Financial Services Bill

Baroness Noakes Excerpts

Wednesday 25th July 2012 Lords Chamber

[Viscount Trenchard]

My Lords, I also recognise the good intention of the noble Baroness, Lady Drake, in moving this amendment. However, I think that the FCA is best helped to help the consumer by having clear objectives and principles, or matters to which they must have regard in pursuing the objectives. I worry that this is becoming overcomplicated.

I also suggest that new Section 1E(2)(a), which states that the FCA must have regard to,

“the needs of different consumers who use or may use those services, including their need for information that enables them to make informed choices”,

overlaps substantially with the effect of the amendment. Furthermore, I am not sure whether it is a good idea to put in the Bill,

“services which are appropriate to their needs”,

and,

“represent good value for money”.

Those two concepts are not defined and may be interpreted in very different ways by different consumers. Who is to say what represents good value for money? The important thing, which has been much too lacking in recent years, is that we should have complete transparency. However, I would like to hear the Minister’s view on this.

I would also like to ask him whether the words,

“The matters to which the FCA may have regard in considering the effectiveness of competition”,

mean that the FCA is prohibited from having regard to other matters, or is this intended to restrict—or to broaden—the matters to which the FCA can have regard? If the provision is intended to broaden the matters, surely the best way is to leave it as simple as possible so that the FCA can use its own judgment in deciding to which matters it should have regard.

[Baroness Noakes]

My Lords, the noble Baroness, Lady Drake, has made a powerful case for her amendment. I think that it is widely acknowledged that the needs of consumers require greater emphasis in the financial services industry as it moves forward, and I believe that that is why the consumer is being placed at the heart of the FCA. However, I am puzzled that the noble Baroness, Lady Drake, has chosen to put her amendment within the competition objective for the FCA. It seems to me that what she was talking about is quintessentially part of the consumer protection objective, which is in new Section 1C. A number of things are already listed within that consumer protection objective, including,

“the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved … and the capabilities of the consumers in question”.

It seems to me that if proper regard was paid to that in the development of the FCA’s policies, that would meet almost all of what the noble Baroness, Lady Drake, seeks to address in her amendment.

[Lord Whitty]

My Lords, I support my noble friend’s amendment and much of what has been said about it. I would also like to counter what the noble Lord, Lord Flight, said because the amendment goes much further than providing information to consumers.

Financial Services Bill

Baroness Noakes Excerpts

Tuesday 10th July 2012 Lords Chamber

[Lord Peston]

My Lords, first, I support my noble friend Lord Barnett in his remarks about this Joint Committee of both Houses, about which we had a great row last week and were even divided on. We would certainly like to know when it will be set up and when it will appear in detail in the business statement. Having said that, I have two or three questions.

My noble friend is quite right to use the word “experiment”, but I hope he will agree that the whole Bill is an experiment. We have not had anything like this placed before us in this form, certainly in my quarter of a century here. That does not mean that it is an experiment that should not take place, but it does mean that we must be immensely careful when it comes to implementation. In particular, the one thing that we do not want to do is what I am afraid all Governments do: look at the past and then repeat the errors of the past willy-nilly. This is not a party political point; it is part of the nature of our political system. We need to make absolutely certain that we do not repeat the errors of the past.

One slight point which my noble friend knows I will disagree on is the phrase,

“subject to scrutiny by the Treasury Select Committee”.

I would always want to add “and the Economic Affairs Committee of your Lordships’ House”, but again we have had that argument before, and the cliché “flogging dead horses” is not my stock in trade.

What troubles me much more is that I cannot see how what is said in the Bill does not lead to clashes with the MPC and what it seeks to do. There is an enormous blurred area of who is responsible for what. After all, if one knows any monetary economics, one knows that the MPC’s role is certainly to produce financial stability. That is the whole point of a correct monetary framework, yet there are these other bodies doing the same thing. I know that we went through this again last week and were told that the governor of the Bank—I add the now mandatory remark, “whoever he or she may be”—will be chairing both committees, but it is still a Herculean task for the governor to ensure that two different committees do not have a decision-making process that leads to conflict.

My last question is due to my ignorance of parliamentary procedure. Could the Minister say a bit more about what the phrase “by order” means? Does it mean putting an order before both Houses that is not amendable by us, or not? Apart from that, as I say, my support is strong.

[Baroness Noakes]

I may be able to help the noble Lord, Lord Peston, with his last question. In two groups’ time, we will be discussing precisely the nature of the procedure that will accompany these new tools. The noble Lord might like to wait until then.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

I am always grateful to my noble friend or anyone else who wants to take the heat on challenging questions. We will come back to the nature of orders.

On the question of what the experiment is here, the experiment that has failed is that of creating the FSA, and we now need to go back to putting the Bank of England at the heart of matters, which is what this is all about. I rather preferred the noble Lord, Lord Eatwell, referring to a “project”, which he did at the end of his speech, rather than an “experiment”. It is indeed a major project.

To dispose of the not entirely relevant question about the Joint Committee on banking ethics and standards, the procedural Motion to set up that committee will be before us very shortly. There is not much more that I can usefully add. I do not think it is directly relevant to these amendments, but I am sure that that Motion will come forward very soon.

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Moved by

[Baroness Noakes]

62: Clause 3, page 8, line 32, at end insert—
“(1A) If the Treasury considers it appropriate to proceed with the making of an order under section 9K, the Treasury may lay before Parliament—
(a) a draft order, and(b) an explanatory document.(1B) The explanatory document laid under subsection (1A) must—
(a) introduce and give reasons for the order,(b) explain why the Treasury considers that the order serves the purpose in section 9K, and(c) be accompanied by a copy of any representations received from the FPC or the Governor.(1C) The Treasury may not act under subsection (1A) before the end of the period of 12 weeks beginning with the day on which the consultation began, unless the order is made in accordance with section 9K(2)(b).
(1D) Subject as follows, if after the expiry of the 40-day period the draft order laid under subsection (1A) is approved by a resolution of each House of Parliament, the Minister may make an order in the terms of the draft order.
(1E) The procedure in subsections (1F) to (1J) shall apply to the draft order instead of the procedure in subsection (1D) if—
(a) either House of Parliament so resolves within the 30-day period, or(b) a committee of either House charged with reporting on the draft order so recommends within the 30-day period and the House to which the recommendation is made does not by resolution reject the recommendation within the period.(1F) The Minister must have regard to—
(a) any representations,(b) any resolution of either House of Parliament, and(c) any recommendation of a committee of either House of Parliament charged with reporting on the draft order, made during the 60-day period with regard to the draft order.(1G) If after the expiry of the 60-day period the draft order is approved by a resolution of each House of Parliament, the Minister may make an order in the terms of the draft order.
(1H) If after the expiry of the 60-day period the Minister wishes to proceed with the draft order but with the material changes, the Minister may lay before Parliament—
(a) a revised draft order, and(b) a statement giving a summary of the changes proposed.(1J) If the revised draft order is approved by a resolution of each House of Parliament, the Minister may make an order in the terms of the revised draft order.
(1K) For the purposes of this section, an order is made in the terms of a draft order or revised draft order if it contains no material changes to its provisions.
(1L) In this section, references to the “30-day”, “40-day” and “60-day” periods in relation to any draft order are to the periods of 30, 40 and 60 days beginning with the day on which the draft order was laid before Parliament.
(1M) For the purposes of subsection (1L), no account is to be taken of any time during which Parliament is dissolved or prorogued or during which either House is adjourned for more than four days.”

[Baroness Noakes]

My Lords, the noble Lord, Lord McFall, is unable to be with us this afternoon because he is en route to receiving an honorary degree tomorrow, which I am sure the Committee will agree is well deserved.

This is another amendment that the noble Lord, Lord McFall, and I have tabled to ensure that the issues covered in the first report in this Session of the Treasury Select Committee in another place are properly debated. I am pleased to see that the noble Lord, Lord Eatwell, has added his name to the amendment. The noble Lord, Lord Eatwell, has already emphasised the importance of the macroprudential tools which are covered by new Sections 9G to 9M. I am sure that the thrust behind these new sections will command general support, but the detail of the new tools must be approached with very great care. My noble friend does not like the term “experiment”, but most of us think that if something looks like an experiment and sounds like an experiment, it is an experiment. We cannot get away from the fact that, because these macroprudential tools have not been used before in this country, nor is there much international experience to go by, we are talking about something very new which should receive very considerable scrutiny. Not even the Bank of England claims a monopoly of wisdom on what these macro- prudential matters should be.

This experimental phase will run for some time. The measures that are initially specified will almost certainly vary over time, as the focus of risks to financial stability changes and as experience is gained of working with the measures. We have something that is very new and, as the noble Lord, Lord Eatwell, has also pointed out, these are very powerful tools to be placed into the hands of the FPC. We have already seen the FPC’s first shot at what it believes those macroprudential tools should be. It has suggested a countercyclical capital buffer, sectoral capital requirements and a leverage ratio. At that time the FPC said that some other measures, such as loan-to-value ratios and loan-to-income ratios, would need public support before they were introduced. I would like to suggest that all the potential measures need public support and therefore there has to be proper debate before it would be wise to introduce them. The Government have, correctly, decided that the new measures cannot simply be set by the FPC or the Bank. They have to be prescribed by the Treasury by order, and that order is subject to parliamentary approval. That meets the point which troubled the noble Lord, Lord Peston, a little while ago.

So far, so good. The measures are to be initially specified by the Treasury, not left to the Bank and the FPC, and they have to be approved by Parliament. The problem is that new Section 9M prescribes the draft affirmative procedure. This procedure is, of course, better than the ordinary affirmative procedure which is, in turn, better than the negative procedure. However, none of these procedures is, in truth, more than a rubber stamp. Oppositions know this only too well, but that knowledge seems somehow to evaporate when they find themselves on the government Benches. Some of us still remember.

The importance of the macroprudential measures lies not in their technical specification and potential impact on financial stability, though those are very important issues. The equally important issues are the consequences of using the measures and their impact on the wider economy. These matters need proper scrutiny and debate both in Parliament and, as we discussed earlier, outside. Once the FPC has been granted these measures they will be able to use them without any further parliamentary intervention. The price for getting these wrong could be very high and so Parliament needs to be very sure that it understands the potential impact of the powers and that it has an opportunity to amend or circumscribe them if that is appropriate. The only way we can get a proper debate in these terms is through the use of the super-affirmative procedure, and that is what the amendment proposes.

The Treasury Select Committee in another place believes that the super-affirmative procedure is appropriate and fully in accordance with Erskine May, which describes the procedure as used,”

“in enactments where an exceptionally high degree of scrutiny is appropriate”.

It is inescapable that these measures fall into that category. It is generally the case that Governments never start out thinking that the super-affirmative procedure is the right one. However, the will of Parliament does sometimes prevail over the Executive in this area.

