King’s Speech

Lord Bridges of Headley Excerpts

Monday 13th November 2023 Lords Chamber

[Lord Bridges of Headley (Con)]

My Lords, I very much look forward to the speeches by my noble friend Lord Gascoigne and the right reverend Prelate the Bishop of Norwich. I see that there is a pub called the “Lord Gascoigne”, which puts him in a unique and elite clique alongside the noble Lord, Lord Cromwell, and the noble Duke, the Duke of Wellington—sadly, there is no “Lord Bridges” yet, although I live in hope.

Here is a striking sentence from His Majesty’s gracious Speech:

“My Government view with grave concern the economic situation of the United Kingdom about which a full disclosure must be made to the nation”.


This sentence was not what we heard last Tuesday. It was in the gracious Speech of the last King, George VI, in 1951, but it is as relevant today as then. Given the talk about the Chancellor having headroom for tax cuts in the Autumn Statement and the fact that we might hear some good news at last on inflation this week, your Lordships might well ask why I am being Eeyore when I should be being Tigger. I could point to last week’s spluttering, flatlining GDP figures but, worrying though they are, that misses a much bigger picture.

Let us start with our debt. Earlier this year the OBR said:

“The 2020s are turning out to be a very risky era for the public finances … This rapid succession of shocks has … pushed government borrowing to its highest level since the mid-1940s, the stock of government debt to its highest level since the early 1960s, and the cost of servicing that debt to its highest since the late 1980s … UK … borrowing costs have risen more than in any other G7 economy … The rise in global interest rates has fed through to the UK’s debt servicing costs more than twice as fast as in the past or elsewhere”.


Debt is just one of the challenges we face. We have heard of others: demographics—our ageing population; decarbonisation, as the noble Lord, Lord Stern, mentioned; digitalisation, the need to retrain and skill our workforce; and defence, the need to strengthen our Armed Forces. These are the five Ds—the challenges that loom over all our debates. Let us consider what these challenges will mean for the public finances, not off in some distant date in 2050 or suchlike but in the life of the next Parliament. According to the OBR, the little list of greening our power, buildings and industry, increasing defence spending and higher health-related welfare benefits will alone cost about £40 billion a year of extra spending. That is before we get on to other topics, such as debt interest.

Some say that this spending is inevitable. I have heard it said many times over the last few months that our government will grow and that we are back in an era of big government. This is therefore an acceptance that we will have to pay more taxes, so that the Government can do more. That is a respectable argument, and many in this House will make it. I profoundly disagree with it because it suffers from a fatal flaw; the only way we will be able to overcome these challenges is to become more productive and more attractive for investment so that we grow more. If we do not grow, we will not be able to pay for the public services we all want. The road to growth is not paved by bigger government and higher taxes, yet I very much fear that this is the path we are on.

Too many people, particularly after years of QE, think we inhabit a forest of magic money trees in which the Government have the ability to spend their way out of any national disaster and to pick up the Bill for any personal misfortune. Too many people believe that government can, should and must regulate and legislate to stamp out or at least mitigate risk and bail out business failures. I strongly believe that, if we want to encourage the enterprise and innovation that power growth, this approach and mindset—I stress that word—are unsustainable. While a tax cut may cheer some this week and while there are some measures in this gracious Speech that I might be able to support, I fear that we are in danger of lulling ourselves into a false sense of security and that we are not rising to the challenges.

We need a coherent strategy to confront those five Ds, and it must ask and answer a very basic question: what do we want the state to do? What is the state’s responsibility and where does the responsibility for the individual lie? For that debate to happen, we need full disclosure about the state we are in and the precarious nature of our finances. Without that brutal honesty, we will stumble and stagnate. In the words of His late Majesty George VI, this overshadows “all other domestic matters”.

Financial Services and Markets Bill

Lord Bridges of Headley Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Lord Bridges of Headley (Con)]

My Lords, I will speak very briefly and I apologise for being late.

The Governor of the Bank of England was just in front of the Economic Affairs Committee and our final question was on CBDCs. He gave an answer that I thought was lukewarm at best in his support for them, which was very interesting in and of itself. Before going any further, I remind the House of my interest as an adviser to Banco Santander.

The last time I debated a CBDC, I think there were five of us in the Chamber. Just as I was summing up my speech, suddenly the Chamber filled up, and I thought: “My God! Everyone is suddenly interested in my thoughts on CBDCs”. Only then did I realise that there was just about to be a debate on Brexit for the 231st time, and my views on CBDCs were completely and utterly irrelevant.

As my noble friend has just so eloquently summarised, this is an issue that we really need to focus on a lot more in Parliament as a whole. You may be a fan of CBDCs—here I am looking at my friend the noble Baroness, Lady Kramer, who I think is more persuaded by the merits of them and may see them as the best thing since sliced bread, or perhaps in this case one should say decimalisation—or, like me and my noble friend Lord Forsyth, you may be of a more conservative disposition and need to be convinced of the need for change. Whichever view you have, as my noble friend has just said, it is imperative that Parliament has the chance to debate, scrutinise and vote on primary legislation before a CBDC is introduced.

My noble friend has summarised many of the most important points, including privacy, financial stability and the impact of bank disintermediation. There is also the entire issue of how a CBDC might affect the operational independence of the bank, as my noble friend pointed out. One estimate is that a CBDC could—I stress “could”—increase its balance sheet by £400 billion, and it would obviously give the bank entirely new tools in monetary policy.

Then there is the entire issue of cost. I have to say that the words “IT infrastructure project” are possibly the most expensive three words that you can put together. I am very concerned about how much this will cost. No one seems to be able to say how much it will cost or who will pay.

Then there are issues of cybersecurity. The Bank states that new infrastructure needed to support a digital pound would make

“an attractive target for hackers and fraudsters who wish to steal funds”

and

“may become a target for hostile attacks with the aim of disrupting the system and, potentially, the wider economy”.

According to GCHQ, while a digital currency presents “a great opportunity”, it goes on to say:

“If wrongly implemented, it gives a hostile state the ability to surveil transactions”.


Those are just some of the enormous issues that a CBDC raises, and why we must have primary legislation to be able to scrutinise and vote on all this. I am very grateful to my noble friend the Minister, her colleague the City Minister, Mr Griffith, and the Chancellor for focusing on this.

I should actually say that the Chancellor may be forgiven: I am christened James George, so he might have just been signing this late at night, even though I have known him for 20 years. I will put that to one side. I got a very nice letter from the Chancellor, as did Harriett Baldwin. The problem is that, although it is signed by Jeremy Hunt, I feel that it is almost signed by Lewis Carroll because it gives you the feeling that it comes from Alice in Wonderland at a certain point.

If I may, I will detain your Lordships by reading two paragraphs:

“The Government and the Bank of England are at an early stage of policy development and have not made a decision on whether or not to introduce the digital pound”—


that we all know. It goes on:

“As a result, we do not yet know whether a digital pound will require primary legislation”.


When you read that back a few times, it begs a question, and I would be grateful if my noble friend the Minister, when she sums up, could answer it. Could a digital pound be introduced without primary legislation? This seems to suggest that potentially you could have one and it would not require primary legislation.

Be that as it may, the letter then goes on to say:

“However, in recognition of the potential significance of a digital pound, and the views of Parliamentarians, the Government commits to introducing primary legislation before launching a digital pound”.


So even though one might not need primary legislation, the Government are committing that there would be primary legislation.

Obviously, that is a great step forward. My problem is that it is still is not watertight. Much as I would like to say that my noble friend, Mr Griffith and the Chancellor are going to be there for years to come, I somehow do not know whether that is going to be the case. That is why I very much echo what my noble friend has said, and would like the Minister to go as far as possible in saying why it is not the case that they are not willing to put this into primary legislation. Moreover, I would be very interested to know the view of the Labour Party and the Liberal Democrats on this, and whether they too would say that they will commit not to introduce a CBDC without primary legislation.

