Child Benefit
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Lord Sassoon
My Lords, what we are talking about principally this afternoon is the restriction of child benefit. The restriction starts to come in only where one taxpayer in the family is earning more than £50,000. In those circumstances, clearly there will generally be a capability for dealing with the forms. I went on to the website this morning and while I could be highly critical of some of HMRC’s forms, I found that the guidance on the changes to child benefit was remarkably clear and easy.
Lord Davies of Oldham
My Lords, the Institute for Fiscal Studies has indicated that under present government welfare cuts 80,000 children each year will be reduced to poverty. Have the Government ambitions to increase that number?
Lord Sassoon
My Lords, the changes to child benefit affect only the 15% of highest earning families in this country. This Government believe that those with the broadest shoulders should share the pain of the massive deficit consolidation and reduction programme that we inherited from the previous Government. That is what we will continue to do.
EU: UK Net Contributions
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Lord Sassoon
I would love to see that happen. Of course, I cannot give any assurances about how it will play out.
Lord Davies of Oldham
My Lords, of course we agree that the European budget needs to be tightly controlled and, if possible, redirected towards jobs and growth. We are not too confident that this Government will produce the same priorities. However, can the Minister confirm that the Prime Minister will be calling on his many friends among the leaders in Europe in this negotiation?
Lord Sassoon
What I can confirm is that the UK’s priorities for expenditure include the following: substantial cuts to the common agricultural policy. However, I agree with the noble Lord that priorities for the UK include growth and competitiveness, climate change and external action. I am not going to speculate on how the negotiations will play out.
Financial Services Bill
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Lord Barnett
As I originally put down the first “may” or “must” group of amendments, together with my noble friend Lord Peston, I have some sympathy with the noble Baroness. We were told by the Minister—I forget whether it was on the sixth, seventh or eighth day—that he had asked his officials to go through the whole Bill for the mays and musts to see which were appropriate. Knowing Treasury officials, I am sure that they will have come back with something to say whether they thought a “may” should be changed to a “must”. Was this group included in that? Perhaps the Minister could tell us. It looks as though the noble Baroness is quite right and that this is one of those occasions where the word should be “must”. I would welcome the Minister’s reply. My own experience of the thinking of Treasury officials goes back too far for me to be sure, as I last took advice from Treasury officials more than 30 years ago and I may have forgotten a bit about how they operate. However, I am sure that they are still as good today as they were then, and I would welcome the Minister telling us what they came back with to his request.
Lord Davies of Oldham
My Lords, I hope that the noble Baroness, Lady Noakes, can stand the accolades that are coming from this side of the House after her speech. I think that she has posed the Minister some very appropriate questions, while my noble friend Lord Peston goes a little further by saying, “What’s the clause here for at all?”. So the Minister has quite a lot on his plate in responding to this debate already, and all this puts the official opposition amendments very much into the minor case. Our amendments in this group, Amendments 192ZZA, 192ZZB and 192C, call for the directions to be laid before Parliament. These are directions in respect of a direction to the FCA from the Treasury to carry out an investigation into possible regulatory failure. Of course, I am at one with my noble friend Lord Peston when he indicates that investigations are about what has gone wrong, and the lessons which can be learnt in order to prevent any reoccurrence. Intervention in time is what is needed if one wants to prevent things going badly wrong. Therefore, with these amendments, we are merely seeking for the issues to be open and transparent. Nothing could make them more transparent than that they should be laid before Parliament.
In passing, on other amendments in this group, those in the name of my noble friend Lord McFall also have some merit. He calls for the person appointed to chair any inquiry set up under these provisions to be “suitably qualified and experienced”; I hope that the Minister can give a positive response to that. He also calls for an exemption for information in respect of which a claim to legal professional privilege could be made; I am sure that the Minister will look sympathetically on that. Of course, his Amendment 193 says that any investigator appointed must be “suitably qualified and experienced”. Now, the Minister and I understand that he only has to reply to the amendment that has been moved in this group but, as we are in Committee, it might be useful if the Minister gives us as comprehensive a reply as possible to the whole group.
