Mortgage Market

Baroness Kramer Excerpts

Wednesday 14th June 2023 Lords Chamber

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the underlying causes of high inflation, as we all know, are driven by higher energy prices as a result of the war in Ukraine and a tight labour market. There are complex factors as that plays out but the Government are absolutely clear in their commitment to get inflation down. We have seen inflation begin to fall, and institutions such as the IMF have recognised the Government’s action in this area and that we are set on the right path to reduce inflation, which will help ease the pressure on not just mortgage holders but all people facing higher prices at the moment.

[Baroness Kramer (LD)]

My Lords, will the Government set up an emergency mortgage protection fund, potentially recouped by a bank levy, to ensure that those struggling the most will not lose their homes and face financial wreckage and wreckage of their lives?

[Baroness Penn (Con)]

My Lords, I hope the noble Baroness will take some comfort from the fact that mortgage arrears and repossessions remain below pre-pandemic levels. I reassure her that, if a borrower falls into financial difficulty, guidance from the FCA requires firms to offer tailored support and deal fairly with customers facing difficulties in meeting their payments. The Government also have a range of schemes in place to support borrowers, not least the support for mortgage interest scheme.

Financial Services and Markets Bill

Baroness Kramer Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Baroness Kramer (LD)]

My Lords I rise because this amendment allows me to do two things that I do not do very often. One is to thank the Minister because the amendments that she has brought forward are constructive, as others have described. The second is to say to the noble Lord, Lord Moylan: finally, a benefit from Brexit. One down, which pleases me, I have to say.

I want to ask the Minister if, in the course of the review, she will look at the industry that has mushroomed from the vetting of PEPs. I dealt with the American Express problem that others have described. I filled in my forms and still have my card—I am afraid that the BA miles win me over. I decided that I would open a savings account at Chase Bank as they were offering some good rates but discovered that I was caught up in this PEP process and the bank asked for a raft of information that, frankly, I should have never been asked for. The breaking point was a phone call asking me for payslips for my husband. On his death, I had inherited from him and therefore the bank wanted historical payslips. My husband died 17 years ago and I do not know how many people still have their payslips from 17 years ago, never mind those of a dead spouse.

To me, that was typical of the overstepping and exaggeration—gold-plating is almost an understatement —that has been going on in this process. It caused me to go on to the web and discover that there is a raft of consultants, advisers and legal entities that have become engaged in this process and taken straightforward guidelines from the FCA and blown them up into something extraordinary and complex. I am furious with the FCA because it does not enforce the guidelines; I hope the Minister will convey that and that the Government will become furious with the FCA for not enforcing its own guidelines. I hope that she will also encourage it to use the review to look at the vast industry that has burgeoned and makes its profits from making life an absolute misery for anybody it can catch in the system.

[The Earl of Erroll (CB)]

My Lords, I should like to add to this because I have had enough trouble with the PEPs issue for a long time. First, I thank the noble Lord, Lord Moylan, for explaining an important point about why I can get no information from Northern Trust on administering an investment trust in which my wife owned shares in Ireland. We had to get probity in Ireland, but the trust will still not release the money and will not say why. I am getting an absolute blind spot. Even Barclays, which wants money over here to pay off something does not seem to be getting any joy. I suspect that it is because the trust is not allowed to tell us that we are under investigation. That is wrong. If there is a problem, we could unlock it if the trust could just say, “We are trying to investigate this because we think we have to”.

I personally find it offensive that I am deemed to be a risk and a crook. I thought that in this country we were innocent until proven guilty. Actually, this is the other way around. Just because I happen to be a Member of the House of Lords, it is assumed that I am corrupt. This has caused a lot of problems for me and my family, but I am not going any further into detail. We have heard good stories from others, but I do not understand why we are PEPs. I have no access to government contracts and there is no reason to bribe me, sadly. I do not understand the logic behind that, and something should be done. The classification of PEPs should be looked at and revised because a lot of other people who are not PEPs are in places handling government contracts. As far as I know, they are not under permanent scrutiny, so I think you have got the wrong people and it is a nightmare.

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[Viscount Trenchard (Con)]

My Lords, I declare an additional interest as stated in the register as a provider of geostrategic advice to Safe Security (SSL) Ltd. I will not repeat the arguments so well put by my noble friend Lord Attlee, who has given much voluntary military service over the years. I have added my name to my noble friend’s Amendment 98, but I also support both Amendments 99 and 100.

The Export Control Organisation at the former Department for International Trade grants export licences for controlled goods for military purposes. Its online export licensing system is called SPIRE. The organisation’s website states:

“We advise that you register your company on SPIRE, benefits include: More Control … Time Saving”.