The Government recently accepted in the Public Bodies Act 2011 that their powers to wind up such hugely important bodies as the Home Grown Timber Advisory Committee or the Railway Heritage Committee should be subject to the super-affirmative procedure, but it appears that they have yet to be convinced that granting these massive new powers to the FPC is of that importance. It is a no-brainer that the super-affirmative procedure should be used and I hope that my noble friend will be prepared to accept that that is the case.

I am aware that the Delegated Powers Committee, which I hold in the highest regard, has not raised objections to the affirmative procedure in the Bill. That is interesting but not conclusive. The final arbiter on these matters is Parliament. The Delegated Powers Committee acts as an early warning system of problems for Parliament to address. The committee does not act on behalf of Parliament to approve particular procedures.

In responding to the Treasury Select Committee, the Government have raised concerns about timing and, in particular, the impact of recesses. This is a red herring. We are not generally dealing with matters which need to be introduced immediately. However, if the FPC woke up one morning with an urgent need to acquire a new macroprudential tool, one’s first reaction would be that that was surprising. However, if that were genuinely the case and the Treasury were committed, my Amendment 62 does not remove the ability to act with urgency. The powers set out in new Section 9M for the made affirmative procedure can be used when the Treasury is convinced of the urgency of the matter.

When the Governor of the Bank of England came to talk to a number of us last week, he rightly emphasised the accountability of the Bank and the FPC to Parliament. Accountability is an ex post concept: Parliament also has to have the ability to be involved fully ex ante in the formulation of important matters such as the macroprudential measures, and the super-affirmative procedure is the only proper way to proceed. I beg to move.

[Lord Northbrook]

My Lords, I support my noble friend Lady Noakes in her Amendment 162. Like my noble friend, I believe that there should be stronger parliamentary scrutiny of the macroprudential tools.

While I accept that there must be flexibility to grant the FPC new tools quickly in rare and urgent circumstances, I still agree with the Treasury Select Committee’s report on the accountability of the Bank of England. As the legislation stands, approval by the House of Commons requires only a 90-minute debate in a general committee and a decision without debate in the House. Like the Select Committee, I recommend that the Government amend the draft legislation to require debates on orders prescribing macroprudential measures to be held on the Floor of the House and not be subject to the 90-minute restriction. The House would benefit from prior scrutiny of such orders by the committee. This view is supported by the Joint Committee on the draft Financial Services Bill, which agrees that there should be a system of enhanced parliamentary scrutiny of these important tools. Like my noble friend Lady Noakes, I was disappointed. Although I respect enormously the Delegated Powers Committee, I felt that its arguments for not wishing this were not as substantial as I would have liked.

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[Baroness Kramer]

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

[Baroness Noakes]

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

[Lord Sassoon]

My Lords, this has been a helpful additional go-round of the tracks because it illustrates, I suggest, that with the procedures already in the Bill and the commitment that my right honourable friend the Chancellor has made to debate the toolkit on the Floor in another place—the same could apply here, clearly, subject to the usual channels agreeing it—we have in substance exactly what my noble friend wants to achieve. We have that without locking ourselves into the difficulty that goes with the 124 days, plus Recess time, which we can get locked into in cases that may be either minor ones where none of this is warranted or, more particularly, ones that started off not being urgent but then became more so. Having had this useful go-round and with the reassurance I have given of what the Chancellor has committed to, I ask my noble friend if she will withdraw her amendment.

[Baroness Noakes]

My Lords, the Minister has not appreciated the difference between the affirmative procedure and the super-affirmative procedure. Simply having a debate can have only one outcome, of approving or not approving the order, and that is the fundamental flaw. It is the thing that we all learn in opposition and that all Governments forget. Whether or not additional time is allowed or whether a different procedure is adopted in the other place may well improve the quality of debate but it cannot change its outcome. In your Lordships’ House, it is always open to us to have a debate on a draft order on the Floor of the House by the simple mechanism of any noble Lord tabling some kind of Motion disagreeing with it. That will automatically bring it into the Chamber. That is not the problem; the issue is the outcome.

The super-affirmative procedure is a more deliberative procedure; it allows views to be expressed without going so far as to say, “We are not having it”—the outcome of which is usually described as very harmful. That is why the House has a general practice of not voting orders down, because it is such a dangerous thing to do. That is why this super-affirmative procedure gives each House of Parliament more opportunity to debate all the issues contained within the order. It may be that we need a greater range of ways of handling this; however, all the methods of handling an order other than the super-affirmative can allow only acceptance or rejection of the whole. That is a difficult thing for the House to do—to put itself in the position of disagreeing with the whole.

The other issue is delay, although I do not see an issue here. The issue is about whether we take the right amount of time to get the thing right. The Government have available in the Bill, unaffected by my amendment, the ability to put something through on an urgent basis. Nobody would dream of circumscribing that power, because it may well be necessary. Even in the middle of the process to get a new measure through, if it was suddenly decided that it was so important that it had to come in urgently, the Government could default to that procedure. As I said earlier, the timing issue is therefore a red herring. The issue is about whether government can give the proper amount of time and consideration to these important new measures.

I will consider carefully what my noble friend has said, but my first instincts are that he has not said enough to convince me that the super-affirmative procedure is not the appropriate procedure for these new measures. I beg leave to withdraw the amendment.

Amendment 62 withdrawn.

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[Baroness Hayter of Kentish Town]

My Lords, Amendment 96A stands in my name and that of my noble friend Lord Eatwell. Despite the increasing importance and powers of the new European Systemic Risk Board and its three ESAs—including, on occasion, the power to override our own regulators—the Bill’s new architecture does not map with theirs. So while Europe cuts by area—with a committee for banking, one for securities and markets and one for insurance and occupational pensions—the Bill divides between prudential and conduct. As AXA warns,

“There is a significant danger that the new structure will diminish the UK’s capacity to influence European regulators as”,

our,

“new ... bodies will be organised along different lines to the European Supervisory Authorities”.

London First, which represents over 200 of London’s leading employers, including many in the financial world, expresses similar concerns about the new framework not mapping onto that of Europe. While it welcomes the establishment of an international co-ordinating committee, it remains worried about the committee’s effectiveness unless it is appropriately resourced and staffed.

We have ceded powers to the EU on many areas of financial services regulation, but there are areas where we may want to retain powers; for example, to impose higher capital requirements on banks. There are also areas for future negotiation where it is imperative that we give leadership and have a good negotiating stance and team in order to have a good outcome. That depends on good preparation within domestic regulators—and that will require considerable co-ordination, which we will rely on a committee to produce.

Our own European Union Committee warned about the mismatch between our new structure and that of the ESAs last July, but the Government did not appear to take much heed of the potential problem. Perhaps the Government are right, and whichever way one cuts and divides, there will not be a brilliant fit. However, given the Government’s commitment to,

“ensuring that the UK authorities … take a leadership role in the ESAs”,

and given the importance of Europe in regulating, in standard setting and in influencing our financial regulators, it might be wise to have a built-in review to check whether we have got it as good as it could be, and to give this House and the other place a chance to see whether any adjustments are called for in the light of experience.

The Governor of the Bank of England has said that the new architecture is,

“a bit by way of an experiment”.

He went on to say that we,

“need to experiment and see how it evolves”

in regard to the whole schema, which he thought should be revisited after five years. In the case of our relations with the European bodies, however, we cannot wait that long. Decisions are being taken even as we meet.

These overlaps—or underlaps—are not theoretical. We know that Michel Barnier, the EU Commissioner overseeing financial services, is to amend EU market abuse rules in the light of the LIBOR scandal. Much of this work will overlap with the probe led by Martin Wheatley of the FCA which is examining almost the same issues. While the EU initiative is likely to complement Mr Wheatley’s conclusions on whether to apply criminal penalties to the manipulation of LIBOR or any other indices, there is potential for a clash over whether to regulate this or other indices.

Clear, focused input into EU thinking is therefore essential for the UK markets. We must ensure that we have the processes and structures right to make sure that those decisions suit our needs. This amendment seeks the information needed to help us assess what adjustments might have to be made to ensure that the decisions taken both here and in Europe really are as good as they can be. I beg to move.

[Baroness Noakes]

My Lords, I completely take the main thrust of the noble Baroness’s amendment, which is that the lack of mapping of our structure onto the European regulatory structure potentially creates problems. We have certainly heard from bodies in the City that they also are concerned that the particular issues that arise in their areas might not be well represented. There is a particular concern about the FCA and ESMA, given the FCA’s inevitable consumer centre-of-gravity and the perceived problem of issues relating to proper representation of the markets in Europe. So I completely buy the need to keep this under review. I question, however, whether the Bank of England is the right body to do that. If we need to hard-bake some kind of review process into the Bill, the review ought to be done by the Treasury, because it is the Treasury that could do something about it if it is not working well.

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Moved by

[Baroness Noakes]

101ZD: Clause 5, page 15, leave out line 31

[Baroness Noakes]

My Lords, I am standing in again for the noble Lord, Lord McFall, in respect of the amendments that are in our joint names. In moving Amendment 101ZD, I shall speak also to Amendments 101B and 118B, which continue on from the concerns of the Treasury Select Committee in another place as expressed in its first report in this Session.

These amendments concern the FCA’s strategic objective, which was the subject of debate on our first day in Committee when, unfortunately, I was not able to be here. The effect of the amendments is to remove the strategic objective set out for the FCA and leave it with its so-called “operational objectives”. The FCA would then have simply objectives.

The FCA’s objectives have been amended quite considerably since they first saw the light of day in a draft nearly two years ago, but it seems to have been a case of two steps forward and one step back. The Treasury Select Committee believes that the Government should aim at simplicity and clarity when framing statutory objectives and that the existence of a separate strategic objective adds confusion. When the Government responded to the Treasury Select Committee’s earlier recommendation in this regard, they said both that the strategic objective,

“has a valuable role in supplementing the operational objectives”,

and that,

“it operates as a check and balance on the operational objectives”.

As the Treasury Select Committee has noted, that is rather contradictory and the Government appear confused. It is difficult to disagree with that conclusion.

The Government also said that the strategic objective acted as a mission statement for the FCA. The Minister repeated that two weeks ago when he responded to the group of amendments led by Amendment 42. The Treasury Select Committee’s view, as set out in paragraph 4 of the 28th report of the 2010-12 Session, is that:

“A ‘mission statement’ has no place in primary legislation. At best”,

it,

“adds nothing. It may be harmful. Multiple tiers of objective risk adding to complexity and diffusing the focus within the FCA”.

Under new Section 1A, the FCA has not only this mission statement-cum-strategic objective but also has three operational objectives, a requirement to promote competition in the interests of consumers, two “have regards” and four functions. As the Treasury Select Committee has pointed out, this really is not clear and simple. I might have understood why the Government had used this contorted formulation if it had been repeated for the PRA or the FPC. However, the Bill does not take this multiple-levels-of-objective route for those bodies, nor was it the route taken for the FSA under FiSMA. I regard it as an unusual formulation for bodies created by statute.