Lord Desai
My Lords, before the Minister replies, I am puzzled, given what the noble Baroness has said, when I read the clause. What are the circumstances under which the Government will not order an inquiry? Are they things like when we had the fiasco with RBS, where an inquiry was conducted, hushed up and not published until we literally marched in the streets for the FSA to do so? Can the Minister explain under what circumstances the Treasury would not order an inquiry if such events had happened?
Lord Davies of Oldham
“( ) Any direction under subsection (5) must be laid before Parliament and published.”
Lord Skelmersdale
My Lords, as an observer of this scene, it is clear to me that my noble friend Lord Sassoon has said that he will take into consideration the two amendments in the name of the noble Lord, Lord Davies of Oldham, and bring something back—whether it is a total positive or a half positive, we do not yet know—at the next stage of the Bill. Therefore, it would be appropriate if the noble Lord would also withdraw this amendment.
Lord Davies of Oldham
My Lords, I apologise to the House. I am sure that the noble Lord is absolutely right and that I got lost in my cricketing batting average. I beg leave to withdraw the amendment.
Lord Peston
It would establish the principle which everything else must follow. That is fine; I understand what the noble Lord is saying. That leads me to ask two central questions. In Clause 73, and I think in something similar earlier, subsection (2) refers to “Relevant events” that occur in relation to,
“(b) a person who is, or was at the time … carrying on a regulated activity”.
What worries me as a matter of logic is whether we will end up with the regulator having to investigate him or herself. If these people have not met the standards, who is responsible? They are partly, of course, but this would also be an indication of regulator failure. To my way of looking at it, we have a part of the Bill that is totally bizarre. From a logical point of view, the answer to the question “Quis custodiet ipsos custodes?” is that the regulator is the custodes himself, if you like. I would certainly welcome an analysis from the Minister in his reply which shows that we are not seriously involved in a logical contradiction here.
My second question is whether the fact of an investigation of the kind we are discussing is to be in the public domain. In other words, will it be publicly known that the regulator is investigating one of the things going on here? It may be that I have not read it properly, but is not that itself potentially enormously damaging, again a point that was raised last week? I should like the answer to these two questions. It may be that Treasury officials will have to do a bit of thinking about this part of the Bill when they are not thinking about the logical nature of “may” versus “must”. As I have pointed out before, there is a vast philosophical literature on this. How much of it they will have time to read, I do not know. However, the central point is to get a rational response to the amendment moved by the noble Lord, Lord Hodgson.
Lord Davies of Oldham
My Lords, I am grateful to the noble Lord, Lord Hodgson, for identifying this issue, but I must say that if noble Lords opposite do not think that the nation is expecting a Bill and eventually an Act of Parliament that tightens up regulation in the wake of the circumstances we suffered four to five years ago, then all I can say is that such a position is not tenable. The noble Lord, Lord Hodgson, is indicating that the principles of the regulator should be expressed in these terms. Who can be against the principles of fairness? Of course we want and expect the regulators to act fairly, but let us remember that they may be acting under a direction from the Treasury because something has gone wrong. The idea that the first thing the regulator must do is consider the principles on which it must act rather than in fact investigate the nature of the problem, as it has been instructed by the Treasury to do, seems to put the cart very firmly before the horse.
In responding to this amendment, I am sure that the Minister will have some warm words for his noble friends who have spoken in favour of the amendments, but I hope that he will defend the basic objective of the Bill. I shall give way to the noble Lord.
Lord Hodgson of Astley Abbotts
I am extremely grateful. I did not want to interrupt his peroration, but dare I say that if he had listened carefully, he would know that I said that this is not about reducing regulatory stringency? I made that absolutely clear and I said it in terms; there is no question about that. This is a question about being fair and reasonable, it is not about reducing regulatory stringency. I do not want that particular line of attack attached to my amendments. I could not be clearer than that, and I think my noble friends on this side of the Committee are all as one so far as that is concerned.
