Monday 20th February 2023
(1 year, 10 months ago)
Grand CommitteeFinancial Services and Markets Act 2023 View all Financial Services and Markets Act 2023 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-V(a) Amendment for Grand Committee (Supplementary to the Fifth Marshalled List) - (20 Feb 2023)
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
My Lords, if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes, but self-evidently we are not expecting a Division.
Clause 27: Review of rules
Amendment 78
Baroness Bowles of Berkhamsted (LD)
My Lords, it is a pleasure to open day five in Committee on the Bill. First, I will relay apologies from my noble friend Lady Kramer, who is not in her place, having had knee surgery last week. She is recovering well and will return as soon as she has permission from her surgeon.
Several of today’s groups concern accountability, both how regulators are accountable to Parliament and then, as with this first group, what that accountability to Parliament means. Is it more than a hot-seat grilling every now and then? What happens to the output of that accountability?
Here I challenge the Government, who have made much of the regulators’ accountability to Parliament in the consultations but then, during the passage of the 2021 Act, said that that accountability has nothing to do with government. We can all see through that. The examples that the Government have set are: failing to reply to committee reports in the allocated time; failing to find parliamentary time for debates on committee reports; and even failing to attend Lords committees, including such important committees as the Economic Affairs Committee and the Industry and Regulators Committee, which engage in financial services matters, and on both of which I and other noble Lords present have served for many years—so we know what we are talking about.
The question is: do the Government want to be part of this scrutiny or not? Do they want the regulators and Parliament to form their own arrangements together and maybe gang up on the Government? I have had experience of organising that in order to challenge the European Commission, and I can see similar seeds being sown here. This is the last chance saloon for the Government to stand by their advertising on parliamentary scrutiny.
I have eight amendments in this group, but it is really four for each of the FCA and PRA instances. I can be brief on the detail. They all relate to the independent reviews of regulators’ rules that can be commissioned by the Government. Amendments 78 and 145 insert into the Government’s powers of review the possibility to seek thematic review as well as reviews of specific rules. They do not compel the Government to do this; it is an empowerment. The Government would still have control over what they choose to implement, but it seems a reasonable power to have. The noble Baroness, Lady Noakes, has supported this amendment so, to go by the commentary that has been made, if we two agree then there must be something in it. It may well be that a thematic review would in fact be more useful for general issues rather than having to identify specific rules, which might not be comprehensive. I would want this if I were the Government.
Amendments 81 and 148 are related and more prescriptive, in that they require the Treasury to establish a rolling programme of thematic reviews and report annually to Parliament on that programme and any changes made to it in the light of other reviews that might be carried out for other circumstances. They also require a work programme for the next three years, along with indicative timetables. The Government would still have control of the programme, but a programme is required.
I have tabled these amendments because somebody should be, if you like, regulating the regulators. My attempt during the passage of the previous Bill to establish an oversight body failed to inspire the Government. These amendments highlight that all the responsibility therefore falls on government, and it is what a responsible Government might be expected to do.
Amendments 79 and 164 include parliamentary committee requests as a potential trigger for the Government to commission an independent review. Again, this is not a compulsion, as the power to seek that independent review would still reside with the Government. The Government claim that there is parliamentary oversight of regulators; this would be a small step in recognition of that, while respecting the work of committees and the evidence that they collect.
Finally, Amendments 80 and 147 require the person appointed to do the independent reviews to be approved by the Treasury Select Committee, as well as by the Treasury. If Parliament is to be regarded as having oversight, these are the kinds of things that endorse that status. I beg to move.
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
The noble Baroness mentioned Amendment 164 but I wonder whether she meant Amendment 146, because Amendment 164 is in a later group.
Baroness Noakes (Con)
My Lords, I support Clause 27 and, in particular, its new Clause 3RC of FSMA, which allows the Treasury to require the regulators to review their rules. As the noble Baroness, Lady Bowles of Berkhamsted, said, I have added my name to her Amendment 78 because it is important to widen out the scope of the reviews which the regulators will have to carry out. I also support her Amendment 145 for the same reason and should have added my name to it as well, so that we cover both the PRA and the FCA.
A lot of the things that regulators do are grounded in the specific rules that they apply, which is the focus of new Clause 3RC, but it should also be possible for the Treasury to tell the regulators to review, for example, the cumulative impact of rules as they affect innovation or new market entrants or any particular segments of the financial services industry. The Bill as drafted simply does not give the Treasury that power.
My Amendment 79A in this group seeks to involve more parties in the review-initiation process. At the moment, it involves only the Treasury and the regulators. My amendment is designed for other voices to be heard and responded to by the Treasury; it would require the Treasury to “consider any representations made” by various sources. I have included all the statutory panels attached to the regulators, including those created by the Bill. These panels ought to have good insights into how the rules work in practice and their opinions on which should be reviewed should be heard, so my amendment says that the Treasury must consider representations from representative bodies, which would include all trade and consumer bodies involved in the sector.
My noble friend the Minister may well say that the Treasury will of course consider any representations made to it in respect of the review of rules and that it is quite unnecessary to put that into statute. I accept that, but only up to a point. The relationship between regulators and their sponsoring departments is often much too close and certainly has the potential to shut out anything that might be uncomfortable for either the regulators or the sponsoring department, or both. That is why the second leg of my amendment requires the Treasury to “inform the body” making the representations if it decides not to require a review.
I do not believe there should be any power for outside bodies to tell the Treasury what it should do, but there needs to be something to counteract the imbalance of power that the Treasury has. Transparency is often the best remedy and it is, in effect, what I propose in my amendment by requiring the Treasury to respond with reasons for not pursuing a particular review. If Ministers do not like the idea of transparency by the Treasury, my noble friend will need to be very persuasive when winding up this debate.
Lord Tunnicliffe (Lab)
My Lords, I will not make any specific comments on this group but I will comment on all that we are doing today—certainly the first three groups, all of which seem to me to have a common theme: the accountability of the Executive to Parliament. The degree of consensus between the amendments is almost historic. I said to my researcher, “I think I am in support of all today’s amendments.” She said, “You mean other than ours?”
Lord Tunnicliffe (Lab)
I will not get carried away—I will probably declare neutrality and opt out—but this issue is so important. I suspect that this Bill is much more constitutional than we expected when we first picked up the document. It is about filling in the space between primary legislation and secondary legislation in all these difficult areas relating to financial services. Members of the Committee have done a great job of putting together a series of proposals.
As far I can see, the proposals in this grouping are to use, in different ways, the age-old device of requiring reports. I can see the value of that. My own experience is that, because time goes on, they are not as effective as one might hope; however, once again, that is down to the membership of Parliament in particular. I support the general thrust of this group but I see it as part of our looking at the first three groups and, with or without the Government’s co-operation, working together after the end of Committee and before Report to try to achieve a common thrust that, if necessary, we can vote through in order to make the important step forward in the relationship between the Executive and Parliament that is so needed.
Lord Harlech (Con)
My Lords, the Government agree that the regular review of rules after implementation is essential to ensure that they remain appropriate and continue to have the desired effect.
The Bill makes a number of substantial changes to the regulators’ framework to ensure that such reviews will be an integral part of the regulators’ functions going forward. In particular, Clause 27 inserts a new provision into FSMA that will require the FCA and the PRA to keep their rules under review. To supplement this duty and ensure that there is a mechanism to require the regulators to conduct reviews of their existing rules where needed, Clause 27 also inserts a new power into FSMA for the Treasury to direct the regulators to review their rules where the Treasury considers it is in the public interest. Clause 46 inserts similar provisions into FSMA for the Bank of England in relation to its regulation of CCPs and CSDs.
I will speak first to Amendments 78 and 145 in the name of the noble Baroness, Lady Bowles. I assure her that the powers inserted into FSMA by Clauses 27 and 46 of this Bill already allow the Treasury to require these regulators to review a range of rules, entire regimes and interrelated rules, as appropriate, where that is in the public interest.
I turn next to Amendments 79 and 146, also in the name of the noble Baroness, Lady Bowles. In order for the Treasury to direct the regulators to review their rules, certain criteria must be met. One of the key criteria is that the Treasury considers the review of the rule or rules in question to be in the public interest. It will be important for the Treasury to work with parliamentary committees to understand the evidence base for whether it is in the public interest to exercise the power.
Lord Forsyth of Drumlean (Con)
I am most grateful to my noble friend; I apologise for not having been able to attend all the Committee’s meetings. Can my noble friend help me by defining “public interest”—that is, how it will be defined?
Lord Harlech (Con)
I understand what my noble friend is getting at and think that, when each issue is put to the Treasury, it will consider whether or not it is in the public interest.
Baroness Noakes (Con)
I think that is merely restating the problem. Could my noble friend have another go?
Lord Harlech (Con)
I will write with a full definition of what constitutes “in the public interest”.
Lord Forsyth of Drumlean (Con)
I am most grateful to my noble friend and do not want to detain the Committee, but the whole point of the noble Baroness’s amendment is to avoid exactly this kind of debate. To my mind, what is in the public interest suggests a very substantial test, leaving the regulators to mark their own homework.
Lord Harlech (Con)
Like I said, I will speak to the department and write with a definition of what constitutes “in the public interest”.
Parliamentary committees can already conduct their own inquiries and hearings, call for papers, and call for individuals and organisations to give evidence. The power in Clause 27 seeks to complement, rather than substitute or detract from, the important role played by parliamentary committees. It will be important for the Treasury to work with parliamentary committees to understand the evidence base for whether it is in the public interest to exercise the power.
On Amendment 79A, from my noble friend Lady Noakes, as with parliamentary representations, it will be important for the Treasury to consider the views of the regulators’ statutory panels and representatives of those affected by the rules. However, it would be inappropriate for the Treasury to provide a running commentary on the individual representations made. In addition, the FCA and the PRA have committed to ensuring that there are clear and appropriate channels for industry and other stakeholders to raise concerns about specific rules. These channels will be set out in the regulators’ policy statements on rule review, required by Clause 27, in due course.
Baroness Noakes (Con)
Could my noble friend explain why it is inappropriate to have transparency on why the Treasury chooses not to pursue representations that have been made to it by bodies that clearly have an interest in and experience of the matters under consideration?
Lord Harlech (Con)
I do not think I said that it would be inappropriate; I said that it would be inappropriate to provide a running commentary, not that there would be no comment on individual representations. Again, my understanding is that it will be done on a case-by-case basis.
Baroness Noakes (Con)
Could my noble friend explain that a little further? If I am a panel, consumer body or one of the trade bodies and I make a representation to the Treasury, what can I expect from the Treasury?
Lord Harlech (Con)
I am sorry; at this stage, I will have to take that back to the department and write to my noble friend.
On Amendments 80 and 147, tabled by the noble Baroness, Lady Bowles, the new rule review powers inserted by Clauses 27 and 46 concerning the appointment of an independent person are in line with the practice of other powers in the regulatory framework. For example, the appointment of Dame Elizabeth Gloster to investigate the FCA’s regulation and supervision of London Capital & Finance plc was approved by the Treasury. The Government do not consider that it would be appropriate to require that appointment to be subject to approval by a parliamentary committee, which, as I have mentioned, can already undertake its own inquiries.
Amendments 81 and 148 were also tabled by the noble Baroness, Lady Bowles. The primary role of the Government in the regulatory framework is to ensure that the regulators operate effectively and in accordance with the framework, as set out by Parliament in legislation. Where there is a case for external review of the rule-making of the regulators, the Bill provides powers to enable this.
