Financial Services Bill

Baroness Kramer Excerpts

Committee stage
Monday 8th March 2021 Grand Committee

[Viscount Trenchard (Con) [V]]

My Lords, these amendments, which are technical in nature, require banks that prepare their accounts in accordance with international accounting standards to apply prudential filters discounting capital to the banks’ statutory accounts. Having read the amendment, I am not clear which is the tail and which is the dog. Amendment 74 in the name of the noble Baroness, Lady Bowles of Berkhamsted, requires a bank to align its accounts with its regulatory capital or prudential capital, and at the same time requires the bank to align its regulatory capital with its accounting capital, for three separate purposes.

I agree with my noble friend Lady Noakes’s forensic criticism of the amendment. I am not a chartered accountant, but I have worked in corporate finance and mergers and acquisitions for many years, and I find the amendment confusing. Does

“then the accounting numbers must have an adjustment to the … profit and loss account”

mean that the bank concerned must alter its accounting principles and adjust its accounts to use the prescriptive and conservative accounting principles used by the PRA for the monitoring of banks? If so, would a bank be required to restate past years’ published accounts for consistency’s sake? Proposed new paragraph (a) suggests that the PRA’s measurement of capital must be carried through to the bank’s accounts, but proposed new paragraphs (b) to (d) suggest that the bank’s regulatory accounts should be adjusted to conform with the PRA’s measurements. I am not clear how that can be done and what the PRA would have to say about it.

The amendment refers to international accounting standards, which were standards issued by the International Accounting Standards Board, based in London. EU legislation has continued to use the term “international accounting standards”, but they were replaced in 2001 by international financial reporting standards—IFRS. The noble Baroness confirmed that she meant IFRS rather than IAS in her amendment, but how does she intend that her amendment should affect banks that apply other accounting standards, such as American banks, which still prepare their accounts according to GAAP? Concepts in the amendment such as accounting numbers and regulatory capital need proper definition.

I have rather more sympathy with Amendment 77. The International Accounting Standards Board develops and issues IFRS for use internationally. In the EU, things are then at the discretion of the European Financial Reporting Advisory Group—EFRAG—which advises the European Commission on whether and how the IFRS should be adopted for businesses in the EU. EFRAG will consult the relevant national bodies as part of that process; for example, if a new or revised IFRS is issued by the IASB that impacts the banking industry, EFRAG will consult the European Central Bank on the impact of that standard before making a decision on its adoption.

Now that the UK is able to establish an independent endorsement process, it seems sensible that that process should similarly involve the Bank of England in matters relating to IFRS that may impact the institutions over which the PRA has regulatory authority. I am not sure whether the amendment as drafted is satisfactory, but I would support the introduction here of an endorsement role for the Bank. I look forward to hearing my noble friend the Minister’s views on that.

[Baroness Kramer (LD)]

My Lords, in this area I cannot pretend to have the scope of knowledge or the expertise of my noble friend Lady Bowles or the noble Lord, Lord Sikka, but I have a great deal of sympathy with their amendments which comes from long frustration with trying to deal with banking standards. I probably had some small part to play in the focus that the Parliamentary Commission on Banking Standards applied to looking at IFRS and other banking frameworks. I would defy almost anybody looking at the published accounts of Northern Rock, HBOS or RBS to have identified how fragile those institutions were and how easily they would crack the moment any pressure was applied to the very fragile arrangements they had in place. It is no wonder that it was missed by the regulators if they were looking at the disclosures that came from those institutions. They were not falsified; it is just that working your way through the disclosures very often discloses very little.

I spent a good part of my banking career trying to extract real and consistent information from accounting statements. That was largely in the States, so we were using GAAP, which I think many people will acknowledge tells one a lot more than IRFS ever does, but a bank has the resource to do that kind of deconstruction for a potential or existing credit client. Investment firms have the resources to do that kind of deconstruction, and so do regulators, but for any normal investor, and certainly for any smaller creditor such as a trade creditor, it is impossible to have those resources, as it is for any normal politician, even if in the end we carry the buck, in a sense, for whether or not we have a system that works. Over many years, the only clients who ever handed me a straightforward deconstructed set of accounts were Warren Buffett and Charlie Munger, who headed up the GEICO insurance subsidiary. They did it simply because they felt that bankers should know what was going on. That is a good enough recommendation for any company or regulator.

[Lord Eatwell (Lab)]

My Lords, I have sympathy with the concerns behind these amendments. As the noble Baroness, Lady Bowles, and my noble friend Lord Sikka have spelled out so clearly, there is an intimate link between accounting standards and effective prudential regulation. It is probably true that nothing has a greater impact on policy than the manner in which relevant variables are measured.

That relationship between accounting standards and prudential regulation has been exposed just this last week with the collapse of Greensill Capital, a supply chain financing firm. Its business model was based on flaws in UK accounting—that was how it worked. As the Financial Times reports:

“While a company that uses supply-chain finance owes money to a financial institution, accountants do not class these facilities as debt. Instead a company typically books the money owed in the ‘trade payable’ or ‘accounts payable’ line of its balance sheet, mingled in with all the other bills owed to suppliers. While a footnote to the accounts might explain how much of this line is made up of money actually owed to financial institutions, rather than suppliers, there is no requirement to disclose it.”


