation of financial institutions to underpin all Paris-aligned strategies, which in turn would strengthen our economy. Our Amendment 15 would require the Financial Conduct Authority to have regard to the climate change targets as set out in the climate change legislation when applying the Part 9C rules. Our Amendment 36 would require the Prudential Regulation Authority to have similar regard to the climate change legislation in carrying out its duties. We believe that these are necessary to spell out that not just the Government but the agencies acting on their behalf have obligations to abide by the Paris treaty.

This is in parallel to the obligations on pension investment fund trustees that the Government helpfully added to the recent pensions Bill. I would say to the noble Lord, Lord Sharpe, that the Pension Schemes Act already contains obligations to address risks arising from climate change. There has not been the cause for confusion or anger among pension regulators that he fears; they have just got on with the work.

Our Amendment 89 would place a requirement on government to draw up within 12 months

“a strategy … to ensure financial services … make a positive contribution to climate change targets”.

This would be put together in conjunction with key stakeholders including the FCA, the PRA and the Committee on Climate Change.

We also support other amendments in this group which would, respectively, broaden the FCA’s responsibility to address climate-related financial risk, bring forward the date by which organisations must make disclosures in line with the report of the Task Force on Climate-related Financial Disclosures, and add a new objective to the FCA’s responsibilities to address climate change-related financial risks.

As the noble Baroness, Lady Hayman said, we are not precious about our wording—we have had a diverse debate today and a diverse set of wording in the amendments—but we believe that this package of amendments is essential to deliver robust and meaningful financial regulation on institutional climate change targets which would be fair, consistent, transparent and measurable. It would also ensure that the regulators were accountable to Ministers and Parliament for delivering these objectives—this point was made powerfully in the previous debate.

We believe these changes are timely and urgent. I hope the Minister will feel able to reflect on them and we would welcome further discussions about how they can be achieved. Failing any progress, we intend to return to this issue on Report. I hope that the Minister can hear what we say with some sympathy and avoid that scenario. I therefore look forward to his response.

[Earl Howe (Con)]

My Lords, I have indeed listened, and I welcome the opportunity to talk about the crucial role played by the financial services sector in supporting the Government’s climate change objectives. Given the strong levels of interest in this topic and the number of amendments we are considering, I hope noble Lords will forgive me if I speak at some length.

Green finance was one of the cornerstones of my right honourable friend the Chancellor’s vision for financial services, as he set out in November in the other place. The Government want to put the full weight of private sector innovation, expertise and capital towards tackling climate change and protecting the environment. Real change requires embedding our climate change goals across all sectors of the economy, including the financial services sector. As my noble friend Lady Noakes has pointed out, the regulators are able to do this already under their current statutory objectives.

I would like to set out a small amount of detail about how the Government are delivering on this agenda. In 2019, the Government set out our vision in the Green Finance Strategy. This strategy also set out the Government’s commitment to use “remit letters” to set ambitious recommendations relating to climate change for the PRA and FCA. These letters will be issued at the next opportunity.

Late last year, the Chancellor announced our intention to make disclosures aligned with the Taskforce on Climate-related Financial Disclosures, or the TCFD, mandatory in the UK across the economy by 2025, with a significant portion of mandatory requirements to be in place by 2023. The Government also published the UK TCFD’s interim report and road map, which set out a clear pathway to achieving that ambition. As my noble friend Lord Sharpe highlighted, the UK expects to be the first country to make TCFD-aligned disclosures mandatory across the economy. The UK is also planning to issue a green gilt, subject to market conditions, to help fund projects to tackle climate change, finance much-needed infrastructure investment and create green jobs across this country.

I understand noble Lords’ appetite to go further and faster, and this is the motive behind many of the amendments we are debating. We are all in agreement that the financial services sector plays a role in meeting our commitments, but the thinking on how this should be factored into legislation and regulations in specific areas such as capital requirements and other prudential standards is still in its infancy. While we are certainly committed to remaining world leaders in this area, it is important that we act carefully and rationally, consult appropriately with interested parties and therefore make progress in the right way.

Before I cover the amendments, I hope my noble friend Lady Altmann will allow me to write to her on the Government’s approach to cryptocurrencies. I shall also write to the noble Baroness, Lady Sheehan, on government funding for fossil fuel projects overseas.

Amendment 23 seeks to prevent the Treasury revoking provisions of the retained UK capital requirements regulation, or CRR, where the rules made by the PRA are not aligned with the UK’s target to achieve net-zero emissions by 2050. Lest we forget, the changes the Bill enables serve to implement a number of vital reforms following the financial crisis. These reforms reinforce the safety and soundness of the UK financial system. This amendment would prevent us giving effect to updated prudential rules and thereby undermine our ability to uphold our G20 commitment to the full, timely and consistent implementation of the Basel standards. There is no evidence that “greener” means “prudentially safer”, at least not yet, and therefore it is not clear that a regulator whose primary objective is the safety and soundness of financial institutions could meet such a requirement now.