I end by echoing my noble friend. The introduction of a digital pound—a “Britcoin”, as you might call it —would be an enormous undertaking. We cannot and we must not leave it to be passed by statutory instrument one wet Wednesday afternoon in the Moses Room. That would be an absolute disaster. It needs to be debated on the Floors of both Houses and voted on.

[Baroness Altmann (Con)]

My Lords, I too apologise to the House for being late.

I have added my name to my noble friend’s amendment. I urge my noble friend the Minister and the House to think very carefully about what possible advantages there could be relative to the disadvantages of having a central bank digital currency. We have seen so many people lose so much money, and so many money launderers, thieves and so on make so much money from digital currencies. This may be one of the biggest scams of the century.

It is very difficult to see why we need digital currencies at all. The risks for money laundering and economic crime, the lack of transparency and security for anyone putting money in, and the opportunity that this would offer to rogue states and actors to try to undermine our entire financial system require significant warning. The possibility that this could be introduced without primary legislation seems to me to be unconscionable and a dereliction of our duty to make sure that we are looking after the currency of this country.

Budget Statement

Lord Bridges of Headley Excerpts

Thursday 16th March 2023 Lords Chamber

[Lord Bridges of Headley (Con)]

My Lords, I declare an interest as an adviser to and shareholder in Banco Santander. I start by saying that I very much look forward to my noble friend Lady Moyo’s maiden speech. I know that she will make a very great contribution to this House, given her enormous experience in business and many other fields—so I extend a very warm welcome to her.

The Chancellor has obviously been dealt a tough hand. Some of the challenges he faces are thanks to decisions made by his predecessors. Some of them flow from Brexit, others from the war in Ukraine and from Covid. Whatever the cause, we are in a new era of higher rates, higher inflation and, above all, higher uncertainty. So let me give credit where credit is certainly due. The Prime Minister and Chancellor have stabilised not just the ship of state but the economy. We have avoided recession.

In the Budget, the Chancellor was absolutely right to highlight the strengths of our economy: for example, our tech sector, life sciences and renewables. I support a number of the measures he outlined to help them, for example, nurturing nuclear power and the AI sandbox. In particular, I am glad that the Government have acknowledged the need to address the growth in inactivity that your Lordships’ Economic Affairs Committee reported on back in December. We highlighted, among a number of other points, the rise in the number of 50 year-olds retiring early.

On this, I do question the approach of increasing tax relief on pensions. The OBR states that this will result in employment increasing by just 15,000—maybe my noble friend could correct me if I am wrong. So this measure could cost £80,000 per worker incited back. That is a figure to focus on, but we need also to put the 15,000 figure in context. Some 37,000 50 to 64 year-olds were inactive in March 2020. The figure now—my noble friend can correct me if I am wrong—is 319,000. That is the backdrop to the 15,000. Moreover, as others have been remarking on overnight, this policy could actually encourage people to retire earlier. So I would be very grateful if my noble friend could talk us through the logic behind this policy. If it is aimed purely at stemming the exodus from the NHS, which I think a number of us are worried about, the words “sledgehammer” and “nut” come to mind.

However, let me take a step back and ask whether we are now on the path to the growth that Mr Hunt and all of us want. Will we see productivity rise from its torpor, as the noble Lord, Lord Eatwell, pointed to? Are the measures we heard about yesterday going to help make people better off, which is vital given that we are now experiencing the largest two-year fall in real disposable income in almost 70 years? I very much hope that the Budget will be one for growth; indeed, I have my fingers, my legs and my toes crossed. But it is worth noting that the OBR forecast is wildly more optimistic than that of the Bank of England, and I would be grateful if my noble friend could explain why she thinks there is this divergence. Obviously, these forecasts are bedevilled by uncertainties and risks. Those are clear in the caveats the OBR makes in numerous places in its outlook.

When we read the Budget and the OBR outlook, we can be sure of the parts of our nation that will grow. Here I fear that, while my noble friend in her opening remarks was Tigger, brimming with optimism, I am more Eeyore. Let me start with the state. It will grow, and this is the case in many other nations. It seems that we are in a new era of a bigger state. As a percentage of GDP, spending, which back in 2020 was set to decline, will reach its highest level since the 1970s.

I fully understand that the Government have had to contend with challenges that, for once, actually merit the adjective “unprecedented”. But let us look at some of the areas, other than support for energy bills, which are driving the increase. For example, we are seeing a growth in welfare spending, which will rise by £9 billion over the forecast period. Health and disability spending alone in 2026-27 will be £8 billion more than was forecast only last March. Another reason for the growth in spending is our debt and the cost of servicing it. Our stock of debt has been pushed to a 60-year high and this year we will spend £114 billion on debt interest. That is the amount we spend on education, the Home Office and defence combined. Then there is borrowing, which is £50 billion a year higher on average in the forecast this year, compared with last year’s forecast.

It is hardly surprising that, given these areas of growth, taxes are another area of growth. The tax burden is set to reach an all-time post-war high. We are growing the number of new taxpayers by 3.2 million and the number of higher rate taxpayers by 2.1 million. There is also the impact of IR35—that insidious policy that the Finance Bill Sub-Committee of this House has focused on. The yield on that has grown to £1.5 billion per year, which is double previous estimates.

As to the tax on business, the capital allowances will help compensate for the damage done by the rise in corporation tax. Again, the noble Lord, Lord Eatwell, pointed this out. But I note that, at the end of the forecast period when those new allowances are due to expire, business investment is set to fall. So it is critical that they are kept in place, not least because, as the OBR states, productivity growth settles at a measly 0.25 percentage points in the final two years of the forecast.

This brings me to another area of growth and something that has not been mentioned so far: immigration. Net migration was forecast to be 129,000 in the March 2022 forecast. Now it is forecast to be 245,000 a year and—this is the point—will contribute to 0.5% in output in 2027. Could my noble friend confirm that it is actually immigration, not the other measures announced yesterday, that will be the main driver behind the increase in our workforce?

There are two final areas of growth we can also be sure of. The first is our ageing population; that is set to grow. The population aged over 65 will rise by 1.2 million between now and 2027. That accounts for the bulk of the rise in labour inactivity. Secondly, by the end of the forecast, more than one in 10 of the working-age population will be in receipt of at least one health-related benefit.

I put all this together and, while I applaud the stability the Government have brought and welcome some of the measures in the Budget, I am afraid I do not share the optimism. I question whether we are doing anything like enough to put us on the stable path to growth we need. To do that obviously means more than just chanting “Growth, growth, growth”. Nor can it be done by irresponsible, unfunded tax cuts. From where I stand, I fear we are in danger of slipping into the groupthink that higher spending, higher taxes and a bigger state are the path to prosperity. They are not. They will snuff out the enterprise, innovation and investment we need to power growth.

More fundamentally, they conflict with the basic belief that I thought—or maybe should not think any more—most Conservatives held, that people, not Government, are best placed to spend their money as they see fit, to the benefit of all. Worst of all, far from taking the highway to prosperity, we risk going down a cul-de-sac to weak growth and flatlining productivity where we become submerged by debt. If we are to address this—again, I agree with the noble Lord, Lord Eatwell, but from a very different perspective—we need to have an honest conversation about what we want the state to do.

Let me end by quoting what the OBR highlights, tucked away on page 80 of its outlook. The UK is like many OECD countries, facing the

“growing fiscal pressures associated with ageing populations, higher stocks of debt … energy insecurity and climate change, and growing geopolitical threats. Meeting these pressures while also respecting their own fiscal objectives may require further increases in tax burdens in these countries over the remainder of this decade, unless they are prepared to significantly scale back spending in other areas”.

Some might say that a bigger state is inevitable if we are to pay for the challenges we face. To me, that is the question that overshadows this Budget. It is a very simple one: is it inevitable that the state is set to grow more and more, given the challenges we face? I think not. Others may disagree, but this is the debate that we must have urgently if we are to have the growth we need.