Lack of disclosure means that the supply chain has proved popular with struggling companies looking to mask their mounting borrowings. When nervous lenders remove these facilities from heavily indebted companies, it can create an effect similar to a bank run on their working capital position, whereby that quasi bank run then escalates into risk to the financial services sector. Who really suffers? Typically, it is the SMEs at the origins of the supply chain. Greensill is not an isolated example. Parliamentary investigations into the collapse of the Carillion group, already mentioned, found that it made heavy use of the Government’s supply chain finance programme. MPs investigating the outsourcer’s demise said that the scheme allowed it to “prop up” its failing business model.

This is a major concern in the prudential management of the financial services sector in the UK. If accounting standards and methods do not accurately represent the fragility or strength of an institution, especially a financial institution, they severely compromise our efforts at prudential regulation.

A quite different prudential and market conduct risk created by accounting standards arises from the fact—again already mentioned—that while the UK’s accounting standards apply IFRS, the US maintains its own GAAP different standard. Are the UK Government pursuing negotiations with the US Administration to encourage the adoption of a common standard, perhaps one that accurately represents the risks present in financial institutions?

The issues raised by the noble Baroness, Lady Bowles, and the noble Lord, Lord Sikka, require urgent consideration, not just by the accounting profession but by Her Majesty’s Treasury and by the prudential regulators.

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[Viscount Trenchard (Con) [V]]

My Lords, Amendment 78, in the names of my noble friends Lady McIntosh of Pickering and Lord Holmes of Richmond, seeks to commission a review of legislation relating to short selling. It is a pleasure to follow my noble friends Lady Noakes and Lord Sharpe of Epsom; I must say, I agree with everything they said.

From time to time in the UK and in other countries, financial regulators have sought to restrict short selling, as the British Government did to stabilise the market after the bursting of the South Sea bubble in 1720. While short selling has been blamed for market crashes and is considered unethical by some as it is a bet against positive growth, many economists and financial practitioners now recognise short selling as a key component of a well-functioning and efficient market, providing liquidity to buyers and promoting a greater degree of price discovery.

I note that, under the statutory instrument transposing the European regulation into UK law, the minimum threshold for the notification of short positions has been set permanently at 0.1% of the issued share capital of a listed company, whereas in the EU, the threshold will revert to the less onerous 0.2% of issued share capital on 19 March. I consider both thresholds unnecessarily restrictive and wonder why the Government have adopted a rule that will be even more cumbersome and bureaucratic than the EU’s, when the Prime Minister and the Governor of the Bank of England have said that we will get rid of red tape. The EU will relax its red tape on short selling reporting on 19 March but we will not. That is disappointing, is it not? What does my noble friend the Minister have to say about that?

In any case, the competitiveness of the market would be best served by removing the current restrictions on short selling. However, I do not think it would be helpful to place in the Bill this kind of requirement, which will add to uncertainty over the freedom to sell short in future and send the wrong message about the kind of regulatory framework the Government intend to adopt.

[Baroness Kramer (LD)]

My Lords, once again, I am moving outside of any area where I can claim expertise. Essentially, I have no problem with short selling in the right place and time and under the right regulations, but I am concerned that, in the current environment, any move to look at the regulations again would listen more closely to the noble Lord, Lord Sharpe, the noble Viscount, Lord Trenchard, and the noble Baroness, Lady Noakes—in other words, look for opportunities to reduce the restrictions on short selling.

We have had a number of exchanges on short selling in the Chamber. The noble Lord, Lord Leigh of Hurley, is particularly vocal, and I do not think that I represent him unfairly by saying that he believes that the restrictions on short selling that were set in place in 2012, which severely limited naked short selling on AIM, are too onerous and that relaxation would be a good thing. He would argue for bringing more liquidity into AIM. I remember that campaign, which was strong and led by companies that were either listed on AIM or wished to be so but that were concerned about becoming the target of speculators who were not interested in supporting sustainable growth but were very interested in bubbles. Of course, this is a risk that goes alongside naked short selling in particular.

I suspect that this issue will be reviewed; I am sure my noble friend Lady Bowles is right that it should be done in a much wider context—I think the noble Lord, Lord Holmes, agreed with that. But I would not work on the assumption that this comes from a concern that rules need to be tightened and safeguards increased; this will very quickly become a process of trying to see whether we can return to the old animal spirits and largely casino-like speculation that once fired London so powerfully and which many of us think largely contributed to the financial crash in 2007-8. While I understand the concerns of the City of London that it needs to make itself more of an exception in order to gather increasing amounts of business, I am rather disturbed if that mode of exception is to allow a great deal more risk to be taken in ways that then impact on the real economy.

[Lord Eatwell (Lab)]

My Lords, this request for a review of short selling is essentially a request to focus on just one of the aspects of the financial markets today that may contribute to enhanced instability in times of stress. It is not just short selling that involves the sale of borrowed assets—this is what the repo market, for example, is all about. The repo market was central to the dangerously short-term funding of the banking sector in the run-up to the financial crisis of 2007-9.