The Minister said last week that there were precedents for this framework but he did not cite them. Perhaps he will do so today so that we can judge whether they are good precedents. The noble Lord also did not explain why this formula is good for the FCA but not for the other bodies in the new financial stability universe. Again, perhaps he will do so today.

When the Minister replies, can he also explain what,

“so far as is reasonably possible”,

means in the opening words to new Section 1B(1)? Surely, the FCA should always act in accordance with its objectives, strategic or otherwise. What do the words mean? How could the FCA possibly act in a way that was not compatible with its objectives? I do not have a specific amendment on this point for Committee and the drafting of the Bill does not permit any sensible stand part debates, but I hope that the Minister can explain this when he responds. I beg to move.

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[Lord Sassoon]

My Lords, in giving those four examples the noble Lord knows very well that the first and fourth of his examples very much fit the bill, and the second and third very much do not. This is all about markets that work essentially to assist the end user of those markets. It has nothing within it to do with working well for a trader or something superficial that all looks smooth on the surface but does not provide the end result of liquidity, price discovery or choice for consumers. The noble Lord knows very well that it would be impossible within the compass of such a piece of legislation to try to define the well working of a market, but the Bill spells out the main ways in which the FCA will seek to promote the well functioning of markets—those operational objectives that I touched on.

Those operational objectives give clues and pointers to the FCA. It will be for the FCA’s board to consider if and when it needs to consider these questions of well functioning markets. I believe that it will be well equipped with its expertise to consider market by market what well functioning means. I see absolutely no problem with this. However, there needs to be something that brings together the FCA’s very diverse and individual functions, roles and responsibilities.

That relates to one of the questions asked by my noble friend Lady Noakes, who asked why the FPC and the PRA do not have strategic objectives. It is precisely because they have much more narrowly focused objectives that they do not need the overall strategic objectives that the FCA needs because of the breadth of its responsibilities. I agree with my noble friend and others that we have not provided this strategic objective for the FCA on some whim. We have not put it in for the FPC and the PRA because it is not necessary. It is precisely because of the diversity and the potentially conflicting nature of the objectives of the other bodies that we believe it is right to have it in the case of the FCA.

By the same logic, the strategic objective will act as a check and balance. If, say, the FCA seeks to advance its consumer protection objective by placing detailed requirements on firms, we want it always to ask itself whether what it is doing contributes to the ultimate end goal of ensuring that markets function well. What functioning well means will be determined with some commonality across all markets, but some of it will be market-specific, particularly depending on whether it is a consumer or a wholesale market. This is no afterthought. It reflects the Government’s desire to enshrine regulation which seeks to ensure that markets can do their job.

My noble friend also asked a question about how the FCA could act in a way that was not compatible with its objectives. There are examples which we need to take into account, one of which might be a short-selling ban which is, arguably, in the interests of end-consumers but is a measure which is not normally thought to be compatible with a well functioning market.

[Baroness Noakes]

I thank my noble friend for that example, in which a short-selling ban could be introduced because it was compatible with one of the operational objectives yet was incompatible with the strategic objective. What, then, is the point of having the strategic objective sitting in this Bill?

[Lord Sassoon]

My Lords, I have explained why a strategic objective is necessary in order to tie together the very disparate responsibilities of the FCA. Nevertheless, in answer to my noble friend’s question about the “in as far as reasonably possible” carve-out, I give her an example of why there will be circumstances where those words are necessary. It is entirely compatible with the need for the general, overarching statement to admit and allow for the possibility that there will occasionally be instances of conflict with that overarching objective. We have done that in the Bill and this does not in any way invalidate it.

I turn briefly to Amendment 101D in the name of the noble Lord, Lord Eatwell. This seeks to extend the FCA’s strategic objective to ensure that markets function in the best interests of society as a whole. Consistent with what I have already said about the well functioning of markets, I support the sentiment underpinning the amendment. We want markets which serve the wider economy, underpin growth and contribute to a more prosperous society as a whole. We are not talking about markets that are working exclusively for those who are operating in them. This sentiment is very much part of what drives this whole programme of financial services reform.

Having said that, I am conscious about the amendment for two reasons. First, it is not the FCA’s job to decide what is ultimately in the best interests of society. The FCA is being set up as a focused, tough and proactive conduct-of-business regulator. If its new style of conduct regulation contributes to ensuring that the financial sector serves the wider economy, that is good and what we want to see. However, I suggest that deciding what benefits society as a whole cannot be the role of a financial services regulator.

Secondly, and linked to that, is an important question of expectations. The FCA will have some important powers but it is questionable whether we could argue that it has all the powers to deliver a market that benefits all of society all of the time.

There are difficult judgments to be made here, not least because there will always be trade-offs between policy choices. It is my strong belief that these societal choices are, ultimately, for the governor and not the regulator. I cannot, therefore, support Amendment 101D. I may be proved wrong in just a moment, but I sense that I have not completely won over my noble friend—no, I will not be proved wrong. However, she is always very reasonable about these things and she recognises the very considerable way that the Government have moved on the FCA’s strategic objective. I ask her to withdraw her amendment.

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[Lord Sassoon]

I said the Government. I hope he would agree that it was for the Government, not the governor. Good.

[Baroness Noakes]

My Lords, I am glad that my noble friend has cleared that up because I heard him say “governor” too. Perhaps there was a small slip, but Hansard will doubtless make sure that what he intended to say is recorded as having been said.

I thank the noble Lord, Lord Eatwell, for his support for my amendments and I agree with him that the current drafting is not much more than a vacuous statement. The Minister said that this is going to be an overarching goal, that it is going to be a check and balance but the first example he gave me, of short-selling, means that it can be ignored. This seems to be some form of window dressing. It is trying to appear that the Government agree with as many people as possible. It probably has no meaning whatever and it is therefore possibly something that we do not need to get overexcited about. It certainly does not add to clarity in the Bill. I shall think further on what my noble friend has said before we return to this on Report. For now, I beg leave to withdraw the amendment.

Amendment 101ZD withdrawn.

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.

Financial Services Bill

Baroness Noakes Excerpts

Tuesday 3rd July 2012 Lords Chamber

[Lord Eatwell]

My Lords, this is another of those bran-tubs full of amendments, to jump us around various aspects of the functions of the FPC as set out on pages 5 and 6 of the Bill. Let us deal first with Amendment 42. I do not know whether this is a slip in drafting—although I know those never occur in the Treasury—but with respect to the need to understand or support the objectives of the FCA, the strategic objective of the FCA is left out. Since the FCA very emphatically has both operational and strategic objectives, it is interesting to know why the FPC does not have to avoid prejudicing the strategic objective of the FCA. According to this drafting, the FPC can readily prejudice the strategic objective that markets should function well. That is a mystery. We are going to have the FPC being able to ensure by its measures that markets do not function well. I think if it got up to that, it would rapidly get short shrift from the Treasury and, indeed, from Parliament, so I presume that this is just a slip and that the strategic objective of the FCA will be added to the operational objectives.

In Amendment 47, here the issue is knowledge collection for the FPC, in the sense that it is important that the FPC has knowledge of levels of leverage, as we discussed earlier this afternoon. Knowing levels of leverage is a vital part of systemic risk analysis so the amendment ensures that the FPC will have access to that information, either from the FCA or from the PRA, divulging levels of leverage as defined clearly in the Basel III agreement. You could take other definitions but the Basel III agreement is a perfectly reasonable definition of leverage and that is why my noble friend and I have used it here.

Amendment 51 is a probing amendment, tabled because I did not understand the issue of a “publication”, as referred to in new Section 9G(10) of the Bank of England Act 1998. Describing directions issued by the FPC, it says:

“The direction may refer to a publication issued by the FCA, the PRA, another body in the United Kingdom”—

so any other body, such as my local sports club—

“or an international organisation, as the publication has effect from time to time”.

I am sure that “publication” in this sense must be a term of art and I am missing something. I would be grateful if the noble Lord could elucidate the issue both of what a publication is in this context and what is “another body” in the UK. Does it include my local sports club, and if not, why not, since it is another body in the UK?

Amendment 53 is one of the standard openness amendments, which have been encouraged by the Treasury Select Committee in another place, requiring the chairman of the Treasury Select Committee to be informed and given reasons if a copy of a report on a direction is not laid before Parliament. A persistent problem that we are going to face in the workings of the FPC is that it is going to be using powers that have traditionally been those of the Executive or of Parliament. There is therefore always going to be this tension of accountability between the FPC and the Executive and Parliament until, after a few years, the process has settled down, we hope. In these circumstances, it seems important that if for some reason a report on a direction is not to be laid before Parliament, the chairman of the Treasury Select Committee should be informed and given reasons.

Amendment 64 is rather more important, particularly in respect of some of the discussions we have had over the last few days, including this afternoon, and relates to the definition of “regulated persons” and the scope of exemptions. We know from the whole LIBOR debacle that one of the problems was that this particular market did not come within the scope of regulation. I am sure the FPC would have been quick off the mark last March, when the Treasury first knew, or presumably even earlier when the FSA knew what was going on, and would have included the setting of benchmark prices within the definition of regulated persons or dealt with it under the scope of exemptions. The recommendations that the FPC should make on the scope of financial regulation are enormously important and it is vital that the FPC has the powers to keep these matters under review. Amendment 64 is, if anything, the most important amendment in this whole group. We have to give the FPC the power to make recommendations with respect to the scope of regulation as it affects financial stability and systemic risk.

Amendment 65, which applies to page 9, line 34, is one of these amendments to which I have already referred where the committee is given discretion over its own action, even though the action seems to be firmly defined in the particular new subsection of the Bill, which reads:

“The Committee may make a recommendation under subsection (2)(e)”—

with respect to additional persons who may be required by the PRA to provide information, so this is very important indeed—

“only if it considers that the exercise by the Treasury of their power to make an order under section 165A(2)(d) of FSMA 2000 in the manner proposed is desirable”.

It is only “if it considers” that. Why should it be its consideration that limits whether it makes a recommendation? Either this is just trivial—in other words it would not have acted if it had not thought it should act—or this is limiting the scope of any legitimate limitation on the recommendations that the committee might make. If we took out the phrase “it considers that”, it would read “The Committee may make a recommendation under subsection (2)(e) only if the exercise by the Treasury of their power to make an order under section 165A(2)(d) of FSMA 2000 in the manner proposed is desirable”.

There the test is the desirability of the Treasury’s action, whereas at the moment the test is whether “it considers that” it is a desirable action. How do we want the test to be posed? Should the test be posed that the committee decides to act, or that there is an objective consideration of the desirability of the action under consideration?

