Financial Services Bill

Debate between Lord Blackwell and Lord Desai

Committee stage
Monday 1st March 2021 Grand Committee

[Lord Desai (Non-Afl)]

My Lords, this is a technical matter and I have nothing to add to what was said by the noble Baroness, Lady Noakes. I am merely an academic but, when these things were going on, I wondered how people who swore by the free market could have had a cartel sitting in a little room, generating a rate of interest on which billions were based. Someday, somebody ought to explain to us how anybody could trust a cartel and hope that it will not be dishonest.

[Lord Blackwell (Con) [V]]

My Lords, I too support these amendments and welcome the fact that the Bill addresses these issues. While Libor may have been effective in the past, we all know that it was becoming an unviable way of setting rates and was subject to manipulation, in the way mentioned by the noble Lord, Lord Desai. It is therefore important that the regulators have taken a firm line in moving us on from Libor to other benchmarks. But, as my noble friend Lady Noakes set out, in doing that, there are lots of problems with continuity of contracts. The legislation is necessary to help address those issues and ensure that partners in contracts move together to a new common contract based on a synthetic Libor.

We have to recognise that no substitute for Libor will have exactly the same characteristics. There is no perfect substitute. Most contracts will be based on SONIA, the sterling overnight index average rate, but getting SONIA terms that have the same characteristics over time is not perfect, so there will be winners and losers. That is one reason why it is important that, to give certainty, the legislation requires the regulator to ensure that synthetic Libor interest rates are taken in the contracts as substituting for Libor for both parties.

As my noble friend Lady Noakes set out, however, some parties will not accept that. They will take the change in the contract as the basis to believe, argue or litigate that the contract has been abrogated. Some parties will be out of the money in a contract and it will simply serve their convenience to choose this method to abrogate the contract. Safe harbour is therefore an important secondary requirement. If banks are following the requirement of the regulator to stop using Libor, and following its instructions in substituting synthetic Libor, they cannot then be subject to litigation from counterparties claiming that, by following the instructions of the regulator, they have abrogated their contracts. This is an important thing for those contracts, which could, in particularly vulnerable contracts, involve vast sums of money.

The Government have launched a consultation on this, but I do not think that is a reason not to legislate in the timescale of this Bill. The problem has been known about for many months—indeed, years—and has been discussed. I do not believe the Government need a consultation to understand that there is a problem or that it must be dealt with. During the passage of this Bill, if not in these amendments then in the Government’s amendments, it is important for this to be incorporated into the Bill. Otherwise, the uncertainty will go on far too long. Libor will come to an end and these issues will present themselves. This Bill is the opportunity to address them.

In taking this issue seriously, can my noble friend the Minister commit that the Government will bring back amendments, or accept these amendments, during the passage of this Bill through the House?