Monday 1st March 2021
(3 years, 9 months ago)
Grand CommitteeFinancial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Amendment Paper: HL Bill 162-IV(Rev) Revised fourth marshalled list for Grand Committee - (1 Mar 2021)
Baroness Jones of Whitchurch (Lab) [V]
My Lords, I am grateful to the noble Lords, Lord Oates and Lord Holmes, for tabling these amendments and for their helpful contributions. They provided a welcome extra clarity as to how we can deliver the UK’s climate change obligations across the financial services sector.
In an earlier debate, we identified the important principles which should underpin the application of climate change principles by the regulators and how they should be reported. A number of noble Lords then made strong and compelling cases for changes to the regulatory regime in advance of the Government’s consultation and implementation of the Basel standards because of the urgency of the climate change threat that we all acknowledged in that debate.
These amendments go one step further. Amendment 28 would add a specific requirement on the PRA to take the level of exposure to climate-related financial risk into account in setting capital adequacy requirements. We believe this is right, given the increasing evidence that institutions with overexposure to carbon-intensive investments are not acting prudentially.
In the debate last week, the Minister said:
“There is no evidence that ‘greener’ means ‘prudentially safer’, at least not yet”.—[Official Report, 24/2/21; col. GC 224.]
Although we accept that evidence in this field is still being collected, we believe that there is already a sufficiently strong evidence base on which to act. This has been confirmed by the Bank of England, which is already planning to tighten the supervisory expectations on climate-related risk for banks and insurers. As the Governor of the Bank of England said—and we all seem to be quoting the governors or the bank in different guises in this debate, but all roads lead to the same conclusion—in a recent speech:
“Investments that look safe on a backward look may be existentially risky given climate change. And investments that might have looked speculative in the past could look much safer in the context of a transition to net zero.”
Therefore, let us face it: high-level thinking is changing fast, whether it is by the Chancellor or the Governor of the Bank of England or, indeed, in the quotes from BlackRock that we looked at in the previous debate. There are big changes and big thinking going on. We now need to turn that recognition by all those leadership characters into practical policies for the future, and that is what we are attempting to do. We identify the urgent need to revisit investment assumptions and near-term capital requirements, and that is what Amendment 28 is trying to do.
Amendments 31 and 32 focus on the specific risk weight of investment in fossil fuels, which remain a major contributor to carbon emissions and are inevitably high-risk. We welcome the debate on these amendments and the specific risk weights that are proposed. I listened carefully to what the noble Lord, Lord Oates, and other noble Lords, had to say on this. We feel that the noble Lord was making a very valid point. As other noble Lords have said, the wording of these amendments might not be perfect, but they are certainly worthy of further exploration. On that basis, I look forward to the Minister’s response.
Earl Howe (Con)
My Lords, I am grateful to the noble Lord, Lord Oates, for his clear and succinct introduction to these amendments, and to other noble Lords who have spoken in his support, as well as to those who have sounded a more critical note.
I have already spoken about some of the broader questions relating to climate change and financial services in a previous debate and, in response to the noble Baroness, Lady Ritchie, in particular, I set out last Wednesday the significant action the Government are taking in this area. I also indicated that I have heard and understand the well-argued concerns of noble Lords about the manifold risks arising from climate change. I stand ready to discuss those concerns in the context of this Bill as constructively as I can between now and Report.
To add one more assurance in reply to the noble Lord, Lord Oates, who spoke about the risk of stranded assets and asked specifically about a transition plan, the Government are committed to a managed transition that puts new jobs in the clean energy sector at the heart of our strategy. My right honourable friend the Prime Minister set out details of this in his 10-point plan; further detail will be included in the forthcoming net zero review.
If I may, I will focus my remarks more narrowly on the specific issues raised by these amendments. Noble Lords reflected in earlier debates on the importance of prudential regulation, which aims to ensure the safety and soundness of the financial system. Much of the UK’s existing prudential regulation was introduced as a result of the 2008 financial crisis, to protect our economy by ensuring that financial services firms are adequately capitalised and properly managed to limit the risk of failure and the impact that would have on the economy. We must therefore be careful when considering the use of prudential tools to deliver other policy objectives; my noble friend Lady Noakes was absolutely right to emphasise this.