Amendment 88 is thrown into this group for reasons which are not entirely obvious, but I will speak to it because again it is a straightforward openness amendment requiring that the chair of the Treasury Committee be informed and given reasons should information concerning a direction not be published.

These amendments are all to do with the very important activity of directions and recommendations by the Financial Policy Committee. We have the need for information derived through directions and the openness issues, which are hugely important. The most important, particularly in the light of what we have seen over the last couple of days, is the question about the scope of financial regulation and the recommendations that the FPC may make about that scope as set out in Amendment 64.

To go back to the beginning of this bran tub-list, let us deal with Amendment 42. I simply want to ask the noble Lord why the FPC can actually, if it wishes, endanger the FCA’s pursuit of its strategic objective of having markets function well. I beg to move.

[Baroness Noakes]

May I clarify one item with the noble Lord, Lord Eatwell? He said in relation to Amendment 64 that the important thing was the definition of regulated persons and that that would have been necessary to ensure that the events in relation to LIBOR were kept under review. Is it not the definition of regulated activities rather than regulated persons that would have been relevant in that instance? That is to say, the activities were already being carried out by regulated persons but they were not regulated activities.

[Lord Eatwell]

The noble Baroness has made a very interesting point. I have forgotten the precise names, but you have a person who submits the information, and a person who receives it and then has the responsibility of transmitting that received information into the LIBOR setting. That is the person I have in mind.

--- Later in debate ---

Moved by

[Baroness Noakes]

42A: Clause 3, page 5, leave out line 38

[Baroness Noakes]

My Lords, in moving Amendment 42A, I shall also speak to Amendment 62A in this group. These are probing amendments. Amendment 42A deletes line 38, on page 5. New Section 9F of the Bank of England Act 1998 sets up the functions of the FPC, and subsection (1)(c) creates the function of making recommendations. Amendment 42A deletes this function.

Amendment 62A deletes a lot of lines, but in practice deletes the whole of new Sections 9N to 9Q, inclusive, which detail the functions created by new Section 9F. The purpose of tabling these amendments is to probe why the FPC needs the power to make recommendations, and what the legal significance of this function is in practice.

When I first saw the Bill, I was mystified by the need to create a statutory power to make recommendations. I was not familiar with that being a requirement, so I did a little research. I seemed to find that this statutory power of recommendation-making is a relatively new phenomenon in legislation, with similar provisions in a handful of laws, all of which have been created since the Government came to power in 2010. I am beginning to think that this might be one of those constitutional innovations for which we have to thank our colleagues on the Liberal Democrat Benches, although I may be wrong on that.

The Minister wrote to noble Lords with an interest in this Bill yesterday, following the first Committee day, which I was unable to attend. In the letter he said that the Treasury has a common law power of recommendation, but that bodies created by statute need a specific power. I find that pretty odd, given that bodies created before 2010 managed perfectly well without a statutory power of making recommendations. Indeed, the Bank of England has managed perfectly well for over 300 years without any kind of power to make recommendations.

It may be just a matter of legislative fashion. One has to go with the times. The main purpose of my amendment is to probe what is meant in practice by the ability to make recommendations.

New Section 9N allows the FPC to make recommendations within the Bank. I found it difficult to get my head around making recommendations within the Bank. The FPC is a committee of the Bank’s court, and that is under Section 9B. Under new Section 9N, this committee can tell the corporate body in which it is housed what it thinks that body should do. What is the purpose of that? More to the point, what is the effect? The Bank, which acts through its court, fulfils its own function, and as far as I can see, those functions do not include paying any particular attention to what one of its committees says. I do not believe that the functions of the Bank or its court are changed by the Bill in this respect. If I am wrong on this, I know that the Minister will correct me. However, I am completely mystified about what making recommendations within the Bank means in practice. The Committee discussed the circularity of this in the context of the financial stability strategy under proposed new Section 9A, which covers the FPC making recommendations to the court. I must say that I was no wiser after reading both Hansard and the Minister’s letter on this point.

Proposed new Section 9O—9 Oscar—would allow the FPC to issue recommendations to the Treasury. However, while the FPC has to take notice of any recommendations made to it by the Treasury and has to respond to them—that is set out in proposed new Section 9D—there does not appear to be any reciprocal provision requiring the Treasury to respond to the FPC’s recommendations. If that is the case, why on earth do we have to provide in legislation for the FPC to make recommendations to the Treasury?

Proposed new Section 9P covers the FPC making recommendations to the FCA and the PRA—and does contain requirements for the FCA or the PRA to comply or explain their non-compliance. This seems to be the only part of the Bill dealing with the FPC’s recommendations that makes sense and has any real-world impact.

Will the Minister explain why, in drawing up the functions of the FCA and the PRA, no reference is made to their duties in respect of the FPC recommendations? If it is necessary as a matter of law to set up a power to make recommendations, why is there no requirement to set up a reciprocal duty or requirement of compliance with the recommendations?

Finally, proposed new Section 9Q allows the FPC to make recommendations to the whole world. The justification for this is that it may make recommendations to bodies such as the Financial Reporting Council. However, since the recipients of these recommendations can—as far as I am aware—do what they like with them, I fail to see the point of the provision.

I looked at the June 2012 FSR, which has been referred to already this evening. The executive summary makes either six or seven recommendations, depending on how one interprets “recommendation”. In six instances it states that the committee “recommends” that other people should do things, but in one instance it states that banks “should” continue to do something. I have no idea whether that constitutes a recommendation. In any event, most of the recommendations were addressed to the FSA—which will be the PRA and the FCA in due course—and two or three, depending on one’s interpretation, were addressed to banks. That is interesting because making recommendations to banks was not mentioned at all in the extraordinary recommendation-making powers, although clearly this will be an important part of their activity.

Perhaps I ought to be less worried about the scope of the recommendation-making power that is not bounded by space or time, because it appears to be of little substance. If my noble friend tells me that it does have real substance, we would look to constrain it in some way so that it did not include the ability to tell the whole world how to act.

In summary, this is a set of largely one-sided recommendation-making powers that might amount to something of importance—or alternatively, not much more than window dressing. We should be told. I beg to move.

[Lord Hodgson of Astley Abbotts]

My Lords, I have some sympathy with my noble friend’s amendment. When the Minister replies, perhaps he will focus some remarks on proposed new Section 9Q, which is the declaratory piece about the whole world. It seems that either the parliamentary draftsmen are saying, “Because you said certain people were included, you must include everybody else”, or it is otiose.

It would also be helpful to have some suggestions about the sort of events and recommendations that might fall under new Section 9Q, so that the Committee gets some understanding of the purpose behind this clause, if it is anything other than declaratory, to avoid, for parliamentary draftsmen’s reasons, the view that, because certain parties have been suggested, by definition they could make recommendations to nobody else.

--- Later in debate ---

[Lord Sassoon]

My Lords, that is broadly right. [Laughter.] We should remember that the FPC will be made up of a different group of people, including independent members, who will be making recommendations. Taking the example I gave of the supervision of payment systems, the FPC, with its independent members and statutory responsibilities, could be making recommendations to the Bank regarding its supervision of payment systems. It would therefore be a mischaracterisation—it really does not matter who signs a letter to whom, it would be the FPC making a recommendation to the Bank. To reduce it to a suggestion that the governor will be writing to himself would be a mischaracterisation of an important power that should have a degree of formality around it, in the same way that the FPC will be required to exercise its powers of making recommendations for other regulatory bodies.

[Baroness Noakes]

My Lords, I thank the Minister for the explanation that he is trying to provide, but I feel a little as if we are in Alice in Wonderland. Can the Minister give me an example in the real world where people within organisations behave in the way in which we seem to be expecting the Bank of England to behave?

[Lord Sassoon]

My Lords, I am not sure whether one can distinguish the world in which we are talking about financial regulation from the real world. This is the real world. It is a world in which these are very important powers that go to the heart of ensuring the financial stability of the UK. This is not a frivolous point. It may appear on the surface to be Alice in Wonderland territory but, if the FPC is to exercise the really significant powers in the system that it is being given or the responsibility for financial stability, it must first have the levers. One of the important constituencies that it will be addressing—and it would be totally remiss of the Government and this Bill to leave it out—would be directions from the FPC to another important regulatory body, of which the Bank is one.

An awful lot of things could be left unsaid which one would assume would somehow happen. This is not one where it would be safe in any way to do so because, if we did not have this power to make recommendations, there could be a significant risk that the FPC would not have the powers—the levers—over critical areas of the supervision and the regulation of the financial infrastructure that underpins so much of our financial system. One only has to look at recent events to see how computer glitches and apparently relatively simple IT problems can have very significant consequences. I suggest that the FPC would have a huge hole in this armoury if it was not able to make recommendations also directed at those who supervise the infrastructure.

--- Later in debate ---

[Lord Sassoon]

My Lords, my clear understanding of the drafting here—and like these other drafting points that we have dealt with, if I have got it wrong I will of course write—is that a specified regulated person is the key thing, which in the examples I gave would be Barclays or the RBS. We should not be concentrating on the verb “relate” but what we need to be looking at in new Section 9G(4) is the construction on “specified regulated person” and that would be naming an individual firm.

If the FPC were to make a direction related to regulated persons of a specified direction which happened only to be a class of one firm, then I am clear that that is what is intended here. If I have got it wrong, which I do not believe I have, I will clarify the situation. I wish I had the complete Oxford English Dictionary. It would be quite difficult to bring it in to discuss it over a glass of wine, but I have the Concise Oxford English Dictionary at my fingertips and it might help the noble Lord to say that the concise edition defines “relate” interalia as meaning “having reference to”. I do not know whether that helps him, but perhaps we can move on.

We were on Amendments 48 and 66, and I think that that particular point was the major one here concerning the Committee. I would just say more generally that we are absolutely committed to maintaining clarity of responsibilities and distinguishing micro or firm-specific roles from the macro role. We do not want any lack of clarity here, but on the situation which the noble Lord postulates, I hope that I have satisfied him that indeed the drafting is correct. After that long and interesting discussion, I would ask my noble friend to consider withdrawing her amendment.

[Baroness Noakes]

My Lords, given the hour I shall not prolong any further what has been an interesting debate. I would like to thank my noble friend and the noble Lord, Lord Eatwell, for taking part in 50-odd minutes of discussion. My noble friend says that these recommendations to which my amendments were addressed are a lever, and that they need legal backing. I frankly do not see that. I am going to read with great care what my noble friend has said, in particular about making recommendations within the Bank, to the rest of the world and indeed to the Treasury, none of which seems to have any legal effect and is just simply a way of writing down something that might happen. I will not prolong the agony any further this evening and I beg leave to withdraw the amendment.

Amendment 42A withdrawn.