Amendments 12, 13, 14, 15, 16, 17, 34, 35, 36 and 37 are all similar in nature. Specifically, they would insert an additional consideration into the accountability frameworks of the FCA and the PRA. In essence, their intention is to require the regulators to take climate change, biodiversity and related issues into consideration when implementing the prudential regimes. Amendments 11 and 12 are also similar, but arguably go further and would impose a duty, rather than a “have regard”, on the FCA to make prudential rules for FCA investment firms and their parent undertakings to manage the climate-related financial risk to which they are exposed.

I agree with the principle that the regulators should have regard to our climate change commitments. I believe that the goal—if I am interpreting the amendments correctly—is to make the regulators consider how to channel private financing towards greener investments. I agree with this goal, but there are some very real challenges to note. First, to hold the regulators to account and achieve what we want, we need to be able to define what we mean by “green”. A programme of work is under way domestically and internationally to achieve that through a green taxonomy; that is, agreeing how we classify what is “green” and ensure consistent standards on that. There is also the important matter of understanding the financial risk of such green investments and the extent to which changing prudential requirements according to the greenness of the investment is justified. Again, work is ongoing on how to capture climate change risks in prudential regulation, both within the Bank of England and by the Basel committee task force, which is leading work to understand how climate risk is transmitted, assessed and measured. This is a significant undertaking and the evidence will take some time to examine. I note the excellent points made by my noble friend Lord Sharpe on some of the complexities in this area.

While the UK is committed to being a world leader in this area, given the global nature of the climate change threat and the interconnectedness of financial markets, this means bringing other jurisdictions with us and, while being bold, it also requires careful thought and robust evidence. These are global discussions and global consensus takes time. Any amendment or “have regard” introduced now would therefore naturally be a stopgap until fuller definitions have been established. In the short-to-medium term, there could well be minimal changes to the prudential framework as a result of this have-regard until the appropriate capital treatment is established.

Secondly, there is a time constraint. We are committed to implementing these Basel standards, the first batch of which the Government aim to implement by the end of this year, lest we risk damaging our international reputation. Further, if we do not implement the investment funds prudential regime by the end of the year, we will have a more burdensome regime than the EU.

18:15

The noble Lord, Lord Oates, the noble Baroness, Lady Hayman, and other noble Lords asked why we cannot include some kind of green “have regard” in the accountability framework to start with. There is a very simple answer to that: as I said, both the Government and the regulators see climate change as a priority in financial services across the piece, but the current “have regards” in the Bill are those the Treasury found immediately and specifically relevant to the implementation of two prudential regimes with specific aims. I emphasise that this is not a case of the Government dragging their feet or wanting to hide in the long grass. As I have tried to argue, it is unclear what integrating climate risks into prudential requirements would look like, so Parliament would be giving the regulators responsibility for important public policy without a good understanding of what it is asking the regulators to do, or what impact that might have. I suggest that that would be deeply unwise.

I hope I have succeeded in setting out some of the different questions that this set of amendments has raised. However, I am aware that this is an important topic. We have spoken at length about the prudential regimes in the Bill, but I will now focus on the amendments which relate to financial services policy more generally. Amendment 75 would require the appointment of a member of the FCA board with responsibility for climate change. Amendment 98 adds a new statutory objective for the FCA to consider climate-related financial risk. In a similar way, Amendment 89 would require the PRA, the FCA and the Treasury to have regard to the net-zero target and international climate change treaties when conducting their functions.

I have already set out a number of actions that the Government are taking to address climate change in financial services. I will return to this point in a moment, but I want to say a little more about what the FCA and the PRA are doing in particular. We work closely with regulators on a variety of green finance issues and have established effective mechanisms to advance areas. We clarified these roles and responsibilities in the Green Finance Strategy and through a regulators’ joint statement. In June 2020, the FCA announced the Climate Financial Risk Forum, established jointly with the FCA and the PRA, reflecting the importance of climate change to their respective strategic objectives, with the aim to build capacity and share best practice across the industry, to advance the sector’s responses to the risks presented by climate change. Therefore, I am content that the FCA and the PRA are aware of, and currently determining, how best to respond to the risks presented by climate change.

On Amendment 75, no other FCA board roles are appointed by the Treasury with specific instruction as to their focus. I am grateful to my noble friend Lady Noakes for what she said in that connection. It would be inappropriate for the Government to dictate the responsibilities of members of an independent board. On that basis, I ask that that amendment is not moved.

Amendment 48 seeks to introduce a blanket requirement for specified firms to disclose in line with the recommendations of the task force on climate-related disclosures by 2023. The UK was one of the first countries to endorse the TCFD recommendations in 2017. As I have mentioned, in his Statement to the House of Commons last November, the Chancellor announced the UK’s intention to make TCFD-aligned disclosures mandatory in the UK across the economy by 2025—becoming, as I said, the first major economy to commit to fully mandatory disclosures, going beyond “comply or explain” or “as far as able” approaches taken elsewhere. The TCFD framework will be a powerful tool, but only if implemented properly. The recommendations do not, on their own, contain the requisite level of prescription to elicit disclosures that are comparable, consistent and decision-useful to end-users, including retail and wholesale investors. Robust implementation will be crucial to enabling investors and businesses to better understand the financial impact of their exposure to climate change and ensuring that financial markets appropriately price climate-related financial risks and opportunities.