Indeed, one of the key advantages of the approach taken in the Bill is that it allows the UK’s prudential regulator, the PRA, to react where necessary to changing market conditions and to developments in international work and research on climate risk, particularly the development of a global consensus on what role the financial sector should play in tackling climate change. I believe this is a better solution than the amendments we are discussing here.
Amendment 28 would require the PRA to set capital adequacy requirements of a credit institution while having regard to its exposure to climate-related financial risk. As I have said, I appreciate all the concerns around climate change—there is no question of the Government being complacent about them—but I cannot see how this amendment would deliver more than the PRA’s existing obligations under the Financial Services and Markets Act, which by definition requires it to consider risks to the safety and soundness of financial institutions. I say to my noble friend Lady Altmann in particular that this includes climate risks in the same way as any other risks. The regulators are very alive to climate-related risks and are already acting to make sure they are understood and addressed in the financial system. To prove the point, the PRA will undertake climate-related stress tests in June to ensure that the financial system remains resilient to climate-related risks.
Amendments 31 and 32 would require the PRA to set punitively high risk weights against exposure to existing and new fossil fuel production and exploitation. These risk weights would, in effect, make it more expensive to finance such activities, and thereby make them less attractive. However, the point of the Bill is to support a flexible regulatory system that can respond to changing circumstances and developments as they arise. This framework puts financial stability at its heart through the PRA’s primary objective of safety and soundness. Other relevant public policy considerations are dealt with through the system of “have regard” set out in the Bill. None of these is prescriptive in the way that these amendments are, and they are, quite importantly, subordinate to the PRA’s primary objective. I maintain that this is the most effective way in which to ensure appropriate prudential treatment for all assets. Putting other public policy issues on a par with safety and soundness could lead to decisions being taken that are not sufficiently focused on the core purpose of prudential regulation.
Amendment 42 would require the Treasury to make regulations requiring credit rating agencies to give due consideration in their ratings to the level of exposure of a credit institution to climate-related financial risk. The credit rating agencies regulation sets out the UK’s regulatory regime for credit rating agencies, which are supervised by the FCA. A key principle of the regulation is that the agencies are independent, and the credit ratings they produce are independent, objective and of adequate quality. In producing these ratings, credit rating agencies are required to use methodologies that are rigorous, systematic, continuous and subject to validation based on historical experience. However, the credit rating agencies regulation does not stipulate factors that must be included within the methodologies used by credit rating agencies. In line with this principle of independence, the regulation prohibits interference of public authorities in the content of credit ratings or methodologies when performing their supervisory functions. This is an important principle designed to ensure that ratings have not been unduly influenced.
However, the regulation places requirements on credit rating agencies clearly to disclose their methodologies and the key elements underlying the credit rating or the rating outlook. That ensures that those using the ratings can make an informed choice as to whether a rating gives due regard to the impact of a type of risk on the creditworthiness of the institution in question, including climate-related financial risk. In addition, EU guidance published in 2019 provides that, when a credit rating agency changes a rating, it must disclose whether environment, social and governance factors played a part in that decision. The FCA has publicly communicated that it considers all guidance published by European authorities before 31 December 2020 to be relevant to UK firms and, therefore, UK agencies are expected to continue to apply this principle. More generally, the Government have committed to implementing the requirements of the Task Force on Climate-Related Financial Disclosures in the UK, with a significant portion of mandatory requirements in place by 2023, and all relevant firms reporting in line with the requirements by 2025.