Financial Services and Markets Bill

Lord Bridges of Headley Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

Moved by

[Lord Bridges of Headley]

160: After Clause 50, insert the following new Clause—
“Office for Financial Regulatory AccountabilityCreation of an Office for Financial Regulatory Accountability
(1) The Treasury must, as soon as practicable after the end of the period of 12 months beginning with the day on which this Act is passed, by regulations make provision to create a body corporate called the Office for Financial Regulatory Accountability.(2) It is the duty of the Office to examine and report on the performance of the FCA and the PRA.(3) The Office must perform its duty objectively, transparently and impartially.(4) The functions of the Office are to be exercised on behalf of the Crown.(5) Regulations under subsection (1) are subject to the affirmative procedure.”Member’s explanatory statement
This amendment would require the Treasury to create an Office for Financial Regulatory Accountability, with duties to provide independent and impartial analysis to Parliament and the public of the financial regulators’ performance against their statutory objectives and regulatory principles.

[Lord Bridges of Headley (Con)]

My Lords, I once again declare my interest as an adviser to and shareholder in Banco Santander. It gives me great pleasure to open today’s proceedings. After several days of debate on this Bill, I get a sense that there is widespread agreement from all sides of the Committee on one point: the measures in this Bill to improve accountability and scrutiny are insufficient and must be strengthened. While the regulators are getting more powers, there is no commensurate increase in their scrutiny and accountability. That comes at a time when many of us were already concerned that that level of scrutiny is too low and the accountability too weak. The breadth of that concern is shown by the fact that there is cross-party support for this amendment. I thank those who put their names to it.

That said, as I have said before, in addressing our concerns we need to proceed with some care. We must get the balance right between accountability and independence and we need to avoid new forms of accountability and scrutiny, politicising the regulatory system and thereby creating uncertainty. With those caveats in mind, we need to do three things, all of which require amendments to this Bill. We need to improve the reporting by the regulators; improve parliamentary scrutiny; and—this is the purpose of these amendments, Amendments 160 to 166, to which I have put my name—improve the quality of scrutiny and accountability by providing independent and impartial assessment and analysis of two things.

First, we need an assessment of the FCA’s and PRA’s overall performance in meeting their statutory objectives and regulatory principles under FSMA 2000. Secondly, we need to provide analysis of the impact assessments for specific pieces of financial regulation so as to determine how those regulations are contributing to meeting the regulators’ objectives, also under FSMA 2000. That can be achieved, as the amendments set out, by creating an office for financial regulatory accountability, a specialist, independent, statutory advisory body, which would work to a charter set by the Government and laid before Parliament. To be clear, this is not a new concept. It has been proposed in various guises by others—and here I am thinking particularly of the noble Baroness, Lady Bowles, as well as the International Regulatory Strategy Group in the City of London and the London Market Group, with which I have worked on this proposal. While I accept full responsibility for any flaws in these amendments, I cannot take credit for the idea.

I shall not waste your Lordships’ time in giving a line-by-line description of each amendment, from Amendment 160 to Amendment 166, which set out the body’s role, its powers and duties and its membership and financing. I think, or rather I hope, that they all speak for themselves—and for that I am thankful for the work of the Delegated Powers and Regulatory Reform Committee, which set out precisely how these kinds of bodies should be set up and whose approach these amendments follow.

I am sure that the amendments could be improved and I would be delighted to discuss with any of your Lordships, on any side of the Committee—in particular, my noble friend the Minister—how we might do so. Rather than regurgitate what the amendments say, instead I shall address questions that may be in the minds of those who may be wary or sceptical of the need for this body.

First, is it not going to duplicate the work of the Treasury Select Committee? No, it will not. As we all know, parliamentary committees are there to hold regulators to account, not to provide the rigorous analysis needed to do so—nor do they have the capacity to do so, as we have discussed previously. Furthermore, few question whether the OBR duplicates the work of parliamentary committees; it provides analysis for Parliament and everyone else to use. The same applies here.

Secondly, will not this body duplicate the work of the cost-benefit analysis panels that the FCA and PRA will now be required to set up? No, it will draw on their work and analyse and interrogate it, but it will also take a wider view. Perhaps more important, this new body will be utterly independent of the regulators, not a body created by them—nor, for that matter, will it duplicate the work of the Regulatory Policy Committee, whose focus is on government departments.

Thirdly, what about cost: can we afford to set up this body? Of course, setting up a new body will carry cost, but I argue that this will be outweighed by its benefit. Let us not forget the enormous contribution that financial services make to our national coffers. They demand, if not deserve, special attention to ensure their regulation meets the objectives that Parliament has set.

Fourthly, will not this simply be a regulator of the regulator? No, as I have said, its role and purpose is one of analysis, to improve and inform scrutiny by and accountability to Parliament and others, period.

Finally, and most important, will this new body undermine the regulators’ independence? I argue—this is crucial—that it will do the reverse. If we have a source of independent analysis of their actions, we can have a debate about that based on fact. It should therefore strengthen the legitimacy of regulators which are fulfilling their objectives and acting in a proportionate and timely manner.

I cannot see any real objection to the overall concept. As I said, I am sure that the amendment can be improved and I look forward to hearing from others how that might be done. Given the wide support that it has, I very much hope that my noble friend the Minister will give it a supportive reply. Many of us want to avoid unnecessary confrontation with the Government on Report, not just on this point but on all the other proposals we have debated that would strengthen accountability and I stand ready to work with her and others to turn this idea into reality. I beg to move.

[Lord Tyrie (Non-Afl)]

I am surprised that nobody else is rising to support this; I was hoping that everyone would. I certainly agree with just about everything that the noble Lord, Lord Bridges, said, but then again I agreed with just about everything that the noble Baronesses, Lady Bowles and Lady Noakes, the noble Lord, Lord Forsyth, and others said on 20 February, about all this. We are all agreed because we can all see the same problem. As has been suggested, the Bill confers huge new powers on the regulators, repatriated from the EU, without making any meaningful suggestions to make them more accountable when they exercise those powers. I will support any and all amendments that improve scrutiny and accountability until and unless the Government come forward with a meaningful proposal of their own. I will come to how they might go about that in a moment.

Our first job as a Committee must be to make sure that the Government grasp that we just cannot carry on as we are. I am not sure that Ministers and, in particular, the Treasury have fully grasped how inadequate the existing structure of accountability is. There are four major bodies that should be contributing and all of them, in their various ways, will be defective. There is the NAO, but we cannot rely on VFM studies alone; the Treasury is frequently conflicted in its relationship with both the regulators; nor can we rely on the boards of those bodies. In principle, there should be some rigorous internal challenge—and that achieves a lot in some regulators—but in practice the boards are all too easily captured by the senior executives and there is a massive problem of asymmetric information.

As the noble Lord, Lord Bridges, said, parliamentary Select Committees should be on the case, and frequently they are, but on the current resources available to them it is simply not reasonable to expect them fully to plug the gap, particularly given their range of other responsibilities —at least not in enough detail on a sustained basis to make the difference that I think most of the Committee thinks is necessary.

The clearest evidence that something needs to be done is the performance of the regulators themselves. Among the many criticisms of the financial regulators have been neglect of some of their objectives and duties, a box-ticking culture, excessive and unnecessary regulation stifling innovation—the “confetti before quality” problem—and inadequate ex post scrutiny of existing rules, without which a steady one-way ratchet develops right across the regulatory piece. A slow and legalistic approach is also a frequent complaint.

In defence of the financial regulators, for the most part they are in much better shape since the crash. That shook them to the core—indeed, one of them was split. Both the Bank and the FCA provide much better explanations for their actions and decisions than prior to the crash. No doubt some of the criticisms have been levelled unfairly, but not all of them.

In any case, we are not in a steady state. With new powers conferred by the Bill will come more of what has come to be known as the restless regulator syndrome. As the regulators identify new problems—real, imaginary or media fuelled—the risk must be of further inadequately considered additions to the rulebook. If the Government can be brought to agree that something needs to be done, one or more of at least three routes to forcing greater accountability are available.

First of all, and in principle the most attractive route for the Government, could be to try to pre-empt pressure from Parliament by creating their own much more rigorous scrutiny team at the heart of Whitehall, probably in the Cabinet Office. A body such as that could do some good work, but I am not convinced that it could fend off the vested interests that all too easily cluster around the sponsor departments at the moment and will no doubt cluster around such a group in the Cabinet Office over time.