Lord Davies of Oldham
The noble Lord will forgive me if the consideration that others might have with regard to a regulator potentially operating under direction from the Treasury to deal with a serious situation is that it should be dealing with it quickly and efficiently, and not just having regard to how much it acts appropriately or fairly, in the way in which the noble Lord has indicated. Of course, regulators know that if they act entirely improperly, even unlawfully, legal action will follow against them, but, in a Bill that is concerned to make regulation more effective, it surely cannot be that the principles upon which the regulators must act are more important than the effectiveness with which they carry out their role.
Baroness Kramer
I have a couple of comments —they are really questions—on both amendments. Amendment 193F, as the Minister has said, essentially extends the Banking Act 2009 special resolution regime to investment firms. In the next two groups there are similar amendments extending that same resolution regime to holding companies and clearing houses. I am sure the Minister does not want me to speak three times on the same point, so perhaps he could extend his comments to those two groups as well.
I share some of the concerns expressed by the noble Lord, Lord Barnett, that we are getting a set of amendments which, by definition, will have to change fairly significantly because this area is being driven by European directives. Even the definition that we are using for an investment firm is a European directive. It is very difficult to understand how this works when the context and framework will be constantly changing. Perhaps the Minister could help us understand how that process is going to happen. With ring-fencing likely to change the way in which we look at and define an investment firm, that is one obvious set of problems. It may end up being different under European law from the application in the UK, because we may draw lines at different points. We may choose ring-fencing, and others separation. I cannot see how this set of language manages to comprehend all those complexities.
It is not just me who is concerned; I know that I have raised this issue before. This time, the BBA is very concerned about marching all the troops up the hill in one direction, finding that there has to be substantial change, and marching them all the way down and back up in another direction. I cannot understand why we are doing this now when we will have clarity in just a few months’ time.
I also want to raise a question which I have asked before but to which I have not had much of an answer, under Amendment 193BA. Again, it concerns the central clearing houses and the central counterparties. I am trying to understand if that amendment deals with an issue that concerns me: the waterfall of the resolution and whether, at the end of that waterfall, it is permissible under the legislation to tear up contracts. That is a reading which the Minister will know that the industry has asked about. When he talks about the protection of client assets, does that apply to contractual relationships—for derivative contract or whatever else—where the clearing house may not be able to meet its obligations because it has got into difficulties and has been put into a resolution procedure? I am unclear whether the legislation establishes that that contract may be torn up as the last resort in the resolution process. That is a big issue that needs general discussion, if that is right. It would be extremely helpful if the Minister could give us some clarity on that.
Lord Davies of Oldham
My Lords, the Minister has a few interesting issues to respond to, but I must say that I am very much on the Government’s side with regard to these two amendments. After all, they are the result of consultation. We agree with the Government that investment firms and clearing houses have the potential to cause instability in the financial system and that therefore, including them within this scheme to ensure their orderly resolution or, perhaps, wind-down in the event of failure, is obviously sensible.
I am slightly embarrassed by the fact that, although 35 years ago, as his PPS, I was used to agreeing with every word that my noble friend Lord Barnett uttered as a Member of Parliament, I have to say to him today that I do not quite agree with the line which he has adopted. I entirely recognise that we will be enmeshed in many of these issues in the not too distant future with another significant Bill but, on the whole, when the Government have a good and constructive idea, it is best for the Opposition to seize it with both hands as early as possible, and that is what I want to do.
Lord Newby
My Lords, this small group of government amendments are of a purely technical nature. Amendment 193J amends Section 120 of the Banking Act 2009 to reflect the terminology of Scottish law, under which documents are “lodged” with the court.
