Financial Services Bill

Lord Barnett Excerpts

Tuesday 20th November 2012 Lords Chamber

[Baroness Kramer]

My Lords, this is an important piece of legislation, and I very much welcome it. I think that this House, along with the rest of the country, was shocked at the manipulation of LIBOR. It may have had the silver lining of at last persuading the banks that they had to take reform seriously, but certainly it was a stain on the reputation of the City and it put further in danger the economic recovery and the financial services industry in this country; so it was significant.

I think that in this House generally, and certainly among my colleagues, we very much welcome the Wheatley review. I was able to be at the launch of that document in the City. There were many present who were from outside the UK, and the consensus in the room was, “He has basically cracked it”; that Wheatley had found the mechanism and a series of reforms that could give us a LIBOR measurement that was clean, that would be respected and that could contribute to the purpose that LIBOR has served in rate-setting for many documents, instruments, investments and loans across the globe. I think that the attempts to put the necessary legislative pieces in place are well reflected in the document that we have in front of us today.

I have just a few questions for the Minister. Like others, I am somewhat concerned about the breadth of the general statement on benchmarks. LIBOR is not mentioned specifically anywhere in these amendments, so in breadth and scope it has about it a certain air of ambiguity. We suffer, of course, because this comes late in the process of legislation and therefore is not accompanied by the notes that would have been available and would have provided much further discussion had this been part of the original document. There are many issues. As the noble Lord, Lord Eatwell, said, some people will look at the manipulation of the gas market and wonder whether that can be encompassed by this legislation; others will wonder whether the FTSE 100, which is an index used in a number of investments, could be encompassed. One could go through a fairly long list. Would the Minister be willing to put in the Library, through a letter or a note, some record that gives us a grasp of the scope of the use of benchmarks in the context of this document? That would be extremely helpful for everybody, and there would be something in the official record that we could turn to.

Unintended consequences are a feature of legislation, and in this area I think that we have had too many unintended consequences of various people’s actions. So it is important that it does not happen in the context of this piece of legislation.

I am very glad that we have language in here that gives the FCA the power to deal with, in effect, the freeloaders—those who benefit from the setting of the LIBOR rate but who, because they wish to keep their own particular credit standing secret, do not participate in the rate-setting process. I wonder whether there is any further guidance or if the Minister can help us understand what he would see as the scope for the FCA to identify those potential freeloaders. Are we continuing to look only at major institutions? Perhaps there might be some reassurance to minor institutions that would be a little nervous of being caught within this net.

Another issue that has been raised is how we cope with European legislation or directives coming down the track. We are all aware that Monsieur Barnier is looking at these matters, but I did not quite understand—and perhaps the Minister could clarify—whether or not secondary legislation will be delayed until there is some clarity on the issues that Barnier is raising, or whether we will proceed with secondary legislation with the idea that it can then be amended if there turns out to be a significant gulf between the secondary legislation that we put forward and the rules emerging from the European Union. In this context, LIBOR is a significant international benchmark which needs international respect. It should not become a football or subject of a battle between the UK and the EU that is driven by other issues. It is important that it serves the broad purposes of the financial services industry, and I therefore see no shame in encompassing the concerns and thoughts of those outside the UK in shaping LIBOR as we go forward.

All of us in this House will be absolutely delighted that there is finally an offence for which people can be investigated, prosecuted and serve time, as well as be fined. There was shock throughout the House that the manipulation of LIBOR was not subject to prosecution under existing statutes on fraud and the consequent penalties. I congratulate the Government on making sure that that part of the Wheatley review has been well incorporated into this process.

I wish to make a couple of comments to the noble Lord, Lord Eatwell. I, too, am interested in the tender process that will lead to an administrator for the LIBOR-setting process, but he asked why it should not be a public body. I remind him that Barclays noticeably prayed in aid its conversations with the Bank of England in the attempt to justify the LIBOR manipulation. It is important that whichever body is involved in rate setting should be very clearly at a distance from the regulator and from any political body in order that we avoid a repetition of that attempted contamination. I have therefore been supportive of the idea that this will be a tender to a private entity. The noble Lord is quite right to say that we have to understand whether or not there are conflicts of interest because there is the thought that the most likely parties to tender for such a process might also be very involved in producing financial instruments on the other side, but not necessarily so. I also understand the need for flexibility in this issue. The complexity of making sure that the use of LIBOR in many existing documents is not disrupted by the changes we make is absolutely crucial. That is surely a level of granularity that cannot possibly be dealt with in primary legislation and has to be left to the flexibility of both the rule-maker and secondary legislation.