On the topic of disclosures, Amendment 136A would require the Government to introduce an obligation on fund managers to report to the FCA on how their funds are satisfying environmental, social and governance requirements. I have already spoken about the Government’s commitment to implementing the requirements of the Task Force on Climate-Related Financial Disclosures—TCFD—in the UK. Becoming the first major economy to commit to fully mandatory and public climate disclosures is even more ambitious than the proposed amendment, which requires FCA-regulated fund managers only to make disclosures to the FCA. But fund managers do not yet have sufficient information on environmental factors from the wider economy in which they invest. The mandatory TCFD road map set out by the Government will apply to funds and the wider economy in a co-ordinated timeline.
Lord Eatwell (Lab)
My Lords, one of the most important elements in this amendment is set out in the explanatory statement provided earlier by the noble Baroness, Lady Bowles, which says that the proposed general review is
“not linked to specific fault or failure”.
When we consider the history of the development of both international and domestic financial regulation, it has almost always been reactive: a model of crisis, then response. As a result, regulatory reform has typically been made in an atmosphere of crisis rather than an environment of thorough, calm consideration. So a periodic report by a skilled group might enable our regulatory system to get ahead of change in financial markets rather than persistently lag—and change, as we know, is persistent and indeed accelerating.
Another important factor that favours the proposals by the noble Baroness, Lady Bowles, is the extraordinary complacency evident in the documents issued with the Bill and in those issued so far that are associated with regulatory framework review. Organisations that in the past displayed a total lack of understanding of systemic risk in the markets they were supposed to be regulating should not resist external scrutiny and advice from well-informed parties; indeed, such external scrutiny would be in the national interest.
However—I am afraid I now come to that word—given the assurances of the Minister in summing up the debate we had on parliamentary scrutiny, I wonder whether we are at risk of creating too many committees and too many reviews. A well-resourced parliamentary scrutiny committee, which I trust the Minister has in mind, would recruit expert, experienced advisers to help them in the discharge of their responsibilities and would conduct periodic reviews. I must say that I was struck by the comment by the noble Baroness, Lady Kramer, that the buck stops with Parliament; indeed it does. I therefore suggest that it would be more fruitful for this Committee to concentrate on ensuring that well-resourced parliamentary scrutiny is indeed introduced, rather than taking the path suggested by the noble Baroness.
Earl Howe (Con)
My Lords, this amendment would require an independent review of both the FCA and the PRA every five years, and it sets out a number of things that the review would have to cover. The FCA was created to ensure that relevant markets work well. In practice, that means regulating the conduct of firms to make sure that the financial services sector is serving the interests of individuals, businesses and the economy as a whole. It has a broad remit and is responsible for regulating nearly 60,000 firms.
I accept the point made by the noble Baroness, Lady Bowles: the recent investigations by Dame Elizabeth Gloster and Raj Parker have shown that the FCA does not always get this completely right. However, the FCA is wholly committed to learning from past mistakes. It is addressing the recommendations in both these reports and we can see that commitment being translated into action.
The FCA has set out how it will accelerate its ongoing process of reform, including through its transformation programme led by the new CEO, Nikhil Rathi. It has committed to provide public updates on progress every six months, and it is right that the Government and Parliament hold it to account on delivering these important changes. The FCA absolutely knows what it needs to do, and that it needs to do it under a spotlight, both from the Treasury and from Parliament.
That is one part of my answer to my noble friend Lady Noakes, who asked me how the Government assure themselves that the regulators are fit for purpose. But the noble Baroness, Lady Bowles, spoke about the need for assurance and the noble Baroness, Lady Kramer, similarly, on the need for accountability. I reassure all three noble Baronesses that there already exist a number of mechanisms to hold regulators to account, both to Parliament to the Treasury. I believe that these existing mechanisms are sufficient to achieve the outcomes that this amendment is aiming at. I touched on some of these points in my previous remarks to this Committee, but I will attempt to provide a short summary here.