Amendments 201A, 201B and 201C are concerned with the rulebooks that the new authorities will use. The FSA’s rulebook is currently made up of around 9,000 pages of rules. In the new system, these rules will become FCA rules, PRA rules, rules shared by both the FCA and the PRA, or Bank of England rules in relation to recognised clearing houses. Noble Lords will no doubt be aware that the Government intend that the new regulatory system will be put in place on 1 April next year. The Government are working closely with the FSA and the Bank of England on the practical aspects of transition to the new regulatory system, while listening to representations from industry on how disruption can be minimised in the run-up to the new system being put in place.
The amendments will give greater precision to the transition of the rulebook by enabling the new regulators to adopt relevant sections of the FSA rulebook, and its supporting materials, by designating the relevant regulatory material to the PRA and/or the FCA, or the Bank, and to make any necessary modifications. The amendments also permit the FSA and the PRA to appoint a set of persons to undertake this designation exercise. The recruitment processes to appoint members of the boards of the new regulators are well under way and the amendments will permit the future PRA and FCA boards to be appointed so that they, rather than the current boards, can make the decisions on the designation of rules.
The new rulebooks will not come into force until 1 April next year but we need the new boards to be able to make and publish their new rulebooks as early as possible in advance of 1 April next year so that industry and the public have certainty and sufficient notice to get ready. These are technical but practical and helpful amendments and I beg to move.
Lord Davies of Oldham
My Lords, it may be a source of some surprise on the Government Bench that I rise to speak on these purely technical amendments, but I merely ask Ministers to recognise that, their having looked kindly on three amendments that I proposed earlier today, I have kept my silence on three groups of amendments that they proposed and which have gone through without dissent.
Taxation: International Companies
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Lord Sassoon
My Lords, a series of measures has been agreed internationally through the OECD over many years. The fiscal affairs committee of the OECD is having a new look at this, and this work was endorsed by the G20 at the Los Cabos meeting in June, to get those rules into a fit state for the 21st century. They are the rules that govern the relationships between countries and the base on which all companies should operate their tax regimes, but they need to be modernised.
Lord Davies of Oldham
My Lords, in responding to an earlier question, the Minister said that there was much work to be done in this area. Who is to do it? What is the point of the Government cutting Inland Revenue staff when there is so much work to be done? Staff concerned with revenue collection can collect 30 or 100 times the annual salary they receive.
Lord Sassoon
I am very grateful, as I often am, for the question asked by the noble Lord, Lord Davies, because it enables me to tell the House, as I have done before, that £900 million has been reinvested in the compliance activities of HMRC precisely because we need to do more work to attack avoidance, evasion and criminal attacks on the tax system. Compliance revenue has more than doubled in six years so that by 2014-15 an additional £7 billion per annum will be coming in. The noble Lord’s concerns are quite right, and this Government are very actively on the case.
Financial Services Bill
Lord Davies of Oldham Excerpts(11 years, 10 months ago)
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Lord Davies of Oldham
Lord Davies of Oldham
My Lords, in moving Amendment 190ZEA, I will speak also to the other amendments grouped with it. I imagine the Minister feels that his reply earlier was so definitive that the Opposition ought really to pack up their bags and go home at this stage. I have bad news for him—we still have open bags with plenty of issues that we seek to explore, not least because we do not think the Government are clear about the issue of crisis management. This, after all, is the absolute heart of this Bill. We all know the reasons why we are greatly concerned about financial crisis management and the difficulties that have obtained in the past. Therefore, I am afraid that the Minister will have to tolerate the fact that we are going to probe as far as we can within the framework of these Committee proceedings. However, he can of course rest assured that when his answers are totally satisfactory, that will only foreshorten the amount of debate we will need on Report. He stands to gain from giving as full answers as he possibly can that may allay our anxieties at this stage.
