Financial Services and Markets Bill

Baroness Kramer Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

[Lord Forsyth of Drumlean (Con)]

My Lords, I agree with everything that has been said by everyone in the debate so far and support all these amendments. I know that my noble friend Lord Bridges is mortified that he cannot be here today. We discussed the arguments and I supported them in Committee. The noble Lord, Lord Eatwell, is absolutely right about how this would have gone down in the Treasury. But I do not want to be grudging, given the amount of movement that the Minister has been able to achieve as a result of the debate, and the government amendments in this group will make a difference. We are dealing with the old “Quis custodiet ipsos custodes?” problem here. This group of amendments would have taken it a lot further forward, although the government amendments are helpful.

I do not want to anticipate the next debate, but the key question will be, as a number of noble Lords have pointed out, the resource that is made available. If it is not to be through a body such as the OBR, as my noble friend Lord Bridges was suggesting, it will have to be provided by the parliamentary authorities. Whether that will work, and how effective it will be, will depend on the extent to which the Government give a clear indication that they would welcome it, although it would be a matter for the House. I suspect that would be helpful.

I thank the Minister for having listened to the debate in Committee, which we are in danger of repeating, and having taken some measures, if not going perhaps as far as my noble friend Lord Bridges’s Amendment 64 would require. I also thank the noble Baroness, Lady Bowles, for so ably making the case for it.

[Baroness Kramer (LD)]

My Lords, I will speak very briefly. It will be evident to the House by now that, as was true in Committee, essentially every speaker takes one position, other than the Government. Maybe one or two support the Government’s position, but overwhelmingly there has been a common feeling across political ideologies and views. People from different perspectives, including those who are independent in this House, all share the same set of concerns.

We all particularly welcomed the amendment from the noble Lord, Lord Bridges, because it was a piece of completely new thinking—a way to break the conundrum very effectively by making sure that an office of financial regulatory accountability would change the game by providing Parliament and anyone else responsible for scrutiny and accountability with the analysis, information and data they need to do that effectively. I very much hope that the Government will take it away and consider it.

I join all other noble Lords in finding not only the amendments from the noble Lord, Lord Bridges, but those from the noble Lord, Lord Eatwell, and the others in this group extremely constructive. I vary slightly from the noble Lord, Lord Forsyth; I understand that the Government have moved a little in the amendments they have brought forward in this group but, my goodness, it is a baby step. This issue is far too big to be dealt with only by baby steps.

[Baroness Chapman of Darlington (Lab)]

My Lords, I start by acknowledging the government amendments in this group, which make a number of changes that we think are sensible to ensure that the cost/benefit analysis panels have representatives from industry, to allow the Treasury to direct statutory panels to make annual reports and to make it the Treasury’s job to appoint the complaints commissioner. These all represent steps in the right direction—even if, as the noble Baroness, Lady Kramer, has just said, they are not necessarily the giant leaps that some would hope to see.

We tabled Amendment 39 in this group, which would require the FCA consumer panel to produce annual reports on the regulator’s fulfilment of its statutory consumer protection duties, and my noble friend Lady Hayter explained why we were backing this so firmly and spoke about the work with the British Steel pensioners, led by Nick Smith. She saved my blushes because Nick is my husband. I know that is not a declarable interest, but in the interests of transparency, I should probably let people know. We are pleased to see Amendment 50 and will not be pressing our Amendment 39 to a vote because of it. We believe that the government amendments go a significant way to addressing our concerns, so will not press our amendment, but that does not mean that we are convinced that consumer issues are by any means resolved, and we may have to revisit this topic in future.

The noble Baroness, Lady Bowles, helpfully introduced the amendments tabled by the noble Lord, Lord Bridges, and presented his proposal for an independent office for financial regulatory accountability. This is an interesting proposal but, when considering the Government’s numerous concessions on scrutiny and accountability, at this point we would not be minded to support it at a Division, because the creation of such a body needs significant work and amounts to a fundamental change in how we regulate the sector. We do not want to pre-empt what the Minister has to say, but it was not a core focus of the future regulatory framework review, the outcomes of which the Bill seeks to implement.

The amendments from the noble Lord, Lord Bridges, raise important questions about the capacity of parliamentary committees to scrutinise the regulators’ output, and this is something we have consistently raised with the Minister during our private discussions. When I say “we”, that is very much the royal “we”—I obviously mean my noble friend Lord Tunnicliffe. I am sure that he is grateful to the Minister for the time she has given to him, to my noble friend Lord Livermore and to me in recent weeks. While we understand that it is for Parliament to make its own arrangements, both now and in future, we hope that the Government will acknowledge the substantial workload that committees will have and remain open-minded about whether and how the regulators can better facilitate Parliament’s work.

I am especially grateful to my noble friend Lord Eatwell for his amendments to the OFRA texts, but I suppose this highlights in part the difficulties with supporting the detail of the proposal at a Division at this point. We see that many people agree with the principle, but there is probably a great deal more work to be done on the detail.

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[Lord Carrington of Fulham (Con)]

My Lords, I will add my two cents’ worth to encourage the establishment of a Joint Committee. I cannot believe that having a committee in each House of this Parliament would work effectively, for all the reasons that the noble Lord, Lord Eatwell, has suggested. The committees of this House and the other place are grossly underresourced in any case. We need a committee looking at something as detailed and complex as this which operates in the way that the Public Accounts Committee in the other place is set up, is dedicated to look at regulation and has the resourcing to double-guess not only the regulators but the advisers who advise them, so that it can stand up and come to its own opinion. In the small time that the members of those committees are able to dedicate to the committee, with all the other duties they have as parliamentarians, it should be able to analyse the evidence and come up with sensible, and inevitably highly technical, solutions.

I have some experience of the committees of both Houses. I chaired the Treasury Select Committee, donkey’s years ago, and I served on the Economic Affairs Committee here for some time. Neither of those committees has the resources to be able to undertake this kind of task. It needs a completely new structure. Possibly the only model we can look at is the PAC, which has the National Audit Office advising it very closely. I am not suggesting we should set up a national audit office for regulation, although I know my noble friend Lord Bridges has suggested such a thing. We need to make sure that whatever is set up is properly resourced. I recognise that it is a matter for both Houses to decide how they do that, but we have to be absolutely clear that both Houses can do that only if the financial resources are made available by His Majesty’s Treasury and the Government to enable them to do so. It will be a decision to be taken by His Majesty’s Government and my noble friend the Minister to ensure that the resourcing is available.

It is a necessary step. However, it is a step and almost certainly not the conclusion. Once we have experience of regulating the regulators, we will be able to judge what other changes are needed to make sure that the regulation is effective and that financial markets in London are regulated in a way that is effective and convincing for participants in those markets on a global basis.

[Baroness Kramer (LD)]

I congratulate the noble Lord, Lord Forsyth, on being so persuasive. The Government have listened carefully to his advice and have come forward with amendments that are identical in their outcome, even if perhaps they have found a more effective or legally acceptable way to set out the wording. I am sure that that is a step forward, but I want to join the chorus.

I had the privilege of being on the Parliamentary Commission on Banking Standards, which in effect was a Joint Committee of both Houses. It was very much driven by the Government, who set it up in the first place, and it was properly resourced. From the work we did over the two years, there are two lessons to be drawn. One is that, with that resource, you can genuinely produce the evidence and go into the detailed questioning that is necessary to expose what may not have been obvious from a superficial or limited inspection; in-depth was possible because of the resource that was made available. The second lesson is that as a Joint Committee—I am very attracted to Joint Committees, as they avoid the duplication that others have talked of—that commission received a degree of respect and significance that is probably not available to a committee that is the creature of one House but not the other. The joining together of the forces of both Houses was meaningful.

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[Lord Holmes of Richmond (Con)]

My Lords, it is a pleasure to take part in this debate and I will speak to Amendments 82 to 85 and 110 and 111 in my name. I start by thanking the Minister and Treasury officials for all the work they have done around access to cash and, indeed, the moves they have taken. It is great testament to all those organisations which have campaigned on cash for so many years, and will make a real difference to people up and down the country.

Without in any sense pre-empting the work that the regulator and others will do on this, I ask my noble friend the Minister to set out some thoughts on what reasonable access might look like. What are the Government expecting? Allied to that, while I join her in welcoming the increase in the number of shared banking hubs that are coming online, what do the Government see as a reasonable number of hubs to be open by the end of this year?

My Amendment 82 seeks to go further and is really predicated on a very simple belief: what point is access to cash if there are no places to spend it? What currency does cash have in those circumstances? The start point would be really to have all businesses with a physical presence mandated to accept cash. Stepping back from that, as my amendment does, does my noble friend the Minister not agree that any government service, be it central or local, and any public service, particularly that which involves a payment, must accept cash? Similarly, any third party acting on behalf of national or local government in performing a public service should be mandated to accept cash. Does my noble friend see it as reasonable for any business, private though it may be, with a turnover of £100,000—as set out in my Amendment 82—to have to continue to accept cash while we move and transition towards a more digital financial services system?

Amendment 83 seeks to make our cash network part of the critical national infrastructure. There are two key reasons for this. First, it would enable cash usage, enable the economy to work and enable financial inclusion. Secondly, does my noble friend the Minister not agree that, when one looks at the current geopolitical state of the world, making the cash network part of the critical national infrastructure would provide a good second and third line of resilience if the digital systems should go down or suffer an attack? As things stand, that is not beyond the realms of possibility.

Amendment 84 addresses banking services specifically and would enable the Treasury to determine that such services must be available on a high street with a certain number of shops and premises. Banking services would include withdrawals and deposits and must cover both individuals and businesses. Indeed, as the amendment sets out, if there is a last branch standing, that branch should not be allowed to close unless alternative provisions are already in place, such as a banking hub.

Amendment 85 addresses the accessibility of financial services and products. This is differentiated from access to financial services, although there are some obvious overlaps. The amendment points out the difficulties with the accessibility of certain financial services and products. The obvious and most easy example to understand is card payment machines where the buttons are removed and there is merely a flat screen. They are completely inaccessible for me and thousands of people.

In Committee, my noble friend the Minister talked about discussions between the Government, the RNIB and other organisations. Can she update the House on where those discussions have got to? How will the Government ensure that, whether one is paying for a meal or a bicycle, the means of payment is accessible for all those seeking to use it?

Amendment 110 addresses the need for a review of access to digital financial services and products. I raised this in Committee and do so again because it seems highly necessary and a logical next step from the Access to Cash Review, which was completed in 2019. Although I am a staunch supporter of cash and people’s access to and acceptance of it, the future is digital. However, we must ensure not only that that future is accessible but, equally crucially, that the transition to it is accessible. Does my noble friend the Minister agree that further work by HMT in this area would not only make sense following the Access to Cash Review but do a great service in addressing issues which will be felt sharply if we do not address them at this stage?

I will give just one brief example. I could have on my handheld device the best mobile banking app ever created, but if I do not have the digital skills and the confidence to use that app, no payment will be made. Similarly, if, in those same circumstances, I have those digital skills but no mobile connectivity or broadband, that payment will not be made. We need this review of access to digital financial services, before these problems become acute and they affect not only people’s finances but all elements of their lives.

Finally, Amendment 111 addresses the issue of the last branch standing in any particular location but seeks to push a bit further. If there is a remaining branch on a town high street, that is a good thing. However, if that branch does not offer a full banking service, particularly to small and medium-sized businesses and micro-businesses, and if it does not serve more than 20% of the local community, does my noble friend the Minister not agree that we should change the regulations to enable a shared banking hub to be opened in that area?

I look forward to my noble friend the Minister’s response. I hope she will respond fully to all my amendments, but particularly to Amendment 111. A very simple change between Report and Third Reading would make such a potential difference for many of the areas in those circumstances.

[Baroness Kramer (LD)]

My Lords, I will be exceedingly brief because we took, as we should have, a lot of time on this issue during Committee. We have also discussed financial exclusion already. Once again, I am channelling my noble friend Lady Tyler of Enfield, who wishes that she were not ill and could be here today. I will focus my remarks on Amendment 80 in the name of my noble friend Lady Tyler, and which is signed by me.

The numbers that have been provided to any parliamentarian of interest by LINK on the rate of bank branch closures are frankly scary. The number of bank branches is now below 5,000 across the country and is expected to fall to around 1,000 in the next few years. Amendment 80 gives the FCA power, where certain conditions are met, to direct the establishment of a banking hub. Banking hubs are the solution proposed by the banking industry, in association with LINK, to provide a physical banking facility which is essentially a collective of the relevant banks and the Post Office, in locations where bank branches have disappeared. I am very sympathetic to the idea that the noble Lord, Lord Holmes, proposed, where a branch in name but not in practice because its services are so limited would qualify as well.

LINK has recommended 100 of these shared hubs, but so far only six have opened. Quite often, that is because of the resistance of the banking institutions, which, in effect under the current scheme, have a veto on whether these hubs happen. The gap is yawning and the FCA needs to step in. Because this was raised in Committee, I say that anyone who thinks that online banking is a substitute for face-to-face banking can live only a very vanilla life. I found out the hard way that the systems online and the telephone constantly get it wrong. Often, the only way to resolve a complex issue is face to face. As others have said, including the noble Lord, Lord Holmes, the 5 million people who find digital difficult are even more disadvantaged.

