House of Lords: Remote Participation and Hybrid Sittings
Baroness Bowles of Berkhamsted Excerpts(2 years, 11 months ago)
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Baroness Bowles of Berkhamsted (LD) [V]
My Lords, in considering whether to keep hybrid proceedings, I have viewed this from external perspectives in addition to my own experience: how is working from home regarded in the business world, and what are the outside impressions about how we work?
Permitting virtual attendance makes us more normal, more diverse and less London-centric. It enables valuable contributions that might otherwise be lost because of ill health, disability, immobility, location or caring responsibilities. We would not think much of businesses that did not make such efforts regarding their employees and we would not reflect society’s interests if we shut out remote participants now that we have the technology. It is a vehicle for greater diversity.
That basic premise extends to every activity, be it Questions, general debates, legislation, committees or voting. To my mind, the question is not whether to keep elements of remote participation but to determine the guidance on how often or why remote participation is requested. Why not be like businesses, with two days a week working from home as the new normal option, with extra days allowed if it is for health, caring or other personal circumstances? It might also help remove the “dinner club” perception of our House.
The hybrid procedures that we have experienced during the pandemic are not a fair sample of what hybrid working in normal times would be like. The social distancing restrictions in the Chamber and elsewhere, travel and the “pay for speaking” virtual allowances have all incentivised virtual contributions, while Covid business has simultaneously pressurised the schedules.
Schedule crowding seems to have eased a little as more have returned to in-person attendance, and there will be further changes, especially to atmosphere, once normal attendance in the Chamber is allowed. The murmurs, groans and spontaneous interventions from the Benches are important—not least when the House thinks it has been short-changed by a Minister on a Question—but that happens when we sit in numbers, not in rationed social distancing. The appetite for numbers will draw us back. If a few noble Lords were also contributing in a virtual way, it would not change the dynamic and take it back to the sterile atmosphere of the fully virtual or socially distanced hybrid arrangements.
When it comes to Select Committees—I have served on three during recent times—it has been a huge benefit to have a wider range of witnesses than the predominant usual suspects who can service London. I have not found remote participation worse; if anything, it has made Members more disciplined and stopped some hogging proceedings, as can happen at Question Time. Proceedings have also been a lot more audible. Some of our committee rooms have terrible acoustics—I went to get a hearing test a while back to make sure it was not just me. Face-to-face togetherness has benefits and will predominate because it wields greater presence, but I would rather a Member contributed virtually than missed a meeting, even if the reason is that the plumber or electrician is coming or the grandchildren need collecting that day. They have still worked on the papers, and what you notice in real time is always a little different from reading or watching it back later.
I have also contributed to all stages of a fair number of Bills in virtual and hybrid format. It has in fact been more exhausting than contributing in person and I expect that we can learn—as businesses are—about the effects of too much video. Going forward, the notion of treating virtual and in-person participation equally, and therefore not allowing in-person interventions, would need revising. I wish we had never had it—we are not being treated equally with half pay for virtual attendance, so it was always untrue anyway. In-person interventions and spontaneity could resume as normal, alongside a system of slot-booking for virtual participants. There might also be scope for expanding the Question Diary approach for remote participants. In some cases, that has already been used quite extensively.
Overall, hybrid working, as in the country generally, is part of the future—of modernising, being greener and spreading opportunity. We will be dinosaurs if we do not reflect that.
His Royal Highness The Prince Philip, Duke of Edinburgh
Baroness Bowles of Berkhamsted Excerpts(3 years ago)
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Baroness Bowles of Berkhamsted (LD) [V]
My Lords, like other noble Lords I extend my sympathy to Her Majesty the Queen and the Royal Family and pay tribute to the remarkable life and work of His Royal Highness The Prince Philip, Duke of Edinburgh.
We are all familiar with Her Majesty’s own words that Prince Philip was her “strength and stay”, and who could not be amazed by the way he stood for hours on the royal barge in the cold and rain during the jubilee in what must have been difficult personal circumstances; a symbolic act that perhaps showed his dedication, stamina and fortitude to do whatever it took in the difficult and enduring role of consort to the Queen. Sir John Major said in an interview that the role of the monarch can be a lonely position, and the Duke was there as confidant and first line of support. Many of us will also recognise that an ever-present supporting role can have its own bleak moments, but he just got on with it.
The Duke had an inquiring mind and, as several noble Lords have noted, took a keen interest in science and technology. In the early 1950s, he took up the role of president of the British Association for the Advancement of Science, for which he penned an impressive inaugural speech. That scientific interest was also shown during the Duke’s first royal visit after his overseas tour when, in 1957, he accompanied the Queen on a visit to the Atomic Energy Research Establishment at Harwell, where I was brought up. My father was among the leading engineers conducting the Queen and the Duke around the site. At the time, I was a child at the on-site nursery school, lining up to wave a flag as the royal party passed by, and, so the anecdote goes, was patted on the cheek by Her Majesty—but afterwards I remembered more about her amazing red velvet coat, which I tried to touch but which her Majesty adroitly swayed out of my reach.
The anecdotes I was brought up on also tell that, while the Queen was guided around the carefully arranged path of exhibits and official explanations, Prince Philip wandered more widely, asking detailed questions, showing both knowledge and curiosity. My family still has photographs of that occasion; while the Queen is the main focus, there is no mistaking the Duke in the background, in animated conversation with engineers and technicians, or heading off-piste from the tour route. Part of the tour included showing the laboratory’s remote mechanical handling apparatus for manipulating radioactive materials. The party trick of the operator was to open a box of matches, strike a match and light a candle—all quite a tricky operation with the remote handling apparatus—and, of course, the Duke stepped up to have a go, putting his hands in the operator’s metal skeleton gloves. That was in 1957, but I remember that party trick, as well as trying to do it myself when I was a vacation student some 15 years later, and being told, as was still remembered then, that the Duke had done rather well at it.
Like many, I admired the Duke’s recognition of the risk to sustainability in the natural world, long before it was fashionable, and I saw how the Duke of Edinburgh’s Award scheme transformed the confidence, life chances and achievements of several people I knew. He has made a positive difference in many ways to causes, individuals, the country, the Commonwealth and his family. The more we learn, the more we appreciate how much he deserves an honoured place in history and in our memory.
Financial Services Bill
Baroness Bowles of Berkhamsted ExcerptsWednesday 24th March 2021
(3 years, 1 month ago)
Lords ChamberRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 162-R-I(a) Amendment for Report - (22 Mar 2021)
“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.
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.
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?
Financial Services Bill
Baroness Bowles of Berkhamsted ExcerptsWednesday 10th March 2021
(3 years, 1 month ago)
Grand CommitteeRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 162-VI(Rev) Revised sixth marshalled list for Grand Committee - (8 Mar 2021)
Baroness Neville-Rolfe (Con)
My Lords, I rise to speak to my Amendments 103 on impact assessments and 104 on reporting. I have been like a long-playing record on the importance of cost-benefit analysis of legislation, regulations and new rules in the form of an impact assessment. I return to the charge today with renewed vigour, as we are transferring very substantial powers from Brussels to Britain. I know that the process of preparing a cost benefit and the sunlight of transparency help enormously in avoiding difficulties and disasters. By the way, I thank my noble friend the Minister for producing an impact assessment on this Bill—always one of the most useful Bill documents, even if in this case it is shortish on numbers.
Amendment 103 is in two parts. First, it requires the Secretary of State—in this case, usually Treasury Ministers—to lay an impact assessment of each SI or regulation that they make before it comes into force. I know from my time as a Minister that having to put my own name to such an impact assessment made me look much more effectively at any instrument I was signing and thus avoid cock-ups—which do unfortunately happen from time to time, even in the Treasury! Secondly, as so much of EU power is being transferred to the FCA and PRA, it requires them to publish their proposed new rules on their respective websites for public scrutiny and to add an impact assessment of the rules. By impact assessment I mean an analysis of the costs and benefits of the proposed change, compared with the existing position and other policy options, including the expected impact on UK businesses and the economy. All I seek is a simple way of ensuring that the authors of new rules always consider the economic impact of their proposals in the interests of good government.
So far, so good. But—and I accept it is a big but —in part these provisions seem to be required already by the Financial Services and Markets Act 2000, as subsequently amended. I have been through the relevant explanations and websites and am still not completely sure whether that is the case. Perhaps the Minister can kindly explain the position and give us some encouraging words as to the present and future position on this important matter. If my proposed provision is genuinely unnecessary, I am of course happy to withdraw it.
Amendment 104 follows on from Amendment 103. However, it is distinct and could be adopted alone. It requires the Secretary of State to publish an annual report on the impact of measures taken by the FCA, the PRA or the Government to regulate financial services with a particular focus on small business, innovation and competitiveness. While there has been a great deal of excellent discussion in this Committee on holding financial service operators to account and improving enforcement, we can lose sight of the value of smaller operators, including those based outside London. Moreover, innovation can bring huge value to consumers—online banking, easy money transfer overseas and share trading on mobile phones are good examples—and our strained economy will benefit from the competitiveness and attractiveness of the UK’s financial sector.
I know from my experience in the intellectual property area, which I hope that the noble Lord, Lord Stevenson of Balmacara, will remember as well, how valuable an annual report of this type can be in focusing staff attention. Writing the report is a complement to the usual in-tray—the focus on risk and the avoidance of banana skins that exercises public servants, sometimes to the detriment of more strategic thinking. I look forward to hearing from my noble friend the Minister on how we might best take some of these matters forward. I believe that they could encourage the intelligent scrutiny of new rules and their early dissemination and publication, and that a strategic look once a year will help the sector to stay ahead in the new world. I beg to move.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, for the purposes of today’s debates I again remind Grand Committee of my financial services interests as in the register.
I have signed Amendments 103 and 104 and agree with the noble Baroness, Lady Neville-Rolfe, so I will not repeat what has already been said. It is a subject that the noble Baroness pursues with diligence, and it is right to do so, even if at times—at least as far as I am concerned—the scope and content of impact assessments are a little disappointing. The amendment relates to the final impact assessments as rules are coming into effect, although, of course, to be useful, impact assessments are needed at each stage. Indeed, if proportionality is to be properly taken into account, that is surely a prerequisite for the regulator.
But returning again to the FiSMA theme, where much of the proportionality, flexibility—call it what you will—will be done on an institution-by-institution basis, so the rules will enable that but not demonstrate how it is to be carried out, I am not sure how that will be properly assessed in an impact assessment based only on the rules. Therefore, it will also be important to be able to capture what actually happens after the rules have come into operation. That might be by way of a retrospective impact assessment after a period of time, and would seem to be another matter that Parliament will need to investigate.
Included in that, it should be relevant to capture the effects of frequency of rule change, which is presently greatly emphasised by regulators and the Government as part of the reasoning behind the Bill, yet somehow I doubt that rule churning was what industry felt it was signing up for by supporting FiSMA. It will be important to understand the scale and nature of that rule tweaking. Amendment 104 gets in part to that with the Government producing a report, but perhaps it should be part of the annual report or an annual impact assessment from the regulators, so that it can be further queried and those regulated can be interviewed by the relevant parliamentary committee. So perhaps the Minister can confirm how this frequency of tweaking will be tracked, what is the Government’s planned part in it and would they support Amendment 104 in particular as part of the way to do that?
Viscount Trenchard (Con)
My Lords, I declare again my interests as stated in the register in respect of financial services companies. I am delighted to support Amendments 103 and 104 in the name of my noble friend Lady Neville-Rolfe. My noble friend is a champion of impact assessments and she speaks from experience. The impact of many financial services regulations on smaller firms has been very damaging. I mention just two examples. The unbundling provisions contained within the MiFID II directive, requiring asset management companies to pay separately for research, have been disastrous in their effect on smaller companies with interesting strategies, which have either been forced out of business or forced into mergers where their innovative strategies have not been taken forward. The effects have been less choice for customers and less coverage as a result of the significant reduction in the number of securities analysts, particularly those covering smaller and growth companies.
The effects were predictable, but ESMA ploughed ahead and the FCA acquiesced. It is small comfort now that ESMA itself realises that the unbundling provisions were a mistake, and may move to make changes, but much damage has been done. An impact assessment, such as recommended by my noble friend, would have avoided this.
I also mention the alternative investment fund managers directive. When I worked in Brussels as director-general of the European Fund and Asset Management Association —EFAMA—my French and German colleagues said that they did not think that the EU should move to regulate alternative funds; that was London’s market, and largely London’s alone. Furthermore, it was of interest only to professional investors, who did not need protection from investment risks. They thought that it would be wrong for the EU to try to regulate it. However, three years later, Michel Barnier, as Commissioner for the Internal Market, moved to introduce the AIFMD. Again we were overruled and reluctantly went along with it. An impact assessment might have encouraged the FSA to fight harder against it than it did.
For the reasons so well explained by my noble friend, I support her amendments and look forward to hearing the Minister’s reply.
Baroness Bowles of Berkhamsted (LD) [V]
I am sorry to intervene again, but I feel I must correct what the noble Viscount, Lord Trenchard, said—or at least remind him that the unbundling of the analysts’ report was an invention of the FSA that the UK then sold to the EU, and now the EU is blamed for what the UK did through the EU. There are many other examples of that, although I can confirm that AIFMD was definitely not one of those. It would be nice if sometimes the Minister could intervene to at least have the record straight.
Baroness Neville-Rolfe (Con)
My Lords, I thank all noble Lords who have taken part in this debate, and I thank the noble Baroness, Lady Bowles of Berkhamsted, for her thoughts and for raising the ante to talk about a slightly more dynamic form of impact assessment.
I thank my noble friend Lord Trenchard for the very example that is now the subject of debate. I think the point that he was making, which I would support, is that impact assessments can reduce the perverse effects of such measures. We know—it is a matter of record, I think—that the number of analysts, especially small analysts, has gone down as a result of the MiFID legislation. An impact assessment on how it was enforced, whether its origin was in the brain of the UK or of the EU, could have been helpful. Of course, that is what my amendment is all about.
I was glad to have the support of the noble Lord, Lord Stevenson, for working up a decent impact assessment model. I share his tribute to public servants, having been one a long time ago, and the work of bodies that produce evidence for things, such as the Low Pay Commission and social trends, and the MPC in our own sector of financial services. Better scrutiny would take place with better impact assessment. It is why, regarding proposed new subsection (3) which Amendment 103 would insert, I talked about both the existing position and other options, because I agree with the noble Lord that it is much better if you can look at several options when developing difficult policies. I agree that pre-legislative scrutiny can sometimes be very useful.
My noble friend Lady Noakes reminded us, rightly, of the lack of impact assessment on the various Covid measures. I thank her particularly for the suggestion that the quality of consultation by the FCA, the PRA or the Government and of impact assessment should be added to any review.
I was glad to hear noble Lords build on what an impact assessment system should look like, including the noble Baroness, Lady Kramer—I echo her concerns about accountability—and the noble Lord, Lord Eatwell. There is a feeling that it is important to have a decent system.
My noble friend the Deputy Leader explained, as I had already anticipated in my own remarks, that a system does exist: both for government regulation and regulation by the two regulators, and for cost-benefit analysis to be produced. What I am not clear about is whether that is fit for purpose. It is very difficult to find out what the requirements are and to read all the various bits of paper. This is why I tabled the amendment, so that we could have an intelligent debate. Even if noble Lords do not want to go along with Amendment 103, we should make an effort, with the dissemination of the Bill, to ensure that the requirements are better understood.
