Financial Services and Markets Bill

Lord Blackwell Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Lord Blackwell (Con)]

My Lords, it is a great pleasure to follow the excellent maiden speech of my noble friend Lady Lawlor, and to welcome her to the House. I have had the great good fortune to collaborate with her on policy issues over what now amounts to several decades in her role as founder and head of a major think tank with a well-deserved reputation for well-researched and detailed reports—perhaps the hallmark of somebody who started her career as an academic historian. I know that she has wise but spirited and forthright views on many topics, and I have no doubt she will bring that sharp intellect and independent mind to the business of the House. We look forward to her future contributions.

Before I speak on the Bill, I should note my role as a former chairman of Lloyds Bank, but I have no current interests other than as a continuing shareholder. I welcome the Bill, in particular the proposal to add competitiveness to the objectives of regulators, but my fear is that the Bill does not go far enough to redress the overly burdensome nature of the regulatory system that has built up over the last decade. I am not proposing that we turn the clock back to the inadequate regime prior to 2008—many of the reforms introduced then were necessary and are effective—but as my noble friend Lord Hunt of Wirral argued, the excessive regulatory burden on the financial services industry comes not so much from the regulation itself as from the overly bureaucratic way it has been implemented by the UK regulators.

This culture stems from the regulators’ overriding internal objective to avoid the risk of being blamed for failing to do something, with little incentive to balance that against the costs that their intervention may impose on the industry. I fear this tendency to gold-plate is fuelled by the current superficial nature of the parliamentary scrutiny by the Treasury Select Committee in the other place, which tends to focus on naming and shaming someone for anything that has gone wrong. Furthermore, the growth in staff numbers means that much of the regulation of major institutions is undertaken by relatively junior staff who are more likely to stick to a rigid interpretation of the regulatory rules because they simply do not have the confidence or experience to make balanced supervisory judgments.

The senior managers regime, for example, is, in principle, a sensible safeguard to ensure appropriately qualified people are in key industry roles and are held accountable. However, when a major institution has gone through a responsible and exhaustive recruitment process involving an external search firm, it is simply unnecessary and damaging to then have the appointment held up for further lengthy scrutiny by often far less experienced staff at the PRA and FCA. The overly forensic attempt by regulators to pin every mistake on some individual and require consequential penalties has had a corrosive impact, discouraging individuals from making difficult decisions or taking on difficult roles that carry a risk of failure. It has led to a huge increase in bureaucratic processes and documentation, as managers seek to syndicate responsibility and cover their backs.

Another example is the tendency of the regulators to apply a one-size-fits-all approach, unwilling to recognise this may be disproportionate for some sectors or firms. The FCA’s fair pricing review is a case in point: in seeking to address certain consumer pricing practices, the review spread across the whole industry and imposed burdensome data collection on sectors such as the wholesale insurance market, where the participants are skilled professionals. Ring-fencing is another example where the overly rigid application of something which is in principle a sound idea has had a disproportionate impact on banks with relatively small non-ring-fenced activities. The FCA’s worthy objective of protecting the customer has been developed under the customer duty approach to the point where firms fear that even negligent or unreasonable customers will claim redress for buying a financial product that, after the event, causes them a loss. As a result, many products and helpful financial guidance have been withdrawn or repriced out of many people’s reach. This overly protective approach to customers needs to be replaced by a more even-handed objective of simply ensuring fair trading. Caveat emptor has been replaced too much by caveat venditor.

The downside of this overly intrusive regulatory approach is not just the direct costs but, more significantly, the diversion of management time and IT resources away from transforming businesses to better serve their customers. The introduction of competitiveness as a regulatory objective may be helpful to provide a counterbalance. I also welcome the provisions in this Bill for the Treasury to require regulators to review their activities and to set up independent cost-benefit panels, but these measures will not solve the problem without a fundamental shift in attitude, skills and culture within the regulators. I welcome the Chancellor’s commitment in Edinburgh to bring forward further measures to address some of these issues, including reviews of ring-fencing, the senior managers regime and the boundary between advice and financial guidance, but even then, I am not sure we will transform the regulatory approach without a more fundamental reshaping of the organisations and their accountability.

I think it is worth considering whether smaller regulators with fewer and more experienced staff would do a better job of providing supervision, with more considered judgments, and whether the benefit of having two separate regulators outweighs the burden of having two overlapping supervisory teams for major institutions. Finally, while I support the Bill, as other noble Lords have argued, given the powers it transfers to regulators it is important that it is accompanied by a more informed and balanced structure of parliamentary scrutiny that can also hold regulators to account for their new objective of the competitiveness of the industry. I ask my noble friend whether the Leader of the House has any plans to bring such proposals before the House.