Financial Services Bill

Baroness Kramer Excerpts

Wednesday 18th July 2012 Lords Chamber

[Lord McFall of Alcluith]

My Lords, I should like to add my support. My name is not on the amendment. A number of months ago I spoke to Giles Andrew, of Zopa, about peer-to-peer lending, and I was very taken by what he said. I think back to the MPC and the American whose name escapes me but who is just departing from the MPC to take up a post at the Peterson Institute in America and his comments about a spare tyre. We lack a spare tyre in the UK in terms of our banking. Whether it is a Labour Government or this Government, none of us has solved the problem of getting lending out. We have a lot to learn in that area. Our top banks are responsible for 450% to 500% of our GDP. We will not make progress on that. This initiative should be looked at. Nothing fundamental will change tonight but it is good that it is on the agenda and I am delighted to be associated with it.

[Baroness Kramer]

My Lords, I am in full agreement with the three previous speakers, who have covered virtually all the territory—which at this hour I will not repeat. However, I should like to add one point. The only argument that I have received from Ministers outlining why this area should not be regulated is that regulation is potentially too heavy-handed and will prevent the sort of growth of a new, young industry. I think that in this House we have rather more faith in the regulator, which has begun to move forward and understand that appropriate and proportionate regulation is a standard that can be achieved. I say that in order to pick up the entity to which the noble Lord, Lord Lucas, referred. Unlike the peer-to-peer lenders which fall outside the current regulatory framework, Seedrs had to be regulated because it is marketing equity investments. It falls into the regulated arena and has had to seek authorisation.

I quote from the blog of the chief executive:

“The authorisation process was long and sometimes painful, but we feel that it was an absolute necessity in order to satisfy both the letter and the spirit of the law. The FSA scrutinised every aspect of our business model and operations, and after over a year of iterative questions and answers, they gave us the go-ahead.

We are proud to be the first platform of our kind to receive FSA authorisation—or, to our knowledge, approval by a major financial regulator anywhere in the world. But more importantly, we are convinced that it was the right thing to do to go down this route, and we now look forward to launching the Seedrs platform as a fully authorised business”.

It is using the authorisation as a marketing mechanism. Having talked to the regulator and then followed through with Seedrs publications, it is clear that both sides have been satisfied with this process. Rather than being too onerous, there is a sense that regulation has been appropriate and that the authorisation has matched the circumstances. If we can achieve that with the equity platform, surely we can achieve that with the lending platform.

Finance Bill

Baroness Kramer Excerpts

Monday 16th July 2012 Lords Chamber

[Baroness Kramer]

My Lords, because of the way in which legislation progresses through the Commons and through this House, I feel that all of us present tonight have discussed all the issues contained in the Bill on numerous occasions. I have to confess to a small temptation just to say, “Please refer to speeches I made earlier”. It means that I shall be brief and just hit on the few issues that I wish to highlight.

To me, the most important measure in the Bill is the raising of the starting threshold for income tax to £8,105 this year and to more than £9,000 next year. Two million low-income earners will have been taken out of paying income tax altogether by this and previous lifts in the threshold and, as the Minister said, some 24 million middle and low-earning income tax payers will have seen their income tax bills reduced by about £330. This has to be right. It moves us well on the way to a starting threshold of £10,000, as set out in the coalition agreement. As a Liberal Democrat, I see it as a significant move towards a threshold that, in essence, starts above the minimum wage, with the notion that there is a relationship between earnings on the minimum wage and the point at which income tax starts. I believe that that has to be right as a major incentive into work and a major measure to tackle long-term poverty.

Cutting taxes significantly at the bottom end of the earnings spectrum is now pretty much taken for granted as the right thing to do across all the parties. I only have a short memory, but I remember all the debates not long ago when this looked pretty revolutionary. The Labour Party chose not to do it in what were considered to be times of plenty, so the fact that it is now being achieved in times of austerity will, I hope, embed this type of philosophy across all the things that we do, no matter which party we come from, as we look at taxation in the future. This is one of the most progressive tax strategies that Governments have adopted in recent years. It has the character of a permanent change and to me is far more effective than the one-off one-year VAT cut that has sometimes been proposed by Labour—which, interestingly, would help the richest members of our community the most.

The Bill also continues to strengthen support for business. I am particularly pleased with the increased incentives for small businesses, new start-ups and entrepreneurs. However, I ask the Government to look at extending the enhanced capital allowances regime to small businesses more widely than just to those in the enterprise zones. I am a member of the All-Party Parliamentary Group on Rebalancing the British Economy, an excellent group that I recommend to the House. Of all the evidence that the group has heard, I have been most struck by that given by Brompton Bicycles, a firm that sells a conventional product but is successful in large part because its manufacturing processes are at the cutting edge of technology. UK small businesses desperately need to accelerate their adoption of new manufacturing technologies to compete and grow. They may not be high-tech in their products, but to be high-tech in their manufacturing tends to make them much more competitive and effective. Incentives to invest in these new processes for small businesses are crucial and I encourage the Government to put this high on their agenda.

The tax avoidance measures in the Bill are very welcome and, I would say, long overdue. Stamp duty has been a particular concern of mine because avoidance by the wealthy is so unfair to the ordinary house buyer. The Bill clamps down on some schemes that use domestic corporate structures to avoid stamp duty, though, in my reading it has not yet eliminated what I would call the Cayman Islands problem—the number of properties that are now already in Cayman Islands trusts or will be put into them in future, avoiding not just stamp duty but also capital gains and inheritance tax. I hope that the Government will make a move on that very soon because it remains a significant loophole and a real sore to every taxpayer who pays up on stamp duty.

Economic growth overshadows all fiscal and economic debates. I am therefore pleased that the Funding for Lending scheme was launched last week by the Treasury and the Bank of England. However, it strikes me as extraordinary that the Treasury and the Bank of England have had to set up a scheme in such a way that banks can get discounted loans only by actually maintaining or increasing lending. That tells you that that they have responded to just about nothing else. To me, that underscores the argument for banking reform, which, hopefully, will be a major occupation for this House after Christmas.

This is a sensible Bill that has been produced in difficult times and I very much hope that we will see it pass.

Governor of the Bank of England

Baroness Kramer Excerpts

Tuesday 10th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, the Bank of England is going to have a very large new mandate, and the points that the noble Lord makes are rather important to this. Whether on the MPC, the FPC or the PRA, the governor is going to be very well supported, not only by deputy governors but by a range of internal and external experts. Just for clarification, the governor no longer chairs the court; that is chaired by a non-executive chairman. I do not know how it was in the noble Lord’s day, but I am sure that co-operation with the Treasury is going to be the least of the new governor’s difficulties.

[Baroness Kramer]

My Lords, I regret that in the Financial Services Bill we have not established a mechanism whereby Parliament can have a say in confirming the new superwoman or superman to take up this role. Will the Minister at least give us an assurance that the Chancellor will look for someone who breaks away from the mould of groupthink, which contributed so much to the financial crisis in 2008, and who, while having all the necessary financial and economic background, perhaps comes with some other, different experience so that we can burst the bubble that has been a real problem in financial regulation?

Financial Services Bill

Baroness Kramer Excerpts

Tuesday 10th July 2012 Lords Chamber

[Lord Barnett]

My Lords, I support the noble Baroness, Lady Noakes, in a way, although the amendment would add even more confusion to the Bill than is already there. My noble friend Lord Peston referred to the fact that it is about shocks. I hope it is not an urgent shock, because the amendment would give time for draft orders to be laid for a period of up to 60 days or before the end of a period of 12 weeks. Then there must be orders in both Houses. I assume that both Houses would also take advice from their Select Committees. All that will be going on while urgency is required. I find the whole thing as confusing as my noble friend does. We are told at the end of the amendment that if this shock arises when the House is not sitting, all kinds of other things happen. As my noble friend said, if the noble Lord, Lord Sassoon, cannot clarify the whole thing for us in asking for the amendment to be withdrawn, we should be glad if he would take it away to think about it further and let us know what he or someone else thinks about it.

[Baroness Kramer]

My Lords, I am very much in favour of scrutiny by this House. I cannot pretend to be an expert either on the different varieties of orders or on the different measurements and tools that the FPC might introduce, but I would be concerned about a mechanism in this House that enabled tools to be amended. Although we have some experts, the capacity to understand the internal workings of a tool with sufficient precision to be able to introduce an amendment to a ratio strikes me as not the particular skill of a legislature or this House. We can raise questions about it or require that it be dismissed because the Government have not sufficiently made their case, but to amend it is not a skill with which we are particularly equipped.

For that reason, and with great respect to the House, it seems to me that the capacity for amendment is inappropriate in this case. The capacity to force the Government to make their case and to judge on that case is entirely appropriate, but not the capacity to substitute; that worries me.

[Lord Myners]

My Lords, I have considerable sympathy with the amendment. I declare my interest as a former member of the court from 2004 to 2008. I fully support the creation of the Financial Policy Committee—I think that it will become the most important committee in the Bank—but I am deeply anxious about the governance of the Bank and the lack of appropriate oversight from the court, the oversight committee as envisaged or, indeed, Parliament.

The Minister is in many ways the architect of this restructuring of regulation, as part of a project which he led for the Opposition, having ceased to work in the Treasury. I understand his thinking in evolving the proposals, but events have moved on. In the light of what we now know about the Bank of England, we must ask whether it is still right to put so much authority in the hands of the Bank without appropriate accountability.

