Financial Services (Banking Reform) Bill
Baroness Cohen of Pimlico Excerpts(10 years, 11 months ago)
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Baroness Cohen of Pimlico (Lab)
My Lords, I rise to support Amendment 21 and will speak to Amendment 20. I am sure that we are all very grateful to my noble friend Lord Mitchell for his tireless efforts in bringing the payday lenders under regulation. I am sure that that is the best result for everybody. I also support his remarks about how we actually need payday lenders. They fill a gap that no one else fills. If you have no food in the house or your car needs repairing in order for you to get to work, and if your family and friends cannot help, there is nobody but the payday lenders. They are colossally efficient—as my noble friend Lord Mitchell found out when he bravely took out a payday loan. They will get you the money very quickly.
That is a function that, in my youth, was fulfilled by employers by way of something called the “sub”. At one point, I was the industrial relations man, temporarily, on the Western Avenue extension. About a third of that whole site received subs on their pay. The rules stopped you receiving a sub for more than three days ahead of time and of course it was not paid interest. I do not think that happens any more and the payday lenders have come into that gap.
What have not come into that gap and are not yet organised to fill it are the credit unions. I very much welcome the most reverend Primate the Archbishop of Canterbury’s view that the credit unions can fill this gap, but they cannot do so at the moment. They are just not fast or efficient enough. I would very much like to encourage, in all work on credit unions that the most reverend Primate is undertaking—and which I shall be pleased to join in on—that they be a bit more like the dreaded payday lenders in their speed, efficiency and ability to respond to need.
The Lord Bishop of Birmingham
My Lords, I take a moment to thank the noble Lord, Lord Lawson, for his kind remarks about my friend the most reverend Primate’s speech last Thursday. I shall pass that on to him. He regrets that he is not in his place today. He is presiding over a whole number of bishops—it amounts to about the number of noble Lords in your Lordships’ House tonight—up in York.
I support these amendments, particularly Amendment 22 on the timetable. I am grateful for the Government’s approach and seriousness towards this payday lending crisis. The examples we have heard from noble Lords about the experience of poverty are gruesome. I should like to introduce a new element of competition to the response time for this particular bit of industry in terms of its timetable, because the risk, referred to by the noble Lord, Lord Newby, to the industry itself in not getting it right is paralleled by the risk just mentioned by the noble Lord, Lord Mitchell, of people having yet another Christmas borrowing at too great a cost and risk to their own future and that of their family. The Minister is trying to set a final deadline of January but I ask that he really encourage the industry to bring this forward to 1 October.
We have heard about the industry’s complexities and the credit unions that are needed. We have also heard of the encouragement this would give to those who are working very hard to provide effective money advice to those who are managing unmanageable debt and to help those young people who have been mentioned start handling their money properly. Local charities, churches and the faith groups are responding to the Government’s approach to tackling this global financial crisis. However, the slow timetable—several years before all this is implemented—is a completely different timetable from that of someone who has no resources, who has no back-up and who is looking for food tomorrow. I encourage people to support this amendment.
Financial Services (Banking Reform) Bill
Baroness Cohen of Pimlico Excerpts(10 years, 11 months ago)
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Lord Eatwell
I should point out to the noble Lord that the case he has described would come, under the terms of my amendment, under duty of care, not fiduciary responsibility.
Baroness Cohen of Pimlico (Lab)
My Lords, as a lawyer I have always believed that I have a contract with my bank, inasmuch as it is making an offer capable of acceptance and I have accepted it, in the case of provision of deposit and current account services, which I believe are the areas which my noble friend Lord Eatwell is proposing to cover. I do, however, support the amendment. It never does any harm to repeat these things. By analogy with part of the criminal law, it has been illegal since 1861 to beat one’s wife, but it took the Domestic Violence and Matrimonial Proceedings Act 1976 to remind the general public and the police of their duties in the matter.
The real problem lies with how to enforce any of this. Through all these debates I have found myself wondering where our lawyers are. Why have we not been suing banks? In many cases there is a perfectly clear case of action against a bank. The answer, of course, is that they are many times bigger than us and have more resources than any individual. If the purpose of the amendment is to encourage, or indeed force, the regulators to take the action on our behalf, which we are not about to do because of the risk of very severe financial consequences, it will be well received by everyone. In any case, I support the amendment.
Lord Lucas (Con)
My Lords, I am interested in a side effect of this amendment. I hope that it may result in us taking a proper look at high-frequency trading, which seems to me to be pretty close to theft, organised on behalf of stock exchanges at the expense of the rest of us in mutual funds and pensions. It seems extraordinary that we allow a certain group of investors privileged access to the stream of information coming out of an exchange, and allow them advantages over real investors. Real investors invest in real funds for long-term real return, performing the function of the market in terms of the allocation of capital and giving people an opportunity to invest their money at risk for return in order to enable them to live in retirement and to prosper from giving other people the use of their money. These are important functions of the market and high-frequency trading seems to me to be parasitical on that.
I have heard it argued that it improves, net-net, the terms on which investors are able to trade. That is not what investors tell me. They say it is as if someone is moving ahead of them. Every time they get into the market they can feel the market being moved ahead by the high-frequency traders. I think that that is an aspect of proprietary trading to which we should pay close attention, and I very much hope that this review will allow us to do so.
Baroness Cohen of Pimlico
I support the amendment. Most of what we are legislating to do is prevent banks doing terrible things to customers. Proprietary trading allows banks to do terrible things to themselves. They are no good at controlling it. The real horrors and the things that, more importantly, threaten the financial system are banks getting proprietary trading horribly wrong. There are examples of distinguished banks coming completely unglued in this. Deutsche Bank, UBS and Morgan Stanley all spring to mind. They seem to have a completely uncontrollable Wild West operation—and if the owners of the operation cannot control it, is it not a serious risk to the financial system and something that, as the noble Lord, Lord Lawson, suggested, should not be taking place inside a bank?