I understand that it takes much time to obtain a SPIRE licence, but I am not convinced that it saves any time in carrying out this control business. It is of course right that companies wishing to receive licences to conduct this kind of business should be properly vetted and undergo the most stringent checks. However, once they have done that and been granted SPIRE accounts, why do they then find that the money laundering regulations prevent banks opening accounts in order to execute this kind of business under any circumstances?

In Committee, my noble friend the Minister acknowledged that

“the government process for the granting of export control licences focuses on the end use of goods rather than the source of funds paying for them”.

She told the Committee that the Treasury has

“engaged with the Export Control Joint Unit, the Financial Conduct Authority and other partners on this issue”.

She said that she was

“not aware of a systemic issue”,—[Official Report, 21/3/23; col. GC 297.]

but would “act to address it” if the Government identified one. I rather think there is a systemic issue here, because banks run a mile when anyone, particularly an SME, tries to open a bank account to do this kind of business. Banks are not aware of the SPIRE system and give absolutely no recognition to any licence granted under it to a prospective customer. The result of this, at least in some cases, is that the business is being carried out in other jurisdictions, such as Finland, that do not apply these regulations in such a stringent manner. This obviously deprives the Exchequer of corporation tax revenues and results in the official statistics understating the extent of British support for Ukraine.

This does not apply only to military equipment but includes the provision of vehicles to be used as field ambulances. I want to ask the same question of my noble friend the Minister as that asked by my noble friend Lord Attlee: do the Government think that absolute observation of the money laundering regulations is more important than permitting those who are licensed to do this business to do so?

[Baroness Kramer (LD)]

My Lords, we should thank the noble Earl, Lord Attlee, for raising a set of significant issues. I have no specialist knowledge in this area, but I am very well aware that SMEs generally are disadvantaged under our current framework arrangements. As the Minister will know, individuals and micro businesses—usually a small sole trader or somebody of that ilk—fall within the FCA’s regulatory perimeter, but the SMEs that have just been described fall outside of it.

Therefore, where there are gaps or where their treatment is completely inappropriate, they have nowhere to turn. In those circumstances, they face significant disadvantage compared to their competitors across the globe. So I hope the Minister will understand that this is a reflection—I think “tip of an iceberg” was the correct term—of something that is quite systemic in many different ways, and an area where the Treasury, and the regulators, need to focus attention.

[Baroness Penn (Con)]

My Lords, as I set out previously in Grand Committee, I commend my noble friend Lord Attlee for his strong role in supporting Ukraine and bringing the value of his expertise in support of efforts to provide Ukraine with vital supplies. I understand that my noble friend wishes to ensure that the money laundering regulations do not hamper the private export of armoured vehicles or military vehicles to Ukraine. However, this cannot come at the expense of weakening the regulations in a way that would allow them to be circumvented by those wishing to launder money or finance terrorism.

The Government are committed to providing economic, humanitarian and military support to Ukraine. That is why the UK is proud to have pledged £6.5 billion in support of Ukraine, including £1 billion of World Bank guarantees to go towards closing Ukraine’s 2023 financing gap and £2.3 billion in military support for 2023. In 2022, 195 standard individual export licences and three open individual export licences were granted for the export of military items to Ukraine.

I recognise that my noble friend has concerns about a wider issue relating to provision of banking services to those involved in the defence industry and the refusal or withdrawal of services for other reasons connected with money laundering or ethical concerns. As I said in Committee, I am not aware that banks are taking a blanket approach to such customers. I am grateful to my noble friend for setting out some further specific cases today and I am glad that he had the opportunity to meet my noble friend the Defence Minister. The Treasury would be happy to look further into these cases with my noble friend and the Ministry of Defence. Equally, if the defence industry has wider concerns, I would encourage it to bring them to the attention of the Government and the regulators.

My noble friend made a comment on the Government’s ESG policy and its impact on defence companies. Our ESG policy is focused on delivering the net-zero commitment and there is nothing in that policy framework that prohibits or otherwise disadvantages defence companies and the war in Ukraine—

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[Earl Attlee (Con)]

My Lords, during my research into the money laundering problems identified in the previous group, I identified another problem for SMEs: the availability of performance bonds from the financial markets to cover stage payments in capital projects. I do not need to explain to your Lordships what stage payments are or how bonds work, and it is certainly something that I do not have any expertise in. The difficulties are that the banks require so much collateral that the system is intractable. It is not a problem for large firms with correspondingly large balance sheets; this problem affects only SMEs and tends to keep them small. I talked to a manufacturer of hovercraft, and if all their current enquiries came to fruition, they would simply not be able to secure the necessary bonds to finance the work. I beg to move.