Section 1S of FSMA and Section 7F of the Bank of England Act 1998 already permit the Treasury to appoint
“an independent person to conduct a review of the economy, efficiency and effectiveness”
of how the FCA and the PRA use their resources. In addition, Section 77 of the Financial Services Act 2012 allows the Treasury to direct an investigation into relevant events, such as the FCA’s regulation and supervision of London Capital & Finance plc.
The Bill further strengthens these accountability arrangements with regard to specific rules through Clauses 27 and 46, allowing the Treasury to direct the regulators to review their rules. In addition, as we have already discussed in this Committee, Clause 37 inserts new provisions into FSMA which permit the Treasury to direct the FCA and the PRA to report on performance where that is necessary for scrutiny of the discharge of their functions. Clause 47 modifies FSMA so that these provisions also apply to the Bank of England in relation to its regulation of CCPs and CSDs.
Finally, as I have already mentioned, Parliament is already able to conduct thematic reviews where it considers these necessary. Clause 36 is designed to support this scrutiny by requiring the regulators to notify the Treasury Select Committee of their consultations and to respond to representations to consultations by parliamentary committees. We will discuss noble Lords’ views on the operation of those specific provisions later today.
With that, I hope I have provided sufficient reassurance to the noble Baroness to withdraw Amendment 78, and that she and my noble friend do not move the remaining amendments when they are reached.
Baroness Bowles of Berkhamsted (LD)
My Lords, I am afraid that the Minister has not given me any reassurance. I think the only thing I have learned is that the Treasury is all at sea and does not understand what parliamentary scrutiny is actually about. It has to have effects and consequences. It is no good saying that Parliament can do its own inquiry and its own report and it is a very pretty document—yes, quite a lot of people praise such reports from time to time—but nothing happens. The attitude of the Government is that these reports can be completely ignored, that there is nothing in them that they wish to do—they do not want anybody else to have any ideas. That is a poor state of affairs.
There are some things that the Treasury does all right. I agree that, for example, when it appointed Dame Elizabeth Gloster to investigate the FCA, it appointed a good person and there has been a good report. I think that in general the people who have been appointed by the Treasury have been reasonably okay, but that does not mean that the responsible committee should not be able to have a view. I can think of instances in other departments where totally unsuitable people have been appointed to do some reviews.
What is wrong with Parliament having a say? I do not think that the constitutional point, as made by the noble Lord, Lord Tunnicliffe, has been understood. We still do not know how high a barrier this “public interest” is. The public interest is just what the Treasury thinks from time to time, by the sound of it. I do not think that there are sufficient safeguards there for when the regulators, as the noble Lord, Lord Forsyth, said, are, in essence, marking their own homework. This is something that has gone wrong in the past.
Yes, Section 1S is there but it is not used often enough. It is a last resort when you have had a whole history of errors and similar things happening and then there is a review. The whole idea of regular review is to make sure that you can intervene before big things happen, that there is the ability to nudge if something is heading off in the wrong direction. You can say that the review is, “All clear: it’s going well”. Why is there such a fear of them?
We will continue this discussion, because there are many formulations in which this can be done. If the Government do not want to have responsibility for it, maybe there has to be some kind of independent body to do it. While Parliament may be ready and willing to do it, what is the point when you are going to ignore what Parliament says? That is not parliamentary scrutiny; scrutiny must have a purpose and must lead to a result.
As this stage is exploratory I will, of course, withdraw my amendment but, as we go through the rest of this group, I hope that some enlightenment will dawn on the Treasury that these are not issues that can be just left. There is a body of opinion around the Committee, on all sides and none, that something has to be done. Most certainly, I will support things returning on Report.
Baroness Noakes (Con)
“The Financial Services Regulators Committee of Parliament
(1) There is to be a body known as the Financial Services Regulators Committee of Parliament (“the FSRC”).(2) The FSRC is to consist of nine members who are to be drawn both from the Members of the House of Commons and from the members of the House of Lords.(3) Each member of the FSRC is to be appointed by the House of Parliament from which the member is to be drawn.(4) A person is not eligible to become a member of the FSRC if the person is a Minister of the Crown.(6) A member of the FSRC is to be the Chair of the FSRC chosen by its members.(7) Schedule 7A makes further provision about the FSRC.”Member’s explanatory statement
These new Clauses, together with a new Schedule 7A, create a joint committee of both Houses of Parliament to oversee the FCA, PRA and the Payment Systems Regulator.
Baroness Noakes (Con)
My Lords, in moving Amendment 86 I will also speak to the other amendments in my name in this group. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, the noble Lord, Lord Vaux of Harrowden, and my noble friend Lord Trenchard for adding their names to the lead amendment.
As has already emerged again this afternoon, there is clear agreement in this Committee that Parliament needs to exercise more oversight of the financial services regulators than has been the case in the past. The proximate cause is that huge new rule-making powers will be granted to them by the Bill, but a number of other issues, which noble Lords have raised in connection with the Bill and doubtless will continue to raise through Committee, also point to the need to put more effective accountability arrangements in place.
The Government have been on something of a journey on this. Their consultation on the future financial framework in October 2020 basically said that the existing arrangements involving the Treasury Select Committee in the other place were fine; your Lordships’ House did not even get a mention. By the time the Government’s final proposals came out in November 2021, they rode in behind the views of the Treasury Select Committee, which, by then, had reported that it was well equipped to carry out the accountability role. It subsequently set up a sub-committee for this purpose.
The November 2021 document did acknowledge that there were serious debates in your Lordships’ House during the passage of the then Financial Services Bill 2021, in particular the view expressed by a number of noble Lords that a Joint Committee of both Houses was the appropriate way forward. I think many of us felt then that the expertise that noble Lords would be able to bring to that accountability should be harnessed. The Government, however, said that this was a matter for Parliament. Well, we now have an opportunity for Parliament to express its views and determine the issue in this Bill.
My Amendments 86, 87, 88 and 156, together with the other amendments in my name that are consequential, would create a Joint Committee of both Houses. I have called it the financial services regulators committee, or FSRC. This would not technically be a Select Committee of Parliament, but the only difference between a committee of Parliament set up by statute and one set up by Parliament itself is the absence of parliamentary privilege, which I do not see as a crucial feature of any accountability oversight committee.
The main amendments in this group are based on the precedent of the Intelligence and Security Committee, a committee of both Houses of Parliament set up by the Intelligence Services Act 1994 and given stronger powers by the Justice and Security Act 2013. It is a committee that has demonstrably worked well on a joint basis.
Lord Forsyth of Drumlean (Con)
My Lords, it might be helpful for me to speak now as my noble friend referred to my amendment, which is in the next grouping. My noble friend has always been cleverer than me; I absolutely, 100% support what she puts forward in this amendment. I have an inkling that the Minister will say, “Ah, but we cannot be instructing Parliament on what to do”; that is why my amendments are in the next group, which we may or may not come to.
My noble friend is presenting the Committee with a Rolls-Royce, whereas my amendment is a Trabant, but it provides an opportunity to do what this amendment would do: set up a powerful Joint Committee of both Houses that is properly resourced. In my view, that is the right solution. I entirely agree with everything that my noble friend said. It seems to me that for the Government to resist this is a great mistake because it actually damages the position of the regulators. The regulators themselves would benefit from having proper scrutiny and accountability.
It is important to remember what this Bill is doing, which is extraordinary. It is taking all our financial regulation, giving it to a bunch of regulators who are not in any way democratically accountable and leaving it to them to decide what they will change, at what pace and everything else. It is absolutely essential that there is parliamentary scrutiny. My noble friend is right in the structure that she is proposing, where the elected House will have a pre-eminent position, but it strikes me as very foolish in this legislation to exclude from any role of scrutiny the House of Lords, which, at the risk of flattering members of the Committee and others, contains people with considerable experience and expertise in this area who could add an enormous amount to the regulators in carrying out their duties.
I seem to recall at an earlier stage—my noble friend Lady Noakes follows these things much more closely than I do—the regulators themselves saying that we need to have proper parliamentary scrutiny in order for us to be certain that we carry the degree of consensus and support that is necessary in the regulatory framework. I hope that my noble friend the Minister will accept this amendment. Then we will be able to make enormous progress because we will not need to discuss my amendment.
Lord Vaux of Harrowden (CB)
My Lords, after a number of days in Committee and at Second Reading, it is clear that the major theme of scrutiny of the regulators has emerged and that we have an extraordinary level of cross-party agreement on the Bill—almost unprecedented, as the Minister will see if she turns around and looks behind her.
This is so important because, as the noble Lord, Lord Forsyth, just said, the Bill transfers huge amounts of power to the regulators but does very little to provide Parliament with the means to scrutinise what they do. This has been raised by a number of parliamentary committees, including the EU Financial Affairs Sub-Committee, of which I was a member before it was wound up, and the European Union Committee, among others. The Bill does give strong oversight, scrutiny and direction rights to the Treasury but that is not the same as parliamentary scrutiny.
The Minister said this at Second Reading:
“It is also imperative that the regulators’ new responsibilities are balanced with clear accountability to the Government and Parliament. I assure noble Lords that the Government recognise the importance of parliamentary scrutiny of the work of the Treasury and the regulators.”—[Official Report, 10/1/23; col. 1332.]
However, nothing in the Bill does that. All the Bill does at the moment is make requirements for the regulators to notify the Treasury Select Committee of the consultation and for the regulators to respond in writing to responses to any statutory consultations from any parliamentary committee.
I am sorry, but that is not the same as providing for genuine parliamentary scrutiny of the activities of the regulators. Are the regulators meeting their objectives? Are they protecting consumers from excessive risk and fraud? Are they ensuring stability? Are they carrying out their activities efficiently? Are they encouraging growth and competitiveness? Are they acting in accordance with the climate change rules? Are they horizon scanning for future risks and so on? Nothing in the Bill, as currently drafted, provides for real parliamentary scrutiny as I would understand it.
I am afraid that the noble Baroness has form in this respect. Perhaps I could take her back a few months to the discussions we had around the UK Infrastructure Bank Bill when we queried her reference to parliamentary scrutiny of various documents within that. To paraphrase, she suggested that the more informal parliamentary scrutiny, such as the ability to ask Oral Questions and such like, was sufficient. We seem to be heading down the same way with this Bill. It is not acceptable.
The other day, the noble Lord, Lord Bridges, set out with his usual clarity the three things required for effective scrutiny of the regulators. To paraphrase, they were reporting, independent analysis and parliamentary accountability. There are various amendments in this group and the next group dealing with the third of those: parliamentary accountability. I have added my name to those in the name of the noble Baroness, Lady Noakes, which aim—as she has explained—to create a bicameral committee that will focus specifically on scrutiny of the financial regulators.
I have long argued that financial regulation is such a large subject, so complex, and dealing with such an important sector of our economy, that it deserves a committee dedicated to it. It is just too big to be able to be meaningfully scrutinised by a committee that covers a wider subject area, such as the Treasury Select Committee of the Commons, the Economic Affairs Committee or the Industry and Regulators Committee, as we heard a minute ago. I strongly support the idea of creating a new bicameral committee that will focus specifically on this subject.
