Financial Services Bill

Baroness Noakes Excerpts

Tuesday 10th July 2012 Lords Chamber

[Lord Flight]

My Lords, I am extremely happy with the domestic competitive objective of the FCA, where it is straightforward that a healthy competitive market is clearly in the interests of consumers. My amendment relates to international competitiveness. I well appreciate that the Treasury is sensitive to that being linked to the concept of easy and relaxed regulation which is being partly blamed for the problems that have occurred. This is why my amendment is in a negative form, reading “does not harm” competition rather than “actively promotes international competitiveness”.

In the context of this Bill the FCA is perceived primarily as looking after the interests of consumers, but it continues from the FSA to regulate in a wide range of territories. The balance sheets of life insurance companies and overall banking supervision go to the Bank of England. Left with the FCA is the investment management industry, retail and institutional. I should declare my interests, as in the register, in a number of investment management companies. What makes that industry stay and succeed in the UK is a mixture of a competitive tax regime, good regulation and a good supply of able people. I cast my mind back 30 years. On a largely fiscal issue I pleaded with the Treasury to enable the UK to compete with Luxembourg, but this did not happen for 20 years and more. As a result a huge investment management industry grew up in Luxembourg which London could easily have had. For institutional business in the various areas which the FCA regulates, it is important that it is at least mindful not to create situations that make the UK less competitive than it need be. There is a warning for the investment management industry that partly for fiscal reasons there has been an exodus from the UK over the past year or so by about 30% of the hedge fund industry and of other more straightforward investment management operations.

This is a practical matter. There is nothing to be ashamed of in having a requirement that what the FCA does should not harm the competitive position of the UK in the world at large. I beg to move.

[Baroness Noakes]

My Lords, I have two Amendments in this group, Amendment 104, which is in my name, and Amendment 139A, which stands in my name and in the names of the noble Lord, Lord McFall of Alcluith, and the noble Baronesses, Lady Cohen and Lady Kramer. Therefore, Amendment 139A has a pretty solid set of supporters. I shall come to that amendment in due course.

In different ways, both these amendments and the others in this group address the position of the UK’s financial services sector. This is a difficult time to be defending the financial services sector in the UK because it is far easier to be in attack mode, as we have seen in both Houses of Parliament and in the media. I thought long and hard about whether it would be appropriate to speak to these amendments at this time, but whatever the current difficulties, which are huge for the banking sector and individual institutions within it—I remind the Committee that I am a director of the Royal Bank of Scotland—we need to be dispassionate about this legislation. We cannot solve all the problems of the sector in this Bill and, thankfully, another Bill will be coming along soon if we need to respond in legislative terms to the latest issues. However, this Bill could, inadvertently or otherwise, damage the broader financial services sector, which is and has been a major contributor to the UK economy. We have a duty to ensure that when this Bill leaves your Lordships’ House we have taken a balanced view of the risks and threats to the UK and have responded in a measured way.

I will start with Amendment 104A. It is very similar to Amendment 101A which my noble friend Lord Flight has already moved. My noble friend’s amendment places lack of harm to the competitiveness of the UK’s financial services sector as a general duty in new Section 1B. My Amendment 104A adds to subsection (5) of new Section 1B a “have regard” item in respect of the international competitiveness of the financial services sector. My amendment merely reinstates the law as it currently applies to the FSA and makes the FCA have regard to the desirability of maintaining the international competitiveness of the UK.

My concern has been that the loss of the FSA’s specific duty to have regard to international competitiveness may be taken as a green light to have no regard whatever to the issue. That would be a mistake for the UK. I do not need to remind noble Lords of the size of the financial services sector. It amounts to very much more than the global banks and it is important for employment, tax revenues and its contribution to GDP.

At Second Reading my noble friend said that the Government’s view was that having high standards of regulation was all that was necessary to establish,

“the attractiveness and competitiveness of London”.—[Official Report, 11/6/12; col. 1262.]