A second approach has been set up by the noble Lord, Lord Bridges, today. It is the statutory independence of the body he proposes that makes it particularly attractive. Like the OBR, on which I think it is modelled, it has a reasonable chance of fending off those lobby groups. Therefore, I will certainly support his proposal if it is put to a vote.

But by far the most straightforward approach would be for Parliament to plug the accountability gap directly, as colleagues from all sides of the Committee have suggested, by creating its own specialist scrutiny committee. To be effective, a new committee would need support from a small group of specialists in financial regulation, much as the PAC is supported by audit specialists from the NAO, now a much larger group. This body would need only a small group, but it cannot hope to rely on the kind of very ad hoc tiny group, without institutional memory across Parliaments after elections, that Select Committees rely on at the moment.

Furthermore, in my view the committee—the Joint Committee, if some want that—would need to empower the specialists in a number of ways. Among the tools that should be considered are powers to see all people and papers, the authority to embed experienced and specialist staff into the Bank or the FCA where a particular concern has been identified, and the power to attend key decision-making committees to check out the quality of governance in regulators. In theory, all Select Committees have those powers already, but in practice, for various reasons, few use them fully. Those powers were all deployed to good effect by the Parliamentary Commission on Banking Standards without being disruptive to the work of regulators.

My main concern about this whole issue is that the Government will now listen carefully to what we have all said and murmur friendly noises but do nothing. The Minister told the Committee on 20 February that

“it is not for the Government to impose”—[Official Report, 20/2/23; col. GC 394.]

a scrutiny tool on Parliament. I understand where she is coming from but, as she well knows, that is not a strong line. If the Government come forward with a worked-up proposal for a new committee with adequate staff support—that is essential—and commit to supporting a change to Standing Orders to implement that reform, it will happen. If they did so, I for one would reconsider my support for statutory reform of scrutiny, and I think many others would too.

I think the Minister is listening—she certainly is now. I hope that her department and a couple of Treasury Ministers in the Commons listen to her and that she will tell us in a moment that she has been listening carefully and agrees to this amendment or to the lion’s share of what was said on 20 February.

--- Later in debate ---

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I thank my noble friends Lord Bridges of Headley and Lord Lilley for tabling these amendments, and for their contributions to this discussion.

I will speak first to Amendments 160 to 166, tabled by my noble friend Lord Bridges. The Government agree, and have been clear, that more responsibility for the regulators should be balanced with clear accountability, appropriate democratic input and transparent oversight. The proposed creation of a new regulatory body to oversee the regulators—a so-called regulator of the regulators, although I know that my noble friend set out why he thought that term did not apply—raises further questions about how the accountability structures for the various regulatory bodies would operate. The Government would need to carefully consider how to ensure clear accountability to both government and Parliament under such a model.

The noble Lord, Lord Hunt, talked—it feels a long time ago—about the need for greater clarity on where accountability lies in this system. I am not sure whether it is clear that the addition of a further body to the system would provide greater clarity on where accountability lies.

[Lord Bridges of Headley (Con)]

How does the OBR undermine accountability? Surely it just provides independent analysis and assessment, and I see no problem there.

[Baroness Penn (Con)]

I believe that is sometimes subject to debate. What I was saying to noble Lords is that it raises questions in this area that we need to consider. If I look back to the creation of the OBR, it was in the Conservative manifesto at the 2010 election; indeed, it was set up in shadow form in 2009. It was first established not in statute and operated without statute after 2010. The provisions for its establishment in statute were then brought forward in a Bill, where there was sufficient time to consider those questions.

I am not saying definitively one way or another, but it raises questions that we would need to consider more carefully about who this body is accountable to and the interactions with parliamentary accountability that we have discussed today; the need for clarity on accountability, raised by the noble Lord, Lord Hunt; and, for example, the remarks by the noble Baroness, Lady Bowles, on the role that the body could have in filling the space that allows industry to make private submissions to the new body, rather than public submissions as happened through Select Committees, and how that marries with the provisions in the amendments on the need for this body to operate transparently.

These are questions that are raised in considering how such a body would operate in this landscape. There is the potential that it could duplicate or dilute the roles within the regulatory framework of government and Parliament to scrutinise and hold the regulators to account.

--- Later in debate ---

[Baroness Penn (Con)]

That is a similar question to that of the noble Baroness, Lady Bowles, and it is probably because I did not answer it satisfactorily that it has come up again. Noble Lords are right that there was not a question on those specific proposals in those consultations. I endeavour to point out, however, that does not prevent the respondents to those consultations, where they believe it to be a good idea, to use them to put forward their support for such an approach. Perhaps I could write to noble Lords specifically on the areas within both those consultations that touched on accountability measures.

[Lord Bridges of Headley (Con)]

To be absolutely clear and just to put it on the record, therefore, the proposal in my amendment has not been consulted on? Is that correct?

[Baroness Penn (Con)]

It would be best to set out in writing for noble Lords the specific areas of the consultation that sought to address the issues we are discussing today. As I have said, in response to those consultations, certain respondents put forward proposals in this area, so it is not right to say that it was not a topic for consultation. However, as my noble friend wants clarity on the record, I think that would be best delivered in writing.

--- Later in debate ---

[Baroness Penn (Con)]

I have set out why the Government have concerns and that we should have further conversations to explore the issues that have been raised. I believe that is neither a “yes” nor a “no”.

[Lord Bridges of Headley (Con)]

My Lords, I will conclude this two and a half hour debate on just the first group and my amendment. I am delighted and thankful to noble Lords on all sides of the House who have supported it. The amendment is mine; the concept belongs to others. I am extremely grateful to my noble friend the Minister for offering to engage. However, I question the word “further”; I have not had any engagement and, so far, all I have heard is three things.

The first is that the Government believe that the measures in the Bill are sufficient. I think there is unanimous support, on both sides of the Committee, that, as far as accountability and scrutiny go, the measures are insufficient and need to be improved. The second is that the Minister is actually against the measures in my amendment today and the third is that they have been consulted on, whereas we have established from the earlier interventions that the specific amendment I propose, with this concept, has not been consulted on and that it was up to others to come up with that. In my view, that is not a consultation.

The Committee has stressed just how important this issue is, not just by the fact that we have been debating it for two and a half hours but because of what my noble friend Lord Hill and others said about the importance of ensuring that our regulators are truly accountable. The noble Lord, Lord Eatwell, made this point extremely well, as does my noble friend Lord Hill in an article in the Financial Times which was published just this afternoon. My noble friend says that

“what regulators decide directly affects our ability to compete and grow”

and that it follows that getting a regulatory framework right

“is central to our national wellbeing”.

He then says that we risk creating

“a new system of unaccountable British regulation”.

I repeat: unaccountable British regulation, and that is despite the measures that my noble friend says are in the Bill to increase accountability and scrutiny. I think we agree that they are completely insufficient.

As the noble Lords, Lord Eatwell and Lord Tyrie, said, this is not a question of just one or another of the little things that we have debated over the last few weeks on the Bill. A package needs to be brought together and it should address three points. One is improving the data that the regulators themselves provide. The second is arming Parliament with independent analysis, and I do not buy for a moment what my noble friend says about it undermining the independence of regulators. It is about arming Parliament and others with independent analysis of what the regulators are up to. The third is improving parliamentary accountability and scrutiny; my noble friend Lord Trenchard and others have made this point, as my noble friend Lady Noakes did in a previous session. These three things hang together.

I am delighted that my noble friend the Minister is willing to meet us, but I very much hope that she comes there with an open mind and a constructive attitude, not just a sense of no. I will obviously not press this amendment to a vote now but I can absolutely assure her that if the outcome of those conversations is not one that meets the challenge at hand, I will have absolutely no hesitation in pressing this to a vote at Report.

Amendment 160 withdrawn.

Financial Services and Markets Bill

Lord Bridges of Headley Excerpts

Committee stage
Monday 20th February 2023 Grand Committee

[Lord Thomas of Cwmgiedd (CB)]

My Lords, I will make three brief points in support of this amendment.