That means that Amendment 104 is perhaps more important, because it asks that we review regularly what is being done in the way of cost-benefit and impact assessment, and how the objectives set out are achieved. I suggested some objectives in Amendment 104; others will no doubt be concerned about other objectives of the regulators. As we have said on earlier amendments, competition is not really the same as competitiveness. I was also keen to throw in small business—for reasons that my noble friend knows very well—and innovation, because of their value.
With this Bill, we need to satisfy ourselves that the new framework satisfactorily replaces, indeed, improves on, what went before. I take the point—the Chancellor is right—that we now have the chance to do the right thing in the UK, and to do it better than was done under the auspices of the EU. I may come back to this on Report, because a simple well-understood system of impact assessment, and of annual review in some form, would boost scrutiny and transparency, which has been a key theme of the Bill, as well as the governance of our largest and most important economic sector. I beg leave to withdraw the amendment.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, as the amendment suggests, I think it is necessary to know when there have been interventions and why. I do not say that from a wish to create political opportunity to complain—in fact, rather the opposite. When matters are transparent, there is generally less to complain about and more understanding. If there is a wish to keep everything private, that in itself is a problem. The amendment does not ask for chapter and verse on everything, just the nature of the intervention.
I recall the instances of HSBC and Standard Chartered. I was aware of them at the time, not from any information from the Government but because the size of US fines and the impact that it had on European banks were spoken about in Brussels. It is fair to say that there were concerns from other European countries. I do not think that the UK was the first to write. The financial stability point on fines for things that we also thought were pretty shocking was openly discussed in Brussels, including in my committee. Indeed, I recall having conversations around financial stability implications with the president of the ECB and with the Fed and US Treasury, although I do not think that one needs to advise people like Ben Bernanke about the relative sizes of UK banks and the UK economy and the problems that that will create; you would get pretty short shrift in return.
It is actually quite humiliating either to make or know about such interventions or to sit there while people say to you, “I’ve had a letter from your Minister.” I certainly felt humiliated about the need for such information by my country and humiliated by the behaviour of important financial institutions from my country. A normal response would be to try to make sure that it does not happen again, and I fear that progress has not been as good as it should have been. Maybe one reason for that, I now realise, was that there was no such discussion about these occurrences in the UK in the same way as there was in Brussels, which I find quite shocking. But too big to fail should not mean too big to jail. We have been around that debate already, in the sense of needing fairly to prevent offences, the construction of large companies, which create organised irresponsibility, and the FCA failing us at a critical moment in the SMCR, so it has been undermined.
To get back to the point about disclosure—yes, it should be shared, and any humiliation should be shared, so that those responsible at the time get more heat and there is greater resolve to make corrections. Everything is all so much more diluted and dismissible when it is looked at only as history.
Baroness Bennett of Manor Castle (GP) [V]
My Lords, I thank the noble Lord, Lord Sikka, for tabling the amendment, to which I was delighted to attach my name. It is a great pleasure to follow the noble Baroness, Lady Bowles of Berkhamsted, and I welcome her support.
I do not think I need to add to the noble Lord’s detailed, forensic presentation of the clear, obvious and systemic problem: that Ministers intervene to end or direct investigations into fraud, corruption and malpractice. As he clearly documented, they do that on what appears to be a semi-regular basis. This amendment seeks to stop that, or at least make it illegal. Noble Lords might argue that it should not be; I certainly look forward to examining any contributions that seek to do that.
We have an institutional culture of cover-up, as the noble Lord said. We cannot be sure that every case has been exposed—indeed, it would be very surprising if they had been—despite the often extraordinary efforts of investigative journalists and academics such as the noble Lord. We are most likely seeing the tip of an iceberg. That what has been done emerges only later, dragged into the light of day despite considerable resistance, is of considerable detriment to public and international trust in both the financial sector and the British Government, as the noble Baroness, Lady Bowles, just highlighted.
The most useful contribution that I can make to this debate is to the politics and the sociology—and I mean politics with a small “p” for, as the noble Lord demonstrated, this behaviour is not contained to Governments of any particular political hue. He said that ministerial coverups had emboldened banks. Behaviour that tolerates, supports and enables dishonest and corrupt practices encourages the spread of those practices. If there are indeed only a few rotten apples, which I am sure many from the financial sector will claim, the rot will spread if they remain in the barrel. Those people will still be in place in institutions—in many cases, in very senior places within those institutions —and be sharing, passing down and directing others to continue their practices, approaches and morals. I have an agricultural sciences degree; I can promise you that the rot will spread through the barrel.
We are now without the protective umbrella of EU regulation and what was once seen as a force independent of one particular financial centre that enforced some degree of cleanliness among all of them—albeit that the UK had an inordinate, often baleful influence on attempts to tighten regulation and prevent fraud and corruption. With the UK making its own rules, the behaviour of both the UK Government and the UK financial sector will come under greater scrutiny.
The EU is—not coincidentally after the UK’s departure—looking in the coming years to significantly tighten regulations on tackling fraud and corruption, on stopping tax dodging, on preventing greenwashing and on reining in the inordinate economic power of the internet giants. What happens in the UK will be weighed against that, which is why tightening up this Bill with this measure and others is crucial. What we need is not a more “competitive” financial sector but an upgraded one, one that is honest, straightforward and trustworthy.
There is also the politics in the broadest sense: the issue of how the Government are regarded, which is a long-running, serious issue for the UK. The place of politicians at the bottom of trustworthiness rankings is a source of jokes and bitterness but a serious and significant problem for our body politic. It has to be tackled. This amendment, a legal commitment to honesty and transparency, would be a significant step.
We are seen, from many sides of politics, to have a Government of the few, a Government for the money, a Government for the City of London, to the detriment of the country. This has to change if we are as a country to go forward.
I shall finish with a quote. The
“trend toward globalized corruption has been enabled in crucial part by regulatory asymmetries among key international economic actors and a lack of resources and political will in law enforcement.”
That comes not from the Tax Justice Network or Transparency International. It comes from a foreword to a report from the Center for American Progress entitled Turning the Tide on Dirty Money, signed by Senator Robert Menendez, chairman of the US Senate Foreign Relations Committee, Tom Tugendhat MP, chairman of the UK Foreign Affairs Committee and David McAllister MEP, chairman of the EU Parliamentary Committee on Foreign Affairs. The authors say that corruption
“threatens the resilience and cohesion of democratic governments around the globe and undermines the relationship between the state and its citizens.”
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I have signed these amendments from the noble Lord, Lord Hodgson, and I agree with what he and the noble Lord, Lord Knight, have said. I am aware that the noble Lord, Lord Hodgson, has a long record of engagement in these matters, because from time to time I discover that I am following in his footsteps. The “good work” amendments recognise that we need structural changes in how companies operate to ensure that they provide good work in the face of technological and societal changes. With the financial services sector both supporting all businesses and being our largest industry, it has a special, strategic leadership role to play, and ways that this can be brought about are contained in Amendments 108, 109 and 110. This would be in line with the principles of Section 3B(1)(c) of FSMA, which states that there is role for ensuring
“the desirability of sustainable growth in the economy of the United Kingdom in the medium or long term”.
In my book, sustainable growth must encompass technological and societal changes as well as the environment, but I fear there is a long way to go to live up to that.
In the interests of time, I shall concentrate on Amendment 122. There has been all-party support for employee share ownership in all its forms for a long time. Such schemes provide rewards and motivations in ways that wages cannot. At its best, an employee share plan will also give employees a say in how a business is run and can help to achieve many of the aims of the Good Work Charter, such as dignity, fair rewards, participation and learning.
Employee share ownership and employee ownership have many positive effects, and I want to highlight research on how well employee-owned companies deal with financial adversity.
Research published by the Cass Business School after the 2008 financial crisis established that employee-owned companies create jobs faster than non-employee-owned counterparts and withstood the recession better as it deepened. They recruited when non-employee-owned companies were laying off staff, and had motivation where others found it hard to motivate staff.
More recently, I chaired an inquiry into the effects of employee ownership and the report, entitled Ownership Dividend, found evidence that showed that employee-owned businesses performed better, were more resilient and more rooted in local economies—hence why the term “ownership dividend” was coined. Therefore, as has been said, such companies have a strong part to play in the UK’s plans to build back better and restart the economy.
Amendment 122 suggests an emphasis on analysing impact of sustainable growth provided by employees share schemes. As I mentioned previously, it should already be covered in the principles, but the urgency around “sustainable” in all its forms does not seem to be present. Therefore, I commend Amendment 122, as well as the good work amendment.
Baroness Bennett of Manor Castle (GP) [V]
My Lords, I will speak briefly to Amendments 108, 109 and 110 in the names of the noble Lords, Lord Hodgson Ashley Abbotts and Lord Knight of Weymouth. I broadly agree with everything they said.
The noble Lord, Lord Hodgson, in his introduction, referred to the level of dissatisfaction in our society: the threats from poverty, inequality and insecurity. I would say that these amendments are digging here into some of the depth of the problems that I referred to in my speech on a previous group and seek to provide some remedies. As he was speaking, I thought of meeting an USDAW representative in Sheffield referring to one of her members who had just come to her to seek a voucher for a food bank. The member was not, as you would expect as an USDAW member, unemployed; in fact, that member had seven jobs, but they were all zero-hours contract jobs and that particular week they had not delivered enough money for that person to feed themselves and their family.
However, it is important that we do not just focus—the noble Lord, Lord Hodgson, did not—on those who are in desperate poverty and inequality, as awful as that is. As he was speaking, I could not help but think of what the late, great David Graeber called—here I may be about to use what is unparliamentary language here, but it is a direct quote—“bullshit jobs”. The noble Lord referred to people’s desire to get meaning, to feel that what they are doing, how they are using their time and talents, is worthwhile and contributing to society. Indeed, a failure to acknowledge and understand that—a focus purely on the pounds, shillings and pence—is at the root of a lot of our problems: the financialisation, to which the noble Lord, Lord Knight, referred, of our entire economy—not just the financial parts but the real economy, the care economy, the public service economy.
The noble Lord, Lord Knight, referred to managing things in a different way. I point again to New Zealand’s living standards framework, that guides its Treasury—based on a system not that dissimilar to our own—where they judge the quality of work, people’s security, the quality of the environment and the economy all together and seek to manage them to a stable, secure, decent whole.
These are important amendments and crucial principles, so I wanted to speak briefly in favour of them.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I thank the noble Lord, Lord Sikka, for introducing this amendment. I will be brief, because it concerns accountability, which has already been much discussed; and, like the noble Viscount, Lord Trenchard, I have really only just found out the intentions of the noble Lord, Lord Sikka, regarding the amendment—I was a little blindsided about the formal structure. The accountability debate, as we have progressed through this Bill, has shown more appetite to enhance Parliament’s oversight than to create other bodies. My personal view is well known, that ultimately I think more than Parliament will be needed, but if the route of just Parliament is followed, at least to start, then it is true that some of the functions—or challenges—listed in this amendment for the supervisory board could be pursued that way.
However, the other intention of this amendment is to find a way to prevent regulatory capture from within, which I understand. The mechanism to ensure that the supervisory board itself is not captured includes having public meetings and public documents—bringing in the sunshine, as the noble Lord said. This has some merit as a way to reflect the public interest that supervisors seemingly could not define and to democratise in some way—although I am not sure whether it has been correctly formulated yet. I also share the noble Lord’s concern that press releases, annual reports and even appearances before Select Committees do not give penetration beyond the regulators making assertions. That has to be so, because there is a mismatch between reports and assertions and then what we discover further down the track about what was actually going on at the same time as we received those assertions. We have obtained penetration only through reports such as the Gloucester review.
Some stronger powers would be needed to compel better information than is currently provided by regulators and made public. That will apply to all the ideas about oversight that we have been probing. I am not sure that we have found a perfect solution or combination of solutions yet, and I suspect that we will need more than one stage to do that. However, having a mechanism to prevent regulatory capture and groupthink is necessary—never mind the revolving door between the regulators and industry and the representation of industries within the regulators’ structure. The obligation to consult the public about rules is predominantly served through responses from industry. One thing that we know about consultations is that, broadly, they run on the weighing of the responses. At least that is certainly the way when it comes to government. When you have the weight of responses from industry, the relatively few that go in from public interest bodies do not necessarily hold the weight that they should.
The noble Lord, Lord Sikka, has brought forward some issues that we have to recognise and address. We need to put them into the pot of the matters that we think about as we move forward on accountability. I maintain my view that we probably will not achieve what we want simply by saying “enhance Parliament”. We will find over time that we need something else as well.
Baroness Kramer (LD)
My Lords, I very much agree with the noble Lord, Lord Sikka, that regulatory capture is a real risk. We certainly saw that prior to the 2008-09 crash, and many people would say that the soft hand of the regulator has ever since reflected an ongoing degree of regulatory capture. I am less focused on the revolving door issue but am much more concerned that the regulator says, “Wait a minute. If we go hard after whichever institution has done wrong, particularly if it is a major one and would involve going after senior people, we will disrupt financial stability. For that greater good, we must go softly and gently”. That approach has not served the industry or the country well.
We have talked extensively about accountability. I see this matter as an extension of that conversation. We have talked about the importance of accountability being extremely well informed in a way in which it is not today, and about the importance of transparency. Numerous ideas have come forward during the process of this Grand Committee. This is another, different approach that essentially tries to get to the same place —a regulator that has to be transparent and which provides genuine, sufficient and high-quality information that can be assessed by people of a relevant skills base, and that is accountable to Parliament. It should not be a regulator that just meets with Parliament and gives it an explanation once or twice a year but one that is actually accountable.
“Country-by-country reporting requirements
(1) The PRA must include country-by-country reporting requirements in reporting requirements for banks.(2) The FCA must include country-by-country reporting requirements in reporting requirements for investment firms.”
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, this amendment was not intended newly to introduce country-by-country reporting but to maintain the country-by-country reporting requirements that exist through CRD IV and retained EU law. In retrospect, looking at my amendment now, perhaps that is not quite clear.
Once again, as the statutory instrument layer is removed, it is within the purview of our financial regulators to decide that some things are inconvenient or not part of their main remit and to dispense with them. Article 89 of CRD IV requires institutions to report annually, specifying by country in which they have an establishment, information on a consolidated basis including: name, nature of activity and geographical location; turnover; number of employees on a full-time basis; profit or loss before tax; tax on profit or loss; and public subsidies received. Since then, there has been a little more general progress in country-by-country reporting, but I wanted to ensure there were no backward steps as the PRA and FCA start to write the rules.
There was much coverage at the time about the late insertion by the European Parliament of country-by-country reporting that nobody expected, but I can tell the story—which can actually be seen if we look at whole article in the directive. As was the way in trialogues that I chaired in the European Parliament, we shared out speaking. I am sure that the noble Baroness, Lady Bennett, will be pleased to hear that the Greens were leading on country-by-country reporting, but all that had been conceded to the Parliament in the trialogue was an assessment, maybe followed by legislation if appropriate.