Importantly, Amendment 87 from the noble Baroness tries to widen the scope of parliamentary scrutiny. It says that:
“The FSRC—
the new committee—
“may examine or otherwise oversee the administration, policy and operations of”
the various regulators and may examine any consultations and reports issued by them. I am slightly nervous about the word “oversee” as I worry that might imply interference in the independence of the regulators. More importantly, I also want to add that the new committee should consider the impact of the regulators, in addition to administration, policy and operations. As I have said before, it is really important that the scrutiny is forward-looking, that we are horizon scanning for future risks, so I would widen the amendment further rather than it just being backward-looking. As I say, I wholeheartedly support the principle of a new, properly resourced bicameral committee with a much wider remit than the narrow focus that the Bill currently provides to the Treasury Select Committee. As we have heard from the noble Lord, Lord Forsyth, the involvement of this House is incredibly important. There is enormous expertise throughout the House.
I recognise that there are other ways of achieving proper parliamentary scrutiny, as we can see from the various other amendments in this and the next group in the name of the noble Lord, Lord Forsyth. I am not going to get too religious about this. It is clear that there appears to be near-unanimity on the importance of strengthening the arrangements for parliamentary scrutiny of the regulators and of the Treasury, as the Minister said at Second Reading, given the greater responsibility this Bill pushes on to the regulators.
In the interests of time, I am not going to speak on the next group. It would just be repeating what I am saying now. But I hope the Minister will take it as read that I support the theme and concept in the next group. just as I do within this one. What I hope will now happen is that the Minister and all interested Peers can get together between now and Report to try to come up with something mutually acceptable that we can all get behind. Is that something the Minister can facilitate?
Baroness Lawlor (Con)
My Lords, it is a pleasure to follow the noble Lord, Lord Vaux of Harrowden, and I support the amendments in this grouping proposed by the noble Baronesses, Lady Noakes and Lady Bowles, the noble Viscount, Lord Trenchard, and others, for the reasons which have been explained. I have an indirect interest in this subject, which I declare. As a founder and research director of Politeia, I have been involved in publishing some analysis on the question of regulation and, indeed, contributed myself on a problem which is very great in Britain now, that of accountability, and more generally this regulatory state into which we have slipped.
My Amendment 175 should be seen as complementary to this grouping. Its aim is slightly different but complementary; it is designed to focus scrutiny ex ante on the rules proposed. The focus is on new, adapted or maintained regulations that are due to come into operation and to consider how consistent, predictable and transparent they will be, as well as how much they will be in accord with the law. Given the fast pace of how the sector works and the speed with which, by necessity, regulators must act and decide things, it is important that we have this external check before rules come into operation. The regulators will have the power to intervene and make new rules within the broad terms of the law, if they judge that they should, without the searching analysis and testing that are needed beforehand. The sector will in most senses be a guinea pig for this process.
Lord Thomas of Cwmgiedd (CB)
My Lords, I will make three brief points in support of this amendment.
First, from a constitutional perspective, it is essential that the accountability is to Parliament. It is subdelegated from us. It seems inconceivable to me that any legislative body should give power to a body that is not accountable to it. That is the first constitutional point.
Secondly, it seems to me that the Treasury is not the right body to do this job—partly for the reason I have given and partly because some of the objectives that are already in the Bill span areas way beyond the Treasury’s competence. One can certainly see on climate change, for example, a real worry that, if the Treasury is left in charge, there will be all kinds of considerations—short-term, mainly; certainly not long-term—that will not be able to examine precisely whether the regulators are doing what they should be doing.
Thirdly, we cannot ignore the vast pace of change. It is difficult to stand back and appreciate that many of the things we have developed over the centuries are having to be changed within a few years. The financial markets is one area where change is enormous, such as in dematerialisation and the use of digital assets. This morning we debated electronic trading documents in this Room. Therefore, we need such a body. I am afraid that whoever joins this committee will find it very hard work but that is no excuse not to set it up, because it must be absolutely on top of things and gingering the regulators. I hope the regulators will come to see that this is good. We cannot have delay and, without a special committee to do it, that is what will happen.
Lord Bridges of Headley (Con)
My Lords, I will make a couple of points quickly. In so doing, I once again declare my interests as an adviser to and shareholder in Santander and, more appositely, as current chairman of the Economic Affairs Committee.
I want to pick up on the noble and learned Lord’s excellent points. If I may be very frank, I was disappointed that in the Minister’s response to the previous group he consistently referred to accountability to the Treasury. We are talking here about accountability to Parliament. This is what matters; it is what concerns so many noble Lords who take a great interest in this debate. There is just nowhere near enough of that in the Bill. I am very disappointed by the tone and approach that the Government seem to be taking, so far, to what I see as a highly constructive set of amendments, especially my noble friend Lady Noakes’s amendment, which I entirely support. I have two brief points to make about the committee structures of this House and of the other place.
As we have seen and are already seeing, the remit of committees here and in the other place is not set up to handle and scrutinise the avalanche of regulation coming out from all the regulators. It is nowhere near adequate to handle the consultations, let alone everything else. They do not have the resources either. It is imperative that the Bill is amended to reflect this. I very much hope that when my noble friend responds she will give this amendment some warm words of support, go away and think of ways in which she might support it. I will be speaking again in support of my noble friend’s other amendments.
Lord Sharkey (LD)
My Lords, I strongly support the amendment in the name of the noble Baroness, Lady Noakes, and observe that the Government have said, more or less consistently, that it is for Parliament to decide what form of scrutiny it requires. This acknowledges the importance of the issue. This is Parliament, and the amendment sets out a clear way ahead to establish parliamentary oversight. If the Government mean what they say, they will not oppose these amendments. They might join in a constructive discussion of how to make them better, but they will not oppose these amendments if they are to be at all consistent.
It is worth noting, though, that accountability and scrutiny are not quite the same. Even if we were to pass the amendments in the name of the noble Baroness, Lady Noakes, we would need to take a closer look at the delegated powers mechanisms that the Bill contains. As things stand, Parliament will have no meaningful say in whatever the new rules may be. Unless I have misunderstood, the proposed financial services regulators review committee will not be able to intervene as the new rules become law. We will need to think about that carefully as we make progress with the Bill.
Lord Tunnicliffe (Lab)
Can I say a couple of words about regulation and regulators? This is usually a political divide and I am proud to be on my side of it. I believe that society is the richer for good regulation; I am against bad regulation but in favour of good regulation. When one has good regulation, the problem is often that it is poorly executed. These financial regulators do the execution, so processes to hold them better to account have to be a good thing. That may include the distasteful fact—it may or may not emerge—that they are underresourced. Certainly, this sort of debate will bring out those sorts of issues.
I have to be careful here, but my general view is that this is really a rather good group. I shall consider it carefully and discuss it with colleagues across the House between now and Report to decide on the extent to which we will support it. I strongly recommend that the Minister does as asked and enters discussions with us, to see how much of this can be agreed and included in the Bill. We had a similar tussle two years ago when we did a big chunk of this and tried to draw in the regulators more. The regulators put down on paper that they were willing to talk to us more. The problem was that we did not have mechanisms in the House to take advantage of that. This would be a game-changer, by breaking through into that area and creating processes to have proper accountability and scrutiny—supervision is the wrong term—of these enormously powerful regulators, which are vital to the success of our financial markets, in terms of both opportunities and appropriate restraint to avoid catastrophes.
Baroness Bowles of Berkhamsted (LD)
My Lords, I strongly support the proposals for a Joint Committee. As ever, the noble Baroness, Lady Noakes, has researched this well. I know she has been looking at it for a long time, because we talked about it back when we debated the 2021 Bill. I commend the thoroughness with which she has done that. I also welcome the amendment by the noble Baroness, Lady Lawlor. One thing about that proposal is that it would be slightly larger at 12 members, instead of nine. It is a different committee, as has been explained. I have done this kind of scrutiny and we really need to think what volume of it there will be—especially now, post Brexit.
After the financial crisis, when I was chair of ECON in the European Parliament, we did 40 pieces of major financial services legislation—directives or, if that Parliament wanted them to be more direct, regulations. That is a huge number, and the volume of rules that came out from them is even more huge. It is an enormous task for the regulators doing those rules and for those who have to scrutinise them. My committee, which did that scrutiny work in the European Parliament, had the advantage of doing the legislative side first and then moving on to the rules. Nevertheless, it had some 60 members so could specialise in small groups, rather as we do with a Committee of the whole House; we self-select a group. Some people would do banking, some would do funds and some insurance. There would be a happy band, probably only five or six, who developed extra expertise in the self-selecting sub-committees. Of course, within that idea of self-selection, you could run parallel informal sessions at the same time.
With our small committees, we will not have the ability to do that. There is no way we can emulate it, as we have already said. Nevertheless, we should think about the size of the committee we might want. I thought having 12 was better than nine, but maybe the number has to be odd. If you go to 13, that is not a happy number so let us up it to 15. Maybe that is as far as we can push it.
I think that a lot of the work of such committees will not be everyone wanting to get in on questioning somebody. An awful lot of such work is an awful, dreadful grind of going through document after document, and documents explaining the documents, then asking somebody what the hell it all means anyway. That is time-consuming. We should have a few more people concentrating on that, maybe with the opportunity to specialise. If we rotate the committee membership frequently we might lose that expertise, although in this House at least we do not seem short of people who can turn their minds to these kinds of things. I know that that is more of a comment, but maybe we can bear it in mind as we debate among ourselves what we will do on Report.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the Government are keenly aware of the interest in Parliament in the appropriate committee structures for scrutinising the regulation of financial services and will listen to the debate that we have on all the different groups very carefully. However, as noble Lords have noted, and I note myself, Parliament is of course responsible for determining the best structure to scrutinise the regulators.
As other noble Lords have also recognised, this debate has been had across different parts of Parliament over previous years, including during the Government’s consultation on our proposals. As my noble friend Lady Noakes said, the Treasury Select Committee considered this question in its report of June 2022, Future Parliamentary Scrutiny of Financial Services Regulations. That resulted in the establishment of a new sub-committee for scrutiny of financial services regulations. I also note that the All-Party Parliamentary Group on Financial Markets and Services published a report in February 2021, which recommended the creation of a Joint Committee.
I note that my noble friend modelled her amendment on the provisions relating to Parliament’s Intelligence and Security Committee, which is a Joint Committee set up on a statutory basis. Let me say to the Committee that the requirements applying to the ISC are quite unique, given the extreme sensitivities concerning the operation of the intelligence services. A large part of the provisions related to the ISC are about limiting its scrutiny powers to ensure that the intelligence services can operate and that the information they require to do their jobs is appropriately protected in those circumstances. The financial services regulators do not handle such sensitive information so the Government consider that a similar approach in statute is unlikely to be required in this instance. As I have said, it is not for the Government to impose an approach on Parliament.
I recognise the contributions from noble Lords saying that, by amending the Bill to create a Joint Committee, Parliament would be expressing its view. However, the point I would make in relation to that is that Parliament has the capability to set up Joint Committees without the involvement of government; they are usually established by Standing Orders in both Houses. This process does not require legislation. Introducing a Joint Committee at this stage of the Bill would be a significant change to the structure of the scrutiny of financial services. There is already a mechanism by which Parliament can establish such a Joint Committee should it wish to do so. Through this Bill, the Government intend to ensure that Parliament has the information it needs to conduct effective scrutiny of regulators, whatever structure it determines to be correct for doing so.