The UK TCFD taskforce interim report and road map, published alongside the Chancellor’s announcement, outlines a co-ordinated, fit-for-purpose and proportionate regime, with requirements that are appropriate in a UK context. This regime takes account of cross-cutting issues such as interdependencies, capability and capacity across market participants, as well as practical issues around implementation, supervision and enforcement across the UK economy.

The proposed amendment does not contain the requisite level of prescription, supervision and enforcement mechanisms to mandate meaningful disclosure. It also does not take into account sectoral data, capacity and capability challenges, which must be addressed before disclosure can be required on a mandatory basis from all relevant firms, as well as legislation lead-in times and legal obligations to consult and carry out cost-benefit analysis.

As outlined in the road map, we have proposed an ambitious timeline, according to which the bulk of mandatory requirements should be introduced by 2023, without compromising on our commitment to ensuring that proposals contain the requisite level of prescription, supervision and enforcement mechanisms to mandate meaningful disclosure. Significant progress towards achieving that ambition has already been made. As such, while I agree with the noble Lord’s push for TCFD-aligned disclosures to be published as quickly as possible, we believe that our co-ordinated approach represents the most ambitious pathway to implementing the TCFD recommendations in a way that will actually elicit meaningful disclosure across the whole UK economy.

Amendment 76 would amend the PRA’s annual reporting requirements to make it report on how it has evaluated exposure to climate-related financial risks and the impact of such risks on the stability of the UK financial system. In conducting this evaluation, the amendment requires the PRA to seek input from the Committee on Climate Change and to publish the advice that it receives.

I believe that this amendment seeks to do three things that I am happy to confirm that the PRA already does. First, it wants the PRA to take steps to preserve the safety and soundness of financial institutions and ensure that climate change risks are included in that. The PRA is already taking steps to do this through its climate change stress test, which will build our understanding of the risks posed to the financial system by climate change so that we can develop policies for managing them.

Secondly, the amendment aims to bring such analysis to the attention of the Government or the public. In addition to its work on the stress tests, the PRA participates in the UK’s Task Force on Climate-Related Financial Disclosures and the Climate Financial Risk Forum, as well as the research papers that they have developed.

Finally, the amendment seeks to ensure that the PRA engages experts. The climate change stress tests that I just mentioned will be based on scenarios developed and published by the Network for Greening the Financial System, which brings together eight central banks and supervisors with a purpose to size the risks from climate change to the financial system and the macroeconomy.

I am aware that, once again, I have spoken at length, but I trust the Committee will agree that this is a crucial topic that should be considered in detail. I hope I have explained what the Treasury and the regulators are doing to tackle climate change and address green issues, and I hope it is apparent to the Committee that it is an ambitious programme of work. However, this is an area where we must continue to be ambitious, and I hope the noble Baroness, Lady Hayman, will forgive me if I do not allow myself to be drawn on the challenge that she issued at the conclusion of her remarks. I simply say that I have listened to the ideas that have been put forward, and I welcome noble Lords’ engagement on the issues that we have debated, which I am sure we will return to throughout our scrutiny of the Bill. On that basis, I ask noble Lords not to press their amendments.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I have received one request to speak after the Minister from the noble Baroness, Lady Bennett of Manor Castle, who I now call.

[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, I thank the Minister for his comprehensive answer, although I ask again, how can the Government justify having included climate change considerations in the then Pension Schemes Bill last year, but not in this far larger, more significant Bill in 2021?

I want to respond to what the Minister said: that there is no evidence that greener means prudentially safer. I hope I am quoting him accurately. I refer specifically to the fossil fuel companies that the noble Baroness, Lady Sheehan, mentioned earlier, as well as to mining companies with a substantial role in environmental destruction. As the UNEP report to which I referred earlier said, this is unlikely to continue to be tolerated on the international stage. Surely the Government are aware and are taking account of the Carbon Tracker Initiative, which is responsible for popularising the term carbon bubble, if not for inventing it. The excess of carbon beyond climate limits is termed unburnable carbon, some of which is owned by listed companies. This has the financial implication of potentially creating stranded assets and destroying significant shareholder value.

The Carbon Tracker Initiative says that valuations tend to be based on near-term cash flows, which are less likely to be affected by climate-related factors. However, exposure varies, and some companies will be in a far worse position than others, as the demand for fossil fuels and the ability to burn them reduces. Surely, this is a potential concern and a risk that the greening of companies can tackle.