[Baroness Kramer (LD)]

My Lords, this is an issue that I have raised in the House before, having run into the same set of issues—I suspect with some of the same companies down in the West Country involved particularly in large-scale exports which require performance bonds to be able to meet their contractual obligations. In these instances, performance bonds were denied by the banks unless the collateral included the homes and personal possessions of the directors and senior managers of the company. This was despite the fact that the firms had long-standing records of being able to deliver on the projects they engaged in and indeed the customers at the far end had reputations, again, of being excellent payers.

It is a real weakness in the system that we have no one who deals with market gaps, particularly when it applies to SMEs. I attribute part of this to the regulatory perimeter, but regardless of where the fault lies, there needs to be a remedy if we are to build a future economy which will be based very largely on SMEs and, hopefully, very significantly on exports.

[Lord Harlech (Con)]

My Lords, the Government recognise the importance of ensuring that SMEs are able to access appropriate financial products, including performance bonds, and of ensuring the availability of useful information on such products. As noble Lords are aware, performance bonds are a type of financing product that provides a financial guarantee to one party in a contract in the event of the failure of the other party to fulfil its obligations.

More broadly, SMEs already benefit from a diverse financial market, made up of high-street banks, smaller banks and a range of non-banks, to ensure they can continue to access suitable finance. The Government support SMEs’ access to finance through a variety of debt and equity finance programmes through the British Business Bank. These programmes were supporting more than £12 billion of finance to more than 94,000 smaller businesses as of June 2022.

The British Business Bank also produces several reports on access to finance on an annual basis, including the Small Business Finance Markets report, providing expert and independent assessment of the availability and options within the wider funding landscape for SMEs. Fundamentally, the commercial terms that banks and insurers offer, including the collateral they require for performance bonds, are a matter for the firms, subject to meeting the relevant regulatory requirements.

The Government remain committed to maintaining the highest international standards of regulation, and the Financial Services Act 2021 granted the PRA the powers to implement the latest international standards, known as Basel III.1. These include revised capital requirements for performance bonds for banks. The PRA recently consulted on its proposals and specifically requested comments and data from firms and wider stakeholders on its proposals for capital requirements for products such as performance bonds, and it will be considering feedback provided by respondents in formulating its final proposals. For insurers providing performance bonds, the Government are reforming one of the capital requirements, the risk margin, removing a barrier to lower product pricing.

As noble Lords are aware, under the provisions in the Bill, our independent regulators will take on new responsibilities. This means that the PRA will take on responsibility for setting the relevant regulatory requirements that are currently set through retained EU law, acting within the framework set by the Government and Parliament.

As we have discussed a number of times in relation to the Bill, when making rules designed to ensure the safety and soundness of financial services firms it is also important to consider how those firms can support the wider UK economy. That is why the Government have introduced the new secondary growth and competitiveness objectives, which will require the regulators to act to facilitate the competitiveness of the UK economy and its growth in the medium to long term. The PRA’s current consultation has been undertaken before the provisions in the Bill will come into effect. However, the Financial Services Act 2021 requires the PRA to “have regard” to the Government’s economic policy, including investment in SMEs and infrastructure, as well as the effect of its requirements on the UK’s international standing and the provision of finance to businesses and consumers in the United Kingdom on a sustainable basis.

Measures in the Bill also allow for parliamentary scrutiny of the regulators’ performance, including how they have advanced their new secondary competitiveness and growth objective. In addition, the Bill requires the regulators to produce statements of policy on how they will review their rules. Recent government amendments will require these statements to include information on how stakeholders can make representations to review rules, and on the arrangements for ensuring that these representations are considered.

In conclusion, the Government are committed to ensuring that SMEs have access to suitable financial products which are subject to suitable prudential safeguards to appropriately manage any risks. This is particularly important to ensure that UK SMEs are accessing finance to support their goals and contribute to the UK’s growth agenda. I therefore ask my noble friend to withdraw his amendment.

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[Baroness Altmann (Con)]

My Lords, I too apologise to the House for being late.

I have added my name to my noble friend’s amendment. I urge my noble friend the Minister and the House to think very carefully about what possible advantages there could be relative to the disadvantages of having a central bank digital currency. We have seen so many people lose so much money, and so many money launderers, thieves and so on make so much money from digital currencies. This may be one of the biggest scams of the century.