Financial Services Bill

Baroness Noakes Excerpts

Tuesday 3rd July 2012 Lords Chamber

[Baroness Noakes]

My Lords, I support the formulation of the Minister’s amendment. While I understand what the noble Lord, Lord Eatwell, says about having regard to—not simply blindly following—the Government’s policies, which the Financial Policy Committee might think are irresponsible, my noble friend Lord Blackwell answered that point effectively. It would be intolerable to have a government-owned body in effect running a policy contrary to the Government’s own policies. However, he has a point but it is already dealt with by the ability of the FPC to make regular reports. Where it has to report on its view of financial stability, the FPC has ample opportunity, on a regular basis and without any interference by government, to say what is making financial stability difficult to achieve—if achieving that is indeed the Government’s economic policy. Therefore, we do not need to reformulate it as the noble Lord, Lord Eatwell, suggests.

I do not support the amendment tabled by the noble Baroness, Lady Kramer, because I am slightly appalled by the prospect of the FPC going out promoting government policy, let alone going out promoting various forms of finance being available to the City. That goes way beyond what the FPC was set up to do and is probably way beyond the competencies of the kind of people it has attracted.

[Lord Davies of Stamford]

My Lords, I will comment on the two previous contributions. I very much agree with the noble Baroness, Lady Noakes. It would be quite wrong to put the FPC in a position in which it was simply a mouthpiece for the government policy of the day. It is very important that it is independent. In response to the views of the noble Viscount, Lord Trenchard, on competitiveness—the suggestion that the FPC should pursue competitiveness as an objective in itself—my answer would be that competitiveness is an intermediate objective, not something that one pursues for its own sake. If one has an obligation to have regard to or to pursue—we will come back to the differences in a moment—growth and employment, anyone pursuing or having regard to those objectives is bound to take competitiveness into account because without it we will not get growth or employment. Growth and employment are ends in themselves, unlike competitiveness; that is the distinction.

We have a menu of choices before us this afternoon. All three amendments believe there should be a link between government economic policy, particularly on growth and employment, on the one side and financial stability on the other. No one has contended—nor could they easily do so—that those objectives should be pursued totally in isolation from each other. However, of the three choices before us, the amendment of the noble Baroness, Lady Kramer, and the right reverend Prelate the Bishop of Durham is the most coercive and creates an unqualified statutory obligation to pursue growth and employment. That is very dangerous because it is likely to result in a conflict of objectives. It is a great mistake to place in statute what could be regarded as contradictory objectives. The government amendment in the name of the noble Lord, Lord Sassoon, does not do that because the reference to government economic policy and growth is subsidiary to the obligation to pursue financial stability. The least coercive of the three amendments, and the one that I most incline towards, is that of my noble friend, Lord Eatwell.

It is particularly important that we should discuss this today, because the results of our discussions, deliberations and votes may have a very specific impact on the economy, about which we must all be very concerned. The situation today in relation to the pursuit of financial stability is particularly grim. There are at least a couple of areas where the Government appear, as of this afternoon, to be contradicting themselves very sharply and dangerously—namely, their policies on economic growth on one side and financial stability on the other. I will set out those two examples in the hope of carrying the Committee with me.

One is in relation to quantitative easing. The Government have promoted or encouraged the Bank of England to promote—in all events the 1946 Act makes it clear that the Bank cannot incur liabilities without the Treasury’s agreement, so the Government must be responsible—a policy of quantitative easing that runs into several hundred billion pounds, as we know. That policy was designed to encourage banks to increase their lending by automatically increasing their reserve assets as they received money from the Bank of England in exchange for bills and other instruments that it is purchasing under the quantitative easing programme. It has not worked at all and that has been very marked indeed. The Minister must have noticed the figures that show that the two quantitative easing exercises have not resulted in any increase in bank lending. The bank lending figures do not seem to correlate at all to quantitative easing. The Government need urgently to ask themselves why that is.

One of the extraordinarily perverse and, frankly, foolish aspects of the quantitative easing programme is that the Bank of England is paying the clearing banks or the commercial banks for the deposits that result from the programme. Its whole purpose was to encourage banks to lend and to encourage an increase in the money supply—in M3 or M4. That has not occurred because the banks have been keeping their deposits at the Bank of England. They are not using them under the fractional reserve banking system to leverage out and increase their lending to the rest of the economy, to the private sector. It is extraordinarily foolish to pay interest on deposits at the Bank of England because that reduces the opportunity cost to the banks of not lending—of not responding to the quantitative easing programme by increasing their lending.

When the Minister responds to the debate, can he first tell me the amount of interest—I am not sure whether it is 50 or 75 basis points—paid by the Bank of England on these reserve assets and deposits, which is a completely wrong thing to do? Secondly, why is the Bank acting so perversely? If it did not pay any interest on those deposits, there would be a much greater financial incentive on the banks, given that they would not be earning anything on that aspect of their assets, to lend more to the private sector, which they are noticeably not doing. Had the Bank decided, under the quantitative easing programme, not to buy in instruments from the banking system—the financial institutions—but to go out into the market and buy instruments, such as short-term gilts at the short end or Treasury bills and so on, from the non-financial private sector, it would have automatically increased the money supply. The Bank did not do that, and I do not know why the Government did not decide to do it that way. The way that the Government have done it seems to be somewhat contradictory and it certainly has not produced the desired result.

The Minister will not be surprised to hear my second point because I have made it two or three times already in this Chamber. It is contradictory to pursue a policy of encouraging bank lending to move the economy to greater growth, while at the same time forcing the banks to increase their capital ratios. In an ideal world, it would be a good idea for the banks to increase their capital ratios. It is something that we should have been doing in the good times when banks were running up their assets, perhaps to an excessive level in both quantity, which was too great in relation to their capital resources, and quality, which was subject to the law of diminishing returns as the assets were increased in the boom times. Those were the days when we should have been pursuing such a course. Of course I recognise that the Government of which I was privileged to be a member was in power at that stage, but the Tory party and members of the coalition cannot claim any virtue in this matter, given that, far from urging us at the time to bring in any such measures, they were always urging us to deregulate the banks further. Nevertheless, we are dangerously pressing on the accelerator and the brake at the same time.

The Minister normally replies to me by saying, “It doesn’t matter. These new capital ratios do not have to come into effect until 2018”. That is a somewhat naive approach. Anyone who has sat on the board of a bank, as I have, knows that if you know you have to achieve certain capital ratios in five years’ time, that is the trajectory that you have to pursue from now until the end of that period. In other words, it constrains you in your lending. It means that you have to be much more selective in the loans you take on because you are concerned that otherwise you will not reach the target that has been imposed on you. I recognise it is very difficult, with the present state of the financial markets both here and in the eurozone, to go back on an announced programme of strengthening the capital ratios of banks.

However, it is an almost textbook example—which will probably be cited in business schools and seminars in economics departments for several decades to come—of the Government pursuing two completely contradictory policies and now finding themselves in great difficulty. Even if they want to extricate themselves from this contradiction, they have already engaged in this particular programme and sent instructions to the banks, and it would obviously cause considerable problems in the financial markets if we suddenly announced that we did not want to strengthen the capital ratios of banks.

These are two good illustrations of how easy it is to run into a contradiction between the Government’s main economic policy objectives—which must always be to stabilise the economy, and in bad times, such as we are in now, to increase growth and employment—and the financial stability mechanism. From the menu of the most coercive, the medium and the least coercive amendments before us, I reject, as I have already said, the most coercive. I think that it is a mistake. I am fairly open-minded about the other two. It is very important that the FPC has an obligation to take into account my noble friend’s formulation of “other, wider economic objectives”. It would be very wrong of it to act blindly, as though it were in a watertight compartment. It may be that we can go a little further and place an obligation on it, provided that it is subsidiary to its main obligation in the view of the Government.

This controversy parallels discussions we have had in both this House and the other place. I remember the discussions in the other place 15 years ago, when we made the Bank of England independent, quite well. There were two great examples of successful independent central banks in the world at that time. One was the Federal Reserve system, which had a double objective statutorily imposed on it. Those objectives were price stability and employment, which in the short term can sometimes be in contradiction. It was left to the Federal Reserve board to resolve that contradiction. On the other side was the ECB which, basing itself on the Bundesbank tradition, had a single technical objective of price stability defined by maximum inflation rate of 2%. We had to choose between the two but ended up with something slightly between them, which may also be the right solution on this occasion, in this context.

--- Later in debate ---

[Lord Sassoon]

No, my Lords, it is not wrong. If we are talking about a British bank, it is a British bank, and that is linked to these metrics and to the remit of the FPC. Of course that is captured in the FPC’s remit. I think we are getting ourselves excessively excited about a simple issue that is perfectly well drafted in the Bill, which is that the FPC has a wide and appropriate remit to deal with financial stability in the UK, but that it should properly take account of systemic risks that may arise both inside and outside the UK. That is exactly what the drafting of the two clauses taken together means. If the noble Lord had been critiquing the Bill as it was introduced in another place, he would have proper grounds for questioning that, but we have plugged a possible gap, and the construction now works.

[Baroness Noakes]

I do not wish to be unhelpful to my noble friend, but I am probably going to be. What the noble Lord, Lord Eatwell, says seems to make sense. The systemic risks in subsection (3)(a) and (b) are defined in subsections (5) and (6) as not having any geographic restriction, but subsection (3)(c), which is defined by subsection (7), as the noble Lord, Lord Eatwell, said, relates only to,

“individuals in the United Kingdom and businesses … in the United Kingdom”,

for credit growth, debt, and so on. That ignores the fact that many banks have global balance sheets. As we do not have rigid subsidiarisation, a UK balance sheet could have significant exposures to other territories, depending on how a particular bank’s overseas operations were organised. Many of them are run as branches out of the UK institution and therefore, I should have thought, would be posing the kind of risks on which the FPC would need to keep an eye. I am unclear why we have chosen that formulation. I accept that for the systemic risks it does not matter where it applies, but when we are talking specifically about credit growth, debt and leverage, it is as if it can impact on the UK only if it happens in the UK, and I do not think that that is correct.

[Lord Sassoon]

I shall have another go, because this is tricky but important. The Financial Policy Committee is charged with responsibility for the overall financial stability of the UK: the systemic risks and the macroprudential role. We need to distinguish that from the situation of individual firms which will or may contribute to the overall systemic risk. In this discussion we risk conflating two things. One is the systemic risk in the system, which the FPC is charged with dealing with. That is credit growth, debt and leverage as defined by subsection (7), which is referenced to the United Kingdom. The financial stability of the United Kingdom is the concern of the FPC. That does not mean that risk may not come from the international financial system—that is made completely clear by subsection (6). However, for individual financial institutions for which the PRA will have first responsibility, if the FPC considers that they contribute to the overall situation, it does not rule out or limit consideration of the factors that affect individual financial institutions. The clause and the definitions do not rule that out. We should not confuse what is being defined here. The definitions are not exhaustive of the systemic risks which the FPC should consider. It may consider whatever else it considers relevant.

