Financial Services and Markets Bill

Debate between Baroness Bennett of Manor Castle and Lord Eatwell

Report stage
Thursday 8th June 2023 Lords Chamber

[Baroness Bennett of Manor Castle (GP)]

My Lords, I have attached my name to Amendment 14 in the name of the noble Lord, Lord Davies of Brixton, who very powerfully introduced it. I associate myself with all his comments. Essentially, he was talking about reasonable adjustments for people with mental health conditions in dealing with the financial sector.

I will briefly address this consumer protection objective from the other side, which is that the financial sector should not make people ill. I am sure the Minister will recall the meeting we had a couple of months ago with mortgage prisoners. At that meeting, we heard some testimony about the impacts of how people had been trapped in the system and suffered enormously as a result.

I want to reflect on two things. The first is the figures that have come out since Committee and the fact that the head of UK Finance has labelled the UK the fraud capital of the world, with fraud last year estimated at £1.2 billion. That reflects the fact that very many people now approach any interaction with the financial sector with a sense of fear, asking, “Is this true?”, “Is this right?”, “Is this a proper email?” This is something that the financial sector needs to do more to address so that people are not suffering that stress and pressure.

The second thing is that I know some individuals who are somewhat older than me who find that there is an inability to walk into a branch and deal with an issue by having a person solving your problems face to face. People spend weeks and weeks trapped in cycles of emails and phone calls. No one can ever solve your problem and you never speak to the same person twice. That has serious impacts on people’s lives and well-being. We need to acknowledge that and say to the banks that this is not acceptable and not good enough.

On the financial inclusion amendments, I have spoken about this at some length so I will not go over the same ground. However, it is clear, in all the amendments in this group, that the financial sector is not meeting the needs of our society. As a Parliament, we need to ensure we do more to make sure that it does.

[Lord Eatwell (Lab)]

My Lords, I support Amendment 18 in the name of my noble friend Lady Chapman, while also recognising the contribution made in the amendments tabled by the noble Lord, Lord Holmes, and my noble friend Lord Davies.

This is an extremely urgent matter because between 6 million and 7 million of our fellow citizens conduct all their financial affairs in cash. Cash is becoming increasingly unacceptable in a whole series of financial transactions that are conducted by electronic means. This means that cash is ceasing to be money, because money is something which is generally accepted in payment of a debt. If you cannot use cash to buy things, it is no longer money.

It is therefore necessary for both the Bank of England and the Treasury to consider making available to all citizens in this country a means of electronic payment. That is a big challenge, but it is urgent because we are all aware that, over the next decade, virtually everything will be entirely electronic and cash will be unacceptable in most transactions. My noble friend Lady Chapman has hit the nail right on the head by saying that this is a consumer protection objective. That 10% of our fellow citizens needs to be protected by financial inclusion in this way. This is an urgent matter which should not be postponed.

Financial Services and Markets Bill

Debate between Baroness Bennett of Manor Castle and Lord Eatwell

Report stage
Tuesday 6th June 2023 Lords Chamber

[Baroness Bennett of Manor Castle (GP)]

My Lords, I rise to speak to Amendments 10 and 112 in my name; I gratefully acknowledge the support of the noble Lord, Lord Sikka. This is a bit of a diverse group, but Amendment 10 in particular heads in a similar direction to Amendment 9 in the name of the noble Baroness, Lady Bowles of Berkhamsted—a direction that seeks to lead towards a financial sector that meets the needs of the real economy rather than swallowing up the scarce human and capital resources that could be used to far better effect than creating complex financial instruments that, when they go down, threaten to take the rest of us with them.

Had it not been for events between Committee and Report, I might have chosen to sign the noble Baroness’s amendment instead of tabling my Amendment 10, which states that Clause 24—the growth and competitiveness clause to which the noble Viscount, Lord Trenchard, referred—should not be deleted from the Bill. It mirrors exactly the amendment tabled in Committee by the noble Lord, Lord Sikka, signed then by myself. However, in the light of events, I thought it really important that we tackle the “growth at any cost” foundation that underlies Clause 24: “Growth is infinite; let’s chase as much growth as we can”—which is, of course, the ideology of the cancer cell.

In Committee, the noble Lord, Lord Sikka, said:

“The secondary objectives of growth and competitiveness cannot be reconciled with the main role of ensuring financial stability and consumer protection”.—[Official Report, 1/2/23; col. GC 242.]


This is a position that we both hold. However, it was clear in Committee that there was no support from the Front Benches, and the issue might have been allowed to lapse. But then there were events that highlighted the many dangers of chasing growth in the financial sector. After several weekends of financial panic, emergency meetings and sudden bank rescues, parts of the real economy—in particular, the digital sector—were left highly uncertain of their financing. I am referring, of course, to the collapse and rescue of Silicon Valley Bank, Credit Suisse and Signature Bank, the first and last of those being mid-sized US banks and the middle one being a former European banking colossus.

