Financial Services and Markets Bill [HL]

Debate between Baroness Bowles of Berkhamsted and Lord Pitt-Watson

Committee stage
Monday 29th June 2026 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, this is the third of the trio. Clause 18 is a deletion clause, the final clause in the trio that removes consideration of the regulatory principles from the context of actual rule-making. It strips out the guidance duties, reporting duties and consultation hooks that once gave Parliament visibility into how the regulators applied their objectives and principles. Let us look at what is being systematically dismantled here. There is some overlap here with some of the things that the noble Baroness, Lady Noakes, has addressed.

Clauses 18(1) and (2) delete the FCA’s and PRA’s guidance about their objectives—the very provisions which, as the Explanatory Notes admit, required the regulators to explain how they advanced those objectives. It is not a question that they still have to explain now; that has gone. Clauses 18(3) and (4) remove the explanations required on directions on consolidated supervision and authorised decisions. Clause 18(7) removes the FCA’s obligation to notify, consult or explain when issuing guidance relating to its objectives. Clauses 18(9) and (10) delete large parts of the FCA’s and PRA’s annual reporting requirements, one of the most sensible and accessible ways for Parliament to understand how objectives were dealt with in practice and would ideally be built upon. Clauses 18(12) to (14) remove linkages to other Acts of Parliament, including the auditor engagement duties that once provided an additional source of supervisory insight.

What is left? Guidance? Gone. Explanations? Gone. Participation? Gone. Annual reporting? Gone. Audit? Gone. These were the exact mechanisms through which Parliament and others scrutinised how the regulators applied their objectives and principles. Clause 18 removes them all. It is the inevitable consequence of the Clause 16 and 17 shift: the practical reality of decoupling principles from operational effectiveness and removing Parliament’s line of sight. It leaves us with no checks and absolutely no balances. For these reasons, I oppose Clause 18 standing part of the Bill.

[Lord Pitt-Watson (Lab)]

My Lords, I will speak to Amendments 93 and 94. I have not audited a bank or sat on a bank board, but I was a member of the Sharman committee that looked at the problems with auditing following the global financial crisis. I sat on the board of one of the big four auditors, chairing its public interest committee, and I talked to a number of partners who audited the banks.

I think that we agree that audit is absolutely a foundation stone for the integrity of the capital markets. For those who are interested, it was part of the settlement following the collapse of the City of Glasgow Bank in 1878 that we would have audits of limited liability banks. It is particularly critical where entities are highly geared or where there is a considerable element of judgment in determining their value. If we look at the banks, they are hugely geared. People like to talk about the common equity tier 1 ratio, but if we look at the gearing that most companies use, it is the equity versus the liabilities. For a typical bank, equity is about 6%: on the back of that, you can borrow £94 and lend £100. That means that, if you have overvalued your assets by 3% and undervalued your liabilities by 3%, you end up with no equity whatever.

This is a really sensitive calculation and, historically, it would have been made with a degree of prudence and conservatism. Prudence and conservatism have now gone as guiding principles, and valuations are done neutrally. For example, this would allow a bank to declare a profit on a zero-interest credit card, on the grounds that it can bring forward the profits it thinks it will make in future. The noble Baroness, Lady Bowles, has been great in raising these issues for some time.

There are of course huge temptations to optimism. Indeed, it is surely testament to the professionalism of our bankers, and the independent agents we employ to monitor and control bank behaviour, that banks have not got into greater trouble. There are four such agents: the independent non-executive directors; the auditors; the investors and the regulators. Many more resources are devoted to auditing banks than to regulating them, and vastly more than fund managers devote to their role as stewards. The auditors have inside knowledge and huge expertise, and it is precisely that insight, given independently, that regulators need in order to play their role.

I think that that was recognised by the noble Baroness, Lady Noakes, when she suggested that the PRA “may” ask to speak to the auditors. The problem is that the auditors have a delicate job: they are referees. The report is done for the investors, but they need the trust of the audited entity. Indeed, they are, in effect, appointed by the audited entity, and they even sometimes describe the audited entity as a client. They are unlikely to go to the regulator without having profound concerns.

Regulators may find it helpful to call in the auditors because of problems that are visible to them: the known knowns. Under those circumstances, this amendment would of course work. However, what the regulator really needs to know is the unknown knowns: something that is known by the auditor, who has gone inside, but not known by the regulator. That is why it makes sense to mandate that the regulator “must” talk to the auditor to hear their concerns, to pick up potential emerging problems before they become critical, and to understand how the auditor judged the numbers to be true and fair.

The audit is the foundation of the integrity of our capital markets. For auditors to have material knowledge of a bank’s position that is relevant to the stability of the system and for that not to be known by the regulator seems to be completely perverse and potentially very dangerous. With that perspective, I wonder whether the noble Baroness, Lady Noakes, might be content with Clause 18, on audit reporting, to remain as it stands.