Financial Services Bill

Baroness Cohen of Pimlico Excerpts

Monday 11th June 2012 Lords Chamber

[Baroness Cohen of Pimlico]

I declare an interest as a non-executive director for many years of the London Stock Exchange and a veteran, like many of us here, of the financial crisis. There is much to welcome in this Bill, but that does not include the format, which involves the amendment of a couple of other Acts and is painful and confusing—and above all not at all user-friendly. It adds to the conviction that regulations are confusing, arcane and accessible only to experts.

I had the honour of sitting on a committee of this House chaired with patience and clarity by the late, lamented Lord Newton, called the Tax Law Rewrite Committee. It did not, of course, rewrite tax law, because we could not, but it codified it so that anybody who wanted for example to get a grip on capital gains tax had only one Act to refer to rather than juggling several Acts at once. If it was worth doing for capital gains tax, how can it not have been worth doing for a major Act to govern for many years the vital regulation of financial activity? The Bill is of course for the long term, but could we not have started with a self-contained document?

However, as my noble friend Lord Turnbull observed, we are where we are—and there is much to welcome in this Bill. It is particularly pleasing to feel that your Lordships’ House is in agreement that we must all get the best Bill that we can, however difficult the format. The effective regulation of our financial services industry is vital to stability, for consumers to save and businesses to invest, and getting the balance right is vital for any Government, especially as so many jobs depend on it.

As someone who has spent the past 11 years concerned with the working of capital markets, I welcome particularly that those markets, including the London Stock Exchange, will be regulated by the Financial Conduct Authority. I welcome the announcement this morning of its chairman, John Griffith-Jones, and expect that he and his CEO, Martin Wheatley, will make a strong team. It is also greatly welcome that the Government have listened to representations on the appropriate home for market regulation and have confirmed that the UKLA will be located in the FCA. It is of course true that effective regulation does not depend on structure, but it is a very good start to have the working parts of successful capital markets regulated in the same place.

The Financial Policy Committee will have the power to move markets and affect consumers, as the Monetary Policy Committee now does. In designing the body, the Government have taken powers to contain the use of those very powerful tools to prevent a negative effect on the real economy. However, the Bill is not consistent or clear about how to meet that objective, and we need to clarify it. After all, the Financial Conduct Authority is going to regulate capital markets, which are estimated to support over 7 million jobs in UK companies, and in the financial sector will regulate 27,000 firms, which contribute £63 billion in tax revenues and provide over 2 million jobs—two-thirds of them not in London. Furthermore, the authority will be a global ambassador and the first point of contact with the UK for international businesses. It needs and deserves a consistent view, which will continue under a Government of whatever character, on markets and the desirability of maintaining the competitive position of the UK.

The original FSA statute provides that the FSA must have regard to,

“the international character of capital markets and the desirability of maintaining the competitive position of the United Kingdom”.

As it stands, the Financial Conduct Authority will not inherit that requirement, despite the FCA regulatory approach document published last year stating that,

“the regulation of markets for capital-raising and trading has worked well”.

If that phrasing is to be discarded, the proportionality principle needs to be clarified in the Bill. The current definition is too vague to be useful. For example, it speaks of benefits and burdens “considered in general terms”, whereas a reference to the impact on the growth of the economy, as the Bill already has in relation to the FPC, would be more tangible.

Proportionality is supported by a requirement to carry out cost-benefit analysis, but again the Bill provides no explicit direction as to what costs should be considered. For example, a direction to consider the impact of actions on the attractiveness of the UK as a business location would be more specific. In their response to the Treasury Select Committee, the Government stated that they see the proportionality principle operating to,

“help to ensure that the UK remains a competitive place to carry on business in the financial sector”.

The Government’s intention in this respect should be reflected explicitly in the Bill. A wide coalition of business groups backs the need to keep regulators focused on the attractiveness of the UK for international business, including the CBI.

The Government have shown real willingness to act in the national interest in the international market. I cite the less well known current action against the European Central Bank, which sought to provide that euro-denominated transactions can be cleared only in eurozone countries. The Government have gone to court to prevent this. The Government’s support for trading on the renminbi is also thoroughly welcome.

However, in a highly competitive market we cannot take for granted the capital markets’ manifest advantages such as location in a time zone handily placed between the major markets of the USA and the Far East; deep liquidity; and skilled and experienced market participants and financial services people. We can afford to ignore the odd petulant threat from individuals to take off for the Cayman Islands or worse, but in dealing with large, foreign-based companies it is always vital to remember that they do not have to come here. The welcoming arms of Hong Kong or New York beckon them and we should always be conscious of this.

Therefore, I submit that we need a constructive debate about what proportionality means in order to ensure that the Bill effectively delivers the Government’s vision of regulation that supports, not undermines, the competitiveness of the UK and the impact on growth and jobs. This is not about light-touch regulation—the FCA does not regulate the banks, and will not—but about the 7 million jobs in UK companies supported by markets which are subject to FCA regulation, and the £161 billion which has been raised by companies on UK markets since the start of the financial crisis. There is a real balance here that the Government need to acknowledge in linking the actions of the FPC to the growth of the economy, and in their statement of intent for proportionate regulation to support the competitiveness of the UK. This is about a system which will endure and continue to deliver an effective balance.

The Joint Committee that scrutinised the draft Bill stated:

“To be successful the reforms will have to change the regulatory culture and philosophy … A change in culture is not something that legislation can guarantee but legislation can influence the culture of a regulator by: … setting objectives; … allocating and aligning powers and responsibilities … establishing appropriate systems of accountability”.

The culture of regard to regulatory impact on the real economy, jobs and the UK’s competitiveness is alive and well, but if it is to endure for the future, the legislation needs to be more precise in stating this. The proportionality principle is the right place to start. I look forward to discussing this in Grand Committee.