Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2013

Baroness Kramer Excerpts

Monday 4th March 2013 Grand Committee

[Baroness Kramer]

My Lords, I shall try to keep my comments brief and, if I may, to follow the order in which the noble Lord, Lord Eatwell, addressed the orders to make life a little easier for the Minister. On those elements of the order that attempt to make sure that the FCA and PRA rulebooks appropriately intermesh, and on the comments of Andy Haldane on the risks that arise when you manage through rules rather than through structure, can the Minister give us some assurance that, behind the clarification of the rules, is the cultural commitment to act together as a coherent unit? The fear that Mr Haldane and others have expressed is that, once the institutions see rules, their first reaction is to attempt to game them. I suspect that it is not the number of rules that is the general concern but the coherence of the regulators in making sure that gaming is not a practice that they will permit.

The heart of today’s discussion is to do with LIBOR. I have a general question on the participation of banks in the LIBOR-setting process. It was the strong wish of many that more banks should participate in the process. At the moment, many seem in effect to get a free ride by allowing others to be the participants in the rate-setting process. They then use the rate across the many instruments and transactions that they sign up to, but because they did not participate themselves, they were in many ways getting a free ride, not exposing their internal positions to public view in the way that the participants were and making it much more difficult for other banks to compete against them when some were being transparent and others were not. I wonder where that process has got to. I understand that it was to be voluntary, and I do not know whether we have had any change in who is involved in rate-setting at this point or are likely to in the near future.

At the heart of my questions for the Minister are the sanctions of themselves. We all strongly support the new offence of making false or misleading statements and false or misleading impressions in the submission of benchmark information in the setting of a rate such as LIBOR. One of the underlying concerns has been the way in which the regulator approaches such violations, which is to come down increasingly hard on the individuals who have been clearly and directly involved in that false submission but not to look upwards to those who create the culture and environment in which that behaviour takes place. Tracey McDermott has said on several occasions that the appropriate way to enforce is to find the problem and then follow the trail and to stop questioning at the point where the trail goes cold. That obviously creates for senior management an advantage in wilful ignorance and makes it beneficial for them not to know in any detail what is happening in their organisation, certainly for there to be no trail that would be easy for a regulator to follow. Many of us have come to the conclusion that the regulator needs to have a way to look through that to make senior members of a company accountable for behaviour that is happening on their watch and which they do not know about through negligence, in a sense, rather than through deliberate deceit on the part of those carrying out the wrongful behaviour. Can the Minister make any comments about that?

The underlying concern is that the regulator has sanctions that are strong enough. Many of us have noticed the distinction between the kind of sanctions that a US regulator can use versus those available in the UK. I know that that is not a direct discussion within the order, but it is so closely tied to it that I wonder whether the Minister would comment.

[Lord Newby]

My Lords, I am extremely grateful to noble Lords who have contributed to the debate and will attempt to answer the questions they have raised. The first questions related to the effect of the tearing up, or bifurcation, of the rulebook and how continuity will be retained. I hope that the cultural commitment which the noble Baroness, Lady Kramer, mentioned, pervades those at the head of the new organisations and that it will be carried forward. In formal terms, consistency will be maintained by the operation of the memorandum of understanding between the two bodies, the PRA and the FCA, which we discussed in relation to other orders last week.

This is of course not the first time that there has been an attempt to reduce the number of pages. The FSA at one point consulted on it, but the answer it got back was, “Actually, we do not want the number of pages reduced significantly, because they tell us what to do, and if you reduce the number of pages, that puts more of a requirement on us to exercise our own judgment”. That is the balance that we are grappling with here. On the one hand, everybody wants less regulation, but when the consequence of less prescriptive regulation is that people have to exercise more of their own judgment, sometimes they become less keen.