First, from a constitutional perspective, it is essential that the accountability is to Parliament. It is subdelegated from us. It seems inconceivable to me that any legislative body should give power to a body that is not accountable to it. That is the first constitutional point.

Secondly, it seems to me that the Treasury is not the right body to do this job—partly for the reason I have given and partly because some of the objectives that are already in the Bill span areas way beyond the Treasury’s competence. One can certainly see on climate change, for example, a real worry that, if the Treasury is left in charge, there will be all kinds of considerations—short-term, mainly; certainly not long-term—that will not be able to examine precisely whether the regulators are doing what they should be doing.

Thirdly, we cannot ignore the vast pace of change. It is difficult to stand back and appreciate that many of the things we have developed over the centuries are having to be changed within a few years. The financial markets is one area where change is enormous, such as in dematerialisation and the use of digital assets. This morning we debated electronic trading documents in this Room. Therefore, we need such a body. I am afraid that whoever joins this committee will find it very hard work but that is no excuse not to set it up, because it must be absolutely on top of things and gingering the regulators. I hope the regulators will come to see that this is good. We cannot have delay and, without a special committee to do it, that is what will happen.

[Lord Bridges of Headley (Con)]

My Lords, I will make a couple of points quickly. In so doing, I once again declare my interests as an adviser to and shareholder in Santander and, more appositely, as current chairman of the Economic Affairs Committee.

I want to pick up on the noble and learned Lord’s excellent points. If I may be very frank, I was disappointed that in the Minister’s response to the previous group he consistently referred to accountability to the Treasury. We are talking here about accountability to Parliament. This is what matters; it is what concerns so many noble Lords who take a great interest in this debate. There is just nowhere near enough of that in the Bill. I am very disappointed by the tone and approach that the Government seem to be taking, so far, to what I see as a highly constructive set of amendments, especially my noble friend Lady Noakes’s amendment, which I entirely support. I have two brief points to make about the committee structures of this House and of the other place.

As we have seen and are already seeing, the remit of committees here and in the other place is not set up to handle and scrutinise the avalanche of regulation coming out from all the regulators. It is nowhere near adequate to handle the consultations, let alone everything else. They do not have the resources either. It is imperative that the Bill is amended to reflect this. I very much hope that when my noble friend responds she will give this amendment some warm words of support, go away and think of ways in which she might support it. I will be speaking again in support of my noble friend’s other amendments.

[Lord Sharkey (LD)]

My Lords, I strongly support the amendment in the name of the noble Baroness, Lady Noakes, and observe that the Government have said, more or less consistently, that it is for Parliament to decide what form of scrutiny it requires. This acknowledges the importance of the issue. This is Parliament, and the amendment sets out a clear way ahead to establish parliamentary oversight. If the Government mean what they say, they will not oppose these amendments. They might join in a constructive discussion of how to make them better, but they will not oppose these amendments if they are to be at all consistent.

It is worth noting, though, that accountability and scrutiny are not quite the same. Even if we were to pass the amendments in the name of the noble Baroness, Lady Noakes, we would need to take a closer look at the delegated powers mechanisms that the Bill contains. As things stand, Parliament will have no meaningful say in whatever the new rules may be. Unless I have misunderstood, the proposed financial services regulators review committee will not be able to intervene as the new rules become law. We will need to think about that carefully as we make progress with the Bill.

--- Later in debate ---

[The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)]

My Lords, I have to inform the Committee that if Amendment 89 is agreed, I cannot call Amendment 90 by reasons of pre-emption.

[Lord Bridges of Headley (Con)]

My Lords, I am grateful to my noble friend Lord Forsyth for tabling this amendment. As he said, there has been an outbreak of consensus on this point overall, and the fact that the noble Lord, Lord Tunnicliffe, and the noble and learned Lord, Lord Judge, have also put their names to the amendment, shows what we have heard time and again on this Bill: that it does not go nearly far enough to increase parliamentary accountability and scrutiny.

As I said in a previous debate, and as my noble friend mentioned, we need to improve this Bill in three ways. First, we need to ensure that the regulators publish more data about their own performance. Secondly—this is an amendment we will come to on another Committee day—we need to create a new source of independent analysis of regulators’ actions and performance. Thirdly, by this amendment, as with those in previous groupings, we need to ratchet up parliamentary scrutiny.

I see this amendment—I use this word carefully—as a backstop. My noble friends who have Brexit dispositions may take exception to the word, but it is absolutely a backstop to what we need to achieve here, given the reservations that my noble friend the Minister made about my noble friend Lady Noakes’s previous amendment. As I have said before, and as my noble friend just mentioned, the Treasury Select Committee is an admirable body. We all know that it has created a new sub-committee to scrutinise consultations published by the regulators but, as many noble Lords will be aware, although consultations are very important, they are just one aspect of the regulators’ work. Furthermore, there are numerous consultations. I spent a joyous few minutes counting the number of consultations published last year by the FCA, PRA and the Payment Systems Regulator; I counted 75.

Finally, as my noble friend pointed out, there is expertise in this House. I will spare the blushes of those in this Room, but there is enormous expertise not just here or on the Economic Affairs Committee or the Industry and Regulators Committee but in numerous other aspects. That expertise should be mobilised effectively and systematically to scrutinise this avalanche of regulation. For those reasons alone, it is critical that the Bill ensures that this House—not just the other place—is seen as a key means of increasing scrutiny and accountability.

Before I end—I know that others want to speak—I say just this: increasing accountability and scrutiny should not be portrayed as a means of undermining independence. I very much hope that no one thinks that. The scrutiny of our regulators and their accountability to Parliament should and indeed must go hand in hand with their independence. This is not just to ensure that regulators are accountable, nor simply because there should be no regulation without representation, but because if regulators wield great powers, as my noble friend said, they must be seen to account for their actions in public, and those actions must be seen to be scrutinised and judged by Parliament to be appropriate and within their remit. The point is that doing so increases the legitimacy of the regulators themselves. That is why this debate is not arcane but highly relevant to the power and the position that regulators hold.

I was grateful to hear my noble friend the Minister’s constructive tone in her response on the previous group, so I end by asking her a very simple question; it requires only a yes or no answer. Does she think that this Bill contains sufficient measures to increase parliamentary scrutiny of the regulators in the light of the powers that those regulators are now getting—yes or no?

Central Bank Digital Currencies (Economic Affairs Committee Report)

Lord Bridges of Headley Excerpts

Thursday 2nd February 2023 Lords Chamber

Moved by

[Lord Bridges of Headley]

That this House takes note of the Report from the Economic Affairs Committee Central bank digital currencies: a solution in search of a problem? (3rd Report, Session 2021-22, HL Paper 131).

[Lord Bridges of Headley (Con)]

My Lords, I am delighted to open this debate on central bank digital currencies, and in so doing I declare my interest as an adviser to, and shareholder in, Banco Santander. The words “central bank digital currencies”, or the acronym CBDC, can be met with either a blank look or a reply of, “Oh yeah, crypto and all that”. There is undeniably and understandably a lot of confusion about what a CBDC is and is not. So before I go any further, for those watching or listening who may need some clarity on this point, what we are talking about here is the creation of a digital pound or bank note that the Bank of England would issue. It is not a new currency, nor a cryptocurrency, which is privately issued and not banked by a central party.

For those who may remember it, whereas Harold Wilson talked of the “pound in your pocket”, a central bank digital currency would mean we might have digital pounds in our digital wallets, which does not quite have the same ring to it, but there we are. A number of central banks are looking at introducing a CBDC, and the Bank of England is among them. So a year ago, the Economic Affairs Committee published a report which, at its core, asked a simple question: is a central bank digital currency a solution in search of a problem?

A year on, I think that that question still needs answering. The fact that this is so shows the wisdom of the then-chairman of the committee, my noble friend Lord Forsyth, in instigating this inquiry. I thank him for and congratulate him on his chairmanship of our committee. In so doing, I also pay tribute to the Bank of England for the thorough work that it—in particular Sir Jon Cunliffe and his team—is doing on a central bank digital currency, and the transparent way in which it is doing so. I thoroughly recommend that anyone who is interested looks at their website, for as their work progresses it highlights the issues that the creation of a CBDC raises and that our report highlighted.