I seriously hope that the Government will accept Amendment 80 because it is the missing mechanism to deliver the project—the Government themselves back the project—of banking hubs and shared banking. To get it delivered we need Amendment 80 to put powers into the hands of the FCA to make sure that it happens. This is a project, I repeat, that the Government themselves have sponsored, in a sense. We need the enablement and delivery to take place rapidly.

[Baroness Chapman of Darlington (Lab)]

My Lords, I congratulate the noble Lord, Lord Holmes, on tabling his amendments and his tenacity in raising these issues on a very regular basis. He is absolutely right to do so. We were pleased to table Amendment 81 in Committee, and we re-signed it when retabled by the noble Baroness, Lady Altmann, on Report.

We strongly welcome the Government finally bringing forward meaningful protections for cash access. Just in case the noble Lord, Lord Tunnicliffe, starts to doubt his powers of persuasion, we wonder if the Minister could explain why the noble Lord did not seem to have the magic touch when it came to getting him to accept it. The position seems to have changed somewhat now.

It is good that organisations such as Which? have welcomed this concession, noting that cash continues to be hugely important for many households, particularly those which need to keep track of their spending during the cost of living crisis. People should not have to pay fees to access their own money. While we welcomed the Government’s previous move to offer cashback at some retailers without a purchase, cashback services are not available anywhere near widely enough for that to be a substitute.

We welcome the progress made, but there is obviously a lot more to be done. An increasing number of people are finding themselves with little or no access to face-to-face banking services. While the banking hub initiative has promise, its coverage is too limited for it to be anything like a viable solution at this point. We welcome the fact that the noble Lord, Lord Holmes, has tabled several amendments on this. We hope that the Minister is able to go beyond previous assurances, and we look forward to her reply.

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[Lord Harlech (Con)]

My Lords, the Financial Ombudsman Service was established through the Financial Services and Markets Act 2000 to provide for the proportionate, prompt and informal resolution of disputes between consumers and financial services firms. The FOS offers a cost-free service for consumers, which is fundamental to its purpose.

The FOS is funded by a combination of an annual levy on regulated firms and case fees. Under the current framework, it is responsible for setting its case fee rules and can charge case fees only to firms that are subject to complaints. This means that claims management companies—or CMCs—and other professional representatives cannot be charged for bringing cases to the FOS. The Government heard the concerns raised by noble Lords, particularly by my noble friend Lady Noakes during Grand Committee, about CMCs bringing large numbers of vexatious claims against firms to the FOS.

Amendment 90 therefore addresses those concerns by amending FSMA 2000 to give the Treasury the power to make regulations specifying categories of persons to whom the FOS can charge case fees. The Treasury intends to add CMCs and other professional representatives such as law firms to this list. This will enable the FOS to amend its rules to charge case fees to CMCs and other professional representatives for bringing complaints, subject to its usual consultation processes. By specifying who can be charged by the FOS in regulations, the Government can ensure that the full range of claims management models can be effectively captured. It also allows flexibility to amend this list in future if different models emerge.

The Government are clear that all consumers should be able to access the FOS free of charge and without the need for any CMC support. The FOS remaining a cost-free service for consumers is fundamental to its purpose. The amendment therefore expressly prevents the Treasury adding consumers to the categories of persons who can be included in the regulations.

In summary, Amendment 90 will ensure that the Treasury is able to empower the FOS to charge case fees to CMCs while ensuring that the FOS remains cost-free for consumers. I beg to move.

[Baroness Kramer (LD)]

From these Benches, the amendment makes sense to us.

[Baroness Chapman of Darlington (Lab)]

Happily, it makes sense to us as well. Without wishing to delay anybody—remembering the exchanges we had before this debate started today—I wonder whether the Minister could indicate the level of fees. He said that consumers would be excluded, which is very important. Are the Government confident that this will not in any way suppress the use of this service? Do they have anything in mind to improve awareness of the service among consumers?

Financial Services and Markets Bill

Baroness Kramer Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

[Lord Ashcombe (Con)]

My Lords, I remind the House of my interest as an employee of Marsh Ltd, the insurance broker. I offer my support to the amendments in this group, so thoughtfully proposed by my noble friend Lord Holmes of Richmond. My noble friend the Minister has indeed made improvements since Grand Committee, and for that I thank her, but I wonder whether the Government have gone quite far enough. I particularly thank the Minister for the generous amount of time she spent with me the other evening.

My noble friend the Minister’s amendment proposes two reports, 12 months apart, as has been mentioned, but I believe that it is important that reports from the regulators should become an annual occurrence concerning the competitiveness and growth objectives. The financial sector of the United Kingdom is a major driver of revenue for the country and we must ensure consistency over time, not just the immediate future. In turn, this suggests the need for consistent metrics on which to report, allowing for the proper comparisons.

Amendment 19 concerns the principle of proportionality, recognising that not all financial services are the same. Again, I will look at the insurance market in particular, but I suspect there are similarities in other financial lines. I am all for keeping individual retail and small business customers safe when working with insurance companies, but there are significant differences to be found between them, users of the London wholesale insurance market—which is used by knowledgeable buyers, using one of many potential advisers—and captive insurance entities. Smaller customers need a level of protection not required by either of these other two groups.

In the debate on this amendment, I wish to refer particularly to captive insurance companies. Captives are wholly owned subsidiaries set up to provide risk mitigation services—insurance—for their parent company and/or related entities. The parent is inevitably a sophisticated entity, almost certainly hiring advisers. They should require a very different approach from the retail customer.

There currently seems to be a one-size-fits-all approach by the regulators when reviewing insurance companies that does not take into account the nature of the purchaser. This is not only time consuming but costly in comparison with other overseas regimes. Captives provide low risk to the financial system and the buyer of their services requires a significantly different level of regulation from an insurance company trading with individuals. They are fundamentally different.

There is no captive company authorised in the UK and even those of our major companies, including UK public bodies, are located in overseas jurisdictions. The captive insurance business generates in excess of $50 billion annually, and here lies a significant opportunity for growth in the insurance sector which, should the regulator alter its stance and act with proportionality, could, as an example, add significant additional capital into the country.

Amendments 40 and 41 refer to the requirements to publish regulatory performance on authorised firms and new authorisations. The Government certainly recognise in Clause 37 the need to improve the regulatory culture, but we need more teeth in terms of reporting metrics so it becomes standard practice within the regulators. This culture needs to become ingrained.

The metrics being proposed in Amendment 40 are granular concerning timing and would bring some needed haste to the system. In business, time is often of the essence and being held up disproportionately by a UK regulator, as opposed those in other jurisdictions, acts as a deterrent to trade in this country. The metrics being proposed in Amendment 41 link together to give a consistent window into the activities of the regulators. With quarterly reporting it will be possible to gain some comparative statistics that will tell a story.

Lastly, Amendment 92 concerns determination of application. London remains one of the world centres of insurance and we must do all we can to preserve its status, but there are for sure a number of other locations that can attract capital more easily and so challenge it. Unfortunately, regulatory burden is regularly raised as an issue damaging London’s ability to attract additional capital and support the market.

Concerns have been raised about the overall performance of the regulators in terms of timing, with authorisations and approvals taking longer they should. It is recognised that they are falling behind their KPIs. Insurance companies here have experienced delays in case handler assignment, which is the beginning of a domino effect. In addition, concerns have been expressed over some of the questions asked and the appropriateness of the data being requested, leading to additional time and expense. The regulators need to streamline their activities by being relevant.

These amendments refer to a great extent to measures designed to bring some more accountability to the reporting by the regulators. I realise there is a consultation with the financial markets, but I believe that the measures being proposed are the bare minimum that should be required and included in the Bill. These sets of metrics will prevent the regulators deciding which of their own sets of data to publish. Certainly, from an insurance perspective, this will allow life to proceed way more freely. This will ensure transparency from the regulators, which is surely what is being strived for.

[Baroness Kramer (LD)]

My Lords, the amendments in this group fall essentially into two categories. Those that improve communication and representation to statutory panels are small but positive improvements and, although I remain of the view that these panels should be given proper independence, I am glad to see that at least there is some improvement in the regime.

The other amendments I view very differently, and I will pick up the issues raised by the noble Lords, Lord Vaux and Lord Davies of Brixton, that if the reporting requirements included a proper consideration of how the competitiveness and growth objectives as they became operational were also impacting on financial stability, systemic risk and consumer protection, I would find myself very much in favour of them. But actually I regard them as a sort of slightly disguised mechanism to enhance the status of the secondary objectives to something which I think the noble Lord, Lord Eatwell, described on Monday as “secondary plus”, or even “secondary plus plus”. I think that is exactly what these various amendments are intended to do.

This House knows well that I join Sir Paul Tucker, Sir John Vickers, pretty much every former Governor of the Bank of England and many others in regretting the introduction of these objectives because, for exactly the reason that others have said, they will incentivise and drive risky behaviour and we will come to rue that. So this further enhancement of these secondary objectives, very much driven by the industry—we heard from the noble Lord, Lord Ashcombe, how strong the feeling was that we try and get towards making these objectives either primary or close to primary—should be a warning to all of us. So I cannot give these amendments my support, although we are obviously not going to vote on them today. However, it is necessary that the House takes note of some degree of warning.

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[Lord Eatwell (Lab)]

My Lords, I support Amendment 18 in the name of my noble friend Lady Chapman, while also recognising the contribution made in the amendments tabled by the noble Lord, Lord Holmes, and my noble friend Lord Davies.

This is an extremely urgent matter because between 6 million and 7 million of our fellow citizens conduct all their financial affairs in cash. Cash is becoming increasingly unacceptable in a whole series of financial transactions that are conducted by electronic means. This means that cash is ceasing to be money, because money is something which is generally accepted in payment of a debt. If you cannot use cash to buy things, it is no longer money.

It is therefore necessary for both the Bank of England and the Treasury to consider making available to all citizens in this country a means of electronic payment. That is a big challenge, but it is urgent because we are all aware that, over the next decade, virtually everything will be entirely electronic and cash will be unacceptable in most transactions. My noble friend Lady Chapman has hit the nail right on the head by saying that this is a consumer protection objective. That 10% of our fellow citizens needs to be protected by financial inclusion in this way. This is an urgent matter which should not be postponed.

[Baroness Kramer (LD)]

My Lords, in speaking to this group I am channelling my colleague, my noble friend Lady Tyler of Enfield, who is unwell and, to her distress, cannot be here. I will focus on Amendment 18, which she has signed, which would require the FCA to have regard to financial inclusion within the consumer protection objective. My noble friend Lady Tyler chaired the Select Committee on Financial Exclusion in 2017 and this was a cornerstone recommendation. A further Lords review in 2020 came to the same conclusion, as did the Treasury Select Committee in 2022.

My noble friend Lady Tyler made a powerful speech in Committee so I will not repeat the detail, but I will cite the briefing I have received from Fair4All Finance, which finds that more than 17 million people—I previously used the number the noble Lord, Lord Eatwell, used of between 6 million and 7 million people who are under stress for this—in the UK are in financially vulnerable circumstances, with access to credit being increasingly difficult. We will discuss access to cash later.

Endless years of discussion on this topic have failed to significantly move the dial. Basic bank accounts are a little improved but still limited. The hopes for credit unions or fintech solutions have faded. Frankly, nothing will change unless the FCA puts its shoulder to the wheel. Amendment 18, if noble Lords look at it in detail, is not the introduction of a new objective; it is a clarification of the consumer objective through a “have regard” duty. In that way, it is different from the amendment proposed by the noble Lord, Lord Holmes—which I do not object to, but the Government have frequently said that we cannot have additional objectives. This is not an additional objective; it is clarification and emphasis of a key aspect of an objective.

Amendment 18 does not ask the FCA to step into territory which the Government have said is theirs—to close the gap on financial inclusion—but to use powers within its existing scope, which it has shown us it will not do without this emphasis from Parliament. I very much support Amendment 18 and consequently hope that the noble Baroness, Lady Chapman, will ensure that it is tested in the House if the Government do not accept it—although government acceptance is of course the preferred route for us all.

Financial Services and Markets Bill

Baroness Kramer Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

[Baroness Altmann (Con)]

My Lords, I add my support to the amendment so excellently moved by the noble Lord, Lord Sharkey, and I thank my noble friends Lord Hamilton and Lord Naseby, who have spoken about the dangers that are entailed if we do not introduce measures such as this amendment into the Bill. There is a risk of executive power-grab. I am not at all saying that that is the intention, but the possibility of that would be opened and surely, as we have just argued in the previous legislative discussion, it is so important that we ensure that Parliament has control, not a few Ministers. That is what I hoped we were going to do when we were revising the laws that had been adopted from the EU.

[Baroness Kramer (LD)]

My Lords, I can add very little to the extraordinary speeches we just heard, many of them quite brief but absolutely targeted and to the point. I simply want to add just two more issues that perhaps have been mentioned but not stressed.

The first is that a carve-out of financial services from the REUL Bill is not the carve-out of some minor area of insignificant interest. Financial services are in effect our largest and most significant industry at this point in time in the UK and will be for many years in the future, and indeed the products that come from financial services are the lifeblood of our economy, both for businesses and for ordinary people. Therefore, scrutiny of decisions that are made within this arena surely has to be a central and significant responsibility of Parliament.

I say to the Minister, who always prays in aid consultation, both formal and informal, in the process of making change, when did consultation replace scrutiny in the mind of this Government? Parliament is not a consultee but the body that is democratically elected to make the key legislative decisions about the future of our country. Its relegation to the role of a consultee, which in effect happens and which this legislation would in some ways counter, is, I believe, completely unacceptable to most people when they have the opportunity to face up to it and think through this issue. Therefore, we on these Benches are very much in support of these amendments, and if necessary we will go through the Lobbies if the Minister is unable to accept at least a significant one of them.