These US events came after President Trump watered down the Wall Street Reform and Consumer Protection Act, better known as the Dodd-Frank Act, in 2018, reducing the supervisory oversight of banks with assets between $50 billion and $250 billion; the noble Viscount, Lord Trenchard, referred to this watering down in his introduction to this group. However, just because someone else is doing the wrong thing and reducing controls and protections, it does not mean that we should chase after and try to compete with them. As David Enrich from the New York Times put it, this was a

“crisis that has revealed the extent to which the banking industry and other opponents of government oversight have chipped away at the robust regulatory protections that were erected after the 2008 financial meltdown”.

What happened is that competitiveness had been advanced while security was lost and risk increased. A great many people had sleepless weekends as a result of that.

What has also become clear since Committee is how Credit Suisse clients withdrew nearly $69 billion from the bank in the first quarter of this year before its fire sale rescue by UBS in March. Of course, Credit Suisse had been hit by the insolvency of Greensill Capital—something that is rather close to home in your Lordships’ House—and the collapse of family office of Archegos Capital Management, which caused huge trading losses. However, the end came very quickly.

Clearly, in the digital age which SVB helped to fund, financial events can occur at a speed that was unimaginable even in 2007-08. I wonder whether, when wrapping up, any of the Front Benches are prepared to say that they believe that regulators today are truly prepared for the world in which they operate, a world that also faces the risks of other substantial shocks, as we have seen highlighted today with the Russian attack on the Kakhovka dam, geopolitical risks and, of course, environmental risks, since as we speak, Canada is essentially ablaze. That will undoubtably have enormous impacts on the insurance sector.

The IMF’s Global Financial Stability Report from April reflects on the challenges posed by the interaction between tighter monetary and financial conditions, and the build-up of vulnerabilities since the global financial crash. It says that:

“The emergence of stress in financial markets complicates the task of central banks at a time when inflationary pressures are proving to be more persistent than anticipated”—


a statement which is particularly true within the UK. There are stresses from the shadow banking sector, the effect of geopolitical tensions on financial fragmentation, the risk of potential capital flow reversals, disruption of cross-border payments, impacts on bank funding costs, profitability and credit provision, and more limited opportunities for international risk diversification. The IMF concludes that there is a need to “Strengthen financial oversight”. This is all referring to events since we were in Committee. That is my case for Amendment 10.

My Amendment 112 is much more modest and addresses in a different way a point that I raised in Committee. I discussed the growing body of literature around too much finance, but in this amendment I am not asking the Government to agree with me on that; I am asking for them to prepare a report to consider the ideal size of the financial sector. What is the Goldilocks range for a financial sector, where we can afford the risks and supply the human resources and it serves the needs of the real economy?

As the House has heard before, I approach this question in the light of the Sheffield Political Economy Research Institute’s study from 2018, which found that the UK had lost £4.5 trillion over two decades because of its oversized financial sector—£67,500 per person. To bring this right up to the present day, in a study published last week, the global hiring website Climatebase has posted more than 46,000 jobs from over 1,500 organisations in the past two years. Of these, data science and analytics were the hardest to fill, taking an average of nearly four months to fill posts compared with three months for engineering roles.

This brings me back to Amendment 10, which would delete Clause 24. I did not have a chance to speak in Committee, but I suggest that Clause 24 as it stands is internally contradictory. It gives the FCA the duty of facilitating the international competitiveness and medium to long-term growth of the economy of the UK,

“including in particular the financial services sector”.

This clause talks of growing the economy of the UK and growing the financial sector. I posit that those two objectives are mutually contradictory. I refer to a Bank for International Settlements working paper from 2018, Why Does Financial Sector Growth Crowd Out Real Economic Growth? It is actually impossible to promote growth both in the real economy and in the financial sector. It comes back to—probably the easiest part of this to understand—the need to think about human resources. We all know the labour shortages and skills shortages that so many sectors of the UK economy are suffering, and we know that many skills are going into the financial sector when they could be going into other areas.

Tomorrow, your Lordships’ House will debate the report of our Science and Technology Committee titled “Science and Technology Superpower”: More Than a Slogan? I am not asking any Front-Benchers or the Government to agree with the claims that I am making here; what Amendment 112 asks for is a report to look at the evidence, so that the Government and the country can make considered judgments about what size financial sector we both need and can afford.

[Lord Eatwell (Lab)]

My Lords, I will address the amendments proposed by the noble Viscount, Lord Trenchard. In some way, they are part of the whole privileging of the competitiveness objective, but I do not want to talk about that. I will talk specifically about his concern about aligning with international standards.

I suggest that the success of the development of international financial markets since the 1970s has been predicated entirely on the development of an international regulatory system. It was first stimulated by the Herstatt Bank crisis in the summer of 1974, which led to the establishment of the Basel committee on settlement risk. Since then, we have developed a whole international financial infrastructure of regulation—the Basel committees, IOSCO and, most importantly today, the Financial Stability Board. That, by the way, was a British idea that has greatly aided the stabilising of international financial markets.