It is very difficult to see why we need digital currencies at all. The risks for money laundering and economic crime, the lack of transparency and security for anyone putting money in, and the opportunity that this would offer to rogue states and actors to try to undermine our entire financial system require significant warning. The possibility that this could be introduced without primary legislation seems to me to be unconscionable and a dereliction of our duty to make sure that we are looking after the currency of this country.

[Baroness Kramer (LD)]

My Lords, I had the privilege of serving on the Economic Affairs Committee, with the noble Lord, Lord Forsyth, as chair, when it produced the report. Your Lordships will gather that my views on whether we adopt a digital currency are distinctive somewhat from others who have spoken today. It is not that I am some enthusiast for it; I recognise all the issues and disadvantages that have been named today, particularly financial stability and privacy. However, 18 countries will be adopting a central bank digital currency this year—including China, initially for its domestic market. It has been piloting it in 12 cities, but eventually it will become an offering that it takes to the many other countries where it expects to exercise influence, in both Asia and Africa.

I am afraid that we are facing potentially a King Canute situation: we may not particularly want such a currency but might simply have to accept that to remain in the forefront and in play within financial services and as a major exporter and participant in global trade, we may have no choice but to go down this route. But I absolutely share with every other speaker the view that this should be determined by Parliament in primary legislation. The issues are sufficiently fundamental and far-reaching. They carry risk, and they require judgment and perspective—and it is in debates in the other place and here that that can happen.

It seems to me that something so fundamental as currency surely is the responsibility of a democratic Parliament. It cannot be transferred, in effect, to either the Treasury to run through an SI, or to the regulators to not even bother with an SI but largely to put it in place through various regulatory changes. So, here we have absolute common ground; this should be on the face of the Bill. I am concerned that this may be the last piece of legislation coming forward where we have the opportunity to put it in the Bill. There might be a further opportunity in a year’s time, but it depends on the speed of change that we experience.

Guarantees from the Government would be good. I am glad that a letter has been written to Harriett Baldwin and the noble Lord, Lord Bridges, but we need something that recognises the significance and importance of doing this through primary legislation.

[Lord Livermore (Lab)]

My Lords, we welcome the amendment in the name of the noble Lord, Lord Forsyth, which has enabled this short and informative debate on the process for establishing a central bank digital currency. As technology develops and people’s habits change, it is vital that we keep pace. Therefore, the principle of a digital pound has much to commend it, although the arguments, implications and details clearly need to be properly worked through. The introduction of a digital pound would represent a significant step, and it is therefore right for the noble Lords, Lord Forsyth and Lord Bridges, to ask about the underlying processes, though it is a novel experience for the two noble Lords to be asking for commitments from this side of the House.

We very much welcome the clarification offered by the Chancellor in his letter to the noble Lord, Lord Bridges, and the Economic Affairs Committee that there would be primary legislation before a digital pound could be launched. We agree that this is an important safeguard.

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At the very least, I hope the Minister can see the merits of adopting this review and promoting the idea that there are important reasons why the long-term investments of our domestic pension funds, which had been the jewel in the crown of our financial system for many years, should be directed to work to the benefit of the economy and the pension scheme members themselves.

[Baroness Kramer (LD)]

My Lords, I speak from these Benches on behalf of my party, as a group of realists. The current Government, and any future Government, look at the pools of money in pension funds, whether defined contribution or defined benefit, and see them as a tempting source of investment in the area of scale up and infrastructure, where we are desperate to find additional investment. I point out that pension funds are not disadvantaged in investing in investment-grade assets in any way. It is in investing in sub-investment grade assets where they carry a burden under the current arrangements.

These investments in scale up and infrastructure are, by definition, high risk and illiquid, and we have to face up to that. Some 40% of scale-ups fail and infrastructure projects run notoriously late, and well over budget. I challenge people to come up with a very long list of infrastructure projects that have come in on time and on budget. It is hard to identify virtually any project that meets that test. It means that pension obligations must be fully protected if we are to open up these funds to be able to invest in a far more illiquid and high-risk way.

That is why I am comfortable with this amendment, because proposed new subsection (2) insists:

“The review must consider how best to do this while protecting the safeness and soundness of pension funds”.


I was also pleased that the noble Baroness, Lady Chapman, introduced the additional consultee identified by my noble friend Baroness Bowles—the Pension Protection Fund—in this process, because that is clearly a mechanism which could provide the kind of protection for pensioners who may be exposed if we change the risk profile of pension fund investment.

I insist that the first responsibility of a pension fund is to pay out its obligations on time and in full. I suspect that everyone who is invested in a pension believes that that is, and must continue to be, true. Often when we discuss these issues the Canadian pensions funds are cited because they do indeed invest in illiquid and high-risk assets, but anyone reading the credit rating agencies discussing those pension funds will find that the pension funds are pretty much backstopped by the Canadian Government.