[Baroness Chapman of Darlington (Lab)]

My Lords, before I address the amendments, I want to acknowledge the work of my noble friend Lord Tunnicliffe, who had been leading for these Benches on this Bill until very recently, and thank him for his hard work and generosity in the way he has handed over custody of the Bill to me and my noble friend Lord Livermore. We are very grateful to my noble friend for everything he did, and he continues to advise and support—as noble Lords who know him can well imagine.

However, we are on Report, and this is the stage where we cut to the chase and pick our battles. I have been leading on the retained EU law Bill and am very familiar with the arguments raised in this debate, but we are treating this Bill slightly differently to the retained EU law Bill because our concerns on that Bill revolved around the lack of certainty created by the Government’s approach. There was no definitive list of the terms of retained EU law that would be revoked at the end of the year, and the absence of that list meant limited scope for meaningful engagement, scrutiny or consultation. That was our fundamental objection to that Bill.

The process set out in this Bill is different, with most of the retained law listed in the legislation and to be repealed and revoked only once replaced by regulations that are UK-specific. Fundamentally, we think that changing the process outlined in the Bill at this stage in a manner that the sector has not asked for—it is very different to the engagement that we had on the retained EU law Bill, where there was strong demand from various sectors for change—would introduce uncertainty.

The Lords were right to ask the Government to think again on the retained EU law Bill, but amendments to one Bill do not automatically work for another and, in any event— as I know from having worked on the retained EU law Bill—the version of the amendment we are considering today has already been convincingly overturned by the elected House and we have had to come back with another. As we need to pick our battles and to prioritise at this stage in our proceedings, we on these Benches will not be participating should the issue be put to a Division today.

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[Lord Harlech (Con)]

My Lords, I beg to move government Amendment 2 and will also speak to the other amendments in this group. These are a set of minor amendments that the Government have tabled to ensure that all provisions of the Bill and the Financial Services and Markets Act 2000 operate effectively and fully achieve their intended policy effect.

Turning first to Amendments 2 and 118, central counterparties, or CCPs, are a type of financial market infrastructure and are crucial to global financial stability. Following the UK’s exit from the EU, the Treasury established a temporary recognition regime to enable eligible non-UK CCPs to continue providing important clearing services to UK firms while equivalence and recognition decisions were ongoing. To allow CCPs exiting the temporary recognition regime without recognition time to wind-down exposures to UK firms, a run-off regime was also established. The length of the run-off is determined by the Bank of England for each CCP, with a current maximum period of one year. As a result of provisions in this Bill tabled in Committee, the Bank of England will have the ability to extend the maximum run-off period for CCPs from one year to three years and six months. This would allow overseas CCPs currently due to exit the run-off regime at the end of June 2023 further time to apply for recognition if desired, and to remain able to offer services to UK firms during that period.

Amendments 2 and 118 seek to facilitate continuity of services under the run-off regime in the event that Royal Assent of this Bill occurs very close to or after 30 June. Amendment 118 provides that the Bill provision that gives the Bank the power to extend the run-off period comes into force on Royal Assent. This will allow the Bank of England to extend the run-off for those CCPs that wish to continue providing services to UK firms but need more time to apply for recognition, as was set out in Committee. However, if Royal Assent is secured after relevant CCPs have exited the run-off, government Amendment 2 will give the Bank of England the ability to reinsert a CCP into the run-off regime by determining that a CCP’s run-off is to be treated as not having expired. This will allow the Bank of England to extend the length of a CCP’s run-off period even in cases where a CCP has already exited the run-off. This will avoid any potential disruption that could otherwise arise if CCPs exited the run-off period before the Committee stage amendment had come into force.

Amendments 3, 16, 17, 21, 22, 34, 53 and 54 ensure that the references to the regulators’ objectives in the Bill and the Financial Services and Markets Act 2000 include the new competitiveness and growth secondary objectives for the PRA and the FCA, and the Bank of England’s new secondary innovation objective.

Turning to Amendments 5 and 6, Schedule 5 to the Bill makes amendments to FSMA to ensure that the regulatory gateway for financial promotions legislated for in this Bill can be implemented and operated. One way that it does this is by applying other relevant parts of FSMA to ensure that the FCA can oversee the gateway effectively. Amendment 5 aligns the wording between a provision introduced by Schedule 5 and a similar existing provision within FSMA. These provisions relate to the issuance of notices to vary permissions or to impose requirements. The amendment will ensure that the regulator is required to provide notice when they propose to vary a permission in all cases, and to avoid any potential duplicatory requirements to provide notices. Amendment 5 replaces the relevant provisions in Schedule 5 and in FSMA with a single new provision. This will help to ensure that these similar provisions are interpreted consistently and achieve the intended policy effect. Amendment 6 is consequential on Amendment 5.

Amendment 49 ensures that the CBA panel’s statutory remit includes cost-benefit analyses for rules for critical third parties, and that it is therefore able to provide advice to the Bank in relation to this. Amendment 86 corrects a drafting error, ensuring that Schedule 11, regarding the central counterparties resolution regime, functions as intended. It provides clarity over the Treasury’s power to lay regulations restricting the making of partial property transfers. Amendments 87, 88 and 89 make technical corrections and clarifications to the insurer insolvency provisions in Schedule 12 to the Bill. Amendment 89 provides a clarification to make clearer the amount of FSCS top-up compensation that policyholders will be eligible to receive following a write-down order, meeting the stated policy intent. Amendment 87 clarifies that a liability is, to the extent of its reduction by a write-down order, to be treated as extinguished unless and until revived by the variation or revocation of the order. This helps to ensure that the intent of the provisions is achieved by increasing legal certainty about the treatment of written-down liabilities.

All these amendments seek to ensure that the provisions in this Bill achieve the policy intent and minimise potential disruption to the UK financial services sector. Therefore, I beg to move Amendment 2 and intend to move the remaining amendments when they are reached.

[Baroness Kramer (LD)]

My Lords, I will make very few comments on this group of amendments. I accept that they are technical. I find some of them distasteful, particularly those that enhance the scope of the competitiveness and economic growth agendas. I fear very much that the underlying concept and construct will lead us back in the direction of the kind of risk taking that created the crisis that we went through so badly in 2008 and 2009. However, given that our attempts to turn around those objectives have not won support from other parts of the House, there is no sensible reason for me to object to these more technical amendments, other than to say that it is a sad day and that many of us will be revisiting this, if we live long enough, when we hit the next financial crisis.

[Lord Eatwell (Lab)]

My Lords, I will make two points on these technical amendments. As the Minister said, central counterparties are fundamental institutions in maintaining the stability of financial markets. This measure, to continue the role of overseas-based central counterparties, is enormously sensible. But there is an issue that has not been addressed. What if the overseas central counterparties decide not to provide services to UK firms—if they decide, following the UK exit from the European Union, that they will withdraw from providing such a service? What provision has His Majesty’s Government made for providing those services in those circumstances?

Secondly, I echo the point that the noble Baroness, Lady Kramer, made about the competitiveness and economic growth objective that is being incorporated as a subsidiary objective. As a subsidiary objective, it is unobjectionable. What is striking in the government amendments that we will debate is the way in which it is continuously privileged, such that it no longer remains subsidiary; extra reports and consideration will now be required, all focused on one objective. This is a serious mistake, because the statutory objectives of the regulatory authorities will change with circumstance over time. Writing into law that one objective should be privileged is a significant error. The primary and secondary objectives make sense, but overegging the position of a subsidiary objective is a mistake.

My main point at this time is to ask the Minister what measures provide central counterparty provision in those areas where overseas central counterparties decide not to act for UK firms.

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It is indeed this economy and its people who bear the cost of that dual system on which my noble friend Lord Trenchard touched, the danger being that the lack of competitiveness might stymie the economy. The reporting requirement is important to encourage further reform and transparency. It will enable a determined effort to be made to move rapidly. It matters that we have greater certainty about where things have got to and what still remains to do. Many do not have ready access to legal help to navigate their way through the retained EU law book and the more complex system for the financial sector, so I hope that my noble friend the Minister will look kindly on and support this amendment. It will make for fairness so businesses are clear about the rules, and it would be a means to the prosperity of the whole economy that we need to encourage. In my view we need to move back more rapidly and thoroughly to our common-law system, and I urge the Minister and the Treasury to be equally as receptive to the obligation to report regularly as her colleagues on the Business team.

[Baroness Kramer (LD)]

My Lords, I will be very brief. I have no objection to either of these amendments, although for very different reasons from the previous two speakers. On the first, which is about the report on retained EU law, it seems sensible to have a proper and lasting reporting requirement to Parliament, although I point out to those who are very worried about additional burdens that the report itself generates a huge amount of effort, energy and paperwork, so I doubt it goes very far in reducing any burden on anybody.

I am more interested in the second amendment tabled by the noble Viscount, Lord Trenchard, Amendment 3B, because it embeds the principle of accountability to Parliament and the wider world and states that, where changes are made in regulation, other than in situations of genuine urgency—I underscore “genuine” because we have seen that flex a great deal, with things said to be very urgent that seem to have no urgency whatever attached to them—the Treasury should carry out consultations.

I say to both previous speakers that if they speak to the industry they will find that the struggles that the financial sector has been facing in the UK—the decline in listings, virtually the complete loss of the European swaps market, our gradual exclusion from a significant range of activities that are international and certainly pan-European and fintech outsourcing extensively into Europe—are post-Brexit consequences. Frankly, I do not think that amendments such as this, in the hope that there will be much lighter-touch regulation, which is what common law really means, are going to remedy that problem. We built our reputation on quality and consistency and, like it or not, those are quite demanding standards that light-touch standards do not achieve.

[Baroness Chapman of Darlington (Lab)]

My Lords, we are grateful to the noble Viscount, Lord Trenchard, for bringing these amendments forward and we ask him to pass on our very best wishes to the noble Baroness, Lady Noakes, and her husband. I am sure she will be impressed by the way he introduced her ideas this afternoon. I feel somewhat that we are intruding on a bit of a family squabble on the Government Benches with this group in that, in the retained EU law Bill, the amendment that she brought forward was as a consequence of her deeply felt disappointment—shared by the noble Baroness, Lady Lawlor, if I remember her speech at the time, and others—at the Government’s change of approach to that Bill. The change of approach was one that we had been calling for and very much welcomed, and we did not feel on that Bill and we do not feel on this Bill that there is an awful lot to be gained by these amendments. There is not a huge amount to be lost either, particularly with Amendment 3A. We are interested in what the Government have to say about them, but they are not amendments that we take a particularly firm view on either way because we think they are designed with a rather different purpose in mind, which is to hold the Government’s feet to the fire.

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[Lord Tyrie (Non-Afl)]

I declare my interest as a consultant to DLA Piper, which helped me with drafting the amendment.

The need to provide the RDC with statutory autonomy was a recommendation of the Parliamentary Commission on Banking Standards, which I chaired in 2013. The purpose of my amendment is to give the FCA’s internal watchdog, the Regulatory Decisions Committee, greater independence by putting it on a statutory footing. I set out why this is necessary in Committee so I will not repeat all those arguments now but, in a nutshell, the benefit will be greater fairness for firms and individuals; it can be accomplished without compromising high-quality enforcement.

The case for this is pretty straightforward. The RDC was created to act as a check on what would otherwise be the FCA’s almost untrammelled power of enforcement. The RDC is the FCA’s in-house watchdog —a second pair of eyes—which can stop an enforcement action. In theory, firms could go to the Upper Tribunal, the equivalent of the High Court, but that is very costly and the fact that its proceedings are in public creates huge reputational risk for a firm or individual going there. For many of them, that can be terminal. So, the RDC is often the only practical safeguard they have against overly zealous enforcement by the FCA.

The problem for the RDC is that it does not have enough statutory authority to do the job as well as it should. At the moment, the RDC’s operational independence is wafer-thin. For a start, the RDC is subordinate to the FCA board. The board can and does decide what type of cases the RDC looks at, what resources are available to it and what procedures it should follow. The RDC also sits down the corridor from the enforcement team in the FCA. So it is small wonder that firms think it is much less than fully independent.

The price of the perception that the RDC is not fully independent is not just a sense of unfairness among some in the regulated community; it also carries a significant economic cost. It acts as a deterrent to activity and investment to many who do not want to take a risk of being on the wrong side of the enforcers. It is for these reasons, among others, that the Parliamentary Banking Commission, which I chaired, concluded that the RDC should be provided with statutory autonomy for its operations.

No doubt the Minister will have been briefed by the FCA, via her Treasury officials, that all these changes that I have set out are unnecessary—but they are necessary. The dangers that come with lack of independence have recently been vividly illustrated by the FCA board’s decision significantly to limit the scope of the RDC’s activities. There was very little public discussion. As of 2021, it no longer supervises the FCA’s decisions relating to a firm’s licensing, authorisations—the specific activities permitted under its licence—or an individual’s approval: that is, whether people are suitable for senior appointments under the senior managers’ regime. It also leaves firms and individuals unable to make oral representations in front of the RDC for many decisions that are crucial to their future. For many cases, those oral representations have now been closed down under the 2021 reforms.

