Financial Services Bill

Debate between Baroness Kramer and Lord Blackwell

Report stage
Wednesday 24th March 2021 Lords Chamber

[Lord Blackwell (Con) [V]]

My Lords, I declare my interests as set out in the register. I support these amendments, which have been so well explained by my noble friend Lady Noakes. In Grand Committee, the Minister accepted that there were concerns that a residual risk of disruption and potential litigation would remain even once the FCA had exercised its powers under the Bill. This is really important, given the amount of money and the number of contracts at stake, and the timescale of the changes in the benchmark at the end of 2021.

My noble friend the Minister said that the Government would prefer to wait for the results of the consultation, but these are not new issues. The Treasury and regulators have been aware of them for many months. The argument was made that the reason for waiting for the consultation is that there might be areas where there was legitimate reason for civil litigation and that those legitimate legal claims might be blocked. I am not persuaded that there are legitimate legal claims where the benchmark is being replaced with a synthetic benchmark at the direction of the regulator. There has to be a change and I cannot think of situations where those claims might be appropriate and fair. I would welcome it if the Minister can explain where those concerns come from and what situations might be blocked unfairly by these amendments.

Other than that, we should move to deal with these concerns now, as noble Lords have said. If the Minister does not like the specificity of Amendments 4 and 5, I would certainly be prepared to accept Amendment 6. I hope my noble friend the Minister will come back at Third Reading with government amendments to address these issues. If she does not feel able to do that and my noble friend Lady Noakes were to bring back her amendments at Third Reading, I would be compelled to support her.

[Baroness Kramer (LD)]

My Lords, I am grateful to the noble Baroness, Lady Noakes, for bringing forward these amendments. I have to confess that I am not keen on Amendment 5 because it seems that it would create an opportunity for various institutions to use the change in the benchmark in a way that would be abusive to a customer, who would then have no redress.

Amendment 5 goes too far, but Amendment 6 makes perfect sense to me. Frankly, I find it extraordinary to think that the Government have not seized it and put “government” in front of it. We will face tough legacy contracts and there needs to be a sensible and appropriate way to deal with them. Amendment 6 captures that exactly as it should. I hope very much that the noble Baroness, Lady Noakes, will get a positive reply on Amendment 6 from the Government, otherwise there will be litigation and a mess, and I am not sure that that helps anybody.

Financial Services Bill

Debate between Baroness Kramer and Lord Blackwell

Committee stage
Monday 1st March 2021 Grand Committee

[Lord Blackwell (Con) [V]]

My Lords, I too support these amendments and welcome the fact that the Bill addresses these issues. While Libor may have been effective in the past, we all know that it was becoming an unviable way of setting rates and was subject to manipulation, in the way mentioned by the noble Lord, Lord Desai. It is therefore important that the regulators have taken a firm line in moving us on from Libor to other benchmarks. But, as my noble friend Lady Noakes set out, in doing that, there are lots of problems with continuity of contracts. The legislation is necessary to help address those issues and ensure that partners in contracts move together to a new common contract based on a synthetic Libor.

We have to recognise that no substitute for Libor will have exactly the same characteristics. There is no perfect substitute. Most contracts will be based on SONIA, the sterling overnight index average rate, but getting SONIA terms that have the same characteristics over time is not perfect, so there will be winners and losers. That is one reason why it is important that, to give certainty, the legislation requires the regulator to ensure that synthetic Libor interest rates are taken in the contracts as substituting for Libor for both parties.

As my noble friend Lady Noakes set out, however, some parties will not accept that. They will take the change in the contract as the basis to believe, argue or litigate that the contract has been abrogated. Some parties will be out of the money in a contract and it will simply serve their convenience to choose this method to abrogate the contract. Safe harbour is therefore an important secondary requirement. If banks are following the requirement of the regulator to stop using Libor, and following its instructions in substituting synthetic Libor, they cannot then be subject to litigation from counterparties claiming that, by following the instructions of the regulator, they have abrogated their contracts. This is an important thing for those contracts, which could, in particularly vulnerable contracts, involve vast sums of money.

The Government have launched a consultation on this, but I do not think that is a reason not to legislate in the timescale of this Bill. The problem has been known about for many months—indeed, years—and has been discussed. I do not believe the Government need a consultation to understand that there is a problem or that it must be dealt with. During the passage of this Bill, if not in these amendments then in the Government’s amendments, it is important for this to be incorporated into the Bill. Otherwise, the uncertainty will go on far too long. Libor will come to an end and these issues will present themselves. This Bill is the opportunity to address them.

In taking this issue seriously, can my noble friend the Minister commit that the Government will bring back amendments, or accept these amendments, during the passage of this Bill through the House?

[Baroness Kramer (LD)]

My Lords, I know we have to accept the safe harbour provisions in Amendment 45, but it would be slightly less galling if we had not had to drag the FCA kicking and screaming to investigate the Libor scandal. As noble Lords know, it was finally revealed after a series of American journalists published an investigation into Libor; it then took parliamentarians months to actually get the FCA to do anything about investigating. It first did so because, by that point, the Bank of England was involved in manipulating Libor as well, although, as I think I said in my Second Reading speech, it intervened to try to provide some element of financial stability for the more honourable purpose of disguising to the world how badly the banks had been hit by the 2008 crisis. However, all of them had been aware for years that Libor was being manipulated.

I say to the noble Lord, Lord Desai, that this was no secret cartel; traders were shouting their required Libor benchmarks—the ones that would assist their bonuses—openly across the trading floors of various banks. There was nothing secret in this. At the time, under the UK approach—which is that anything not forbidden is permitted; since there was nothing to say, you could not lie in contributing to a financial benchmark —it was apparently not a criminal act or fraud. I do not think it ever even invoked the senior managers regime which came in later, but many of the players who were deeply involved in all this were obviously still around. It is a real stain on London.

I accept the safe harbour, but one of the things that saddens me is that some of those who will be hardest hit by the transition are small companies. Loans with spreads over Libor were not restricted to large, sophisticated companies; those companies will manage to work their way through this and make sure, if they are moving to a particular benchmark or negotiating a contract with the financial organisation they are set up with, that they do not come out damaged. However, many small businesses are exceedingly worried and have no idea which way to turn—do they get shifted to a new benchmark or stay with synthetic Libor? I hate to say this, but I think the assumption will turn out to be justified that, whatever happens, the amount they will pay in interest will be ratcheted up compared to the interest they would have paid had Libor remained. I find it very hard to conceive of banks saying, “We will move you to Sonia and you will pay less than you would have”. I am afraid there will be rounding up involved in all this. I am not sure how we provide any kind of fairness and justice, but maybe the Minister can talk about that.