I got a note from the Greens’ adviser saying that they were out of arguments and asking whether I could help. Maybe I should have framed that, because a Green being out of arguments is quite an astonishing thing. They knew that at that stage we had nothing to trade in return to get country-by-country reporting in. So I asked the Council and Commission to confirm that the only reason why they objected was that industry was saying that economic damage would be caused by country-by-country reporting. They both swore that that was the only reason why they were objecting to the insertion of such a clause: that they were afraid of what might happen if these really rather mild provisions were introduced.
I then proposed that the information be submitted in confidence to the Commission and that, in consultation with the regulators, there be then a general assessment of potential negative economic consequences of public disclosure, including the impact on competitiveness, investment, credit availability and the stability of the financial system. It sounds incredible, but those were the scare stories that the other institutions had bought into.
In the event that the report, including analysis based on actual data, identified significant effects, then the provision of public disclosures could be deferred or removed, but otherwise the provision would come into force in 2015. Having sworn that the only nervousness was about all these effects, they then had to concede that proposal. All that explains the content that you can clearly see in article 89 and the report in its paragraph 3. Of course, no damage was found, and the article is in force and transposed into UK law. I quote from a 2014 PWC document on compliance:
“HMT sought to adopt a pragmatic approach to provide rules that are practical and which provide some options designed to ease the compliance burden faced by businesses. This optionality has allowed HMT to implement rules that comply with CRD IV, but which, in line with broader Government policy, do not mandate reporting beyond the requirements of CRD IV.”
There are some activities that would trigger investment firms falling within scope, so it therefore seems relevant to raise this matter in the Bill, as the investment firm provisions are about to be rewritten. Of course, small and UK-only investment firms may not fall within the definitions, because I am proposing carry-over of the existing ones, but where they are larger organisations then they should continue to comply. Against that background, I hope that the Government will not say that they want to allow closing down of transparency and that the Minister will understand why I do not believe any of the scare stories about damage. I beg to move.
Baroness Bennett of Manor Castle (GP) [V]
My Lords, it is a great pleasure to follow the noble Baroness, Lady Bowles, not just because she highlighted the role of the Greens in pushing country-by-country reporting at the European level, and the value of having a Green in the room. A great way of bringing people on board and into the debate is to ask them for help. I will briefly quote the chair of European Parliament’s sub-committee on taxation, MEP Paul Tang:
“I think transparency is a powerful tool for change because many of the current tax policies can’t stand the light of day. Just shine the light on it.”
That was from an interview with Forbes, showing how so many of the defenders of the status quo are increasingly isolated and clearly out of touch, not just with the public but with much of the establishment who realise that things cannot go on as they are.
I have been asked at public meetings over many years how we get multinationals, rich individuals and the financial sector to pay their taxes. My first answer is simple: you need a Government who want to make them pay their taxes. My second, more detailed and technical, answer is, simply, country-by-country reporting. This is something that the UK can impose without needing international agreements. I back the noble Baroness’s amendment to the hilt.
Baroness Bowles of Berkhamsted (LD) [V]
I thank everybody who has spoken. The Minister has answered the question and I do not need to make any comments so, in the interests of time, I beg leave to withdraw my amendment.
Financial Services Bill
Baroness Bowles of Berkhamsted ExcerptsMonday 8th March 2021
(3 years, 1 month ago)
Grand CommitteeRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 162-VI(Rev) Revised sixth marshalled list for Grand Committee - (8 Mar 2021)
“Alignment of accounting to prudential standards
Where the prudential capital and profit or losses for a banking company are lower than the accounting numbers for that banking company where International Accounting Standards have been used, then the accounting numbers must have an adjustment to the balance sheet and profit and loss account in order to—(a) align the accounting numbers with the regulatory capital of the banking company which constrains the growth of a banking company and its ability to lend,(b) align the regulatory capital for going concern purposes with the accounting capital for going concern purposes,(c) align the regulatory capital and profits for remuneration purposes with the accounting capital and profits in accordance with the regulations for shareholder approval of director remuneration, and(d) align the regulatory capital and profits for distribution purposes with the accounting capital and profits for distribution purposes.”Member’s explanatory statement
This amendment ensures that when there are prudential filters discounting capital these should be carried through to accounting capital figures.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I declare my financial services interests as in the register. The two amendments in this group concern the use of international financial reporting standards, particularly with regard to banks. Their aim is to permit a very abbreviated explanation of some of the problems with and lack of transparency of IFRS and to probe the return of a role for the Bank of England concerning the endorsement of accounting standards now that the approval of IFRS is repatriated to the UK and their approval under UK legislation involves an economic interest test. I thank my noble friend Lady Kramer and the noble Lord, Lord Sikka, for signing my amendments.
It is undeniable that IFRS played a part in the financial crisis and, even though they have been amended since in recognition of that role, they are still not fit for purpose for calculating prudential capital. As far as banks are concerned, they have two sets of numbers: statutory accounts for Companies Act going concern, on which there is an auditor’s opinion, and numbers for the prudential regulator which—if I may put it this way—really show the going concern situation, because that is what prudential regulators want to know.
It is worth looking at a couple of points to see the sort of thing that regulators discount for prudential purposes. Good will is taken out, because obviously it is not loss-absorbing and is not much good when a company is running out of money. It is also the case that a bank’s debt can be shown merely at the junk bond debt value in a bank’s IFRS accounts rather than the sum actually owed, which again is not the real money situation. For a bank that is going bust, or just not doing so well, the published accounts can show a rosier picture than the prudential numbers. I do not know any serious analysts who use the IFRS accounts rather than regulators’ numbers.
Regrettably, there are many other anomalies affecting other businesses. IFRS 15, for example, can introduce a smoothing effect, changing some sales into an income spread over future years and therefore providing exactly the kind of disguising of downturns that has caused problems in the past.
Given that a bank’s ability to trade is determined by its prudential solvency and banking licence rather than its IFRS accounts disclosed to the market, it is actually a bit absurd to say that a set of accounts can fit the Companies Act going-concern requirements and be signed off for the market when a bank might be a gone concern as far as the regulator is concerned and no longer able to trade. That may be the theoretical end-game problem, but it would seem more sensible for the banks to have to disclose to the markets the accounts that they have to live by for their licence. That is probably a better set of numbers on which to reward executives as well.
Many other countries recognise such anomalies and do not allow IFRS to be used without modification. Australia has its guidance note AGN 220.2, Impairment, Provisioning and the General Reserve for Credit Losses, and fared better in the financial crisis as a result. EU countries do not allow IFRS or IFRS-like calculations at the company level for determining going concern. The US will have nothing to do with it and only very grudgingly allows it to be used by non-US companies. I know that because I helped to negotiate it. The UK is really the outlier here.
Amendment 74 suggests that where the prudential capital and profit or loss for a banking company are less than the accounting numbers, the accounting numbers should be adjusted to the prudential numbers in the balance sheet and the profit-and-loss account because it is the regulatory capital that is the true amount for limiting growth, the real going-concern number, the safe distribution calculation and the fair director remuneration assessment. Yes, I am being provocative because I want some thinking on this, not the usual bland leave-us-alone acceptance.
I turn to Amendment 77. The PRA is the body closest to dealing with the unrealities still existent in IFRS that affect banks and recognising the effects that they have on the safety and stability of companies. The Bank of England is surely the pre-eminent body for analysing economic effects in the UK. Therefore, my Amendment 77 proposes to give the Bank of England a role in determining whether there is an adverse effect on the economy of the UK—the test set in the relevant statutory instrument for endorsing IFRS—and whether the standard is suitable for use in prudential regulation and, if not, to require that it not be used for the purpose of prudential regulation. Of course, some of this overlaps with what it is already doing.
I am sure that the Minister and other Members of the Committee realise that I am using this opportunity to highlight a matter that should be looked at more carefully, rather than just letting the IFRS juggernaut trundle on, whether that be for another HBOS or another Carillion. There are significant issues that affect the economy as well as many other issues with IFRS that depart from the normal logic of what accounts should mean and that are hard, if not impossible, to reconcile with the various requirements of company law. They have been swept under the carpet for far too long. I beg to move.
Baroness Noakes (Con)
My Lords, I am struggling with Amendment 74 because I think that it is aiming at a target that does not really exist, and it confuses capital and profits and losses.
The amendment would require what are quaintly called the “accounting numbers” to be adjusted to align with regulatory capital. Apart from anything else, that would result in accounts that do not comply with the Companies Act 2006, which requires, under Section 393, that accounts show
“a true and fair view of the assets, liabilities, financial position and profit or loss”.
The amendment seems to suggest that adjustments would be made to the accounts other than for the purposes of compliance with international accounting standards or to show a “true and fair view”, and, in that case, I believe that the resulting accounts would not comply with the Companies Act. We have to emphasise that these are international accounting standards, to which all countries that sign up follow, so this would be a major departure for accounting by banks and other institutions in this country.
I also note that, in proposed new paragraph (d), this is to apply to “profits for distribution purposes”, but that seems to misunderstand the fact that distributable profits are determined at the level of the parent entity solo accounts, whereas the adjustments that I believe are being targeted would be found in the accounts of subsidiary regulated entities or in the consolidated accounts, rather than those of the parent itself.
Regulatory capital already operates as a constraint on lending, so I fail to see what real-world impact any adjustments in the statutory accounts would have. While I understand the concept of regulatory capital, I do not understand the concept of “prudential” or “regulatory” profits or losses. I do not believe that “regulatory profits or losses” is a term that really exists, except to the extent that accumulated profits or losses form part of regulatory capital. It is difficult to see how proposed new paragraph (c) in Amendment 74 would work in relation to remuneration.
The noble Baroness, Lady Bowles of Berkhamsted, has explained the sorts of adjustments that are made for regulatory purposes and that, under her amendment, would be taken into the statutory accounts—for example, the treatment of intangible assets. It is not clear to me why the prudential treatment of these items should be imported into true and fair accounts. The treatment for regulatory capital is linked to loss absorbency, which is not an underlying principle of financial accounting, and it therefore cannot readily be accommodated within the structure of accounting standards.
Pillar 3 statements, which are required to be produced by all regulatory banks, set out the information required in much detail. If the noble Baroness is correct—I am not sure that she is—that analysts use and rely on Pillar 3 statements, not statutory accounts, they already have that information: all of it is in the public domain.
Amendment 77 is unnecessary. It is already open to the PRA to base regulatory capital on different numbers from those in the annual accounts. I have already mentioned intangible assets. It also ignores gains or losses or known liabilities, a very arcane bit of the accounting standards that makes companies recognise gains when their credit ratings reduce the fair value of their outstanding liabilities. The PRA has not needed any special statutory cover to eliminate that from regulatory capital.
Furthermore, it is unsound for the Bank of England to approach accounting for individual institutions on the basis of the impact that a standard may have on the economy of the UK, as if accounting were a mere plaything of policymakers. I hope that the noble Baroness, Lady Bowles, will not press these amendments.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I thank all noble Lords for having taken part in this debate and for enabling me to find some way in a busy parliamentary schedule to enable airing of a few of the problems with IFRS. I regret that IFRS has not been picked for a study by a Select Committee; I have tried but it is a rather dry subject that gets few votes when set against competing topics.
I have to admit that Amendment 74 was not only probing but perhaps a little impetuous in trying to provoke some thought about what was actually going on. My main point is that accounting has made it very difficult to get a genuine view of what is true and fair. If anybody wants to look at the RBS preliminary hearings that went to the courts, it was said there that the law was not for experts but for ordinary people. The fact is that we have got to a stage where there is such a departure between accounting standards and what the normal person would understand that I seriously challenge whether they really do give a true and fair view.
Things that can be done with supply chain financing, as the noble Lord, Lord Eatwell, expressed, have undermined several significant businesses, yet still it is there and going on. I accept that one needs something like IFRS for international comparisons, but the UK is still the outlier in having copied a lot of the flaws of IFRS into the national accounting, so it appears again at the company level beneath. It is that which can therefore cause some of the crashes, whereas, in other countries, because they do not apply it at their national accounting standard level and to company-level accounts, they manage to escape.
Amendment 77 is not as impetuous, perhaps, as Amendment 74. Once upon a time the Bank of England used to jointly appoint the head of the FRC, so it had some say in it, but that now seems to have disappeared and it is left just to the Minister and BEIS. But I did not invent the bit that I pointed out about the economic analysis; that is what the endorsement board has to do to endorse IFRS and what is present in the International Accounting Standards and European Public Limited-Liability Company (Amendment Etc.) (EU Exit) Regulations 2019, one of the 100 or so SIs that I diligently scrutinised with other noble Lords. So I have not invented the test; a test is there and is going to be conducted by a subset of the FRC, a board established under the auspices of the FRC, or the ARGA, when we get round to doing it. Will it really be the right body for that economic interest test? As the noble Viscount, Lord Trenchard, explained, taking an opinion from the Bank of England would seem appropriate.
The Minister’s argument is that we should not rock the boat on anything. We can let the deceptions and failures keep on coming but, underlying this, if we do nothing and leave it with the accountants to do their fancy footwork on the figures, which might suit them but nobody else, we can record now that the Treasury did not go poking around to find out what was going on and has done nothing to help. For now, I beg leave to withdraw my amendment.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I was not sure where the debate on short selling would go. I am broadly satisfied with the present rules that prohibit naked short selling and require that a short seller has identified where they will obtain the shares when delivery is required. There is a little bit of wriggle room in the identifying, which was very hard fought for by the UK when the EU regulation was being negotiated. Some would like it more relaxed so that there is a looser understanding of how the shares will be found; others would like to ban short selling altogether. I am not convinced that any significant change is needed in that area but, having negotiated the current compromise, I am both biased and happy for someone else to gather the scars on their back.
As the noble Baroness said, there has been additional interest in short selling because of the developments around GameStop and AMC shares, with some retail investors deliberately seeking to put a short squeeze on to hedge funds with large short positions. The shares became heavily promoted on internet sites and social media, and no doubt there are individuals who made poor decisions about investing as a consequence. Eventually, brokers took steps to curtail retail access, and therefore activity, which stopped extreme movements, but that also calls into question rights of retail access and whether there will be discouragement of things such as commission-free retail trading.
In the UK—and, indeed, the EU—we do not have such large net short positions as tend to be found in the US. That may well be due in part to the more restrictive requirements on the identification of where one is going to get the shares from, and stricter disclosure requirements. Retail access is not so well developed here, either.
I do not know whether the Treasury Select Committee has taken any evidence on this—it seems taken up by the Gloster review—but the chair of ESMA appeared before the corresponding committee in the European Parliament on 23 February. In that appearance, there was a suggestion that other things around the subject may need looking at—such as market abuse and best execution, which would be under MiFID II—rather than short selling.
The FCA website has a six-line generic statement, put up on 29 January, about “recent share trading issues”, warning about potential loss of money, that losses are unlikely to be covered by the Financial Services Compensation Scheme, and that broking firms are not obliged to offer trading facilities to clients, which covers the point about withdrawal of service. It tweeted a similar warning.
Here I should probably draw attention to my specific interest as a director of the London Stock Exchange. I know that a close eye has been kept on the situation, looking at additional analysis, possible additional monitoring and scenarios that could arise within our markets, and having discussions with the FCA, but that is all work in progress.