Lord Hamilton of Epsom (Con)
I, too, support the amendment. The problem that we have in the City today is that everything is moving so fast, and that traders have the capacity to use computers for all sorts of things. My noble friend Lord Lucas talked about high-frequency trading. I suspect that in three years’ time the new way of operating and making money will be something that none of us has even dreamt of. It is very important that this is reviewed and that there is an opportunity to take a very close look at it in a few years’ time.
Financial Services (Banking Reform) Bill
Baroness Cohen of Pimlico Excerpts(10 years, 11 months ago)
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Baroness Cohen of Pimlico (Lab)
My Lords, I have spoken before against ring-fencing and for full separation. We may not be in any kind of agreement on that, but what we ought to be in agreement on is that ring-fencing will require particularly scrupulous and detailed regulation. It will require more of our regulators than full separation, because institutional separation to some extent requires less regulation.
I wonder whether we are quite sane in putting so much faith in our regulators. The people who gave us Mr Flowers as chairman of the Co-operative are hardly those I feel very confident about exercising the very complex regulation that ring-fencing will require. It is complex and it is difficult. It is more difficult than it needs to be than with the policy of full separation. I therefore continue to support my noble friend Lord Barnett in his amendment.
Lord Barnett
My Lords, the Minister has told us that the Government consulted widely and got agreement. Well, more recently, there were 300 professionals who were consulted in a survey and only 35 of them thought it would work. I do not know who he consulted. He also talked about the robust regulations. Who is going to supervise these robust regulations—the old FSA, now called the FCA? Is he confident that it can? I am certainly not clear myself, nor do many people have a lot of confidence that the old FSA, now the FCA, can do that job. He is confident, however, that it can.
My noble friend Lord McFall pointed out what Volcker said to that committee: the chairman of a holding company, of which some part got into trouble because of the lack of regulation or whatever—what would he do? I know what he would do. He would seek to save it. These merchant banks may lose money at times—indeed they have done—but most of the time they make a lot of money and do not want to lose it. They want it separated, but under the same roof, with one holding company. That is what they have got and are going to get under the new administration.
I cannot see this regulation working and would like to hear the views of any other Member of the House who has an interest in this.
Financial Services (Banking Reform) Bill
Baroness Cohen of Pimlico Excerpts(11 years, 1 month ago)
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Lord Flight (Con)
My Lords, I rise very much in agreement with the noble Lord, Lord Lawson. The particular point that I should like to make is that if we look at events over the past five years, it was not derivatives or standard investment banking activity which got the banks into trouble but unwise forms of large-scale lending. It was the purchase of blind CDO instruments from the US without knowing what was in them and the banking practices in particular of HBOS. These were the areas in which huge amounts of money were lost and which nearly brought down two of the main banks of this country.
Looking at the ring-fence model, it seems rather strange that all that sort of activity will be in the same box as good old-fashioned high-street banking, as I understand it. I repeat my interest as a director of Metro Bank, which is an old-fashioned high-street bank in essence. But if the high-risk areas of banking generally are going to be in the same box as the lower-risk activities of high-street banking, that does not seem to make much sense. The delineation of what is investment banking and what is commercial, high-street banking is not a particularly good one if your objective is to protect the ordinary citizens’ banking activities.
Baroness Cohen of Pimlico (Lab)
My Lords, like many in the House I did not manage to speak at Second Reading either, but I have spent a miserable summer concluding that Vickers got it wrong. This is a horrible thing to say to my good friends in the Parliamentary Commission, but they got it wrong too about separation. I come from a long career in merchant banking. I was pulled out of the Civil Service to be a merchant banker and I understand very well how ingenious they are. We had a wonderful concept in my youth called the Chinese wall. All I can say is that ivy grew over that Chinese wall and ear trumpets went through it because we are an ingenious lot.
The very complication of the debate that we are having, the horrible complication of the legislation and the very real difficulty of the amendments all stem from the fact that we are trying to do something impossible. Ring-fencing will not work. It does not matter how many people you place in charge of it, you need institutional separation. As my noble friend Lord Barnett says, we are going to have to come up against this one of these days.
I am also fairly horrified to hear Members of this House describing ring-fencing as an experiment. What are we doing experimenting with the banking system? We have experimented with it before and we should not. We should be sticking to what we actually know will work.
I am in entire sympathy with the points made by the noble Lord, Lord Forsyth. I think that his diagnosis is absolutely accurate, but I differ on the conclusion.
Lord Forsyth of Drumlean
I did not say that I necessarily accepted the Government's conclusion: I was merely testing the Government on the logic of their own position.
Financial Services Bill
Baroness Cohen of Pimlico Excerpts(11 years, 11 months ago)
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Lord Newby
My Lords, last week on Report my noble friend Lord Sassoon signalled that the Government were minded to bring forward amendments at Third Reading to address some of the concerns that have been raised by the industry regarding the proposal to confer on the Bank of England an additional power of direction over clearing houses. This group of amendments reflects those concerns.
First, the amendments will require the Bank to be satisfied that any direction made under the power is necessary, having regard to the specified public interest criteria, rather than simply desirable. Secondly, they will put it beyond doubt that this additional power of direction will not be available in instances where the desired direction could be given under the Bank’s existing power of direction under Section 296 of FiSMA. Thirdly, the Bank, in instances where it gives a direction under this power without giving the recipient prior notice, will be required to explain to the recipient after the direction has been given why the direction was given, and why no prior notice of it was given. I should also make it clear that any justification given pursuant to this requirement will be given to the clearing house directly, will not be published and will not divulge sensitive information that might harm the public interest. Fourthly, these amendments will give effect to the assurance that we have already given the House that the additional power of direction could not be used to compel a clearing house to accept the business of a competitor. The amendments will provide greater certainty to clearing houses regarding the circumstances in which the additional power of direction could be used.
To alleviate any remaining doubts from industry, I repeat the assurance that my noble friend has previously given the House: the power of direction relates only to the recognised clearing house itself. The Bank of England cannot use the power of direction to require shareholders, members or clients to recapitalise or otherwise fund a failing recognised clearing house, with one exception: where the UK clearing house already has recapitalisation arrangements and agreements in place with its shareholders. In this instance the Bank of England could use the power to direct the clearing house to enforce those arrangements, provided that the necessary conditions and safeguards were met. Furthermore, this power cannot be used retrospectively.