Clauses 36 and 46 and Schedule 7 require the regulators to notify the Treasury Select Committee of their consultations and draw the committee’s attention to specific sections, including those that deal with how the proposals advance the regulators’ objectives and how they have had regard to the regulatory principles. Those references to the TSC are in line with wider requirements elsewhere in existing financial services legislation, which establish that committee as the main committee for financial services matters. However, I note the wide range of sincerely held views on this matter and the fact that a number of different committees have previously been involved in scrutinising the wide breadth of financial services regulation.
Lord Forsyth of Drumlean (Con)
I am trying to follow the logic of my noble friend’s argument. If her argument is that Parliament can set up committees so there is no need for legislation, why is it necessary to reference the Treasury Select Committee in the legislation?
Baroness Penn (Con)
In the legislation, the Government are seeking to formalise and make explicit some of the ways in which committees can have their work facilitated. I recognise that this Bill refers to the Treasury Select Committee. That is the case in existing financial services legislation; for example, Schedule 1ZA to FSMA requires that the person appointed as the CEO of the FCA must appear before the TSC before their term can begin. Also, when appointing independent reviews of ring-fencing and proprietary trading, as required by Sections 8 and 10 of the Financial Services (Banking Reform) Act 2013, the Treasury was required to consult the TSC.
Lord Vaux of Harrowden (CB)
I am struggling with the logic here. If it is the case that scrutiny by the Treasury Select Committee is in previous legislation, why is it wrong to change that and enhance the scrutiny in this way? Logically, the two seem to be the same thing.
Baroness Penn (Con)
Perhaps I could finish my point; we will also come to this issue in the next group. In seeking to ensure that the relevant committees of Parliament have the information that they need to do their jobs, the Bill references the TSC, but I acknowledge that other committees in Parliament have done this role in the past or may wish to do it in future. That is something we will want to reflect on in our discussions of both this group of amendments and the next one. I recognise the point that has been made to me and will, I think, be made to me again in our debate on the next group. Although there is precedent for the TSC—indeed, it has set up its own sub-committee on this matter—I completely see the value of contributions of committees from this House or, if Parliament determined it, Joint Committees. We want to reflect carefully on how we can ensure that we are able to facilitate that also.
The noble Lord, Lord Vaux, invited me to reflect on this discussion and discuss with noble Lords between Committee and Report if and how we can take the thoughts and ideas further. That is something that I would be very happy to do. We will reflect on the points raised during this debate and consider them carefully before Report.
I wanted to make two points regarding this group. First, it is for Parliament to determine its committee structure and it has the ability to determine that, including the establishment of a Joint Committee, through existing procedure. Establishing a Joint Committee through statute is the exception rather than the rule and reflects the specific circumstances of the Intelligence and Security Committee. It is, I think, the only committee that has been established by statute in the last 100 years or so.
The other point, which we will discuss further, is that although we do not want to determine the correct committee structure, we do want to ensure that committees have the information they need to do their work. We have put clauses in the Bill to reflect that but, as I believe we will come on to, we will want to consider whether they fully reflect the work done in both Houses to scrutinise the regulators.
Baroness Bowles of Berkhamsted (LD)
I do not know whether the Minister is going to come on to this, but I hope she will also say something about what I called the consequences of scrutiny and what my noble friend called accountability. We can set up all the committees we like within the permissions of the parliamentary structure, but the point is what the Government then do and take notice of. There is no point in doing it otherwise. That is what we want to hear: how are they going to, as I would say, put wheels on it so that the reports are acknowledged? We are not saying that the Government or the regulators have to take everything but they at least need to comment and such things. Will the Minister say something about that, please?
Baroness Penn (Con)
On that point, the noble Baroness referred to the Government responding, but we are broadly discussing the committee’s scrutiny of the regulators and the Government’s role as well. The Bill provides a specific power to ensure that the regulators respond to representations made to them by parliamentary committees in response to their consultations. That clause is not limited to the Treasury Select Committee but applies to any parliamentary committee that makes a representation.
I look forward to debating the next group, which continues the theme, but for now, I hope that my noble friend will withdraw her amendment.
Baroness Noakes (Con)
My Lords, I thank all noble Lords who took part in this debate—with the possible exception of my noble friend the Minister.
I think we were pretty much at one in this Committee on the importance of setting up proper accountability arrangements for the financial services sector. I make no apology to my noble friend Lord Forsyth for trying to design a Rolls-Royce solution. The financial services sector is the biggest contributor to the national economy. What regulators in the financial services sector do has a huge impact, not just on the players in the financial services sector but on the whole economy. For that reason, we have to take this extremely seriously. It is at this point, when we are about to make a very radical change in the scope and responsibilities of those regulators, that we should consider this all very carefully.
The noble and learned Lord, Lord Thomas of Cwmgiedd, is absolutely right: this is about the importance of accountability to Parliament, and we must not forget that. That is what we have been trying to do.
Lord Forsyth of Drumlean
Lord Forsyth of Drumlean (Con)
My Lords, perhaps I should repeat the declaration of interests I made at Second Reading. I am regulated by both the FCA and the PRA and am chairman of a publicly quoted bank, Secure Trust Bank. In tabling this amendment, I anticipated my noble friend’s response to the previous group. I have Amendments 89, 93, 97 and 109 in this group; Amendments 89 and 97 are the guts of it. Basically, they would enable Parliament to set up a committee—a Joint Committee or its own committee or whatever.
In making her case for the last set of amendments, my noble friend Lady Noakes pointed to a key point, which is about resources. The noble Baroness, Lady Bowles, has talked about the scale of the task that is being put before the regulators. It is hard to believe that without some kind of statutory backing, the huge resources that will be required to do this task and to do it effectively are likely to be forthcoming. I think that is in the nature of things. Certainly, my experience as chairman of the Association of Conservative Peers has been that getting any change in this place is a lifetime task. I just do not see Parliament being able to rise to the challenge.
If my noble friend cannot countenance writing into the statute book that there should be a Joint Committee of both Houses, which I believe is the right solution, these amendments at least provide for that. It is evident from this quite short debate that every member of this Committee thinks that this is desirable, although I quite understand why my noble friend’s briefs say that it is not.
I do not wish to be rude about the Treasury Select Committee in any way but, as a former chairman of the Economic Affairs Committee—I am sure my noble friend Lord Bridges agrees—I have not detected within the Treasury Select Committee the kind of commitment that we see in the Select Committees of this House. That is because their members have constituency and other responsibilities. You can see that in the committee’s attendance and in the way in which it operates. As the noble Baroness, Lady Bowles, pointed out, this is a monumental task.
Now, I hate all this consensus so I will introduce a degree of controversy. I voted for Brexit. I voted for Brexit because I believe in Parliament taking back control over our regulations. I did not vote to give all the European regulations, over which we have had insufficient parliamentary scrutiny and control, to a bunch of regulators who are not subject to any parliamentary control. From the Government’s point of view, when they keep being asked “What did Brexit ever do for us?” to refuse even minimal accountability over our most important earner and job creator is extraordinary.
We should listen very carefully to the points made by the noble and learned Lord, Lord Thomas, in the debate on the previous group: this is a central constitutional matter. Without wandering into a Second Reading debate, throughout the Bill we have endless examples of where power is being taken away from Parliament by the Executive without being subject to scrutiny.
I am actually speaking to my amendments, in the hope that, at the very least, my noble friend will say that, as I made the case against my noble friend Lady Noakes’s amendments on the basis that it is for Parliament to decide, these amendments enable Parliament to decide what it should be. At the same time, I recognise that they do not deal with the issue of resources although—believe it or not—it is entirely up to Parliament how much resources its committees adopt. It is not within the Treasury’s control; Parliament votes resources to the Treasury, not the other way round.
My noble friend is a very effective and much respected Minister at the Dispatch Box but, if I were a Minister faced with a Committee as unanimous as this, knowing the views that were expressed at the Second Reading on the Bill, I would not hope to proceed without making a major concession in this area. Not doing so would make it more difficult for the passage of this legislation.
It is a great experience for me to have the noble Lord, Lord Tunnicliffe, and the noble and learned Lord, Lord Judge, support an amendment in my name. I am not used to this degree of consensus. That in itself ought to make my noble friend aware that she needs to take this away and come back with a government amendment that establishes a Joint Committee.
I will deal with the argument about the ISC, which my noble friend said is unique. It is indeed. It is a unique committee, because the powers that are operated by the security services are great. The powers that are operated by the regulators are great. We can argue that this is about confidentiality—it certainly is—but it is also about ensuring that people who wield great power are held to account, and that is missing from the Bill, as so many have said during this debate.
The other point I make to my noble friend is that yes, it is true that it is the only statutory committee that has been established, but we have made a fundamental change in taking financial regulation away from the European Union, where it was subject to considerable scrutiny—a moment of praise from me for the European Union and the wonderful work that the noble Baroness did as chair of ECOFIN. Whatever criticism one might make of the regulations, there was proper scrutiny, and that is completely absent here. Are we really going to say that we as a Government have delivered Brexit by making sure that there is little democratic accountability and less than was achieved in respect of the European Union?
In responding, I ask my noble friend to accept the amendments, but go further if she can.
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
My Lords, I have to inform the Committee that if Amendment 89 is agreed, I cannot call Amendment 90 by reasons of pre-emption.
Lord Bridges of Headley (Con)
My Lords, I am grateful to my noble friend Lord Forsyth for tabling this amendment. As he said, there has been an outbreak of consensus on this point overall, and the fact that the noble Lord, Lord Tunnicliffe, and the noble and learned Lord, Lord Judge, have also put their names to the amendment, shows what we have heard time and again on this Bill: that it does not go nearly far enough to increase parliamentary accountability and scrutiny.
As I said in a previous debate, and as my noble friend mentioned, we need to improve this Bill in three ways. First, we need to ensure that the regulators publish more data about their own performance. Secondly—this is an amendment we will come to on another Committee day—we need to create a new source of independent analysis of regulators’ actions and performance. Thirdly, by this amendment, as with those in previous groupings, we need to ratchet up parliamentary scrutiny.
I see this amendment—I use this word carefully—as a backstop. My noble friends who have Brexit dispositions may take exception to the word, but it is absolutely a backstop to what we need to achieve here, given the reservations that my noble friend the Minister made about my noble friend Lady Noakes’s previous amendment. As I have said before, and as my noble friend just mentioned, the Treasury Select Committee is an admirable body. We all know that it has created a new sub-committee to scrutinise consultations published by the regulators but, as many noble Lords will be aware, although consultations are very important, they are just one aspect of the regulators’ work. Furthermore, there are numerous consultations. I spent a joyous few minutes counting the number of consultations published last year by the FCA, PRA and the Payment Systems Regulator; I counted 75.
Finally, as my noble friend pointed out, there is expertise in this House. I will spare the blushes of those in this Room, but there is enormous expertise not just here or on the Economic Affairs Committee or the Industry and Regulators Committee but in numerous other aspects. That expertise should be mobilised effectively and systematically to scrutinise this avalanche of regulation. For those reasons alone, it is critical that the Bill ensures that this House—not just the other place—is seen as a key means of increasing scrutiny and accountability.
Before I end—I know that others want to speak—I say just this: increasing accountability and scrutiny should not be portrayed as a means of undermining independence. I very much hope that no one thinks that. The scrutiny of our regulators and their accountability to Parliament should and indeed must go hand in hand with their independence. This is not just to ensure that regulators are accountable, nor simply because there should be no regulation without representation, but because if regulators wield great powers, as my noble friend said, they must be seen to account for their actions in public, and those actions must be seen to be scrutinised and judged by Parliament to be appropriate and within their remit. The point is that doing so increases the legitimacy of the regulators themselves. That is why this debate is not arcane but highly relevant to the power and the position that regulators hold.