So the narrowing of the remit will matter a lot, particularly for smaller firms. What is more, it will drive a coach and horses through the RDC’s already fragile independence and certainly through the perception of it. The fact that such a change could have been pushed through by the FCA board, after a consultation exercise which did not even support it, illustrates the need for much greater accountability and much better explanations from the regulator. Something was already needed in 2013 when we looked at this, to boost the RDC’s operational independence, but this 2021 reform shows that it is even more badly needed now. The modest amendment on the Marshalled List will entrench the RDC’s independence in statute. It will give the RDC the jurisdiction to challenge—publicly, if necessary —FCA board decisions that are relevant to its work, and it will create a direct statutory line of accountability to Parliament for everything it does.

Since 2013, I have scarcely heard any arguments against the banking commission’s proposal and, since I raised these issues in early March, I have been flooded with support from all sides of the financial services industry, and from a number of Peers and several former senior regulators. Two former Cabinet Secretaries have contacted me to tell me they strongly support it, as has the right reverend Primate the Archbishop of Canterbury. This is quite a large collection of varied support for a relatively small but sensible measure. They have done this, I think, because it has clear upsides, and neither they nor I can think of any downsides. It does not even carry an Exchequer cost.

I very much hope that the Minister will not be the last opponent standing when she stands up, but, if she is unpersuaded, I very much hope that she will at least agree to a consultation taking place on whether something should be done to boost the RDC’s independence, with an open mind on what should be needed. In that conciliatory frame of mind, I beg to move.

[Baroness Kramer (LD)]

My Lords, I had the privilege of adding my name to this amendment, and of serving with the noble Lord, Lord Tyrie, in his pre-Lordship days, when he chaired the Parliamentary Commission on Banking Standards. Like virtually everyone else who was on that committee and had spent two years taking evidence across the full range of issues that underpinned the crisis of 2008 and 2009, we were very surprised that the Government did not seize upon the recommendations for a body such as the RDC to have the kind of statutory independence that is described in this amendment. The amendment is extremely well drafted, as anybody reading it can recognise. It is not one of those where people say that the idea is good but there is a problem with the language. In this instance, there is not.

I have always thought that the regulator benefits as much as anybody else from oversight and challenge by an independent body with the requisite expertise. I also have the privilege of sitting in the Economic Affairs Committee. We have had discussions in the context of the independence of the Bank of England, but this has far broader implications. The problems of groupthink are becoming extraordinarily evident. Creating independence in a body such as the RDC is a mechanism for breaking down some of that groupthink. It is not because people are bad, incompetent or inadequate, but because, if there is not a process of challenge with sufficient gusto, groupthink begins to take hold. There begins to be a measure of complacency, people become less inclined to challenge and that benefits none of us.

I see no downside to the Government accepting this amendment. I hope that they take it extremely seriously and recognise that the quality of the language is here, meaning that they can run with this amendment as it sits, and that the regulator will benefit, the industry will benefit and individuals will benefit. There are very few occasions when one can look at a measure and say that this is true on all those fronts.

UK-EU Relationship in Financial Services (European Affairs Committee Report)

Baroness Kramer Excerpts

Wednesday 17th May 2023 Grand Committee

[Baroness Kramer (LD)]

My Lords, I join in congratulating the noble Earl and the committee on this report. It is rather eerie that, so many months after it was written, it still seems to be exceptionally relevant, which is a compliment to all who were engaged in this process.

The UK is a leader in financial services, and I certainly take the view that preserving that leadership is critical to our economy. I would say to the noble Lord, Lord Davies, that it would be brilliant if we built up some other economies to the leadership position that I would like to see, but frankly, if we look at the real world as it is today, it is financial services and life sciences, and not a whole lot more; perhaps some of the creative industries, but they are under huge pressure as well. So, for the benefit of our people, we absolutely have to make financial services successful.

However, I am concerned that the impact of Brexit is being played down. The industry hesitates to speak openly to the Government about many of the issues that it sees. I congratulate the noble Earl, Lord Effingham, for raising some of those issues today, because frequently it holds back in silence. I see the Government constantly determined just to look on the bright side. Unless we face reality, we cannot take the steps that are necessary. I join with the noble Lord, Lord Desai, in that view.

The noble Lord, Lord Bilimoria, was right that we are seeing a slow bleed of our leading position. New York now heads the league tables, not London. We are coming into year 3 of that being true. Financial services sectors from Singapore to Barbados have benefited. Many of them are former colonies of the UK, and they march into a European company with the message, “We too have been snubbed by the British. Let’s do business together”. I am told that it is proving a very successful pitch. London still stands significantly ahead of any EU financial centre, looked at on an individual basis. But the question is not, “Is London dominant compared with Frankfurt or Paris?” but “Is London dominant compared with Frankfurt plus Paris, plus Berlin, plus Amsterdam, plus Dublin, plus Luxembourg, et cetera?”

The EU is not developing a single centre to rival London—the noble Lord, Lord Liddle, made this point. Paris is rising fast and has that potential, but the EU is creating a network of centres—perhaps unintentionally, but that is how it is developing—to rival London. That would have been unworkable in the past, but with digital technology it is very possible. I would like the Government today to give us the comparison between London and that EU network, and, if they cannot, they are not doing proper due diligence.

EU-generated business has for many years been about a third of financial services activity in the UK. Obviously, some of it has simply gone, post Brexit, without equivalence agreements in place. ESMA-regulated stocks are now traded in Amsterdam, Paris and Dublin but not in London. Picking up the point made by the noble Earl, Lord Effingham, we see many UK-based firms developing EU hubs. I was stunned to be in a conversation about Lloyd’s and hear it described to me as “Lloyd’s of Brussels”. The reality is that firms are having to take advantage of this and seize it—but it is not to London’s advantage.

I may say that it is not just the big players. I will pick up on the point made by the noble Lord, Lord Holmes, on the significance of fintech. In a February survey, Anglia Ruskin University found that 40% of the fintechs it surveyed had now opened offices outside the UK, mainly in the EU—and that was within the past two years. So we have a definite and clear move that is taking place. It is not so much personnel because, frankly, since we do not have free movement of people, those who carry a British passport are pretty much stuck here; it is new hires, and the EU is very much insisting on new hires as its general strategy.

So we really need some focus on this issue, and I will pick up with great concern and anxiety a subject that was picked up by the noble Earl, Lord Kinnoull: central counterparties. There is an article in today’s FT that I recommend, although I have to say that I felt almost physically ill when I read it. Noble Lords will be well aware that the euro swaps market accounts for something in the range of $100 trillion a year—it is always expressed in dollars. Pre Brexit, 70% of that market played through in the UK. As of this last report, which comes from OSTTRA, a post-trade services company based in the UK, the US market share is 51%, the EU share is 35% and the UK has just 14% of the market.

Why does it matter? Because, as the article carries on to say, it means that most market operators now have to have three versions of themselves: a US, a UK and an EU version. They have to run liquidity pools on each of those and have to go to lots of places, hunting for liquidity. That cannot be a good thing, and of course it comes at huge cost. So, if they decide to begin to refine, we are placed in the position of a potential loser. It is absolutely crucial that we manage to keep our position in the central counterparty arena, which brings me to a question that others have raised: the negotiation of the MoU to set up regulatory dialogue between the UK and the EU. I do not understand why it has not been signed; we must get an update and it really needs to be treated by the Government as a matter of urgency.

The noble Lord, Lord Hannan, said, “Well, you know, if the EU doesn’t want to give us equivalence, so be it, that’s their problem”. He will know that the EU is not stupid. If you delay providing equivalence in an area where you have yet to build up your capability, you buy time for that capability to develop. Then it is easy to grant equivalence: you now have a functional rival. I see no reason why that is not the strategy that the EU is pursuing. Frankly, if the situation were reversed, we would be doing the same. So I have really serious concerns in this area.

I will switch now to the other area of discussion, which is the new framework that has been looked at in the report and is the subject of the Financial Services and Markets Bill and various other steps that the Government have taken. I very much join Sir Paul Tucker, who prays in aid practically every previous Governor of the Bank of England who says that the competitiveness objective for the PRA and the FCA is genuinely not desirable and who advises the City to think twice about pushing for this, saying that it really does not know what is best for itself in this situation. I am very concerned about this challenge to financial stability and to the primary objectives of both the FCA and the PCA. The City has a terrible history of disregarding the real issues that are embedded in risk and pushing every opportunity it has to the extreme.

When I look that the other measures the Government are taking, I see that they feed into much of the same. For example, one noble Lord—it might have been the noble Lord, Lord Hannan, or the noble Viscount, Lord Trenchard—mentioned Solvency UK replacing Solvency II. The key element of that is that it will now encourage pension funds, and certainly defined benefit pension funds, to invest much more heavily in high-risk, illiquid assets that are seen as beneficial to the UK economy: scale-ups and infrastructure. I am constantly told, “Yes, look, the Canadian pension funds do it”. But take a look at the credit analysts writing about the Canadian pension funds; the funds are in effect backstopped by the Canadian Government. So my question to the Government today, as they continue on their path, is: are they going to fully backstop defined benefit contribution pension funds? At present, the pension protection scheme that is in place is not 100% for all participants in the funds. So will that happen?

Of course, there is talk now about trying to bring in defined contribution schemes. How on earth are the Government going to provide protection for those as they get higher-risk portfolios, or are we basically going to tell pensioners that they will now face much more risk about receiving the pensions that they believe they have signed up to?

The Minister will know that I am also concerned about the Edinburgh reforms because embedded in them is a rollback of many of the safeguards that were put in place after the 2008 crash. In particular, they undermine the ring-fencing of retail banks and weaken the responsibility for wrongdoing and mismanagement in the senior managers regime. I am really troubled when the Government’s answer is, “Look, it’s not a problem because we have in place resolution regimes that protect the taxpayer if any of these institutions collapse”. In the recent case of Credit Suisse, Swiss regulators abandoned the resolution plan because they realised that it would lead to an economic crisis in Switzerland. In the US, regulators refused to impose a resolution on Silicon Valley Bank because it would destroy a key sector of their economy. It is beginning to look like resolution will only ever be applied in very limited circumstances because of the collateral damage to the economy.

I do not want to repeat all the important discussions that we are having on the Financial Services and Markets Bill, but I must highlight the issues of accountability for and scrutiny of the regulators in this regime, which other noble Lords have spoken about. In our discussions in committee, the Government have heard alarm expressed by Members on every Bench. Among many others, the noble Lords, Lord Forsyth of Drumlean, Lord Bridges and Lord Tyrie and my noble friend Lord Sharkey have put down—or will put down—amendments on Report to ensure scrutiny and accountability. I hope that today the Government will tell us that they will accept those key amendments.

Banks: Closures and Shared Banking Hubs

Baroness Kramer Excerpts

Thursday 27th April 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, as my noble friend will know, in the Financial Services and Markets Bill, we are legislating to protect access to cash. That covers withdrawal as well as deposit services. The Government do not plan to mandate the acceptance of cash. That would be an unprecedented intervention. However, the increased access particularly to deposit services for businesses should allow those who wish to continue to accept cash to be able to do so on a more sustainable footing. My noble friend makes an interesting suggestion. The Government are working hard to ensure financial inclusion, including digital financial inclusion. I will think about his suggestion very carefully.

[Baroness Kramer (LD)]

My Lords, getting a smart hub still requires the voluntary participation of the banks, which is part of the reason why the pace of progress has been so slow. Will the Government consider changing the rules so that any community that meets the standards to justify a smart hub, as assessed by LINK, then has an automatic right to that hub and can overcome bank resistance?

[Baroness Penn (Con)]

My Lords, the Government are not considering changing the framework. As I said in response to the Question, we expect the pace of delivery to pick up. Shared banking hubs are one initiative to ensure that communities can continue to access banking. I mentioned the Post Office as being another route: 99% of personal and 95% of business banking customers can carry out their everyday banking there, with more than 11,000 branches across the UK.

Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023

Baroness Kramer Excerpts

Wednesday 19th April 2023 Grand Committee

[Baroness Noakes (Con)]

My Lords, I declare my interest as a shareholder in UK banks which are subject to the ring-fencing regime. My husband and I hold shares in HSBC, which will benefit from this order, and in both NatWest and Lloyds, which are subject to the ring-fencing rules but do not derive a benefit from this order. I think my registered interests in this case probably cancel each other out.

I should say that I have never been a big fan of ring-fencing. The triple whammy of an electrified ring-fence, elaborate resolution planning and higher capital and liquidity requirements have imposed a very high set of costs on UK banks which can in the long run result only in disbenefits for UK bank customers —that is, all of us. I do, however, believe passionately in fair competition and level playing fields, and my concern about this order—and, more so, the one that we are promised that will come later—is that it distorts competition and creates an unlevel playing field by creating unfair advantage for one particular bank in relation to the ring-fencing rules.

I completely understand that the Bank of England had to operate under pressure to achieve a sale of Silicon Valley Bank over a weekend and that avoided having to place it into an insolvency procedure, and we owe the Bank a debt of gratitude for what it achieved over that weekend. But there are some aspects of the transaction—and therefore this order—which I find mysterious. I am also, as I said, concerned that HSBC has obtained an unfair competitive advantage compared with other UK banks, so I have some questions to put to my noble friend.

First, SVB UK is not a ring-fenced bank under UK legislation and it remains outside that legislation. Why did the Bank not agree to sell the bank to HSBC itself rather than to HSBC’s UK ring-fenced subsidiary? Had it done that, I do not believe that any special legislation would have been necessary. HSBC operates a narrow definition of ring-fencing—unlike other UK ring-fenced banks—such that the majority of its commercial customers are serviced within the non-ring-fenced part of HSBC. Why was it decided to place Silicon Valley Bank UK into the ownership of the ring-fenced bank? Would it not have been more appropriate to have put it somewhere else within the HSBC Group along with other commercial customers?