The Bank of England also expects to publish a supervisory approach document in the coming weeks. This will give further information on how powers of direction will fit within its wider supervisory powers over recognised clearing houses. I beg to move.
Baroness Cohen of Pimlico
I, too, am supporting a government amendment, though one that is not nearly as dramatic as that secured by my noble friend Lord Mitchell, whom I congratulate very much not only on doing it but on the thoroughness of his research. He actually took out a loan with one of these companies, an act of true heroism that I hope will not result in his being deluged with peculiar financial products for the rest of his life.
In welcoming this amendment, I remind the House once again that I am a non-executive director of the London Stock Exchange. I very much welcome the Government’s amendments to the powers of direction and the spirit of engagement that HM Treasury and the Bank have offered in dialogue on these matters, and which I know the industry will look to continue. The amendments provide useful further context for the use of the power. They put it mostly outside the scope of a day-to-day power, and reassure us that it will be used only when it is reasonably necessary to do so.
That said, it would be very helpful if the Minister were able to offer any further thinking on the circumstances in which it is envisaged that this power would be used, and took this opportunity to give us his vision for co-operation between HM Treasury, the FCA and the PRA in advising on the powers. All relevant authorities, particularly the Financial Conduct Authority as the market regulator, will need to consider the wider market impact of any proposed direction by the Bank.
Finally, the announcement that the Bank will be consulting on its supervisory approach before the end of the year is very good news. That will be an excellent opportunity for it to explain the intended circumstances under which the Section 296A power would be used, and more generally, I hope, to give an account of the Bank’s approach to capital requirements for clearing houses.
Baroness Kramer
My Lords, I rise with a question for clarification for the Minister. Is the net effect of this amendment to make it clear that the owners of the platform that is clearing derivatives—one of the central clearing platforms—are exposed only to the extent of the loss allocation that is defined in their membership agreement; and that, beyond that, the Government will not, in case of a failing platform, force other platforms to take on open, out-of-the-money contracts? If that is so, is the Minister in effect saying that the backstop for the collapse of an exchange is effectively the taxpayer? I ask that not in criticism, but for the sake of absolute clarity.
Financial Services Bill
Baroness Cohen of Pimlico Excerpts(11 years, 11 months ago)
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Lord Sharkey
My Lords, Amendment 92A would require the Bank of England to ensure that UK-authorised clearing houses have in place a recovery plan. The amendment sets out the features of a recovery plan and requires each clearing house to submit a recovery plan to the Bank for assessment. The amendment also gives the Bank the power to require changes to recovery plans that it finds deficient against well defined criteria. In the case of continued deficiency, it gives the Bank the power to require the clearing house to take any measure that it considers necessary to remedy these deficiencies. The overriding purpose of the amendment is to put in place statutory provisions to make catastrophic clearing house failure less likely.
I know that the Government are entirely alive to the possible failure of clearing houses, and I am grateful for the discussions that I have had with the Ministers’ officials on the subject. I think that it is almost universally acknowledged that when the G20 proposals for putting almost all derivatives trading through clearing houses are in place, these greatly enlarged clearing houses will be the focus of greatly enlarged risk.
One of the immediate consequences of the huge enlargement of business through the clearing houses will be a huge increase in the demand for high-quality collateral. The IMF believes that this shift will boost demand for high-grade assets by between $2 trillion and $4 trillion. The question is, of course, where will these high-grade assets be found? It is entirely possible that there will not be enough of them to backstop the $700 trillion derivatives market. In fact, in the US at least seven banks plan to let customers swap lower-rated securities that do not meet clearing house standards in return for a loan of treasuries that do—a process which is known, rather alarmingly, as “collateral transformation”. We saw what happened with the collateral transformation of sub-prime bonds, and we can see where this new collateral transformation might lead.
On 7 November, in his evidence to the Banking Standards Commission, in response to a question from my noble friend Lady Kramer, Andy Haldane of the Bank of England said that,
“many people are fearful that the next crisis may be in the infrastructure and particularly in the central counterparty space. For all the reasons you say, these will be entities that are too big to fail, on steroids”.
He was talking about clearing houses.
The Bill already contains a partial response to the fear that the failure of a clearing house would produce an even worse financial crisis than the one we are enduring. The Government have introduced in the Bill powers of resolution to deal in an orderly way with the failure of a clearing house. However, there is a stage before failure that is vital to consider if the chances of avoiding collapse are to be as high as possible—the stage that deals with recovery.
I am certain that all clearing houses already have in place detailed recovery plans aimed at preventing outright failure, allowing some continuation of trading and preventing infection spreading pervasively throughout the financial system. I am certain that these plans will have been discussed with the Bank. The Government may think that these discussions are sufficient. After all, there are only five recognised UK clearing houses and seven recognised overseas clearing houses under supervision.
The Government may also feel that the Bill already gives the Bank power to do pretty much as it sees fit, in the widest possible sense, if it sees a crisis developing. However, this assumes that it can see a crisis developing, which was obviously not true in the recent past. It also assumes that informal discussions are better than a clear, well defined statutory obligation. It places a higher value on informal contact than on an open, clear, regular and disciplined system of review. That attitude did not work too well with LIBOR. The Government’s Statement this afternoon about the new Governor of the Bank of England rather bizarrely stated:
“The role the Bank of England plays in our economy cannot be underestimated”.
It does not seem satisfactory essentially to say that because there are only 12 recognised clearing houses, the Bank can and will keep a very close eye on them. I am sure that the Bank already keeps a close eye on them, and its gaze will be even keener when the clearing houses’ risk to the entire financial system is enormously magnified. However, an eye, no matter how closely applied, is no substitute for a formal, disciplined, well defined and transparent supervisory process.