When I was a member of the court, I sat in on a meeting of the Financial Stability Committee. That would have been in 2006 or 2007. At that meeting, one of the governors proposed that as a mechanism to cope with the crisis, the Bank should buy half a dozen or a dozen bicycles in order that members of the Bank could move swiftly and anonymously around the City. That tells us a huge amount about where the Bank sits in terms of its understanding of the complexity of financial markets. Some of the things that we have seen over the past few weeks have simply raised more questions about the wisdom of putting so much power in the hands of the Bank.

We are also about to have a piece of legislation to implement the recommendations of the Independent Commission on Banking. Having been intimately involved in the Government’s response to the banking crisis from 2008 onwards, I would point out that the losses incurred in the British banking system—at HBOS, Lloyds and Royal Bank of Scotland—largely occurred within the ring-fence. The losses of $5 billion which we have seen recently reported in London from JP Morgan took place within the ring-fence as envisaged by the Vickers report. The noble Baroness, Lady Kramer, looks somewhat sceptical about that. Those losses occurred within the treasury operations, or the investment office, of JP Morgan, and as such lay within the ring-fence rather than outside it. In being sympathetic to this amendment, and hoping that at the very least the Minister will go away and reflect on that, I think that the Minister will have to rethink some of the fundamental building blocks of this legislation—in particular the great powers and responsibilities that we are placing in the hands of the Bank of England—before we reach its next stage. These are powers and responsibilities that the Bank of England has historically not had and, in my judgment, is still not equipped to exercise.

If we are to do this then, at the very minimum, we must ensure that the Bank and its various agencies, including the Financial Policy Committee, are properly accountable to a court which is clear about its functions and clear about who it reports to. As a former member of the court I know that it was never clear who we reported to. It must also be clear about its parliamentary accountability.

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[Lord Peston]

Speaking as an economist, that sounds complete nonsense to me. I point out to the Minister that the measure I have just described was at the centre of the collapse of both the British and American financial systems in the post-2007 era. This is precisely what these financial intermediaries were up to and precisely what led to the enormous damage that all the economies have suffered. How the Minister can possibly say that that is not a relevant tool is completely beyond me. I could give him some more examples, but let us leave it at that one.

The only question then is whether the noble Baroness, Lady Kramer, is right that if it were introduced as an order we could not debate it in a way to be able to say that the Government’s method of dealing with this problem could be bettered. That is the only point at issue here. I would not like us to do this all the time. I would simply like us—and I mean the other place at least as much as us—to have the power to be able to say, “We can see that you’ve identified the problem and that you’ve got a solution, which you’re introducing by this order, but we think you could do it better this way”. That is all I am arguing and I cannot see what is unreasonable about it.

[Baroness Kramer]

I thank the noble Lord, Lord Peston, for giving way on that because I am again working in murky waters here. The Minister may correct me but I think the example that he referred to was of a leverage ratio, in which the assets had to be weighted in some way for their riskiness or toxicity. There would be an argument for using those weights within a leveraged ratio, would there not? You can use risk weights on anything, I say, having used them. However, that is not the kind of detail we would want to get into on the Floor of this House. My argument is that it would become so highly technical. If there is an amending capacity, that is exactly where we will take ourselves—and without a series of blackboards and three academics to lead us through it, I am not sure we could manage, frankly.

[Baroness Noakes]

Perhaps I might intervene on whether there is the power to amend or not. Debating under super-affirmative procedure is not like considering a Bill. There are no amendments tabled and voted on but there is the ability of either House to pass a resolution saying what it thinks. Much as the noble Lord, Lord Peston, articulated, either House would be able to consider whether it thought that the tools were up to the job. More importantly, as I tried to explain in my opening remarks, Parliament could consider the potential impact of using those tools and say to the Government whether it thought the tools appropriate in the context of the wider impact, not simply the narrow impact, on the regulation of financial institutions. The super-affirmative procedure does not allow a specific amendment process but it allows Parliament to say, “Government, we think you have got this wrong”. It is in contradistinction to any of the other procedures where we have the nuclear option: we either accept the order or we do not accept it. It is a more deliberative and amenable process, in particular for considering these very new tools which are being talked about. I hope that helps the Committee.

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Moved by

[Baroness Kramer]

98A: Schedule 2, page 174, line 3, at end insert—
“( ) In paragraph 13, for sub-paragraph (3)(a) substitute—
“(a) a director of the Bank to chair its meetings (“the chair of the Court”), and”.”

[Baroness Kramer]

My Lords, I think that I can be very brief in moving this amendment. Its purpose is to close a gap between the Government’s clearly stated intent and the language in the Bill. I am sympathetic to those who have drafted the language, because the complexities of the Bank of England Act 1998, as amended by the Banking Act 2009, make it quite hard to follow through a single train of thought, and I suspect that that is what has caused a trip-up in the language in this instance.

On the first day in Committee on this Bill on 26 June, the Minister was absolutely clear that the oversight committee—whose existence and procedures he put forward and the Committee accepted—should be made up of non-executive members of the Court of the Bank of England, and that its chair should also be a non-executive member. However, the language in the Bill does not allow that train of thought to follow through. It would permit the Chancellor to appoint the governor or deputy governor to the role of chair of the court and hence see that individual put into the position of chair of the oversight committee. I shall not bore the Committee at this point by trying to track through that but I assure noble Lords that that is the consequence of the current language. I simply say to the Government that I hope that someone can go away and fix this more elegantly than I have been able to do and, on that basis, I shall not be pressing the amendment.

[Lord Sassoon]

My Lords, I do not know whether anyone else wants to come in on this but it may be helpful if I speak now. This amendment in the name of my noble friend Lady Kramer returns us, as she says, to the territory of not only Bank of England governance but nomenclature, which we discussed at some length two weeks ago. As my noble friend says, one of the changes made in the Banking Act 2009 was intended to amend the Bank of England Act to require the court to be chaired by a director, which, as we established two weeks ago, means a non-executive member—again, as my noble friend pointed out. However, she has gone further because it is only my noble friend, with her razor-sharp eye, who has noticed that the relevant provision inserted into the Bank of England Act 1998, while allowing the court to be chaired by a director, does not require that it be so. That is clearly not correct.

Therefore, although I cannot accept the amendment as drafted because it does not cover all the necessary ground to give full effect to this change, I assure my noble friend and the Committee that we will go away and draft the necessary changes. I thank my noble friend for bringing this to the Committee’s attention.

More generally, I am aware from the discussion that we had two weeks ago that there are some irregularities in the terminology in the Bank of England Act which I certainly had difficulties with and I think that other Members of the Committee did too. A prime example of this is that the so-called Court of Directors includes the executive members of the court who are not, and cannot be, directors. This is plainly absurd. To say that this is all justified because the Bank has been in existence for 300 years so we just have to live with it is not the right approach. As I think I wrote following the first day in Committee, I will consider further whether any other changes might be made to the 1998 Act to clarify these terms, making them more consistent with current usage. We cannot proof the legislation against further changes over 300 years but we can at least try to update a few things.

With thanks to my noble friend, I ask her to withdraw her amendment, as she has already indicated she will do.

[Baroness Kramer]

I beg leave to withdraw the amendment.

Amendment 98A withdrawn.

Financial Services Bill

Baroness Kramer Excerpts

Tuesday 10th July 2012 Lords Chamber

[Baroness Kramer]

My Lords, I was delighted to add my name to Amendment 139A. The excellent speeches which precede me really laid out the case, so I have just a couple of comments. Although the financial services industry is currently the target of very much justified anger, I hope that this legislation sets a regulator in place which will last more than a decade. I think that the previous legislation lasted pretty much for 12 years. We have to take the long-term view and make sure that it is fit for purpose for the long term and when the period of correction within the industry has passed.

It also seems that the language is carefully crafted in such a way that it did not in any way encourage the regulator to look at this as an opportunity to take more risk but as an opportunity to make sure that there was healthy and sustainable growth within the financial services sector. Perhaps I may give a simple example: in a few later amendments we will look at social investment, which is one of the new fields that are beginning to gather some momentum. That is an aspect of the financial services industry which has initially gone to Luxembourg.

The City now is expressing serious interest in the opportunities. Many institutions in the UK could use those kinds of instruments. But the regulator has not been aware of the differences between that sector and other sectors and, therefore, the sensitivity of regulation necessary to support the growth in a new area. I think most people would agree that we are not talking about unethical behaviour or the kind of risk that might be involved in some aspects of the more casino side of investment banking.

There are many areas where there is huge potential going forward. It will be absolutely essential that the regulator takes that on board and is a supporter of the healthy and sustainable growth of this industry, both to support the real economy and the many direct jobs involved with the sector.

[Lord Hodgson of Astley Abbotts]

My Lords, I support Amendment 101A in the name of my noble friend Lord Flight about the importance of maintaining the competitive position and that that needs to be uppermost in our minds. But I am also attracted by Amendment 139A which has drawn in the regulatory principles that are to be followed by both regulators. It seems to me that here we will be starting to set the culture. It is the culture of the regulator that will have such an important impact on the way our financial services develop and the way the people who work in them behave. As my noble friend Lady Noakes said, it is important not just to see this through the prism of City eyes but to realise that there are a wide range of financial services in Edinburgh and the provinces of this country which require the appropriate regulatory framework.