Let me turn to that main exam question that our report poses: what problem is a central bank digital currency attempting to solve?

“I start by saying—it can come across the wrong way—that we have to be very clear about what problem we are trying to solve before we get carried away with the technology and the idea. I am not convinced about some of the problems that we might be trying to solve.”


Those are not my words; they are the words of the Governor of the Bank of England himself, Mr Andrew Bailey, just a few weeks ago. He is quite right; I would actually go further. There is still no clear, simple answer to this fundamental question, nor in my mind a clear answer to the follow-up question: if there is a problem that needs solving, could it not be solved in other ways?

The Bank of England website states that it is

“considering a central bank digital currency (CBDC) because the way people are choosing to pay for things is changing.”

The argument is that a digital pound would effectively be a new payment system. Our report found that a CBDC could indeed spur competition and innovation in payments, possibly lowering costs for merchants. But we heard few significant advantages for UK consumers if there were a digital pound in their digital wallets, and the Governor himself told us that issuing a CBDC was

“a disproportionate response to that issue”

of competitiveness in the payments system.

Then there is the argument that we need a CBDC to address the decline in cash, and that we need a digital pound as an anchor of confidence. But it is not obvious that the properties of CBDCs would satisfy any residual demand for cash, which is often valued for its physical properties and the privacy that it can provide. Our committee also noted that the Bank itself has said that it would continue to issue cash. Next, and linked, is the argument that a CBDC would increase financial inclusion. Possibly, but it is not clear that a digital pound will break down the barriers currently preventing or deterring people from accessing the financial system. It is likely that there are more straightforward and targeted ways to support access to financial services than launching a CBDC.

The next argument is that CBDCs are needed to avoid the risks that new forms of private money creation, such as stablecoins, pose to financial stability. We heard that greater regulatory control over stablecoins might be sufficient to manage such risks, although there are technical and jurisdictional issues to overcome. That begs the question whether such regulation undermines the need for a digital pound or, to flip this point on its head, whether if there were to be a sterling stablecoin—that is, a stablecoin backed by sterling—that would undermine the need for a digital pound.

Finally, there is an argument that a CBDC is needed to make cross-border payments cheaper and easier. Well, CBDC payments could, in theory, bypass some of the existing frictions in the internal payments systems, with lower costs. Nevertheless, the CBDC system would still have to comply with oversight frameworks, national laws, and international technical standards, which are a long way from being agreed. Furthermore, cross-border payments are already improving as a result of innovation and competition in the fintech sector.

My first question to my noble friend the Minister is: can she summarise in a couple of sentences what problem a CBDC would solve, and why that problem cannot be solved in other ways? Given her ability and expertise, I assume that she will be able to knock that ball straight out of the park and we will get a very clear answer, so I will proceed on the basis that it is clear that we need a CBDC.

The next issue, which our report went into, is how we avoid a CBDC undermining financial stability. If a CBDC is introduced, it is inevitable that some people will transfer money out of their bank accounts and into their CBDC wallets—their digital wallets. It is unclear how much such so-called disintermediation might take place; that will ultimately depend on how the CBDC is designed. But the impact could infect the entire economy, as higher levels of disintermediation would lead to more expensive credit and tighter lending criteria. Without safeguards, CBDCs could exacerbate financial instability during periods of economic stress, as people would likely seek to replace bank deposits with CBDCs.

There are two main options for reducing the negative effects of this disintermediation. The first is to limit the amount of CBDCs that can be held or spent by an individual. The second is to disincentivise use by paying uncompetitive rates on a CBDC above a certain level of holdings. Either of these options, or a combination of both, would be likely to reduce the attractiveness of a CBDC to users, depending on their stringency. This could therefore undermine other possible objectives, such as the ones that I have mentioned: financial inclusion or crowding out privately issued stablecoins.

So, the next question for my noble friend is: what studies has the Treasury or the Bank done on this crucial issue of disintermediation over the last year? In answering that, as we unpeel this onion, I fear we get to other big issues. The first is monetary policy. I assume that the Government do not envisage CBDC wallets to be interest-bearing, and that the CBDC would not be used to implement monetary policy, but, to ask a simple question, can my noble friend rule that out?

Then there is the issue of privacy. In this entire debate, privacy is the dog that has yelped but not yet barked. We heard that any CBDC system could not support anonymous transactions in the same way that cash can be spent anonymously. For that to happen, payments data on CBDC users will exist. The question of who performs the necessary checks on when and where that data is held is a major privacy issue. The Governor of the Bank of England said that a digital ID would be needed but that it was yet to be determined what form that ID would take. So the next question for the Minister is: how has thinking on know your customer rules progressed? How can a CBDC ensure strong privacy safeguards while also meeting financial compliance rules? Which organisations will be able to access sensitive CBDC payments data, and for what purpose will that data be used? Crucially—this is the main question—what kind of digital ID would be needed?

A retail CBDC raises many other issues which our report touches on; for example, its impact on national security and sanctions. There is also the key question of priorities: whether the Treasury and the Bank should focus more on a wholesale CBDC, which would arguably be less disruptive than a retail CBDC and have fewer economic and political risks.

However, I will end by focusing on two less technical points. Our report touched on the first one, but it needs further scrutiny: how much will the creation of a CBDC cost? Secondly, who will foot the bill? Can the Minister give us some indication on that? Thirdly and finally, there is the important issue of the role of Parliament. Given the importance of the creation of a CBDC and the issues that I have raised, can my noble friend confirm without equivocation that if the decision is taken to proceed with creating a CBDC, Parliament will be given the opportunity to scrutinise, debate and vote on primary legislation to do so, and that Parliament—not the Treasury or the Bank of England—will have the final decision on whether we press ahead and create a digital pound?

I apologise for giving my noble friend so many questions to answer. To do so is not to question the need to explore the potential that a CBDC might offer—I repeat that the Bank of England is right to do so—but before we proceed, we need clear answers to these core questions, especially the first: what is the problem that only a CBDC can solve? I beg to move.

--- Later in debate ---

[Lord Bridges of Headley (Con)]

My Lords, I thank all the speakers who have contributed to this short debate. What we have lacked in quantity we have certainly made up for in quality.

As my noble friend rose, I was wondering why the House was suddenly filling up with other noble Lords. Was there a sudden massive outbreak of interest in CBDCs? Then I remembered that of course, we are about to debate Brexit. As a captive audience is here, I ask all noble Lords to start to focus a bit more on this subject, which I think demands more parliamentary scrutiny, given the profound issues we have been hearing about from the noble Lords, Lord King, Lord Desai and Lord Tunnicliffe, the noble Baroness, Lady Kramer, and obviously the Minister. What we are talking about here could have a profound impact not just on our currency and how we pay for things, but on our wider economy.

I have three brief points to make. First, the noble Baroness, Lady Kramer, is quite right that we need to keep our critique of CBDCs balanced. We certainly need to explore this subject, and she is right that 114 countries are looking at it. Obviously, we should avoid falling into groupthink, which is I think where the noble Lord, Lord King, is coming from. But at the same time, the fact that China and particularly the EU are progressing incredibly fast in the development of central bank digital currencies could have deep geopolitical and global macroeconomic implications. So the noble Baroness is right that we need to look at the subject, and in so doing it may have spin-offs in terms of benefits and innovation.

My second point is equally important, and this is where the noble Lords, Lord King and Lord Desai, came in. As I said in my opening speech, the challenges that the creation of a central bank raises are significant. As the noble Lord, Lord Desai, put it—and he is right—the question is not just, “What problem is the CBDC trying to solve?” but, “What problems might it also create?” We need to bear that in mind. I noted down the motto that the noble Lord, Lord King, wants to have for every central bank, and which he certainly abides by: only do what you can do alone. How very true, and that should certainly be a guiding thought.