--- Later in debate ---

[Baroness Noakes]

My Lords, as the noble Lord, Lord McFall, has already said, my name has been added to this amendment. It is one of those that have been put forward in the spirit of co-operation with the other place, and is one of the items left over, in the opinion of the Treasury Select Committee in the other place, at the conclusion of consideration of this Bill there. I was happy to put my name to it so that we could have a proper debate on the issue in your Lordships’ House.

There does not seem to be any fundamental disagreement that some indicators of financial stability should be used in the dialogue about how well financial stability is going along and ultimately, I imagine, how well the FPC is doing its job. Consequently, I am unclear why there has been so much resistance to date to recognising the importance of this in the Bill. The Bank of England rightly said that this should not be hardwired into legislation—that is, the hardwiring of the particular indicators. I do not think that anyone has a monopoly of wisdom at the moment regarding what those indicators should be and it is clear that the nature of the indicators will change over time, so it is wholly inappropriate for specific indicators to be reflected in the Bill. The amendment would merely ask the FPC and the Treasury to agree and then publish a set of indicators, and clearly that can vary over time.

I find it difficult to understand the Treasury’s approach on this. Usually the Treasury likes to get stuck in on practically anything and not leave things to the Bank of England, but it seems quite content to leave the issue of financial stability indicators solely to the Bank of England and to have no direct locus itself. It was curious that when the Government responded to the Treasury Select Committee’s 21st report of 2010-12, when this issue was raised, the response said:

“If necessary, as part of its annual remit to the FPC the Treasury will be able to make recommendations about additional indicators that it feels the FPC should consider”.

I do not understand why we have to have this indirect dancing around recommendations made in the context of an annual remit to the FPC. The measurements that are used to tell whether or not the financial stability objective has been met should be so caught in the dialogue between the Treasury and the FPC that it should be a routine item for discussion, not one left to the possibility of recommendations.

This is all part of the link of accountability from the functions of the Treasury in relation to the FPC to Parliament. The Treasury should be accountable to Parliament for its role in agreeing the indicators and not just say, “Well, it’s really up to the Bank of England and we’ll give them a recommendation if we feel that they’re seriously out of line”. I am struggling to find why the Government have not embraced the very modest idea that the Treasury should be agreeing this issue with the FPC.

[Lord Davies of Stamford]

My Lords, I think that my noble friend Lord McFall and the noble Baroness, Lady Noakes, have been very persuasive on this point. All human institutions—indeed, all human beings—perform best in life and achieve the most when we set ourselves clear objectives, we monitor our performance in meeting them and we are quite clear and honest with ourselves and others about the extent to which we have met them. Clearly, with regard to an institution that has public responsibilities and fiduciary responsibility on behalf of the public as a whole to supervise our financial sector, those criteria and objectives and the extent to which they have been achieved or otherwise should be a matter of public knowledge and public debate. I am certain that matters should proceed like that.

As the noble Baroness has just said, the amendment would not in any way hardwire specific metrics or criteria into the legislation; it says merely that the FPC and the Treasury would have to agree among themselves what particular objectives or criteria they were going to adopt for a foreseeable period, and then we could watch to see whether they were adopted or not. I do not have any specific objectives or criteria to put forward except perhaps an addition to the sort of principles that my noble friend Lord McFall referred to. We should at least mention something that, while it is quite obvious, the public would expect to be there, such as that the FPC would expect to intervene sufficiently early and to be sufficiently alert to the difficulties that can arise in order to avoid situations where the Bank of England has to supply either solvency support to banks by way of deposits in a crisis or indeed liquidity support or solvency support if it requires accuracy or nationalisation. These are extreme examples of how things can go badly wrong. They have gone badly wrong over the last few years and there should be an explicit commitment to avoid those mistakes and those disasters in any agreed criteria which may come out of the discussion between the Treasury and the FPC foreseen by the amendment.

--- Later in debate ---

My noble friend Lady Noakes questioned in particular the Treasury’s role in all this. It is important to stress the independence of the FPC and, although this was not what my noble friend was suggesting, for the avoidance of doubt, it is important that the Treasury ought not to be able to tell the FPC definitively which indicators to consider. I can imagine the situation if the Treasury said, “We do not want you to consider house-price growth”, for example. This would be a serious curtailment of the FPC’s independence.

[Baroness Noakes]

My Lords, my noble friend is mischaracterising what I was suggesting in relation to this matter. The amendment states merely that the Treasury and the FPC,

“must agree and publish a set of indicators”.

There is no suggestion that the Treasury could use this mechanism to tell the FPC not to look at certain things. The issue is whether or not the Treasury should take the responsibility of agreeing a range of indicators that are appropriate to the FPC’s objectives, just as the Treasury does in relation to the indicator that is set for the MPC. We know that it is radically different from the MPC, and that a single indicator cannot be set and that it cannot be the sole responsibility of the Treasury. However, the Treasury should have some responsibility for agreeing with the FPC the range of indicators that will be used.

I hear the cry of a child in the Public Gallery. It is amazing the effect that one has when talking about financial stability.

It is important that the Treasury should be engaged formally in the process, and it should not just leave it to the Bank of England. Equally, the Bill should not be silent and leave it to the Bank of England to choose whether or not to put forward indicators. I agree that it is doing so at the moment, but is it wise to legislate that there should be no requirement for it to do so?

Financial Services Bill

Baroness Noakes Excerpts

Monday 11th June 2012 Lords Chamber

[Baroness Noakes]

My Lords, our rules say that, on behalf of the whole House, the noble Lord, Lord Bilimoria, should welcome the maiden speech of the noble Lord, Lord O’Donnell, but I hope that I may be permitted to add my congratulations on his forthright and interesting speech. I hope in particular that eurozone Ministers heeded his wise words on leadership. I should declare my interests as set out in the register of interests. I am a non-executive director of RBS and a shareholder in a number of financial services companies.

My first point on this Bill is that it misses opportunities to ensure that UK plc is at the heart of financial services legislation. Bodies such as the CBI have pointed out that none of the new regulatory bodies is due to inherit the FSA’s current requirement to,

“have regard to the international character of capital markets and the desirability of maintaining the competitive position of the UK”.

The misguided reason given in another place is that this was associated with light-touch regulation and its disastrous consequences, but that is not good enough. Just as important, as other noble Lords have pointed out, is that the FPC’s remit does not have an explicit requirement to have regard to growth in the UK. When I read the attempt made by my honourable friend the Financial Secretary to the Treasury to justify this in another place, I nearly lost the will to live.

The financial services sector is a crucial part of the UK economy both directly in its contribution to GDP and tax yields and indirectly in its underpinning of the rest of the economy. It would be truly disastrous if the new bodies created by this Bill were merely technocratic and divorced from the needs of the wider economy. I hope that the UK’s economic success will be hard-wired into this Bill and that we will avoid the stability of the graveyard.

I cannot pretend to be enthusiastic about everything in this Bill. In particular, I believe that the twin-peaks approach may well create as many problems as it seeks to solve. That the FSA failed as a part of the tripartite arrangement is beyond doubt, but it is less than clear that the Bank of England would have made a better fist of prudential supervision before the financial crisis or that separating out conduct will be net positive.

The FSA was expensively created in the late 1990s and now we are even more expensively creating new arrangements that will have different gaps and overlaps. I can sense the law of unintended consequences waiting to spring into action. My noble friend will be relieved to hear that I am not going to fight a rearguard action, and shall instead concentrate on other areas of the Bill where I believe improvements are required.

I support the creation of the Financial Policy Committee to give focus to the Bank’s financial stability objective, but the Bank and the Financial Policy Committee must operate in an accountable and transparent way. My noble friend has helpfully confirmed that the Government will make changes in the Bill as it goes through your Lordships’ House, and I hope that this will go beyond the Bank’s own suggestions. I hope that my noble friend will heed the wise words of several noble Lords on this topic, including the noble Lord, Lord Myners, and my noble friend Lord Lamont.

I am sure that creating new macroprudential tools that will be available to the FPC can make a significant contribution to financial stability, but they are much too important to be created and operated in an accountability vacuum. As a minimum, the super-affirmative procedure will be necessary to give parliamentary oversight to their creation.

If we are to have the twin peaks of the PRA and the FCA, they must be made to work together. I am concerned that the solution in Clause 5 rests on a memorandum of understanding, the very mechanism that demonstrably failed the tripartite authorities. My noble friend may already be aware that there is concern about the practical impact on regulated firms of the separation of the FSA into the two arms that will shadow the PRA and the FCA.

There is no requirement in the Bill for the PRA and the FCA to consult on the creation of the memorandum of understanding; nor is there any parliamentary approval of the arrangements or provision for independent review of the effectiveness of co-ordination. This area of the Bill seems decidedly weak, and we need to strengthen it.

The Government have usefully set out in the Bill the regulatory principles to be applied by the PRA and the FCA, including the rather elusive concept of proportionality. This is described in terms of burdens being proportionate to benefits—which sounds okay—but is then qualified by “in general terms”, which of course begs a lot of questions. The London Stock Exchange believes that this needs to be explained in much more detail and that it should be calibrated both internationally and by reference to specific sectors. We need to look at the detail of this in Committee.

The PRA will be charged with operating judgment-based supervision, which of course marks a radical departure from the last decade or so under the FSA. It is important that the PRA gets this right. I do not understand why the FCA will have a practitioner panel that it must consult but the PRA does not. The Joint Committee thought that this might lead to regulatory capture but wanted to see the PRA’s approach to consultation laid out. We have now seen that approach and it has been described as “dismissive” by the British Bankers’ Association and “insufficient” by London First. I am sure that we will need to look again at the way in which the Bill mandates consultation.

I know that the FCA has a number of supporters, who see it as a consumer champion. But we must not forget that the FCA also has responsibility for wholesale markets and as the listing authority. It is the FCA that will have the UK’s seat on the European Securities and Markets Authority. We will need to look carefully at the proposed membership of the FCA and its objectives to ensure that it will be properly focused on its whole range of responsibilities.

The FCA will have many powers and responsibilities in relation to consumer protection, including product banning powers. We will need to scrutinise these carefully to ensure that they are proportionate and balanced and that they do not stifle product innovation, which could very easily happen.

I would like to mention three final areas before concluding. First, I welcome the Treasury’s new powers of direction. However, like the noble Lord, Lord Eatwell, and the chairman of the Treasury Select Committee in another place, I believe that those powers should be very considerably extended.

The consumer credit responsibilities of the OFT are to be transferred to the FCA, which is a good idea in principle, but a number of practical issues have been raised by market participants, in particular the Finance and Leasing Association, and I hope that we will be able to deal with those in Committee.

Finally, important clauses in Part 5 of this Bill lay the ground for independent inquiries. My test for these clauses is whether or not they would have made the Bank of England set up reviews of its own role in the financial crisis earlier and more comprehensively. I suspect that we need to amend Part 5 so that duties rather than powers are created.

