Financial Services Bill

Baroness Hayter of Kentish Town Excerpts

Monday 12th November 2012 Lords Chamber

[Baroness Hayter of Kentish Town]

My Lords, I am delighted, nay honoured, to see my name alongside that of the future Archbishop of Canterbury, the right reverend Prelate the Bishop of Durham. If his contribution today is anything to go by, we can look forward to a thoughtful, progressive and determined ministry, which will serve this House and this country well. Like all my colleagues, I warmly welcome his appointment and congratulate the right reverend Prelate. I wish him well in the challenges ahead, which may be a little more demanding than getting an amendment accepted by the Government.

As has been said, there is a real lack of transparency in the financial sector, which is a key problem, given our reliance on competition to make the market work. Without information, choices of customers or of policy-makers are hampered. We know a few things but not enough; we know that one-third of a million small and medium-sized businesses could not get access to finance from mainstream banks in 2011. Indeed, only half of the young, fast-growing, small businesses had their loans fully met last year compared with 90% in 2007, so it is no wonder that our economy has stalled. But regulators and others cannot take action until we have these better, more precise and locally based data. Banks have to made to be more open about what and where they are lending. They are too important to work in the shadow. I am delighted that the Government have accepted this amendment, although I note that the Financial Services (Banking Reform) Bill is potentially growing larger by the amendment. I think that this is the third reference today to something that may be in the Bill. Nevertheless, we welcome the Government’s move on this matter.

[Lord Sharkey]

I would like to thank all noble Lords who have spoken in this brief debate, particularly my noble friend Lord Newby for his commitment to the publication of disaggregated, postcode-level data in this important area and also, in a way, for helping us to look forward to a slightly more varied Financial Services (Banking Reform) Bill than we might have expected in the new year.

Last week it was the noble Baroness, Lady Noakes, who told us what the correct technical response was to this kind of government commitment: she said it was “bingo”. I would like to echo that. I finish by saying that, although I hope we will be able to get a satisfactory voluntary agreement on this, I am enormously encouraged by the Government’s firm commitment to legislate should this not be the case. I beg leave to withdraw the amendment.

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[Lord Flight]

My Lords, I am delighted to see that my Amendment 37A has effectively been reproduced by the Government. I apologise as I note that my amendment states, “The FCA may appoint”, whereas it should refer to the PRA. I had taken the same wording for the PRA panel as for the FCA panel. It is healthy to have this structure, which will give people greater confidence to work with the PRA.

[Baroness Hayter of Kentish Town]

My Lords, as I said earlier today, it feels rather wrong to establish a PRA practitioner panel while excluding the views of those whose money and savings are at the heart of this industry and who depend on well regulated companies for their well-being. It also looks a bit too cosy a set-up between the regulator and the regulated community with no user-interest input. So, while we do not oppose these amendments, we do not think that they are a balanced response to the demand for the PRA to listen to those who work in financial services.

We know from the Treasury Select Committee report on RBS of the silos that existed even within the FSA between its prudential and conduct sections. With the move to two regulators, physically a mile apart, there is an even bigger risk of such silos. This will not be helped by having two separate practitioner panels, so that even within the industry there will be a split between those addressing one regulator and those focused on the other. This will be the case as regards numerous issues, including, for example, benchmarking. The proposal is for LIBOR to be overseen by the FCA, and therefore have input from the FCA practitioner panel, but how it is working out in practice, the inputs to it and the use made of it will be the preoccupation of that part of the regulated community represented by the PRA practitioner panel. This proposal might therefore not be the best that the Government could have come up with. It was not the first choice of the industry and it would not have been our first choice.

[Lord Newby]

I am grateful to the noble Lord, Lord Flight, for his support for what we are seeking to achieve. I am not surprised by the comments of the noble Baroness, Lady Hayter. However, I hope that the House will feel able to support these amendments.

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Moved by

[Baroness Hayter of Kentish Town]

46A: Clause 6, page 36, line 9, at end insert—
“( ) the exercise of their functions in relation to the stewardship of listed companies by institutional investors, with a view to controlling systemic risk and protecting consumer interests”

[Baroness Hayter of Kentish Town]

My Lords, these amendments are about the heart of banking and insurance. They are about stewardship. Amendment 46A requires the FCA and the PRA to co-ordinate to ensure effective stewardship. Amendment 79B clarifies that the FCA’s powers enable it to make rules on stewardship. They give stewardship an explicit place n the Bill and confirm that the Government expect the FCA to act on this.