I was grateful to hear my noble friend the Minister’s constructive tone in her response on the previous group, so I end by asking her a very simple question; it requires only a yes or no answer. Does she think that this Bill contains sufficient measures to increase parliamentary scrutiny of the regulators in the light of the powers that those regulators are now getting—yes or no?
Lord Naseby (Con)
My Lords, I have a couple of quick comments. I have had the privilege of being across the two Houses for coming up to half a century. In my judgment, this Bill, which has a clear objective of growth—a brand-new element that has not been laid on financial services before—means that Parliament needs to show leadership. We are not often asked to show particular leadership but, with this substantial change, we in Parliament need to show leadership. That is what this amendment is all about.
Baroness Bowles of Berkhamsted (LD)
My Lords, I have two rather modest amendments in this group. They are again part of my drawing attention to the fact that there needs to be accountability to Parliament. All they would do is insert that, when a regulator does its consultation and is giving the notification to Parliament, it should mention and draw attention to the fact that issues have been covered by a parliamentary report. I know that the regulator will already have responded to a parliamentary report but it might have been some time sooner.
This is a relevant issue. Any sensible regulator would probably make the comment anyway but that does not mean you cannot put little pieces into legislation here and there that just remind people of the status of parliamentary reports. That is what these two amendments would do, with one for the FCA and one for the PRA. When those notifications come to Parliament, they would have to indicate when they have been covered by a parliamentary report. They would not have to say that they agree with it; one presumes that they would comment on it.
I will not say anything more about the scrutiny—I have said a lot already—other than that I basically agree with everything that everybody has said. We are all agreeing with one another. When the Minister has meetings to work out what concessions can perhaps be made, they will have to be substantial, not a little tweak. They will have to recognise the importance and magnitude of financial services—including the great power that they have, as has been said—and move towards what must be great accountability to measure up to that great power.
Lord Tunnicliffe (Lab)
My Lords, I hope I will be forgiven for not going through my various amendments. Their essence seems to be in the general direction of this group of amendments and I think it highly likely that, between now and Report, the supporters of this group will knock together a cohesive set of amendments to achieve our common objective. I know that the noble Lord, Lord Forsyth, finds it painful but we are agreeing with each other on this group.
One of the problems of society is that people grow old in waves. We are already running out of people who have forgotten about the last financial crisis. It was by a hair’s breadth that the economic system in the world did not fail. It took some brave decisions, in this country in particular and in the United States, to save the world from an economic catastrophe. This is different from the Intelligence and Security Committee but in no way is it less important. It is crucial to this nation.
We are suggesting that we in this House should be a backstop. That is not particularly surprising because that is what we do all the time. When the Government do not have a working majority, I believe that they are much more alert to what happens in this House because, suddenly, they are all there, they have their majority, they have got something through the House of Commons but then it runs into the Lords and new questions are asked. People spend a lot of time worrying about particular points. Yes, our role is a backstop, but we could not be one as the Bill is drafted at the moment because it sees two levels: the House of Commons level and the House of Lords level. This Bill brings us into parity of access. It is not nearly as comprehensive as the proposal from the noble Baroness, Lady Noakes, but it is a basic matter of equity to bring this on to a level playing field.
My next point concerns the issue of volume. The volumes will be very significant. One of the best things that the House of Lords does is its committees, where people actually put the time in. I really am quite pleased that I avoided becoming an MP. I only aspired to it before I knew what it was all about. Once you are an MP—I hope that ex-MPs will interrupt me if I am wrong—the first thing it is all about is getting re-elected. That requires a lot of work in the constituency and all that sort of thing. That is all part of the democratic process but the volumes need the sort of people who are in this House—as the noble Baroness, Lady Bowles, said, they almost self-select—to put the effort and energy in.
Scrutiny is not a negative process. Too often, in the way we run bits of society, it is a single heroic leader passing down the rules, but very good organisations encourage dissent in their top teams—not external dissent but internal dissent where people ask, “Do you really mean that? Have you thought through the consequences of that?” The effect of those processes is extremely benign. Either things get changed for the better or people understand what they are saying better and are able to present it better. Scrutiny is an extremely positive thing.
The mood that has got us here today has been around for years, I would say. We need a discontinuity; this group of amendments is the minimum discontinuity that I believe this House will tolerate. We will all be working across the House over the coming weeks to put together something that cannot be resisted. I hope that the Minister does not floor us by coming forward us early on in discussions with some sensible concessions to embrace the direction of this group.
Baroness Penn (Con)
My Lords, first, I will briefly speak to the government amendment in my name in this group—I feel I should—before turning to the substantive measures raised by the debate.
Amendment 151 corrects a minor drafting error in Schedule 7 to the Bill. The current drafting requires the PSR, when notifying the Treasury Select Committee of consultations, to set out how the proposals are compatible with the regulatory principles. However, the Financial Services (Banking Reform) Act 2013, which established the PSR, requires it to have regard to its regulatory principles. The Government are therefore bringing forward this amendment to Schedule 7 to align this Bill with that Act. The amendment also aligns the requirements on the PSR with those imposed on the FCA and the PRA through Clause 36 of the Bill.
I turn to the amendments tabled by my noble friend Lord Forsyth and the noble Lord, Lord Tunnicliffe. Through FSMA and, in respect of the PSR, as I just noted, FSBRA 2013, Parliament sets the regulators’ objectives and gives them the appropriate powers to pursue those objectives. I therefore agree with this Committee that Parliament has a unique and special role in relation to the scrutiny of the FCA, the PRA, the PSR and the Bank of England.
I also agree that effective parliamentary scrutiny provides a valuable service for consumers, firms and the regulators themselves. It can help ensure that the regulators’ resources are appropriately targeted to consider appropriate democratic policy input from Parliament and bring important public policy considerations into focus.
I recognise noble Lords’ point that regulators in this sector are in a somewhat unique position and the approach that we take to financial services regulation is somewhat unique in the level of delegation that we give regulators in their rule-making. The Government’s approach, through our FRF consultations and this Bill, is an attempt to recognise that somewhat unique position and role of regulators in this sector, their wide remits and their position as independent public bodies that are accountable to Parliament.
As I mentioned in the debate on the previous group, I will set out the rationale for the Government’s approach in the Bill and our consultations. Our intention is to ensure through the Bill that the Treasury Select Committee has access to the information needed to best scrutinise the work of the regulators. The requirements for the regulators to notify the TSC in Clause 36, and the PSR in Schedule 7, are in line with requirements elsewhere in FSMA that establish the TSC as the main committee for financial services business. This is intended to support more effective accountability and scrutiny of the regulators by Parliament as a whole.
The Bill requires that notifications sent to the TSC must be made in writing. As is usual practice, the Government expect this correspondence to be published. It will therefore facilitate broader awareness of the regulators’ consultations and enable relevant Lords committees to consider the matter. The clauses also require the regulators to respond in writing to formal responses regarding their consultations received from any parliamentary committee. The Government recognise the significant interest of this House and Committee in ensuring that all committees conducting regular scrutiny of financial services are adequately notified of the regulators’ consultations to ensure that they have the information required to conduct that scrutiny.
As I said in the previous debate, parliamentary scrutiny is first and foremost an issue for Parliament to consider. It is not for the Government to determine the best structure for ongoing scrutiny of the financial services regulators, but we do have a role in setting out the suitable mechanisms by which the regulators must give Parliament the appropriate opportunity to scrutinise the work of the regulators in taking forward their functions. I would like to reassure noble Lords that the Government have heard the points made in the debates today and that ahead of Report we will carefully consider the views expressed today.
I recognise the level of consensus among speakers in this Committee. My noble friend picked up my point and said that there was not a range of views on this issue. In the debate on the previous group—and we have touched on it in this debate—in some respects we are talking about the establishment of a Joint Committee of both Houses. If you look across both Houses, there is a range of views about how this should be taken forward. I will listen very carefully to the views of this Committee as we conduct our scrutiny of the Bill at this end—in our House—but, when I made that point, I was maybe pointing to the whole of Parliament, not just our end of it.
Lord Forsyth of Drumlean (Con)
My Lords, my noble friend referred to the range of views and the House of Commons. I hope that this does not get into a kind of turf war between the House of Commons and the House of Lords. The reason I say that is that if I look at the scrutiny the Bill got in the other place, it is not impressive.
The noble Lord, Lord Tunnicliffe, said that he does not regret not becoming a Member of Parliament. When I was first elected as a Member of Parliament in 1983, it was exceptional to have a guillotine in consideration of legislation. Now everything is timetabled in the House of Commons and when you say that it results in almost zero scrutiny, the response one gets is, “Ah, yes, but that’s because all parties agreed that only that time was necessary”. That is why this House spends so much of its time looking at badly drafted legislation that has not even been considered.
If we think about the work that this House has to do and the burden of the legislation that comes our way, it is particularly acute at the moment. I certainly find it difficult to keep up with all the legislation that we are at present being asked to look at. I would like to be speaking today on the legislation in the Chamber but cannot because I am here, and so on. The idea that the main purpose of the House of Commons is scrutiny is completely wrong—accountability, yes, because they are elected. They are accountable to the voters, unlike all of us here.
At the heart of, if I may say so, the Treasury’s misreading of this situation is its not distinguishing between accountability, scrutiny and independence. Yes, we want the regulators to be independent and to have scrutiny, but we also want accountability. They need to be able to explain why they have done or are proposing certain things. To argue that that is achieved by getting them to send a copy of their latest consultation documents, which they might have spent two years thinking about, and that they will respond to letters and representations from committees that are overloaded and focused on long-term scrutiny is just—I am sorry to use the word—fatuous. It does not begin to meet the challenge created by the decisions to leave the European Union and to give the responsibility for these regulations to the regulators.
My noble friend the Minister keeps referring to the legislation that was passed in FSMA. As my noble friend Lord Bridges has said, that was then and this is now. This is a complete sea-change in what is required, and the Bill does not meet the test. My noble friend Lord Bridges asked the Minister to answer the question with a yes or no. Listening to her speech, I thought that was definitely a “yes”—that she does think the Bill provides sufficiently for parliamentary scrutiny and accountability. There is no one else in this Room, who is a Member of this House, who thinks that.
It is not enough to say, “I hear what you say and we will come back at Report stage.” I can see a car crash here. I can see us getting into a fight, which might be represented as a turf war between the Commons and the Lords, but is actually about ensuring that our regulators have the credibility that will come from effective scrutiny and that we get regulations that have been properly accounted for. At the end of the day, it will be for the House of Commons to decide what should happen.
That is the central role of this House. Frankly, it is insulting to this House to say, “Don’t worry your heads about this. The House of Commons and the Treasury Select Committee are the designated bodies to deal with scrutiny on an unprecedented scale.” It is the scale of the thing that I do not think is understood. A little voice in my head says that the Treasury sees itself as providing the scrutiny. Well, how do we hold the Treasury to account for the scrutiny? The argument may be that we do so by asking Oral Questions or Written Questions, but I have heard a few recently and the answers, frankly, do not persuade me that we have effective scrutiny through that route even in this House. I will not give examples as that would be embarrassing to those concerned.