All these amendments relate to the memorandum of understanding on crisis management—the blueprint on who has to do what and what would happen in the particular circumstances of any crisis situation. The substance of the memorandum is not in legislation and therefore not quite subject to the scrutiny that we are afforded on other aspects of crisis management. It is being published separately and does not go through quite the same degree of parliamentary scrutiny as the other agents and factors involved in crisis management. Therefore, the Minister is bound to expect us to press hard in this area.
The broad message of this group of amendments is to call for the Financial Conduct Authority to be given an explicit role in the process and its related mechanisms. The tenor of all our amendments today is that the collaboration between the Treasury, the Bank and the regulators is exceptionally important. In particular, why does the Bill allow the Bank, the Treasury and the Prudential Regulation Authority to include in the memorandum provisions on co-operation between any of them and the FCA, but the FCA itself seems to have no reciprocal power? It can like it or lump it; it can accept what is put forward as an agreed position or it can seek to veto, but it is not party to the drafting process. We are concerned about this because the risks of disruption and instability in the financial markets, which are overseen by the FCA, are not being given sufficient weight.
We all appreciate that we are reckoning with the future and that we cannot predict it. We also know that the last people we want to be are generals solving the problems of the last war and not being ready for the next. We understand the very real difficulties that the legislation seeks to address. We can put in place as many suitable mechanisms as possible to try to implement appropriate safeguards, but we cannot be certain that we have got it right, and we cannot foresee totally the type of crisis that might arise. Therefore, we on this side of the House think that properly involving the FCA in crisis management preparations can only enhance the collective pool of knowledge and increase the likelihood of better outcomes.
I recognise that there is an element of repetition in these amendments. The Minister addressed this earlier when he explained how Clause 54 addressed many of these issues. However, we believe that our case merits consideration by the Government. The amendments are framed in a constructive fashion and I hope that the Minister will accept the spirit in which they were tabled and perhaps indicate that the Government might think again. I beg to move.
Lord Flight
My Lords, I want briefly to support the Government’s position here. I am one of the few people still around who participated in the lifeboat back in 1974 in the wake of the secondary banking crisis then. Although I felt that the Bank of England had been less than perfect in allowing that crisis to develop, the way in which it handled it was first class. It did not cost the taxpayer a penny and the lifeboat got to grips and sorted out the various banks that were, in essence, bust.
The fears that I expressed in the other place at the time of the FiSMA about the tripartite agreement were exactly what transpired. The three parties failed to reach agreement, as I think is now widely recognised and known, and it is a miracle that the banking system did not actually collapse because it was dangerously close to doing so. In a banking crisis which is not about, if you like, conduct and how customers are treated, but for whatever reason is about the potential pack of cards implosion of the banking system, it is crucial that it is the banking regulator entity—in essence the Bank of England in consultation with the Chancellor of the Exchequer of the day—that has clear authority to get on and take the necessary measures promptly.
Lord Davies of Oldham
My Lords, I am not sure that we are disputing that last point. We are arguing that there may be a crisis in which the contribution of the FCA would be of considerable importance. Perhaps the Minister will answer this point for the clarification of the Committee and all those interested in this matter. We are not quite clear why the other regulator, the PRA, operates in a different fashion from the FCA with regard to the consultation on the memorandum. I should like the noble Lord at least to identify that factor.
Lord Sassoon
I am not quite sure I have understood what clarification the noble Lord is asking for. The simple fact is that we are talking about a memorandum to do with crisis management. Crisis management is to be led by the Bank of England under the clear responsibilities that we have in this framework and therefore the memorandum is focused entirely on matters where the responsibility lies between the Bank and the Treasury in so far as public money is at risk. We are talking about matters where essentially the FCA is an ancillary party because dealing with crisis management is not the FCA’s principal role. It has a lot of other responsibilities in the new system, but crisis management is not one of them. That entirely drives the logic behind who is and who is not party to the MoU. I do not know whether that helps the noble Lord.