Competition, by its nature, introduces novelty—novelty being something that the regulators tend to fear. It carries risk, but of course what is old and familiar is much easier to deal with. In a way, that is liked. But, particularly when established firms tend to draw attention to the risks of novelty, the regulator tends to back down. I am not suggesting that we should not take risks. We need to be risk aware but we must not be risk averse. There is a danger that in the pendulum within the Financial Services Authority and, no doubt, driven by the criticism that it has faced, we have gone to the end of the risk-averse scale. There is a great deal we still need to do in this Bill to provide the right framework and culture. I shall look forward to returning to this in amendments to which we will come shortly. For the time being, I am delighted to support my noble friends’ two amendments.

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[Lord Flight]

My Lords, I shall speak briefly to Amendments 108A and 117A, which essentially cover the same territory. They seek legislation which explicitly encourages the FCA to extend consumer access to financial services that meet their needs.

To that end, it is desirable that the FCA should assess the impact on markets and consumers when making regulatory decisions. For example—we have yet to see the result—the RDR reforms, though from many aspects fully justified, run the risk of having the reverse effect of reducing substantially the access to financial services and products for the great majority of people. In the absence of a requirement there is the risk that the FCA will always be steered towards risk-averse regulation, preferring to see markets restricted for large groups of consumers in order to avoid any individual consumer getting sub-optimal products.

The issue also arises in the context of the Government’s welcome initiative to encourage the development of simple financial products. If it is to succeed, it will need a regulator which is working with the grain of that policy rather than in the other direction, and which has a clear brief to act in a way to help extend consumer access to financial services that meet their needs, and not the reverse.

[Baroness Kramer]

My Lords, Amendments 102, 118 and 121 are very dear to my heart. They are perhaps some of the most important amendments to the Bill that have been brought forward. I have been interested in financial services for deprived communities for more than 20 years, partly from living in Chicago and seeing the impact that community development banking had on the revival and regeneration of Chicago’s south side. It was an area once written off because it was both black and impoverished and, in the end, it was only action by the banking regulator, under legislation, that drove forward change which was, and continues to be, dramatic.

The noble Lord, Lord McFall, who is not in his place today, will remember the visits that the Treasury Select Committee made to community banks in the United States in 2006—I take some credit for nagging the committee into making some of those visits—which made clear how much we are missing in this country. Both individuals and small and new businesses in the United States have a degree of access to financial services and credit that we cannot rely on in the UK.

The changes in the United States came through a piece of civil rights legislation, the Community Reinvestment Act. This amendment is not a copy of that Act, but it attempts to repeat its achievements. The data that the Act forced banks to publish exposed vacuums in lending across the United States and, to no one’s surprise, they matched very much with the boundaries of deprived communities and—I hope that we would not see the same thing here—the boundaries of communities of ethnic minorities. The regulator then stepped in and required those banks to meet the target of serving those communities, or to fund someone else who would, before allowing them to engage in mergers and acquisitions. It was an extremely effective strategy and continues to be so to this day.

The amendment is also a read-over from the banking reform White Paper, because it would allow the regulator to play a significant role that is described in paragraph 4.4 of that White Paper as,

“a more diverse banking sector”.

Surely the areas where banks are failing to play a role should be at the top of the list for new and diverse participants.

On our previous day in Committee, I said that the role of the regulator nowhere seems to touch on a responsibility to make sure that financial services are available all across our complex communities. Competition is focused on making sure that there is multiplicity of products, not that there is coverage of the full range of demand. Surely if we wish all our citizens to be able to participate in the economic growth of the country and want small businesses to become established, to grow and to build our economic future, we have to pay attention to that access and coverage issue as well. The requirements set out in these amendments get us to that point.

[Baroness Hayter of Kentish Town]

My Lords, I rise to support the amendment moved by the noble Lord, Lord Sharkey, and to speak on other amendments in this group. I believe that the Minister received a letter from the Community Development Finance Association which specifically supports the amendment. It is a powerful case and I trust that he will respond positively at the end of this debate.

Although the Bill grants the FCA significant powers, it makes little mention of consumer access to financial services and products. Access to such services is essential in a 21st-century society, but the Bill makes no mention of it. It would be extraordinary for a competition authority, as the FCA will be, to be required to judge the effectiveness of competition in the markets which it regulates without taking into account whether the market is delivering products and services that are good value for money.

There is not much point talking about a fairer, more competitive market if consumers are unable to access the services on offer, yet uncertainty as to whether the FCA can have regard to affordability might make it reluctant to take action on a fundamental aspect of competition for fear of being challenged. Amendment 104AA, in my name and that of my noble friend Lord Eatwell, is about access by consumers to financial service products and the need for good value for money, including for the financially excluded in society.

In many parts of the country, there are individuals who struggle even to open basic banking facilities or to gain access to small levels of credit, yet credit is a necessity of life for many people, bridging the gap, as we know, between when one has to spend and when paydays arrive. I know that in another place Mark Hoban has said he fully agrees that consumers should have access to financial services that meet their needs, but he prayed in aid the FCA’s new competition objective, which he said would give it an explicit mandate to consider the needs of consumers and to act to improve competition. However, that does not necessarily bring people into the market; it is probably only competition for those who are already there.

Amendment 104AA would remove any uncertainty by spelling out accessibility and affordability. Amendment 102 offers a way forward for financial institutions which reflects a decent, responsible approach to the needs and ambitions of communities in a way that would benefit not just them but the economy as a whole. The amendment would promote an appropriate level of services in deprived communities, as we have heard, and ensure that the FCA plays its role in that by its interventions in affordable loans, savings and insurance products. As we have heard, that is crucial for small businesses and social ventures as much as for individual consumers. It is estimated that more than 4.5 million small businesses and social ventures and more than 3 million households are unable to access the fair and responsible finance that they require. It is particularly apposite in the context of the current revulsion—one has to use that word—felt about some parts of the banking community. This is the chance for them to rise to the challenge and show what the good side of banking can be.

All of us have heard of small shops or service providers going to the wall thanks to the inappropriate policies of banks. It is not simply about mis-selling of interest rate swaps, important though those were; it is also about the unavailability of financial products for small entrepreneurs or, sometimes, for larger ventures that want to locate in some more deprived areas. There needs to be a proper investment strategy for social enterprise and small businesses, especially where they work in those difficult areas.

In the past, I thought that encouragement alone would work in making banks be socially responsible in such a way as to help consumers and potential consumers in difficult areas. I no longer think that. When the previous Government were trying to set up basic bank accounts, we tried very hard, along with the FSA, but people were still denied access. People need a bank account and insurance these days; they have become essentials rather than nice- to-haves.

Amendment 104AA would make the FCA have regard to consumer access to affordable and appropriate financial services, and Amendment 118A requires an access and choice code to make clear what the FSA expects of those it regulates. I hope that the Minister will be able to accept the amendments and enable the FCA to play a role not just in promoting competition for existing consumers but for those whom we all want to be consumers.

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[Lord Sassoon]

My Lords, I share many of the concerns raised in this debate. Access to financial services and access to lending for individuals and businesses are vital to our society. The question we have to ask is: who should be charged with tackling access issues? The FCA will be a conduct of business regulator with a clear objective concerned with creating the right conditions in which well functioning markets can meet the needs of consumers. Ultimately, the menu of products and services they offer to whom and at what price is a decision for firms themselves. The FCA is there to regulate the market, not to ensure that the market delivers a particular set of services or products.

Where the market fails to provide the services that consumers need, there may well be a case for intervention in the market to promote consumers’ access to financial services. The noble Baroness mentioned that issue in connection with the previous Government’s drive on basic bank accounts. That is rightly the province of government and action needs to be taken. However, I do believe that it is not a matter of regulation. It is a matter of social policy and it is therefore the responsibility of the Government. It is not the job of the FCA to prescribe that there should be universal provision and who should be required to deliver it. That is for the Government.

I will not detain the Committee with the great detail that I could go into of the actions we are taking to promote and extend access to financial services: to boost lending, particularly to small businesses; to nurture and encourage the mutual sector; and to help increase consumers’ capabilities and work with industry to make access to simple products possible. We have touched on some of these issues in considerable detail in the past. There are some areas which my noble friend Lord Sharkey specifically raised, such as bank charges. I draw his attention to the agreement we announced with the banks last November, under which the major personal customer account providers came forward with a new agreement to send text alerts when balances fall below a certain level, and to provide buffer zones and so on. The action there has been significant.

The provision of data is another area which has needed and continues to need attention. It has had some attention. Information is already regularly published concerning lending and the provision of loans and other services in deprived communities. For example, the banks that are members of the British lending task force have publicly committed to continue to publish subregional lending data on an annual basis through the BBA. I could point to a significant number of initiatives. These are things that the Government will continue to work on but they are outside the ambit of the Bill.

[Baroness Kramer]

Is the Minister aware of the mechanism that has been successful in the United States and how much that is tied to action by the regulator under the Community Reinvestment Act? It is the regulator that has driven that process forward, because only when conditions are met does it give permission for the banks to act in ways for which they need the regulator’s permission. Is he abandoning a tool that we know has been successful?