Secondly, what activities of Silicon Valley Bank UK would disqualify it from being housed within a ring-fenced bank? Commercial banking business can be satisfactorily included within a ring-fenced bank provided that the business within the ring-fenced bank is in effect plain vanilla business—that is, conventional lending and very simple derivatives, which are allowed. What does Silicon Valley Bank UK do which would disqualify it from being placed properly within the UK ring-fence of HSBC, and what policy grounds make it necessary to allow the ring-fenced bank to own this kind of business when it cannot carry out that business itself?

Thirdly, the Minister has said that the order was necessary to allow HSBC’s ring-fenced bank to provide funding out of the ring-fence at preferential rates to Silicon Valley Bank UK. Why was this funding not provided out of HSBC’s other, non-ring-fenced resources? Of course, I can see the attraction to HSBC of using the cheap funds that it has from its ring-fenced depositors, but the ring-fence regime was set up precisely to stop such funds leaching out of the ring-fence. Related to that, is there any limit on the amount of funding that HSBC UK can provide from within the ring-fence to Silicon Valley Bank in breach of the ring-fencing philosophy, and if there is not a limit, why not? Are there any limits to the generosity with which the ring-fenced bank can provide the funds, since it is going to be providing at rates below market rates? Will there be any limit to that degree of discount that it will allow, and again, if not, why not?

Fourthly, can the Minister confirm that Silicon Valley Bank UK will not be allowed to form part of HSBC UK’s Bank Domestic Liquidity Sub-group, or DoLSub, and that liquidity will be monitored separately for the ring-fenced and non-ring-fenced parts of HSBC UK? If that is not the case, can the Minister explain the position on how liquidity is to be managed and monitored within the ring-fenced bank and its new subsidiary?

Lastly, it is clear that the intention is to provide some long-term exemptions from the ring-fencing regime, and the Minister referred to this. I appreciate that the precise details may not yet be finalised, but will the Minister set out what exemptions are likely to involve? I believe that the Minister said that this would be in a separate statutory instrument and therefore Parliament would be able to look at that, but it would be good if she could confirm that. My main concern when we come to the second order is whether it will be fair and reasonable for ring-fencing exemptions to be provided on a long-term basis, which disadvantages other UK banks which have to operate completely within the ring-fence rules. Put another way, when considering the case for HSBC to be allowed special treatment, will the Government ensure that they consider the case for equivalent relaxations to be more generally available? I look forward to my noble friend the Minister’s response.

[Baroness Kramer (LD)]

My Lords, first, let me say that obviously we will support this order—although I cannot see any way in which one could not. In retrospect, it confirms the regulatory adjustments that were necessary or enabled the efficient rescue of Silicon Valley Bank UK and the transfer of ownership to HSBC, effectively protecting customers from the implications of the collapse of the US parent. We need to congratulate the Government, or the Treasury, the Bank of England and indeed the industry—Coadec, Tech London Advocates and BVCA—for acting together, co-operating and moving swiftly to make sure that a problem did not turn into a crisis or catastrophe.

That said, I have a whole series of questions. I am incredibly grateful to the noble Baroness, Lady Noakes, who in far more detail and far more effectively than me raised the relevant questions on ring-fencing. Where she and I slightly disagree is on her request that, if there is going to be a long-term exemption that gives a competitive advantage to HSBC, let us let everybody have it, whereas I am concerned about the undermining of ring-fencing in a fundamental way. I can understand that sometimes one has to act to undermine ring-fencing on a short-term basis, but this has pinned into it that second exemption, which effectively makes this a life-long exemption.

I will not repeat the points that the noble Baroness made. I have a lot of them down on the piece of paper in front of me, but she made those points so well that I think the Minister needs only to hear them once—they were so detailed and rightly crafted. We have to understand whether to some extent the Government are pre-running the changes that they anticipate making under the Edinburgh proposals. We saw that with previous financial services Bills, when powers were given to the regulator ahead of the consultation processes that would all be relevant to it, so the consultation process then led to a phase 2 or part 2 Bill that came in later. I am very anxious to understand whether this is reflective of the Government’s approach to ring-fencing from now on—in other words, that they no longer intend to separate retail banking from investment banking.

I recommend to everybody the work that we did in the Parliamentary Commission on Banking Standards, in taking evidence for more than two years. The reasons for ring-fencing retail banking from investment banking were multiple and complex, and certainly included culture. Retail banking is essentially a utility and investment banking is very different in its risk profile. There is no question but that some of the misbehaviour that we saw in retail banks, PPI being just one of many examples, was inspired by that cross-cultural flow between the investment bank and the retail bank.

It was also true that many risks that we saw banks take, which were entirely inappropriate and not well understood and which led to a crash, for which we all continue to suffer, were inspired by access to what was seen as very cheap and easy money—money sitting in retail deposits, checking accounts and saving accounts, and not protected to a certain degree by insurance, which took away any sense of responsibility to customers. Banks took on risks that they would not have been able to take on had they been financing themselves wholly in the financial markets, because the markets would have recognised those risks and demanded far higher returns if they were going to finance such activities. So that access to a pool of cheap money was absolutely critical to the structures that led to the financial crash of 2007-08. I am really concerned that we have changes here that foreshadow a much more extensive undermining of ring-fencing, and I hope that the Minister will respond to those broader issues, as well as to the detail that the noble Baroness, Lady Noakes, asked for.

--- Later in debate ---

Moving from the bigger picture to the matter at hand, several noble Lords asked what the justification was for exempting SVB UK from ring-fencing requirements, not just for the four-year transition period but in perpetuity. That is a matter that will come before us in the SI to follow later this year. The exemption that we are debating today relates to the provision of preferential intragroup lending from HSBC to its new subsidiary. My noble friend Lady Noakes also asked about that. In relation to the intragroup lending provisions, it was crucial to the success of the sale of SVB to HSBC UK, as it has enabled it to provide around £2 billion of liquidity following the transaction.

[Baroness Kramer (LD)]

I do not want to pre-empt the noble Baroness, Lady Noakes, in trying to press her question, but it seemed to me that she was asking why was the ring-fenced part of the bank used to make this purchase? HSBC presumably had a very wide range of options of pieces of corporate structure that it could have used. There may be a very good answer to that, such as “This was the only one we could do over a weekend”, or something. However, the Minister also said that it was explicit in the agreement that the extended exemption would be a part of the package. That has not yet gone through a parliamentary process, and it will, but it is clear that the Government have taken a position that they will support that extended exemption. There is stuff going on here that we are trying to unpick, and I just wonder whether the Minister can help us to do that.

[Baroness Penn (Con)]

I was only at the beginning of my attempt to answer my noble friend Lady Noakes’s questions. I think that I will cover a fair amount of ground in dealing with them, but I am also very happy to follow up in writing.

I moved between the permanent exemption and the intrabank lending, so I will deal with the intrabank lending question first, then I will move on to the matter of a subsequent SI. As I say, the provisions in today’s SI were essential for the sale and allowed for the provision of around £2 billion of liquidity. My noble friend asked whether this exemption was permanent and whether there was any limit to the funding that HSBC could provide through this route. This exemption is permanent to ensure that HSBC can continue to provide liquidity support, should that be needed at any point in the future. There is no limit to the amount of funding that can be provided through this route. The PRA has stated that it has the tools to effectively supervise HSBC, even with this exemption in place.

--- Later in debate ---

[Baroness Penn (Con)]

That point was also raised by my noble friend, and I was hoping to come to it. Whether my answers mean that we will not have a further discussion on it either on the Bill or when the future SI comes forward remains to be seen. I shall try to address some of the points around the ring-fenced bank, the need to go down that route and whether SVB UK needed to be purchased by HSBC’s ring-fenced bank. That was a commercial decision made by HSBC, and it would not be appropriate for me to comment further on it.

[Baroness Kramer (LD)]

I am sorry to interrupt, but the only rationale I can think of is that from a ring-fenced bank you have that very cheap source of funding known as bank checking accounts and savings accounts. That precisely gives the commercial advantage to HSBC that the noble Baroness, Lady Noakes, is describing. Is that the only basis on which the Government were able to negotiate the deal: to make sure that the ownership of Silicon Valley Bank and the business it would pursue in future would be advantaged compared to similar activities by its rival banks? Is that what we are talking about here?

[Baroness Penn (Con)]

I am afraid I have to disappoint noble Lords and say that I have no further comment to make on the decision to purchase it by the ring-fenced bank. It was a commercial decision for HSBC.

My noble friend had some other questions on the use of the ring-fenced bank. She asked what activities SVB UK undertakes that are not allowed under the ring-fence regime. SVB UK provides lending to certain types of financial institutions, such as venture capital funds, which is not allowed under the ring-fencing regime. It also provides certain equity-related products in relation to its lending, which is also not allowed under the ring-fence regime. She also asked whether I could confirm that SVB UK will not be added to HSBC’s domestic liquidity subgroup. That is a matter for the regulator to decide.

All three noble Lords asked about the implications for competition and whether this move has given a competitive advantage to HSBC. The exemption is limited to the acquisition of SVB UK by HSBC, and was necessary to facilitate this acquisition—something I think all noble Lords welcomed. As Sam Woods explained at the TSC recently, a necessary condition of HSBC moving forward was that it could keep the entirety of SVB UK as one business. The value was in the integrated nature of the business, and HSBC could make that work only if it had it as a subsidiary of HSBC UK, the ring-fenced bank.

It is also worth reiterating that SVB UK remains very small compared to HSBC. Its assets amount to around £9 billion compared to HSBC’s $3 trillion group balance sheet.

To come on to the second statutory instrument and the permanent exemption from ring-fencing for SVB UK, the second exemption was also crucial, as it ensures that SVB UK can remain a commercially viable stand-alone business, as part of HSBC UK. It will be subject to conditions, which are intended to ensure that the exemption is limited to what was needed to facilitate the sale of SVB UK. We will set out details of those conditions alongside the second statutory instrument, which noble Lords will have the opportunity to debate. Alongside that, as I said earlier, the PRA outlined in its response to the Treasury Select Committee that it has a range of tools that it can and will draw on to ensure the effective supervision of HSBC and the protection of retail deposits.

[Baroness Noakes (Con)]

Can I just clarify something with my noble friend? I can just about understand why, for the transaction to happen over the weekend, HSBC was allowed to bully the other participants into breaking the ring-fence rules to allow it to be set up. However, allowing a permanent change means that the ring-fenced bank will be allowed to provide liquidity, and presumably capital as well, on advantageous terms to a bank which can be used as a growth vehicle within HSBC, thereby increasing the risk to ring-fenced funds. I understand why you might have to do that initially, to get the deal through, but I do not understand whether there are any limits at all on what can happen after the acquisition has happened. These permissions have been set up in a way, and are likely to continue in a way, that will allow Silicon Valley Bank to continue to operate in a way that is completely antithetical to the ring-fenced banking regime. As I have said, I am not a fan of it, but I have a strong objection to one bank being allowed to operate in a distinctly different way from other banks.

[Baroness Kramer (LD)]

I shall just add something, so that the Minister does not have to repeat herself constantly. The Minister was very clear that the flow of funds out of the ring-fenced HSBC would go into the hands of a body that will then use it to fund venture capitalists. That is not normally permitted under the ring-fence because it is a very high-risk speculative activity. The whole purpose of ring-fencing is to split activity like that away from the utility role of retail banks. Since there is, apparently, no constraint on the amount of money that can be moved, it has just opened up a massive chasm in the separation, and a massive advantage for one particular high street bank versus the others. I think that the Minister said that the amount of money that could be moved was limitless —so it is really a big issue.

Financial Services and Markets Bill

Baroness Kramer Excerpts

Committee stage
Thursday 23rd March 2023 Grand Committee

My noble friend Lady Noakes asked about consultation. The Government expect that there will be a combination of formal consultation, including on draft statutory instruments, and informal engagement in cases where there is a material impact or policy change, such as where activities that are currently taking place in the UK would no longer be subject to a broadly equivalent level of regulation. The Government’s approach to future statutory instruments will be informed by these consultations and by the work of parliamentary committees that relate to these areas of regulation.

[Baroness Kramer (LD)]

Could I ask a clarification of the Minister—I know that I have not participated? Has she just confirmed that in the Government’s view statutory instruments will indeed be making policy change? That would be important for us to understand. I believe that is what she has just said, but I thought I should confirm it.

[Baroness Penn (Con)]

I can only repeat to the noble Baroness my words, which were that consultation and informal engagement, including on draft statutory instruments, will take place where there is a material impact or policy change.

Financial Services and Markets Bill

Baroness Kramer Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

Moved by

[Baroness Kramer]

216: After Clause 71, insert the following new Clause—
“Limitation on the powers of the PRA
The PRA may not accept an application from any insurance undertaking, reinsurance undertaking or third-country insurance undertaking for the application of a matching adjustment to a risk-free interest rate term structure for a portfolio of assets with a rating of less than BBB by Standard and Poors Global Ratings or its equivalent.”Member’s explanatory statement
This amendment seeks to prevent a matching adjustment being applied to a portfolio of high-risk and/or illiquid assets.