Of course, short selling is prominent because it is a factor in falling markets, when money is being lost, as opposed to similar practices in rising market bubbles, when money is being made. Of course, the short sellers sometimes get their comeuppance, as has been mentioned by several noble Lords in reference to the case of GameStop. The fundamental question is not whether short selling is a process that can be abused—of course it can. What is important is whether the very existence of the practice contributes to market instability and risk or, as has also been argued, to price discovery and greater liquidity.

Those questions may be asked of many practices in our financial markets today, and, at a time when the UK is rethinking its economic and financial future after leaving the European Union, perhaps the time is right for such a wider review of permitted practices. This could begin with consideration of the impact of trading in borrowed assets—as well as, of course, naked transactions—in forward markets.

Since the liberalising years of the 1970s and 1980s, a wide range of these market practices have developed, with potentially serious destabilising consequences—indeed, we have seen these. As such, does the Minister agree with the many noble Lords who have argued that it is time to stand back and think through whether matters have gone too far, are just right or have not gone far enough? Perhaps such a review is too specific for the regulatory framework review that is going on at the moment because, after all, that is about the framework. However, it is necessary to consider, from time to time, practices that will inevitably have downsides but may also have upsides. That sort of consideration should not be delayed at a time when market regulation is changing significantly, with the exit from the European Union.

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Individuals in this position need legislative protection from the Financial Conduct Authority. It is a matter of regret that so far the Government have not brought forward such an amendment, but there is always the possibility that they might accept this amendment or bring forward amendments on Report. I too commend the noble Lords, Lord Tunnicliffe and Lord Eatwell, on their compassionate and interventionist amendment which would protect people from a genuine humanitarian point of view. I note that this matter was raised in the other place by the Labour MP Stella Creasy and that at that stage it was rejected by the Government, but the noble Lord, Lord Tunnicliffe, said that that was perhaps in view of the fact that they were waiting for the results of the Woolard Review. The Government should put social justice and humanitarian matters along with compassion at the heart of financial policy and therefore should consider accepting this amendment, which would ensure that the Chancellor of the Exchequer conferred responsibility for the regulation of the non-interest-bearing elements of buy now, pay later to the Financial Conduct Authority, with such a duty to come into force no later than the beginning of 2022-23. This amendment, if accepted, would be a much-needed initiative in legislation to prevent those in debt getting further into debt. We must always remember that buy now, pay later schemes encourage all of us to spend when we might not have done so if we were simply using cash.

[Baroness Kramer (LD)]

My Lords, I read all the amendments in this group, and I found myself in support of every one of them. It is an excellent group. We all realise now that Amendment 136F, tabled by the noble Baroness, Lady Meacher, is in the wrong group, which I suspect is why she is not speaking on this group under the heading that I loosely call offences.

Picking up on that theme, I say to the noble Lord, Lord Leigh of Hurley, that he was the victim of an attempted fraud. It is astonishing that action did not follow. When we discuss that group of offences, one of my underlying concerns is about the lack of resources to pursue offences of any kind within the financial services spectrum, so I suspect that that is probably where the resistance has been coming from. It is an area that we need to resource properly, and we need to make sure that when a red flag is raised by an experience such as his there is follow-up, knowing that that will have been one of many attempts to defraud and that some of them will have succeeded. I hope that the Government will look at resourcing.

When I look at quite a number of the amendments in this group, whether on buy now, pay later, bills of sale or mortgage prisoners—which I think we will deal with in more detail later—it strikes me that all of them could have been headed off at the pass as problems if we had had an underlying duty of care. That takes me back to the first group of amendments that we dealt with, because with that in place we would not have had a regulator hanging back to see what the competitive implications were, whether or not various tests were reached and so on. It would have shaped very early the framework within which these activities sat. It really is a very strong argument for that duty of care.

On the excellent Amendment 79, I understand, following Chris Woolard’s report, that we are to expect action. The Woolard report raises the issues in detail; I will not repeat them here today but I will say this: if the FCA does nothing more than introduce an affordability test, which is how it tried to manage the payday lenders, we can guarantee that this House will intervene. We will expect stronger action than that, to make sure this problem is grasped—and not allowed to encourage people to fall into debt which frankly they cannot handle—and to put a proper framework around what is essentially a form of lending. I note in that context that Klarna is described today as the most valuable new start-up in Europe; its rate of growth and the appetite for buy now, pay later should set alarm bells ringing.

I thank the noble Baroness, Lady McIntosh, for supporting my Amendment 92. It is a probing amendment that deals with a crucial aspect of financial inclusion—I find echoes of this in some of the words of the noble Lord, Lord Holmes. The inadequacy of basic bank accounts and the reluctance of many of the banks that offer them to engage with the needs of basic bank account customers is an underlying problem. It certainly means that basic bank accounts do not lead to appropriate vehicles for people in the most disadvantaged end to borrow or save, or to engage much more broadly with financial service products. In this day and age, that is a serious issue.