What I hope will come out of this review process are new opportunities to fund our economic growth but also protections commensurate—it may not be the same strategy but through some mechanism—with those that the Canadians have put in place, to make sure that our pensioners will still be paid on time and in full. If that no longer remains true, we end up in a very serious pickle but, having read through this set of amendments, I think they get us to the right place to be able to achieve that.

[Baroness Penn (Con)]

My Lords, the Government welcome the further discussions that this debate has given us the opportunity to have on the issue of unlocking pensions capital for long-term, productive investment where it is in the best interests of pension scheme members. Indeed, as I set out in Committee, the Government have a wide range of work under way to deliver the objectives set out by this review. While I was a little disappointed not to hear those initiatives referenced in this debate—apart from, perhaps, by my noble friend Lady Altmann—I will give it another go and set out for the House the work that is already under way in this area.

As previously set out, high-growth sectors developing cutting-edge technologies need access to finance to start, scale and stay in the UK. The Government are clear that unlocking pension fund investment into the UK’s most innovative firms will help develop the next generation of globally competitive companies in the UK.

The Chancellor set out a number of initial measures in the Budget to signal a clear ambition in this area. These included: increasing support for the UK’s most innovative companies by extending the British Patient Capital programme by a further 10 years until 2033-34 and increasing its focus on R&D-intensive industries, providing at least £3 billion in investment in the UK’s key high-growth sectors, including life sciences, green industries and deep tech; spurring the creation of new vehicles for investment into science and tech companies, tailored to the needs of UK defined contribution pension schemes, by inviting industry to provide feedback on the design of a new long-term investment for technology and science initiative—noble Lords may have seen that the Government launched the LIFTS call for evidence on 26 May; and leading by example by pursuing accelerated transfer of the £364 billion Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets. The Government will come forward shortly with a consultation on this issue that will challenge the Local Government Pension Scheme in England and Wales to move further and faster on consolidating assets.

At Budget, the Chancellor committed the Government to undertaking further work with industry and regulators to bring forward an ambitious package of measures in the autumn. I reassure the noble Baroness opposite that this package aims to incentivise pension funds to invest in high-growth firms, and the Government will, of course, seek to ensure that the safety and soundness of pension funds are protected in taking this work forward, as in proposed new subsection (2). Savers’ interests will be central to any future government measures, as they have been to past ones. The Government want to see higher returns for pension holders in the context of strong regulatory safeguards.

In addition, the Government are already working with a wide range of interested stakeholders, including the DWP, the DBT, the Pensions Regulator, the FCA, the PRA and the Pension Protection Fund, as well as pension trustees and relevant financial services stake- holders. Proposed new subsection (3) in the amendment seeks to set out this list in legislation. I reassure the House that this is not necessary as the Treasury is actively engaging with them already, as appropriate. The Government would also be happy to engage with other interested stakeholders, as raised by my noble friend Lord Naseby and the noble Lord, Lord Davies of Brixton.

I note the specific areas of review outlined in subsection (4) of the proposed new clause, and I reassure noble Lords that the Government are considering all these issues as part of their work. In particular, proposed new subsection (4)(a) references the existing value-for-money framework. As I set out in Grand Committee, one area of focus for the Government’s work in this area is consolidation. To accelerate this, the Government have been working with the Financial Conduct Authority and the Pensions Regulator on a proposed new value-for-money framework setting required metrics and standards in key areas such as investment performance, costs and charges, and the quality of service that schemes must meet.

As part of this new framework, if these metrics and standards were not met, the Department for Work and Pensions has proposed giving the Pensions Regulator powers to take direct action to wind up consistently underperforming schemes. A consultation took place earlier this year, and the Government plan to set out next steps before the summer.

Turning to proposed new subsection (4)(b), I have already set out the forthcoming consultation to support increased investment in innovative companies and other productive assets by the Local Government Pension Scheme. Noble Lords may also be aware that the levelling up White Paper in 2022 included a commitment to invest 5% in levelling up. This consultation will go into more detail on how that will be implemented.

I turn to proposed new subsection (4)(c). The Government are committed to delivering high-quality infrastructure to boost growth across the country. We heard references in the debate to the UK Infrastructure Bank, which we will work with. The Treasury has provided it with £22 billion of capital. Since its establishment in 2021, it has done 15 deals, invested £1.4 billion and unlocked more than £6 billion in private capital. Furthermore, we have published our green finance strategy and Powering Up Britain, setting out the mechanisms by which the Government are mobilising private investment in the UK green economy and green infrastructure.