A lot of people seem to consider short selling fundamentally evil, but it is really just like ordering a book from a bookseller, paying for it, and getting it later when the seller has purchased it from the publisher. That is okay if you know there is a book and a publisher and you have not already been told that it is sold out. It is not okay when there is no book, and so on. That is the distinction between naked short selling, when you do not know whether the book is there, and having identified that you can actually get your hands on the book to fulfil the order. Broadly speaking, I am not sure that a huge overhaul of short selling needs to be looked at. If all these things are to be looked at, it probably needs to go beyond what is in the short selling regulation and look at how execution has to happen as well.
Lord Holmes of Richmond (Con) [V]
My Lords, it is a pleasure to take part in day five of Committee of the Financial Services Bill. In doing so, I declare my interests as set out in the register.
I was keen to speak to the amendment in the name of my noble friend Lady McIntosh of Pickering—and have put my name to it—mainly because of the reasons set out by my noble friend and the noble Baroness, Lady Bowles. That is, given the position we are now in with financial services, it seems opportune to review this practice. In saying that, I agree with the noble Baroness, Lady Bowles, that it makes sense to see this as part of a wider review of a number of other market practices. Indeed, it reflects an earlier amendment that I put forward on day one on the opportune moment to review all our financial services regulations and regulators’ rules, given that our situation is so fundamentally different from what it was a matter of weeks ago.
On short selling, it is important to understand the difference between different markets, as the noble Baroness, Lady Bowles, eloquently set out. It is important for that to be understood, not least as a number of people’s understanding of short selling will have been informed by the earlier situation with GameStop on the exchange in the United States and the excellent film “The Big Short”—excellent unless you happen to be on the wrong end of that practice. However, it is different in different jurisdictions. Which jurisdictions would the Minister look at in considering potential better practices around the world? Would she also see this as a positive, opportune step to take as part of a wider review of all financial services regulations and the rules of our regulators?
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I have some sympathy with the motivation for this amendment concerning co-ordination of regulators and combined regulatory agendas. Of course, there is already an MoU between the PRA and the FCA about modes of co-operation, who leads on which issues, and how to escalate to the two CEOs to resolve. I took the opportunity to remind myself of it; it is only an agreement to consult on deliberations that are equally relevant to both regulators’ objectives or which might have a material effect on the others’ objectives. Senior executives have discussions every quarter and report to their respective boards. It is perhaps disappointing that it does not contain more. It reminded me that it can be hard to force independent regulators to co-operate, especially at the moment that they are created. They fiercely guard their independence, not just wanting to do things their own way but vehement that they are obliged to do so.
In the EU, my committee insisted that there be a joint committee of the three regulators; we got it into legislation, albeit in a very sketchy form, with the intention that they got together to thrash out different positions. However, in that, they stayed as equals and there was no overarching power, rather as it is in the MoU between the PRA and the FCA. I can tell you that the regulators did not like the idea. When they came to committee hearings, we had to keep asking whether they had met yet. The answer was that they were concentrating on their own set-up and procedures first. Eventually, there came to be a few problems and, as happened back then in the EU, the Parliament was seen as part of the solution. So, they came to me, discovered that I knew all about this since industry had alerted me as well, and, after a chat and—perhaps—a bit of pressure, I remember saying that that was why we had invented the joint committee and kept asking about it. Slowly, they started to use it, then decided it was quite a good thing and, finally, wondered how they could ever have done without it; maybe they were also a little afraid of what Parliament might say if they did not make it work.
I have thought about that experience and whether the UK is better off with the MoU—which actually has more definition in it—or worse off because, in the end, it reinforces territories rather than being a less formal get-together. There is a problem with the proposal by the noble Lord, Lord Blackwell, in that it is formalised with the Governor of the Bank of England as chair. I am not sure that establishing a pecking order as it does is the right thing, even if it does end up going back to the two CEOs, which, of course, is where the MoU takes it all to anyway. I certainly do not like it as a step towards abandoning the “twin peaks” idea.
The present Governor also has FCA experience but, in the circumstances, that might complicate matters. One thing the amendment proposes is for the joint committee to check that the MoU is working. That check is important; it will surprise nobody that, in my view, if the MoU is not working, that is just the sort of matter that Parliament should get involved with to see if it can catalyse some action. The rest of the amendment also seems to be on things Parliament should be asking about and could ask to have reports about. Although I do not think that the noble Lord, Lord Blackwell, has directed attention towards the right body, he highlights some issues on which the regulators should be quizzed.
Baroness Noakes (Con)
My Lords, my noble friend Lord Blackwell’s Amendment 86 identifies a very real problem that has existed since the Government decided to abolish the Financial Services Authority and split responsibility for conduct and prudential regulation.
I was never in favour of splitting the FSA. It had certainly failed as a regulator, as the financial crisis laid bare, although it must be said that other regulators around the world, whether combined or separate, fared no better. The FSA had not managed to get the balance right between conduct and prudential regulation; it had an obsession with conduct matters and treating customers fairly, which often dominated its thinking, while banks in particular were allowed to run on wafer-thin capital ratios. It needed reform rather than a wrecking ball.
When they were separated by the Financial Services Act 2012, many concerns were expressed about the possibility of a lack of co-operation. As has been said, a number of mechanisms were put in place, including the statutory duty to co-operate, the memorandum of understanding and cross-membership of the boards of the PRA and the FCA. However, as my noble friend Lord Blackwell explained, it has not always worked well in practice. There are problems of overlap and overload. Some issues, such as cybersecurity, are of interest to both the PRA and the FCA. Such an overlap comes with the split between the two regulatory peaks, but often they focus on the issues in different ways, on different timescales and with different objectives. This is often inefficient from the perspective of regulated firms.
The cumulative impact of the requirements of the PRA and the FCA can lead to significant overload. There is no real prioritisation mechanism. Regulated firms can be bombarded by each regulator and, even if the individual regulator prioritises its own demands, which is not always the case, there is no real mechanism for the competing demands of the FCA and the PRA. For example, I recall in the middle of stress testing, which is led by the PRA and tends to absorb the resources of subject matter experts specialising in credit risk, the FCA produced big data demands in exactly the same area and requiring exactly the same subject matter experts. It would not have occurred to either regulator to see regulatory demands from the other regulator as more important than its own.
I support the aims of this amendment. Whether another committee would have any impact is another matter, especially if it met only once a year. We must remember that the tripartite arrangements that failed during the financial crisis looked good on paper. It was just that they were never taken seriously and were allowed to fall into disuse. The same could happen to a committee.
My noble friend might want to look at how his amendment could be improved by incorporating an element of reporting to Parliament. On the first day of Committee, we debated parliamentary accountability more widely in the context of the new rule-making powers that are being transferred to the FCA and the PRA. The new accountability arrangements, which some of us advocated, could include examining how well the regulators are working together and co-ordinating their activities; that should be strongly considered if my noble friend chooses to bring this issue back on Report.
“Equivalence
The Treasury may not make an equivalence decision unless it has determined that a third country has equivalent legal and supervisory standards, and it may not make a determination based only on agreement to make reciprocal determinations.”Member’s explanatory statement
This is a probing amendment in order to discuss equivalence determinations and processes and the role of reciprocity.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, in moving this amendment, I shall make comments that reflect in part on EU relations and therefore on the other two amendments in this group.
As the explanatory statement says, this is a probing amendment in order to discuss equivalence determinations and processes and the role of reciprocity. The amendment states:
“The Treasury may not make an equivalence decision unless it has determined that a third country has equivalent legal and supervisory standards, and it may not make a determination based only on agreement to make reciprocal determinations.”
Broadly speaking, the first part of the amendment restates the usual equivalence requirement, and in the second part I am hoping that the Minister can explain how equivalence through trade agreements or reciprocal equivalence agreements will work. Will those mechanisms be allowed to dilute the standard set through the usual requirement?
We have heard a lot about trying to get equivalence with the EU. My position has always been that it was a remote possibility without rule taking, or dynamic alignment as it has become called. It also seems to me that the way in which the UK wants to operate, with the regulator making rules that can be flexible, makes it more difficult, or even impossible, for the EU, and maybe some other jurisdictions, to agree equivalence. That is because it ends up not being about rules—because in the UK they will be able to flex and vary—but about supervisory equivalence, or, as the noble Viscount, Lord Trenchard, called it, the outcomes. That is more subjective, a matter of opinion and confidence in supervisors rather than an objective analysis of rules.
This reasoning also lies behind what some noble Lords may see as my obsession with getting more information out of supervisors and for regular independent reviews. How else are we, let alone another jurisdiction, going to know what really goes on? Even less demanding jurisdictions than the EU, such as Australia, once they have set up independent scrutiny of their own regulators, may begin to wonder what they know about ours.
Our regulators will say that they have good and friendly relationships with other regulators and that they are respected and so on—all the presentations that they have repeatedly given to committees about why there would be equivalence with the EU in the end. They have been wrong so far, and I am not holding my breath. The statutory instruments currently underpinning legislation will be progressively taken away. I am sure that the EU will read these debates where the Minister has repeatedly stated how FSMA will enable rules to change quickly and be made bespoke and that is why Parliament cannot be let in too much. One hopes that means that rules will change to close gaps and adapt to new types of business, but there is nothing anywhere that says that. It can easily be interpreted as an intention to ease here and there, just like the tailor if we eat a little too much.
I am not trying to be awkward. I have sat in discussions with the European Commission at a time when my committee was concerned that the EU was being too rigid on equivalence. I have had to explain that equivalence was sometimes—in fact, quite often—of mutual benefit. That instinct to have things fixed and controlled between member states ran through every piece of legislation in one never-ending grind, as elaborated correctly by the noble Viscount, Lord Trenchard, on the previous amendment, although we may come from opposite positions. Such an instinct is stronger in financial services than in any other sector because of the philosophical commitment to the euro, whether or not that is relevant. Yet, somehow, it is still hoped that the EU can work out how to deal with this squidgy balloon that defines UK financial services rules. All I am saying is that we have to recognise that if we want the squidgy balloon way and the outcomes way, there are consequences when it comes to equivalence decisions.
That is looking at it from the outside. The other side of it is the inside. What are our rules and supervisory standards that other countries will have to be equivalent to? How is that judgment to be made? Will it be a rule book by rule book comparison or will it really be mutual recognition of supervisors, and if so, based on what? How will that assessment be done? Will HMT agree reciprocal equivalence with anyone when it sees an opportunity for export of financial services and assumes that not much will be incoming back to the UK, or will UK standards be lowered to match those of incoming equivalent businesses from the third country? Will UK firms be allowed to drop standards when operating overseas? To come back to my amendment, will the Government allow weaker standards, through trade agreements and reciprocal equivalence agreements, and how will consumers and financial stability be protected?
The example of software being allowed for capital is a convenient one, although there are probably bigger things. I kept that out of EU legislation but the UK could not hold the line on that this time round. The US has also allowed it. Where does that put banking equivalence for us in relation to the US and, should it ever be on offer, the EU? What top-up supervision or other requirements will go on?
It will be clear that I am less obsessed by getting reports on the EU situation as required by Amendments 100 and 105—although I will happily read them and wonder what is new. I am more obsessed with what standard is really being required by the UK of other jurisdictions to permit equivalence by any route and, in turn, how that will reflect back into our own supervisory standards. I beg to move.
Lord Hodgson of Astley Abbotts (Con) [V]
My Lords, I have Amendment 105 in this group, which is also a probing amendment, and seeks to insert a new clause in the Bill about regulatory co-operation with the EU. In her Amendment 90 the noble Baroness, Lady Bowles, called for actions. Amendment 105, as the explanatory statement makes clear, is a reporting mechanism to report on progress towards or completion of an MoU with the EU on regular co-operation measures, which were envisaged under the trade and co-operation agreement between the UK and EU as regards financial services. The amendment flows from my chairmanship of the Secondary Legislation Scrutiny Committee of your Lordships’ House.
Last autumn, the committee considered a number of statutory instruments, which have granted equivalence to oversight and regulatory arrangements in the EU in the area of financial services. Mostly they were laid by the Treasury but some were laid by another departments. It was not clear to our committee whether the SIs were all part of a potential agreement with the EU or whether they were unilateral individual decisions. We wrote to John Glen, the Economic Secretary to the Treasury, as follows:
“Equivalence in relation to the regulation of financial services is an important aspect of our future relationship with the EU. In several of the instruments that we have considered, the UK appears to have granted equivalence indefinitely, while the EU has not yet completed its assessment of the UK’s equivalence (for example in relation to the regulatory regime for auditors) or has granted only time-limited equivalence (for example limited to 18 months in the case of the supervisory arrangements for central counterparties).”
Against this background, we asked for further and better particulars on three points:
“A list of the equivalence decisions made by the UK Government in the different areas of financial services regulation. Whether the EU has reciprocated and granted equivalence to the UK and its regulatory arrangements in these areas. Whether equivalence by the UK and EU has been granted indefinitely or is time limited.”
The reply on 7 January, which I referred to in my speech at Second Reading, was not a model of clarity and precision. Phrases like
“a package of equivalence decisions”
and “the majority of decisions” do not help critical analysis. The correspondence between the noble Lord, Lord Butler, and my noble friend Lord Agnew at Second Reading, which followed this and circulated among all who participated in that debate, seemed to follow the same generalist approach.
However, John Glen’s letter did make one thing clear, that
“there are no decisions made by the EU that have not been reciprocated by the UK.”
As such, to date, it has been a one-way street. That is not necessarily a bad thing, but Parliament and the country are entitled to, and should, know about the development of our relationship with this most significant and geographically proximate market in a sector of particular importance to the United Kingdom—hence my tabling this amendment.
Earl Howe (Con)
My Lords, I hope that my response to this debate has indicated that, of course, we regard mutual determinations of equivalence as desirable. However, I have also made it clear that there is advantage to both the UK and the EU in our adopting an autonomous position to take decisions for ourselves in this area. Of course, I am hopeful that our discussions with the EU will progress in a helpful way, and I assure my noble friend that, as soon as I have news that I can vouchsafe to him and other noble Lords, I shall certainly do so.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I thank all noble Lords for what has turned out to be a very interesting debate. For once, the crafting of my probing amendment produced exactly the responses that I was hoping to obtain. Here is the thing: in many respects, I can agree with everybody, even though noble Lords were obviously coming from different positions.
The noble Viscount, Lord Trenchard, and the noble Baronesses, Lady Noakes and Lady Neville-Rolfe, think that we just have to get on and plough our own furrow. The Minister has said that that is essentially what we are doing, but we are maintaining the hope or ambition that the EU will, one day, come round and finally realise that there is mutual advantage in equivalence decisions or whatever one wants to call them. In my opening speech, I said that I had sometimes failed to persuade it of that, and, ultimately, we already see the pattern: once it realises it needs it, we will get it, but not before. It will not concede a general mutual benefit, which is one of the big differences between the UK and the EU. I fully support the line that the UK is taking, which is to be open and to show that openness works. There lies the power of London—and common law has a hand in it as well.