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[Baroness Kramer]

My Lords, I will add only a few words, because of the powerful speeches that have preceded me. After hearing the noble Lords, Lord Phillips and Lord Hodgson, who have spoken with such enthusiasm, the Minister may have the wrong impression that this sector is taking off with great and roaring strength, so why on earth should we worry about the role of the regulator? However, if he looks back at the numbers that have been quoted to him, the amounts of money that are being raised or proposed are extremely small compared to the demand and the need. The regulator needs to act in order to release the energy of this whole sector.

I know that the Government are constantly concerned that no one sector should be favoured above the other, but it is important to recognise that this sector is distinctively different. I draw his attention to one example that may help clarify the matter—and which I have raised with the regulator, which acknowledges that it is clearly a problem. This is based on a communication that I received from someone involved as a financial adviser, who directed me towards a report done by Nesta in collaboration with Worthstone called Financial Planners as Catalysts for Social Investment. The response that they got back in the course of this work made it clear that the regulatory environment is not yet appropriate for this sector. The report contains quotes such as:

“The social investment asset class, due to its early-stage of development lacks the regulatory clarity of other markets”.

That lack of clarity is turning into a real problem. It is not clear, for example, that an independent financial adviser can advise a client on a social investment because the return is a combination of some sort of more traditional manner of financial return, but also of a social benefit—and how is that to be measured? More to the point, how is it to be set within the suitability requirements that financial planners have to observe when they advise clients? The report states:

“Ultimately, there is a need for the FSA”—

which I suppose is the FCA now—

“to establish clear guidelines around suitability to provide financial planners with a frame of reference. Consistency is required, together with a set of understood and agreed practices and procedures”.

That is one small example. Rather than tackle this issue by issue and try to hoe the ground in the most difficult kind of way, we should make sure that the regulator clearly understands that they need to act in a way that would enable this industry to develop to its full potential. That would accelerate the flow of funding, and I believe that as an economy we would only benefit from that.

[Baroness Hayter of Kentish Town]

My Lords, I first apologise to the Committee, because I would like to degroup Amendment 128AA, which is in this group. I know that the Minister has had minutes’ notice of this, but I apologise to others. It is an important issue, and clearly we will return to that.

I support the amendment moved by the noble Lord, Lord Phillips, and I will also speak to Amendment 104ZA. As we have heard, social enterprises are businesses that trade to tackle social problems and improve communities, people’s life chances, or the environment. They make their money from selling goods and services in the open market, but they reinvest their profits back into the business or the local community. So when they make profits, society profits. They do not make profits for the shareholders. In future, perhaps we should adopt the words of the noble Lord, Lord Hodgson, and call them not-for-profit distribution, NFPDs, which may be the new word for them.

Funding is certainly needed to start up enterprises but, just as critical is the need to scale up and sustain them. That means getting access to modest and responsible sources of finance which will grow profits and jobs in this case, and make the local and national economy work. Appropriately funded social enterprises can lead an economic fight-back in the most deprived communities. The more deprived the community, the more likely you are to find social enterprises working there. They reinvest in the community. Indeed, 39% work in the 20% most deprived communities. They employ more people relative to turnover than mainstream small business and are outstripping other SMEs in terms of growth and sustainability. Just as access to funding can unlock the social enterprise sector’s potential, so it is the single largest barrier to the sustainability of this sector. Last year, 44% of respondents to a survey said that they were hampered by the availability and affordability of finance.

I make no apology that our Amendment 104ZA asks the FCA to discharge its general functions in a way that promotes growth and development of social finance and social investment. We ask that it should promote competition. This is, if you like, an emerging market, which needs a little help at the moment. I think that the word “promote” is not too dangerous but if the Minister would accept “enable”, I would settle for that. There is a distinctive difference to this sector. I hope that our regulatory system is big enough to engage with it.

--- Later in debate ---

[Baroness Kramer]

I am sorry and recognise the late hour, but if we let this opportunity go we will not get it back again. I wonder whether the Minister will—even if it is afterwards—sit back and think through this issue. I am a simple person. I come from a banking background where you look at outputs. We know that investors are seriously interested in these kinds of products. We know that there is a need on the far side, whether individuals, small start-up businesses, charities, social enterprises and whatever else. In the middle we have a regulatory pattern of behaviour. If the regulation was not acting as a barrier, surely the outputs we would have would be a thriving community development banking sector, a thriving social investment sector, and a thriving social bond market. We can look at other countries and see these things in far more advanced states of development than we have. The conclusion has to be that the regulator is playing a significant role as a barrier in this process. If we cannot tackle that in this legislation, how on earth can we tackle it?

[Lord Hodgson of Astley Abbotts]

The FSA currently has responsibility for one particular sector of the social enterprise movement—the industrial and provident societies. I suggest that the Minister asks his officials in the morning to ring the FSA and ask how many people are working in the industrial and provident society section. The answer is half.

Financial Services Bill

Baroness Kramer Excerpts

Tuesday 3rd July 2012 Lords Chamber

[Baroness Kramer]

My Lords, I appreciate the introduction to the topic from the noble Lord, Lord Eatwell, and I hesitate to speak on behalf of all of my noble friends but I think we have become aware in this country and across the globe that shifting the balance of policy in favour of economic growth is a desirable target. Therefore, to use language, as he has, which downgrades that role in the way that it is approached by the Financial Policy Committee frankly strikes me as unfortunate. We are talking to some degree about semantics but we have learnt the hard lesson that promoting is more important than simply paying regard. He could argue that when his own party was in government it chose the wrong policy path and was pushing on a boom. But had it really examined that boom, it would have recognised that underneath it the fundamental necessary structures for economic growth were not being achieved.

We have all heard in a variety of other debates that manufacturing was declining steadily, certainly as a percentage of this country’s GDP and in comparison to competitive economies such as Germany. We know that there was an incredible overreliance on a banking sector that was reporting forced profits because we were hearing an inflated set of reports from the banks that were not based on a genuine economic boom. We know that underlying that whole period, youth unemployment was steadily growing even though it was masked by overall employment figures. We know that that particular boom was being fuelled by consumer debt that led to both intensive borrowing by individuals and therefore a lot of purchasing, which in a sense was a false contribution to the underlying economic growth, and also inflated house prices creating a house-price bubble. Requiring the new FPC to dig beneath what is actually happening in the economy, to recognise what is happening with the fundamentals of economic growth and then to give that a great deal of importance in the way that it shapes its policy is essential.

I am glad in many ways that the whole issue of economic growth does not have much in the way of party characteristics. I hesitate to quote from the BBA at this point but, like a curate’s egg, everybody has good stuff in parts and this is one of the good parts. It talks about the Chancellor’s commitment to an economic growth objective to stand beside the financial stability objective and says:

“This is to be welcomed as we have said on many occasions that there is a risk that insufficient weight will be placed upon the achievement of economic growth and jobs which must be the overarching objective. This we believe feeds through to ensuring that the FPC be set the symmetrical task of using its tools and powers not only to subdue demand at the top of the economic cycle”,

which is the issue of sustainable growth,

“but also to ensure that reserves are used in support of lending capacity at the bottom”.

That strikes me as very important. Mr Sants, before he stepped down from his role at the FSA, said:

“Changing the FPC’s remit is really important. The interaction between regulation and economic growth should be debated at the FPC”.

It seems to me that the language we have used frames that debate.

I wanted to take this opportunity to comment on part of the amendment in my name and those of the noble Lord, Lord Sharkey, and the right reverend prelate the Bishop of Durham, because it contains within it one further element that the noble Lord, Lord Eatwell, at this particular point in time, has not addressed. That is the language that includes within the objective the promotion of,

“a stable and sustainable supply of finance to the economy”.

We see that as important enough to be worth integrating and highlighting. We should not simply assume that it will be part of an economic growth objective without a specific mention.

The reason we have done that is probably evident to many in your Lordships’ House. We have all shared frustrations over Project Merlin, quantitative easing and credit easing, and I fear we may have the same problem as we look at the consequences of the Government’s new “funding for lending” scheme. The Government, or the Bank, effectively push money into the system, which gets as far as the banks but does not emerge the other end. The second quarter report from the Federation of Small Businesses shows that demand for credit among its members was stable but that more small firms than ever were being rejected, with the rejection rate now reaching 41%.

The Bank of England’s credit conditions survey, for that same second quarter, shows that for small businesses, interest rate spreads actually widened, despite the Government’s loan guarantee scheme, which is meant to bring down interest rates for small businesses, and despite a sharp drop in default levels among them. Small businesses are demonstrating that they are less risky than they might have seemed historically, but are being rejected at a greater rate and also found that they were facing wider spreads on interest rates. We have to acknowledge at present that high street banks are the only distribution network of any size to get credit to those who need it on a small scale, but looking at the overall situation, we can easily recognise that the high street banks have many easier ways to generate a higher level of return than lending to small business.

There is a reason why, in our language, we have used the word funding and not just credit. The supply of finance is not just a debt issue but one of equity capital. Capital willing to take risks is hard to find. Angels are fewer than ever and venture capitalists are finding funds harder to raise. Indeed, long-term money of any kind is difficult to find at the moment, as I suspect the Government are finding as they try to look at ways to develop infrastructure projects. Some disintermediation of the banks is, if anything, aggravating the problem.