[Earl Howe (Con)]

My Lords, I failed to cover the Pension Schemes Act. I apologise to the noble Baroness. The Act provides a power to bring forward regulations, placing various obligations on pension schemes relating to climate change risks. The provisions in the prudential package of the Financial Services Bill do something slightly different. They place a duty on the regulators to have regard to certain matters and to explain how they have been considered, given that the Bill imposes duties on the regulators to make rules relating to Basel and the IFPR. I reassure the noble Baroness that my officials and I have considered these provisions carefully, as we have the other amendments discussed today.

As regards her main question, my point was simple. As yet, there is no international agreement on what the term “green” means. Therefore, we cannot say with certainty that greener means prudentially safer. I do not say that we will never be able to, but it is not possible at present.

[Lord Oates (LD)]

My Lords, I am grateful to all noble Lords for their thoughtful contributions to the debate. I thank and pay particular tribute to the noble Baroness, Lady Hayman, for her important leadership on these issues through Peers for the Planet which is recognised across the Committee. I also thank all noble Lords who signed or spoke in favour of amendments for their co-operative, cross-party approach.

In quoting the Government’s approach, the noble Baroness, Lady Hayman, paraphrased St Augustine: “Lord, make me greener, but not yet”. I thank the Minister for his comprehensive response and characteristic courtesy, but it felt a little complacent. One could also quote from St Paul—that it was about “the good that I would I do not”. There is no doubt about the Government’s intentions, ambitions and targets. We welcome and are impressed by them, but it is now reaching the point where we have to act.

18:30

However, perhaps the most appropriate quotation would be from Martin Luther King in a different context, where he spoke about what he called,

“the fierce urgency of now”,

and warned against,

“the tranquilizing drug of gradualism”.

The threat that is posed both by climate change and, as the noble Baroness, Lady Bennett, rightly pointed out, the ecological emergency—the threats to nature—is now aptly described in that phrase,

“the fierce urgency of now”.

The IPCC has warned that, if we do not get this issue under control, we could see between 4 and 7 degrees of warming by the end of the century. That is in the lifetime perhaps not of me but certainly of children who are nieces and nephews. This matter has to be acted on now. I did not get that sense of urgency.

There was much talk about acting cautiously and consulting widely on all the various things that we have to take into account. What we have to take into account is that we face a unique, existential threat, both to the financial system and to all of us alive on the planet. The noble Lord, Lord Sharpe of Epsom, talked about the difficulties of measurement, which was reflected by the noble Earl the Minister. I commend to both noble Lords the excellent report that Finance Watch has published, entitled Breaking the Climate-Finance Doom Loop. It makes the point that

“The lack of prudential action so far is grounded in a paradox: policy-makers recognise the near-impossibility of modelling climate-related risks but say that they need such modelling to be done before intervening.”

We do not have time, and we have to act now.

We cannot say that the regulators of the financial services sector—which is, after all, the vector through which we finance much of the action, either to the good or, unfortunately at the moment, very much to the bad —do not even have to have regard to issues of climate change. The Minister said that the Treasury had looked at the “have regards” in the Bill and put in those that it felt were most relevant and appropriate, but it has not put in those that are most important and critical.

We have had a long debate and I will not detain the Grand Committee longer. I am grateful to the Minister for listening and being willing to talk. I hope that we can go on talking. However, I would say to him that what cannot be acceptable to the House is the approach taken by the Economic Secretary to the Treasury, referred to by the noble Lord, Lord Sharpe. The Economic Secretary, in Committee in the House of Commons, conceded that there might be a case for a green “have regard” but that

“The Bill grants the Treasury a power to specify further matters in the accountability framework at a later date, which could be used to add a requirement to explicitly have regard to green issues in the prudential framework”.—[Official Report, Commons, Financial Services Bill Committee, 24/11/20; col.157.]

Wherever one comes down on this issue, whether one is in favour or against that sort of “have regard”, it is surely a matter for Parliament and not the Treasury to decide.

I hope that we can work with the Minister and find a way in which to amend the Bill in co-operation and advance these goals. But if we cannot do so, as I said earlier, the spirit of the House is that we will come together on some consolidated amendments, which will be put down for Report.

Amendment 11 withdrawn.

Amendments 12 to 21 not moved.

Schedule 2 agreed.

Clause 3: Transfer of certain prudential regulation matters into PRA rules

Amendments 22 and 23 not moved.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

We now come to the group beginning with Amendment 24.

Amendment 24

Moved by

[Lord Tunnicliffe]

24: Clause 3, page 4, line 14, leave out “adequately replaced by” and insert “replicated or otherwise reflected in”
Member’s explanatory statement
This probing amendment aims to understand the degree of flexibility that the Treasury will allow the PRA when it replaces provisions of the CRR via general rules.

[Lord Tunnicliffe (Lab) [V]]

My Lords, I shall speak also to Amendment 25. This is a Christmas tree Bill with many attractive decorations, to which the Committee has tried to add. They have all been important issues, but in my view Clause 3 is the most important clause in the Bill.