The Minister has been clear. On the adoption of the squidgy balloon, as I termed it, I did not mean that in a disrespectful way; I was just trying to say that the EU looks for something concrete, and we have a squidgy balloon, although the outcome might end up being around the same. It has difficulty with that, but we are proceeding with the squidgy balloon, and, therefore, we will have to take in our stride whether we get equivalence or not. I think that that is what the Minister has said, quite fairly and clearly.
However, he has confirmed that standards will be maintained. I knew that I was broadly quoting from guidelines in the first part of my amendment; that was not a happy accident. However, there was confirmation that there will always be this looking at the outcomes and what is supporting that, which applies no matter the route we take to equivalence or whatever else it is called—as the noble Baroness, Lady McIntosh, explained, there are various routes to achieving the mutual recognition, however it comes about.
From my perspective, this has ended up being quite a satisfactory debate—probably nobody is happy, but we are where we are. On that basis, I beg leave to withdraw my amendment.
Financial Services Bill
Baroness Bowles of Berkhamsted ExcerptsMonday 1st March 2021
(3 years, 1 month ago)
Grand CommitteeRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 162-IV(Rev) Revised fourth marshalled list for Grand Committee - (1 Mar 2021)
“Further matters for regulators to take into account
When making rules using their powers under the Financial Services and Markets Act 2000, the Prudential Regulation Authority and Financial Conduct Authority must—(a) have regard to competition within the contexts of—(i) the availability of consumer choice and fair pricing;(ii) the development and encouragement of new products and new industry;(iii) the desirability of supporting the international reputation of the United Kingdom for good governance;(b) structure the rules to establish clear categories for different types and sizes of financial service businesses including—(i) in banking, for small co-operative, mutual and community banks;(ii) in insurance, for captives and reinsurance.”Member’s explanatory statement
This is a non-exhaustive example of additional high level policy that could be embedded in the remit for the Regulators.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I support all the amendments in this group and will speak to my Amendment 29, which suggests further measures for regulators to have regard to. I also remind the Grand Committee of my financial services interests, as in the register.
“Have regard” clauses are the only things that the Government are proposing as additional accountability measures in this Bill, or as the “activity-specific regulatory principles”, in the language of the HMT consultation. Indeed, views were sought in question 2 of the consultation concerning more “have regards”.
The first part of my amendment seeks to give the PRA, as well as the FCA, a set of competition considerations relating to consumer choice and fair pricing, the development and encouragement of new products and new industry, and the desirability of supporting the international reputation of the United Kingdom for good governance. These are self-explanatory, but giving encouragement to new products and new industry is something that is important for both regulators. There is overlap here with issues that were discussed in the competition group on the first day of Committee. This is the kind of measure on which it seemed there was more consensus, but I will not repeat that debate.
The second part of the amendment, also under the umbrella of competition, in proposed new subsection (b), suggests that rules establish clear categories for different types or sizes of business, and two examples are given for banking and insurance. The regulators frequently inform us that they apply proportionality, but it is often within an overall regime that does not allow specific or easy identification of a stand-alone category and may not always take advantage of all legitimate considerations.
In banking, I have highlighted regimes for small co-operative, mutual and community banks. I have the impression that these banks have been at best tolerated by the PRA, rather than encouraged; perhaps it is awkward for the PRA to have more banks to deal with, perhaps there is no promotion from working with the small guys, or perhaps it is like it was with the old FSA and everybody wants the big glamour jobs. It seems to me that, for quite a long time, the public and parliamentarians have been saying that they want banks in the community, understanding the community and with purpose linked to the community, but the atmosphere in the PRA still seems to be one of reticence and suspicion.
For insurance, there has also long been a call to have better-elaborated categories that deal with different types of risk transfer. This is something that other countries have done, notably carving out specific regimes for captives and reinsurance, which has given them a competitive advantage. I should like to be able to see what the UK is doing in this regard and compare it much more easily with Ireland, Luxembourg or the Netherlands—or, indeed, Bermuda. It has always been possible; it is nothing to do with being in the EU or not—it is our regulators.
Recital 21 of Solvency II states:
“This Directive should also take account of the specific nature of captive insurance and reinsurance undertakings. As those undertakings only cover risks associated with the industrial or commercial group to which they belong, appropriate approaches should thus be provided in line with the principle of proportionality to reflect the nature, scale and complexity of their business.”
Of course, the attitude of HMT and UK regulators to recitals in European legislation is that they are not binding and so they are not interested, but other countries have taken notice. It is all very disheartening, as it was British MEPs who worked hard to get those words in there. Therefore, I would quite like to have another go with a “have regard”, where at least the regulators would have to explain why they have disregarded it.
The Central Bank of Ireland took the recital to heart and, taking the definition of a captive from Solvency II, has defined a “direct writing captive insurer” for which there is a specific “differentiated supervisory approach” under which the solvency, capital and governance requirements are less onerous. That approach is justified by the narrower risk referenced in recital 21. Are these the sort of more flexible, tailored kinds of rules that the Minister would like to see put to good use in the UK? If so, then maybe, over a decade on, we can get to where we should have been. Even if we do not, this illustrates a significant example where having the regulator’s justification for not “having regard” would at least be useful. I beg to move.
The Deputy Chairman of Committees (Lord Russell of Liverpool) (CB)
I have received no requests to speak after the Minister so I now call the noble Baroness, Lady Bowles of Berkhamsted.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I thank all those who have participated in what has turned out to be quite an interesting debate. It seems that most or all noble Lords have managed to put their fingers on one or two points. It would be useful if the regulators could look through this debate, and maybe the Government could also look through it a little bit more when we get offline.
The noble Lords, Lord Holmes, Lord Naseby, Lord Stevenson, and the noble Baroness, Lady Kramer, all linked together the fact that, post-Covid, changes will be going on. Younger people in particular are looking to bank in different ways; they want to use their local services. Although I listened to what the Minister said about this Bill enabling the PRA to act in more proportionate ways, I know for a fact that they can already do that but do not. So there needs to be a little bit more encouragement. To go back to my first amendment, if things were more transparent in terms of having a category and saying, “This is how it is for a bank of small or medium size, or mutual,” we would be able to see how that proportionality works. At the moment, we are told that it is there, or “You can’t do it because of the EU”, and that is simply not true. Let us take the example given by my noble friend Lady Kramer about the MREL. You do not have to have the MREL kicking in at such a level for the medium-sized banks; that was very much introduced as something for the larger and more systemic banks.
My plea is: look at what this is asking. My basic “have regards” provisions were asking for us to have something that shows us the categorisations, layers, tiers and the strata—whatever you want to call them—so that it is clear for everybody. As the Minister herself said, there can be lots of places where things are too complex; it is not just for MREL. That is exactly the point I was trying to address: you have to go across the whole suite of regulations and bring together what is relevant for the different categories, not have the smaller banks having to fight their way through and find out that there is no consistent set of proportionality requirements.
We have started an interesting conversation here; there may well be some point that it is worth us pursuing when we get to Report on categorisation as a “have regard”. I see nothing wrong with that: we are not telling the regulators what to do but asking them to have regard because we think there has not been enough of it already. I am interested in carrying that forward, but, for now, I beg leave to withdraw the amendment.
“Skilled person review of supervisory bodies
(1) At least once every five years, an independent skilled person review must be conducted of—(a) the Financial Conduct Authority and(b) the Prudential Regulation Authority.(2) The body set up to conduct the independent skilled person review must include a person nominated by resolutions of the House of Commons and House of Lords.(3) The independent skilled person review 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 relevant legislation and 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 the Authority’s staff;(h) any other matter the skilled person considers relevant;(i) any other matter requested by a relevant Committee of the House of Commons or House of Lords.”Member’s explanatory statement
This amendment suggests a generalised review, not linked to specific fault or failure, of a kind that exists in other jurisdictions.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I have already trailed the notion of regular independent reviews of regulators in an earlier amendment, but this amendment gives an opportunity to investigate it at greater depth.
In the Government’s consultation and in the context of the Bill, we are told that we are returning to basic FiSMA, getting rid of the statutory instrument layer containing EU-made legislation and going back to what was devised by the UK for the UK. However, it is worth noting that FiSMA never really stood alone, because the EU’s financial services action plan, laid out in 1999 and broadly completed by 2004, meant that the extensive consultation, public transparency and policy co-ordination of the EU was there and growing from the start of FiSMA and, by the time of the 2012 reforms, the EU’s rigorous regulatory and supervisory architecture was in place. Although those things were viewed as annoying by some—perhaps by many—in the UK, changes are now happening by going standalone, including loss of peer-reviewed rules and loss of peer-reviewed supervisory practices. That is especially problematic for the conduct and markets side, given the less developed international co-ordination.
After the financial crisis, the missing element of supervisory quality control was a primary driver behind the EU regulatory architecture reform, its absence being considered part of the reason for the financial crisis—a view much reinforced by the admissions of the FSA in the Turner report. Unwillingness of regulators to see the writing on the wall had certainly been a flaw in the UK. The fundamental gap of supervisory quality control has not been routinely addressed domestically; we just get reviews after failure happens. This gap will be more critically exposed in a standalone system where the regulators make all the detailed policy and all the rules as well as supervising.
Our immediate history, especially with regard to the FCA, is of repeated supervisory failures, already elaborated last week by the noble Lord, Lord Sikka—the latest being the Gloster report showing operational failures. In the news last week was the FCA being too slow on buy-to-let cars, and many more cases are bubbling on. In every case, warnings have been ignored. Private Eye often gives a good summary of what is going on, as do the broadsheets.
Earl Howe (Con)
My Lords, this amendment would require an independent review of both the FCA and the PRA every five years, and it sets out a number of things that the review would have to cover. The FCA was created to ensure that relevant markets work well. In practice, that means regulating the conduct of firms to make sure that the financial services sector is serving the interests of individuals, businesses and the economy as a whole. It has a broad remit and is responsible for regulating nearly 60,000 firms.
I accept the point made by the noble Baroness, Lady Bowles: the recent investigations by Dame Elizabeth Gloster and Raj Parker have shown that the FCA does not always get this completely right. However, the FCA is wholly committed to learning from past mistakes. It is addressing the recommendations in both these reports and we can see that commitment being translated into action.
The FCA has set out how it will accelerate its ongoing process of reform, including through its transformation programme led by the new CEO, Nikhil Rathi. It has committed to provide public updates on progress every six months, and it is right that the Government and Parliament hold it to account on delivering these important changes. The FCA absolutely knows what it needs to do, and that it needs to do it under a spotlight, both from the Treasury and from Parliament.
That is one part of my answer to my noble friend Lady Noakes, who asked me how the Government assure themselves that the regulators are fit for purpose. But the noble Baroness, Lady Bowles, spoke about the need for assurance and the noble Baroness, Lady Kramer, similarly, on the need for accountability. I reassure all three noble Baronesses that there already exist a number of mechanisms to hold regulators to account, both to Parliament to the Treasury. I believe that these existing mechanisms are sufficient to achieve the outcomes that this amendment is aiming at. I touched on some of these points in my previous remarks to this Committee, but I will attempt to provide a short summary here.
First of all, the regulators are required to produce annual reports and accounts, which are laid before Parliament by the Treasury and certified by the National Audit Office. The regulators are subject to full audit by the National Audit Office, and the NAO has the associated ability to launch value-for-money studies on the FCA and PRA. The FCA is subject to scrutiny via departmental Select Committee hearings, including the Public Accounts Committee and the Treasury Select Committee, which holds regular six-monthly meetings with the FCA CEO and Chair. The Treasury Select Committee scrutinises the appointments of the FCA Chair and CEO posts, and the Treasury has direct control over appointments to the FCA board and powers under the Financial Services Act 2012 to commission reviews and investigations.
The Treasury is also able to launch investigations under Section 77 of the Financial Services Act 2012 where it suspects there may have been regulatory failure. There are a number of informal mechanisms as well: there is nothing to prevent a Select Committee of either House launching inquiries, taking evidence on them, and reporting with recommendations; that is a decision for them. In speaking to Parliament about this Bill, both the PRA and FCA have stressed that they are committed to appropriate parliamentary scrutiny and will always respond to requests for engagement. Combined, these measures ensure that there is sufficient independent scrutiny of our regulators.
I am the first to agree that this is particularly important in light of Dame Elizabeth Gloster’s findings, but I reassure the Committee that, in addition to these measures, the Economic Secretary meets frequently with the FCA CEO to monitor progress on these critical reforms and ensure that the FCA remains focused on effectively delivering against its objectives. Of course, however, as we have discussed, the future regulatory framework review is considering the appropriate accountability mechanisms for the regulators, so this will provide an opportunity to consider these issues further. I hope that these remarks are helpful and sufficiently reassuring to the noble Baroness to enable her to withdraw her amendment.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I thank everybody who has spoken in what has turned out to be quite an interesting debate, the majority of whom have supported the general notion of my probing amendment, if not exactly all the specifics that I put into it, which perhaps tried to do too much. To clarify my intention, it was exactly as my noble friend Lady Kramer summarised: it was for a regular review that gave oversight to the regulator’s activities. As the noble Lord, Lord Sikka, said, the systemic factors also had oversight of that change.
I am sure that it is possible for this to come from other quarters. The Minister has suggested that it comes from the Treasury. Perhaps it could come from a parliamentary committee, although what I had in mind was not so much a body that solely took evidence but a few people who could get inside and examine procedures and find out how the operations worked.
Like others, I would like to clarify my concerns here. I know how difficult it is to be a regulator, especially to be the conduct and markets regulator, where things are less tangible than in some of the prudential regulation work, but it is about giving a helping hand. Although a lot of good thought and planning goes into how to address the problems that are exposed every time there is a review, if it is done from the inside, that is never the same as having eyes that come from outside. The thing about having an independent regulator is that, if you want independence, ultimately, the review should be independent. Having those reviews monitored through the Treasury is not necessarily the sort of independence that is satisfactory if you want to say that it is independent, and I question whether it is possible to do it through a parliamentary committee.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I am pleased to support the amendment from the noble Baroness, Lady Noakes, which, as she explained, was tabled before the benchmarks consultation was launched. I share her thoughts that something nevertheless has to be done quite quickly if there is to be an opportunity to ensure that one can look forward to stability of contracts, knowing that something will be done before the end of the year. Maybe we are again in the territory of Parliament giving a consultation response through the debate.
Switching from Libor reminds me just a little—it is complicated—of the problem that we had with gilts being indexed to RPI rather than CPI, when RPI was both wrong and not being maintained by the ONS. The Economic Affairs Committee covered this in a report; indeed, we were tempted by Mark Carney to try to get it sorted out. Though I paraphrase, I think the report’s message was to grasp the nettle. That is certainly where I stood. That is really what the noble Baroness, Lady Noakes, is saying with the amendments: there needs to be continuity of contract. We do not want lots of litigation, so there needs to be a safe harbour. It makes one reflect on how wise some of the fallback positions possibly were, but we are where we are; in many instances, nobody really expected them to be activated. They are sometimes maybe not fair between the parties.
The explanations given already are very good. It would be useful to have something in the Bill. It might even be crafted in such a way that it could apply as the general precedent if one came across such circumstances again, heaven forbid. Benchmarks do change from time to time: one discovers that something is flawed, therefore one has to correct it. That should not disturb what could be made into something that can operate with continuity, certainty and without disadvantaging either side. I would therefore like the Government to take something up, if that is possible in the timeframe they have given themselves now that they have launched a consultation.