I thought my noble friend the Minister might say, “I’ll grab this as a lifeboat because it is the very least that can be done,” but, actually, my noble friend is sticking to her guns. I agree with the noble Lord, Lord Tunnicliffe, that, if the Government are not prepared to bring forward amendments, we will have to find agreement on a suitable amendment. I think the Government will be defeated; there are very strong feelings on this. I say to my noble friend that she should go back to the Chancellor and to her colleagues and ask whether they really want to get into an unnecessary fight about something that any reasonable person would see is essential for the proper conduct of the financial services in our country, on which we so depend. I beg leave to withdraw the amendment.
The Deputy Chairman of Committees (Lord McNicol of West Kilbride) (Lab)
We have had a request from the Minister for an adjournment for 10 minutes, which I am going to grant. The Committee stands adjourned until 5.51 pm, when we will proceed with Amendment 123.
Lord Holmes of Richmond
“(c) be provided with any information or data that the Panel requires in order to fulfil its duties,(d) publish the agendas and minutes of meetings of the Panel, and(e) make publicly available its recommendations in full, including, but not limited to, the evidence base and analysis it used to make its recommendations, the assessed costs and benefits of the FCA’s activities and the range of representations made by Panel members to those recommendations.”Member’s explanatory statement
This amendment would require the FCA to provide its CBA Panel with the necessary data and information to undertake its duties and ensure that the Panel’s recommendations were made publicly available.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to start this fourth group on day five of Committee. As it is the first time that I have stood up today, I declare my interests in financial services as set out in the register.
I will speak to my Amendments 123, 129, 130, 132, 138 and 139; I thank my noble friend Lady Noakes for co-signing them. In essence, what they try to get at is pretty simple: to enable the CBA panels to be effective in the mission they purport to be set up to achieve.
I present to the Committee a new financial instrument: the ISA. Noble Lords might think that they are familiar with the ISA, but this ISA is “independence, scrutiny and accountability”, which we have heard so much about today and previously in Committee. I gift this particular ISA to my noble friend the Minister. Treat it as a woodworking router or some such device. If we take independence, scrutiny and accountability and apply them throughout the Bill, will she agree that, if current clauses do not stack up, they should be kicked out, improved and changed before Report?
With the CBA panels we currently have a conceptually useful form of ISA approach. However, the difficulty is that, as we have heard with so many other provisions in the Bill, as currently constructed they are the plaything of the regulator, again enabling the regulator to mark its own homework—or, even more so, to simply respond to whatever the CBA panels might say with, to put it in common parlance, “Whatevs”.
Importantly, rather than, for example, the membership of the panels, their agendas and outputs being down to the regulators, this suite of amendments can, in effect, empower a CBA panel to do its job effectively for all our benefit. Consider the membership: would it not be good if at least some of those members came from the sectors, with clear, recent and relevant expertise to bring to bear on the matters at hand?
If Amendment 123 and other amendments in my name—and others in this group, which all have a similar purpose—were agreed, it would enable these panels to operate far more effectively. The panels could also take a cumulative view on the impact of regulatory change. They could have a power of pre-regulatory scrutiny to consider the impact and force the regulator to think again before such regulations are brought into being. They could look at and opine on the overall economic impact of regulatory change. Having such an approach would make it far clearer and more transparent for all to see, when the costs are out there, whether there is necessarily any benefit from a particular change.
When my noble friend the Minister responds, will she agree that the CBA panels are a good thing, but it would be a great thing to fully enable and empower them to pass the ISA test? I beg to move.
Lord Lilley (Con)
My Lords, I did not speak on the previous group of amendments, but I endorse everything that my noble friend Lord Forsyth and the consensus of speakers said on that issue. I also strongly support what my noble friend Lord Holmes has spelled out, in not only proposing his amendment but providing an overview of this whole group.
We all agree that regulators must meet the objectives set by Parliament, but should do so in a cost-effective way, without erring, as regulators can, on the side of overburdensome regulation that makes life simpler for them without consideration of the costs to others. As drafted, the Bill requires both the FCA and the PRA to have two panels that undertake cost-benefit analysis. That is excellent but, as with much else in the Bill, it allows the regulators to mark their own homework or, at least, to appoint most of the panel of examiners who will mark their homework for them.
My Amendments 124 to 128 and 133 to 137 do, in essence, three things. They ensure, first, that all the members, not just the chair, are appointed by the Treasury rather than by the regulators; secondly, that they are independent; and, thirdly, more specifically, that they are not employees of the FCA or the PRA. I hope they find acceptance from the Government and this Committee. They are not contentious and are quite simple. They are within the spirit of the Bill, but simply tighten it up and make sure that what the Government appear to want is achieved without allowing the regulators to take over the process and run it in their own interest.
Baroness Noakes (Con)
My Lords, I have added my name to the amendments in this group in the name of my noble friend Lord Holmes of Richmond, and I endorse everything that he said in introducing them. I should also have added my name to my noble friend Lord Lilley’s amendments, because I agree with everything that he said in respect of them.
I congratulate the Government on embedding cost-benefit analysis panels into the architecture of the PRA and FCA. That is a very good thing. These amendments, which focus on transparency and independence, are intended to be helpful and to make the implementation of cost-benefit analysis panels more effective so that we can properly rely on their contribution to regulation. I hope that my noble friend the Minister will welcome these amendments.
Baroness Bowles of Berkhamsted (LD)
My Lords, again, I have a few niche amendments in this group. I have never been entirely comfortable with statutory panels. I understand their origins as wise men—undoubtedly, they were supposed to be men then—and that they formalise and take into the structures the voices of experienced people, but I am concerned that either they become about favoured sons or daughters or there is a potential to capture the people on the panels. Neither am I necessarily convinced that having them fragmented is all that sensible, because if you discuss things that may be relevant to big business in isolation from the public interest and smaller business, the big picture that is then put together is left to the regulator.
Those are the issues in my mind as I propose my amendments. I was not going to unpick the panels, but I suggest that every panel should have to have on it some representation of the public interest. That is probably already there on the Consumer Panel, but it is not on some of the others. Amendments 141 and 142 are to make sure that, even when you are dealing in a more specialised context, somebody is there putting the pieces together with regard to the bigger picture. I am not saying that they are supposed to keep intervening and doing the consumer bit when you are on the big business bit, but this is part of making sure that you are not too compartmentalised.
For a similar reason I have, in Amendment 143, proposed empowering Parliament to nominate one person to panels. This is part of Parliament representing the public interest. I am not saying that a parliamentarian should be on that panel, but it could choose to do that. In its wisdom, the European Parliament once chose to do that to me, and to some extent I wish that it had not, because it was a lot of work. When we started having these positions through appointment from the ECON committee, the Commission initially did not like it, then eventually it decided that it did rather like it because it helped to join up the processes and open up transparency and communication channels.
That is the point of suggesting that there be a parliamentary nominee. Again, it is just to make sure that we do not have sameness all the time, with the nominations coming from the same place. That is one way that it could be addressed. If others have other ideas to address the same problem, I am quite happy that those be incorporated, but those were the points of my Amendments 141 to 143. I think I am in common cause with the noble Lord, Lord Holmes, who does not want the panels to be the plaything, if you like, of the regulator, and with the noble Lord, Lord Lilley, who thinks that they are appointing their own examiners. I am trying to address the same problem. Whoever’s amendments we work with, the message again is that we need some change in this area.
Lord Flight (Con)
My Lords, the big change over the last decade has been the explosion in the number of people and the costs of those working in the regulatory context. I would have hoped that this debate and further consideration would look at what really adds very little to this Bill but costs a fortune in terms of people.
Lord Ashcombe (Con)
My Lords, before I start, I declare my interest an employee of Marsh Ltd, the insurance broker.
I again find myself supporting my noble friend Lord Holmes. These amendments would ensure that the cost-benefit analysis panels are better equipped to undertake the necessary scrutiny of the regulators’ work by ensuring their independence from the regulators. As the Bill stands, all the powers are given to the regulators in controlling the membership, agendas and outputs of these panels, thus allowing the regulators to set and mark their own homework, as people have said.
These amendments would ensure that the CBA panels have the necessary independence from the regulators by giving them powers to set their own agendas and work programmes. Where appropriate, the work of the panels should be made public. The amendments would ensure that the panels have the powers and authority to gain access to the data and impact assessments on which the regulators propose to make their decisions, including a cumulative cost-benefit analysis to understand the cumulative impact of regulation. The panels would have powers to have two existing representatives—or a number that noble Lords so suggest—in order for the views of the prevailing market to be heard. Importantly, the CBA panels would be given the freedom to offer a view on the overall economic impact and effect on UK competitiveness of regulatory changes, including scrutiny over the regulators’ reporting on the competitiveness objective. Finally, the panels should have the ability to undertake pre-regulatory scrutiny of rules, with the ability to challenge the regulators and seek a response to new regulations coming into force.
Lord Tunnicliffe (Lab)
My Lords, I think I want to commend the Government on actually bringing in the concept of cost-benefit analysis panels. Generally speaking, the amendments in this group elaborate on that and probably make them better balanced. I will certainly be interested to hear the Government’s reaction to them.
We have Amendments 131 and 140 here, which would require the FCA and the PRA respectively to put on their CBA panels
“at least three individuals with experience and expertise in the field of economic crime, with one drawn from the public, private and third sectors”
and to consider
“any economic crime risks posed”
by any new rules they propose. These amendments have come from thinking at the other end and from the organisation Spotlight on Corruption. I thank it for contributing its expertise, and Emma Hardy MP for pursuing the amendments in the Commons.
These amendments are part of our overarching push to highlight the Government’s weaknesses on economic crime, mainly fraud. There are serious concerns from consumers and stakeholders across the board about the slowness of regulators in preventing and tackling the vast amount of economic crime in the system. The size of the prize is vast. Money laundering is estimated to cost the UK £100 billion a year and fraud costs us £137 billion a year. The regulators need to do much more. I hope the Minister will agree that having panel members with specific expertise in economic crime is one way to ensure this, given the perverse ingenuity of the criminals they are up against.
Baroness Penn (Con)
My Lords, perhaps it would be helpful to start with a bit of context behind the Government’s approach to the statutory panels and the new cost-benefit analysis panel established in the Bill. I will then turn to the specific amendments.
The FCA and the PRA are required by FSMA to maintain statutory panels as part of their general duty to consult. As noble Lords have noted, these panels play a vital role in supporting the PRA and the FCA in developing regulatory proposals. As noble Lords have also noted, robust cost-benefit analysis—CBA—is an important part of the regulators’ policy-making process. It helps the regulators to understand the likely impacts of a policy and determine whether a proposed intervention is proportionate.
Respondents to the October 2020 future regulatory framework review consultation recognised the value of cost-benefit analysis but expressed some concern about the rigour and scope of the regulators’ analysis. Several respondents also supported enhanced external challenge as an effective way to improve the quality of the regulators’ cost-benefit analyses. Clause 41 addresses these concerns by introducing requirements for the FCA and the PRA each to establish and maintain a new statutory panel to support the development of their CBAs. Clause 47 includes a requirement for the Bank to consult the PRA cost-benefit analysis panel in relation to its FMI functions, while Schedule 7 includes a requirement for the Payment Systems Regulator to consult the FCA cost-benefit analysis panel. The new CBA panels will have a crucial role to play in providing challenge to regulatory proposals and ensuring sufficient scrutiny of the regulators.