In conclusion, I hope that my noble friend will be receptive to the many improvements to this Bill that our debate today is showing to be necessary.

Financial Services Bill

Baroness Noakes Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Foulkes of Cumnock]

My Lords, it is seldom that the noble Lord, Lord Hamilton, and I agree. We were introduced into the House on the same day and I found it a privilege to be introduced on that day. However, I fully agree with him on this issue. I returned from the Recess to find this Motion on the Order Paper. I was not aware of it before and, as far as I know, there was no consultation about it. Members did not know that it was going to be remitted to a Grand Committee. I may have shown a lack of acuity in picking this up but I have discussed today the fact that many Members were not aware that it was going to be suggested that this important Bill should be committed to a Grand Committee.

As the noble Lord, Lord Hamilton, said, this is an important issue. It may not be politically contentious but it is vital. As the Minister said, it arises to some extent from a major financial crisis that hit the headlines. He described the Bill as major legislation and, after talking with Members who have been in the House much longer than me, I believe it is very unusual for such major legislation to be remitted to a Grand Committee for discussion. As the noble Lord, Lord Hamilton, said, it would be normal for it to be taken on the Floor of the House.

There may be other reasons—far be it from me to suggest them—why the Government want to remit the Bill to a Grand Committee, but our decisions as Members of the House should be on the merits of the Bill and not on any secondary reasons beyond the basis of the Bill.

It would be unfortunate if we had to divide on this, so I urge the Minister to withdraw his Motion on the basis that there will be further discussion and consultation with all parties and all sides of the House. I hope he will see fit to do so.

[Baroness Noakes]

My Lords, it is a great pleasure to be in complete agreement with the noble Lord, Lord Foulkes, which is not an occasion I find often to celebrate.

Having been in his position for many years, I understand completely the noble Lord, Lord Eatwell, who expressed earlier his view that we could have a more intimate discussion about issues with the Minister in Grand Committee. Equally, when I was in his position, I always took the view that Bills of major significance, which this one is, should be considered in the Chamber.

There is a particular reason for that. When a lot of issues have to be debated and decided, the only time you can divide in Committee is when a Bill is considered by the whole House, not in Grand Committee. In Grand Committee you have one fundamental opportunity to test the opinion of the House, which is on Report because there is a restricted ability to test matters at Third Reading. So for a Bill like this, with quite a lot of issues, it would be much better for the whole House to consider them so that we can settle them in Committee. Otherwise we will have one of those invidious things where we have to consider how many issues we can deal with by 7.30 in the evening before people go away. You have to take things over from Grand Committee to the whole House on Report.

This Bill is very significant and covers many issues. That has been reflected in our debate over the past seven hours or so. It is our responsibility as a revising Chamber to do this in the proper way by considering it not in Grand Committee but by the whole House.

[Lord Myners]

My Lords, I rise briefly to add my support to the views expressed by the previous speakers. There are significant issues in this Bill which require attention. They are not issues that divide on party political lines, and it is clear from today’s debate that there is a wealth of information and understanding in the House. Having previously taken legislation through Committee both in the House when I was a Minister and in Grand Committee, I have no doubt that this Bill should be appropriately considered by the whole House in order to be able fully to draw upon the knowledge and expertise of your Lordships. I would enjoin the Minister to withdraw the Motion that the Bill be taken in Grand Committee in order to allow further time for discussions through the usual channels—taking into account the views which have been expressed this evening from all sides of the House.

--- Later in debate ---

[Baroness Kramer]

I have relatively little experience in this area, but it is my understanding that one of the advantages of Grand Committee is the easy access to officials. If the Government are seriously considering a range of amendments, as the Minister has indicated in the debate today, I presume that the ability to discuss and negotiate those and to make sure that government amendments come forward that meet the required standard will be easier within the Grand Committee context. I am something of a novice on this, so I would take the guidance of the House.

[Baroness Noakes]

Perhaps I may challenge the suggestion made by the noble Baroness, Lady Kramer. While officials sit rather nearer to the Ministers in Grand Committee, I think that they take no active part. All we have is that the same number of officials sit rather closer to the Minister, so it makes very little difference in terms of determining government policy. In practice, because no decisions are made in Grand Committee, or at least they are made very rarely there, the proximity of officials is of no account whatever.

[Lord Sassoon]

My Lords, I hear the opposition to this Motion loud and clear. Rather than put ourselves through the agony of going through the Division Lobbies at this late hour, let me withdraw the Motion and let some more discussions go ahead.

Euro Area Crisis: EUC Report

Baroness Noakes Excerpts

Monday 21st May 2012 Lords Chamber

[Baroness Noakes]

My Lords, the noble Lord, Lord Harrison, and his committee have produced an excellent report on the most critical issue facing the European economy since the start of the EU. They are to be congratulated on it.

Given all that has happened—and indeed has not happened—in the eurozone since the report was published in February, I am sure that the noble Lord, Lord Harrison, is not expecting all speakers to stick rigidly to the report and the Government’s response. I hope I may be forgiven for straying a little outside the narrow confines of the report.

However, I shall start with the report. The committee was rather exercised about the December 2012 European Council and the circumstances surrounding the Prime Minister’s use of the veto—it seems rather a long time ago now. Unlike the committee, I have never been curious about who said what to whom before the veto was deployed. The most important thing was that the UK demonstrated that we can—and will—use the veto to protect our national interests, and I was extremely proud of the Government that day.

I am well aware that some noble Lords have criticised the UK’s veto as an isolationist strategy which will harm our role in Europe. I am quite sure that some in Europe are extremely vexed by our stance on the crisis and the chatter in Brussels may well be negative. The European project has never liked independent thought or action. However, I have seen no evidence of extra harm since last December and would certainly trade some unpopularity within Europe for a clearer understanding that the UK’s own interests are paramount.

The Government’s position on the eurozone, which I completely support, is that it is for the eurozone countries to sort out their own mess. When the euro started life, we could see that our economy was so unlike those on mainland Europe that we were more likely than not to be damaged by being tied into policies not designed around our needs. We could also see that the countries which became eurozone economies were insufficiently convergent for the one-size-fits-all interest rate to be good for the whole euro area.

It is now plain that the low interest rates within the eurozone, which suited Germany’s economic strategy, have done massive harm in terms of inflation and asset price bubbles to other eurozone economies. The euro arrangements lacked any instruments or incentives to require economic reforms, so southern Europe remained unreformed. But entry was voluntary and those volunteers must now find their own solutions.

As noble Lords are well aware, I am a confirmed Eurosceptic—sceptical about the whole project and about the euro—but I take absolutely no pleasure in seeing the current problems in the eurozone. The UK’s economic success is still too closely bound to that of the rest of Europe for problems across the channel to be any source of joy. My great regret is that the UK has tied its economic fortunes so closely to Europe and hence is vulnerable to economic success or failure there. We depend on European markets for roughly 40% of our exports. Our history as great exporters is in the past. Somehow, we have let the emerging markets grow without us, and it is shameful that we export more to Belgium than to India and China combined. Lessening our trading exposure to the eurozone should be a government priority.

I turn to the position of Greece, which dominates the headlines. Greece lied and cheated about its economic affairs and, at one level, there is a certain satisfaction that it is now getting its comeuppance, but the medicine that has been forced down the throats of the Greek people by the German-led eurozone group is more than tough and more than painful for them. The imposition of an unelected Government was a particularly shocking development and it is no surprise that the Greeks now reject austerity and what is demanded of them. Greece needs devaluation, and it simply cannot get that within the euro. It seems to me obvious that Greece cannot survive within the euro and should be encouraged to take an orderly exit. The longer that the European core tries to hold Greece in while imposing impossible economic conditions, the more likely it is that an exit will be disorderly. The signs are not good.

In the past few months, there has been deposit flight from Greece. Corporates routinely sweep any cash out daily. Anecdotal evidence suggests that wealthy Greeks have been transferring large sums of money to other, safer eurozone territories—in particular, Germany—or beyond the eurozone. Now ordinary Greeks seem to think that keeping their money in the banks is not a clever thing to do, and a real bank run could bring the Greek problem to a head.

I am sure that a lot of work has been done throughout Europe to model the consequences of a Greek exit, with best, worst and intermediate cases. I know that my noble friend cannot give market-sensitive information, but I would be interested to hear what he feels that he can say about the impact on the UK of a Greek exit.

Of course, the bigger danger is contagion. Cyprus and Portugal might well be early casualties—the former because it is so intertwined with Greek banks and the latter because it is a weak economy. They, too, could probably exit with few repercussions. The real problems lie elsewhere, as the noble Lord, Lord Harrison, said. We have seen the cost of borrowing in Spain and Italy rise towards levels which could easily be unsustainable. The cost of credit default swaps are also, unsurprisingly, rising for those countries. Those are the judgments of markets. Financial markets have judged that the actions to date have failed to deliver a sustainable solution. For example, last week’s overdue recapitalisation of the Spanish banks was nothing like enough to deal with the underlying problems, which is why Spanish bank yields continue to rise.

Markets want comprehensive solutions. Common issuance eurobonds would probably be a popular solution with markets, because they would involve a common commitment to a long-term economic solution. The committee examined that. Markets need Germany’s financial commitment to the whole eurozone, not just to economic policies, but Germany cannot or will not deliver that at present. If eurozone leaders come up with more half-baked packages which depend on extraordinary feats of austerity or are based on wishful thinking about growth measures, markets will reach their judgments and other weak countries in the eurozone will be exposed.

The G8 summit last weekend failed to do anything to reassure markets that the euro crisis will be dealt with. If the position of Spain or Italy within the euro becomes untenable, the consequences would be severe for Europe as a whole, including the UK. That is why I support the efforts made by my right honourable friend the Chancellor to urge the eurozone countries towards fiscal union.

I certainly would not have started with fiscal union. Indeed, I would not have started with the euro at all, but there is no example of successful currency union without fiscal union, and if that leads eventually to greater political union—the dream of the European federalists—so be it. It is a fact of life that the euro exists, so breaking it up is going to be very painful and it is therefore in the British interest to push the euro to its logical conclusion. The Government’s first priority is to protect Britain’s interests, and Britain’s interests will be protected if the euro does not go into a disorderly break-up.

If there is closer fiscal and political union within the eurozone, that will at least lay to rest the question that seems never quite to go away about whether we should join the euro. It will at the same time throw into sharp relief the whole nature of our relationship with the rest of Europe. I am not optimistic that the distinction between the internal market, which we will want to participate in, and the economic governance of the eurozone, which we will not, will stand the test of time. It seems that the eurozone will be driven more closely together, and that that will drive the UK and the other “euro out” countries away. The EU as we know it almost certainly could not survive a break-up of the euro.