First of all, the regulators are required to produce annual reports and accounts, which are laid before Parliament by the Treasury and certified by the National Audit Office. The regulators are subject to full audit by the National Audit Office, and the NAO has the associated ability to launch value-for-money studies on the FCA and PRA. The FCA is subject to scrutiny via departmental Select Committee hearings, including the Public Accounts Committee and the Treasury Select Committee, which holds regular six-monthly meetings with the FCA CEO and Chair. The Treasury Select Committee scrutinises the appointments of the FCA Chair and CEO posts, and the Treasury has direct control over appointments to the FCA board and powers under the Financial Services Act 2012 to commission reviews and investigations.
The Treasury is also able to launch investigations under Section 77 of the Financial Services Act 2012 where it suspects there may have been regulatory failure. There are a number of informal mechanisms as well: there is nothing to prevent a Select Committee of either House launching inquiries, taking evidence on them, and reporting with recommendations; that is a decision for them. In speaking to Parliament about this Bill, both the PRA and FCA have stressed that they are committed to appropriate parliamentary scrutiny and will always respond to requests for engagement. Combined, these measures ensure that there is sufficient independent scrutiny of our regulators.
I am the first to agree that this is particularly important in light of Dame Elizabeth Gloster’s findings, but I reassure the Committee that, in addition to these measures, the Economic Secretary meets frequently with the FCA CEO to monitor progress on these critical reforms and ensure that the FCA remains focused on effectively delivering against its objectives. Of course, however, as we have discussed, the future regulatory framework review is considering the appropriate accountability mechanisms for the regulators, so this will provide an opportunity to consider these issues further. I hope that these remarks are helpful and sufficiently reassuring to the noble Baroness to enable her to withdraw her amendment.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I thank everybody who has spoken in what has turned out to be quite an interesting debate, the majority of whom have supported the general notion of my probing amendment, if not exactly all the specifics that I put into it, which perhaps tried to do too much. To clarify my intention, it was exactly as my noble friend Lady Kramer summarised: it was for a regular review that gave oversight to the regulator’s activities. As the noble Lord, Lord Sikka, said, the systemic factors also had oversight of that change.
I am sure that it is possible for this to come from other quarters. The Minister has suggested that it comes from the Treasury. Perhaps it could come from a parliamentary committee, although what I had in mind was not so much a body that solely took evidence but a few people who could get inside and examine procedures and find out how the operations worked.
Like others, I would like to clarify my concerns here. I know how difficult it is to be a regulator, especially to be the conduct and markets regulator, where things are less tangible than in some of the prudential regulation work, but it is about giving a helping hand. Although a lot of good thought and planning goes into how to address the problems that are exposed every time there is a review, if it is done from the inside, that is never the same as having eyes that come from outside. The thing about having an independent regulator is that, if you want independence, ultimately, the review should be independent. Having those reviews monitored through the Treasury is not necessarily the sort of independence that is satisfactory if you want to say that it is independent, and I question whether it is possible to do it through a parliamentary committee.
The Minister of State, Cabinet Office (Lord True) (Con)
My Lords, this has been a very interesting brief debate. I will not follow the noble Lord, Lord Rooker, into speculating about Delaware because I am acutely conscious that the new President of the United States represented Delaware in the US Senate for 36 years. However, I appreciate what my noble friend Lady Neville-Rolfe and indeed the noble Baroness, Lady Kramer, said: I think that the people of Gibraltar merit sympathy and understanding.
Before I turn to the specific amendments tabled, it might be beneficial in the light of a number of the questions and comments to set out some of the intentions behind the introduction of the Gibraltar authorisation regime. As the right reverend Prelate said, the financial services industry plays an important role in Gibraltar’s economy, and Gibraltar-based firms have made extensive use of the existing market access arrangements between the UK and Gibraltar. It is true, as has been pointed out in this debate, that currently firms based in Gibraltar service a large retail consumer base in the United Kingdom, particularly in the insurance sector, where, as has been said, more than 20% of motor policies in the UK are written by Gibraltar-based insurers. The reasons for the concentration of motor insurance in Gibraltar are complex and obviously of a commercial nature, but it is natural that growth in a sector can lead to an agglomeration effect. Business attracts business, and that attracts people and talent.