I hope that he meant more than London because the financial services sector is important to many parts of the UK and is not confined to London. More importantly, high standards of regulation can never be enough on their own. We can have the highest possible standards, but they could be operated in such a way that they actually drive business away. There is a very real danger that in response to the financial crisis and more recent revelations the regulatory pendulum will swing to a place which, to use the phrase of my right honourable friend the Chancellor, achieves the “stability of the graveyard”. If there is no reference in this legislation to the wider context of the financial services sector, there is a very big risk that it will be ignored entirely, and that is a risk which I suggest that we ought not to take with this legislation.

I should say that I tabled Amendment 104A in respect of the FCA but did not table a similar amendment in respect of the PRA. At that point, my primary focus was on the fact that the FCA’s objectives are very consumer-focused. That is clear from the Bill and is also clear from what Mr Wheatley, the chief executive designate, has said in public. However, the FCA has a very broad scope in wholesale financial markets, including the recognised exchanges, where issues go way beyond consumer protection in a narrow sense. Wholesale markets are important, both internationally and as part of the infrastructure which supports the financing of British business. There may be other ways of ensuring that the FCA does not forget the wider picture, but my amendment is just one way of achieving it.

I should probably have tabled a similar amendment in respect of the PRA. The two bodies have different functions but they both have the capacity to do harm or good to our financial services sector. I am therefore supportive of Amendment 129 tabled by my noble friend Lord Flight.

Both the PRA and the FCA should have something about the success of the financial services sector hardwired into their framework, so I have also tabled Amendment 139A, which was suggested by the London Stock Exchange. Amendment 139A is slightly different. It amends the regulatory principles, which will apply to both the FCA and the PRA through new Section 3B of FiSMA. Under subsection (1)(b) of new Section 3B, the regulatory principles include the principle of proportionality—that is, that burdens should be proportionate to costs. I am sure that we will look at this in more detail later in our Committee, but for present purposes my amendment states that in considering benefits and burdens, the regulators should consider,

“the capacity of the financial sector to contribute to the growth of the United Kingdom economy in the medium or long term”.

The point is that regulators need to think about the impacts of their regulatory actions in the broader context of the financial services sector and its impact on the UK economy. There could be direct impacts, as in the direct contribution of the sector to GDP or employment; or there could be indirect impacts; for example, through the ability of the financial services sector to support the real economy.

I am not wedded to the precise formulation of this amendment, or indeed the other amendment in my name, but I would simply note that it is drawn from wording that applies to the way in which the FPC is required to go about its business as set out in new Section 9C(4) under Clause 2 of the Bill.

When my noble friend the Minister wrote to noble Lords after Second Reading on the issue of proportionality, he urged us to examine the FSA’s compatibility statements, which are used to evaluate proportionality. My noble friend misses the point, which is that the FSA currently has the “have regard” obligation in respect of international competitiveness and so of course it includes the financial sector’s position in the compatibility statements. If we take the “have regard” out of the legislation or indeed any other similar reference to the wider context, it will follow, as night follows day, that such issues will drop out of the compatibility statements. We cannot assume that these issues will remain anywhere in the minds of the regulators.

The substance of these amendments is crucially important and much more important than the exact form of the amendments in this group. I hope that my noble friend will give them serious consideration.

[Baroness Cohen of Pimlico]

I support Amendment 139A, also tabled in my name, along with the noble Baronesses, Lady Noakes and Lady Kramer, and my noble friend Lord McFall, who is not in his usual place. I remind the House that I am a director of the London Stock Exchange. The words are carefully chosen, and I would not disagree radically with the other amendments proposed. I believe that we are all seeking a regulatory regime, which, while preserving stability, leaves room for one of our most successful industries to grow and prosper. It can only do that if regulators are able, as the amendment suggests, to include consideration of the capacity of the financial sector to contribute to the growth of the United Kingdom’s economy in the medium or long term. It remains vital—even in hard times like this, when much of our financial services industry is under criticism —not to forget the long term and not to handicap the regulator, enabling the industry to grow as it should while retaining stability.