The situation is better today than it was a few years ago; I remember listening to high-street banks who would encourage those coming in to open a basic bank account to go down the street to Nationwide, where they would receive a friendlier reception. Basic bank accounts were regarded just as cost; this was not only inappropriate but meant that those who were welcoming ended up with the greatest share of the burden. I have always taken the view that trying to make an institution provide a service to a customer that they do not want will mean a failed product. We have about 7.5 million people with basic bank accounts and some 1.2 million people completely unbanked. We have to grasp this nettle.

In the United States, intended or not, the approach to people who have been shut out of the financial services system has been different and rather more effective. I would like the Government as well as the regulators to go away and look at it. Under the Community Reinvestment Act 1977, any bank that sought permission to acquire or merge with another bank—something almost every bank was doing at the time—was required to demonstrate that it fully served the disadvantaged communities in its service area. As a civil rights measure, banks were basically red-lining African American, Latin American or Central American communities. They were allowed to serve those communities by supporting local institutions identified as much better fitted to the purpose. This gave a new lease of life to community development financial institutions—CDFIs—of all kinds, including credit unions and community banks. The major banks invested in them to pass that threshold and be able to do acquisitions and mergers, and supported them with expertise in marketing and technology.

I would very much like to see that model here; that is the purpose of my amendment. The DWP’s 2019 report on financial inclusion states:

“Social and community lenders such as credit unions and … CDFIs … provide a lower cost alternative to high-cost lenders, they are small in comparison and lack the visibility and capability to compete at scale. The UK needs a much larger, more vibrant social lending sector”.


CDFIs know the needs of their clients—that is where their work is targeted. They often work with local charities and civil society groups to provide money advice, business advice and a wide range of additional support to make people financially capable.

Some investors in the UK are developing new entities in this space. I am aware of two potential new mutuals, one in the south-west and one in London, targeted at this group of people. The recent report by Ron Kalifa on fintechs identified that new fintechs have the capability to provide a tailored, low-cost offering. But the reality is that very few new players have emerged to serve the excluded sector, which tells me that the system that we have at present is not working. I want all major UK banks to engage with this sector and for the regulator to make it a requirement, not just an act of charity or public relations. That could be done within the banking licence or through regulation, but that would change it from being a passive set of actions to an active way in which to make sure that this gap in the market is filled by people capable of doing it well.

I thank the noble Lord, Lord Naseby, and others who supported Amendment 93, which deals with the current and accelerating crisis of access to cash. The Government promised legislation at last year’s Budget, but there is no sign of it yet. Covid has driven a sharp drop in cash usage from three in 10 people before the crisis to just one in 10 people. That is a huge drop, but it still leaves about 5 million people who rely on using cash. Of course poverty and age are often a characteristic, but for many people it is a strong cultural preference; they want to use cash, and it is really their right.

As I understand it, the Government are going to follow the direction recommended by the noble Lord, Lord Holmes; they will be able to confirm whether that is correct. That would permit retailers to provide cash without a purchase, which would help, but it is still very hit and miss. The Access to Cash Review done by Natalie Ceeney in 2019 highlighted the fact that retailers’ reluctance to accept cash is driving a lot of the change. Bank branches are closing across the country, especially in rural and disadvantaged communities. LINK, the largest cash machine network, has a contract with the Post Office, but it has about 18 months or so to run. Free-to-use ATMs are disappearing fast; when I talked to the industry, the estimate that I was given was that, if we do not do something quickly, half the ATMs in the country will be pay to use within 18 months.

We will need intervention by the FCA. Lots of commercial companies are involved in the system and any change or rationalisation throws up competition issues. The banks, for example, could be given an obligation to provide free access to cash but then allowed to use a utility model whereby they combine to provide free, shared smart machines capable of a range of services, perhaps with an assistant present to help users to navigate the machines. That changes how we think about this issue quite dramatically—and normally we would have time to do that, but we are now faced with an urgent situation.

I quote one final phrase of Natalie Ceeney’s report, because to me it says it all:

“It is … critical that action is taken now, so that no-one is left behind.”


I recommend that the Government take urgent action to deal with access to cash.

[The Minister of State, Cabinet Office (Lord True) (Con)]

My Lords, I thank all those who have spoken very genuinely, because we are considering an important group of amendments on consumer access to credit. I am very grateful for the continued and thoughtful interest of noble Lords in this area. I assure all those who have spoken that we are listening carefully and will read this debate.

Amendment 79 would require the Treasury to introduce legislation to bring buy now, pay later products into FCA regulation, to which all speakers referred. The Government are committed to protecting the interests of consumers and, since Second Reading, as the noble Lord, Lord Tunnicliffe, said in moving his amendment so ably, the Woolard Review has recommended that these products should be brought into the scope of FCA regulation. The Government are acting swiftly, following the outcome to this review, just as the Economic Secretary committed to do during this Bill’s passage through the other place. That is why, on 2 February, we announced our intention to legislate to bring them into regulation. However, it is important to know that these products are interest free and, therefore, inherently lower risk than most other forms of borrowing, so it is essential that regulation protects customers in a way that ensures that they can continue to use these products to manage their finances, rather than more expensive forms of credit on which they might otherwise rely. The Government therefore intend to consult stakeholders to ensure that a proportionate approach to regulation is achieved.