Lord Davies of Oldham
The Minister is always helpful, if not always totally convincing. We shall think further about this matter and the answers he has given today. For the time being, I beg leave to withdraw the amendment.
Lord Davies of Oldham
Lord Davies of Oldham
My Lords, again I apologise to the Committee that this amendment is also a casualty of the fact that we ought to have tabled and discussed it the other evening in the context of Clause 54, but in fact we failed to do so. I would therefore ask the Committee to show a degree of patience and bear in mind the content of Clause 54 which, as the Minister has already identified, is absolutely critical to this part of the Bill. We want to make our argument as it relates to Clause 61 because that is where the amendment is actually located. However, Clause 54, which sets out the circumstances under which a decision is made to notify the Treasury about the need for financial assistance to address a risk to public funds, is the background to the amendment.
The amendment seeks to arrive at a clearer definition of what “material risk” means. We have already had one shot at this issue today and I think we made a modicum of progress, but as my noble friend Lord Peston indicated, if we are not careful we might become engaged in a somewhat philosophical debate about the definition of risk. However, the term “material risk” appears in the Bill and therefore we ought to be as clear as we possibly can about what the term means. In the context of the memorandum of understanding, this amendment states that the memorandum needs to make provision for what the Bank and the Treasury regard as material risk. The amendment requires the definition to include risks that significantly impact on the safety and soundness of PRA-authorised persons and factors that put at risk relevant markets functioning well.
These are specifically and deliberately definitions which directly refer to the roles and objectives of the PRA and the FCA respectively. This is because the Opposition argue that the Bill and the draft memorandum are too vague about the role of the FCA and PRA in circumstances of material risk to public funds. I do not think that our discussion earlier this afternoon cleared this matter up. That is why we are once again giving the Minister the opportunity of being clearer about the matter, perhaps. We want to ensure that the Bank—the governor—will involve the FCA and PRA in these matters. The importance of defining material risk, and concerns that the Bill currently falls short on this, was raised by the committee convened to look at the draft legislation. That pre-legislative committee argued that it should be subject to parliamentary approval and should not be left to the memorandum of understanding.
We have parliamentary colleagues who have a real anxiety about this matter. I do not think that the discussions we have had thus far this afternoon allay all those anxieties. However, the Minister may be able to have a better shot at it a second time. I beg to move.
Lord Sassoon
Well, I will have another shot at it, but I do not suppose the schoolmaster opposite will necessarily mark me any better, however well I do. I am under no illusions. Nevertheless, I take this amendment suitably seriously. I will go through the arguments in the expectation that perhaps all will become clear and I will get an alpha plus for this one.
Amendment 190ZEB would link the threshold of the “public funds notification” detailed in Clause 54 to risks that could significantly impact the safety and soundness of PRA-authorised persons or undermine the orderly operation of financial markets.
This amendment would make the public funds trigger confusing, and less, rather than more, effective. I should explain why. The phrase “public funds notification” set out in Clause 54, which is a notification that public funds could be at risk, is precisely that. It is not a notification that there are circumstances in the financial sector that threaten the PRA or FCA’s objective.
The PRA will be responsible for prudential regulation of a large number of small deposit-takers and insurers, many of which can and do fail without any risk to public funds. Requiring the Bank to make a formal notification to the Treasury under Clause 54 every time and any time any of these institutions got into trouble could lead to a relatively large number of notifications where there was in fact no risk to public funds.
Similarly, adding a reference to the FCA’s objective to the definition of material risk in this way would broaden the grounds on which the duty to notify would be triggered to risks which do not involve public money. It would mean that the notification under Clause 54 was not in fact a public funds notification at all. Crucially, this would mean that the Treasury’s power of direction in Clause 57, which is available where there is a live public funds notification, would be available when there is no risk to public funds. I do not know whether that is what was intended here but I hope that the noble Lord would agree that that is not what should be achieved. This matters because decisions to use public funds to resolve a financial crisis are for the Government to take, usually the Chancellor personally. As such, the purpose of Clause 54 is to ensure that the Treasury is always informed when there is a material risk to public funds, and not for other, wider purposes.