The Deputy Chairman of Committees (Baroness Fookes) (Con)
The next speaker is the noble Viscount, Lord Trenchard.
I believe the noble Viscount is muted. Would he be kind enough to unmute?
Financial Services Bill
Baroness Bowles of Berkhamsted ExcerptsWednesday 24th February 2021
(3 years, 2 months ago)
Grand CommitteeRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 162-III Third marshalled list for Grand Committee - (24 Feb 2021)
Baroness Noakes (Con)
My Lords, this is my first day in Committee and I place on record my interests as declared in the register, particularly my shareholdings in financial services companies.
I am very grateful to the Committee for going so slowly on Monday and not reaching Amendment 10. As I think noble Lords are aware, I was in the Chamber and could not have moved it myself. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, and my noble friend Lord Holmes of Richmond; not only have they added their names to my amendments in this group but they were standing by to deal with them without me on Monday. Normal service is resumed and I can move my amendment myself. I shall also speak to Amendment 26 in this group.
This is a fairly large group of amendments but its underlying theme is a search for the right balance between letting the specialist regulators get on with the job of regulatory rule-making and the role of Parliament in overseeing those regulators. My Amendment 10 to Clause 2 says that Schedule 2 to the Bill, which amends FiSMA to create rule-making powers for the FCA to undertake prudential regulation of investment firms, will not come into effect until each House of Parliament has approved accountability arrangements for those powers.
Amendment 26 is drafted in identical terms but relates to the rule-making powers conferred on the PRA by Schedule 3, which deals with the capital requirements regulation rules.
I make no attempt in these amendments to say what form of parliamentary accountability arrangements should be put in place, although the second part of my amendment says that accountability arrangements should include a number of things: arrangements for drafting the final rules being laid before Parliament; taking evidence on a draft of final rules and, importantly, Parliament expressing an opinion on them; and the consequences of any expression of opinion. On reflection, the drafting of my amendment is perhaps not clear enough as I was not intending to suggest that Parliament had to, for example, have the laying of draft rules as part of the accountability arrangements. I merely intended to indicate that it could have that as part of the arrangements.
My amendments are predicated on a belief that we should not grant significant new rule-making powers to the regulators without sufficient checks and balances in the system. Had the Government retained the rule-making powers repatriated from the EU, it would have been pretty clear that Parliament would have had an involvement. I am clear that passing these powers to the regulators should not allow the Government to write Parliament out of the picture. I am not, however, of a settled view as to what Parliament should do, which is why my amendment says that these new rule-making powers can go to the FCA and the PRA only when Parliament’s involvement is settled by Parliament itself. I am very conscious that it is not correct—or at least not normal—for legislation to cover the precise arrangements for parliamentary scrutiny. Those arrangements are for Parliament itself to determine, and I have tried to respect that.
Other amendments in this group seek to fill the void of what Parliament should do in practice, and I shall comment briefly on some of them. The noble Lords, Lord Tunnicliffe and Lord Eatwell, in their Amendments 20, 21, 40 and 41, have set out involvement, with time limits, for each House of Parliament reporting on draft rules, with the ability to report on them but no power of veto. I can certainly see the merits of these amendments, as they strike a balance, giving Parliament an opportunity to give its views on new regulations but without allowing it to overrule our independent regulators. They should allow Parliament to take evidence on the impact of proposed new regulations, for example, on different parts of the financial services sector. This could deal well with concerns about, for example, the impact of regulations on both small and large players in parts of the financial services sector, and whether regulations create new barriers to entry. I am not sure, however, that the amendments sit easily with a need to make new regulations rapidly, which I believe is necessary from time to time.
On the other hand, many in the financial services sector are fearful of regulators gold-plating regulations and imposing unnecessary costs on whole sectors. At the end of the day, costs get passed on to consumers, even though there is often no direct correlation between a rule or regulation and any particular increase in consumer costs. That would not necessarily be well dealt with by the amendments in the names of the noble Lords, Lord Tunnicliffe and Lord Eatwell.
Some elements of Amendment 27 in the names of the noble Baronesses, Lady Bowles of Berkhamsted and Lady Kramer, would allow more thematic or cumulative reviews. I particularly like the elevation of the statutory panels of the FCA and the PRA, though I do not believe that those panels should include Members of either House of Parliament. I know that these panels could be more effective voices for industry concerns. I have in mind, in particular, the PRA’s practitioner panel, which the PRA certainly did not want when it was set up by the Financial Services Act 2012, and has had no discernible impact since then. On the other hand, other elements of Amendment 27, for example Parliament’s involvement in the regulators’ meetings with the Basel Committee or IOSCO, seem to me to go beyond what it would be reasonable for Parliament to do.
My noble friend Lord Blackwell has an amendment with yet another variant with scrutiny of rules by parliamentary committees, but with any results being passed to the Secretary of State for action. My concern with that is that the only action that could in practice be taken, once the power to make rules has been passed to the FCA and the PRA, would be more primary legislation. That seems a sledgehammer to crack a nut and would, in practice, not really act as a restraint, a check or a balance on the undesirable use by the regulators of their powers.
The issue of the nature of parliamentary involvement is discussed in the Treasury’s future regulatory framework review. The consultation on part 2 of that process, started last October, has just closed—my noble friend the Minister may want to say something about where we are with that process. I thought the section on accountability in that consultation was not strong and that reliance on the existing committee structures of both Houses was the wrong direction of travel. Whatever our views on that, a longer-term overhaul of accountability structures will not help us; we will have to find a solution that works for this Bill and until any changes emerge from the framework review. That is the challenge before us. I beg to move.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, my name is on eight amendments in this enlarged group. They cover different aspects of parliamentary accountability, although a common thread is Parliament’s right to information. Whether Parliament chooses a regime that scrutinises everything in detail or one which picks points of contention, and however it may develop over time, timely access to background and information is relevant.
My Amendment 18 and its counterpart, Amendment 38, relate to keeping Parliament informed about the discussions between the Treasury and the regulator concerning equivalence. In Schedules 2 and 3 this Bill establishes that, when making rules, the FCA or PRA may consult the Treasury about the likely effect of the rules on relevant equivalence decisions.
Parliament should be sighted of these considerations because they may affect the content and strength of rules and, as explained in the Government’s consultation, equivalence decisions may result in requirements being embedded in statutory instruments. Just as we used to have EU requirements in regulations, we may end up having equivalence requirements. There is nothing complicated about my amendment; it just says, “keep Parliament informed”. Unless Parliament establishes that right now, it will not exist.
To illustrate this, I quote from the recent FCA consultation on investment firms which, like this Bill, front-runs the Treasury consultation. Paragraph 9.68 states:
“we have discussed with HM Treasury the rules’ likely effect on relevant equivalence decisions. We are not expected under our new public accountability requirements to provide further detail on this.”
I think we need to know something, and I hope the Minister will appreciate that too.
I turn to my Amendments 19 and 39, which specify the level of detail that regulators’ explanations concerning compliance with statutory requirements should contain. I was provoked into tabling these amendments on reading the FCA’s explanations in its consultation. Although they gave a reasonable but qualitative explanation of its general approach to the Financial Services Bill, the statutory accountability statements were poor, containing nothing quantitative or illustrative. They consisted of “trust and believe me” statements littered with phrases such as “proportionality”, “business specific”, “bespoke” and “flexible”; no attempt was made to identify or quantify how that was done. Information would have to be extracted from the rest of the consultation and rules, if it were there at all; or—and this is the nub—we have to swallow that, as paragraph 9.71 states, it is left up to the
“investment firms and supervisors to focus on the core business model indicators of financial resilience relevant to each firm”.
There are no examples given.
The statutory explanations are an important part of accountability. They should be elaborated on as a stand-alone justification, perhaps to spoon-feed the non-skilled reader, but not just through assertions. We need more than assertions that supervisors cosying up with firms can decide how to get it right. That is not accountability. These statements should be written more like justifying a case in court and less like how to pander to industry. They should inform on the toughness of the regime and capital calculations.
My amendment proposes that the explanations
“must include specific, detailed and quantitative elaboration, with worked examples”,
and that Parliament may reject rules that are accompanied by inadequate explanation. By way of comparison, when I checked the PRA’s front-running consultation which came out on 12 February, it seems to have done a rather better job and included examples.
Baroness Neville-Rolfe (Con)
My Lords, as the noble Lord, Lord Tunnicliffe, intimated when he introduced his amendments, Clause 3 is very important to prudential regulation and the banks and financial institutions concerned. However, we must make progress with this Bill, so I will speak briefly. I look forward to the Minister’s explanation of what is intended here and why, and what the safeguards will be for those entities regulated by the PRA in terms of purpose, consultation, impact, cost benefit and so on. I do not read it in the same way as the noble Baroness, Lady Bennett of Manor Castle.
I would like to understand the competitive position. My son works in London for a French investment bank regulated primarily in Paris rather than London, under the equivalence arrangements that we have granted. I suspect that the local branch here may be part of a legal entity based in Paris. How would such an EU bank be affected by the proposed changes in Clause 3 and whatever replaces the revoked regulations? Is there a level playing field?
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, the noble Lord, Lord Tunnicliffe, has reminded us that this is the clause where the legislation on the CRR gets waived away into rules without any legislative replacement. This follows the pattern that the Government proposed in their consultation: once there are rules from the regulators, the statutory instruments are revoked.
Paragraph 2.25 of the Financial Services Future Regulatory Framework Review states:
“The default approach would be for any retained EU law provision that is in scope of the regulators’ FSMA rule-making powers to be taken off the statute book to become the responsibility of the appropriate regulator.”
Therefore, although there may be consultations on replacement rules at the point of revoking the SIs, there are no checks further down the track, so at some time further on all the rules could be revoked too. As a practical matter, that will not happen, but it is possible that for some things big changes could happen. It is probably more of a worry when it is happening to the wider generality of financial services legislation than with standards that are underpinned by Basel provisions, but I make this point because the Minister said on Monday at the start of Committee that everything is being listened to in the context of the consultation, although I must say that his replies so far do not inspire too much confidence.
It may seem convenient to have a more flexible arrangement of having regulators doing everything and not bothering Parliament with statutory instruments, and the view being pushed by the Government seems to be that Parliament should not become too bothered by rules because they contain frightening Greek letters such as Σ that really just indicate some very simple sums that could easily be explained in a sentence. Underlying that is that there should not really be challenge, only fig leaves and what the noble Lord, Lord Holmes, called the rear-view mirror.
Even though I have no great love of statutory instruments as a measure for showing parliamentary consent, there is a qualitative difference compared with rules, and I want to flag up that this clause is where the notion that we will no longer have any firm policy against which to hold the regulator accountable is endorsed. From here on, the regulator makes the policy, and there is no policy guidance between the regulator’s rules and the simple objectives, have-regards clauses and perhaps a few generalised statements, such as supporting UK economic growth. I do not like this sparseness, and it is ridiculous to suggest that rules are constantly, rapidly needing change. That is not true and not internationally sustainable.
To some extent the Government acknowledge this, otherwise there would not be the statement in the consultation that some things may have to be put into SIs as a consequence of equivalence decisions. So other countries can measure our standards, but not Parliament. How embarrassing. I heard what the Minister said in reply to my equivalence information point in the first group today. He said that such things may have to stay out of the public domain—at least until they become a statutory instrument—but I never suggested that they be public, just that there should be some sharing with Parliament about the policy direction. I am pretty sure that the EU will take the view that regulator rules alone are not enough and are potentially too transient when it comes to such a large financial centre as London, not least when it comes to looking at the lavish use of “bespoke”, which was always one of Brussel’s most hated words because it thought, and I tend to agree, that it was tailoring cut to flatter and trick the eye. That is fine for clothes, but not so good for financial services rules.
As I want to mark resistance to this passing of all policy to the regulators so they end up held accountable only to their own rules, I support the noble Baroness, Lady Bennett, in the suggestion that Clause 3 does not stand part.
Viscount Trenchard (Con)
My Lords, I understand the purpose of Amendments 24 and 25, in the name of the noble Lord, Lord Tunnicliffe, but do they suggest that he would like to stick with the enormously detailed and prescriptive provisions of the CRR as they are in retained EU law? The Government’s intention to transfer most of the provisions of the CRR into more flexible rules is right. The PRA will be able to react more quickly if it needs to change particular rules, and this should reduce the risk of failure of banks in the future.
The Government have been clear that the UK’s regulators are the right people to set the detailed, firm-level rules to implement the remaining Basel standards. Of course, as discussed in previous debates, and supported by noble Lords on all sides of the Committee, we need proper parliamentary oversight of the PRA before it starts to use its new powers. The wording in the noble Lord’s amendments suggests that he wishes to reduce the degree of flexibility that the Treasury will grant the PRA, but I think that that might be counterproductive. Does he not accept that, as we move to a simpler, more flexible, outcomes-based regulatory framework, there should be less detailed prescriptive rules?
The noble Baroness, Lady Bennett of Manor Castle, wants to retain all the CRR rules in legislation. I cannot agree with her approach, which might damage the attractiveness of the City as a financial centre. She referred to Singapore-on-Thames, which is becoming a fashionable way to describe a light-touch regulatory regime, but is she not aware that Singapore is one of the best and most strictly regulated centres in the world? It is strict, yes, but much simpler and less cumbersome and bureaucratic. Does the Minister agree that we need to return to a simpler, different, more flexible and agile regulatory style?
Financial Services Bill
Baroness Bowles of Berkhamsted ExcerptsMonday 22nd February 2021
(3 years, 2 months ago)
Grand CommitteeRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 162-II(Rev) Revised second marshalled list for Grand Committee - (22 Feb 2021)
Lord Sharkey (LD) [V]
Amendment 1 would require the FCA to
“make rules introducing a duty of care … owed by authorised persons to consumers in carrying out regulated activities”
under FSMA 2000. The Government understand the value of a duty of care; they are about to introduce exactly that in the forthcoming online harms Bill. They understand the immense harm that can be done to consumers without this duty, especially in complex and asymmetric environments.
We have already seen too many examples of the immense harm inflicted by our financial services industry on ordinary consumers—I am thinking here of PPI, which was a product sold to consumers at an 87% commission rate. The scandal ended up costing £53.8 billion in redress and administration costs. I am also thinking of mis-sold interest-rate hedging products and the general and widespread unfair treatment of small businesses in financial difficulty. There was also the long-running saga of overcharging for overdrafts and of leaving loyal customers languishing in poor-value products.
The existing rules did not prevent any of these things, which is not a surprise. There is no explicit requirement in FSMA or in the FCA’s principles for business for firms to prevent harms to customers. The FCA’s “treating customers fairly” business principle is substantially weakened by the legal principle in FSMA that consumers should
“take responsibility for their decisions”.
This fails to take into account the imbalance in power and information between firms and their customers.
Things are not getting any better. Recent examples of misbehaviour include the banks’ response to the authorised push payment fraud, inadequate assessment of affordability by payday lenders, the scandal in Woodford Investment Management, sales of risky investment products on the boundary of the FCA’s perimeter and the outrageous behaviour of some insurers during the pandemic trying to welsh on their business interruption policies.