The UK differs from many other countries because it has very low retail investment in bonds and equities. Retail money is less volatile and tends to stick through the good times and the bad times. Germany is a good example, although there are many others, of a country where businesses, particularly small businesses, have been far less impacted because that retail sector, investing in both bonds and equities, is available to them.

There is another area where it is crucial that we have the attention of the FPC because the regulator can make a difference. We have a system now where the small end of the spectrum is very ill served—the small stockbroker, who often followed the small company, has largely gone. Most of the funding we have is simply fairweather funding. To change this, we have to develop a reliable funding supply. I understand that that is not for the regulator alone, but the regulator has a huge role to play if we are ever going to close those kinds of yawning gaps. This amendment puts it in a position to act. Some will say that there is already a competition objective in this Bill. There is a competition objective for the FCA, but it is very much designed to encourage a multiplicity of products—not to bring in new players or expand the scope of existing players, but to cover access to funding right across the business spectrum. Those are two very different things and we believe that we must capture that second aspect in the language that we use.

The FPC has to be engaged and to be part of making sure that there is capacity for funding the system across the whole spectrum, whether it be small, medium or large businesses. I would argue it also covers disadvantaged individuals and social enterprises, charities and other bodies which play a crucial role in our society today and will play bigger roles in the future. I suspect that other people will have much more to say about that, perhaps around this amendment and others. It is to push those underlying principles that we have put down Amendment 35.

[Baroness Valentine]

I am grateful to the Government for tabling Amendment 35A. This is a very important and conceptually challenging issue. I hope noble Lords will excuse me if I talk around the subject a little because, while it is certainly a step in the right direction, it is not at the moment clear to me whether, in legal terms, this amendment sets the right framework.

We should, perhaps, first consider that whatever framework we adopt must be flexible enough to operate effectively in three primary sets of economic conditions: first, the healthy state when one would expect the Financial Policy Committee to be scanning the horizon for future shocks at the same time as being conscious of any impact its actions might have on economic growth; secondly, crisis, where stability must be paramount; and, thirdly, the current state where uncertainty, principally from the eurozone, must be expected to continue for some time. This is, of course, a situation over which we have little control.

In the first and third of these scenarios, the issue at stake is the interplay between economic health and financial stability and the difficulty of balancing the two. There is a well-known saying:

“A ship in port is safe, but that’s not what ships are built for”.

In this instance we can see absolute financial stability as a safe port but it would be ironic, given our island’s history as a trading nation, if the port were so secure that our businesses could not put to sea.

At a simple level, this is seen in the tension between capital ratios set by regulators and the demand that the banks increase lending, variously voiced by parts of the Government, some parts of the business lobby and the media. It is sometimes forgotten that the collective interests of the banks are, in fact, aligned with those of the Government in seeking economic health and financial stability, but both sides of the lending equation have curbed their appetite for risk. Just as banks are mindful of their own exposures, small businesses, because of economic conditions, will be both less robust to lend to and less keen to take on debt.

On this point, it is essential to have a common understanding between the Bank of England, BIS and the Treasury, and for the banks and the real economy to have the same understanding of where we sit on the risk spectrum. We also need the Government to be clear whether, and to what extent, they can or want to influence lending in the marketplace through initiatives such as the Business Growth Fund, the green investment bank or, indeed, their shareholdings in certain banks.

The amendment, as proposed, makes it clear that financial stability retains primacy. Some have argued that there is a logic to this because it mirrors the hierarchy of the Monitory Policy Committee’s objectives. The flaw in this argument is that the primary objective of the MPC is clear and measurable. Inflation is X%. Conversely, I know of no indicator as simple as inflation that would provide a proxy for financial stability. The primary objective of the FPC therefore requires judgment. We cannot state that financial stability is 23 whereas last month it was 27. So the point at which the secondary objective comes into play can remain for ever opaque.

I think this argues for one of two approaches: either tightening up the FPC objective to one which is measurable or leaving it as it is but then recognising that the interplay between the primary and secondary objective is necessarily different and therefore that the current drafting may not in fact be fit for purpose.

The challenge for the FPC is that it is unlikely that any Government will be prepared to state explicitly where the axis between stability and growth should sit. As we saw under the previous regulatory culture, the Government’s desire for risk-based regulation, under which banks could and would be allowed to fail, lasted only as long as it took for a bank actually to find itself on the brink of failure. Under the new regime, I suspect that Governments of all political persuasions will wish to champion both goals, leaving it to the FPC to judge how to offset the two. I believe, therefore, that we need a clear mechanism under which the FPC can demonstrate how it has achieved its primary objective while complying with the requirements placed on it by its second one and not hindering the Government’s economic strategy.

--- Later in debate ---

[Lord Kerr of Kinlochard]

My Lords, like the noble Lord, Lord Neill, I hope that the noble Lord, Lord Eatwell, will withdraw his amendment. His three-dimensional answer to my question made it impossible for me to support it, because I fear that he is taking a hostage. The most important thing that must be done is to establish quickly how we can ensure that the fixing of LIBOR cannot happen again. That is the crucial operational thing to do. I agree with those who say that this is an international scandal. I agree that around the world, people know about this. There are plenty of other scandals in the banking system that must be addressed, such as the mis-selling scandal and questions of remuneration and bonuses. There is plenty of time for a study of the culture of the banking and financial services industry. That is important but not urgent. What is urgent is to do something operational now.

I understand from the Prime Minister’s Statement that the Wheatley report will be published this summer. That fits very well with the Tyrie exercise, which will finish this autumn and can establish what happened. It should not go into areas of criminality. What was said by the noble Lord, Lord Carlile of Berriew, was fully justified; I would not go down the special prosecutor route but would follow the advice of the noble Lord, Lord Howard. We need a quick operational inquiry to establish how to make sure that this shocking thing—this poisoning of the water supply that is a scandal around the world—is put right and cannot damage London, and borrowers and lenders, any more.

I will say one further thing to remedy an omission in our discussions, and those of the other place, yesterday. I am confident that Mr Agius is an honourable man. It is a pity that no tribute was paid yesterday to the way in which he immediately accepted responsibility and felt that the buck must stop with him.

I was reminded of the noble Lord, Lord Carrington. Nobody thought he was responsible directly, hands on, and involved in the loss of the Falklands. I do not believe for a moment, and I do not believe that anybody in this Chamber believes, that Marcus Agius was in any way involved in fixing the LIBOR rate, yet he undoubtedly did the right thing, and it is important that that should be put on the record. It makes a striking contrast to the behaviour of some others in public life these days. I advise anyone intrigued by this reference to read a remarkable speech made on Friday on the Steel Bill by the noble Lord, Lord Fowler, referring to another Member of the present Government.

[Baroness Kramer]

My Lords, I want to associate myself with the words we have just heard from the noble Lord, Lord Kerr, on the importance of acting quickly. I speak as someone who has spent most of her career in banking, working with clients on transactions that involve the LIBOR rate and I understand the significance of the issues we have discussed in this House.

As others have said, this is not just a UK issue. The earliest that any inquiry, as proposed by the noble Lord, Lord Eatwell, could begin would be the autumn, so we are looking at something like a two-year inquiry. I am not sure that he understands—

[Lord Eatwell]

If the noble Baroness would allow me, perhaps it would be for the benefit of the Committee if I said that I certainly did not rule out the Wheatley or Tyrie inquiries: I argued that both have something to contribute. I say that to the noble Lord, Lord Kerr, as well. Therefore, I accept the whole notion of acting quickly—it can be handled—but we then have to ask: what next?

[Baroness Kramer]

When the noble Lord, Lord Eatwell, talks about the Tyrie inquiry, I am still not clear whether he is talking about the Joint Committee of both Houses, in which the Lords are as involved as the Commons, or whether he is simply talking about the Treasury Select Committee acting, if you like, in its normal way. I think that he has avoided giving us clarity around that issue.

The critical thing here is that other jurisdictions will act. The United States will not sit around while a committee lasting one or two years talks about the fundamental issues of banking, so the actions that we are going to take have to be decided in a far more immediate way. We have great opportunity with this Bill and with the forthcoming banking reform Bill. The changes will have to be embedded in those Bills at the latest if we are to stem the tide of real disadvantage.

If anyone doubts that work is afoot elsewhere to deal with the problems that we have been so slow to pick up and deal with, I suggest they take a look at today’s Wall Street Journal. There is an article in there called “Lining Up Potential Successors to Libor”. It is very clear that we in the UK are on the back foot and we need right now to get on to the front foot and not start playing for the long grass, however worthy that is. It is that sense of urgency that I want to convey. If we hear that the answer for the British Government is going to be a commission, there will be a very cynical reaction in the United States that once again the Brits are going for another long-term committee with navel-gazing and endless discussion, rather than immediate action. Perhaps someone can tell me what the value is of a commission that reports after all the changes have taken place. That sounds to me like a method for closing a stable door long after the horse has bolted. It is crucial to get that horse moving now, without delay.





I also have to say that I regard a Committee of both Houses as an extraordinarily effective way of getting to the root of a problem. Think of the expertise we have in this House. Surely that is exactly what we should be using. The breadth of the experience we can bring is important. Moreover, it is very different from Leveson because at the heart of that inquiry is the reality that it is investigating a relationship between politicians and the media, one in which there is a high suspicion—outside here I would probably go further, but that would not be tactful—of collusion and corruption. Politicians cannot investigate themselves under those circumstances, but I do not think anyone is suggesting that that is the situation in the banking industry. We are not talking about political collusion or corruption here.