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[Lord Stevenson of Balmacara (Lab) [V]]

My Lords, I believe the House owes a great debt of gratitude to the noble Lord, Lord Sharkey, for the work he has been doing on this issue over the last nine years. I have been involved in part of the process, which is why I put my name down to speak: like him, I feel rather confused and not a little embarrassed that no action has been taken in recent years.

Like the noble Lord, Lord Sharkey, I first got involved in this when policy changed in the early part of the coalition Government and new arrangements were introduced for interest-bearing loans and, eventually, maintenance loans. I recall that in about 2014 there was the consultation process described by the noble Lord, Lord Sharkey. As I was then the Labour spokesperson on higher education in your Lordships’ House, I got a lot of correspondence, exactly as he described, from potential students and some existing students. Potential students wanted to know whether at the time they applied and went to higher education there would be a real chance of there being loans that they could take out that would not be a problem in terms of sharia compliance. More worryingly, students who were already at university in the middle of their course found that they could not continue without a guarantee in some form that finance would be available to allow them to see out their course.

In a sense, we were all trying to do the same thing. Indeed, I sat in on meetings with the Higher Education Minister at the time, Jo Johnson, and other colleagues in the House. We had meetings with representatives of Muslim students and the community at which a lot of these issues were explored. When the Government took powers in the 2018 Act, as described by the noble Lord, Lord Sharkey, to ensure that they could facilitate the production of loans of this type, we thought the matter was over. Indeed, I wrote to a number of people I had been working with saying that we thought that the process had reached its natural conclusion and that it was just a matter of time before the Government brought forward the necessary proposals.

As we have discovered, that has not happened, and although there have been promises and suggestions that it was coming, it has not. The Government have got themselves into a very bad position here. I cannot believe that it is impossible to go forward—as the noble Lord, Lord Naseby, said, just to do it—and I am looking forward to hearing the Minister’s response. If there is anything we can do to help, he should be sure that there is, as the noble Lord, Lord Sharkey, said, no politics in this. We simply want a good job done to make sure that all people who contribute and wish to contribute to higher education in this country can do so and are not in any sense disadvantaged simply because of their religion.

[Baroness Kramer (LD)]

My Lords, any one of us can go on to our smartphone and find an app for halal financing for someone who wants to buy a car or a house—they are called “halal mortgages”—or who needs money to support a small business. It is incredible and quite incomprehensible that we do not have a sharia-compliant version of student loans. It is not as though we do not know how to do it or the institutions do not exist in the UK. I suspect that many noble Lords have been, like I have, at general meetings of the financial services industry where, as well as talking about being world leading in terms of green finance, we have talked about London as a very important centre for sharia-compliant finance as we attempt to expand and have a much greater global reach. Six years is an incredible time to wait. It has been four years since enabling legislation was put in place.

I was looking at a Metro article on the web about students who were interviewed in 2019. Some had managed to put together a way to pay their student fees. One said:

“I was constantly broke as a student and never, ever did anything remotely fun. I always felt too guilty if I spent any money on myself.”


Students who started out and found that they just could not keep going left and went to work, but then found that, as this lady said,

“to progress further I need that degree so the plan is to go back.”

However, this young woman has no idea how to finance it. Another youngster talked about the stress of

“having to live scrupulously and scrape up enough to pay each instalment in time.”

We really should not be putting any student into this situation. I do not understand the delay. There does not seem to be an obstacle in terms of designing the appropriate facility or the appropriate legislation. I hope that the Ministers who are here, all of whom are people of understanding and sympathy, will go and put pressure on the Government to take this from the bottom of the in-tray and put it at the top. It could be a minor amendment that we make on Report.

[Lord Tunnicliffe (Lab) [V]]

My Lords, the last Labour Government were supportive of facilitating access to sharia-compliant financial services, and we understand—and welcome—that Her Majesty’s Government have made similarly helpful noises during their time in office. This is an interesting time for financial services as some firms prioritise divesting from fossil fuel projects, and so on. If such moves are possible, surely we can make progress on services that do not have involvement in industries such as gambling or alcohol?

Amendment 88 raises the issue of sharia-compliant student finance, which was subject to a recent e-petition on the Parliament website. In their response, the Government recalled their consultation on the matter back in 2014 and said that they intend to publish an update on progress later this year. While we appreciate that it takes time to engage with communities to understand their needs, evaluate feedback, devise new schemes and ultimately make them operational, there has been a significant wait for new products, and we need evidence from the Minister that we will soon turn a corner.

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[Viscount Trenchard (Con) [V]]

My Lords, my noble friend Lord Blackwell’s amendment is an interesting idea and deserves serious consideration. It requires the establishment of a new joint co-ordination committee, comprising delegates of both regulators under the chairmanship of the Governor of the Bank of England. As long as we retain a “twin peaks” regulatory structure, it is clearly right that both regulators carry out their duties in a co-ordinated manner, ensuring that their activities are consistent and proportionate in meeting their respective general duties and objectives.