These committees, as the noble Viscount, Lord Trenchard, pointed out, are not part of any form of international law or treaty. They are what is known in the trade as “soft law”. They are laws that countries agree it is in their mutual benefit to align with, and failing to align is against the benefit of individual countries as well as of the system as a whole. It has been the judgment of His Majesty’s Government that it is in the best interests of the United Kingdom to align with international standards.

But there are other international standards with which we align. Take the Paris-based Financial Action Task Force. Would the noble Viscount, Lord Trenchard, suggest that we do not align with the international anti-money laundering police? It is essential that we agree to align with this framework of international financial regulation, which we have been such an important element in creating.

Financial Services and Markets Bill

Debate between Baroness Bennett of Manor Castle and Lord Eatwell

Committee stage
Tuesday 21st March 2023 Grand Committee

[Lord Eatwell (Lab)]

May I comment on the issue of stress tests, which the Minister also raised during Questions this afternoon? You can stress test only risks that you know are there. It depends on the underlying model that you create to examine in your stress tests. Thus stress tests did not pick up the LDI problem at all because it was not there in the models that were used. In financial services, risks appear in entirely unexpected places, and relying on stress tests is, and has been demonstrated to be, a very weak answer. She should reconsider her reliance on this argument.

[Baroness Bennett of Manor Castle (GP)]

Since it is related, I also question the readiness for a 1-in-200-year shock. We have seen very similar kinds of mathematical approaches, if you like, taken to issues such as flood risk and other climate risks, and they have been found to be very ineffective in dealing with problems. They only increase the failure to understand risks.

--- Later in debate ---

[Baroness Bennett of Manor Castle (GP)]

My Lords, I thank the noble Lord, Lord Tunnicliffe, for introducing this amendment. I have chosen to address simply the green infrastructure parts, and at this time of the evening I shall park the high-growth debate in the interests of not sidelining the main issue.

The idea of a review is useful here, because the evidence we have of other measures the Government have tried to take to encourage green investment is perhaps mixed—that is the charitable description. I refer to a survey published this month by Pensions for Purpose, which looked at the first wave of obligatory reporting of the scheme introduced in October 2021 based on the Task Force on Climate-Related Financial Disclosures being done by the larger occupational pension schemes and authorised master trusts. That study found that this introduction by the Government was having very limited effects and that it was, to a large degree, being treated as a tick-box exercise. Where it was having an impact on investments, it was not driving towards green investment but rather to a portfolio decarbonisation—a stepping away from things rather than into the kinds of investments we need. This is something we are also seeing implicitly, in that the pension regulator is about to launch a publicity campaign for pension trustees, stressing the need to look at ESG responsibilities, particularly around climate issues—that has been its responsibility since 2019. It is clearly thought necessary to have a publicity campaign about this.

We really need to see steps forward and to see things joined up here. I am reminded of a debate last week with the same Minister, when we finally finalised the UK Infrastructure Bank Bill, which, of course, is looking at another source of investment going into green. I am very encouraged by the Government’s decision to include nature-based solutions there, which is obviously a cross-reference to our need to see much more private investment in nature-based solutions as well. Dare I say it, it would be nice to see some circular economy as well—if I can just put that in there.

On the idea of a review, we desperately need to see money going into green infrastructure. All the evidence we have says that is simply not happening. I also note that the Government need to create the frameworks in other areas of policy to make this happen. I was sitting here, thinking of when I was in this very same Room a few weeks ago with the Energy Bill. One of the things that could be a very good target for investment would be that if we are to get community energy schemes up and down the land—if we get delivery of the widely-backed Local Electricity Bill, as it is in the other place—that would be a great area to see pension funds investing in and supporting. I was at an event this morning debating social value and the importance of that in procurement.

We need to tie all these things together. All these things are running off at different angles, but we are still not creating an environment where people who are putting money into their pensions, seeking to invest in their own future, will have a liveable future for that pension to pay out in.

[Lord Eatwell (Lab)]

My Lords, it is obvious that the issue of pension funds investing in equities and longer-term growth prospects was highlighted by the LDI crisis in the autumn. I hope that, when the Government come to consider the consequences of that crisis, they will look at the letter that your Lordships’ Industry and Regulators Committee sent to Andrew Griffith MP, the Economic Secretary to the Treasury, setting out the reasons it saw for the peculiar financial structures that led to the LDI crisis and the lack of long-term investment in equities and growth stocks by British pension funds. They traced this to the accounting regulations that are imposed on British pension funds—particularly the way in which liabilities are assessed—and noted that, since those regulations were introduced maybe 15 years ago, there has been a dramatic reduction in the investment by British pension funds in long-term equity assets and a focus mostly on rather low-yielding government securities instead.

The LDI scandal was produced by the development of a peculiar financial device using repos, which were then used to make some investment in equities. There is clearly a fundamental problem in the regulation of British pension funds, which has both reduced the returns on their investment and limited the sort of investments they might be able to make in growth assets to their benefit and that of the economy as a whole. There needs to be a major review on the regulation of pension funds, both to make them more secure—to avoid them resorting to very unstable financial constructions to try to increase their returns—and for the overall benefit of the economy.