Indeed, if we doubt the effectiveness of the political system in handling this, let us look at Bob Diamond’s resignation this morning. It is easy to see what happened. He knew he would face the Treasury Select Committee on Wednesday, so he sat down with his lawyers—I am guessing that, but I suspect I am right—and started to role-play how he would behave in the meeting. Soon he realised that his position was totally untenable. That is effective action, and it is what we should be building on, not going back to some sort of long-term commission. The additional benefit is that if there is leadership from Parliament, it will continue to observe and supervise the banking industry for many years. It will not pack up and go away after 18 or 24 months. We should build on that, not lose it.

Perhaps I can make a last comment. We seem to be going through an extraordinary trend, if you like, of subcontracting out our responsibilities. As politicians with the privilege of being part of this Parliament, surely we ought to be taking the tough decisions. We should not be trying to find someone else to contract out to every time there is something tough to do, otherwise we might as well just become a commissioning body. I would argue that we should look at our strengths and skills and take this opportunity to act. That would show the banking industry and the wider world what we can do. The longer term is too late, and we have to be aware of that.

FSA Investigation into LIBOR

Baroness Kramer Excerpts

Monday 2nd July 2012 Lords Chamber

[Baroness Kramer]

My Lords, I said last week that there was public outrage, and that outrage has only been growing. Mr Diamond remains in post; he just does not get it. That now raises questions about the fitness of Barclays’ board, which also just does not get it. Does the Minister agree that this matters? I very much welcome the review that Martin Wheatley will lead. Whatever changes are made to the rate-setting of LIBOR will always depend on engagement with the major banks. Therefore, there must be confidence that the banks fully understand their role in providing that information.

The other area of outrage, as I recognise it, is the perceived impotence of the FSA in being able to pursue sanctions for activities that are so widespread that, according to the Telegraph, they have their own technical term—the,

“dislocation of Libor from itself”.

Will the Minister explain why there is no scope under Clauses 397 and 400 of FiSMA, which I can quote if he wishes, to pursue individuals and the officers who supervise them? Surely an amendment could be put into the Financial Services Bill. It would be welcome if there was any way for it to be retrospective. Can he also explain why it was the CFTC in the United States that jumped on the issue in May 2008, based on information from whistleblowers, whereas with the same information the FSA did not become engaged until 2010? Obviously, I am dependent on media reports. Can we please look at the powers, resources and capacity of the FSA to ensure that it is never again in such a position?

[Lord Sassoon]

My Lords, first, I will not comment further on the senior executives of Barclays. Clearly the chief executive is coming before the Treasury Committee later this week and will be asked a lot of questions that will further elucidate those aspects.

On the question of prosecution, the basic flaw is that the setting of LIBOR was not and is not a regulated activity, so the FSA does not have a direct way in. My noble friend is right to be quizzical and shake her head but that is the position as it was under FiSMA and the construct put in place by the previous Government. If the FSA wanted to bring criminal prosecutions, as it has done with the civil settlement, the attempted fixing of LIBOR is an activity that is ancillary to a regulated activity. The construct is difficult and the chairman of the FSA has pointed out the difficulties.

As I said in repeating my right honourable friend’s Statement, most normal people would assume that there was a prima facie case to look at the Fraud Act and false accounting and that is precisely what the SFO was doing. Through the inquiries that are going on, we will look at what needs to be done to plug gaps in the financial services legislation. For the avoidance of doubt, I should tell my noble friend that there will certainly be no retrospective legislation in respect of criminal action because—before anybody else jumps up—it would be against the European Convention on Human Rights. I am sure that my noble friend would not want us to go there—and she acknowledges that.

As to which regulator started work when, I would not rely too much on what the newspapers say. As with all these things, I am sure that in due course the regulators will look into their conduct and the lessons to be learnt. I certainly would not take as gospel the newspaper reports of who started when.

FSA Investigation into LIBOR

Baroness Kramer Excerpts

Thursday 28th June 2012 Lords Chamber

[Baroness Kramer]

My Lords, the public are rightly outraged by the manipulation of interest rates and Europe is going to look more suspiciously at London just at a time when we are trying to protect the City. So there are great issues at stake.

Will the Minister explain why the FSA’s fine on Barclays is so small? As far as the company is concerned, £59.5 million is a freckle and far less than the fine in the United States. Surely it is not the senior regulator in this case. Why are there no sanctions at all—we are not just talking about criminal sanctions—against anybody senior? It is one thing to go after the traders but systematic mismanagement and manipulation of the market over four years surely affects senior people and has to engage them. The questions are to be asked by the Treasury Select Committee, which is an outstanding Committee, but surely they should be coming from the regulator with the ability to follow with direct sanctions.

Lastly, it is crucial that the Financial Services Bill is looked at again because, although we have a new form of regulator coming in the FCA, which I hope will be rigorous and effective, we must ensure in this Bill that the regulator has real teeth so that there is fear when that regulator looks again at this kind of mismanagement, and a fundamental change in behaviour.

[Lord Sassoon]

My Lords, I share the concerns of my noble friend. This is the largest fine ever imposed by the FSA. The US comes at this in a different way in many respects so the seriousness of the issue is demonstrated by the size of the fine in relation to anything else that has ever been done by the FSA in this country. It is the largest. The FSA sets the fines and it should do so. This has to be an independent process and I am sure nobody would want the Government involved in it.

As far as the investigations are concerned, my noble friend may be jumping ahead of the ongoing investigations by the FSA and SFO. I do not know where they will come out or who will be involved, but those investigations are going on. As for a powerful regulator for the future that is able to do this, I could not agree with her more. The FSA model completely failed. As I have already explained, the Financial Conduct Authority will be focused and will have as a core objective the integrity of markets. It will be much better placed to deal with these kinds of problems as they come up in future.

Financial Services Bill

Baroness Kramer Excerpts

Tuesday 26th June 2012 Lords Chamber

[Lord Peston]

My Lords, I shall not talk about the Treasury representatives because we have an amendment relating to them later in the list and I shall save my vitriol for then.

I did not understand Amendment 9 until the right reverend Prelate the Bishop of Durham spoke. I am grateful to him because I now understand it. In essence, he is saying that three different people ought to chair the three different committees, which makes perfectly good sense. Chairing a committee is an important task and would involve a great deal of work, and I am sympathetic to the amendment.

However, going back to my and my noble friend Lord Barnett’s amendment, these appointments are only titular. It is not for your Lordships’ House to decry those who like titles. In other words, if there are three people, men or women—although I am afraid that these days it seems to be all men in the Bank of England—who want to be called deputy governor, it is no big deal. If it turns them on, and if a wife refers to her husband as the deputy governor and that cheers her up, why not? However, I am concerned as to whether it is more than that in two ways. First, do you get paid more for being a deputy governor? The Minister keeps telling us that we have to be economical, so we have to ask whether this is the correct way to spend money.

More specifically, the amendment is also about the following. First, can we have a full job description in each case? Does a full job description for these three posts exist, and if so can we see it? Secondly, how are the three of them appointed? For example, are the three jobs advertised, and can someone from outside apply to be a deputy governor with appropriate references, experience and so on? Thirdly, who appoints to this post? Those are the questions that I wanted answering. In the transparent, modern world in which we live, the answers should be that anyone can apply for these jobs, that the jobs should be advertised, and that there should be a precise job description and a proper appointing panel. That is the world in which we live, so I hope that the answer to all my questions is yes.

[Baroness Kramer]

My Lords, perhaps I may comment quickly on Amendment 9. The noble Lord, Lord Turnbull, presented what I suspect will be the Government’s argument, which is that having the Governor of the Bank of England in all these roles provides co-ordination. At Second Reading, I described the twin-peaks strategy as a small mountain range, so your Lordships will understand that I appreciate the need for co-ordination, but to use as the co-ordinating mechanism the single person of the Governor of the Bank of England strikes me as exceedingly inadvisable. The challenge is huge. It is a mechanism for co-ordination that is likely to suffocate, challenge and encourage group-think, but, frankly, no matter how much of a superman the individual who is appointed to that post is, I cannot see that they could possibly have shoulders broad enough to carry all those roles in the demanding way which this legislation and the economy require. Co-ordination strikes me as not the appropriate argument. If the argument is to be made, it must be on other grounds and not to make up for other weaknesses in the Bill.

[Lord Eatwell]

My Lords, the essence of the debate on these amendments comes down to a lack of a clear governance structure in the Bank. If there were a clear governance structure, with the roles which exist in modern corporations—described clearly by the noble Lord, Lord Sharkey—being performed, we could understand how the co-ordinating activities referred to by the noble Baroness, Lady Kramer, might be carried out. In general, any organisation would be expected to review its internal operations and create an efficient internal management structure, but there is no evidence that the Bank of England is capable of doing this. Given the significant powers that are to be bestowed on the Bank, surely the Government cannot sit idly by. This may be unfortunate, and primary legislation is probably too rigid for the goals that the noble Lord, Lord Sharkey, seeks, but we cannot accept a dictatorship at the Bank or even a belief elsewhere that such a dictatorship exists.