The Minister will be aware of the Banking Standards Board’s annual survey of 29 member banks’ behaviour and competence. There was some welcome improvement in these areas between 2016 and 2017 but none since. In 2019, 13% of employees of these banks said that they had seen instances of unethical behaviour being rewarded and 14% felt that it was difficult to make career progression without flexing their ethical standards.
The FCA knows all this, of course, and has occasionally acted. However, within the existing legal framework it often takes many years for the FCA to respond to firms’ harmful practices. An example of this is the treatment of loyal general insurance customers, which the FCA is only just beginning to tackle.
Then there is the question of the high-cost short-term credit sector. Wonga may have gone, thanks largely to pressure from this House, and after intense pressure from Parliament there is now a price cap on rent to own. But problems persist with, for example, doorstep lending, guarantor loans and new, automated overdraft products.
The FCA tackles unacceptable practices slowly and piecemeal, allowing harm to persist for many years. It was particularly late in spotting the rapid growth of buy now pay later and its potential for harm. I believe that the Government have said that they intend to address this problem and I hope that they will use this Bill as an opportunity to do that. I would be pleased if that were to be the case, but the slow and cumbersome engine of primary legislation would not have been necessary had a duty of care extended over the sector.
The FCA has published eight papers in the last five years dealing wholly or in part with the question of duty of care, but it still has not developed a clear view or a recommendation. In its consultation feedback paper of April 2019, the FCA noted:
“Most respondents consider that levels of harm to consumers are high and there needs to be change to better protect them.”
It then sat on the fence about what this change should be, reporting that none of the financial service providers favoured a duty of care. Mandy Rice-Davies would have known what to say to that.
In any case, as the FCA’s consumer panel noted,
“Much of the debate on a duty of care has centred on legalistic arguments about whether there is a ‘gap’ in protection. What matters is whether consumers get the treatment they want and expect from their financial services providers.”
The consumer panel commissioned Populus to ask individual and small business customers about their experiences. The research showed that the customer is not at the heart of business decisions and that 92% of respondents were in favour of a duty of care in financial services.
While sitting on the fence, the FCA has also managed to hit the ball into the long grass. It promised to initiate yet another consultation on the issue, initially due last year but now postponed. In the meantime, levels of financial vulnerability grow. The FCA’s latest Financial Lives survey, published 11 days ago, makes grim reading. It notes that Covid-19 has reversed the previous positive trend in vulnerability. Between March and October last year, the number of adults with characteristics of vulnerability increased by 3.7 million to 27.7 million. That means that over half of all adults are financially vulnerable—a truly alarming figure.
The same survey also notes that unsolicited approaches have increased during the pandemic, increasing the risk of fraud and scams. Over a third of adults say that they have received at least one such approach and 1.4 million say that they have paid out money as a result of a possible Covid scam. Unsurprisingly but regrettably, people with characteristics of vulnerability have been the more susceptible: 12% paid out money, compared with 1% of the non-vulnerable. None of this will get any better when the furlough and business support arrangements come to an end. Financial pressures and desperation will inevitably increase; vulnerable people will be disadvantaged, treated unfairly and scammed.
Dealing with all this would be made significantly easier if the FCA were to impose a duty of care on service providers. The idea has widespread support. In May 2019, the Treasury Select Committee published its report on the inquiry into consumers’ access to financial services. Paragraph 210 of the report says:
“All retail financial services, no matter which sector of the industry they operate in, should be acting in their customers’ best interests at all times. If the FCA is unable to enforce such behaviour in firms under its current rule book and principles, the Committee would support a legal duty of care, analogous to that in the legal industry, creating a legal obligation for firms to act in their customers’ best interests.”
The FCA’s own financial services consumer panel, responding to the FCA’s discussion paper, said:
“A new duty is required to improve the position of all consumers … including those who need more support.”
The Money and Pensions Service said:
“MaPS remains convinced that a formal ‘duty of care’ on financial firms could provide a better balance between firm and consumer responsibilities and help deliver extra protection and better treatment to vulnerable consumers.”
StepChange is in favour, as is Fair by Design, and so are many organisations with direct and in-depth experience of the financial catastrophes that can be visited on the poor and the vulnerable. I am grateful for the explicit support and encouragement in pressing for a duty of care from Age UK and the Alzheimer’s Society and I am especially grateful to Macmillan Cancer Support for its unfailing help and advice. I am also indebted to the former chair of the FCA’s consumer panel, Sue Lewis, for her support.
Despite all this support, the Government will no doubt resist the idea of introducing a formal duty of care. When this issue was raised at Report in the Commons, John Glen addressed it by saying simply:
“As the FCA is already taking steps to ensure that financial services firms exercise due care and regard when offering products, services and advice, a statutory duty of care, as proposed by new clause 21, is not necessary.”—[Official Report, Commons, 13/1/21; col. 366.]
He did not say what these steps were or make any assessment of their actual or likely effectiveness. Today the Government may add to John Glen’s reasons for rejecting a duty of care and may advance the argument that they need to wait to give the SMCR time to work. Surely five years is long enough—five years in which there has been just one successful conviction. The FCA’s consumer panel points out that this is essentially a category error and notes:
“The SMCR is primarily a supervision tool—it will be a valuable mechanism to ensure that firms are complying with a new duty.”
The Minister may also pray in aid the reinforced, better-resourced and more active FOS. It is true that FOS dealt with around 250,000 cases in 2019-20. In these cases overall, one-third of judgments were in the consumers’ favour. This is evidence enough of large-scale misbehaviour, but the figures are much worse for products aimed at the financially vulnerable: 89% for guarantor loans, 84% for doorstep loans and 78% for logbook loans.
This is not—absolutely not—evidence of successful regulation. Every one of these judgments is evidence of a failure to sell the right product to the right individual or small business, to explain it clearly or to handle a complaint properly. The FCA’s current rules and principles are failing to stop this tidal wave of mis-selling, malfeasance and malpractice. We need a new approach that focuses on prevention of harm and delivers extra protection and better treatment for vulnerable customers. We need a duty of care and I beg to move.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I declare my interests as in the register. I support all the amendments in this group and what has already been expertly said by my noble friend Lord Sharkey. I will comment on the duty of care later, but first I will introduce my Amendment 72, which calls for warnings relating to non-regulated activity.
The issue here is one where firms that are authorised in respect of regulated activity also conduct unregulated activity, and customers are misled by the fact that the firm is authorised for some activity into thinking that the authorisation is some kind of guarantee of quality. It is what Dame Elizabeth Gloster called in her report “the halo effect”, and about which she said again to the Treasury Select Committee a couple of weeks ago that something should be done.
One thing that is done by the Bill is enabling unused authorisations to be more easily cancelled, but that does not solve the problem when there are still used authorisations. This is a problem that has long been known about and does not affect only unscrupulous businesses. Therefore, the amendment aims to make it quite clear to consumers what the situation is in three ways.
First, authorisation must not be referenced in any communication, including on letterheads or websites, as a reputational guarantee regarding non-regulated activity. In practice that should mean the ending of straplines. Secondly, when non-regulated activity is being conducted, that must be made clear, together with an explanation that it means that access to the Financial Ombudsman Service and/or Financial Services Compensation Scheme is not available. Thirdly, it would be an offence to imply that a non-regulated activity is covered by an authorisation.
The first two provisions relate to authorised firms aiming to stop the halo effect in as far as that is possible. I do not expect firms to write to clients saying, “This is the rogue side of our business”, but I hope that clients will be more aware that that might be so. The third point is a general point and would apply beyond regulated firms, but my aim is to catch passive implications, so that active steps to inform have to be taken.
The amendment has been drafted to make the point clear, rather than as a perfect draft to weave in among other regulatory provisions, and I hope that the Minister will take up the idea and recognise that reducing a problem by eliminating surplus authorisations does not reduce the problem to its smallest possibilities.
Turning now to the duty of care, I want to add that a duty of care should apply to the regulators as well. Of course, they say that they act in the public interest, but they are every bit as aggressive about protecting themselves—of all things from the public and from liability—as the firms that they supervise. My view of this is simple: “If you don’t live by it, you don’t really understand it”.
If one examines the responses to the FCA’s discussion paper in July 2019, the majority were in favour, two of the main reasons being that it was critical to triggering a fundamental culture change away from asking “Is this within the regulations?” and into “Is this right?” Secondly, it would give a duty to avoid harm that would incentivise firms to evaluate consumer risk at every stage.
What is not to like in that? It seems that just a handful of respondents did not want any more than was already in those principles about treating customers fairly. But they were very much in the minority and, sadly, it seems that some of those in favour of a duty of care are not in favour of it being actionable. I am in favour of a duty of care, I am in favour of it being actionable and I am in favour of it applying to regulators as well, because something is going wrong all round and, frankly, I find the FCA’s hesitancy a matter of serious concern.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, Amendment 3 in my name and that of my noble friend Lord Sharkey is an amendment to Amendment 2 and probes what is meant by “high market standards”. Could these mean, “no lower than current standards”, and what are they measured by? Are they just rules, which we hear a lot about, or do they also include enforcement? Regrettably, we also hear about that when it has all gone wrong, with the Gloster and Connaught reports being the latest examples of that. Like a taster menu, our amendment then leads on to the connection between standards and oversight of regulatory performance with respect to both rule-making and enforcement, and suggests that there should be regular independent reviews every three years. For clarification, that would not be instead of whatever Parliament decides it wants to do; it would be additional.
I will put my cards on the table and say that I am nervous about any introduction of competitiveness as a general duty, even with the qualification, or as a bidding, to consider ranking. If one thing was learned from the FSA’s demise and the financial crisis it is that giving a financial services regulator a competition duty can lead to disaster through creating incentives to balance industry profit against safety and consumer protection. It can potentially lead the regulator astray from its essential objective of safety and soundness. If there is such a remit it will inevitably lead to calls from parts of industry that do not want fetters, or even from shareholders that want profits. If competition appears as a duty there will be pressures to go just a little bit lighter touch, then just a little bit more, with arguments that this is all okay because it is among experienced market participants.
Unfortunately, light touch in one part of a market that may seem remote from retail consumers does not prevent contagion. Let us not forget the investment bank “slice and dice” of subprime mortgages, which fuelled the financial crisis by stimulating yet more subprime lending—what gets made gets sold and invested in. Later amendments deal with what happens nowadays with regulated mortgages that are sold on to unregulated entities, so let us not kid ourselves that different parts of the market are in self-isolation or lockdown.
However phrased, a competition mandate is different from a proportionality mandate, which the regulators already have. I am all for regulators making it much clearer how they categorise activity as part of proportionality and transparency. I wish they would do more of it—it can aid competitiveness too—but put in an additional competitiveness mandate and what does that mean, other than to go lighter than proportionality requires?
On the other hand, it is necessary to recognise that regulation is a good way to end up with a closed shop, preventing new entrants and new products, and there can be incentives on regulators to seek the stability of the graveyard. I can think of areas where I would lay that charge, such as fixation on gilts and sluggishness around approving new banking models. However, I do not see a primary competitiveness mandate solving that, even alongside a “high market standards” statement.
This takes us back to what is meant by high market standards. Who sets those? Whatever they are, I am sure they will be lauded as “world beating” even before the rest of the world has been looked at. However, I think that a regular, expert independent assessment can check and report on all aspects—the standard of rules, whether they are gold plated, how good enforcement and operational systems are and, yes, what can be learned by comparison with elsewhere. However, I do not think it is for the regulators to advise on whether they are better at doing things than elsewhere. I already know their answer.
The final part of my amendment suggests that the regulators pay for the reviews—so it is rather like a Section 77 review. Then it says that the review must be published without modification, because there was a certain amount of photoshopping of the Promontory report about GRG and it was made public only via the Treasury Select Committee publishing a leaked copy.
However, there are other ways that regular independent reviews could be done—more like an independent person FiSMA Section 1S review that the Treasury can require—or through an oversight body led by a handful of skilled individuals, as the Australians are now doing. It seems to me that, if you want assurance on high standards, which I do, that is the way to do it, in line with what looks like becoming the new best practice, and that is where the UK should be.
Baroness Neville-Rolfe (Con) [V]
My Lords, I will speak to Amendments 6 and 7 in my name and that of my noble friend Lord Trenchard, who has a lifetime of experience in the financial services sector and understands the whole issue of competitiveness and UK influence from banking for many years in Japan. I am so sorry that because of procedural changes he is now unable to speak to these amendments.
I refer to my interests in the register, particularly as a non-executive director of Secure Trust Bank plc in Solihull and of Capita plc and as a member of this House’s EU Financial Affairs Sub-Committee. I was especially sorry to miss Second Reading of this very important Bill.
These amendments—like the one moved by my noble friend Lord Blackwell and those in the name of my noble friend Lord Bridges—introduce a competitiveness objective for the FCA and PRA. My Amendment 7 also applies to the Bank of England itself. My amendments differ because they spell out aspects of competitiveness that I know are important from a lifetime in business and from nearly three years as UK Minister attending the Competitiveness Council in Brussels.
Of course, consumer protection, stability and standards are important, but they are very well looked after in the structure of financial services regulation, even if the regulators do not always deliver or enforce properly, as we have heard from the noble Baroness, Lady Bowles. I come from a different perspective. Those of us with an understanding of economics know that needless red tape, inefficiency and lack of care for UK interests end up hurting UK consumers with prices that are higher than they need to be, delays that frustrate, and a failure to get things right first time. These also hamper innovation and productivity growth, two of the best ways to both benefit consumers—and I come from a consumer background—and stay ahead internationally.
This matters today even more than in the past. Financial services are the leading sector in the British economy, not only in London but in many other areas of the UK: Edinburgh, Cardiff, Newcastle and Birmingham, to name but a few. In the wake of coronavirus, Brexit and international competition, we need to treasure and enhance our leading position. France, the Netherlands, Germany, Ireland and Luxembourg are trying to steal our lead—but ineffectively, as this hurts their business and consumers and encourages investors and services to move to New York or Singapore. As Mr Barney Reynolds has argued, we must look again at the legacy of EU law, and I know my noble friend Lord Trenchard will have more to say on his ideas on another day.
We must not forget one point: small and entrepreneurial businesses are the backbone of this country. Everyone should remember that the big, powerful multinationals find it relatively easy to adapt to new regulations, rules and requirements, and to lobby for arrangements that suit their interests.
We must also create a benign climate for innovation, which is a vital part of improving efficiency. There is one great example: the Financial Conduct Authority’s so-called “sandbox”—clear, simple and easy regulation for fintech. Thanks for this are due to the current Governor of the Bank of England, but Mr Bailey and I were promoting this as good practice in India four years ago. It is dispiriting that there are not more such initiatives.
As my amendment states, we need “efficiency” and “competitiveness” in the interests of UK plc to feature in the purview of our regulators. A competition objective is not enough; indeed, it can sometimes harm smaller players, driving them bankrupt and causing problems for their customers, as bigger institutions mop up and take over their client base. Competitiveness is sometimes wrongly associated with bad aspects of globalisation. That is wrong: UK competitiveness is what this country now needs to strive for to support the UK base, rather than encouraging the sale of wonderful companies such as Arm to overseas interests. Alex Brummer has argued this forcefully in a series of books, and I agree with him.