Clause 3 takes away a system of regulation without a clear replacement and, if we get it wrong, it could create another crisis. We have all started to forget the crisis of 2008-09 and we do not recall, I fear, just how close that crisis came to being a catastrophic worldwide crisis. We were saved by a number of very small margins, and I think many Members of the Committee have sensed this. That is why we spent the first part of the day addressing what, at Second Reading, the noble Baroness, Lady Noakes, called “the accountability deficit”. I hope the Government heard the debate and we can come to a satisfactory consensus. I draw some comfort from the Minister’s closing remarks that that is, indeed, his intention.

Amendments 24 and 25 address the Clause 3 problem from a different direction. What should replace what Clause 3 takes out? This particularly relates to the “have regard” provisions. If we look at the history of legislation in this area, it starts with the now unrecognisable FSMA 2000. That was the original Act, but 2012 brought significant change and created the FCA and the PRA. The model was supposed to be that the Government and Parliament would create a framework and the regulators would invent the rules. However, in many ways, that was overtaken by the European Union capital requirements regulation. It is worth noting that, while we were a rule-taker in that regard, the EU regulation went through a significant democratic scrutiny process in the EU Commission and, particularly, the EU Parliament. The noble Baroness, Lady Bowles of Berkhamsted, may be able to assure us of that, since she took a considerable part in that scrutiny.

Then came 1 January 2021, and the effect of the European Union (Withdrawal) Act 2018 was effectively to translate the regulation into UK primary legislation. Clause 3 revokes the regulation, so the real question is, what is to replace it? One has to delve quite deeply into the Bill to find out.

The Bill inserts new Section 144C,

“Matters to consider when making CRR rules”

into the now-famous FSMA 2000. Subsection (1) states:

“When making CRR rules, the PRA must, among other things, have regard to … (a) relevant standards recommended by the Basel Committee on Banking Supervision from time to time.”


As far as I know, there is no democratic input to the Basel Committee on Banking Supervision. I believe that UK interests are represented not by a politician or by government but by the Governor of the Bank of England. It seems that we are to be a rule-taker yet again.

Subsection (1) has three other paragraphs: paragraphs (b) and (c)—which I did not understand when I read them; I gather from a reference during an earlier debate that they are probably something to do with competition—and (d), which refers to

“any other matter specified by the Treasury by regulations”.

About the only good thing that can be said about that is that it has a parliamentary process and is subject to an affirmative statutory instrument. At first sight, it is the only democratic control in the regulations.

What has all this got to with Amendments 24 and 25? They are an attempt to prescribe what goes into the “have regard” section. Clause 3(4) of the Bill states:

“The Treasury may only make regulations under subsection (1) or (3) revoking a provision if they consider that … (a) the provision has been, or will be, adequately replaced by general rules made, or to be made, by the Prudential Regulation Authority.”


The weakness of this provision is that it is not at all clear what “adequately replaced” means, hence we propose that it be substituted by

“replicated or otherwise reflected in”.

That would mean that every provision in Clause 3(2) would have to be considered and replaced. The exception is in subsection (4)(b), which states

“consider that … it is appropriate for the provision not to be replaced”.

We cover that in Amendment 25, which would insert:

“Where the Treasury makes regulations in reliance on subsection (4)(b), the Treasury must, when laying a draft of the regulations before Parliament, also lay before Parliament a statement explaining why, in the Treasury’s opinion, there are good reasons for revoking the provision.”


The constraints which our amendments propose would mean that the initial, “have regard” rules would be at least as comprehensive as those they replace. I hope that the Government will consider with care these two modest amendments and accept them or incorporate their essence into their own proposals to achieve consensus on Clause 3. I beg to move.

18:45

[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, I thank the noble Lord, Lord Tunnicliffe, for his clear and incisive introduction to this group, and the identification of the problem of Clause 3, which I am proposing in a probing amendment should not stand part of the Bill. Amendments 24 and 25 seek to improve Clause 3 and appear to do so, but this group is crucial for debating the very issues that the noble Lord has raised. He reflected some of the concerns that I expressed in the first day of the debate: namely, that the language we are hearing from the Government and some Members of this Committee closely resembles that of 2006, most notably in the then Chancellor Gordon Brown’s infamous Mansion House speech.

Clause 3 transfers certain prudential regulation matters into PRA rules. The Treasury may by regulation revoke provisions of capital requirement regulations relating to the matters listed—a list that then amounts to a couple of pages. This Bill is often presented as primarily simply a matter of transferring and translating technical regulations from Basel and the EU into UK statute. Many of us have spent much of the last year in this Room working on just such statutory instruments. However, when considered more deeply, vesting such powers in the Treasury would seem to be a kind of discretionary deregulatory charter. It has been described to me as potentially a clause allowing Singapore-on-Thames to run riot.