At the time of the introduction of the “twin peaks” system, we were told that it was necessary because there was a conflict between the interests of the consumer and those of the Government in maintaining financial stability. However, the FCA is responsible for both consumer protection and the prudential regulation of all regulated companies except very large ones that are considered systemically important. Might not the best way to be sure that the regulators’ actions are consistent and proportionate be to merge them into a single regulator—the FSA—but leave the Bank responsible for macroprudential regulation?

As I failed to add my name to the speakers’ list for the group of amendments beginning with Amendment 2, debated on 22 February, I was able to speak only briefly after the Minister. My noble friend’s amendment deals with much the same ground, which gives me an opportunity, with the Committee’s leave, to make some of the points that I had wanted to make on the first day.

My noble friend’s amendment seeks to ensure consistent priorities between the two regulators. This is hard to do if the objectives confer conflicting priorities on the two regulators. Indeed, it can be argued that being dual regulated at all is time-consuming, expensive and unattractive. However, I strongly believe that we must move quickly to maximise the attractiveness of London’s markets in order to be assured that the City, including our wider financial services industry, will remain one of the two truly leading global financial centres, with all that that means for our prosperity as a nation.

In 1999, I was privileged to serve on the Joint Committee on Financial Services and Markets under the chairmanship of the noble Lord, Lord Burns, during my first incarnation in your Lordships’ House. At that time, we considered arguments that the FSA should be given a competition objective as a fifth objective. This was supported by the BBA and the ABI, but the Government argued, and the committee ultimately decided, to put competition and competitiveness among the principles rather than the statutory objectives. Two arguments that led us so to decide were that ensuring competition was the primary task of the OFT, not the FSA, and that making competitiveness of UK financial services an objective could damage the FSA’s relations with overseas regulators. Our report at that time noted that some members of the committee would have preferred competition and competitiveness to feature among the FSA’s statutory objectives.

Much water has flowed under the bridge since 1999. Following the financial crisis of 2008, the FSA was split into two regulators, and we adopted the “twin peaks” model that had first been introduced by Australia. On 22 February, my noble friend Lord Howe said that discussions about the balance of the regulator’s objectives

“are not arguments for today. The Government’s future regulatory framework review is considering how the UK’s financial services regulatory framework must adapt to reflect our future outside of the EU. That has to be the right place to consider issues such as the regulators’ objectives”.—[Official Report, 22/2/21; col. GC 142.]

The Minister’s response was disappointing. Does he not agree that our departure from the EU and freedom to adopt an entirely different, principles-based, outcomes-oriented regulatory model suggests that the Government should look seriously at this question as soon as possible?

Some encouraging proposals are included in the phase 2 framework consultation, such as the introduction of “activity-specific regulatory principles”, described in section 2.38. However, it seems that the Government do not plan wholesale changes. They conclude in section 2.46 that these regulatory principles could bring about

“enhanced regulator focus on … competitiveness, without needing to change the regulators’ overarching objectives”.

Such an approach is dangerously complacent. Can the Minister confirm that the Government agree with Andrew Bailey that it would be unrealistic and dangerous to stick to EU banking rules in the future? Surely, in financial services, where we enjoy the advantages of scale and can influence the emergence of global consensus around principles-based regulations that support innovation, we should move quickly to establish the right regulatory framework to do that.

Co-ordination between our two regulators has served us fairly well to date, but it is likely that the regulators will continue to face difficulties inherent in a multi-agency regulatory structure where the performance of one regulator is often dependent on that of the other. There is also a challenge in establishing the borders of financial regulation for allocating functions between the FCA and the PRA. In particular, the increased focus on systemic stability and macroprudential regulations has resulted in overlap between the two regulators. The FCA has responsibility for the prudential regulation of more than 24,000 firms in the UK, whereas the PRA is responsible only for the prudential regulation of some 1,500 systemically important banks and investment firms. Further, the “twin peaks” system is inherently anti-competitive for dual-regulated banks and investment companies, which have to report a large amount of monthly data in two different formats to two different regulators.

The PRA’s secondary competition objective is, by definition, subordinate to its other two objectives. In effect, it is simply a principle to which the PRA should have regard. Many countries have financial regulators that incorporate some kind of competition objective among their statutory objectives, and I do not think that there is any evidence that this has damaged their relationships with either the PRA or the FCA.

Furthermore, in his recent report on competition and markets, John Penrose found that

“our independent competition and consumer regulation regime currently has a good reputation, but not a great one. International rankings put our major competition institutions behind USA, France, Germany, EU and Australia. We have stopped making progress on cutting the costs of red tape and, in recent years, have gone backwards”.

This is largely as a result of a constantly increasing number of sectors, including many in financial services, being caught by the tentacles of the very cumbersome, expensive and complicated system of regulation that has been increasingly pushed by the Commission in the interests of harmonisation.

We have prospered and succeeded as a global financial centre not because of our EU regulatory framework but in spite of it. We may have devised much of the financial regulation ourselves and may even have gold-plated some of it, but we did not choose to work within the codified structures on which European law is based. Besides, our regulators are not that different from anyone else’s: they like to make rules, and gold-plating has been the only way that they could do that in recent years.