Generally, I am in favour of developing the roles of the deputy governors, particularly in the three major areas of financial stability, monetary policy and prudential regulation. That could provide a framework within which a more collegiate structure of decision-making was developed in the Bank. As I noted at Second Reading, given the differing roles of the MPC, the FPC and the PRA, it is likely that they will put forward contradictory proposals. If one person is supposed to chair all those committees, he or she will either be driven mad or will concentrate on one area to the neglect of others, as we saw the Bank do in the run-up to the crisis. Therefore it seems to me that the right reverend Prelate’s idea of having the deputy governors chair the committees is a good one. Then the Bank could presumably develop a proper management structure in which it was the role of the governor of the Bank to gather together the views of the committees and develop a coherent policy structure from their differing perspectives.

The right reverend Prelate is on to a very important development. It is unfortunate that these procedures do not seem to be developing within the Bank itself and that we do not have a clear governance structure for a Bank which is going to be placed, as the Government say, at the centre of UK financial regulation, and therefore I am very sympathetic to the ideas that the right reverend Prelate has developed.

--- Later in debate ---

[Lord Peston]

My Lords, I shall speak to Amendment 8A in my name and that of the noble Lord, Lord Barnett. In doing so, I shall not comment on Amendment 6 in the name of the noble Baronesses, Lady Kramer and Lady Wheatcroft, simply on the grounds that the subject is totally beyond me. I am no expert on governance whatever, and I could not tell good from bad governance if it hit me over the head. However, what the noble Baroness said sounded very persuasive, and I am sure that she is right.

I also apologise to my noble friend Lord McFall. I just did not notice his Amendment 10. If I had done so, I would have tabled an Amendment 10A as I have tabled Amendment 8A.

I take noble Lords back to the Bank of England Bill, which the noble Lord, Lord Barnett, and I played a full part in debating. Indeed, one thing that I still remember with enormous pleasure and some amusement is the fact that, while the noble Lord and I were enthusiastically in favour of the Bill and said so, Conservative noble Lords who were then on the opposition Benches were doubtful. One of my tasks was to try to persuade many Conservative Peers that what Gordon Brown was doing was not only the right thing but that it was a very strong move in a Conservative direction to give independence to the Bank of England for monetary policy. I still give the odd lecture, and I sometimes boast that I was once involved in educating the Conservative Party in the correct way in which to run monetary policy.

In the course of debating the Bank of England Bill, all references to feeding back were to the House of Commons. The noble Lord, Lord Barnett, and I put down an amendment—I think that it was the only one that was accepted from us—to say that wherever the word “House of Commons” appeared it should be deleted and replaced with “Parliament”, and the Bill was changed so that Parliament became the body, meaning that it included the House of Lords. That established the fact, on which Lord Williams of Mostyn got a definitive opinion from the Clerk of the Parliaments, that the House of Lords is fully entitled to look at any matters of this kind and to be consulted on them. The Commons does not have to take any notice of us on these matters, but we can certainly exercise our rights. That is why I object very much to the form of Amendment 10 in my noble friend’s name and feel that the correct wording should be, “Treasury Committee of the House of Commons and the Economic Affairs Committee of the House of Lords”. This is a matter of principle for your Lordships’ House. I am personally not persuaded by any of what might then happen, but that is another story. If it is going to be done, I feel very strongly that both Houses should have access.

That was all about appointment, which comes up several times later on other things, but I shall make one speech do for all the other times it comes up. In my total naivety, it never occurred to me that there was any question of removal from office being a serious matter. That is another reason why I apologise to my noble friend. I would probably emigrate if we got to a state in our society where we were dealing with the removal from office of the Governor of the Bank of England. I hope that that was what the noble Lord, Lord Turnbull, was saying as well. We are all very keen on science fiction, but I think that we can go a little too far.

[Baroness Kramer]

My Lords, I have attached my name to Amendments 5, 6 and 10, so I think I will by definition be hated by any future Governor of the Bank of England.

I want to speak for a moment on Amendment 6, which was spoken to by the noble Baroness, Lady Wheatcroft. The 2009 report by Sir David Walker, on behalf of the Government, which took a detailed look at corporate governance in the UK banking industry, is very relevant. Your Lordships will remember his recommendation that:

“Balance also needs to be found between the role of executives and non-executives on a well-functioning bank board”.

Amendment 6 goes a significant way towards achieving that and establishing that real relationship between a non-executive chair and the Governor of the Bank of England as the chief executive. That distinction is also important for the purposes of accountability which others, including the Minister, have described as significant and important.

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[Lord Sassoon]

My Lords, it relates to the former. I do not think it is fundamental; it just fits in with the construct of the legislation that we are talking about. There is no mystery behind it; it is purely a case of the grammar that the draftsmen have thought appropriate to use in the different lines.

[Baroness Kramer]

My Lords, the Minister has just put forward an argument for retaining the current process, which excludes the Treasury Select Committee from participating in the appointment of the governor. However, has he ever looked at the idea of allowing the Treasury Select Committee to question pre-appointment, even if there is no veto? I think we can all see a potential scenario—one that we hope never to have—where an appointee who is already in position, although they may not have commenced the role, comes before the Treasury Select Committee and does not win the confidence of the committee or the confidence of Parliament. That would leave us in a particularly dire situation and it is one that I think most of us would wish to avoid.

[Lord Sassoon]

I attempted to address the pre-appointment versus pre-commencement issue and I shall not repeat my remarks, other than to say that I believe that, for the market reasons I have given, among other reasons, it would be damaging if there were significant doubt over the clarity of the appointment of a particular individual as governor. One can very easily see how such a situation would be damaging and dangerous in present market conditions. Therefore, I repeat that I believe there is a distinction—

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[Lord Hodgson of Astley Abbotts]

My Lords, I found this amendment attractive because it seemed to be very direct and to provide a very important check. Having served on the boards of companies, it is extraordinary how often you find in the post-investment assessment report, which is what we are talking about here, that you have not quite landed up where you thought you were going when you set the policy and made the decision in the first place. That is a very important issue. As my noble friend Lord Flight has just said, the court is the body responsible, and it is perfectly possible when dealing with a matter that may be sensitive, such as individual directors’ conduct, for appropriate arrangements to be made to avoid that. I am not entirely convinced of the need for an oversight committee, and I am not sure that it cannot be carried out within the arrangements of the court as it stands.

I am very grateful to my noble friend for the extensive answer that he gave. Perhaps I might raise one point about proposed new Section 3D, on publication. Subsection (1) of the proposed new section says:

“The Bank must give the Treasury a copy”.

I do not want to sound cynical, but one wants to be able to ensure that this can come out unimpeded. One does not want to find that the hidden hand will be able to say, “Actually, it’s most inconvenient if you say this. We’d like this to be doctored, monitored, removed or dealt with in one way or the other”. The “public interest” referred to in proposed new Section 3D(3) is always a useful cosh to avoid things that are not necessarily against the public interest but may be simply embarrassing at the time. When he comes to speak further, can my noble friend give an assurance that my cynicism is unfounded and can he address the point made by my noble friend Lord Flight about the proliferation of committees?

[Baroness Kramer]

My Lords, I join with the comments made by the noble Lord, Lord McFall, and I have a couple of quick comments to make on this very substantial proposed new section. I have two queries on it, which I wonder whether the Minister can clarify. The oversight committee, as he conceives it, is to be chaired by the chair of the court. Am I correct in understanding that he expects this to be a non-executive chair? Although there is currently a non-executive chair of the court, the Minister will know that I have concerns about the Banking Act 2009. In Part 7 of that Act, Section 241 seems to be quite ambiguous about whether that is a requirement or merely in the gift of the Chancellor. If I am right, I hope that that can be corrected at some later stage of the Committee.

My second set of comments concern proposed new Section 3C(5), on performance reviews. When the cynics among us—I am afraid that I confess to being one—read a phrase that says:

“In the case of a performance review, the Committee must have regard to the desirability of ensuring that sufficient time has elapsed … for the review to be effective”,

the Minister will understand that there is an element of thought that that could mean the long grass, if we are not careful. Paragraph (b) of that proposed new subsection,

“to avoid the review having a material adverse effect on the exercise by the Bank of its functions”,

could be read as “no serious criticism required”. I would like some assurances from the Minister that that is not a possible reading.

The Minister will understand that some of those concerns are reinforced by widespread criticism of the delay, under the current banking structure, of the three reviews that were started in May this year. Seeing those reviews now in place, it seems an awfully long time since the financial crisis. There are also real questions about the scope of the reviews, particularly the review looking at the provision of emergency liquidity assistance in 2008-09. Many of us would have asked, “Why did this not start in 2007?”. Notwithstanding the fact that the Treasury Select Committee has looked at that, it is surely not a substitute for the Bank of England or the court doing the work itself. There are concerns in that area, and I look for reassurances from the Minister.

[Baroness Drake]

My Lords, perhaps I might ask the Minister a very brief question. Proposed new Section 3E(2) says:

“The Oversight Committee must … if or to the extent that the Bank accepts the recommendations, monitor the implementation of the recommendations”.

My question is very simple. If the Bank does not accept the recommendations, what then happens?

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[Lord Eatwell]

My Lords, I welcome Amendment 11, which is the Treasury Select Committee amendment, put down by my noble friend Lord McFall and the noble Baroness, Lady Noakes. I also welcome the government amendment, which is taking us forward on this vexed issue of the governance of the Bank of England. I regard that as a general welcome, notwithstanding any criticisms or questions I may later have about some particulars of the amendment.