I would not care to take an examination on the detail of what Clause 3 does, but I am being advised by someone who could set that exam, and I take great heart from the earlier expression of support from the noble Baroness, Lady Kramer, for this probing amendment—for Clause 3 potentially hands quite substantial discretionary powers to the Treasury to get more involved in PRA matters. It could be used to soften up or undermine the PRA. I can already predict some of the answer that I may hear from the Minister, that “Our intentions are good”. But, as we go around this merry-go-round again and again, what matters is what is written on the face of the Bill, not whatever the current Minister or Government’s intention might be.

My question, to which I would appreciate an answer now and perhaps in more detail later, is: does the Bill as currently written—perhaps improved by Amendments 24 and 25, but certainly without them—hand too much discretionary power to the Treasury and should the wording not be tightened to specify more precisely the circumstances in which the Treasury would involve itself in these matters of the PRA?

[Baroness Neville-Rolfe (Con)]

My Lords, as the noble Lord, Lord Tunnicliffe, intimated when he introduced his amendments, Clause 3 is very important to prudential regulation and the banks and financial institutions concerned. However, we must make progress with this Bill, so I will speak briefly. I look forward to the Minister’s explanation of what is intended here and why, and what the safeguards will be for those entities regulated by the PRA in terms of purpose, consultation, impact, cost benefit and so on. I do not read it in the same way as the noble Baroness, Lady Bennett of Manor Castle.

I would like to understand the competitive position. My son works in London for a French investment bank regulated primarily in Paris rather than London, under the equivalence arrangements that we have granted. I suspect that the local branch here may be part of a legal entity based in Paris. How would such an EU bank be affected by the proposed changes in Clause 3 and whatever replaces the revoked regulations? Is there a level playing field?

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, the noble Lord, Lord Tunnicliffe, has reminded us that this is the clause where the legislation on the CRR gets waived away into rules without any legislative replacement. This follows the pattern that the Government proposed in their consultation: once there are rules from the regulators, the statutory instruments are revoked.

Paragraph 2.25 of the Financial Services Future Regulatory Framework Review states:

“The default approach would be for any retained EU law provision that is in scope of the regulators’ FSMA rule-making powers to be taken off the statute book to become the responsibility of the appropriate regulator.”


Therefore, although there may be consultations on replacement rules at the point of revoking the SIs, there are no checks further down the track, so at some time further on all the rules could be revoked too. As a practical matter, that will not happen, but it is possible that for some things big changes could happen. It is probably more of a worry when it is happening to the wider generality of financial services legislation than with standards that are underpinned by Basel provisions, but I make this point because the Minister said on Monday at the start of Committee that everything is being listened to in the context of the consultation, although I must say that his replies so far do not inspire too much confidence.

It may seem convenient to have a more flexible arrangement of having regulators doing everything and not bothering Parliament with statutory instruments, and the view being pushed by the Government seems to be that Parliament should not become too bothered by rules because they contain frightening Greek letters such as Σ that really just indicate some very simple sums that could easily be explained in a sentence. Underlying that is that there should not really be challenge, only fig leaves and what the noble Lord, Lord Holmes, called the rear-view mirror.

Even though I have no great love of statutory instruments as a measure for showing parliamentary consent, there is a qualitative difference compared with rules, and I want to flag up that this clause is where the notion that we will no longer have any firm policy against which to hold the regulator accountable is endorsed. From here on, the regulator makes the policy, and there is no policy guidance between the regulator’s rules and the simple objectives, have-regards clauses and perhaps a few generalised statements, such as supporting UK economic growth. I do not like this sparseness, and it is ridiculous to suggest that rules are constantly, rapidly needing change. That is not true and not internationally sustainable.

To some extent the Government acknowledge this, otherwise there would not be the statement in the consultation that some things may have to be put into SIs as a consequence of equivalence decisions. So other countries can measure our standards, but not Parliament. How embarrassing. I heard what the Minister said in reply to my equivalence information point in the first group today. He said that such things may have to stay out of the public domain—at least until they become a statutory instrument—but I never suggested that they be public, just that there should be some sharing with Parliament about the policy direction. I am pretty sure that the EU will take the view that regulator rules alone are not enough and are potentially too transient when it comes to such a large financial centre as London, not least when it comes to looking at the lavish use of “bespoke”, which was always one of Brussel’s most hated words because it thought, and I tend to agree, that it was tailoring cut to flatter and trick the eye. That is fine for clothes, but not so good for financial services rules.

As I want to mark resistance to this passing of all policy to the regulators so they end up held accountable only to their own rules, I support the noble Baroness, Lady Bennett, in the suggestion that Clause 3 does not stand part.

[Viscount Trenchard (Con)]

My Lords, I understand the purpose of Amendments 24 and 25, in the name of the noble Lord, Lord Tunnicliffe, but do they suggest that he would like to stick with the enormously detailed and prescriptive provisions of the CRR as they are in retained EU law? The Government’s intention to transfer most of the provisions of the CRR into more flexible rules is right. The PRA will be able to react more quickly if it needs to change particular rules, and this should reduce the risk of failure of banks in the future.