As Barnabas Reynolds explains well in his recent paper, published by Politeia and entitled Restoring UK Law: Freeing the UK’s Global Financial Market, common law is

“pivotal to the success of a global financial centre … A key element of London's attractiveness to investors is its legal framework, which underpins a flourishing commercial environment with the rule of law”.

I worry that the Government do not yet recognise that we have to replace the entire directives-based, cumbersome, EU-derived financial services rulebook and go back to something more like how we used to regulate: based on common law principles and outcomes. There is huge resistance to change among trade associations and larger financial services groups because the present system helps the strong incumbent against the innovator and the challenger—and is, in fact, a form of protectionism.

I look forward to hearing what my noble friend the Minister intends to do to move in the direction in which we need to go. I believe that my noble friend’s amendment may provide a first step on that journey.

[Baroness Kramer (LD)]

My Lords, I will respond to the noble Viscount, Lord Trenchard. I for one would be very reluctant to go back to the pre-2008 principles-based approach to regulation that led us into a long, slow crash that, frankly, seriously undermined the financial stability of the UK and caused years of austerity. I do not think that is a good example to hold up of the world that we want to return to.

When the FCA and PRA were created—at that point the latter had a degree of independence from the Bank of England, although I think the Governor was always going to be its chair—one of the reasons that it was important to keep some distinct separation was to prevent the groupthink that had been fundamental to the failures that led to 2007-08. Those were failures to identify systemic risk, to ask questions, to create challenge and to recognise that conduct and prudential regulation are equally important in keeping a system as complex and difficult to regulate as the financial services industry on some kind of transparent and rational platform.

--- Later in debate ---

[Baroness Neville-Rolfe (Con)]

My Lords, I am delighted to follow my noble friend Lady Noakes. Like her, I was struck by the comments of the Governor of the Bank of England, and I feel she has given us a welcome dose of reality this evening.

I speak as a member of the EU Committee and its Services Sub-Committee. We have wrestled long and hard on the vexed question of the granting of equivalence by the EU, including the important issue of reciprocity, highlighted by the noble Baroness, Lady Bowles. I want to make three points and ask one question.

First, once one has decided to leave the EU, it makes little sense to be tied to its rules and regulations—in effect, as the Governor of the Bank of England has said recently, thereby becoming a rule taker without being able to make any input to the new rules. So we will have to plough our own furrow on financial services. But that does not stop us agreeing equivalence arrangements in areas where there is strong mutual interest such as central counterparties, known as CCPs, already temporarily approved, and perhaps insurance. We have granted equivalence to European banks and other bodies, as has been said, and the prospect of maintaining that equivalence gives us some leverage.

Secondly, I do not see why we should necessarily refuse equivalence to third countries which do not have similar legal and supervisory standards. Flexibility is important if we are to welcome investors here, and they may have different yet adequate regimes, bringing in innovation and diversity of offer, which could be valuable in the UK. Trade in services is absolutely vital to the future of this country.

Thirdly, I can see the value of some form of reporting to Parliament, as proposed by the noble Lord, Lord Tunnicliffe, in Amendment 100 and my noble friend Lord Hodgson in Amendment 105—although in different ways. Even on the EU Committee, we have had the greatest difficulty extracting information on the progress of negotiations on financial services, partly because this is in the hands of the Treasury and its officials, while the main spokesman has been my noble friend Lord Frost, who has led our negotiations across the board with such tenacity.

My question is this. How does my noble friend the Deputy Leader feel about the balance between UK-owned banks and financial service operators and their EU competitors now that we have granted equivalence and the EU, in the main, has not? Am I right in thinking that a German bank such as Deutsche Bank, a Dutch bank such as Rabobank or a French asset management firm such as Amundi is regulated in its own country and less subject to UK regulator bureaucracy and aggressive enforcement of something like MiFID than its UK counterparts? Is there any sense in which it is privileged, and is this true also of smaller operators? Does this matter to UK plc?

[Baroness Kramer (LD)]

My Lords, I shall begin by addressing Amendments 100 and 105, which would require reports that would be both useful and interesting. However, I want to pick up the point that was made by the noble Baroness, Lady Noakes, who essentially took the position—I understand its logic—“Why bother to seek equivalence from the EU?” I think she said, “They wish us ill and see a competitive advantage in not offering equivalence.” However, I do not think she listened carefully to my noble friend Lady Bowles, who comes with a great deal of experience from the EU. The point my noble friend made is that in the EU, which is a rules-based organisation —that is its absolutely core fundamental structure—it is quite hard to offer equivalence to a financial centre where those who are regulating it make it very clear that they want great flexibility to be able to make change very easily and with very little process. That is what we are doing with this Bill.