In a very real sense, the whole Bill is based on the premise that formal, disciplined, well defined and transparent supervisory processes are critical to the proper functioning and stability of the financial system. The EU also takes this point of view. An EU draft directive on recovery and resolution was published earlier this year. It requires a specific, formal and disciplined process for clearing houses to draw up recovery plans, maintain them and have them assessed and gives the appropriate regulator power to assess and to intervene. The language of the amendment comes almost directly from the draft directive. However, at the moment, the draft directive is not making much progress. It is still waiting for First Reading in the European Parliament.
The Government had anticipated that it may take time for European legislation to emerge. In their response to the consultation opened by the document, Financial Sector Resolution: Broadening the Regime, which covers central counterparties as a key group and closed on 24 September, the Government stated:
“In due course, the Government would therefore expect to see European legislation brought forward. However, the timing of any European legislation is uncertain at this stage. Even the Recovery and Resolution Directive, which is more advanced than other proposals, does not have a date that is certain for its adoption. The Government is therefore minded to develop the UK’s domestic regime in advance of the European process”.
This is exactly what the Government have done regarding the resolution half of the proposal. The question is why they have not done this for the recovery part of the proposal. Warding off collapse is every bit as important as dealing with collapse. The risks involved in the failure of a clearing house have the potential to make the current financial crisis look almost trivial. Why not take every precaution we can, and why not take them now?
The new Governor of the Bank of England is also of this mind. He said two weeks ago in a speech to the Canadian Club of Montreal that it was not yet clear that the “too big to fail” situation had been ended, and added, quite explicitly, that each global systemically important financial institution must have mandatory recovery resolution plans in place. I hope that the Minister will agree with Mr Carney and might reconsider the importance of having in place a rigorous recovery plan regime for clearing houses, rather than relying on informal supervision while we wait for the EU to regulate. I beg to move.
Baroness Cohen of Pimlico
My Lords, I draw attention to Amendments 92B and 92C in my name. I must declare my interest as a director of the London Stock Exchange and, for that matter, as vice president of the Borsa Italiana—and, as such, the owner of a clearing house in Italy. Subject to all the regulatory requirements, I have a 60% shareholding in LCH.Clearnet, a London-based clearing house.
London Stock Exchange Group supports recovery and resolution powers for the financial markets and believes that these will be best delivered in clear and consistent legislation. We expect to come under close scrutiny. The amendments in my name help with elements of proposed new Section 296A of the Financial Services and Markets Act, which gives the Bank of England additional powers to direct UK clearing houses that were introduced by the Government in Committee. That is why we have not heard quite so much about them until now.
I am grateful to the Minister for the assurance he provided to the House on 15 October that the Bank of England would not use these powers to require shareholders, members or clients of clearing houses to recapitalise or otherwise fund a failing clearing house. This is vital because owners of a clearing house need to know their maximum possible liabilities in order to manage and control their funding. Following helpful discussions with HM Treasury and the Bank of England, it is understood that the circumstances in which the power of direction would be exercised fall somewhere between the day-to-day powers and the other powers provided by the Banking Act. Again, I am grateful to HM Treasury and the Bank of England for their willingness to engage in dialogue on all this. I am sure that we all want effective regulation of clearing houses, but we need clarity and certainty around the scope of the powers and the circumstances of their use.
The amendment seeks to put in the Bill the government description of the circumstances in which the powers would be used, as is the case for the existing crisis powers, and when they are to be used. This should also include a requirement to consult the other regulators and the clearing house, as suggested in the amendment.
My amendments would bring clarity and would, to some extent, future-proof these powers in three key ways. First, Amendment 92B would clarify that the powers would be used only if “necessary”, rather than “desirable”, which is an objective and appropriate test.
Secondly, Amendment 92C seeks to characterise the new powers in proposed new Section 296A of the Financial Services and Markets Act more clearly as sitting between the day-to-day powers and the Bank of England’s crisis powers. My amendment seeks to introduce conditions on the Section 296A power, while stopping short of requirements provided for under the Banking Act powers, which have much stricter trigger conditions and consultation requirements. This would allow the Bank a clear ability to use the different sets of powers. If Government can improve on this wording to give greater clarity on exactly when the powers would be used, I would welcome that. I hope at this stage only to highlight the issue and seek closer definitions.
Thirdly, Amendment 92C would place a consultation requirement on the Bank before using the powers—and takes account of the changes being made to Section 298 of FiSMA—that would allow the Bank to waive consulting the clearing house, if necessary. This would ensure that the relevant authorities considered the wider market consequences of a proposed direction, while allowing flexibility for the Bank.
Taken together, these amendments would achieve the Government’s objectives and support the legitimate interest of clearing houses. The amendments would retain full flexibility of the Bill as drafted, while offering greater clarity and certainty for market infrastructure operators, which we all need.
Financial Services Bill
Baroness Cohen of Pimlico Excerpts(12 years ago)
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Lord Peston
I take it that we are not discussing—because if we were, I would make a speech—the fact that we believe strongly in a single market for financial services but that many of the European countries go to enormous lengths to prevent our highly efficient financial services firms getting into their markets. I would not mind having a debate on that some time during proceedings on this Bill. However, I gather that in the Minister’s view this is not the moment.
Baroness Cohen of Pimlico
Might I ask the Minister for a little guidance? If we are discussing all these amendments together, I have a set of problems that I would like to discuss on Amendment 176D. Is this the moment or are we going to do all the amendments separately?
Lord Sassoon
If the noble Baroness will allow me, we will come to Amendment 176D—I would say in a moment, but it might be a prolonged moment.
Baroness Kramer
My Lords, I hope that these amendments will be consistent with EMIR and ESMA rules. It is not as though those are not available to the Treasury, and the last thing the industry needs is continual revision. Can the Minister clarify whether the amendments give the Bank of England a fairly free hand in resolution procedures? As he said earlier, the steps to resolution are, first, to use the collateral margin; and, secondly, to go into, presumably, the clearing house default fund and exhaust that. I am not clear what the next step and fallback is at the end of that process.