The Government have been clear that the UK’s regulators are the right people to set the detailed, firm-level rules to implement the remaining Basel standards. Of course, as discussed in previous debates, and supported by noble Lords on all sides of the Committee, we need proper parliamentary oversight of the PRA before it starts to use its new powers. The wording in the noble Lord’s amendments suggests that he wishes to reduce the degree of flexibility that the Treasury will grant the PRA, but I think that that might be counterproductive. Does he not accept that, as we move to a simpler, more flexible, outcomes-based regulatory framework, there should be less detailed prescriptive rules?

The noble Baroness, Lady Bennett of Manor Castle, wants to retain all the CRR rules in legislation. I cannot agree with her approach, which might damage the attractiveness of the City as a financial centre. She referred to Singapore-on-Thames, which is becoming a fashionable way to describe a light-touch regulatory regime, but is she not aware that Singapore is one of the best and most strictly regulated centres in the world? It is strict, yes, but much simpler and less cumbersome and bureaucratic. Does the Minister agree that we need to return to a simpler, different, more flexible and agile regulatory style?

[Baroness Kramer (LD)]

My Lords, I do not have a great deal to say but there are a couple of points that I would like to make. First, the two probing amendments from the noble Lords, Lord Tunnicliffe and Lord Eatwell, make a great deal of sense to me, so I hope that the Government will pay attention to them and provide some substantial answers.

However, what struck me more than anything else was that this was an opportunity to comment on Clause 3. That suddenly dawned on me as I looked at the language both in the Bill and in two amendments which appear in later groups. One I have added my name to and the other is in my name only at this point in time. The first, in the name of my noble friend Lord Oates, looks at capital adequacy ratios for investments in fossil fuel relating to exploitation and exploration. The other amendment, which stands in my name and is in what could loosely be called a regulatory group, deals with MREL thresholds for medium-sized banks.

It occurred to me that this is the last time that we will be able to raise issues such as these in government time in this House if the Bill passes with Clause 3 in it. All the rules issues detailed in Clause 3, which are in effect fundamental to policy, will be transferred to the book of the regulator. Were I to look for an opportunity to raise these issues, which I shall follow up on in later debates on the Bill, the Government would say to me either, “You’re out of scope”, or, “Those are dealt with by the regulator, so wait a year or two and the regulator might do a consultation on one of these issues, then you can make your opinions heard.” They might say to me, “Write a letter to the Treasury Select Committee and see whether it considers the issue important enough to take up its very precious time, in dealing with its very heavy workload, by picking up your issue as part of one of its broader consultations.”

If ever we needed a graphic illustration of the loss of authority of Parliament and the loss of accountability to it, this is the time to illustrate and say it. I am really curious to hear from the Minister how he feels that that is justified and why he will explain to me that the amendments we have tabled are such an irritant to him that he is quite determined that never again will they fall into the scope of a debate on government time.

19:00

[Earl Howe (Con)]

My Lords, perhaps it will be helpful if I take as my starting point Clause 3, which enables the Treasury to revoke provisions in retained EU law to enable the PRA to implement the remaining Basel standards. As I discussed in an earlier debate, the UK Government are committed to the Basel prudential standards as a member of the G20. While a member of the EU, our adoption of the latest Basel standards was achieved through EU legislation. The capital requirements regulation implemented the previous set of Basel reforms in the EU and, therefore, in the UK. However, regulation is not static: it must continually evolve to mitigate emerging threats and respond to developments in the financial markets.

As I set out in earlier remarks, the most recent set of internationally agreed Basel standards now needs to be implemented in the UK. The capital requirements regulation, or CRR, forms part of retained EU law in the UK and therefore continues to form the basis of the UK’s prudential framework for credit institutions. In order to comply with the latest Basel standards, the CRR needs to be updated. The EU is updating its own standards through the second capital requirements regulation, CRR2. Rather than implementing the new provisions through detailed primary legislation to amend the retained CRR, Clause 3 gives the Treasury a power to revoke relevant provisions of the CRR that need to be updated in order to comply with the latest Basel standards. This then allows the PRA to make rules implementing the latest standards.

As I have already set out, the Government stand by the delegation of the responsibility for implementing those standards to the PRA but with an enhanced accountability framework. In that general context, and in response to the noble Lord, Lord Tunnicliffe, and for that matter the noble Baroness, Lady Bennett, I might usefully repeat something that I said in an earlier debate: the rules that will replace the EU legislation being deleted are already available in draft form. The regulators and the Treasury are working to make sure that the final rules are published ahead of the debate on the relevant statutory instruments, which have also been published in draft.

It is the PRA that has the technical expertise to implement these essential post-crisis reforms. This is a novel approach, so the Bill ensures that there are checks and balances in place. First, Clause 3 ensures that we transfer only some elements of the CRR to the PRA. The extent of the Treasury’s powers to delete will be confined to those areas of the CRR that are necessary to ensure that the UK upholds its international commitments. It is for the PRA to write the rules. The Treasury’s involvement is merely to enable the rules to be updated by deleting old rules that no longer meet international standards.