I very much welcome the legislation in front of us. Let us hope that this is the beginning of the end of a very unfortunate experience in the history of financial services in the UK.

[Lord Barnett]

My Lords, this debate began with the clear statement that we should abide by Committee-stage rules. I am sure that noble Lords will be as surprised as I am at the definition of Committee-stage rules in this debate. I thought we were debating a Second Reading, but forgive me if I misunderstood. I, like my noble friend Lord Eatwell, very much agree with the Government on wanting to introduce Wheatley. That review was excellent and well deserved our support. What I am worried about is the way that the Government have decided to implement it.

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[Noble Lords]

Oh!

[Lord Barnett]

That is apart from my noble friend Lady Hayter. I am not a lawyer, but even if I were what would worry me about the whole thing is that, at the end of the day, I still could not be sure that this new Bill, created by way of amendments, has got it right. We will know whether it is right only when the lawyers finish dealing with the law in the courts. For the moment, I have grave doubts about whether this way of doing things is right. I apologise to the House for this Committee stage speech, but this is a very unsatisfactory situation.

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[Lord Barnett]

I am sorry to interrupt, but I am trying very hard to understand where we are getting to. I understand that we will finish up with regulations on top of all this, which will finally decide the matter. However, I am still unclear about it. We had the note earlier from the Minister’s officials, which set it out very clearly. We are talking about not trivial sums here but global sums of $300 trillion. These are mind-boggling figures. It is not $300 million or $300 billion but $300 trillion. What we are deciding in considering this Bill clearly has major global interest. Have there been serious discussions on a global scale?

Earlier, my noble friend asked the Minister—wrongly, I think—whether his legal officials had given him a guarantee that they had got the wording right. Nobody is going to give him a guarantee; I assure my noble friend of that. It is a question which cannot be answered, because they will not give it; how can they? How can anyone? The noble Lord, Lord Sassoon, cannot give us a guarantee that the Bill has got it right now. My noble friend Lady Hayter found one lot that was wrong. It would not surprise me if she found something else wrong, if she were to look further, because it is a very complex matter. We will now have complex secondary legislation on top of all this shambles. I very much hope that this will be successful, but I am sorry to say that the way it has all worked out, I certainly could not guarantee it.

[Lord Sassoon]

My Lords, there has been consultation on these clauses already. These clauses, which were published last month, have not been put forward in some huge rush; they have been put forward with due speed to reflect the seriousness of the situation that the LIBOR scandal revealed. Yes, there are hundreds of billions of dollars-worth of contracts relying on LIBOR, but many other very important equity market and other indices, in the UK and around the world, have functioned successfully for many decades. I have no doubt that as well as accounting firms and others, people who provide indices in other contexts—those who provide market data and who support market infrastructure—would be the sorts of entities that would be well suited to be the administrator of this important benchmark. There are many other critical functions of price discovery out there which are wholly run by private sector entities, albeit regulated under FiSMA in the UK, so we should not make a great drama out of this. The FCA will be regulating this activity, including the performance of the specified person.

The noble Lord, Lord Eatwell, asked perfectly reasonably about what happens if somebody is not performing and does not want to give it up. Because the administration is proposed, subject to the secondary legislation passing, the administration of LIBOR will come within regulation. If the administrator is not performing, therefore, the regulator—namely, the FCA—can take regulatory action in appropriate cases, which could include removing permission to act, if appropriate.

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[Lord Sassoon]

I have some understanding, but I am a non-lawyer and it was a long time ago so it is only slight. Price stabilisation rules go back to pre-1991. They are very specific rules that allow things to be done in markets in very prescribed circumstances that would run against what might be perceived to be the free flow of markets. As the noble Lord knows, they were introduced in the context of ensuring a safe and stable aftermarket following a large share issue. I think they were first used in this country by the Government in the second sale of British Telecom shares, and they relate to that regime. If there is something else going on there, I will write to the noble Lord, but they are not intended to be some carve-out that could be used to get people off a charge of manipulating LIBOR.

[Lord Barnett]

I asked the Minister whether the criminal sanctions could be used retrospectively against those who may well be criminally responsible for the LIBOR scandal.

[Lord Sassoon]

Forgive me; I thought I did answer. It is an absolute principle that we do not put in place retrospective criminal offences because that would be, among other things, against human rights legislation. We will certainly not be doing that.