To what extent is there the capacity to go back to members or, as implied by EMIR, for the Bank of England to direct or permit clearing houses in effect to tear up their trades where a financial stability issue has been raised? If those are the kinds of powers that are being transferred to the Bank of England as a consequence of this, when will we get some clarity on exactly what the rules are—by whom, how and when those steps might be applied? Will they be comprehensive when we see them, as well as clear? Will they be credible, in the sense that they are the kind of rules that could be implemented in a crisis? There is a lot of concern about all that, because EMIR creates a possibility but has not created the rules. Can the Minister tell us when we will get those rules and be able to look at all this again? I understand that EMIR is to be implemented by the middle of next year. That does not give us much time if we are going to use this legislation, so I remain very confused.
Baroness Cohen of Pimlico
I draw attention to some difficulties raised by Amendment 176D. In doing so, I need to declare my interest as a non-executive director of the London Stock Exchange, and in that respect as the owner of a clearing house in Italy, and, I hope, subject to all the regulatory requirements, the owner of a majority share in the London Clearing House, and therefore very directly concerned.
These new powers extend the existing powers of direction over clearing houses that the Bank will already have under Section 296 of FiSMA. The amendments are being brought forward following many consultations with the Treasury this summer. I have two problems with the new clauses; I am not certain that the Minister has not just solved the first one, but I will say all this in order to make quite sure that we have got the answer right.
Will the Minister please confirm that the new powers under Amendment 176D cannot and will not be used to direct owners and members of a clearing house to recapitalise or re-fund the default arrangements? I hope that I am pushing at an open door here. I think the Minister said that the direction would not compel unless the default or refunding arrangements were already agreed and an already agreed arrangement were simply being activated. If so, that is splendid, and I would be grateful if he could kindly confirm it again. It is obviously important for owners and members of a clearing house to understand their maximum possible liabilities and to finance accordingly.
Financial Services Bill
Baroness Cohen of Pimlico Excerpts(12 years, 3 months ago)
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Baroness Hayter of Kentish Town
My Lords, in a way these amendments ask for quite simple things. First, the PRA must have arrangements in place to consult consumers or their representatives and report annually on these arrangements. Secondly, the PRA should consider any representations from the FCA’s practitioner or consumer panels. Thirdly, practitioner representatives should similarly be hardwired into the PRA’s working practices. We welcome Amendment 130ZAA in the name of the noble Lord, Lord Northbrook. It is key to have practitioners involved, but for their expertise, not as representatives. On our side we are content that no new panels need to be created either for practitioners or for consumers, provided that the PRA is committed to enter into dialogue with the FCA panels and respond to other relevant submissions.
However, the need for the amendments in our name and that of the noble Lord, Lord Sharkey, are more important perhaps, given the paper released on Monday. I do not know whether that is the same one referred to by the noble Baroness, Lady Noakes, but I think not. This one is entitled The PRA’s Approach to Consultation. This is a slightly different concern from the one she has, but to have a whole paper on consultation in which the word “consumers” is not mentioned seems a particularly alarming reflection of its approach.
The probing amendment in our name—Amendment 130ZZB, which proposes an annual report of the arrangements, rather than the content, of consultation activities—now becomes rather more of a real than a probing amendment. We have grave doubts as to how a paper on the PRA’s consultation could omit any reference to consumers, concentrating only on regulated firms. That is not even-handed or very sensible.
In response to the query from the noble Baroness, Lady Noakes, I will just say why consumers do have an interest in the role of the PRA. This is not of course simply about the prudential issues but about some of those raised by my noble friend Lady Drake earlier. Consumers have many interests in issues that are the responsibility of the PRA, particularly, as the noble Baroness mentioned, with-profits policies but also leveraged ratios and even bank charging policy, about which we have heard things from the putative head of the PRA. It would be strange for the PRA not to hear input from consumer representatives on these matters and simply for it to respond to the panel when it takes a different view. Unless the Bill is amended as suggested, consumers will be excluded from the PRA’s decisions on prudential matters. The PRA will lead on regulation of with-profits policies, but there is no requirement on it to consider representations from anyone representing the consumer interest on that. There are a number of issues relating to with-profits policies, orphan estates and others, which they do have an interest in.
My noble friend Lady Drake talked earlier about £330 billion, I think, being under management in with-profits funds. That is 25 million policyholders, and it is essential that the interests of these policyholders are properly considered, which can only be achieved by working with consumer groups and not simply seeking the views from the FCA. It is the same issue with mortgages, where prudential requirements can have huge implications for consumers. Decisions about the stability of the market potentially restrict the availability of mortgages to a large number of people who, up until that moment, had been servicing their mortgages without any problem. It is vital that the application of any prudential controls treats all customers fairly. The existing consumer panel has been involved in the regulation of insurance and prudential issues in relation to the mortgage market review, and I understand that its advice has been acknowledged as particularly valuable. All we are asking is that consumers get a hearing, which does not seem too much to ask, but also that the expertise of practitioners similarly gets an appropriate hearing.
Baroness Cohen of Pimlico
I support the amendments proposed by my noble friend Lady Hayter and the noble Baroness, Lady Noakes. Both consumer panels and practitioner panels are extremely important and it is very difficult to see an argument against them, particularly because the PRA will be regulating insurance companies. I declare at this point that my own background includes being a non-executive director of a couple of smaller insurance companies in the 1990s. The accounts and concepts are difficult, but such firms are of enormous importance to the economy and to everything that matters to us. Pensions, whole-life policies and insurance in general are important to us all, and it seems quite irrational not to have a consumer panel and, indeed, a practitioner panel, which should include people who really know about insurance policies. It could be the next disaster waiting to happen in financial services, simply because people do not know very much about insurance companies. Their accounts and the way they are managed are quite difficult to understand. For that reason, I support both amendments.
Lord Stevenson of Balmacara
My Lords, I rise to speak to Amendments 140A, 140BA, 140DA, 143C and 144JA. Amendments 140AA to 140DA appear to be, to use the words of the noble Lord, Lord Flight, in the same territory as those amendments that he was proposing and which have also been supported by the noble Lord, Lord Hodgson. Therefore, I do not think that we need to say much more except that we support them. We hope that our points will also be taken into account—they are relatively self-explanatory. We look forward to hearing the Minister’s response.
