Financial Services Bill

Baroness Bowles of Berkhamsted Excerpts

Report stage
Wednesday 24th March 2021 Lords Chamber

Moved by

[Baroness Bowles of Berkhamsted]

2: After Clause 5, insert the following new Clause—
“Periodic independent review of regulators
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 1S (reviews) insert—“1SA Periodic independent review of regulators(1) The Treasury must appoint a group of at least three independent persons to conduct a periodic general review of the effectiveness of—(a) the Financial Conduct Authority,(b) the Prudential Regulation Authority, (c) the Bank of England in respect of its functions under Parts 1 and 5 of the Banking Act 2009 (bank resolution and payment systems) and Part 2 of the Financial Services Act 2012 (recognised clearing houses), and(d) the Payment Systems Regulator.(2) The general review must take place every two to three years and must include a review of—(a) internal operations and controls;(b) systems for responding to whistleblowers, parliamentary correspondence and reports, and public concerns;(c) regulatory perimeters;(d) the effectiveness of rules and the regulatory burden;(e) whether all statutory and public policy objectives have been met;(f) the operation and effectiveness of engagement practices before and during rule making;(g) the skills base of staff;(h) any other matter the independent persons consider relevant;(i) follow up from the previous review and any other intervening review under this Act;(j) any other matter requested by the Treasury or a relevant Committee of the House of Commons or House of Lords.(3) On completion of the review, the persons conducting it must make a written report to the Treasury—(a) setting out the result of the review, and(b) making such recommendations (if any) as the persons consider appropriate.(4) A copy of the report must be—(a) laid before Parliament, and(b) published in such manner as the Treasury considers appropriate.”(3) In section 1T (right to obtain documents and information) after “1S” insert “or 1SA”.”

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

My Lords, this amendment is an evolution of the amendment I tabled in Committee and called the “Skilled person review of the regulators”. I thank the noble Lord, Lord Sikka, for adding his name on Report.

Since Committee, I have received growing expressions of interest in the concept as an important process for improving financial services regulation—indeed, one that could be replicated for other systemic regulators. My purpose in tabling the amendment here is further exploration. I have reframed the amendment to be an independent person’s review via a new Section 1S(a) in FSMA that broadly follows the format and definitions already contained in Section 1S. Under the section, the Treasury can establish an independent person review of the FCA. However, it has not been deployed as a routine matter, but rather to deal ad hoc with specific instances, as have reviews under Section 77. My proposed new Section 1S(a) would provide for general review by at least three independent persons and would take place after every two to three years. That period has been chosen so that it can reflect when there are changes in appointments of the regulators. It also broadly reflects the two-year cycle envisaged in Australia for its financial regulator oversight board and the EU’s three-yearly reviews of the ESAs. Today, the ABI circulated a note supporting the idea, but it thinks that a longer period might be better, as indeed I first proposed.

I have also added to the list of regulators which are to be subject to the review to cover not only the PRA and the FCA, but the Bank of England for its other regulatory functions and the Payment Systems Regulator. I did that on the suggestion of UK Finance, which has also taken an interest in my amendment as potentially filling in a gap in accountability. It has argued in response to the Treasury’s framework review consultation that covering all banking and finance regulators is needed for a coherent and consistent approach to the whole sector while structural changes are breaking down the distinctions within it. I thought that a fair point and have included it as food for thought.

The list of issues for review are largely taken from the matters found to be at fault in the Gloster report, such as internal operations and controls, responding to whistleblowers, regulatory perimeter and the skills of staff. It also covers the effectiveness of rules and regulatory burdens, which it is important to study periodically as a check. But it is important to note that I do not propose some kind of routine second-guessing on rules as they are made, but more like an impact assessment after they have bedded in.

A long list may not be needed and could perhaps be left to the independent person to prioritise, but one other addition I have made is to follow up on any other intervening review. The amendment also provides a similar right to information and documents, as a Section 1S review would have, by adding proposed new Section 1S(a) to the existing provision in Section 1T of FSMA.

In the clauses that immediately precede this amendment, the PRA and FCA are each given the power to make all the policy and rules for financial services save for the broad public interest objectives and “have regard to” measures defined in FSMA. The way that that is done front-runs the conclusion of the future regulatory framework consultations, and I see two consequences. One, which is conceded in the Government’s consultation, is that Parliament will want to undertake additional scrutiny. We will deal with that in later amendments and it is urgent. A second consequence is that we are conferring a lot more power on our regulators, one of which has been the subject of a flow of negative findings. This amendment is not intended to address the first consequence or to diminish in any way the constitutional position of Parliament regarding scrutiny—far from it: it is meant to address the second consequence. It also replaces some of the scrutiny of the EU which included three-yearly reviews of the European supervisory authorities.

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

My Lords, for the purposes of Report, I must remind the House of my interests in the register, which I omitted to do when I first spoke today.

I thank all noble Lords who have spoken in this interesting debate. The noble Lord, Lord Davies, reminded us of the effects of regulatory capture and the way in which that is just something that is endemic within the system, not least because of the overwhelming volume of meetings that take place and contacts that are made with the industries, both in policy terms and as they are regulated. As my noble friend Lady Kramer observed, he drew a slight parallel with Ofsted—there is a point that somebody from outside has to come in. I agree with the noble Lord, Lord Davies, that at the moment this does not seem to be something to which the Government are turning their minds often enough, because otherwise we would not keep having to have reviews about failure.