[Baroness Kramer (LD)]

My Lords, I start by thanking your Lordships for your patience in putting up with me being gone over the past few weeks following surgery. Noble Lords from all sides of the House have been so kind; I have appreciated it very much. It is lovely to be back in this company today. Special thanks go to my colleagues who have carried the burden that I should have been here to carry.

In a way, it is almost ironic that the three amendments in this group are all in my name. Amendment 216 deals with insurance and matching adjustments; Amendment 241C deals with the ring-fencing brought in following the 2008 financial crash; and Amendment 241D deals with the senior managers and certification regime, which is also a feature of the remedies proposed after the financial crash. When I tabled these amendments, a number of people pointed out to me that they did not seem particularly pertinent to the time—what a difference two weeks make. We have had three mid-sized banks fail in the United States and HSBC has had to step in and take over Silicon Valley Bank’s UK arm. Of course, we have also had the debacle of Credit Suisse, now part of UBS.

All that underpins the consistent jeopardy and risk that exists in the financial services industry and, to my mind, underlines the importance of having proper regulatory mechanisms in place to remove that risk in the first place, deter risky behaviour and provide a resolution mechanism for when things go wrong, as they always will. I regard the three amendments in my name in this group as rather crucial.

Earlier in Committee, we discussed the concern that the new secondary objective of international competitiveness could compromise the primary objective of financial stability. However, in many ways, that was an abstract discussion. These amendments in these three crucial areas of the financial services sector—all are areas where the Government have clearly signalled both their intention to allow, indeed incentivise, a significant increase in risk and their determination to use the law to prevent regulators limiting that risk—provide us with something much closer to real-life examples.

I start with Amendment 216, which addresses the insurance industry. Of course, this also encompasses many people’s pensions; in a sense, that was clarified in the Budget by the Chancellor, who talked about, in essence, opening up defined benefit pension plans to holding illiquid high-risk assets, in the same way as he anticipates Solvency UK opening up insurance companies to holding a far greater portfolio of illiquid high-risk assets. Under the EU regime, Solvency II, insurance companies are required to build a capital buffer based on the risks in their investments—their asset portfolio. The provision is designed to provide a safeguard if an insurance company fails, protecting both policyholders and the taxpayer. Solvency II allows an insurer to reduce its buffer where the insurance company is holding long-term assets that match the cash flows of its life and annuity insurance and its reinsurance obligations. That relief is called the matching adjustment. It allows adjustment to the discount rate that the firm is required to use to value its cash flows in order to determine the size of the buffer.

With Brexit, Solvency II is being replaced by Solvency UK. No one, including me, denies that Solvency II is probably overly restrictive and requires a degree of reform. I have not objected that Solvency UK is reducing the level of capital—the sort of raw capital buffer—by 65% for life insurers and 35% for general insurers. But the Government are now choosing to go much further. At present, the matching adjustment, which, as I said, has the effect of reducing the buffer even further, applies only to long-term assets held by the insurance company that qualify as investment grade. The change now proposed allows long-term, high-risk, illiquid, sub-investment grade assets—subprime is another word that is often used—to get the benefit of the matching adjustment. There is nothing that the regulator can do about it.

Why would the Government take such a risk? I think the answer is sheer desperation. They are hoping that the insurance companies and the defined benefit pension funds, to which we now know that this will extend, if they do not need to hold much of a buffer, will invest much more in the scale-up of innovative businesses, because scale-up money is hard to find in the UK. Unfortunately, scale-up is the phase at which many companies fail. The standard rule of thumb is that 40% of companies scaling up fail.

The Government are also hoping that the money will go into infrastructure. I should explain that many infrastructure projects are investment grade. TfL bonds, for example, are investment grade, as are the bonds for the M6 toll road; they qualify for the matching adjustment. But many infrastructure projects are high-risk and the bonds they issue are very illiquid. Just look at the pattern for most major infrastructure projects, and small ones as well. There have been delays and overruns in Crossrail, HS2 and pretty much every nuclear power project anywhere in the world. The worst part with infrastructure is that you rarely know that it is in trouble until it is very close to its official completion date. The matching adjustment would apply a far more extensive range of sub-investment grade investments. I know from talking to many companies that they see this as their way to get back into subprime mortgages and subprime property arrangements.

I am very old-fashioned. I believe that the primary purpose of an insurance company is to pay its policyholders on time and in full, and the primary purpose of a defined benefit plan is to pay its pensioners on time and in full. As I said at Second Reading, many people point out that these are pools of money and that the equivalent pension funds in Canada invest heavily in global infrastructure. I point out yet again that, if anyone reads the comments of the rating agencies on those Canadian pension funds, they will become very aware that the Canadian Government are regarded as a backstop should those funds collapse.

That is very different from the situation that we have in the UK, unless the Minister is about to tell me that the UK taxpayer is now willing to become a backstop for pension funds and insurance companies in the UK. The only example that I know about is one that we discussed earlier—Equitable Life. We know that nearly a million policyholders lost more than three-quarters of their investments when Equitable Life failed and that the Government did not bring them back to full recovery, even though the financial ombudsman found serial maladministration by both the Treasury and the regulator. I would very much like to know from the Minister, as we look at Solvency UK, which is enabled by the Bill, whether the Government now propose to give an equivalent backstop to that provided by the Canadian Government.

My amendment basically says that:

“The PRA may not accept an application from any insurance undertaking”—


I will not give you the rest of the details—

“of a matching adjustment to a risk-free interest rate term structure for a portfolio of assets with a rating of less than BBB by Standard and Poors … or its equivalent.”

This is my attempt to stop that reduction in the capital buffer for illiquid, high-risk investments.

I will try to be briefer in dealing with the other two amendments in this group. I shall take Amendments 241C and 241D together. These amendments sprang from the Chancellor’s speech on the Edinburgh reforms. I have referenced before my concerns, which are shared by many who, like me, sat on the Parliamentary Commission on Banking Standards, that we are seeing the rollback of the safeguards that followed our commission’s report Changing Banking for Good. Let me quote from it:

“An important lesson of history is that bankers, regulators and politicians alike fail to learn the lessons of history … measures that are implemented while memories are fresh will be at risk of being weakened once the economic outlook improves, memories fade, and new, innovative and lucrative approaches to global finance emerge.”


That is exactly what we are seeing today, and the past two weeks have illustrated it in spades. The failure of three significant mid-sized banks in the United States was enabled by the rollback of regulation, a rollback that had been sought by the siren voices of the industry. Those same siren voices are currently extremely influential in the Treasury, and I am hoping that we will hear from the Minister that she will go back and look at the decisions to weaken that regulation in the light of the reality that we have seen over the past two weeks and the experience in the United States. Many of these regimes, particularly the senior managers regime, are now to be carried over into the shadow banking world. I am sure that is a good thing, but it is very concerning if those projects are watered down before they are carried over.

I am very concerned about the watering down of ring-fencing. Today, I asked some questions in the Economic Affairs Committee, and it is clear that the Chancellor intends to make changes to the ring-fencing regime. I accept that there are times when one could claim that ring-fencing has been overzealous with small and medium-sized banks and there are some arguments for the need to change MREL, but it is shocking to see that the Government are backing the recommendation of the Ring-fencing and Proprietary Trading Independent Review that if a bank is deemed “resolvable” its ring-fencing features can be removed.

The proposition behind ring-fencing was that retail banking is an entirely different animal from the casino banking of investment banking. It is essentially in many ways a utility, and it needs to be kept safe and separated by the virtues of the ring-fence. On the commission we also saw constant cross-contamination—in other words, risks being taken within the retail bank because of the impact in the universal banking model of their investment banking colleagues. Things such as PPI and various other forms of general abuse of customers clearly sprang from the internal pressures that were created by the overall culture of the combined firm. We could also see that many of the risks that the investment bankers tended to take were fuelled by their access to retail bank accounts that paid no or very little interest and were protected by insurance and which almost, in a sense, provided a honeypot that incentivised the taking of undue risks and played a very significant role in the kind of failures that led to the crash.

To quote Paul Volcker,

“it is the damage that it does to the culture of the whole institution … Trading operations and impersonal proprietary trading operations are simply different from a continual banking relationship.”

In other words—of which there were many—the linkage between retail banking and investment banking contributes fundamentally to all kinds of abuse of customers and small businesses, from PPI, the asset stripping of RBS GRG and the mis-selling of interest rate swaps. It also lay behind the complete collapse in credit standards and the short-term funding strategies that sank HBOS. Ring-fencing is a vital tool to provide for financial stability. With the plans to remove the cap on bankers’ bonuses, which the Government and industry treat as one of their highest priorities, it is even more important that this protection stays in place. My Amendment 241C would prevent any such destruction of the ring-fence without a decision by Parliament in primary legislation.

--- Later in debate ---

The legislation establishing the SMCR is contained within FSMA; amending that already requires primary legislation. However, Amendment 241D would also bind the hands of the regulators, restricting their ability to amend their respective regulatory handbooks. The Changing Banking for Good report was crucial. It paved the way for this important regime but regulation must be able to respond to changing circumstances. The proposed amendments would make the regime less flexible and leave the regulators less able to respond to emerging issues or risks.

[Baroness Kramer (LD)]

My Lords, I thank everyone who has spoken. When I originally drafted these amendments, they were genuinely probing amendments. I felt that I had stumbled on some issues that, if I was correct, would surely be of such significance that they would have been brought before the House and widely discussed. They changed two of the absolute pillars of our financial regulatory regime: ring-fencing and the senior managers regime. It is evident to me that this is a relatively new topic for most noble Lords here, who are the core of those in this House who engage on these issues. I am therefore very troubled that this has not been part of a broad, in-depth discussion between the Government and Parliament.

I very much agree with the noble Lord, Lord Eatwell. If we had a working accountability system, there would be a mechanism to help deal with all this, but we do not have one. Frankly, I do not want to wait until we do, unless we agree something on that in this Bill, because these fundamental changes have such a possibility of putting our financial stability in jeopardy that we cannot simply sit back and treat them as if they are fairly minor adjustments. They are fundamental to changing the guard-rails that have protected us for the past several years.

I very much agree with the noble Lord, Lord Eatwell. Stress testing is not a litmus test; it is simply a tool to try to expand one’s thinking and to try to identify potential possibilities. The Government have treated it as if it was some kind of litmus test: if it comes up red or blue, or whatever else it is, you have passed and everything is fine. That is not what it is about—in fact that is an abuse of the whole concept of stress testing.

I am extremely worried about the changes to Solvency II as it moves to become Solvency UK. I should say to the noble Baroness, Lady Bennett, that I do not have a quibble with the regulator—the regulator has been shut out of this process. This is a government decision that the matching adjustment will be allowed to apply to illiquid high-risk investments because those are the kind that the Government wish to see increased in our economy. I am happy to see them too but, frankly, I would like somebody in the financial capital market who understands the risk and is willing to take the risks to put money in, whether it is scale-up or infrastructure. The idea that this will now become the norm for pension funds, where basically the policyholders will have absolutely no say and I suspect very little understanding of the level of jeopardy in the fund to which they are contributing on a regular basis, bothers me hugely.

I will be very glad if someone else can come up with some mechanisms. The mechanisms that I used here of parliamentary accountability have been my attempt to deal with what seemed like a problem that was not being discussed. However, the excellent speeches that we have heard today, and indeed the Minister’s reply—it did not suggest that we have been exaggerating the situation, but confirmed the problems—mean that we will have to try to find some mechanism, and quickly, to deal with this range of issues. The last two weeks have made it clear that it is complacency to think that we have in place the kind of structure that genuinely protects us from financial risk, and complacency is exceedingly dangerous. I beg leave to withdraw the amendment.

Amendment 216 withdrawn.

Financial Services and Markets Bill

Baroness Kramer Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

[Baroness Twycross (Lab)]

My Lords, I declare an interest as London’s Deputy Mayor for Fire and Resilience, as risks associated with access to cash were noted as a risk to financial inclusion in the London City Resilience Strategy published in 2020.

I am grateful to my noble friend Lord Tunnicliffe and the noble Baroness, Lady Tyler, for allowing me to add my name to their excellent Amendment 117 on financial inclusion. I will speak particularly on digital inclusion. The other signatories have already outlined in much better words than I could why this amendment is required. This amendment would ensure that the heart of this legislation takes account of the needs of the most vulnerable and that we have the opportunity to mitigate the risk that a significant minority of the population may be unwittingly left behind or excluded from crucial financial services. This amendment would be an important addition to the legislation. I agree with my noble friend Lord Tunnicliffe that this is not party political. It is a really sensible and pragmatic measure which should afford significant protection.

On financial inclusion, I ask noble Lords to note specific issues of digital inclusion. This relates to financial inclusion as, without access to a smartphone or computer, it is almost impossible to carry out online banking or transfer money to a family member or a business.

I apologise for using a string of statistics, but beneath them there is a significant minority of the population whose stories and suffering because of financial exclusion often get missed. These people may be unable to access basic banking services online, relying heavily on cash or even cheques, and may struggle to pay for very basic things we all take for granted—for instance, automated parking.

Latest figures from the ONS estimated that, in January to February 2020, 96% of households in Great Britain had internet access. This increased from 93% the year before and 57% in 2006, when comparable records began. Although this number is increasing, and statistically it looks as if there is not a huge number of people without internet access, in the same period 76% of adults were using online banking. This leaves a significant minority who still do not. Estimates suggest that over 7 million adults in the UK—around 14%—could be classed as potentially financially excluded, with around 5.8 million having no record of an open or closed bank account. There are well over 600,000 people who could be classed as credit invisible, with the issues that causes for affordable credit.