Amendments 143C and 144JA, raised in the other place, are intended to probe the practical aspects of co-ordination behind the FCA and the PRA on the ground—for example, across the membership of the boards. Schedule 3 on page 177 makes provision for the Bank’s deputy governor for prudential regulation to be on the FCA board. However, paragraph 6 states that:
“The Bank’s Deputy Governor … must not take part in any discussion by or decision of the FCA which relates to (a) the exercise of the FCA’s functions in relation to a particular person, or (b) a decision not to exercise those functions”.
Similarly, new Schedule 1ZB(5) states that:
“The chief executive of the FCA must not take part in any discussion by or decision of the PRA which relates to”—
I do not need to quote it further, it is very similar. There we have two deputy governors, supposedly sitting on these two boards to aid the co-ordination of these two bodies and to have cross-membership, and yet there is a provision that gags those two individuals and prevents them getting involved in discussions in certain areas. There may be a rational reason for this but it beats me as to what might be.
There is a further point. Paragraph 5 on page 177 of the Bill states;
“The validity of any act of the FCA is not affected”,
if there is a vacancy in the office of deputy governor, or if there is
“a defect in the appointment of a person”,
to those boards. However, if a deputy governor happens to stray in discussions into areas that relate to a particular person or to a decision on exercising a function, might there not be a serious risk that on judicial review—for example, a third party could challenge the validity of any act of the FCA—should it be discovered that the deputy governor had uttered a phrase or misspoken in a particular way about a particular person or issue?
One must be concerned about enshrining restrictions on the things that board members can and cannot utter so that they cannot take part in a decision. How would that be implemented? Would they have to leave the room when one of these topics came up? Would every single decision of the FCA and the PRA have to be separated into generic and operational questions? It would surely not be right to fetter internal discussions in this way. If it is right to put them on the boards of both organisations, it must be right to let them discuss everything that comes up on those boards. I look forward to hearing the Minister’s response to these points.
Baroness Cohen of Pimlico
I support the amendment in the name of the noble Baroness, Lady Kramer, and particularly her remarks about the importance of the status of the FCA in relationship to European negotiations. I remind the House that I am a non-executive director of the London Stock Exchange and that until 2010 I also chaired the sub-committee of the European Union Committee that is concerned entirely with difficult negotiations on wholesale finance. It is extremely difficult, particularly in the present climate of financial panic in Europe, to make progress—nay, even to hold our own—in negotiations with fellow European countries. The FCA must, as a very minimum, be seen to be of equal status to the PRA. I cannot emphasise how important this is. Over there in Europe, they have got used to having the FSA and they will be totally puzzled as to who is important unless it is made clear in the Bill.
Lord De Mauley
My Lords, these amendments have in common that they concern the relationship between the PRA and FCA and mechanisms for co-ordination between the two. Amendment 140A would insert a declarative provision that the PRA and FCA are considered equal in status. I agree with the sentiment. The PRA and FCA have very different remits: the PRA for prudential regulation and the FCA for conduct regulation. These are equally important. The Bill gives the PRA and FCA the necessary powers to deliver their objectives. Within their area of competence and expertise, each will have discretion as to how they exercise those powers to achieve their objectives.
Clearly there are differences between the regulators, in structure as well as in their objectives. Indeed, some of them could be construed as making the PRA appear to be the junior partner—for instance, it is the subsidiary of the Bank while the FCA is a wholly separate body. However, nothing in this arrangement should be taken to imply that one is superior to the other. My noble friend Lady Kramer, echoed by the noble Baroness, Lady Cohen, emphasised the importance of the FCA’s equality of status, particularly in the international context. The fact that the FCA will attend ESMA underlines that it will be the UK’s pre-eminent markets regulator.
Amendment 140 would require the PRA and FCA to co-ordinate their actions in relation to dual-regulated persons to ensure that they avoid duplicative requests and do not impose inconsistent requirements. Co-ordination is indeed a key point—one that has been emphasised by both industry and consumer representatives. The Government have considered this carefully. The general duty to co-ordinate is designed to address exactly the points that the amendment raises.
Subsection (1)(c) of new Section 3D specifies that one of the three purposes of co-ordination is to allow the regulators to use their resources in the most efficient and economic way, and to act in a proportionate manner. An efficient and proportionate approach will require the regulators to minimise duplicative requests wherever possible and avoid inconsistent requirements. This is supported by the new power for the Comptroller and Auditor-General to conduct value-for-money reviews of the financial services regulators and to report back to Parliament. The NAO will of course be able to look into co-ordination between the PRA and the FCA. I hope that noble Lords can agree with me that these mechanisms, already described in the Bill, are sufficient and that we do not need further provision to support them.
Amendment 140B would require the FCA and the PRA to publish guidance explaining the circumstances where the duty to co-ordinate does not apply. I agree that it is important to have clarity about this. The MoU will set out how the regulators will comply with the duty as a whole, including the limitations on the duty established in subsection (2).
Amendment 140AA would modify the general duty to co-ordinate to make it explicit that an objective of co-ordination is to minimise “unnecessary additional expenses” that might arise as a result of the separated administration of the PRA and the FCA, and to,
“maximise any common administrative savings”.
The Government agree that, where possible, costs arising from duplication of effort should be avoided. That is why the duty to co-ordinate requires the regulators to co-ordinate so as to act in a proportionate manner. This will include, for example, co-ordinating their information gathering in a way that will minimise costs. The regulators will be scrutinised by the NAO to ensure that they are delivering value for money. However, if the Bill were amended in the way suggested, I fear that it could be a distraction. There is a risk in requiring the PRA and the FCA to focus too much of their attention on co-ordinating at the expense of focusing on delivering their own separate regulatory objectives. The Government’s view is that this amendment goes too far in that direction.