I turn first to Amendments 123, 129, 130, 132, 138 and 139, tabled by my noble friend Lord Holmes, and Amendments 125, 126, 134 and 135, tabled by my noble friend Lord Lilley. The Government agree that the composition of the regulators’ panels is important for ensuring that they can effectively fulfil their role as a critical friend to the regulators. In particular, the Government consider that the CBA panel should benefit from those with experience of working in authorised firms.
During the debate in the Commons, the importance of ensuring that the regulators’ statutory panels, including the new CBA panels, are made up of a diverse range of independent experts was highlighted. In response, the Government introduced Clause 44, which requires the FCA, the PRA and the PSR, when appointing persons to their statutory panels, to ensure that all members are external to the FCA, the PRA, the Treasury, the PSR and the Bank of England. The regulators’ existing panels are currently made up of external members so this requirement will ensure that the approach is standardised and maintained on a long-term basis. In addition, the Government expect the FCA and the PRA to publish responses to the CBA panel’s representations at appropriate intervals, although it would not be appropriate to fix in legislation specific deadlines for independent regulators that may not be deliverable in practice.
Turning to Amendments 131 and 140 from the noble Lord, Lord Tunnicliffe, I assure the Committee that the Government are committed to tackling economic crime, as we have discussed in previous debates. This is also a priority for the regulators. For example, since 2015, the FCA has prioritised its strategy to ensure that firms take adequate steps to prevent them being used for financial crime.
Section 1D of FSMA sets out the FCA’s market integrity objective while subsection (2)(b) makes it clear that, in advancing that objective, the FCA must ensure that the financial system is
“not being used for a purpose connected with financial crime”.
The Government therefore expect that consideration of economic crime will feature in the regulators’ considerations when conducting a CBA. This is reflected in the FCA’s existing published guidance for CBA, which sets out that, when considering the rationale for a regulatory proposal, it should be clear what type of market failure or harm it seeks to address—including, for example, economic crime.
Lord Holmes of Richmond (Con)
My Lords, I thank everyone who has spoken in this group; indeed, I thank my noble friend the Minister for her response. At the beginning of that response, she set out very clearly the role and purpose of these panels—a role and purpose that could only benefit from much that is in the amendments in this group.
This is an area to which we will return. To pick one example, if good people, even independent people, come through such an approach—as I am sure they will—as currently drafted, they will not be independent appointments; that is clear, and that is just one example. We will need to return to a number of these issues for the sole purpose of making the panels as effective as they can be; this will lead to better regulation, help the regulator and benefit the wider sector. For the time being, however, I beg leave to withdraw Amendment 123.
“Recommendations to FCA and PRA: systemic risk
In section 9Q of the Bank of England Act 1998 (recommendations to FCA and PRA), after subsection (2) insert—“(2A) The Financial Policy Committee may make recommendations to the Pensions Regulator, FCA and PRA about financial stability and systemic risk from investment strategies in Pension Funds, including concentration, risk modelling, margin, collateral and stress testing.(2B) The Financial Policy Committee may request a joint annual report from the Pensions Regulator, PRA and FCA about investment strategies in Pension Funds, and the outcomes of any risk modelling and stress testing, and to highlight aspects of investment or otherwise that may present a risk to financial stability or systemic risk.(2C) The report must be sent to relevant Parliamentary Committees.””
Baroness Bowles of Berkhamsted (LD)
My Lords, this is probably an appropriate time to remind the Committee that I am a member of the international Systemic Risk Council and a director of the London Stock Exchange. My three amendments in this group are inspired by the events of last September, when it became necessary for the Bank of England to intervene in the gilt markets, and by the subsequent inquiries into and analysis of liability-driven investment, especially leveraged liability-driven investment.
The Lords Industry and Regulators Committee recently published a 22-page letter to Ministers—it is more like a mini-report—following its investigations into LDI. Among its suggestions was that, like the PRA and the FCA, the Pensions Regulator should come under the “comply or explain” category for recommendations made by the Financial Policy Committee; I am aware that this suggestion was also floated in the Economic Affairs Committee’s session with Sir Paul Tucker. This is exactly what my Amendment 149 would do, together with the necessary context—in this case, regarding
“systemic risk from investment strategies in Pension Funds, including concentration, risk modelling, margin, collateral and stress testing.”
I have also included specific mention of the FCA and the PRA, both to clarify their roles in relation to systemic risk from pension funds and to emphasise that pension funds need to be considered in that context because it is inevitable that there will be far more correlation and groupthink than there would be among other groups of funds. The collective size of pension funds and their substantial role in gilt investment is not going away; the specifics of the Pensions Regulator’s rules and accounting standards relating to pension scheme valuation have driven and will drive that correlation, even if adjustments are made. It would take too long to cover all the things that have come to light but one reason why such an amendment is necessary is to clarify that it is an ongoing source of systemic risk that must be routinely monitored.
It is true that, in 2018, the Financial Policy Committee noted the fact that leverage in pension funds was greater than in hedge funds. It also noted the substantial concentration—indeed, almost a cornering of the market—in index-linked gilts. The claim is that the FPC then worked with TPR, the FCA and the PRA on stress tests. Further analysis by TPR in 2019 highlighted again that there was significant borrowing and leverage in large defined benefit pension funds but, again, it left out analysing the smaller end of the market, where operational challenges were greatest. TPR said that it could not impose on the small schemes, while we heard from L&G in the Industry and Regulators Committee that it got the okay for its pre-existing buffer of 100 basis points.
Frankly, nothing got changed. Nothing was done on leverage. The Bank sat happily by as sponsor companies effectively ran off-balance sheet hedge funds in their pension schemes. Nothing was done about the concentration in index-linked gilts and—guess what?—when the glitch came due, to the mini-Budget, the part of the market that was cornered found it had nobody else to sell to. So, it was a pretty bad job all round. Meanwhile, many are patting themselves on the back because the mark-to-market valuations, following accounting standards based on gilt discount rates, make it look as if liabilities have dropped more than the drop in asset valuations, so they say that the losses do not matter. It is, of course, an illusion: the pensioners are paid out of real assets and the losses will be paid for, down the line, by the sponsor companies and the taxpayer via tax relief. That will be measured in very many billions.
To put in some real figures, pension schemes had assets of £1.8 trillion. Losses are put at £400 billion by the Pension Protection Fund; others reckon it may be £500 billion. The ONS will tell us the actual figure next month. That £400 billion or £500 billion has to be replaced, whether through sponsor contributions or growth. All that will be tax advantaged in some way, thus a loss of maybe some £100 billion to the public purse, without any increase in pensions from which tax would be recouped. None of this is escaped through buyout.
Whether you are a back-patter or a sharper analyst, we cannot afford a repeat and routine reliance on Bank of England intervention. There has to be increased diligence. As part of that, the specific need for the Financial Policy Committee more thoroughly to consider pension funds should be up there in lights and in legislation. That is the basis for the proposal in my Amendment 149.
It will be noticed that I have then amended my own amendment with Amendment 149A, which would also bring accounting standards and the endorsement board under the auspices of the Financial Policy Committee. This is not a totally off-the-wall suggestion because the Bank of England used to have a role in accounting standards back in the day, before Basel standards took over for banks. Nowadays, the Bank is not interested in accounting standards because it does its own calculations. That is, in fact, a quote from an important person at the Bank, who I will not embarrass today because it was made privately, but Andrew Bailey also told the Treasury Select Committee that he did not understand arcane pension fund accounting.
However, accounting standards can substantially affect the economy, financial stability and systemic risk, and there is no systemic oversight. After the financial crisis in the US, Bob Herz, then chair of the Financial Accounting Standards Board, asked to be given accountability to Congress. In the UK, we accept international standards created by the IASB, a private body, after review by the unaccountable endorsement board, which has no financial stability or systemic risk remit or experience.
Liability-driven investment and concentration in gilt investment was driven by the predominant use of gilt discount rates in accounting standards for valuing pension scheme liabilities on corporate balance sheets. The volatility that gave to corporate balance sheets drove towards investments that would match and counteract that volatility—that is, towards gilts and, in particular, away from equities. Indeed, as given in evidence to the Work and Pensions Select Committee, the extent of this is such that the London Stock Exchange listings are the most foreign-owned and most subject to foreign takeovers of any major exchange.
Matching accounting standard valuations has dominated thinking to the extent that the FTSE group of 100 CFOs has written to the Work and Pensions Select Committee, essentially saying, “We’d rather invest in gilts than in ourselves.” Meanwhile, as I have said, the “nothing to see here” illusion in the attitude to pension scheme funding—despite asset losses and because the gilt-linked discount rates on liabilities has made them look smaller—prevails even at the Bank of England over its own pension scheme.
Lord Davies of Brixton (Lab)
I broadly support the proposals in these amendments, although I have doubts and I do not think this is the final answer—I suppose that is what I am struggling to say—in part because I have yet to be convinced that the Bank of England is the appropriate holder of the knowledge on these issues. It is a highly contested area; there are strong views and a range of views.
It is not clearly understood, except perhaps by the noble Baroness who moved this amendment, that there is total confusion between different standards involved in assessing a pension fund. There are the technical provisions under the solvency legislation; the accounting standards set by the accounting bodies so that the sponsor has some idea of the ongoing liabilities to the pension fund; and the standards set by the Pension Protection Fund. They are all important, but they are not the funding standards. The funding standard is the assessment of what money is required to be paid into the scheme to fund future benefits, and none of those other three funding standards is designed to produce that result.
The technical provisions are not a funding standard, just a way of assessing whether further contributions to the scheme are required; they do not tell you what those contributions should be. Similarly, the accounting standard does not tell you how to fund the scheme; it is purely for the purposes of the sponsor, so it has some idea of its financial standing. The standards set by the Pension Protection Fund, which are a specific insurance-type approach, are certainly not a funding standard.
The problem is that there is total confusion, and I am not sure that we can look to the Bank of England in its present state of knowledge, or the financial responsibility committee, to make that assessment. The issue is: who is going to promote this debate and arrive at a conclusion?
Another point that needs to be clearly understood is that pension funds are distinct from insurance offices. They are two financial institutions of a completely different nature. Over the last 20 years we have edged to a situation in which pension funds are expected to behave as though they are insurance companies.
I support the amendments, but I raise some doubts as to whether we can really look to the Bank of England and its committee to provide the clarity that is so sorely needed on these issues.
Baroness Noakes (Con)
My Lords, it is a pleasure to follow the noble Lord, Lord Davies of Brixton, because he knows rather a lot about this area—far more than I and perhaps many other members of this Committee.
I added my name to Amendment 149 in this group from the noble Baroness, Lady Bowles, and have little to add to what she said on it. It was genuinely shocking to find out about the risks to financial stability that existed through the use of LDI strategies last September. Even more shocking was the fact that the Financial Policy Committee knew about them but had done very little about it. These amendments would not solve the problem but at least remind the FPC what its job is supposed to be: to identify areas of risk to financial stability and do something about it.
I did not add my name to the noble Baroness’s Amendment 159 because giving wide-ranging responsibilities around financial stability and systemic risk to three separate bodies is just a recipe for confusion and inefficiency. It is perfectly true that none of the three covered itself in glory during the LDI episode, but I do not think the answer is in this amendment.