The Government wholeheartedly share the ambition of the amendment to see more pension schemes investing effectively in the UK’s high-growth companies for the benefit of the economy and pension savers. We agree with noble Lords on the importance of this issue. Where we disagree with noble Lords is on how crucial this amendment is to delivering it. Indeed, the Government are currently developing policies to meet these objectives, so legislating a review would pre-empt the outcome and might delay the speed at which the Government can make the changes necessary to incentivise investment in high-growth companies. Therefore, given all the work under way, I hope the noble Baroness feels able to withdraw her amendment.

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Moved by

[Baroness Kramer]

106: After Clause 71, insert the following new Clause—
“Protection of banking reform: ring-fencing and SMCR
(1) Parts 1 (ring-fencing) and 4 (conduct of persons working in financial services sector) of the Financial Services (Banking Reform) Act 2013 and amendments made by them to FSMA 2000 may not be modified or revoked except by an Act of Parliament.(2) No change or revocation may be made by secondary legislation, including by the PRA and FCA, to—(a) the requirements for ring-fenced bodies, and(b) the senior managers and certification regime, or other rules for the conduct of persons working in the financial services sector,that departs from the principles set out in the final report of the Parliamentary Commission on Banking Standards.(3) For the avoidance of doubt, subsection (2) includes secondary legislation that would allow ring-fenced bodies permanently to carry out excluded activities.(4) This section may not be amended except by an Act of Parliament.”Member’s explanatory statement
This amendment would prevent the Government from making substantive changes to the policy on ring-fencing and SMCR by statutory instrument, and would prevent policy from being amended in a way that departs from the report from the Parliamentary Commission on Banking Standards.

[Baroness Kramer (LD)]

My Lords, in Committee the Minister reassured the House that the principles of ring-fencing and the senior managers regime which protect our banking system could be changed only by primary legislation. Then came the Silicon Valley Bank UK crisis and we discovered that breaking down the ring-fence in particular can be done by simply using statutory instruments and without the full engagement of Parliament. My Amendment 106, which is written from the two tabled in Committee, is intended to reassert the fundamental principle that change has to be driven by primary legislation and it removes the loophole which we experienced with Silicon Valley Bank.

I shall explain very briefly the Silicon Valley Bank issue. As part of their agreement with HSBC to acquire SVB UK, the Government permitted HSBC to transfer funds from its ring-fenced retail bank into SVB UK, which is outside the ring-fence. The transferred funds can now be used for activities which the HSBC retail bank would be prohibited from, including high-risk and speculative transactions.

If this was a temporary state of affairs, I could understand this awkward response to an emergency, but on Thursday the Minister will bring a statutory instrument to this House to make that breach of the ring-fence for HSBC permanent and notably with no limits on the amount of funds that can be transferred from ring-fenced to unring-fenced. Unless I misunderstand the SI, there are no conditions on the use of those funds, even though last month the Minister seemed to imply that we could expect conditions or limits. In effect, the ring-fence is now fully breached for HSBC. Its rival banks, not surprisingly, expect further government action soon to give them exemptions in order to level the playing field. We have in effect destroyed the ring- fence.

Ring-fencing and the SMCR, I would argue, are vital protections against another 2007 banking crisis. They limit the incentives and mechanisms for banks to mingle the culture and capital behind retail banking with the very different and high-risk world of investment banking, with the SMCR establishing individual responsibility for bad or abusive management. The Government have posited in discussion that these protections can be safely weakened because banks now have resolution plans to protect the taxpayer from a bank failure. But that presumption, frankly, has been blown out of the water. Both the Swiss and the US regulators in the last few months facing bank failures—one Credit Suisse and the other the three regional banks in the US—decided that, in the circumstances, resolution would be far more damaging to their economies than seeking taxpayer support to extract those banks from their predicaments and failure.

We have had an illustration that makes it clear that the resolution plans that we have in place for banks may work in certain limited circumstances but very often, particularly when there is high risk in the economy, may indeed not work and are more damaging to use than to discard. In that situation, it is absolutely crucial that we return to the protections provided by ring-fencing and the SMCR.

That is my view. If the Government disagree with me and believe this is time for weakening the ring-fence or diluting the SMCR, I argue they have to come to Parliament and do it under primary legislation, not through the backdoor that we experienced over the last couple of months through the mechanism of the purchase agreement for Silicon Valley Bank UK.