While we come at the issue from different angles, I really do want my noble friend the Deputy Leader to listen to those of us who are seeking a change to the Bill to bring in considerations of “competitiveness”. So I will finish with the word’s dictionary definition:
“1. Possession of a strong desire to be more successful than others … 2. The quality of being as good as or better than others of a comparable nature.”
What could be better than that?
Earl Howe (Con)
My Lords, this is clearly a detailed and analytical question, which is probably not appropriate for Grand Committee. I would be happy to write to the noble Baroness, giving her chapter and verse as far as I am able to do.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I thank all who have spoken in this debate, and the Minister for the extensive replies. As he said, we have heard a lot of views, a lot of which I felt coincided with one another, at least in terms of what was said, more perhaps than appears in the amendments. Ultimately, a lot of the things that were complained against could be dealt with through proportionality. Yes, it is not competitive if the actions of the regulator are not proportionate—be that in rules or supervision. Therefore, I think there is less need to give a specific competitiveness mandate, because that confuses whether you are seeking something else on top. I refer to what the noble Lord, Lord Blackwell, said in introducing his amendment, when he said that these things were probably taken into account but not formally, or they would be taken as given in any other industry.
“Non-exploitation of consumers or small businesses
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) In section 1C (the consumer protection objective), after subsection (2)(e) insert—“(ea) the general principle that firms should not exploit a consumer’s or small business’s vulnerability, behavioural biases or constrained choices;”.(3) After subsection (2) insert—“(3) Exploitation under subsection (2)(e) includes, but is not limited to, situations where—(a) there is a system of conduct, or pattern of behaviour, that relies upon unequal power between the parties to impose disadvantage on consumers or small businesses or gain advantage for the larger party;(b) notice or other compliance terms are imposed which make it impractical for consumers or small businesses to comply;(c) there is use of notice terms to coerce consumers or small businesses into unfavourable contracts;(d) conduct by a supplier causes a consumer or small business to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; or(e) there are risks that the supplier should have foreseen would not be apparent to the customer or small business.In this section, “small business” is as defined in Part 15 of the Companies Act 2006 (accounts and reports).””Member’s explanatory statement
This amendment is to protect consumers and small businesses from exploitation.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, Amendment 5 builds upon Amendment 4, tabled by the noble Lord, Lord Tunnicliffe, which was discussed within the first group and in turn built upon Amendment 1, moved by my noble friend Lord Sharkey. I will not revisit the “duty of care” part of the amendment, as it has already been well discussed, but the point about Amendment 5 and the similar Amendment 73 is to bring small businesses within the non-exploitation principle—defined by the noble Lord, Lord Tunnicliffe, in his amendment—and to highlight some things that regularly happen in contractual terms and which can be exploitative. Amendment 73 is more explicit and would allow the FCA to intervene where there is “Unconscionable conduct”, even if a consumer or small business has entered into a contract.
The issues that are highlighted as wrong behaviour, although within an exemplary list, are: patterns of conduct that rely “upon unequal power”; terms of notice
“or other compliance … which make it impractical … to comply”;
the use
“of notice terms to coerce … unfavourable contracts”;
compliance terms that are “not reasonably necessary”; and risks that the larger supplier should have realised would not have been
“apparent to the customer or small business”.
This is not a random list of points—there are rather more in my Private Member’s Bill on the same subject—but a key list of matters that were used by GRG in the exploitation of small businesses, and which the FCA said it could do nothing about because they were outside the regulatory perimeter.
Once more I must look to other countries to see how we compare, and once more I find that Australia has tried harder. It has a general law of unconscionable conduct in commerce that deals with all these issues and more, and which extends to not only consumers but business to business. I do not know how many noble Lords read the various detailed contracts that one is forced to sign as an individual or small business to access almost anything nowadays. In the earlier group, these were similarly referred to by the noble Lord, Lord Eatwell. I have seen barely one that is reasonable. It is only getting worse as everything becomes a leased service rather than a product.
With these amendments I make the point for small businesses as well as individuals, and in the context of financial services, which are among the most fundamental of services, that bullying contracts must stop. They must be within the regulatory perimeter and the FCA must be prepared to intervene. Excuses about GRG and what the FCA did not do there hold no power. We saw what happened; we need strong measures that mean it must not happen again and that imitations of it must not be tolerated in day-to-day operations. I beg to move.
Baroness McIntosh of Pickering (Con) [V]
My Lords, I find myself in some sympathy with the noble Baroness, Lady Bowles, on Amendment 5 because this is a grey area where small businesses are perhaps not well served. My noble friend Lord Howe claimed, in his full and comprehensive response to the last debate, that this was not the right time or place to look at the regulatory objectives, as this would better take place under the Government’s future regulatory framework review. I would argue, in support of the noble Baroness, Lady Bowles, that small businesses are not well served by the current provisions. If you look at some of the work of the Financial Ombudsman Service, which the Committee has referred to, I would not hold out much hope for a small business claiming redress and a decision under that agreement. I would be delighted if my noble friend were to prove me wrong in summing up this debate.
Amendment 5, in particular, has strengths to commend it and I would very much like to lend it my support. I look forward very much indeed to hearing what my noble friend will say and whether the Government might look favourably on it, a lacuna having been identified in the regulatory framework.
Baroness Penn (Con)
My Lords, clarity around all terms and conditions is, of course, to be welcomed. I agree with my noble friend that one challenge with these amendments is potentially introducing new concepts, which might need to be defined through regulation, where we think that there are existing protections in place and the effect could be duplicative.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I thank all those who have taken part in this debate; it has been short but interesting, and I thank those who have supported the concept that I am trying to elaborate. What the noble Viscount, Lord Trenchard, has just said is probably true to some extent—why should we rely upon the FCA for this? It is true that this probably should be more of a general legal offence of unconscionable conduct, which is what they have in Australia. So there is no point trying to argue that, in a common law country with a similar kind of legal system, you cannot work out how it happens and whether it is effective: I can tell you that it is.
As the Minister elaborated, the problem with having a subjective measure—as the noble Viscount, Lord Trenchard, called it—is that you then have to put a whole load of rules around it. That is exactly the problem with the FCA. It has done it with the senior managers regime, something that I always understood Parliament wanted to be a subjective measure—that is, if you behaved badly and something happened on your watch, you were responsible. That has now been tied up with contracts approved between the regulator and the employees in the businesses. Instead of capturing the people at the top, it has pushed responsibility down the chain. The same has happened with “fit and proper”. The FCA has chosen to redefine what that means so it will catch only very extreme cases rather than bad behaviour.
Business and Planning Bill
Baroness Bowles of Berkhamsted ExcerptsMonday 20th July 2020
(3 years, 9 months ago)
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Lord Addington (LD)
My Lords, I stand here as a rather inadequate substitute for my noble friend Lady Thomas of Winchester to support the thrust of the amendments spoken to very ably by the noble Lord, Lord Holmes of Richmond, and a triumvirate of government Back-Benchers. This took me back a few years to when we had to cover access on virtually everything, as every single Bill required it. One wonders why when we have the Equality Act, but apparently we need to put something into this piece of legislation.
The noble Lord, Lord Holmes, has said that he is satisfied with the Government’s amendments, so I feel that we probably should be too. However, there is one other issue—enforcement. Who will undertake enforcement? Access officers have been cut. Who will make sure that the arrangements embodied here are enforced? Clearness of guidance is vital, and, as we hear from the Government all the time, this is emergency legislation. If we have to wait to book someone to come in and have a look, that will take time. Will the police have some enaction? Will someone else do something? How clear will that guidance be?
It is not just those who are disabled or in wheelchairs who will benefit from this, but the entire flow of pedestrian traffic. Anyone pushing a buggy with a child in it or luggage on wheels will be positively affected by these changes. How will we make sure that they are enforced? The Government must answer this question; if they do not, this will become an empty series of words with no action to back it up.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I speak in support of Amendments 9 and 10, although many in this group which make a lot of sense. I welcome the Government’s Amendment 16 and will possibly welcome what follows on from it even more. I hope so. I cannot better what those who tabled them have said about needing more space on pavements, other than to add that I can think of many more reasons to have one and a half metres of space as well as disability needs.
I welcome Amendment 9 from the noble Lord, Lord Holmes, which probes how much scope local authorities will be able to have in what they put on under the conditions. Could the Minister make it clear whether local authorities can stipulate a set of standard requirements in advance that will always apply to every licence? Examples could include space, no smoking or types of barriers, but I am sure that there would be other things for particular circumstances. To have a list in advance that you knew would apply to your licence would be helpful both to those seeking licences and to those who may have concerns. Such sets of requirements are far more easily consulted on. Is it reasonable to expect the public to respond to a continuous flow of licence applications? Will fatigue not set in? Ultimately, responses that should perhaps have been made will not go in.
Baroness Neville-Rolfe (Con) [V]
My Lords, I always take great pleasure in following the noble Baroness, Lady Bowles. I note that we debated many of these issues very well in Committee. Things have come on a great deal, and my noble friend the Deputy Leader has tabled a number of well-judged amendments and concessions in this and later groups.
I wish to reiterate the importance of balance. This legislation is intended to help businesses, particularly in the hard-pressed hospitality sector, so that they can get back to work, lure back customers and support broader economic recovery. We are concerned with temporary measures and must not confuse matters by adopting regulatory amendments, some of which we might feel would be well justified if we were talking about permanent laws. To my mind, we have already gone quite far enough and the detailed draft guidance—I think its extent will make many small businesses blanch—makes it quite clear that where a pavement licence is granted, clear access routes on the highway will need to be maintained, taking into account the needs of all users, including disabled people, as my noble friend Lord Blencathra made clear earlier. The guidance also requires applicants to fix a notice to the premises when they make their application.
The noble Lord, Lord Addington, made a good point about enforcement. I look forward to hearing from my noble friend the Minister on that.
We have to get the economy, our construction industry and our high streets going again if we are not to live through a number of frigid economic winters. In particular, our hospitality sector has been decimated and needs all the help it can get. We must stop debating this Bill with its temporary provisions and get it on to the statute book.
Baroness Bowles of Berkhamsted [V]
My Lords, I thank the noble Baroness, Lady Altmann, and the noble Lords, Lord Carlile and Lord Stevenson, for supporting this amendment, which limits the disapplication of the Consumer Credit Act in Clause 12 to being only in so far as it relates to affordability.
There is no disagreement over disapplying affordability criteria, given that the Government have asked banks to speed up loans and dispense with the usual due diligence on affordability. However, we can see no reason for disapplication for unfair treatment, such as in default measures, which have been at the centre of more than one SME banking scandal. This is not an unreasonable amendment, because disapplication for affordability is exactly the same measure that has been introduced throughout the Lending Standards Board’s voluntary lending code. Why do the Government have to go further in disapplying remedies for all unfair treatment under this Bill rather than limiting it to affordability?
Apart from for micro-businesses, there is no regulatory protection for business loans or recovery procedures other than the measure the Government now seek to disapply. This was excruciatingly elaborated in the Financial Conduct Authority’s report on RBS’s Global Restructuring Group, which said that the FCA had no regulatory power. It also said that it was unlikely the behaviour would have been caught by the senior managers regime, had that applied. Andrew Bailey has since spoken before committees in Parliament and at many other meetings, explaining how business lending and debt recovery are outside the regulatory perimeter.
In Committee, the Minister said that
“the Government have retained Financial Conduct Authority oversight for debt collection, meaning that lenders must comply with the Financial Conduct Authority rules on arrears, default and recovery.”—[Official Report, 13/7/20; col. 1516.]
Those rules are only for loans up to £25,000 made to sole traders, unincorporated associations and partnerships of fewer than four people—that is, micro-businesses. The Bill deals with removing protection from loans up to £50,000, which is by far the majority of bounce-back loans, given that the average loan is £37,000. Why, when there is more restrained disapplication for micro-businesses, and in the voluntary code, are the Government so resistant to a similar compromise in the Bill? Why are the Government depriving most bounce-back borrowers of the courts’ protection, at least for debt recovery?
The Deputy Speaker
I have received no requests for speakers to come back after the Minister, so I now call the noble Baroness, Lady Bowles.
Baroness Bowles of Berkhamsted [V]
My Lords, I thank all those who have spoken in this debate. The noble Baroness, Lady Altmann, reminded us how attractive assets might tempt a bank or that companies’ equipment could be seized when they ended up in default after a period of forbearance. The noble Lord, Lord Carlile, with reference to the Post Office cases, reminded us how bad things can happen and that sometimes things that perhaps start off looking reasonable get very much out of hand. My noble friend Lord German reminded us that companies need the confidence to borrow. Perhaps we need four times as many bounce-back loans as have already been applied for, but they need protection.
Business and Planning Bill
Baroness Bowles of Berkhamsted ExcerptsMonday 6th July 2020
(3 years, 9 months ago)
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Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I welcome the Bill and will speak about pavement licences and bounce-back loans. I declare a non-financial interest: my brother owns a pub. Many in the pub trade are counting on the Bill to enable them to trade viably, and it is a pity that it did not come along faster. It will be mid-August, and a lot of summer gone, before pavement licences are issued. There are big differences between locations and what can and cannot work reasonably. There are more spaces than pavements that could adapt to temporary conversion for outside hospitality use, including areas within the boundaries of properties but not under the licence.
Last week, I did a pre-opening pub crawl, speaking to landlords and looking at the range of preparations. Surprisingly few in my area would benefit from a pavement licence. For some, there was no space on the pavement; for others, there was no need due to gardens; elsewhere it would be in the way for queuing and one-way access. What was clearly of more benefit was repurposing space, such as putting a few tables in part of the car park. It would surely make sense to accelerate licence variations on outside areas belonging to the property in the same way as for pavement licences, and I intend to table an amendment on that for Committee. Would the Minster also advise on the scope of wording in Clause 1(4)(b), which seems very wide:
“food or drink for consumption on or off the premises”?
That seems to cover any food selling, such as supermarkets. Is that intended and is it helping the hospitality industry?
Turning to the bounce-back loans and the disapplication of the CCA, I am concerned whether it is right to disapply all court interventions in Section 140B. I understand that banks have been asked not to apply the usual due diligence concerning affordability, but Section 140B covers more than affordability and relates generally to abuse of power. Why should that be disapplied? These loans last for six years and, during that time, it will be possible for the lender to engage in heavy tactics. Even though the loan is guaranteed by the Government, that does not prevent it being a pawn in other financial arrangements. I would be happier if the disapplication related only to refunds for unaffordability.
Neither should there be reach-across between the loan and other financial arrangements with the lender, such as including it in triggering events or the so-called normal approach to repayments that gave us GRG and other scandals. These are not normal loans; they are encouraged by Government and government guarantees to those struggling due to coronavirus and are to help both them and the wider economy bounce back. Stripping the full content of Section 140B and the related FCA rules is not appropriate and is likely to keep the APPG on Fair Business Banking busy for years. Are big lenders requiring the complete disapplication of Section 140B as their price to play ball?
I shall return to this in Committee but, meanwhile, what terms, other than interest, cover the loans? The agreements seem thin—answer 20 questions and get your money—which is all the more worrying when consumer protections have been removed and there does not seem to be anything else in the agreement literature.