As we have had a trade deficit with the EU for a long time, we should not get paranoid about those problems. The eurozone countries need our markets more than we need theirs, so we should be able to achieve our trading aims without the need to conform to every directive or regulation designed by the eurozone countries.

Of more immediate concern is the direct financial exposure of the UK. I congratulate the Government on bringing to an end our liability to the European financial stability mechanism, which the party opposite committed us to after it had lost the general election but before it conceded defeat. It will be important to avoid any further commitment. My noble friend the Minister was only partly reassuring on this front when he answered a Question from the noble Lord, Lord Empey, last week. He refused to say in unequivocal terms that the Government had no intention of providing further funding for the euro bailout. I hope that he can be clearer today. The question is: will the Government rule out providing any further financing to bail out the eurozone? It is a simple question and requires only a simple yes or no answer.

Queen’s Speech

Baroness Noakes Excerpts

Wednesday 16th May 2012 Lords Chamber

[Baroness Noakes]

My Lords, it is a bit rich that the party opposite has tabled its amendment to the Motion for an humble Address. It seems to have collective amnesia about the economic mess that it left this country in only two years ago. Let me remind it that it left behind a very large deficit. There is no doubt that some of the ballooning of the deficit was down to the financial crisis, but the Labour Government had been consistently spending beyond their means in the run-up to that crisis. They failed to reform welfare spending and failed to deliver efficiency in the delivery of public services. They had overcommitted the defence budget by £38 billion. They left behind a legacy of debt and forecasts of more deficits to come, but they also left no credible plans to reduce them. That was not just our opinion; that is what the IMF and the OECD told us.

Since my Government came to power, we have delivered firm action to control public expenditure and to eliminate the structural deficit. We have balanced the defence budget. Debt will be falling as a percentage of national income by the end of 2015-16. It is through that resolve that we have reduced the cost of borrowing and kept it low. Yesterday, gilt yields were at their lowest for 300 years.

The noble Lord, Lord Myners, who is no longer in his place, is wrong about interest rates. They are a reflection of market confidence, as anyone can find out by looking at what is happening to eurozone interest rates. I hope that, when he winds up this evening, the noble Lord, Lord Davies of Oldham, will tell the House what he thinks interest rates would have been today if his party had continued to manage the economy.

I pay tribute to my right honourable friend the Chancellor of the Exchequer for delivering this impressive result. The economic headwinds have not been favourable in the past two years. He could have lost his nerve and taken the advice of the party opposite to spend our way out of trouble. However, Labour has never explained the magic by which spending more will not result in unsustainably high levels of debt and rising interest rates. Perhaps the noble Lord will do so today.

Our economic policies are often given the label of “austerity” but we are not in the same league as Greece. Our public expenditure will continue to rise. At the same time, we are taking 2 million people on the lowest incomes out of taxation altogether. We are managing to escape from the millstone of a 50p tax rate and reducing corporation tax rates to more competitive levels to support our economy.

There is no doubt that the economic outlook continues to be troubling. The uncertainty created by eurozone instability is a big problem. I can see no future for Greece remaining in the euro and the best thing for it would be to exit, or “Grexit” as Willem Buiter would have us say. Other eurozone countries are also struggling. Spain and Italy are again having a bad week in the bond and credit markets. We need the eurozone to sort itself out, which is why I support the Bill, which has already been introduced, to endorse the eurozone stability mechanism. However, there is not much else that the Government can or should do to support the eurozone. We should certainly not put our cash into any eurozone rescue fund.

The Government can do things to support growth in our economy and have done a lot already. However, there is more to be done and I would have liked to see more in the gracious Speech to support UK businesses. In particular, I would have liked to see a commitment to reverse more of the regulatory burdens and employee rights imposed by the previous Government. These are the very things that make running businesses, especially at the small and medium-sized end of the spectrum, particularly tough.

There are some parts of the legislative plans in the gracious Speech about which I am not entirely enthusiastic. We are promised legislation to reform competition law to promote enterprise and fair markets, which sounds good in theory. However, competition law has often ended up being a big stick with which to beat our most successful businesses. A wholly blame-free company can end up with a lot of costs and huge distractions from running its business if the OFT launches an unnecessary investigation. Let us see whether the Bill really promotes enterprise.

In the same Bill we are promised the green investment bank, about which some noble Lords seem enthusiastic. It is not a bank in any real sense. It will put money into things that sensible banks would not touch with a barge pole. It will be gambling with taxpayers’ money. Even the cheerleading report on the green investment bank commissioned by BIS goes no further than to say that,

“it is unlikely to have a significant impact on economic growth … in the short term, but there might be some benefits in the long term”.

We are paying homage to the green religion at just the time that other countries are seeing that green policies are expensive luxuries. We do not have any spare money for such luxuries. We could spend the £3 billion that has been committed to it on so many more things that would promote our economic growth.

We are also promised a Bill on the reform of the electricity industry. But, in plain English, that means more subsidies for green energy, which in turn means more costs for British businesses and domestic consumers. I hope that the Government will start to understand that the cost of energy in this country is a very real burden. They need to find ways of reducing it and not increasing it. This is another unaffordable green luxury. Last year, my right honourable friend the Chancellor of the Exchequer got it right when he said that he would not save the planet by putting our country out of business. When these Bills come forward, they must be justified against that background.

Finally, I turn to the promises of legislation on the financial services sector. There will be two Bills; namely, the Financial Services Bill, which was carried over from the previous Session, and the banking legislation. I agree with the noble Lord, Lord Myners, on the need to look carefully at the powers of the governor. However, there is one thing that is not likely to be covered in either Bill, which I hope that the Government will want to address. The Bank of England has resisted calls to publish an assessment of its role in the financial crisis. I do not understand how we can be expected to consider legislation explicitly designed to remedy deficiencies that arose during the financial crisis without that background. How will we know whether the problems related to the crisis have been dealt with? I hope that my noble friend the Minister will have an answer to this problem before he brings the Bills before your Lordships’ House.

European Union Membership (Economic Implications) Bill [HL]

Baroness Noakes Excerpts

Friday 25th November 2011 Lords Chamber

[Baroness Noakes]

My Lords, if I have a sense of déjà vu in approaching today's debate it is indeed because we have been here before, as the noble Lord, Lord Pearson, whom I still like to think of as my noble friend, has already reminded us. I supported his last Bill and I support him today. The previous debate on a Bill of his was handled by a Foreign Office spokesman and I am very pleased today that the Government have recognised that this Bill is, first and foremost, about the economic analysis of our membership of the EU. I look forward to my noble friend Lord Sassoon responding for the Government later. I hope that when my noble friend winds up, he will confirm that an understanding of the costs and benefits of our membership of the EU is crucial. It has to be in the public interest that the debate that is already happening about our future in the EU is well informed.

The noble Lord, Lord Pearson, has an immaculate sense of timing in bringing forward his Bill, with the turmoil that is happening in the eurozone. The eurozone is not the subject of this Bill, but it is inextricably linked with the EU. President Barroso has been telling us frequently that the euro is an essential part of EU membership. The euro was meant to be the crowning glory of the European project, but it is now threatening not only its own members, as Germany found out this week with a failed bond auction, but the rest of Europe, which includes us, and the global economy.

The euro was flawed at the outset. It was constructed on two downright lies: first, that the eurozone countries met certain economic tests; and, secondly, that their economies were genuinely convergent. The euro was then flawed in its operation. The European Central Bank delivered the German economic preference for low interest rates. Ireland and Spain have paid the penalty for this one-size-fits-all madness with property booms that have bust their economies, and now the euro is flawed in its inability to deal with failure. The foolish architects of the euro designed it with no emergency exits. Germany and France, as self-appointed guardians of the euro, are still ducking the real issues, and so the profligate, unreformed, book-fiddling Greece and Italy have nowhere to go and suffer the indignity of unelected officials now running their countries.

Fortunately, we have our opt-out. I have absolutely no doubt that our country would be in a very much worse economic position had we become a part of the eurozone. Even though we have kept out of the euro, there is still a centrifugal force in the EU that keeps sucking us in. Mr Blair saddled us with the Social Chapter. That, together with the inexhaustible stream of single market directives, has resulted in our businesses being weighed down by rules and regulations that choke the life out of them. We ceded significant powers when the Labour Government colluded with the rest of Europe and allowed the constitution to be dressed up as treaty changes, thus denying people a referendum, and I am not proud of my party’s failure to rectify that. Brussels has used the recent financial crisis to pursue policies that are naked attempts to ruin the UK’s successful financial services industry. Our Government have woken up to that, but it may be too late.

The noble Lord, Lord Pearson, has already explained the existing analysis of the costs and benefits of the UK’s membership of the EU. Suffice it to say that the best the studies ever show is that the effects might be marginally positive, but most show the disbenefit rising to as much as a quarter, as the noble Lord pointed out. Since the trend in Europe is of an increase in regulation, the trend will be for that analysis to get worse over time for the UK.

The main point for those of us on this side of the argument is that it is pretty clear that there is a cost of staying in the EU, that the cost is significant and that the benefits are limited. Those on the other side of the argument tend to avoid being drawn into the specifics of cost-benefit analysis. They tend to rest instead on rather broad, often irrelevant or incorrect, assertions of benefit, and the noble Lord, Lord Pearson, dealt with some of them. I very much regret that even Conservative Ministers in the coalition Government do this, although I hope my noble friend the Minister will not do so today.

I am not advocating today, as the noble Lord, Lord Pearson, is, that we withdraw immediately from economic membership. I note in passing that the committee that this Bill would set up is entitled a “committee of inquiry” into withdrawal from the EU, although it is very clear that the matters to be covered as set out in Clause 1 deal with the costs and benefits of membership, so I think that the noble Lord has indeed prejudged the outcome of the inquiry by calling it a withdrawal study. I would like to see whether there is any mileage in a Europe in which we can assert more positively the rights of nation states to run their own affairs. We have to be able to have less Europe in our daily lives, not more.

Until recently, I had some hope that a way could be found for the UK to participate in Europe on a more voluntary and less extensive basis. I still think that it is worth a try but I am becoming less optimistic. In particular, the turmoil in the eurozone has emphasised that if the euro survives—and that is now a big if—it seems likely to involve more central control within the eurozone. The prospect of caucusing within the eurozone will become a very real threat to our interests, and I firmly believe that we should remain outside that. So, ever closer union within the eurozone means ever more likely divorce from the EU for us. On this basis, it would be wise for the Government to prepare for all eventualities in our relationship with Europe. That is why I support the Bill.

Of course, there ought to be no need for the Bill. The Government are aware that the EU is not popular, that three-quarters of the population want a referendum on it and that over half think that we should withdraw. The debate is already out there and the Government should positively want to have good-quality information guiding that debate.

There are some things in the noble Lord’s Bill that could be improved in Committee, but for today I hope that the House will give the Bill a Second Reading and that the Government will give it their full support.