Whether one is sceptical about the rationale for introducing a CBDC or more persuaded of its merits, we must continue to scrutinise and debate these issues. For sceptics, too little scrutiny means that we might stumble into introducing a CBDC, which could have profound unintended consequences. For those who are more forward-leaning, a failure to progress might mean not just missing out on opportunities but getting left behind, which could have geopolitical and macroeconomic consequences.

I say for those who were not present that I bombarded my noble friend with lots of questions—I apologise—but the central question was: what problem is the CBDC trying to solve and, crucially, why can it not be solved by other means? I think my noble friend said that the reason for it is to address the decline in cash. That is obviously a reason, but I make two points. First, the Bank of England itself recognised that the CBDC would be an imperfect substitute for cash, saying two years ago:

“For those in society who value the physical nature of cash, the introduction of CBDC is unlikely to affect their payment behaviour, and so we consider that CBDC would likely act as a complement to cash rather than a substitute.”


Secondly, are there not other means to address that?

Finally, and I am grateful to the noble Lord, Lord Tunnicliffe, for raising this, we still need a much clearer and unequivocal answer to the question: will it be Parliament that votes on whether to introduce a CBDC? It could have a major impact on this country, and it is only right that Parliament takes that decision. It cannot be taken by the Bank of England and the Treasury alone. We will return to this point, but I thank my noble friend.

Motion agreed.

Financial Services and Markets Bill

Lord Bridges of Headley Excerpts

Committee stage
Wednesday 1st February 2023 Grand Committee

[Lord Remnant (Con)]

My Lords, I declare my interest as a director of Prudential and chairman of Coutts.

I apologise to the Committee that I was unable to attend the first two days of this debate, but I spoke at Second Reading. I said then that I was very much in favour of the additional reporting requirements introduced to the Bill at that stage but hoped that they could be strengthened further. Many of these amendments do just that. I will not repeat the eloquent arguments of those noble Lords advancing them—indeed, there seems to be a large amount of consensus in this Committee—but I would like to emphasise my support in two areas.

First, on Amendments 45 and 63, in the names of the noble Earl, Lord Kinnoull, and my noble friend Lord Naseby, and Amendment 66, in the names of my noble friends Lord Holmes of Richmond, Lady Noakes, Lord Trenchard and Lord Naseby, I regard as of paramount note the introduction of the secondary objective for our regulators to promote the sector’s international competitiveness to support long-term growth. As this is a new objective, it is critical that the regulators should account to Parliament for their performance against this objective and against a clear set of reporting and performance metrics, measurements which are indeed measurable, verifiable and independently set.

Secondly, I especially support Amendments 115 and 116, in the names of my noble friends Lord Holmes of Richmond and Lady Noakes. I have direct experience, both personally and at firms with which I am involved, of how long it can take for seemingly eminently well-qualified individuals to gain authorisation. For the avoidance of doubt, I exclude myself from that category. Businesses have choices about where they place capital and people. The burden and cost of regulatory supervision really can damage London’s ability to attract talent and capital. I do not for one moment suggest that there should be any diminution in the rigour with which applications should be assessed, merely that in pursuance of their competitiveness objective, our regulators should give enhanced emphasis to the speedier clearance of the applications before them. These amendments should help them do just that.

[Lord Bridges of Headley (Con)]

My Lords, I will make a brief intervention. I declare my interests as an adviser to and shareholder in Banco Santander in Madrid. I have a lot of sympathy with some of the amendments in this group, especially those in the name of my noble friends Lord Holmes of Richmond and the noble Earl, Lord Kinnoull.

I will take a quick step back. The Bill needs to be improved in three key ways. First, we need to improve the reporting by the regulators. Secondly, as the noble Baroness, Lady Bowles, said, we need to make sure that the regulators are not marking their own homework, which is why it is important that we create a form of independent analysis. Thirdly, we need to improve parliamentary accountability. The amendments clearly address the first point on reporting. I will not repeat the number of points made very eloquently by the noble Earl and others, especially my noble friend Lady Noakes. However, I strongly believe that, as has been said, this will help regulators define their actions and, in so doing, help address confidence in the regulators that they are meeting those objectives.

I listened to the noble Baroness, Lady Kramer—I was about to call her my noble friend; she is a good friend—and she is absolutely right. We absolutely have to get right the balance between competitiveness and stability here. I do not think anyone here is arguing for a race to the bottom; that would be a disaster for our financial services sector. A strong financial services sector is based on robust, proportionate and simple regulation, so I completely heed that concern. However, I look at some of the amendments, especially some of the metrics being quoted here, and the data that they would provide would be exceptionally valuable to us as Parliament when we come to assess the performance of our regulators in a critical sector for our economy, and we can then judge them on those actions. I look at the consultation that the PRA set out, which states that it will include its performance in meeting this new objective but it does not say how. It is important that we send a signal, and at least have a very thorough debate as to what that might be.

I end on this point: does the Minister seriously think that the current reports we get from our regulators are satisfactory and adequate, especially in the light of the new powers and the new objective that the Bill confers on them and the concern that I think many on both sides of the Committee have about what that means for their powers and their accountability? That is a simple question.

[Lord Ashcombe (Con)]

My Lords, I declare my interest as an employee of Marsh & Co, the insurance broker. I too support Amendments 66, 115 and 196 in the names of my noble friends Lord Holmes of Richmond, Lord Naseby, Lord Trenchard and Lady Noakes. Since Second Reading the Bermuda authority has reported that it saw the highest number of new insurance-broking companies registered in more than a decade as 84 new companies were set up in 2022, but not one has been set up in the UK for 15 years. This is the reality of international competition that the UK is facing as it competes with jurisdictions around the world for investment, capital and jobs, but we note that we depend on high standards of regulation. It seems that a number of key changes are needed to address this to improve the accountability of UK regulators, making them more consistent in their approach and more responsive in ultimately ensuring that they act more proportionately, as mentioned by the noble Earl, Lord Kinnoull.

Amendment 66 requires that the FCA and the PRA each publish an annual report setting out how they have facilitated international competitiveness and growth against a range of data and analysis requirements. Clause 26 currently allows regulators to decide for themselves how they believe they have met the requirements of their new competitiveness, as already mentioned. For example, the clause states that the FCA can decide “in its opinion” how to report on the objective and therefore decide solely for itself how it has met the objective’s requirements. The objective must therefore have alongside it a clear reporting criterion so that the Government and Parliament can properly hold the regulators to account. It is unclear whether the regulators will consider metrics specific to international competitiveness, not simply domestic competition. The criteria set out in the amendment can be measured and targets created to ensure that the regulators are operating effectively.

The Bermuda Monetary Authority takes a different approach and has different classes of insurers and reinsurers, together with authorisation criteria and KPIs that match the level of risk that the entity poses to the system. This allows it to undertake an authorisation of an international reinsurer with clients that are solely other insurance companies in less than one week—can you imagine?—thereby freeing resources to focus on entities serving individual retail customers.

Clause 37 gives Ministers a power over the regulators’ reporting requirements by providing them with a mechanism through which to direct information to be published. The danger is that this clause becomes more of a backstop measure, rather than something embedded in our new regulatory framework. While the clause is welcome in demonstrating the Government’s recognition of issues around needing to improve regulatory culture, it asks more questions than it necessarily answers. It is unclear how the Government will decide the criteria for requesting a report and whether they will seek input from industry and Parliament or the new bodies that the Bill creates, such as the cost-benefit analysis panels, in understanding where there is a demand for information. It is unclear whether, as part of its report, the regulator will undertake comparative analysis of its performance against the UK’s competitor jurisdictions as well as analysis of product and service innovations taking place in key markets. This is how Parliament will best understand whether the UK is performing well globally.

What we need are mechanisms in the Bill that help ensure that accountability becomes part of the day-to-day operation of the regulators, not something used ad hoc. That is the only way that we will get culture change and deliver the kind of culture change that we in Parliament and industry want, as addressed by my noble friend Lord Hunt of Wirral at Second Reading. That is why measures set out in these amendments are so important. I hope we can look at further changes along these lines.

