Financial Services Bill

Debate between Baroness Cohen of Pimlico and Lord De Mauley

Wednesday 25th July 2012 Lords Chamber

[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.