Financial Services and Markets Bill

Debate between Lord Davies of Brixton and Viscount Trenchard

Report stage
Tuesday 13th June 2023 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, I support the amendment. We will return to these issues on Thursday, when we discuss the regulations in Grand Committee. However, it is worth mentioning to the House the clash today between this Bill and a meeting of the Economic Affairs Committee, of which the noble Baroness, Lady Kramer, and I are members. By chance, the committee was interviewing the Governor of the Bank of England. The issue of this arrangement arose, and the governor was quizzed on these very issues. It will be useful on Thursday to explore further why and how this action was taken. The governor provided a justification, but, in the light of his remarks, it will be worth while exploring these issues in more detail when we get the regulations.

[Viscount Trenchard (Con)]

My Lords, the noble Baroness, Lady Kramer, and the most reverend Primate have retabled as a single amendment—Amendment 106 —the two amendments that were debated in Grand Committee: Amendment 241C on ring-fencing, and Amendment 241D on the senior managers and certification regime.

As my noble friend Lady Noakes said during that debate, these amendments are trying to set in stone for all time the conclusions of the report of the Parliamentary Commission on Banking Standards. Times change, and I cannot support this amendment because it introduces an inappropriate degree of rigidity.

As my noble friend also pointed out, the lesson of the HSBC and Silicon Valley Bank episode was that the ring-fencing rules were not, after all, considered inviolable. It was necessary to provide HSBC with special statutory exemptions from the ring-fencing rules to enable it to acquire Silicon Valley Bank. That exemption has brought permanent changes to the ring-fencing regime for HSBC which affect it alone. Can my noble friend say whether that means it has a permanent competitive advantage over rival ring-fenced banks in the UK?

In any case, I rather doubt whether the introduction of ring-fencing has reduced the risks to which bank customers’ deposits are exposed. I disagree that it is therefore important to make it very difficult to weaken the ring-fencing regulations in any way. As I said in Committee, I worked for Kleinwort Benson for 23 years, for a further 12 years for Robert Fleming and then for Mizuho. All three banks operated both commercial and investment banking businesses. Internal Chinese walls between departments made it quite impossible for customers’ commercial banking deposits to be diverted to risky investment banking activities. As I said in Grand Committee, there is no positive correlation between the two cash flows of retail and investment banking. It follows that universal banks are in fact gaining diversification benefits. There is little global evidence that splitting up the banks has made them less likely to get into trouble.

Following the Lehman shock, is it not interesting that the US Government did not go for the reintroduction of a kind of Glass-Steagall Act? I am not convinced that ring-fencing is a good thing, and in general I am opposed to market distortions of this kind, which actually make the consumer less safe rather than safer. Ring-fencing also makes it harder for smaller banks to grow, because they must compete for a small pool of permitted assets against the capital of the larger banks. Will the Government conduct a review of the effectiveness of ring-fencing?

As for the senior managers and certification regime, I am sceptical as to whether it has been effective, because there is no hard evidence that it has been used as the stick that was originally intended. Most well-run banks operate in a collegiate manner, and I think it rather odd to attempt to attribute personal responsibility to managers and directors of banks for the decisions and actions of those banks, beyond the responsibilities that the directors carry in any event.

The SMCR has especially inconvenienced foreign banks operating in London. As an example, I refer to the Japanese megabanks. It used to be their practice to assign a very senior executive to London to take responsibility for all the bank’s activities in the UK and in most cases the whole EMIR region. Often, this might be the executive’s last major management position before retirement, and would typically be for two to three years leading up to his retirement date. Such executives have typically worked for 40 years or more for that bank and have managed regulated financial businesses in Japan for many years. However, the FCA has consistently been extraordinarily slow in approving those executives under the SMCR.

Therefore, the Japanese banks have given up on this strategy and feel compelled to appoint as head of their UK and EMIR operations not the person most appropriate for the job, but the most senior person who has already been working in London for three years or so, merely in order to meet the criteria of the SMCR regime. This has caused considerable inconvenience, because it is unreasonable to send a trusted senior executive overseas for five or six years in the last years of his active career, rather than a more reasonable stretch of two to three years. I know that the SMCR is much resented by Japanese and other foreign banks and I ask my noble friend if she will agree to conduct a review of how it is being implemented by the FCA.

Financial Services and Markets Bill

Debate between Lord Davies of Brixton and Viscount Trenchard

Report stage
Thursday 8th June 2023 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, I declare my interests as a director of two investment companies, as stated in the register. I agree to some extent with what the noble Lord, Lord Eatwell, said, but I am not sure I can agree that the United Kingdom’s financial markets are uniquely peculiar in any sense. It is true that we do not have such a large domestic hinterland as the United States, but compared with financial centres such as Switzerland and Singapore, we have a rather larger domestic hinterland. I do not think what he said is therefore so relevant as he perhaps believes.

Furthermore, I agree that our high standards and what used to be called “my word is my bond”, which was what I was taught on day one when I went to work for Kleinwort Benson in the City, are very relevant. We have always been proud, and rightly so, of the very high standards and honourable way, in the main, in which our financial institutions have conducted their business. Indeed, competitiveness of the market depends, to a degree, on maintaining those high standards. But competitiveness also depends on having clear, comprehensible and proportionate regulation, and in recent years our regulation has become too cumbersome, particularly after the FSA was split into two regulators. If you are a dual-regulated company, it is a nightmare to have to report much the same information but in different formats to the two regulators. This is why the time spent by executive committees of operating financial companies in the City is so greatly taken up by compliance, reporting and regulatory matters, rather than innovation and the development of new businesses to attract more international companies to do their business in London, thus providing more revenue for the Exchequer and more jobs for British people, and indeed for non-British people to come and work here.

I support the Government’s amendments to strengthen the reporting requirements of the regulators, and Amendments 40 and 41 tabled by my noble friend Lord Holmes of Richmond. I agree with those noble Lords who have thanked the Minister most sincerely for her response to concerns expressed across the House about accountability and scrutiny. However, the British Insurance Brokers’ Association has expressed concern that the Bill, as drafted at present, largely allows the regulators to decide how to fulfil the reporting requirements for the competitiveness and growth objective.

Clause 37 acts as a backstop that allows the Treasury to compel additional reporting. What assurances can the Minister give that the Government’s response to the ongoing consultation on the appropriate metrics for the regulators to publish will lead to concrete changes to which metrics are published, given that the Bill will have been passed by the time the Government respond to the consultation? Given that it will not be possible to include any details of specific metrics or how the Treasury will exercise its powers in Clause 37 in primary legislation, how can the Government ensure that the consultation will lead to a sufficient challenge to the regulators, allaying concerns about them marking their own homework in their reporting? Will the Minister also give assurances that the Government’s response to the consultation will reflect the parliamentary debate in this area, where noble Lords have consistently stressed the need for extensive metrics to be published by the regulators with regard to the new objectives?

[Lord Davies of Brixton (Lab)]

My Lords, I do not want to run the risk of repeating myself, but I have made plain in previous debates my concern about the inclusion of the competitiveness objective in this legislation. Just to be clear, I think it has no place, but I welcome these provisions that there should be a report on the competitiveness objective. My concern is that the wording does not get to the heart of the problem that I believe exists, which is the interaction between the competitiveness objective and the other objectives. My reading of the way this is worded is that the report just has to talk about the competitiveness objective and does not have to say how it affected the other objectives. Maybe the Minister in her reply could allay my concerns and make it clear that the regulatory bodies are required to look across the whole gamut of their obligations when reporting on the competitiveness objective.