I am not asking this House to make the decision on whether we keep ring-fencing or the SMCR. What I am saying is that it is this House and the other place that need to actively understand and make the determination if that change is to happen. It is fundamental to the financial stability of our country and therefore that is the way this issue would be addressed. My Amendment 106 combines into one the two amendments from Committee and adds a clause to require primary legislation for any permanent exclusions from ring-fencing rules, closing the loophole used by the Government and reasserting the original intent of the law. I beg to move.

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[Baroness Penn (Con)]

My Lords, it has been over 10 years since the Independent Commission on Banking recommended important structural changes, including the introduction of ring-fencing for the largest UK banks, and the Parliamentary Commission on Banking Standards recommended the introduction of the senior managers and certification regime, or SMCR, to embed a culture of greater accountability and personal responsibility in banking. I pay tribute to the important work of these commissions and their lasting legacy in improving the safety and soundness of the UK’s financial system. Amendment 106 from the noble Baroness, Lady Kramer, covers the ring-fencing and SMCR reforms.

In response to my noble friend Lord Trenchard, the legislation that introduced the ring-fencing regime required the Treasury to appoint an independent panel to review the regime after it had been in operation for two years. That independent review was chaired by Sir Keith Skeoch and concluded in March 2022. The review noted that the financial regulatory landscape has changed significantly since the last financial crisis. UK banks are much better capitalised and a bank resolution regime has been introduced to ensure that bank failures can in future be managed in an orderly way, minimising risks to depositors and public funds.

In the light of these considerations, the independent review concluded that changes could be made in the short term to improve the functionality of the ring-fencing regime while maintaining financial stability safeguards. In December, as part of the Edinburgh reforms, the Chancellor announced a series of changes to the ring-fencing regime that broadly follow the recommendations made by the independent review. The Treasury will consult later this year on those near-term reforms. The panel also recommended that, over the longer term, the Government should review the practicalities of aligning the ring-fencing and resolution regimes. In response, the Government published a call for evidence in March. This closed at the beginning of May and the Government are in the process of considering responses.

The noble Baroness, Lady Kramer, and other noble Lords referenced the resolution of Silicon Valley Bank UK, which was sold to HSBC on Monday 13 March. The Government and the Bank of England acted swiftly to facilitate the sale of SVB UK to HSBC after determining that action was necessary to protect depositors and taxpayers and to ensure that the UK’s world-leading tech sector could continue to thrive. To facilitate the sale, the Government made modifications to the ring-fencing regime that apply to HSBC only in relation to its acquisition of SVB UK.

It is critical that the Government have the necessary powers to act decisively to protect financial stability, depositors and taxpayers. The power under the Banking Act 2009 enables the Treasury to amend the law in resolution scenarios. Parliament gave the Treasury this power recognising the exceptional circumstances that can arise. However, I say to the noble Baroness that the changes made to the ring-fencing requirements are specifically in relation to the acquisition of SVB UK and should not be viewed as an indication of the future direction of government policy on ring-fencing. The Chancellor has been clear that, in taking any reforms forward, the Government will learn lessons from the crisis and will not undermine financial stability.

The core features of ring-fencing are set out in primary legislation, which generally may be amended only by primary legislation, so the Government are already constrained in one of the ways that this amendment seeks to ensure. In passing that legislation, Parliament delegated certain detailed elements of the regime to the Government to deliver through secondary legislation, given its technical nature and to allow it to evolve over time, where appropriate. Parliament also included clear statutory tests and objectives within the framework, which the Treasury and the PRA must satisfy when making changes to the regime. These statutory tests continue to reflect the underlying objectives and purposes of the regime. The Government are of the view that they remain appropriate and that no further constraints are necessary.

Turning to the SMCR, I can confirm to the House once more that the framework of the SMCR is set out in primary legislation, so it is already the case that significant amendments can be made only via primary legislation.

Let me also reassure the House that the Government continue to recognise the contribution of the SMCR in helping to drive improvements in culture and standards. The principles of accountability, clarity and senior responsibility that are emphasised by the PCBS report were reflected in the SMCR. We should take confidence from the findings of separate reports by UK Finance and the PRA, which both show that these principles are now more widely embedded in financial services than before the introduction of the regime.

The Economic Secretary made it clear to the Treasury Select Committee on 10 January that the purpose of the review was to seek views on the most effective ways in which the regime can deliver its core objectives. It is important to review significant regulation from time to time to ensure that rules remain relevant, effective in meeting their aims and proportionate to those aims. The Government are grateful to those who have submitted responses to the SMCR call for evidence. This information will help the Government, alongside the regulators, build a proper evidence base for identifying what, if any, reforms to the regime should be taken forward.

