Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2021

Debate between Baroness Kramer and Lord Naseby

Tuesday 30th November 2021 Grand Committee

[Lord Naseby (Con)]

My Lords, I declare a possible interest as a trustee of the Parliamentary Contributory Pension Fund. I want to put this on the record, as we are getting wide briefings at the moment. I also have some experience of the friendly society movement as a former chairman of the Tunbridge Wells Equitable Friendly Society and two Invesco investment trusts.

I particularly draw attention to paragraph 7.8 of the Explanatory Memorandum, which is key. It says that

“the framework in its current form does not appropriately cater for the differences between credit institutions and investment firms and can be disproportionate”

and “burdensome”, et cetera. That seems crucial. It then goes on to mention the consultation that has been carried out. When my noble friend winds up, could he make it clear whether all parts of Part 9C rules have been produced and circulated to the interested parties, or not? Certainly, implementation on 1 January 2022 does not fill me with enthusiasm. It is after Christmas and less than a month away, so I hope he will say that they have been produced, and when.

I am sure that my noble friend and all noble Lords would feel that there are some deficiencies in UK-retained law. I seek reassurance that we are confident that those deficiencies have been removed.

The other dimension I raise relates to paragraph 12.3. It will not surprise my noble friends that, once again, I feel very strongly about impact assessments and statements from Her Majesty’s Treasury that it considers that the net impact will be less than £5 million and very limited. Paragraph 14.1 says that

“the number of small businesses in scope is low.”

They may be small businesses, but they are important businesses to whoever is running them—and we are talking about financial firms.

It is always helpful to have a review of any legislation, particularly legislation relating to our coming out of the EU. That may not be proportionate in the judgment of the Treasury, but I do not know how many firms we are talking about. If my noble friend has that information, that will be helpful. I suppose that if we are talking of only three or four, that may be right, but I do not believe that that is the number—from my experience in the City, from some of the presentations we have recently had and, indeed, from some of the publicity about what is happening in the financial sector at the moment.

Is my noble friend absolutely confident that those firms do not want the SI reviewed after a period? If they all say no—that they do not want a review and are comfortable—fine, but my judgment is that, in life, it is helpful to have a review at some point.

[Baroness Kramer (LD)]

My Lords, obviously I will not oppose this statutory instrument, but it raises a number of issues which need to be explored, and I shall look forward to the Minister’s response to our concerns. We raised these concerns during the passage of the Financial Services Act 2021, but they have not been alleviated.

The Act and this SI transfer significant power to set the UK rules on Basel III standards to the financial regulators accompanied by minimal parliamentary oversight. It is a crucial process and has a fundamental impact on financial stability, as it sets the capital and risk management requirements for banks and other financial institutions. The PRA and the FCA are expected to consult on their decisions, and parliamentarians can contribute to those consultations, but as no more than ordinary consultees, despite their responsibilities to the public, and can at best hope for a few comments on their points as part of the general response.

Committees of Parliament can question the PRA and FCA and undertake reports but, in practice, on only a handful of issues each year, so they are likely to be visited exceedingly rarely and probably only at a time of crisis, which is rather too late. Even the SIs offer no meaningful accountability, because they cannot be amended. This SI, with the powers it gives the regulators, will mean that the issues of Basel III, so crucial to our financial structure, will probably never again come before either this House or the other place, except through that committee arrangement, which is, as I said, pretty minimal. Perhaps the Minister will confirm that.

When we were members of the EU—I know mentioning that is not popular with the Government—basic Basel standards were implemented through EU law, where the process was open and accountable and as different as day from night from our current circumstance. Before the EU Commission proposed draft legislation, it held many conferences and public meetings involving parliamentarians; parliamentarians were engaged in briefings, expert evidence sessions and discussions with a wide range of relevant regulators and supervisory authorities; and the Economic and Monetary Affairs Committee would be involved in scrutinising the main directive and regulations by way of co-decision. With Brexit, the power has transferred from the EU, but the Government have chosen to do it in a way that essentially removes any meaningful democratic accountability. I should like to hear for the record why the Minister has chosen such a route.