I thank the noble Baroness, Lady Noakes, for thinking that I got the right ideas. Some of my drafting might have been a bit adrift; I meant that each regulator had its own review and certainly the concept of a rolling review was what I would have had in mind. I agree with her that set pieces make it difficult to get into the systematic operational review that lies at the heart of my amendment, even if I, perhaps accidentally, strayed too widely. I also agree that annual reports concentrate on the good. Responses to the report and parliamentary engagement with the report are, in fact, intended to be via the Treasury, but that indirect link is not satisfactory as far as Parliament is concerned.

The noble Lord, Lord Sikka, reminded us of the cost of failures in regulations. He asked whether, because of the history and where we are at, it can be business as usual. We have had examples of the FCA making excuses for slowness and failures. As the Minister said, there is a new CEO, whom I know extremely well. He made some good points when he appeared before the Treasury Select Committee about having brought in some outside people to bolster the system, using exactly what I said is the understood way of doing things in business: you need outside eyes. He has done his best in that sense by bringing some fresh blood into the FCA.

When it comes to parliamentary reports, as the noble Lord, Lord Sikka, reminded us, the one about Carillion, for example, did not trigger action. If they do not trigger action, something is missing. My noble friend Lady Kramer explained exactly where I think we are. I am testing the water and exploring; I am asking whether our traditional roles are sufficient. We will have a little time to see. Like my noble friend, I think that we will be back here in due course. The noble Lord, Lord Eatwell, put his finger on the distinctions between operational and policy and what would belong with Parliament and what would belong with independent review. That is a useful distinction, which, going forward with these ideas, I can take to heart.

The Minister again said that there is plenty of opportunity for reviews to be done. The point is that they are not being done; they are only being done in default. They are not being done in a systematic way that is quality controlled. I do not disagree that there might be, within legislation, sufficient scope to do some that are more like quality control. If the Minister is saying, “Well, right, we will have a look to see whether that can be done,” I might agree. At the moment, however, there is a hole. The Minister says that it might be expensive but, as the noble Lord, Lord Sikka, pointed out, it is very expensive on the industry that has to cough up compensation if needed and if it comes from the central compensation funds. When things go wrong, it is expensive and probably more expensive than if one had done the proper quality-control monitoring.

The IMF and the Basel reviews are not UK-based reviews and are not debated in the public forum within the UK. They are also reviews done by regulators of regulators, which is absolutely one of the things that I am trying to get away from. Again, I agree with the noble Lord, Lord Eatwell: yes, they have to be skilled people but, no, they jolly well should not be regulators or recent regulators, and maybe not even former regulators, because otherwise you do not get away from the groupthink. I am sorry, but IMF and Basel are part of the groupthink.

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

My Lords, in Committee, I supported the amendments of the noble Baroness, Lady Noakes, as something that had to be done. It seemed to be a reasonable, if simple, concept that a flawed benchmark reference in a contract, if changed to a closely corresponding but not flawed benchmark—a change required by the regulator—should not give rise to litigation, not least because the contracts should still largely perform as originally intended.

Some contracts may have had termination clauses in the event of no benchmark, which could give rise to premature terminations and winners and losers. However, this is not really a no-benchmark situation. While not everyone has sympathy with banks and industry should they be the losers, this is not a matter on which they would be at fault. I am sure that everyone would have sympathy if consumers were losers but what if it goes the other way and banks want to pursue consumers if they are the winners? I am sure that that would be seen as unacceptable.

This is not mis-selling but, as far as contracts are concerned, it is a blameless matter and it seems to me that continuity is the closest to honouring original intents. If there were a way in which to make simple compensatory adjustments, we would not be facing these problems. I therefore still feel that something has to be done and doing the same as the US also seems to be good in terms of the UK’s reputation for giving certainty to markets.

However, the noble Baroness, Lady Noakes, has now come up with a third amendment, Amendment 6, which empowers the Treasury to address matters further down the track and gives more flexibility in what may be determined. It is a bit of kicking the can down the road and a bit of Henry VIII, but one hopes that it will encourage more solutions to be found. I have therefore added my name to that amendment and hope that at least, if the Minister cannot accept the other amendments, it can be accepted as a way forward.

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

My Lords, I am delighted to speak to this group of amendments and declare my interests as set out in the register.

I congratulate my noble friend Lady Noakes not just on the eloquence that she demonstrated in introducing these three amendments but on the quality of their drafting. As an ex-City solicitor, I look on that with awe. I also congratulate my noble friend on offering options. We had a thorough and in-depth debate in Committee on these issues. My noble friend has done the House a great service in bringing a buffet approach for the Government to consider. If they are not partial to Amendments 4 or 5, Amendment 6 will work just as satisfactorily.

These amendments need to be seriously considered. For the want of certainty and for ensuring that litigation does not result if we do nothing, I ask my noble friend the Minister on Amendments 4, 5 or 6, as I have in the past and will do on forthcoming amendments: if not this Financial Services Bill, which financial services Bill? If not now, when?