Digital exclusion’s effects fall disproportionately, and research by the Centre for Social Justice has found that digital exclusion is significantly higher among those on the lowest incomes. It has a disproportionate impact on those who can least afford it. A fifth of adults with a household income below £15,000 are digitally excluded, compared to just 1% of those with an income of £50,000 or more. In turn, this adds to the poverty premium they already pay, as they cannot access the best prices or deals. This poverty premium, which has already been mentioned in this debate, includes borrowing and other financial services, so the proposed duty to be placed on the FCA would ensure that it, as well as the Government and the banking sector, can act to mitigate the risks posed by increasing digitalisation of the sector.

I note that technology often moves faster than we can imagine, Covid changed behaviours that now cannot be unchanged, and any duties imposed on the FCA in relation to financial exclusion will need to assume that the discussion about cash versus card that we are currently having will move to card versus phone, as well as include other technological approaches. Ensuring that the FCA has oversight over that would provide additional protection for the most vulnerable in our society, and I hope the Minister sees the merit of safeguarding which this amendment would provide and agree to include it in the Bill.

[Baroness Kramer (LD)]

I shall combine speaking as a winding speaker with addressing the amendment that sits in my name. I added my name to the two amendments from the noble Lord, Lord Moylan, Amendments 55 and 241. Like him, I am very conscious of many of the recent scandals we have seen—he mentioned London Capital & Finance, but there is also Blackmore Bond and mini-bonds, to mention just two of the most recent. They were fuelled by ordinary investors looking for improved returns. I would hope that with easier access to regulated markets, which typically come with information and analysis by independent entities such as the rating agencies, an investor would be far less likely to fall into unscrupulous hands. That is a consequence that neither the regulator nor the Government have been fully aware of. They are always surprised when an unscrupulous product appears, and they should not, given the general track record.

I also join the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Tyler, in their amendments to insert at least “have regard” for financial inclusion and for proper reporting on financial inclusion. I also support Amendment 67A, in the name of the noble Lord, Lord Holmes, to turn that into an objective.

My biggest gripe with the FCA on the financial inclusion agenda is that it is passive. If a new product or organisation were to come forward serving part or all of that community, it would of course appropriately regulate it. The problem is that it does not use its incredibly powerful and influential role as a regulator to spearhead the actual change—to pick up the words of the noble Lord, Lord Holmes. It does not, for example, ask the competition to come up with a product or even look at mechanisms such as bank in a box, which is very popular across the globe. That makes it very easy for new entities to come to market, because the whole core regulatory piece comes off the shelf. That changes the dynamic dramatically. It does not take the initiative and, until it does, I can see that no one else will.

All of that in a sense leads me to my Amendment 228. Others have talked about the intractable problem of financial inclusion, and I suspect that many in this Room, like me, have been to round table after round table, meeting after meeting, conference after conference, with banks, credit unions, mutuals, fintechs and civil society groups to hear proposals for cracking the financial inclusion problem. Year after year, it is the same conversation, with relatively little headway. Others may correct me, but the number I have is that we still have 1.2 million people without a bank or credit union account, and in modern society that means that you simply cannot function.

I have huge respect for credit unions; I am delighted that there are amendments to support them and mutuals in the Bill. However, only 1.4 million people in the UK actually use them. That is a fraction of those who could benefit. Other forms of community development financial institutions are scattered, tend to be small and have limited scope. Local and community banks, as well as the old savings and loans, have largely been absorbed by the high street banks. In turn, as others have said, they have rapidly closed branches and anyway rely on a centralised system of decision-making that does little for local businesses or circumstances; we saw that graphically after the 2007 crash. There is a regional mutual bank movement—the noble Lord, Lord Holmes, addressed this in our debate on a previous set of amendments—that is trying to build, but the lack of capital is a major hurdle. Again, my noble friend Lady Tyler referred to the banking hub scheme driven by the access to cash task force, but it is growing exceedingly slowly.

--- Later in debate ---

[Baroness Penn (Con)]

In government, the Financial Inclusion Policy Forum is jointly chaired by my honourable friend the Economic Secretary to the Treasury and a Minister from the DWP; I will confirm who to noble Lords, because I would not want to get it wrong. That is the forum by which the Government drive the work and bring other actors into this space to co-ordinate on issues.

We recognise financial exclusion and the need to promote financial inclusion as an important area of policy work. We recognise some of the gaps raised today. I would point noble Lords towards progress that is being made in some areas.

We have also heard today about a changing landscape and how we will need to continue our work to keep up with it. As use of cash changes, we are legislating to protect access to cash, but we also need to consider how we can promote digital inclusion, so that, as services move online, people can access them in the same way as they have been able to previously.

The point of difference is not whether there is a problem but whether it is for the Government to lead on co-ordinating the response to that programme, with an important role for the regulators, or whether it is the regulators that should have more emphasis on driving this work.

[Baroness Kramer (LD)]

Can I put in a real request to the Minister? I understand that she is keeping to her brief, but could she get back to the department and tell it that it is time to do something about this, not just to have endless meetings, gatherings, reports, reviews or pieces of minor tinkering at the corners about it? This needs a driven central initiative. If she can answer me at all, can she take that on and go back to the department to tell it that it is time to do, not just to talk?

[Baroness Penn (Con)]

I will absolutely take that back to the department, but I disagree with the noble Baroness that no action is happening on this issue. We talked about access to cash; that is being legislated for in the Bill. On access to low-cost finance, I have talked about the money that the Government have put in to pilot a programme of interest-free finance for those who are most vulnerable. We have talked about access to bank branches. I acknowledge that the initiatives on banking hubs have not been as fast as people would want, but they put forward a solution to an issue that we face. We agree that it is a common issue. I have given examples of what we are doing on digital inclusion. In a later group, we will discuss the importance of mental health. We have put in place the Breathing Space scheme for those who are in problem debt and have mental health problems.

Yes, there is a lot more action to take. I recognise the problem and I will take the noble Baroness’s words back to the department, but we are legislating on some measures in the Bill. I have set out very specific measures that we are taking in other areas. It does not mean that the job is done, but it does mean that action is happening.

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[Lord Northbrook (Con)]

My Lords, I declare an interest as a consultant to an FCA-regulated investment management firm. Like the noble Lord, Lord Hunt of Kings Heath, and others I find it disappointing that the Bill fails to address the growing problem of financial fraud.

There was an interesting article in the Times on Saturday. It said that

“according to the National Fraud Intelligence Bureau, in the last 13 months there has been a reported loss of £4.3 billion from fraud and cybercrime. That is an eyewatering amount of money going into the pockets of criminals … Criminals are getting away scot-free but what is even more worrying is that they know that it is unlikely that any law enforcement are looking for them. This is not because the police are not interested, but simple maths. According to the Social Market Foundation, in 2021 in England and Wales just 1,753 officers and staff were dedicated to economic crimes such as fraud. That equates to just 0.8 per cent of the total workforce and yet”—

as other noble Lords have said—

“fraud accounts for 40 per cent of all reported crime. In many cases … the victims were simply given a crime reference number by the police and told there was nothing more they could do. It remained up to them to try to get their money back from their bank.

If one is determined to find the culprits, an alphabet soup of crime agencies such as the NCA, NECC and NCSC, all with different remits and jurisdictions, awaits. Most people give up and the scammers get to keep their cash.


Unless we increase the number of officers and staff that investigate fraud to reflect the amount of fraud reported we will continue to lose billions to criminals.”


Clause 62 addresses the issue only partly. It enhances protections for victims of authorised push payment fraud, which, according to the shadow Treasury Minister in the other place, quoting UK Finance figures, reached an all-time high of £1.3 billion in 2021. In the other place, the Government promised a review without giving a timescale, but more immediate action is needed.

The Bill ignores the fact that digitally savvy criminals are increasingly exploiting a range of financial institutions, such as payment systems operators, electronic money institutions and crypto asset firms, to scam the public. As my noble friend Lord Naseby mentioned, UK Finance pointed out that, in 2021, 44% of fraud was authorised push payments, about 40% was payment card fraud and 15% was remote banking.

As several noble Lords have already stated, last November, our House of Lords Fraud Act 2006 and Digital Fraud Committee released a report stating that the Government should introduce a new corporate criminal offence to ensure that big tech platforms and telecom companies tackle financial crimes. Under the Online Safety Bill, which is currently going through its stages, online platforms will face a duty of care to protect their users from fraud, but that Bill does not cover telecoms and other related sectors. It is a very good step but more needs to be done, including requiring tech companies to publish data on the nature and volume of scams on their platforms.

Of the amendments in this group, I am very much in favour of the all-encompassing Amendment 209 from the noble Lord, Lord Tunnicliffe, particularly as it includes, under the proposed new subsections (3)(d) and (e),

“telecommunications stakeholders, and … technology-based communication platforms”.

I have been disappointed by the Government’s reaction so far. Although Mr Griffith said in the other place that the Government

“are dedicated to protecting the public from that devastating and sadly growing crime”,

he also said that the Government want

“to be right rather than quick”.—[Official Report, Commons, 7/12/22; cols. 446-47.]

Well, one can be right and quick. As with several other points on this Bill, such as credit card monitoring, the Government do not seem to be moving very fast at all. If we believe the Sunday press, something may be happening, but I await the Minister’s response with interest.

[Baroness Kramer (LD)]

My Lords, the Minister will have picked up the mood of the Committee and I hope she takes it into consideration when she looks at and decides on her remarks. The concern that has been expressed from all sides of the Committee on fraud and the absence of action on it is loud and strong.

I support all the amendments in this group, including those from my noble friend Lady Bowles, and the noble Lords, Lord Hunt, Lord Davies and Lord Tunnicliffe. I particularly recommend my noble friend Lady Bowles’s Amendment 214, which goes after the enablers and facilitators with a “failure to prevent” clause. This group is continuously overlooked and is absolutely pivotal. Action in this area could be really effective and leverage some significant change.

My Amendment 217, in a small way, tries to counter one of the reasons why financial fraud flourishes: the lack of resources for investigation and enforcement against the perpetrators. The noble Lord, Lord Sikka, has addressed some of this.

I, too, am a great fan of Anthony Stansfeld and his personal courage in deciding, as the then police and crime commissioner of Thames Valley Police, to pursue the HBOS Reading fraud case when others had turned it away. That fraud amounted to £800 million and six people—I thought that it was five but the noble Lord, Lord Sikka, said six—went to prison. However, the fine that was levied on Lloyds, as HBOS’s parent, was £45 million. As the noble Lord said, not a single penny of that went back to Thames Valley Police even though the pursuit of the case cost that force £7 million. The consequence of that was heard loud and clear by police forces across the country. They expected that, because of its success, Thames Valley would end up getting reimbursed, and saw clearly when it did not. Since then, no police force has taken on a major case of financial fraud; that dates back to 1977. Frankly, it is a failure of duty. I hope that the Government will finally understand the consequences of that kind of funding decision.

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[Baroness Penn (Con)]

I have listened very carefully to the debate, and I see the point that noble Lords are making. This operates in other areas of government—there is the Proceeds of Crime Act and how that operates—but I slightly counter leaning too heavily into the fact that the police would have no incentive to investigate serious organised crime unless the costs of the investigation and the prosecution are reimbursed to them. Their fundamental role is to investigate and prosecute crime. I understand that there is a complex landscape when it comes to investigating and prosecuting fraud, and that is something that the Government have tried to tackle with the establishment of the economic crime command at the NCA—but it is ongoing work for us. The challenge before me today is that the funding that comes from these fines currently goes to the consolidated fund and is spent elsewhere on public services, so any change of this nature would have implications that go—

[Baroness Kramer (LD)]

If the Minister is able to persuade the Treasury or the Government to look again at this issue, can she make the point that, if you can get much more activity from the police forces on pursuing fraud, you end up with much more coming in in fines? To look at the US example, it makes far more money out of financial crime because it prosecutes financial crime far more extensively.

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[Lord Tunnicliffe (Lab)]

My Lords, this group contains Amendment 120, signed by me, my noble friend Lady Hayter of Kentish Town, the noble Baroness, Lady Altmann, and the noble Lord, Lord Morse. Our amendment would facilitate further parliamentary and public

“scrutiny of the work of the FCA to protect consumers by requiring the Financial Services Consumer Panel to lay an annual report before Parliament outlining”

the extent to which the FCA is successfully fulfilling

“its statutory duty to protect consumers.”

We have included the provision that the Consumer Panel must comment on the “adequacy and appropriateness” of its use of its powers; the measures it

“has taken to protect vulnerable consumers, including pensioners, people with disabilities, and people receiving forms of income support”;

and its “receptiveness to the recommendations” of the panel. We need a mechanism to encourage the FCA to exercise its regulatory duties more readily and consistently.

This is all in the context of very serious FCA failings. I am thinking particularly of the British Steel pension scheme scandal to which the FCA was found to be “slow to respond” at every turn, according to the Public Accounts Committee. If the Government are inclined to reject this amendment, I would appreciate further work in this space in the interests of all those who have fallen foul of FCA failures. I urge the Minister to look seriously at this amendment, given its cross-party support across the House and in the other place.

[Baroness Kramer (LD)]

My Lords, I am speaking a little earlier than I usually do on my amendments in case others want to join in on the Equitable Life issue. I thank the noble Baroness, Lady Altmann, for signing my first amendment; it is hard to tell what happened with the second. I hope she signed both of them. Yes? Fantastic.

