Financial Services Bill

Baroness Valentine Excerpts

Monday 11th June 2012 Lords Chamber

[Baroness Valentine]

I declare that I am chief executive of London First, a not-for-profit business membership organisation, whose members are drawn from a wide range of business sectors, including banking, insurance and professional services firms, and their customers

Over centuries and through several crises, the UK has built a global reputation as a safe and honest place in which to do business. Its financial sector is seen to offer a deep pool of knowledge and expertise that is, arguably, unrivalled. Businesses value this expertise and the ability to harness it to their own requirements. These can be as diverse as raising capital, structuring and financing mergers and acquisitions, or hedging against price fluctuations in their raw materials. These are essential services for businesses. Therefore, in developing the framework for regulating the financial sector, we must take into account the likely impact on not only the financial institutions themselves but, perhaps more importantly, their clients.

For business, the price, range and availability of financial products and services will be contributory factors in achieving economic recovery and maintaining international competitiveness. With this in mind, I join other noble Lords in expressing concern that the proposed objective of the Financial Policy Committee is solely to focus on ensuring financial stability. This objective should, I believe, be complemented with a duty to foster an environment in which the financial sector can continue to support economic development—for example, by helping to ensure a stable supply of credit.

When we look at other national regulators or central banks, we see that they are often given similarly balanced objectives. For example, in the US the Federal Reserve maintains the goals of maximum employment, stable prices and “moderate” long-term interest rates. The Reserve Bank of Australia has both its social and its economic purposes clearly defined in law. Its job is to ensure that its monetary and banking policy contributes to,

“the economic prosperity and welfare of the people of Australia”.

Closer to home, as other noble Lords have noted, the Bank of England’s own Monetary Policy Committee includes in its objectives the aim of supporting the Government’s,

“objectives for growth and employment”,

albeit, as the noble Lord, Lord Barnett, notes, as a subsidiary objective.

Financial stability must, of course, be a core objective of the regulatory system—it is a precondition of economic well-being—but it should not be the only criterion against which we measure success and, indeed, we should not be seeking financial stability at the cost of economic development. If we do so, we risk hard-wiring a bias towards conservatism into the new regulatory architecture. We have to recognise that innovation is part of what will keep us at the cutting edge of global markets. Without it, the economy will continue to be stifled.

At a time when our economy is in a double-dip recession with an anticipated slow and bumpy road to recovery ahead, all aspects of the regulatory framework, including financial regulation, should be designed and implemented in support of growth. I cannot see why this approach is not relevant for the Financial Policy Committee and, in his closing remarks today, I would welcome some explanation from the Minister of the rationale for adopting such a narrow brief.

I further note that the Government have established a Regulatory Policy Committee to ensure that any new regulation meets the principles of good regulation. There is a strong argument for bringing the FPC and its sister bodies within its scope.

My second concern relates to the approach that the UK is taking towards integration with the new European regulatory framework and the need for those working with the new European bodies, on the UK’s behalf, to have relevant market experience and expertise.

Increasingly, the regulation and supervision of financial services is driven by decisions taken outside our Parliament at a European or G20 level. This is right if we are to ensure a consistent approach to supervising global institutions, but it seems strange that the proposed UK framework does not correspond to the recently established European framework. We appear to be developing a new imperial system while the rest of Europe consolidates a metric one.

The UK already punches below its weight in voting terms. Despite having more than 35% of the European wholesale financial markets, under qualified majority voting we have fewer than 15% of the votes on decisions governing those markets. British nationals occupy only 5% of the posts in the Commission, even though we make up 12% of the population, and that proportion is falling. At a time when the so-called Anglo-Saxon model of financial services faces considerable suspicion from some quarters, for the UK to be so under-represented is worrying. My fear is compounded by the general lack of experience of truly international financial markets among those responsible for regulation and supervision in the new European regulators. It is essential that Britain’s regulators offer a coherent voice that can provide these new institutions with the expert guidance and insight they will need to fulfil their functions without damaging the very markets they have been established to protect.

[Lord Lea of Crondall]

I am most interested in the point that the noble Baroness has just made about whether we have the right number of people in Brussels, Frankfurt or wherever. Is that the view of her constituency in the City of London and, if so, what are the members of that constituency doing about it?

[Baroness Valentine]

I could give a long answer to that. I do not believe that industrial representatives from the City are necessarily welcome in the European supervisory bodies, and that creates a complication in dealing with that particular issue. I think that they would be happy to put forward people but you have to be clear that the Chinese walls are there. I am not sure whether that answers the noble Lord’s point.

I welcome the Government’s creation of an international co-ordinating committee to present issues and concerns from the UK regulatory bodies. However, I believe that its effectiveness and credibility would be enhanced by mandating a secretariat made up of individuals who have experience of the international markets and have worked in international organisations. This would be a significant step towards ensuring that the UK’s contribution to EU financial regulation was proportionate to the importance of the financial sector to our economy, and would send a clear signal that the Government recognised that contribution.

Last week the chairman of the Treasury Select Committee commented that this Bill was,

“the most important overhaul of financial regulation ever undertaken in this country … It is crucial that we get it right”.

I could not agree more.

Despite laying claim to be the birthplace of modern football, it is many years since any of our national teams have been dominant on the field—as I fear the French may well be demonstrating this evening. I do not know the score.

[Noble Lords]

A draw.

[Baroness Valentine]

A draw. However, we have long been pre-eminent in financial services and we should aim to remain so. I therefore urge the Government seriously to consider the suggestions I have made this evening.