In the aftermath of the financial crisis it was acknowledged that institutional investors had acted as “absentee landlords”, not doing enough to challenge the risky behaviour of the banks they effectively owned. This had direct consequences for the savers whose money these shareholders were investing. The Financial Reporting Council established the stewardship code to encourage investors to behave as active owners in the companies in which they invest. This is vital to building responsible capitalism where shareholders exercise greater oversight of, for example, executive pay. As the noble Lord, Lord Turner, told the Joint Committee,

“shareholders … have major responsibilities. A lot of what went wrong with our banking system was encouraged by a set of shareholders who thought that high levels of leverage, rapid growth of EPS and aggressive acquisitions were rather sensible”.

Stewardship was identified by the Kay review as a principle of more effective capital markets. The first of his principles reads:

“All participants in the equity investment chain should act according to the principles of stewardship ... respect for those whose funds are invested or managed, and trust in those by whom the funds are … managed”.

Therefore, if this Bill is to help prevent another financial crisis, regulators must address the quality of shareholder oversight.

The FSA has a rule requiring asset managers acting on behalf of institutional clients to disclose whether they commit to the stewardship code. However, the organisation FairPensions found that the quality of such disclosures is often poor, particularly over managing conflicts of interest. Furthermore, this FSA rule does not mandate compliance and does not apply to firms acting on behalf of retail clients. It looks rather as if the FSA does not regard stewardship as a consumer issue, despite its implications for consumer outcomes.

The Bill makes no mention of stewardship despite the importance of the objectives of both the FCA and the PRA and despite the fact that shareholders have the primary responsibility for ensuring that banks are well run. Regulators simply must take an interest in how shareholders discharge this responsibility. I should add, as was mentioned earlier, that the millions of employees soon to be auto-enrolled will depend in part on their agents making sure that the companies in which they invest are well run.

Stewardship is key but there is a mismatch between the code and its enforcement. The FRC oversees the stewardship code, but does not regulate the entities to which the code applies. The PRA may take little interest because the firms are FCA-regulated. Yet the FCA may not accord this any priority, given that the system-wide problems caused by a lack of stewardship make it hard for the FCA to intervene in relation to a particular firm or group of consumers.

The current duty of co-ordination will not resolve this, since it focuses on reducing the burden of regulation on dual-regulated firms, rather than on preventing gaps in regulation between the two new authorities. Stewardship might just end up between the cracks. I feel sure that the Minister will agree on the importance of stewardship and I therefore ask him where responsibility for it will sit in the new architecture. I beg to move.

[Lord Newby]

My Lords, no one would doubt the importance of stewardship and of ensuring the proper conduct of those authorised persons who manage investments on behalf of others, including in relation to the exercise of voting rights. Stewardship is also a matter for a wider range of authorities than the financial regulators—in particular, the Financial Reporting Council which has issued a stewardship code.

Amendment 46A would require the regulators to include in their MoU provision about the exercise of their functions relating to stewardship. This amendment is based on the premise that the PRA has a role in stewardship. I do not think that this is a correct premise. First, only the FCA will have any powers in relation to listed companies themselves. The PRA has no responsibilities in relation to listing. Secondly, the regulated activities which cover managing investments are not PRA-regulated activities. The PRA will need to regulate an authorised person who manages investments only if the firm also has a permission to carry on a PRA-regulated activity, such as accepting deposits or effecting or carrying out contracts of insurance. In those cases, the PRA will be the prudential supervisor and the MoU will already cover the co-ordination of FCA and PRA interests in these firms.

Amendment 79B would make clear that the FCA’s powers to make general rules include the ability to make rules relating to stewardship. I can assure the noble Baroness that the amendment is not needed. First, there is no doubt that the FCA’s general rule-making powers extend to making rules about stewardship. New Section 137A to be inserted into FiSMA 2000 under Clause 23 of the Bill is quite clear. It states:

“The FCA may make such rules applying to authorised persons … with respect to the carrying on by them of … activities … as appear to the FCA to be necessary or expedient for the purpose of advancing … its operational objectives”.