Amendment 140DA would require that the co-ordination MoU between the PRA and the FCA contains an estimate of the additional annual costs when compared with the estimated costs of the administration of the FSA. I reiterate the point that the Financial Secretary to the Treasury made in another place: a core purpose of these reforms is to reduce the frequency and severity of future financial crises. This will require much tougher and more effective regulation. As we acknowledged in the impact assessment published alongside the draft Bill, there may be additional costs as a result of the separated administration of the PRA and the FCA. However, these costs pale into insignificance when compared with the cost to the economy of the recent financial crisis.
Amendment 140D would remove the provision stating that the MoU between the PRA and the FCA need not include technical or operational matters that do not affect the public. The MoU must set out enough detail to make clear the standards against which the regulators can be held to account, and to enable the public and regulated firms to see the principles and agreements that are driving the regulators’ approach to co-ordination. However, as I am sure noble Lords will accept, it is important that it does not become simply an impenetrable technical manual. The purpose of this is provision is to make clear that it need not include a great deal of detail that is of no interest to Parliament or the public. I think that is a suitable test of the kind of material that need not be set out in the MoU.
Amendment 140BA would require the regulators to include in their MoU provisions about how they would co-ordinate their activities,
“in relation to the promotion of high standards of stewardship by institutional investors”.
The FCA will be the regulator of the conduct of all asset managers, including their conduct in looking after institutional investments. The PRA will take a regulatory interest in asset managers if they also have permission to carry on PRA-regulated activities; but even in those cases the PRA will not be responsible for regulating their conduct as asset managers. It is not clear what activities in relation to stewardship the PRA and the FCA would need to co-ordinate or why they should be specifically required to provide for that co-ordination in the MoU. The MoU will, of course, already cover any necessary co-ordination in relation to PRA-regulated firms that also happen to be asset managers.
Amendment 140C would require the PRA and the FCA to consult publicly on any proposed changes after their annual review of the MoU. It is essential that industry has the opportunity to make representations about the contents of the MoU and the way in which the regulators comply with it. The draft MoU has been published, and the Bank and the FSA have invited comments. The Bill makes provision to ensure that industry and others can make further representations. The FCA and the PRA are required to include an account of how they have complied with the duty to co-ordinate in their annual reports. After publication, they are required to consult publicly on the effectiveness of their strategy. The FCA will do this by holding an annual public meeting, while the PRA will use a written consultation arrangement. Respondents to those consultations will have ample opportunity to comment not just on the content of the MoU itself, but also on the way in which the regulators have put it into practice.
Financial Services Bill
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Lord Davies of Stamford
I also strongly support my noble friend’s amendment, which was very well conceived and—if I may say so—very persuasively moved. I also agree very much with my noble friend Lord Liddle in the way that he approaches this problem. I think that there are four major issues on which the House needs to ponder carefully. The first is the emerging mismatch between the evolving structures in financial regulation on both sides of the channel. Something has already been said about that so I will not go into it any further.
The second issue is subjective, but I fear that it is very difficult to deny. It is our declining influence in matters of financial regulation and supervision around the world. Many of us can remember a time when the British were regarded as great experts in these things. We obviously were brilliant because we had such a successful financial services industry. Therefore, when we said something about financial regulation, supervision or the right way of creating a framework for a thriving financial services industry, whether it was said in Washington, New York, Brussels or Frankfurt, it was listened to with great attention. We naturally had a very strong influence. I am sorry to say that a combination of the Euroscepticism of this new coalition Government and our recent failings in financial regulation and supervision—one thinks of the failings of the FSA in matters of RBS and so forth, and now the terrible and very upsetting scandal of LIBOR fixing, which I will not go into any further—inevitably will, and is, undermining the influence that we used to have. That is a very worrying situation.
There is, thirdly, the competitive issue, which we will come on to in later amendments. It is quite clear that as the framework for financial regulation diverges between this country and the continent, there is always a danger of competitive advantages changing, and possibly not in our favour. One of the obvious examples of which people are well aware is the possibility of lower capital-adequacy ratios on the continent. Presumably, particularly in the light of the crisis that we have all been through, they will always be set at a fairly sensible prudential level. However, there may be significant differences—for example, in retail deposit insurance schemes—which would lead people to want to hold their accounts on the continent rather than here. All kinds of things could emerge from regulatory and supervisory initiatives that would change the competitive balance. We need to be very alert to that.
Finally, the jury is out on whether or not it is in the national interest for us to be part of the emerging European banking union. I can see a great many theoretical reasons why it might be very strongly in our interest to join, but I do not have the slightest hope of persuading colleagues in the House today of that. Indeed, I am happy to wait and see, but we need to keep the matter under review. The regular review which my noble friend proposes in this amendment is exactly the kind of procedure and discipline that we want.
All British institutions involved should be aware that they are being reviewed in this matter; that their collaboration and effective participation in European structures is being watched; that they are expected to use their influence as effectively as they can on our behalf; and that they should be very conscious of the role they are playing. All that is very important and we need to monitor the results. We need, a few years after it comes, to be able to look back over the record as revealed by these reviews and otherwise—quite pragmatically and open-mindedly, without dogmatism or emotionalism—and to take a rational decision on the best way of achieving the national interest going forward.
Baroness Cohen of Pimlico
I support the amendment proposed by my noble friend Lady Hayter. Not only are we poorly mapped on to the new European financial regulators, but we are poorly represented in relation to our weight in financial services in Europe. We are under-represented, in fact. We are where we are, but this is one of the areas on which, in a year’s time, it would be useful to have a review and to see how best we might change or adjust our position, either by adjusting our own institutions, or by hoping to make greater progress in Europe. However, financial services are key to this country. Immense amounts of regulation being debated in Europe at the moment, and we are not quite in the best position to be doing all this. I very much welcome the idea of a review in a year.
Financial Services Bill
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Baroness Noakes
My Lords, I have two Amendments in this group, Amendment 104, which is in my name, and Amendment 139A, which stands in my name and in the names of the noble Lord, Lord McFall of Alcluith, and the noble Baronesses, Lady Cohen and Lady Kramer. Therefore, Amendment 139A has a pretty solid set of supporters. I shall come to that amendment in due course.