I hope that I have sufficiently reassured noble Lords that the Government remain committed to high standards of regulation, and to the important reforms introduced following the global financial crisis. Therefore, I ask the noble Lady, Baroness Kramer, to withdraw her amendment.

[Baroness Kramer (LD)]

I thank the Minister, but she has essentially repeated the speech she gave in Committee. At the time, I took her assurances at face value that primary legislation would be necessary to make a fundamental change to the structure of the ring-fence. I was therefore frankly shocked when, within a matter of days, the Government took a different point of view in the acquisition of Silicon Valley Bank UK by HSBC. There is no reason why HSBC should have used its ring-fenced arm to make the purchase of SVB; it chose to do so because it got, as a consequence, this opportunity to take that ring-fenced money and put in into non-ring-fenced activities, with no constraints whatever in terms of amount or activity.

The Government are bringing forward another statutory instrument to make that change permanent for HSBC. It is unconscionable that our largest bank should have a competitive advantage like that and other banks not be given it. I am extremely concerned about the way in which statutory instruments are being used to undermine the principle that changing the principles should be only by primary legislation. Therefore, I wish to test the opinion of the House.

Financial Services and Markets Bill

Baroness Kramer Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

[Lord Forsyth of Drumlean (Con)]

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

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

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

[Baroness Kramer (LD)]

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

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

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

[Baroness Chapman of Darlington (Lab)]

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

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

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

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

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

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[Lord Carrington of Fulham (Con)]

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

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

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

[Baroness Kramer (LD)]

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

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

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[Lord Holmes of Richmond (Con)]

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

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

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

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

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

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

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

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

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

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

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

[Baroness Kramer (LD)]

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

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

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

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

[Baroness Chapman of Darlington (Lab)]

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

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

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

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

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[Lord Harlech (Con)]

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

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

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

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

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

[Baroness Kramer (LD)]

From these Benches, the amendment makes sense to us.

[Baroness Chapman of Darlington (Lab)]

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

Financial Services and Markets Bill

Baroness Kramer Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

[Lord Ashcombe (Con)]

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

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

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

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

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

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

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

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

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

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

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

[Baroness Kramer (LD)]

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

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

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

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[Lord Eatwell (Lab)]

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

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

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

[Baroness Kramer (LD)]

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

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

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

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

Financial Services and Markets Bill

Baroness Kramer Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

[Baroness Altmann (Con)]

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

[Baroness Kramer (LD)]

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

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

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

[Baroness Chapman of Darlington (Lab)]

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

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

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

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

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[Lord Harlech (Con)]

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

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

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

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

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

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

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

[Baroness Kramer (LD)]

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

[Lord Eatwell (Lab)]

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

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

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

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

[Baroness Kramer (LD)]

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

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

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

[Baroness Chapman of Darlington (Lab)]

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

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[Lord Tyrie (Non-Afl)]

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

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

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

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

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

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

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

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

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

[Baroness Kramer (LD)]

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

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

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

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

Baroness Kramer Excerpts

Wednesday 17th May 2023 Grand Committee

[Baroness Kramer (LD)]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Banks: Closures and Shared Banking Hubs

Baroness Kramer Excerpts

Thursday 27th April 2023 Lords Chamber

[Baroness Penn (Con)]

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

[Baroness Kramer (LD)]

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

[Baroness Penn (Con)]

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

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

Baroness Kramer Excerpts

Wednesday 19th April 2023 Grand Committee

[Baroness Noakes (Con)]

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

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

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

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

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

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

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

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

[Baroness Kramer (LD)]

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

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

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

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

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

--- Later in debate ---

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

[Baroness Kramer (LD)]

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

[Baroness Penn (Con)]

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

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

--- Later in debate ---

[Baroness Penn (Con)]

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

[Baroness Kramer (LD)]

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

[Baroness Penn (Con)]

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

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

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

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

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

[Baroness Noakes (Con)]

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

[Baroness Kramer (LD)]

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

Financial Services and Markets Bill

Baroness Kramer Excerpts

Committee stage
Thursday 23rd March 2023 Grand Committee

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

[Baroness Kramer (LD)]

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

[Baroness Penn (Con)]

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

Financial Services and Markets Bill

Baroness Kramer Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

Moved by

[Baroness Kramer]

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

[Baroness Kramer (LD)]

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

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

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

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

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

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

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

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

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

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

My amendment basically says that:

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


I will not give you the rest of the details—

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

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

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

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


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

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

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

To quote Paul Volcker,

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

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

--- Later in debate ---

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

[Baroness Kramer (LD)]

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

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

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

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

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

Amendment 216 withdrawn.