Financial Services and Markets Bill

Lord Bridges of Headley Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Lord Bridges of Headley (Con)]

My Lords, I declare my interest as an adviser to and shareholder in Banco Santander.

This Bill touches on many topics, but I want to focus on two big questions: what are the objectives of financial services regulation, and who holds the regulators to account, and how?

On the first question, we know that the main objectives of regulation are ensuring that markets function well and that there is market stability, market integrity and consumer protection. As has been said, this Bill adds a secondary objective of competitiveness and growth. I support that new objective entirely, not because I want a race to the bottom—quite the reverse. I believe that simple, proportionate and robust regulation, applied by regulators in a timely, consistent way, is the bedrock of a competitive financial centre. To achieve that, regulation must reflect developments in finance.

We all know how much finance has changed over the past decade or so, since the financial crisis: crypto, AI and blockchain—technology in all its guises—turbocharging areas such as payments; green finance and ESG; not to mention the rise in Asian markets. All this has dramatically reshaped the financial sector, not just here but across the world. For us, obviously we have had Brexit, raising challenges but also opportunities. We need our regulators to be mindful of this new world in all they do, so that our financial service sector continues to attract capital, investment and talent—and, yes, that means change. But regulations are judgments; they are made at a moment in time. We should not get into the mindset of treating them, dare I say it, as tablets of stone, brought down from the mountain and never to be changed.

To ensure that our regulatory framework is fit for purpose, we must remember the lessons learned in previous crises, but we must not regulate via the rear-view mirror but for the world as it is and for emerging risks. My concern is not that the new objective goes too far but the reverse: that it will not have any meaningful impact. One reason for that is that it is a secondary, not a primary, objective. Another reason is that I question how it is going to sit alongside the new regulatory principle contained in the Bill that regulators must be mindful of the Climate Change Act 2008. How many trade-offs, should they arise, would be made between the green objective and competitiveness?

This brings me to another concern and my second big question: who holds the regulators to account? There is of course the specific issue of how regulators will be held to account in implementing the new secondary objective, but there is a much broader issue, raised a moment ago by the noble Lord, Lord Vaux. The Bill will give ever more power to unelected regulators; how are they going to be held to account? Of course, they are independent, but independence and accountability must go together hand in hand, and by accountability I mean regular systematic processes whereby the main actions of the regulators are thoroughly scrutinised by Parliament. As has been said, we have no such effective system at the moment.

I know the Bill stipulates that the Treasury Select Committee will scrutinise consultations, but consider just one fact: last year, on my reckoning, the FCA, the PRA and the Payment Systems Regulator between them launched 75 consultations—and that is just consultations, not policy statements or anything else. On my reckoning, there is no way that one parliamentary committee, under the current system as currently resourced, can possibly scrutinise this torrent of regulation; it will simply be washed away by the flood. Of course, we need to avoid politicising the regulatory process, which would undermine the confidence we all want. We also need to avoid parliamentary scrutiny making regulators so nervous that they become excessively cautious in all they do, gold-plating regulation and creating the stability of the graveyard. That said, we need to have an answer to this simple question: who regulates the regulators? At the moment, as the Bill stands there is no clear and effective answer.

Autumn Statement 2022

Lord Bridges of Headley Excerpts

Tuesday 29th November 2022 Lords Chamber

[Lord Bridges of Headley (Con)]

My Lords, I start by drawing your Lordships’ attention to my entry in the register. I welcome my noble friend Lady Penn back to the Front Bench. It is excellent see her there. I absolutely echo the words we have just heard. I warmly welcome my noble friend Lady Lea. It gives me great pleasure to be able to call her “my noble friend”. I congratulate her on her excellent speech, which I am sure all noble Lords agree shows the great wealth of talent she will bring to our deliberations. I thought it was a wonderfully uncontroversial speech, and next time I very much hope that the gloves will come off.

In that spirit, the season of good will is about to be upon us, so I will try to start with some words of praise about the Autumn Statement. I think that the Prime Minister and the Chancellor are quite right to be honest with us all about the dire economic situation we are in. I agree with a lot of what my noble friend Lord Lamont said. The oncoming recession would be worse. My reading of it is that inflation would have been higher if the Government had not taken some of the measures they have announced. As my noble friend Lord Lamont said, those measures were tough.

From where I sit, the worrying reality is that although we have avoided falling into the economic abyss, we are still very close to the edge of the precipice. Why are we there? There was the mini-Budget—there is no doubt about that—and there has obviously been the economic shock of the two undeclared wars this country has fought, first against Covid and now against Putin, the impact of which my noble friend also eloquently referred to, so I will not repeat those points. I will also point to something else where I think that the noble Lord, Lord Eatwell, who is sadly no longer in in his place, and the noble Lord, Lord Hain, will profoundly disagree, so I am testing the spirit of good will. I see Conservative-led Governments bit by bit defaulting to a mentality that higher spending and higher taxes are the solution to all the problems we face. My concern is that that mentality has been nurtured and watered by quantitative easing, which has become the magic money tree. Our QE addiction, as the House of Lords Economic Affairs Committee warned 18 months ago, has left us perilously exposed to what might happen when the era of cheap money ended, and that era is now over. Interest rates, as we all know, are up, belatedly, to grip the tiger of inflation, and that tiger is already gnawing into household incomes, pushing up welfare costs and creating havoc with government finances.

The noble Lord, Lord Fox, is absolutely right that the Autumn Statement lays out the gruesome cost of debt servicing. It is at its highest level in a generation. In the seven minutes of my speech, if I am right in my calculations, we will spend roughly £1.5 million on debt interest. That is quite an expensive speech—I think it is six times even what Boris Johnson gets paid. More than this, our public finances are more sensitive to movements in interest rates than they have been for decades. Every one percentage point rise in short-term interest rates now adds £13 billion to debt interest costs the following year. As to the debt stock itself, despite the £60 billion of tax rises and spending cuts in the Statement, debt will be £400 billion higher in five years than forecast just back in March. Added to all this are other uncertainties. The volatility of the gas prices is one. If prices go back to their late August peak, that could add £42 billion to borrowing next year.

So, given all this, taking a step back, I think the question the Autumn Statement begs is this: as we look ahead—and when I say “look ahead”, I mean look ahead several years out—are we really addressing the enormity of the situation we are in and the need to bring spending and, with it, taxation back under control?

I fully accept the pressures we are under, as my noble friend Lord Lamont and others have said, but let us just consider spending. The cuts are not being implemented until after the next election. Even then, by 2027-28, total departmental spending will be more than £90 billion higher in real terms than at the start of this Parliament.

Consequently, in the meantime—the next couple of years—we are tackling borrowing by raising taxes. As has been said, the tax burden will be at its highest sustained level since just after World War II. Millions more people will be dragged into a higher rate of tax. Worse still, our workforce appears to be becoming sicker and more people are becoming inactive. Thanks to all this, we are destined to become poorer, which to me is the most startling fact of the Autumn Statement. Real household disposable income per person is set to see its largest fall since Suez.

Having said all this, I do not question the need for the Government to act to stabilise the economic situation—but we must beware stability becoming the stability of the graveyard, where ever-higher taxes and spending snuff out enterprise and growth. If we are to wrest control of tax and spending, we need to answer the really difficult questions and topics that I believe we—and I take full responsibility for this, as a Conservative —have failed to tackle: our appalling productivity, our planning system, and how we are going to pay for an ageing population in a sustainable way. Above all, we have to ask ourselves how we are really going to encourage enterprise, innovation and investment—the essential ingredients of growth—if we keep taxing and spending at this level.

That begs a very difficult question: what do we want the state to do? Here I sense a creeping consensus that we must somehow accept that we are in a new era of higher taxation, higher spending and a bigger state. We are told that this is the solution to the challenges we face and the way to grasp the opportunities of the future. Others will profoundly disagree, but I reject that thesis outright. It is not what I believe in, not just for reasons of principle but because this approach, I contend, will fur up the arteries of our economy. That will hinder growth, and our children’s and their children’s ability to pay for the services their generations will need.