I want quickly to follow up on the comments from my noble friend Lord Sharkey. Perhaps the Minister can clarify this for me. She will remember that the PPI scandal was widely spread across the industry. It was not unique to one or two companies, therefore no company that invested in that mis-selling was behaving as an outlier. Again, when interest rate caps were inappropriately sold to small businesses, it was not the action of one or two particular banks. It was industry-wide, therefore nobody was the outlier. Can she explain to me what this new consumer duty will contribute to enabling the FCA to act on these kinds of abuses? She will note that the FCA did not act until there was a major scandal and a huge amount of public pressure and pressure in Parliament because, when it looked at it, it could see no basis for action. Perhaps she might tell us how the consumer duty would have worked in those two key cases. I am sure that the Government must have tested those cases in coming to their decision to support the consumer duty, so I think she will be able to give us clarification on that.

Both of the amendments in my name arise out of the Equitable Life policyholder cases. I thank the Equitable Members Action Group, which has been frankly magnificent in support of the victims of the collapse of Equitable Life. It has fought for them in the past and continues to fight for justice.

Amendment 225 is a direct plea for compensation. When Equitable Life collapsed, 1 million people lost a significant part of their retirement savings. In 2008, the Parliamentary Ombudsman concluded that the victims’ losses were directly attributable to a decade of serious, serial regulatory maladministration.

The ombudsman made 10 determinations of maladmin-istration: one against the DTI; four against the Government Actuary’s Department; and five against the FSA, which

“resulted in the true financial position of the Society being concealed and misrepresented”.

I cannot think it extraordinary that, in a situation such as that, one would have expected the loss to the victims to have been remedied in full. In recommending redress, the ombudsman said that she would

“normally expect that, where appropriate, such a loss should be remedied in full”

and she called for the Government to

“fund a compensation scheme to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred.”

The Government later accepted that the amount of compensation to achieve that would have amounted to £4.5 billion but only £1.5 billion in compensation was announced by George Osborne. Some 37,000 with-profits annuitants were fully compensated but a further 10,000 received only £5,000—or £10,000 if they were on pension credit—because they took their annuities before September 1992. The vast majority of the victims—895,000 people who were not with-profits annuitants—received only 22.4% of their acknowledged losses. My amendment would carry out the recommendation of the Parliamentary Ombudsman and put everyone back into the position that they would have been in had maladministration not occurred.

This leads to my second amendment, Amendment 226, which would establish in law a requirement that, when the ombudsman finds maladministration by the regulators or government departments, all consumers affected

“are put back into the position they would have been in had that maladministration not occurred.”

Just imagine how we would react if a bank decided that, instead of paying the full compensation it owed, it would pay just a portion of it. I cannot see why the Government should be treated differently from an entity such as a bank. We would expect compensation to be paid in full.

How can we ask people to turn with confidence to the Parliamentary Ombudsman when recommendations are watered down after the fact? How we ask people to save when a rogue society—I think that describes Equitable Life quite well—cheats them? The Government make appalling mistakes to the level of maladministration —that is a very high bar; it is not a low bar—and then will not make it right. Many of the victims are now in their eighties and nineties so time is running out for justice; indeed, many have died without justice. That is the reason behind my two amendments. I very much hope that there is support for that perspective; indeed, I hope that we will finally see support from government.

In making a brief comment on the amendment proposed by my noble friend Lord Sharkey, on a return to a proper duty of care—it is one of the most important amendments that we are considering today —I want to stress, in this context, the private right of action. It seems to me that, without a proper duty of care or private right of action, we can never make banking institutions or other regulated financial services sector institutions live up to their full responsibilities to consumers.

[Lord Davies of Brixton (Lab)]

My Lords, I support all the amendments in this group. I dipped down the order a little because I wanted to hear what the noble Baroness, Lady Kramer, would say on Equitable Life. I have nothing to add. I was an Equitable Life policyholder twice over and no one came out of that whole sorry saga well. I do not think that all the necessary lessons have been learned, but that is perhaps for another debate.

I will address my Amendment 77. I am sure all noble Lords accept the principle that financial regulation should pay regard to the particular problems faced by people who have problems with their mental health. The issue is not about the principle but about whether it requires or deserves a place in Section 1C of the Financial Services and Markets Act 2000. I think it does, which is why I start by re-emphasising something. Many noble Lords might have heard this part of this speech before, because it has arisen in debates on the Online Safety Bill and on the last group—although the personnel attending this part of the Committee has changed somewhat, so I am not that embarrassed at repeating myself.

There are strong links between having a mental health problem and experiencing worse financial outcomes. Either a financial problem leads to poor mental health or pre-existing poor mental health leads to financial problems. Either way, mental health difficulties all too frequently make it harder to earn money, manage spending and get a fair deal on products and services. Life is likely to cost more precisely when we have less money available to spend.

Facing financial difficulties should not result in needing mental health treatment, but too often these things come hand in hand. Financial difficulties do not just cause stress and anxiety; this is often made worse by the follow-up actions—collections activity and having to go without essentials. It is not just an occasional problem. Here I must pay tribute again to the work of the Money and Mental Health Policy Institute, which in a series of reports has amply illustrated the scale of the problem and the relationship between good mental health and well-regulated financial markets.

Common symptoms of mental health problems, such as low motivation, unreliable memory, limited concentration and reduced planning and problem-solving abilities, are just the things that make managing money significantly harder. These symptoms can also make it more difficult to interact with financial services firms. For example, people with mental health problems are three and a half times more likely to be in problem debt than those without. Just under half of adults in problem debt also have a mental health problem. In nationally representative polling from November last year, the institute found that around half of those who were behind on multiple bills have had suicidal thoughts as a result of the increasing cost of living. More than 100,000 people in England attempt suicide while in problem debt.

A problem we face is that communicating with financial services providers can be particularly challenging for people with mental health problems. Three-quarters of people with mental health problems found at least one communication channel difficult to navigate, with four in 10 saying they found it difficult or distressing to make phone calls, for example. This has to be taken into account in FCA guidance. Part of the problem is that providers simply do not have the information about their customers to enable them to make better decisions. That is a crucial issue that will have to be addressed.

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[Baroness Penn (Con)]

My Lords, let me start by dealing directly with Amendment 76, moved by the noble Lord, Lord Sharkey, and spoken to by many other members of the Committee.

I assure noble Lords that, in coming to this debate, I took the time to remind myself of our debate on the then Financial Services Bill in 2021; it is either an advantage or disadvantage, depending on your perspective, that I participated at the time. It is worth going through what that Bill, now the Financial Services Act 2021, required. It required the FCA to consult on whether it should make rules requiring regulated financial services providers to owe a duty of care to consumers. It also set out that the consultation must include

“whether the FCA should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care”.

The then Bill further set out that the consultation must be carried out by the end of 2021 and any new rules introduced, if considered appropriate, before 1 August 2022. The FCA publicly consulted on its consumer duty in May 2021 and again in December 2021, and issued its final consumer duty policy statement in July 2022. In its consultation, the FCA noted that its proposals met the requirements in the Financial Services Act 2021.

[Baroness Kramer (LD)]

I think the Minister said that the legislation, as it finally went through, gave the FCA the option of either a duty of care or something else. Did that imply that it could be much weaker than a duty of care—and did anybody signing up to it understand that?—or was there a sense that it might be done in a different way but would be equally as strong and effective as a duty of care?

[Lord Flight (Con)]

The other fundamental point is that it is not the law; it is a sort of quasi-law that does not have the same power as law.

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[Baroness Penn (Con)]

The noble Lord gave other examples of the concept in the past, but it is important to root it in this particular context. Perhaps I can write to the Committee to expand on that point.

[Baroness Kramer (LD)]

Can I ask the Minister to follow up seriously on this? The reasonable expectation point matters so much. If it is a case only of outcomes, but that is then qualified by reasonable expectations, the reasonable expectations provide a complete out for PPI, interest rate swaps or virtually anything else that we see. The core concept of the consumer duty is that somebody has to be behaving outside the norm within the industry. The problem is that the norm within the industry was abusive.

[Baroness Penn (Con)]

The points that I gave in reply to the noble Baroness’s specific question on PPI and interest rate hedging products were in the context of the consumer duty as written, with the reasonable expectations provision in there. However, of course I take seriously the point raised by the noble Lord, Lord Sharkey, and I will write to the Committee to further expand on that.

Central Bank Digital Currencies (Economic Affairs Committee Report)

Baroness Kramer Excerpts

Thursday 2nd February 2023 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I also had the privilege of sitting on the Economic Affairs Committee for the development of this report under the excellent chairmanship of the noble Lord, Lord Forsyth, who is no longer in his place, and with the expertise brought by the noble Lords, Lord King and Lord Bridges. I tend to be of their mind but I really do not think that we can have four speeches in a row that represent only the more sceptical side of the argument. I am a debater so I will try to present some of the other views because they are significant.

First, there is the issue of cross-border transactions. I say to the noble Lord, Lord King, that there may be ways in which the cost of cross-border transactions can be reduced but, boy, are they not evident at this moment in time. I constantly need to bring money from the United States because I worked over there for many years. I am really tired of paying Barclays something like 15% of every transfer; it gets you one way or another, either through manipulated currency exchange rates or fees. Yes, there are alternatives—I also use some of the fintechs—but, frankly, one is grateful to be taken for just 5% to 7% rather than 10% to 15%. It is absolutely ridiculous. It is not just the KPIs and the regulations. The institutions have seen that this is an opportunity where they can take superprofits—and they jolly well do. I would grasp at almost any mechanism that would give us an efficient and fair cross-border transfer system. As I said, I am speaking on this personally.

If we expand this out to business, we are a trading country and we say that our future is trade, so this has to be tackled and dealt with. At this point in time, to turn down looking at any solution might be rather unwise. However, a different argument, and one that I found interesting, was brought before the committee. Noble Lords will be aware that something like 114 countries are currently looking at a potential CBDC. Three Caribbean countries and one African country have already launched a CBDC in some form or another—some in quite constrained forms, but they have launched it. Various countries are running pilots and, most significantly, in China the digital yuan is being trialled now in 15 cities, with transactions surpassing 100 billion yuan, or $14 billion, to last August. You can see the attraction of the yuan. At the moment, China says it will merely be used domestically, but its potential to export this across the developing world as a reliable mechanism for payment where people are suspicious of their local banks and their Government is extremely powerful. If China does that, I think we can all guarantee that along with the digital yuan will go a great deal of political control. Quite frankly, this is something that we have to look at from that perspective as well.

The European Union is taking a look at this issue and is expected to conclude its investigations in the autumn. The US is at a very early stage, and is probably much closer in its position to that expressed by the noble Lords, Lord King and Lord Bridges, but it has a great deal to lose if it is outmanoeuvred. Currently, the US dominates the international payment system through SWIFT, which is a major contributor to international financial stability. If China or Russia come to control a significant portion of the international payment system through CBDCs, western security, including its sanctions regimes, could be incredibly difficult to enforce and is potentially quite seriously compromised.

I have to say to the noble Lord, Lord Desai, that, back in the UK, quite a number of social justice groups that work with people who are financially excluded can see real possibilities in a CBDC. We know that all the banks, working together, have for years talked about dealing with financial exclusion and bringing people in from the cold. They have made some progress, but we still have something like 1.2 million people without a bank account because they do not trust the banks. There is a possibility that they might trust the Bank of England where they will not trust the banks that they see involved in various mis-selling scams and abusing their position of power, and where they are generally always going to be suspicious of the motives of the private banking sector. We have got to think some of that through. It interests me that so many of those groups are looking at CBDCs as a route to be able to deal with that excluded population.

The other issue that was brought to our attention, which has not been discussed, is the learning factor that comes from being so deeply engaged in digital currency, as a regulator such as the Bank of England would be if it delivered a CBDC. That becomes necessary as you start to look at the world of stablecoin and, more broadly, crypto assets. The Government issued their consultation on crypto assets yesterday. I printed it out and thought that I would read the summary section. It is absolutely impossible—you have to read the whole 42 pages; it really is a nightmare. It will be entertaining for me this weekend, because I am a geek. The reality is that there is extraordinary complexity in understanding this field and the plumbing that sits behind it; it is not just blockchain but the far more complex mechanisms for tracking, enforcement, reporting and monitoring—it is a very complex environment. It is also about dealing with the players that appear on the horizon that most of us look at and think are a Ponzi scheme by any other name.

The UK continues with its declaration. Last April, John Glen, then Economic Secretary, stated our goal to be a global hub for crypto assets. I can understand why; we are bleeding a lot of the traditional business here in UK. It was inevitable after Brexit, and it is happening slowly but steadily. We are trying to grasp the new area of green finance because it offers possibility and potential, and I hope very much we will become a leader in it. However, every time we think that crypto is bound to die now, after the latest scandal, it rises again from the dead, and we discover that billions of pounds of assets are flowing in its direction. If we want to be engaged in that world and decide that, like it or not, that is where the public are going and therefore that is where we have to be, the question is this: does it make a difference to our ability to understand, monitor and control if we have a regulator deeply embedded in the process by engaging itself in a digital currency?

I understand all the issues that have been raised—questions around why we would do this when there are other ways to do it; that all it does is upset the system; that we can have lesser innovation to make things work more effectively—but, if the public make the call that this is where they are going, that is where we also have to go. I hope very much that the Government will take all of that into account as they try to make these complex decisions in the future.