However, before getting into the discussion of Amendments 11 and 13, I reiterate the question raised by the noble Baroness, Lady Kramer, with respect to Section 241 of the Banking Act 2009, where it appears that the chair of the court is in the gift of the Chancellor of the Exchequer. There is nothing in that clause to suggest that the chair must be one of the non-executive members.

[Baroness Kramer]

I have tabled Amendment 98A, which I think fixes the problem, although it may be fixed by the Government before we get to that point.

[Lord Eatwell]

Let us hope that it is fixed by the Government, to general approbation.

I turn to Amendments 11 and 13. The noble Lord, Lord Turnbull, perhaps hit the right note when he said that there are elements of each of the two amendments that, if combined, could be turned into a truly satisfactory structure for this activity. As far as I can see, there are three crucial differences between the amendment proposed by my noble friend Lord McFall and that put forward by the Government. The first, as several noble Lords have pointed out, is that my noble friend’s amendment refers to the Court as a whole. Secondly, the Government’s approach would not allow the proposed oversight committee to consider the merits of the policy pursued by the Bank, a point that could be considered under Amendment 11. Furthermore, there is a third point: the Government’s approach does not commit anyone other than those internal to the Bank to know if a report is lying somewhere gathering dust, unpublished because of some concern about the public interest. Surely this is not the best way to grow confidence in the procedure, and the suggestions made in Amendment 11 would give some confidence that if reports were not published, at least there was some outside overview of the report and the reasons why it would not be published.

Given the detailed scope of the Government’s amendment, I am going to concentrate on its provisions. This represents a major concession, finally forced out of the Bank through gritted teeth by the criticisms of the Treasury Committee and the Joint Committee, to some sort of oversight of its actions. As the Committee will be well aware, the Bank has severely damaged its own reputation, as several noble Lords have said, by its persistent refusal to conduct a proper, wide-ranging review of its conduct in the run-up to the financial crisis. There was the downsizing of the financial stability department, for example; its obsession with moral hazard during the crisis when what was urgently needed was a recapitalisation of the banks; and indeed since the crisis the governor and others have persistently suggested that they knew what was going on but either did not have the tools to respond or were not loud enough in their protestations. I must say that that seems to be a derogation of duty.

So the Bank has form that has been damaging both to itself and to the effective development of stability policy and the British economy. It would greatly help the Committee if the Minister would specify precisely in what ways the proposal for an oversight committee now before us differs from the proposals first advanced by the Bank in January. Has the Treasury added to or subtracted from the bank’s suggestions, and what are the implications of the Treasury’s modifications? Can we now have confidence that the Bank will not only learn from its mistakes but have sufficiently critical procedures in place that it learns before making them?

I am afraid that my confidence in these proposals was severely undermined by the Bank’s own commentary on the proposed oversight committee:

“It is vital that the Oversight Committee does not seek to second guess the decisions of policymakers themselves. The passing of such judgements could threaten the relationship of trust that is necessary between policymakers and the Oversight Committee. Were the Oversight Committee to be seen to ‘take sides’ in the policy debate, those policymakers from whom it differed would be less likely to trust as independent its judgement of whether proper processes were followed”.

I think that that is nonsense. I really had no idea that policymakers in the Bank were such delicate flowers that they could not withstand a little robust assessment of their decisions.

On several occasions today, Members including myself have quoted from the evidence of Mr Greenspan before the US House of Representatives, when he said:

“This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year”.

At least Mr Greenspan had the guts to stand up and admit what was true for every central banker: that this was an intellectual failing, and analysis and judgments were wrong. That is why it is imperative that the oversight committee has the powers to penetrate groupthink at the Bank, to assess and evaluate analysis and judgments and to create a framework in which the institution can learn and adapt in the rapidly changing environment of financial markets. As the Treasury Committee itself said:

“It is unrealistic to suppose that an oversight body could plausibly be expected to commission an external review of a policy decision without assessing the substance”,

of that decision.

What is the full significance of the phrase,

“keeping under review the Bank’s performance”,

in new Section 3A(2)? Will it enable the oversight committee to review the judgments of the Financial Policy Committee as defined in proposed new Section 9C and the Monetary Policy Committee as defined elsewhere? For example, does the expression “duty of the FPC” include the tasks set out in new Section 9C(2)? Does the review of strategy include the right to criticise the intellectual framework used by the Bank in pursuit of its responsibilities under new Section 9C and the proposal of alternative frameworks? In other words, can the oversight committee do exactly what the Bank said it did not want the committee to do when it reviewed the proposal?

Then there are the phrases that the noble Lord, Lord Tugendhat, has referred to in respect of an office or employee of the Bank who could conduct the review but who has to be approved by the governor. I find that rather disturbing; surely if there is an employee who is truly competent and is chosen by the court and/or the oversight committee, and that employee may end up criticising some judgments of the governor, it is not appropriate that the governor should be able to approve that person.

As my noble friend Lady Drake pointed out, under new Section 3E(2) the oversight committee must monitor the Bank’s response and, to the extent that the Bank accepts the recommendations, monitor their implementation. As she pointed out, it is not at all clear what is going to happen if the Bank rejects the committee’s report. What is the committee supposed to do, slink away with its tail between its legs? What is supposed to happen in this case? What of the oxygen of publicity? As I have already commented, new Section 3D makes clear that the Bank may choose not to publish a report. That is entirely understandable in particular circumstances, but surely an outside eye needs to be cast over that decision, as my noble friend Lord McFall and the noble Baroness, Lady Noakes, have suggested.

I shall briefly address Amendment 29 in this group, which is in my name and that of my noble friend. Given what I have said already, the point of the amendment should be clear. As the Bill is presently drafted, the oversight committee would be able to keep only the procedures of the Financial Policy Committee under review. If that clause is inappropriate, as the Minister suggested in his introductory remarks, surely it should not be there or it should be appropriately amended. Proper oversight should be able to keep all the activities of the Financial Policy Committee under review. Once again, the Treasury seems to be unreasonably constraining the scope of oversight. The Minister shakes his head; I am delighted, but then why is the clause not amended?

I should refer to Amendment 31, which was put down in my name and that of my noble friend, and I was delighted to see that the noble Lord, Lord Sassoon, added his name to it. I regret that I have had to express such caveats regarding the Bank’s and indeed the Treasury’s motives in the design of the oversight committee but, as I said earlier, this is really because the Bank has let itself down and done itself significant reputational damage in failing to be open about its own failings in the crisis. A way of repairing that damage would be to develop an effective supervisory board, the court, with a proper strategic role including the oversight function, which I commend the Government for proposing.

I have raised these issues for clarification. I want to be clear that we have not been stuck with the proposals that the Bank itself put forward in January, and that the issue of oversight really would be as comprehensive as the noble Lord suggested. I hope that the Government consider the proposition put forward by the noble Lord, Lord Turnbull, and see that there are merits in both these amendments, and that by combining them later on in the development of the Bill a truly satisfactory structure could be attained.

Banking Reform

Baroness Kramer Excerpts

Thursday 14th June 2012 Lords Chamber

[Lord Sassoon]

The noble Lord, Lord Bilimoria, makes a very good point about the credit rating agencies. The Bill is about the structure of banking. Credit rating agency regulation is now essentially in the hands of the European Commission. The appropriate sub-committee of your Lordships’ European Union Committee produced an excellent report, which we debated recently, on this subject. Yes, we must keep the subject of credit ratings under discussion, but the competence is not primarily here, and it is not the subject of the Statement we are addressing.

On the lessons of history, Glass-Steagall and so on, this is a different model from the Glass-Steagall model and from the model that the US is implementing at the moment. The commission talked to a very wide range of people and, I am sure, studied the history very carefully. In the knowledge of the current and historical international precedents, that was its fundamental judgment about the high but flexible ring-fence. I believe it has come up with something that takes all those lessons on board, is appropriate for what we need now and is not going to impact significantly on the necessary driver for growth in this country, which is keeping credit flowing this year, next year and the year after.

[Baroness Kramer]

It is with real pleasure that I welcome the White Paper and the Statement by the Minister. He will be aware that my colleagues in both Houses, especially Vince Cable, have long called for the structural separation of vanilla banking from more speculative investment banking. We look at Vickers and the White Paper as a very acceptable and effective compromise. As a result of its structural nature, ring-fencing has far more possibility of resisting erosion over the years as the masters of the universe regain their confidence and begin to attempt to transfer risk back to the taxpayer.

The Minister mentioned the Government’s decision to stick with the 2019 timetable. Is that a really robust measure? He will have heard some of the major banks trying to put a bit of pressure on this. A long-grass strategy is clearly under consideration by those who are resistant to these changes.

I see no reason why the Financial Services Bill should be held up to make way for legislation that comes from this White Paper, but will the Minister and his team take a look to make sure that what is likely to flow from this can find a framework and that there will be genuine capacity within the Financial Services Bill? He will know that I am particularly taken with the section in the White Paper called “A More Diverse Banking Sector”. I am delighted to see that and the whole competition area in the White Paper emphasised so strongly. Will he make sure that the capacity for that exists comfortably within the Financial Services Bill when it leaves this House?

[Lord Sassoon]

I am grateful—