Secondly, the clause ensures that the deletions the Treasury makes take place only when it is clear that adequate provision has been made by the PRA to fill the space. Deletions will be subject to the draft affirmative procedure, providing the proper opportunity for scrutiny. The clause also allows the Treasury to make consequential, supplementary and incidental deletions to parts of the CRR. This is to ensure a coherent regime across the CRR and PRA rules, which are critical to industry.

Furthermore, Clause 3 gives the Treasury power to make transitional and savings provisions to prevent firms facing cliff edges from the deletion of a provision in the UK CRR. This will allow the Treasury to save, for example, permissions to modify capital requirements that have already been granted to firms under the CRR and avoids the need for firms to reapply for those permissions under the new PRA rules.

Amendment 24 would remove the requirement on the Treasury to ensure the PRA’s rules “adequately replace” revoked parts of the CRR. It would replace this requirement with ensuring that the rules “replicate or otherwise reflect” them. I understand that the intention of this amendment is to probe the degree of flexibility allowed by the current drafting. The intention is not for the new PRA rules to completely mirror the CRR provisions that they will replace. The PRA rules will update the CRR provisions they replace to achieve compliance with the revised Basel standards, and the language of “adequately replaced by” is intended to allow for this.

The wording in the Bill— “adequately replaced”—is also phrased to ensure that the rules are written in a language appropriately tailored to the PRA’s rulebook, which is specifically for the UK sector, and that the regime remains coherent. The amendment replaces this with the word “replicated”, which suggests that the language of the EU CRR is copied over exactly into the rulebook. This may not be the most suitable language for the UK’s rulebook and may prevent the PRA making the necessary changes to ensure compliance with the latest Basel standards.

In response to the noble Baroness, Lady Bowles, the EU—as I am sure she will recognise with her immense experience—is an outlier in the extent to which it specifies these matters in the equivalent of primary legislation. The approach taken in the Bill will bring us more into line with other major financial centres. This means that the EU is used to assessing rules set in the equivalent of regulator rules.

Amendment 25 would bind the Treasury into setting out why it thinks it is appropriate for the rules not to be replaced before laying the relevant regulations before Parliament. Clause 5 already provides for the PRA to prepare a document setting out whether its rules correspond to the revoked provision and, if so, how. The Government’s view is that that should be the primary document to explain why a CRR provision is not being replaced to provide a coherent explanation. If that document does not reflect a revocation where the CRR rule is not being replaced, this can be explained by the Treasury in the Explanatory Notes accompanying the statutory instrument revoking the rules. The amendment is therefore unnecessary, and I hope noble Lords will feel able not to press it.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I have received no requests to speak after the Minister, so I call the noble Lord, Lord Tunnicliffe.

[Lord Tunnicliffe (Lab) [V]]

My Lords, I thank all Members who have taken part in this debate. The statement of the noble Baroness, Lady Bowles, that Clause 3 waives away a whole series of rules, without any clarity about how they are replaced, is very prescient. She rightly made the point that it may not be helpful in our aspiration to achieve EU equivalence.

The noble Viscount, Lord Trenchard, asked if I want the old. No—I want the old to be used to test whether the new is equally as comprehensive. He also spoke about simplicity. As someone who has been involved in rules in all sorts of environments, I know that they are not usually complex because people want them to be but rather because, in the operation of simple rules, questions come up and teach you that you need more complex ones. What impact will that have in this situation? The probability is that the apparent rules will be simple and the complex ones will be hidden from us in a series of rules that we do not see, which the PRA will inevitably have to create to make its supervision practical.

Furthermore, we had the comment that we are looking for light-touch regulation. In 2008 and 2009, we discovered light-touch regulation. This was not solely a British mistake but one made almost throughout the western world. However, the consequence was very close to disastrous. I find it interesting that, in his response, the noble Earl said that we have the Basel standards and already know what they are. This suggests that they are a system of rules ready-made for this purpose; if that is true, where is this flexibility that everyone praises so much?

Finally, we were told to rely on the checks and balances. We had a long debate at the beginning of today’s session, in which many people around this table, to a greater or lesser degree, were not at all convinced that the processes we are being asked to adopt have sufficient checks and balances. I will have to consider whether I want to bring this further forward on Report but, in the meantime, I beg leave to withdraw Amendment 24.

Amendment 24 withdrawn.

Amendment 25 not moved.

Clauses 3 and 4 agreed.

Clause 5: Prudential regulation of credit institutions etc by PRA rules

Amendment 26 not moved.

Clause 5 agreed.

Amendment 27 not moved.

[Baroness Penn (Con)]

My Lords, I suggest that this is a convenient moment to conclude our debate in Grand Committee today.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

That concludes the work of the Committee this afternoon. The Committee stands adjourned, and I remind Members to sanitise their desks and chairs before leaving the Room.

Committee adjourned at 7.13 pm.