Essentially, we are removing the normal parliamentary processes that would have been engaged in the process of changing regulation and leaving it in the hands of the regulator, with, as we have all discussed, virtually no accountability to Parliament. It seems from what we read that a 12-week consultation would be about all that is required for a regulator to change the rules, compared with the process in the EU, which people may regard as cumbersome but which has with it extensive consultation, engagement and oversight, and which flushes out exactly what is associated with, what is involved with and what the consequences are of that rule change. We will now have light-touch rule change—that would be an accurate way to describe it. In an atmosphere where there is very little trust—the language certainly has not been that which would develop and promote trust—I can certainly see why the EU would be uncomfortable with the idea of offering equivalence in those circumstances. Therefore, it is not a determination to do us ill but, to a significant degree, some shock that change will happen so often that it will have very little idea of the rule base that applies in the UK and certainly will not understand its various ramifications.

However, in a sense it really does not matter. I find it quite shattering that we have a Government—the noble Baroness, Lady Noakes, seems to be aligned with them—who say, “We are really not interested in being able to sell our services into the second-largest economy on the globe”—whether measured by population or in terms of GDP. That is a huge and significant market. We have never been successful at selling financial services into the United States, partly because it has its own, very stalwart financial services sector. I suggest that selling financial services into China will be exceedingly difficult over many years. China will wish to develop its own financial centre; it has Hong Kong. We begin then to look at countries across Asia and in South America. However, I think we will find very shortly that they intend to develop their own financial centres. When I have talked to people in India, they would be willing to do some work here with people in the UK but they want to develop Mumbai. We are seeing a regionalisation of economic blocs, which will lead to a rise of significant financial centres in other locations across the globe. There is a real danger in dismissing with a wave of the hand the customers who sit on our doorstep, who have traditionally been our core customers, and saying, in essence, “It really doesn’t matter whether we are able to sell them services. Let’s look elsewhere.” I am not sure that “elsewhere” looks quite so promising.

What I found most interesting in this whole debate was a very different set of questions raised by my noble friend Lady Bowles. To me they were, if you like, the financial services equivalent of the chlorinated chicken question. As we go out and seek to sell our financial services more broadly, presumably, many of those locations will turn to us and say, “You can sell to us provided we can sell to you. We’re developing our financial sector and we would like to have access to your markets.” My noble friend was asking: what standards will we be using to determine that reciprocity? As I say, it is the chlorinated chicken question. We have not heard much—or anything, frankly—from the Government about what standards we will apply under those circumstances.

It seems to me that, when we assert that we can find markets all over the globe that will take the place of the EU—and that this can be done rapidly and very easily—we have to answer that question. Are we going to have to pay the price of providing reciprocity to financial centres whose standards do not meet our own? What are the consequences of that if those entities are then freely able to enter the UK market? We have a long history of concern about money laundering and market abuse. There are very serious questions associated with that; I would like to begin to hear some answers.

[Lord Eatwell (Lab)]

My Lords, I have been very struck by this particular debate and the positions taken by Members of the Grand Committee. I approach this question of our future financial services relationship with the European Union with a sort of historical perspective. In a way, the financial services industry in this country is unique in the history of financial centres in that it is a financial centre without any significant savings or economic hinterland. The great financial centres of history—be it Venice, Amsterdam, 19th-century London or 20th/21st-century New York—have thrived on a powerful flow of domestic and imperial savings, and have tended to fade when that flow has dried up.

The fact that the City of London has continued to thrive even as Britain has lost its Empire and the UK economy has lost its dominant position is no doubt due to a remarkable concentration of talent and entrepreneurship; to the remarkable luck of widespread access to financial markets around the world; and to becoming, as the noble Viscount, Lord Trenchard, pointed out, the financial centre of the European Union. The international liberalisation of the 1980s and the creation of the European single market gave the City access to that economic hinterland and the opportunity to provide financial services throughout an open market.

As we know, the openness of the European market for financial services to the UK is now in question. As this Bill makes clear, access that was previously open is now potentially closed and hanging on this delicate thread of equivalence. It is interesting to see that the Bill is nervous about equivalence. On page 65, we read that

“the FCA must consider, and consult the Treasury about, the likely effect of the rules on relevant equivalence decisions.”

On page 82, we read that

“the PRA must consider, and consult the Treasury about, the likely effect of the rules on relevant equivalence decisions.”

That nervousness is well founded. I agree with the noble Lords who have been critical of the European Union that the likelihood of equivalence being the foundation of successful financial activities for the City’s continuing growth in Europe is at least in great doubt. Indeed, just imagine the chief executive of a big international bank or an asset manager with a large number of employees in London telling the board of directors that they are planning their long-term investments on the shaky foundations of a political equivalence ruling by Brussels.

At the moment, the only thread that seems to be at least holding and maintaining the potential of access to a market of 500 million people is the memorandum of understanding, which was due in June but is still apparently debated. However, a draft that was leaked to the Politico website

“states categorically that equivalence findings remain unilateral decisions, meaning the U.K. would have no recourse if the EU opted to withdraw it.”

The draft does propose the creation of an EU-UK financial regulatory forum but this resembles the arrangement with the United States that is defined as “strictly informal”. I think that access will be diminished, perhaps significantly. That is the only certain conclusion we can make. Perhaps the Minister will tell us more about the progress of the memorandum of understanding when he sums up.