In different ways, both these amendments and the others in this group address the position of the UK’s financial services sector. This is a difficult time to be defending the financial services sector in the UK because it is far easier to be in attack mode, as we have seen in both Houses of Parliament and in the media. I thought long and hard about whether it would be appropriate to speak to these amendments at this time, but whatever the current difficulties, which are huge for the banking sector and individual institutions within it—I remind the Committee that I am a director of the Royal Bank of Scotland—we need to be dispassionate about this legislation. We cannot solve all the problems of the sector in this Bill and, thankfully, another Bill will be coming along soon if we need to respond in legislative terms to the latest issues. However, this Bill could, inadvertently or otherwise, damage the broader financial services sector, which is and has been a major contributor to the UK economy. We have a duty to ensure that when this Bill leaves your Lordships’ House we have taken a balanced view of the risks and threats to the UK and have responded in a measured way.
I will start with Amendment 104A. It is very similar to Amendment 101A which my noble friend Lord Flight has already moved. My noble friend’s amendment places lack of harm to the competitiveness of the UK’s financial services sector as a general duty in new Section 1B. My Amendment 104A adds to subsection (5) of new Section 1B a “have regard” item in respect of the international competitiveness of the financial services sector. My amendment merely reinstates the law as it currently applies to the FSA and makes the FCA have regard to the desirability of maintaining the international competitiveness of the UK.
My concern has been that the loss of the FSA’s specific duty to have regard to international competitiveness may be taken as a green light to have no regard whatever to the issue. That would be a mistake for the UK. I do not need to remind noble Lords of the size of the financial services sector. It amounts to very much more than the global banks and it is important for employment, tax revenues and its contribution to GDP.
At Second Reading my noble friend said that the Government’s view was that having high standards of regulation was all that was necessary to establish,
“the attractiveness and competitiveness of London”.—[Official Report, 11/6/12; col. 1262.]
I hope that he meant more than London because the financial services sector is important to many parts of the UK and is not confined to London. More importantly, high standards of regulation can never be enough on their own. We can have the highest possible standards, but they could be operated in such a way that they actually drive business away. There is a very real danger that in response to the financial crisis and more recent revelations the regulatory pendulum will swing to a place which, to use the phrase of my right honourable friend the Chancellor, achieves the “stability of the graveyard”. If there is no reference in this legislation to the wider context of the financial services sector, there is a very big risk that it will be ignored entirely, and that is a risk which I suggest that we ought not to take with this legislation.
I should say that I tabled Amendment 104A in respect of the FCA but did not table a similar amendment in respect of the PRA. At that point, my primary focus was on the fact that the FCA’s objectives are very consumer-focused. That is clear from the Bill and is also clear from what Mr Wheatley, the chief executive designate, has said in public. However, the FCA has a very broad scope in wholesale financial markets, including the recognised exchanges, where issues go way beyond consumer protection in a narrow sense. Wholesale markets are important, both internationally and as part of the infrastructure which supports the financing of British business. There may be other ways of ensuring that the FCA does not forget the wider picture, but my amendment is just one way of achieving it.
I should probably have tabled a similar amendment in respect of the PRA. The two bodies have different functions but they both have the capacity to do harm or good to our financial services sector. I am therefore supportive of Amendment 129 tabled by my noble friend Lord Flight.
Both the PRA and the FCA should have something about the success of the financial services sector hardwired into their framework, so I have also tabled Amendment 139A, which was suggested by the London Stock Exchange. Amendment 139A is slightly different. It amends the regulatory principles, which will apply to both the FCA and the PRA through new Section 3B of FiSMA. Under subsection (1)(b) of new Section 3B, the regulatory principles include the principle of proportionality—that is, that burdens should be proportionate to costs. I am sure that we will look at this in more detail later in our Committee, but for present purposes my amendment states that in considering benefits and burdens, the regulators should consider,
“the capacity of the financial sector to contribute to the growth of the United Kingdom economy in the medium or long term”.
The point is that regulators need to think about the impacts of their regulatory actions in the broader context of the financial services sector and its impact on the UK economy. There could be direct impacts, as in the direct contribution of the sector to GDP or employment; or there could be indirect impacts; for example, through the ability of the financial services sector to support the real economy.
I am not wedded to the precise formulation of this amendment, or indeed the other amendment in my name, but I would simply note that it is drawn from wording that applies to the way in which the FPC is required to go about its business as set out in new Section 9C(4) under Clause 2 of the Bill.
When my noble friend the Minister wrote to noble Lords after Second Reading on the issue of proportionality, he urged us to examine the FSA’s compatibility statements, which are used to evaluate proportionality. My noble friend misses the point, which is that the FSA currently has the “have regard” obligation in respect of international competitiveness and so of course it includes the financial sector’s position in the compatibility statements. If we take the “have regard” out of the legislation or indeed any other similar reference to the wider context, it will follow, as night follows day, that such issues will drop out of the compatibility statements. We cannot assume that these issues will remain anywhere in the minds of the regulators.
The substance of these amendments is crucially important and much more important than the exact form of the amendments in this group. I hope that my noble friend will give them serious consideration.
Baroness Cohen of Pimlico
I support Amendment 139A, also tabled in my name, along with the noble Baronesses, Lady Noakes and Lady Kramer, and my noble friend Lord McFall, who is not in his usual place. I remind the House that I am a director of the London Stock Exchange. The words are carefully chosen, and I would not disagree radically with the other amendments proposed. I believe that we are all seeking a regulatory regime, which, while preserving stability, leaves room for one of our most successful industries to grow and prosper. It can only do that if regulators are able, as the amendment suggests, to include consideration of the capacity of the financial sector to contribute to the growth of the United Kingdom’s economy in the medium or long term. It remains vital—even in hard times like this, when much of our financial services industry is under criticism —not to forget the long term and not to handicap the regulator, enabling the industry to grow as it should while retaining stability.