I note the remarks that have been made in the debate on a range of companies. However, I remind noble Lords that the Bill is limited to financial services firms only. It will establish a new legal and institutional framework that provides for mutual market access and aligned standards in financial services between both jurisdictions. The United Kingdom and Gibraltar have a historic and unique relationship in financial services, and the UK has not had the same level of market access arrangements with any other jurisdiction. This regime will enable Gibraltar-based firms operating in the UK to continue to do so provided they meet certain standards. That way, the regime respects Gibraltar’s regulatory autonomy while ensuring high standards of supervision and consumer protection for UK customers.
On the amendments themselves, Amendment 46 would require any Gibraltar-based person carrying on authorised financial services activity in the UK to provide an annual statement to the Treasury of the profits it has made from those activities, and for the Treasury to report on this. This proposal cannot be supported by the Government because it does not reflect Gibraltar’s autonomy. As an overseas territory, Gibraltar is fiscally autonomous, and it has the right to set its own policy to support its economy within international standards and to determine its own tax rates. The scope of the GAR is focused on ensuring continued market access for Gibraltarian firms to the UK market based on the alignment of relevant law and practice. The GAR does not extend to taxation.
As my noble friend Lady Neville-Rolfe said, Gibraltar is already committed to meeting international standards on illicit finance, tax transparency and anti-money laundering, including those set by the OECD and the Financial Action Task Force. Gibraltar shares confidential information on company beneficial ownership and tax information with UK law enforcement bodies in real time and has agreed to introduce publicly accessible registers of company beneficial ownership. The Government were satisfied that the Gibraltar authorisation regime is rigorous and includes the right safeguards to ensure consistent standards of law and supervisory practice. I therefore ask that the amendment is withdrawn.
Amendment 47, in the names of the noble Lords, Lord Tunnicliffe and Lord Eatwell, would require the Treasury to report on the regime, the current position regarding financial services market access enjoyed by the Crown dependencies and the case for extending the regime to the Crown dependencies. I suggest to noble Lords that the first part of this amendment would replicate provisions that already exist in the Bill. Clause 22(3) of the Bill, which inserts a new Section 32A into the Financial Services and Markets Act 2000, already imposes a duty on HM Treasury to lay a report to Parliament on the operation of the regime. This report will be presented to both Houses within two years of the regime coming into force, and every two years from then on. It will specifically include an assessment of whether the alignment condition between the UK and Gibraltar is satisfied before market access is granted for an approved activity.
Noble Lords have alluded to the frequency of reporting. It has been chosen considering a range of relevant factors, including the length of time required to undertake a meaningful assessment. In this context, the amendment would simply duplicate this requirement within 12 months of the Bill receiving Royal Assent, potentially demanding a statement before this is appropriate and before any assessment has been completed.
Turning to the second point raised in this amendment, it is important to note—and the noble Lord, Lord Eatwell, acknowledged this—that no other overseas territory or Crown dependency has the same market access arrangements with the UK as Gibraltar has today. The Gibraltar authorisation regime has been designed to deliver the Government’s commitment to Gibraltar in 2018 to maintain long-term market access for financial services between our jurisdictions, based on shared high standards of regulation and modern arrangements for information-sharing, transparency and co-operation. This commitment and the framework reflect the unique historic position of Gibraltar and the UK, specifically the passporting arrangements that were in place when we were both members of the EU single market, as has been said.
In our judgment, it would not be appropriate to extend the operation of the regime to other jurisdictions that do not have the same starting point of close alignment between our rules and supervisory practice. The Treasury remains committed to working with the Crown dependencies, and there are existing tools, including equivalence, that enable different degrees of access to the UK market and are more appropriate for the circumstances of the Crown dependencies. Having considered those points, I therefore ask noble Lords not to press this amendment.
The Deputy Chairman of Committees (Baroness Fookes) (Con)
I have not received a request from anyone wishing to speak after the Minister, so I call the right reverend Prelate the Bishop of St Albans.