Financial Services Bill

Debate between Baroness Kramer and Lord Naseby

Committee stage
Monday 1st March 2021 Grand Committee

[Lord Naseby (Con) [V]]

I thank the Lord Chairman. As I was just saying, in both the United States and Canada there has been a change in young people’s attitudes to debt. This is one reason why the credit union movement there is seeing better times and beginning to come strongly back to life. However, two other things have happened here. First, during the pandemic, people have had a chance to look in great depth at their own financial situation; many are responding to approaches by building societies, credit unions and the other mutuals by having interactions, on the basis that they know somebody. They do not know anybody in the banks. I do not have a clue who looks after an account that I have at RBS; all I can do is act on the telephone. Secondly, and in addition, what do we see on the ground? Bank after bank are closing branches. Whereas in the old days I could go to the RBS in Biggleswade, and then to Bedford, now they have all gone. There is an opportunity here that should be encouraged.

Secondly, I will look not at cheap credit—I hasten to say—but what is called “home-collected credit”, which I covered to some extent at Second Reading. That is all about consumer choice and a fair price. Home-collected credit has been around for 150 years. It is highly successful: it is the credit of choice for the working classes, if I may use that phrase in today’s world. People who use home-collected credit take out small, short-term loans perhaps three or four times a year, probably around Christmas, Easter, birthdays and days such as that. They know what the terms are; the terms do not change, and if they run over in terms of repayment, there is not some swingeing increase in the rate charged. They get a single credit charge.

On the other side, there are payday loans. Every one of us in politics knows exactly what those loans are about: they compound interest and offer high-frequency, weekly loans that people get hooked on. When they go a bit wrong, the claims management companies—CMCs—leap in with a huge volume of complaints, most of which are manufactured. The problem is that today the FCA appears to be treating all high-cost credit models in the same way. The regulator is taking a singular sector-wide approach to affordability and repeat lending and pays less or no attention to the crucial differences between these two products. Whereas officials once differentiated between the responsible and the harmful models, now they treat them all the same. There is therefore a real danger of the HCCs being driven out of business.

In 2018 no less a man than Andrew Bailey said that people viewed home-collected credit differently from rent-to-own and payday ones, and that this was the model he thought about because the difference with home-collected credit is that the borrower knows the lender. The agent is the lender; that is, it is a different, almost social relationship that goes on and creates different attitudes. I ask the Minister to have a close look at this, and perhaps a discussion with the FCA and the Financial Ombudsman Service, to ensure that there is a clear differentiation in any investigations that they might want to undertake between these two very different models.

Thirdly, with the permission of the Committee, I would like to go back to the Mutuals’ Deferred Shares Bill, which I took through your Lordships’ House in 2015. I was motivated to do so by my interest in the mutual movement and by the financial crash of 2008. It seemed to me that there was a need for mutual insurers and friendly societies to have a means of raising capital. That is what I set about doing and it became law in 2015. That was, for me, a high day for the mutual movement. Today, there are not hundreds of mutual insurers and friendly societies: in fact, the active ones are the 52 that are members of the Association of Financial Mutuals.

What that Bill—which is now an Act—did was important, first, because it gave access to new capital, particularly for the friendly societies and mutual insurers. Secondly, without that new capital, many mutuals would have been driven into inappropriate corporate forms through demutualisation. Thirdly, a lack of capital limits mutuals’ growth and their ability to develop new services, which is what this amendment is all about. Fourthly, like all businesses, mutuals need to be able to benefit from economies of scale. Fifthly, it is important to learn lessons from that financial crisis I mentioned; if financial services businesses are to build up stronger capital bases, they require the legislated regulatory agility with which to do so. Sixthly and lastly, there are direct benefits of being able to issue new shares; debt—the alternative—is of lower quality than equity for firms wishing to build their capital base.

One dimension of the then Bill had two elements to it. I am afraid the Government of the day decided they would not accept the second arm that I put in the Bill originally, which was the proposal to have redeemable share instruments for co-operative and community benefit societies. At the time, the Government said they were

“unpersuaded about the merit of a redeemable share instrument as these societies already have a means of issuing redeemable shares. The Government do not see a clear need and demand for such an instrument”.—[Official Report, 24/10/14; col. 923.]

I think the world has not changed. The Government need to have another long, hard look at the second element of that Bill. Obviously, I withdrew that section, because I was happy to have what I could get.

The mutual world is dynamic. If we have learned nothing else from Covid—I was in isolation for my 10 days because I caught it at the beginning of January—it is that people work very hard on a local level. We need to capitalise on that. Society wants it. The wind is in the right direction. I hope very much that the amendments that both the noble Baroness, Lady Bowles, and my very good and noble friend Lord Holmes are putting forward find a following wind—not necessarily in the format they have produced them but certainly in some other format—and come to fruition.