Secondly, the FCA’s powers essentially follow the existing FSA powers. The FSA has already made a rule which requires UK-authorised asset managers to put statements of commitment to the FRC’s stewardship code on its websites or, if an asset manager does not commit to the code, to provide its alternative investment strategy there. I expect the FCA to continue with this rule. Far from any suggestion that the responsibility will fall through the cracks between the two regulators, it is absolutely clear that the FCA will take on the FSA’s existing powers in respect of stewardship and ensure that they are properly implemented. I hope, therefore, that the noble Baroness will agree to withdraw her amendment.

[Baroness Hayter of Kentish Town]

I thank the noble Lord, Lord Newby, for that. Of course, he did not answer the point that I made. When research is done, it is found that details of the “the comply or explain” commitment are not on the web—neither what is being complied with in the code nor what is there instead.

However, I thank him for the clarity of his answer that it is an FCA responsibility. That rather begs a question that I asked in Committee, and to which I may return, that the code is the responsibility of the Financial Reporting Council, which gets no mention in this Bill. In Committee, the Government refused my suggestion that there should be an MoU between the FCA and the FRC, which is regrettable. The importance that the noble Lord has said about the code and the ability of the FCA to make rules, including the commitment to follow it, strengthens the case for a better connection between them. I at least thank him for clarity on that, but we may need to come back to look at the FCA aspects. For the moment, I beg leave to withdraw the amendment.

Amendment 46A withdrawn.

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Moved by

[Baroness Hayter of Kentish Town]

61A: Schedule 3, page 207, line 31, at end insert—
“( ) an assessment as to how well markets are meeting the needs of businesses and households in lower income communities,”

[Baroness Hayter of Kentish Town]

My Lords, we have spoken already about the need to have information from banks about their lending to different communities and sizes of business. The noble Lord, Lord Newby, said that the FCA will collect data about access to financial services. In the amendments we seek to obtain information to identify how well markets are working for lower-income communities. This is therefore broader than simply small businesses, and is about whether lower-income households can get credit, insurance, saving products and banking services. We know already, for example, that about 1.5 million people have no bank account, but we need to know more about what other groups are excluded from such services and products. We therefore ask for the FCA—which will be able to obtain the information—to research and assess whether such needs are being met and to include its findings together with any strategy for dealing with identified unmet need in its annual report. If the FCA is doing its job, it will do this anyway, but this is belt and braces so let us write down our expectations of it in this regard. I beg to move.

[Lord Newby]

My Lords, having agreed earlier today that we want to require the FCA to obtain and publish these data, obviously we have considerable sympathy with these amendments to the extent that they seek to flesh out how that remit should be undertaken. However, that is the end of the good news because we think that the amendments are in part unnecessary and in part inappropriate because they are too prescriptive.

We believe that there is no need for a specific provision relating to the annual report for the FCA because in paragraph 11(1)(b) of Schedule 3 we state that the annual report must cover,

“the extent to which, in its opinion, its operational objectives have been advanced”.

Given that in a series of amendments today we have strengthened the role of the FCA in looking at disadvantage and making that a new area where the FCA has a very specific responsibility, it will have to report in those areas in any respect.

Amendment 61B is very prescriptive. Our view is that with the FCA reporting on this, as with many other things that it will report on, the Bill itself should not have detailed prescription as to how the FCA should do its work. It has a legal requirement to report and it is up to the FCA to respond as it thinks fit. If there is any sense that it is falling down on its objectives, it will be reporting to Parliament and will be questioned by Parliament and Parliament will have the opportunity to raise with representatives of the FCA on a regular basis how it is meeting this and any other of its statutory objectives. I hope that the noble Baroness will feel that the outcomes that she seeks will be achieved in any event and that she can withdraw her amendment.

[Baroness Hayter of Kentish Town]

My Lords, I warmly thank the Minister because sympathy was much more than I got when I spoke on consumer input to the PRA. So I think that I will bank that one. I thank him, too, for endorsing the spirit of my amendments on the record so that when the report comes out people will be able to quote his very wise words that that was what we were looking to the FCA for. With that, I beg leave to withdraw the amendment.

Amendment 61A withdrawn.