Financial Services (Banking Reform) Bill

Debate between Lord Blackwell and Baroness Anelay of St Johns

Tuesday 8th October 2013 Lords Chamber

[Lord Blackwell (Con)]

My Lords, since I was unable to speak at Second Reading, I should take this opportunity to declare my interests at the start of Committee stage. I am a non-executive director of Lloyds Banking Group and chairman of Scottish Widows group.

[Baroness Anelay of St Johns (Con)]

My Lords, I would be most grateful if colleagues could leave the Chamber quietly, particularly because my noble friend is taking the proper course of declaring an interest which must be correctly entered in Hansard.

[Lord Blackwell]

My Lords, before moving on to the amendment, and as I did not speak at Second Reading, I want to make it clear that I strongly support the principles of the Bill, and the principle of ring fencing in particular. My amendment is to deal with some of the practical issues of making that work in the financial institutions. The amendment deals with the situation where a financial services group that is primarily operating ring-fenced activities retains a small set of activities that may fall outside the ring-fence.

The consequence of the legislation as it stands is that where a group is primarily operating ring-fenced activities but retains some non-ring-fenced activities which may be excluded activities, it would be required to have a separate board for the ring-fenced subsidiary and a separate set of directors operating in it—that is, separate from the group board.

I can understand why having separate boards for a ring-fenced subsidiary may be seen as desirable where the group contains a large non-ring-fenced activity in investment banking or wholesale market activities in order to police the separation between the ring-fenced and the non-ring-fenced activities. The provisions of ring-fencing under the Bill should of course deal with that situation by specifying the amount of capital and requirements for security in the ring-fenced activity and its resolution, preventing the flow of dividends controlling the financing relationships between the ring-fenced activity in the group, but I can also understand that having an independent board for the ring-fenced activity where there are other significant activities in the group provides an added level of security to deal with potential conflicts of interest.

However, where the non-ring-fenced activities are of a very minor nature compared with those within the ring-fenced bank, it could potentially lead to a situation where the group board with responsibility to shareholders and to the public has virtually no control over the activities of the ring-fenced activity, despite the fact that the vast majority of the assets and capital are within the ring-fenced subsidiary. That would be a nonsensical situation. It would be poor governance and it would be difficult to operate such a group board in that situation.

The type of activities that I am talking about are those where the ring-fenced bank may feel that to serve its customers effectively it needs to retain some element of activities outside the ring-fence not engaging those as a principal part of its business but as part of achieving a proper level of service to its customers.

The amendment would explore that situation where the non-ring-fenced activities are a fairly minor part of the group. There are two ways in which this could be resolved in a common-sense way. The first way would be for the regulator to exercise discretion under new Section 142D to the FSMA to allow a small volume of otherwise excluded activities to be carried out within the ring-fence so long as the regulator is satisfied that including those activities within the ring-fenced subsidiary did not put at risk the solvency or ability to resolve the ring-fenced activities if there were situations that used the capital applied to the non-ring- fenced activities. So one solution would be to allow the ring-fenced bank to extend its activities. Of course, the regulator would also need to be assured in that situation that allowing the ring-fenced bank to operate those activities would not distort competition with non-ring-fenced banks operating in those markets without the ability to operate within the ring-fence.

The second way of resolving this, if the regulator does not feel that it can include those excluded activities within the ring-fenced subsidiary, would be for the regulator to use its discretion under new Section 142H(5)(d) to waive the requirement for separate board membership of the group and its subsidiary, again where the regulator is convinced that in so doing it does not put at risk the ability to resolve the ring-fenced bank where there was a threat to its solvency.

The amendment is probing in nature. The legislation as I have described it allows the regulator to exercise discretion, but I invite the Minister to provide clarity that where the legislation says that the separation of the boards should be “to a specified extent”, the regulator would have the freedom and indeed the expectation that it should exercise that discretion with due respect for the proportionality of the activities within the ring-fence and any activities that there may be within the group outside the ring-fence. That seems to me to be a common-sense solution. I beg to move.