[Baroness Kramer (LD)]

My Lords, I will speak very quickly to Amendments 29 and 126. Like the noble Lord, Lord Naseby, I welcome both. We need to keep putting pressure on the regulator to be far more granular in regulation. There has been significant improvement on predecessor regulators, but there is a lot more work to be done. I will speak in a later group about roles which could encourage the regulator to gap-fill, which is very much related to how it regulates a much more varied set of financial organisations, particularly relatively small ones.

Unlike the noble Baroness, Lady Noakes, I am a very strong fan of the idea of regional banks, so I appreciate the amendment of the noble Lord, Lord Holmes. You have only to look at the Landesbanken in Germany and their capacity to focus on local issues and people; they are there for them during times of crisis when, frankly, big banks tend to flee. Being regional does not guarantee that you are good, but it certainly creates a different dynamic, which we ought to explore—particularly in an era when we are talking much more about the importance of devolution and recognising its significance, and dealing with a levelling-up agenda. I hope all those will generate some thought in the Treasury and Government.

My three amendments—I am sorry there are three and that I have to talk to all of them—are probing amendments into problems that the Government need to get down and fix promptly.

Amendment 43 deals with the proportionality issue, which really is urgent. The level of loss-absorbing capital which medium-sized banks must hold in the UK is decided by the Bank of England. The Bank has been clear in declaring that these banks are not systemic, so we are not looking at systemic risk, but it treats them as if they were major banks, systemically risky, for the purposes of setting the requirement for loss-absorbing capital, and sets what is known as MREL—the minimum requirement for own funds and eligible liabilities—at 200% of their minimum capital requirements.

This is not an international norm. In the UK, the threshold at which MREL kicks in is a £15 billion balance sheet, or 40,000 transactional accounts—that really is a medium-sized bank. In the eurozone, the threshold is a €100 billion balance sheet, and in the US it is $250 billion before MREL kicks in. I really think that the Bank of England needs to go back and look at this.

--- Later in debate ---

[Lord Naseby (Con) [V]]

My Lords, I would like to thank the noble Baroness, Lady Bowles, for the second time this afternoon for an interesting new clause. I have in the back of my mind the concluding words of the Minister of State, my noble friend Lord Agnew, when he introduced this Bill. Colleagues will remember that he said the Bill

“will support economic prosperity across the country, ensure financial stability, market integrity and consumer protection. It will ensure that the UK remains a world-class financial centre.”—[Official Report, 28/1/21; col. 1814.]

So we all know that the Bill is absolutely key. This particular amendment is about the enhanced role of the FCA and the PRA and, in particular, those who lead them. It means, frankly, that they are ever more powerful and important.

The amendment calls for a review after five years, although the noble Baroness, Lady Bowles, made it clear that, according to her contacts in Australia, a shorter period would have been better. I am quite clear in my own mind that five years is far too long. A great many changes are happening all the time, and I am quite sure that the market will remain dynamic and there will be many opportunities; personally, I would suggest a period of three years. You could argue for two, and I understand why you might, but I think that three years is about right, because it is quite a challenge for those who are running these two organisations to be reviewed after two years, which in effect means 18 months.

Should it be just one person? No, it is far too big a challenge for just one person. I believe there should be a team of three, and it should be the responsibility of one of them to be the chairman of the review, with a casting vote if necessary. In my experience of 12 years on the Public Accounts Committee, quite often a small working group would be set up of just three of us to look at the spread and success or otherwise of our work, and it seems to me that that was a good test market. Secondly, I had the privilege of being chairman of a quoted investment trust for some 10 years on a fixed-term basis. We had a limited number of non-executives and we decided that there should be a review every two to three years of the strategy that the operational company was following.

I say to the noble Baroness: well done for putting this forward. In principle, it ought to find favour from Her Majesty’s Government, although I am sure that the review period should be shorter than five years.

[Baroness Kramer (LD)]

My Lords, come another Monday, come another financial regulator story—this time in the Times. There are concerns that the FCA is going too slowly in its investigation of the Woodford scandal, to the point that Neil Woodford has felt confident about announcing plans to stage a comeback. It is just one story after another, and it very sadly makes the point. I think it is necessary to say that there are many—plenty—of good people at the FCA and the PRA, but clearly something is not working when we have regulatory scandal after regulatory scandal.

Financial services are notoriously difficult to police. The FCA is knee-deep in reviews that it has carried out after a failure, but the internal remedies that are promised every time perhaps help with the problem but do not seem to really cure it. Any financial services firm with a track record like the FCA would have been required by the regulator to bring in outside expertise to give an objective overview but then also to oversee change.