I am also deeply sceptical about giving the FPC any role in relation to accounting standards, as proposed in the noble Baroness’s Amendment 149A. While individual accounting standards are often flawed, the underlying concept behind accounting standards is sound, because it is trying to ensure that financial statements are prepared in accordance with a consistent and coherent set of principles, and not driven by non-relevant preferences or by events. In a sense, the amendment is trying to shoot the messenger of what accounting standards are bringing in terms of the message.
Accounting standards can have real-world consequences—for example, when what is now IAS 19, which has already been referred to, was introduced, it was almost certainly one of the factors that led to the demise of defined benefit schemes in private sector companies. But that is not a reason for not applying the accounting standard. So, too, if any accounting happens to amplify financial stability risks, the problem is with risk management, not with the accounting. That should be the focus of the FPC, risk management, not the formulation or approval of accounting standards. But as I said, I firmly support Amendment 149.
Lord Sharkey (LD)
My Lords, I add briefly to my noble friend’s comments on the need for a proper and joint assessment of systemic risk in pension funds and their management strategies. I think the need is urgent, as the LDI debacle has shown. Indeed, there is continued turmoil and unrest in the sector. I notice that Risk.net reported last Friday that UK pension funds are exploring legal claims against LDI managers, their fiduciaries who they tasked with running the LDI strategies. Five law firms have told Risk.net that they have been approached by pension schemes invested in both pooled and segregated funds to investigate whether legal action can be taken against the relevant managers.
There are apparently also questions being asked, not surprisingly, about whether fund managers had fully explained to trustees the risks associated with LDI, a point raised by the chair of our Industry and Regulators Committee in his brief letter of 7 February to Andrew Griffiths. It is a point that has a direct bearing on the generation of systemic risk.
Lord Davies of Brixton (Lab)
I intended to make a second point about risk. Everyone tends to think about risk in terms of systemic risk—the finances of the country come under some pressure—but there is another risk that is not given sufficient attention, which is the risk that pension funds will fail to deliver the benefits that people expect to receive. That risk is given insufficient attention, but I hope it will be covered if there is a system where someone is given responsibility to look at risk. There is the risk of not getting out the benefits expected, as well as the risk to the financial system.
Lord Tunnicliffe (Lab)
My Lords, I do not particularly understand the technicalities that have been alluded to in this debate. I will just say a word or two about the bigger issue here, which is the problem that human beings as individuals and institutions have with handling low-probability, high-consequence risk. We know that younger human beings, particularly, gamble their lives on it in how they behave.
Of course, I was very close to this because, in 1988, I took over London Underground, which had just killed 31 people. In a sense, the syndrome that led to that was, “Well, it won’t happen”. The defence was that it was unforeseen—that is, the circumstances that led to that catastrophe were unforeseen. Yes, it was unforeseen because it was not looked for. It was not unforeseeable. That is the issue.
Anybody or any organisation—public bodies, in particular—that is responsible for big risks has a duty to pursue the low-probability, high-consequence risks. I think it was the noble Baroness, Lady Noakes, who said that this is about risk management. It is much deeper than individual bits and bobs. We have had centuries of knowing just how high the consequences of systemic risk can be. If these amendments can address this problem in the financial world, I hope that the Government will give them a fair wind.
Baroness Penn (Con)
My Lords, as the Chancellor has set out previously, it is vital that lessons are learned from both the recent disruption in the gilt market and the vulnerabilities in leveraged funds that this exposed. Pensions and, more specifically, liability-driven investment—LDI—funds are regulated by a number of different bodies. In the UK, the Pensions Regulator oversees pension schemes and the FCA supervises fund managers that manage LDI funds. Many LDI funds are based overseas; authorities in these jurisdictions are responsible for supervising the funds themselves.
In accountancy, the Financial Reporting Council is responsible for regulating auditors, accountants and actuaries, whereas the UK Endorsement Board works internationally to agree accounting standards and adopts these for use by UK companies. More broadly, considering the financial system as a whole, the Bank of England’s Financial Policy Committee—the FPC—is responsible for monitoring and addressing systemic risks to promote financial stability in the UK.
It is therefore right that the FPC has played and will continue to play an important role in ensuring that vulnerabilities in LDI funds are monitored and tackled. The Government welcome the FPC’s Financial Stability Report from December as an important milestone in the “lessons learned” process. The Government and the Bank of England agree that the FPC’s existing powers and duties remain appropriate and are sufficient to monitor and address the systemic risks associated with pension funds and their investment strategies.
Regarding Amendments 149 and 149A, the FPC already has broad powers of recommendation, as set out in the Bank of England Act 1998. It can make recommendations to the PRA and the FCA on a “comply or explain” basis and can make recommendations to any other persons it deems necessary to fulfil its objectives, including the Pensions Regulator, the Financial Reporting Council or the UK Endorsement Board. The FPC is also able to make recommendations to the Treasury, including in relation to the regulatory perimeter. These powers are used by the FPC to ensure that it can effectively monitor and/or address systemic risks, including those that may arise from pension funds and their investment strategies or accounting standards.
Additionally, the FPC must keep its recommendations under review and publish an assessment of the effectiveness of the committee’s actions in its financial stability reports. These must be published twice per year and laid in Parliament, allowing for further public scrutiny with regard to the impact of any recommendation made by the FPC, including whether it was complied with.
The FPC’s proactive approach to reviewing and addressing systemic risks was demonstrated in December when the FPC recommended that regulatory action be taken as an interim measure by the Pensions Regulator in co-ordination with the FCA and overseas regulators to ensure that LDI funds remain resilient to the higher level of interest rates that they can now withstand, and defined benefit pension scheme trustees and advisers ensure these levels are met in their LDI arrangements. The FPC has welcomed, as a first step, the recent guidance published by the Pensions Regulator in this regard. The FPC can also make recommendations in relation to reporting and monitoring requirements for LDI funds and pension schemes. The FPC’s financial stability reports then provide a public assessment of risks to UK financial stability.
With respect to Amendment 159, the Government agree it is essential that appropriate risk oversight and mitigation systems are in place, including for non-bank financial institutions. Sections 9C and 9G of the Bank of England Act 1998 stipulate that the FPC is responsible for identifying, monitoring and taking action to remove or reduce systemic risks, with a view to protecting and enhancing the resilience of the UK financial system. This responsibility includes risks emanating from all parts of the financial system, including the broader system of non-bank finance such as defined benefit schemes. It is right that this responsibility sits with the FPC which is able to prioritise its work as necessary to improve financial stability. The FPC has well-established processes for achieving this task, working closely with the FCA and the PRA.
Lord Vaux of Harrowden (CB)
The Minister seems to be telling us that it has all the powers it needs and that everything is fine, and yet it happened. What went wrong and how do we fix it, if not this way?
Baroness Penn (Con)
There is ongoing work to look at that question. There has been an interim finding, as it were, setting out a number of recommendations. At the moment what they do not do, in my understanding, is set out the need for increased or different powers. But the noble Lord makes the correct point that we then need to understand whether those powers were used in the most effective way to prevent something like this from happening in the first place. The point I was seeking to make was that, so far in its work in reviewing what went wrong and why, it was not a question of a lack of powers or the inability in its remit to make certain recommendations. That is not to say that that work has concluded or that all the action that we need to take after reflecting on what happened has concluded either.
I was talking about the FPC’s powers and responsibilities to look at risks emanating from all parts of the financial system, including non-bank finance. It has the powers to recommend and, under Section 9H of the 1998 Act, also to direct the FCA and PRA to implement certain measures as specified by Parliament in order to further its objectives. Furthermore, as the IMF noted last year, UK authorities have often taken the lead in international efforts to improve the surveillance of risks beyond the banking sector.
In dealing with Amendment 159, looking at the risk from the non-banking sector in terms of financial stability and echoing my words to the noble Lord, Lord Vaux, the Government’s position is not that those risks are all fine, managed and under control. It is that the FPC has the powers it needs to deal with those risks where it can at a domestic level. In the Chancellor’s annual remit letter to the FPC, he reiterated the importance of prioritising work with international partners to address the vulnerabilities associated with non-banks. The FPC welcomed this recommendation. I say to the Committee that we agree that this area has been identified for more work at an international level but, alongside this co-ordinated international work, the Bank will continue to take unilateral action to reduce domestic vulnerabilities where it is effective and practical to do so.
Lord Tunnicliffe (Lab)
Will the FPC go out of its way to seek out risks—not risks known at the moment or even evolving risks, but the possible risks that could lead to a catastrophic effect?
Baroness Penn (Con)
My understanding is that that is what the FPC does. One of the mechanisms by which it does it is through its stress tests; it operates regular stress testing of the banking system and has also undertaken stress tests of the non-bank system. For example, in the latest Financial Stability Report in December 2022, it included a specific chapter on market-based finance. In 2023 it will run for the first time an exploratory exercise to test the resilience of the financial system against a scenario focused on the risks associated with market-based finance. This is one route by which it seeks to explore and seek out what those risks could be, to help inform understanding of those risks and future policy approaches that should be taken to mitigate them.
As I have said, much of the work needs to take place at an international level, but I accept the point made by the noble Baroness, Lady Bowles, that we also need to take unilateral action at home to reduce domestic vulnerabilities where it is effective and practical to do so. That work is ongoing.
I hope I have dealt with the noble Baroness’s amendments and reassured noble Lords that the Government are conscious of the risks—including systemic risks—that can be posed by the non-banking financial sector. With the FPC, we are undertaking further work to ensure that we can better understand and explore those risks, and take domestic action where possible to mitigate them, but also lead the work internationally to ensure a co-ordinated response.
Baroness Bowles of Berkhamsted (LD)
I thank all noble Lords who have spoken in this debate. I will reply to some of the points, but I will start with the Minister’s response. I am a little disappointed in two things. The main point of these amendments is to draw attention to the fact that, while the Bank of England and the FPC maybe had the powers to do things, they did not do them. As the noble Baroness, Lady Noakes, and I said, they did not do them after having spotted that the problems were there.
They did something pretty de minimis—some stress tests that basically followed what the industry was already doing—and left out the smaller end of the market. Had they put their thinking caps on, they might have realised that that is exactly where you would have problems with providing collateral. They did not do it because the Pensions Regulator said, “We can’t put this onus on the small schemes”. Maybe that was a comply or explain type of answer, but they just took it as given.
The fact is that, once again, they are shutting the stable door after the horse has bolted. I am saying that they need to be more proactive. They have to stop being scared. This was not an issue where, by doing something first, we would have put ourselves at a competitive disadvantage with industry in other countries; that is why you do “hug a mugger” or “let’s do international rules”. I understand it for insurance companies, where there is big competition and if we do something and they do not do it in Europe, there will be issues.
By the same token, if you think you are ever going to get something agreed about insurance companies globally, you will hear some rude expressions. For starters, in the United States it is state-based, and they do not do Solvency II, so it will be very difficult to get that agreement on non-bank financial institutions, which basically means insurance companies. There is absolutely no reason to prevaricate and hide behind NBFI when you are taking about our specific defined benefit pension schemes. It is just an excuse, and I do not buy it. I do not buy it from the Minister, the Chancellor, the regulators or the Bank of England.
Baroness Penn
“(b) demonstrate that the Regulator has had regard to the regulatory principles in section 53 when preparing the proposals,”Member’s explanatory statement
This amendment ensures that the notification provisions align with the duty in section 49(3) of the Financial Services (Banking Reform) Act 2013 for the Payment Systems Regulator to have regard to the regulatory principles set out in section 53 of that Act.