Lord Davies of Oldham
My Lords, it is almost half a century since I was a schoolmaster so I have forgotten what alpha plus means. I cannot remember ever offering one to a student. I might have done to undergraduates later but certainly not in school.
However, I am not going to grade the Minister. I would not want to flatter him too much. After all, he derives enormous satisfaction from these interesting debates and I do not think that I should add to his sense of self-satisfaction at this stage by marking his last effort. Where I was nodding is obvious enough. Of course I agreed with the Minister when he was emphasising that what we are concerned about with the warning mechanism is where public funds might be engaged. That is the nature of Clause 54 and our amendments with regard to Clause 61 also take that very much into account.
I am grateful to the Minister for his commendable contribution today, which I very much enjoyed and I hope the rest of the Committee did. Like him, I am looking forward to our engagement next week on Part 5. As he predicted, he has not heard the end of this matter, although I beg leave to withdraw the amendment.
Lord Davies of Oldham
Lord Davies of Oldham
This amendment furthers the points that my noble friend and I have already made this afternoon about widening the range of individuals who should be in a position to contribute their knowledge, experience and advice to a crisis management scenario. We remain concerned that the Government have narrowed the point of action in crisis management. I listened very carefully to what the Minister said about the advantages of that narrowness and fully understand it, but I am still unconvinced that the Government have the Bill right about who should contribute fully to the management of what we all recognise is an issue of very great significance to the nation.
The memorandum of understanding on crisis management must, according to the Bill, make provision about obtaining and sharing information. This amendment seeks to facilitate this requirement and enhance the Bill. We need to ensure that certain key personnel can consult directly with the Treasury. The amendment develops our clearly argued concern that reference in the legislation to “the Bank” is too often taken to mean, or certainly risks being interpreted and acted on as meaning, simply the governor. We argue that the Bank’s deputy governors and the chief executive of the FCA should in the Bill be explicitly enabled to consult directly with the Treasury in such extreme circumstances.
We are worried about the concentration of power and feel that relevant alternative voices must be given the opportunity to be heard in the management of an issue of such great concern for the nation. This is particularly important if there proves to be a difference of opinion within the Bank. We know there are differences of opinion in the Bank on very important matters. One would expect that highly capable individuals with different experience would not always reach an identical opinion. If they did, they would not deserve the high position they occupy because they would be merely yes men or, in one or two cases, yes women.
Under the current formulation of financial regulation, the Chancellor can hear directly from the chairperson of the FSA. Under the new system and the memorandum of understanding, the Chancellor could hear from no one but the governor.
In the other place, the Minister said, “Well, of course, the Bank encompasses a range of people”. We are not convinced about that. We do not feel that the position is explicit enough. It does not address the point about including the FCA in the vital process of obtaining and sharing information. Nor does it indicate that, at a moment of great crisis for the nation, voices which might present a somewhat different view from that of the governor will have their position adequately reflected to the Chancellor. In every other aspect of the role that the Chancellor plays, he welcomes engaging with the opinions of a large section of the population, represented by Parliament. We are talking about crisis management here. It is an extremely important dimension. We all recognise the constraints; I am not sure that it is right that the legislation should so circumscribe those who advise the Chancellor. I beg to move.
Lord Sassoon
My Lords, the arguments represented by the amendment have been raised at virtually every stage of this Bill’s progress in both this House and another place. Indeed, my honourable friend the former Financial Secretary speculated that it seemed to reflect the Opposition’s obsession with dominant figures preventing any dissent emerging from within an organisation. That is probably more a reflection of where those concerns are coming from than anything to do with how the Bank of England operates. This is an extraordinary line with which the Opposition persist. I start by repeating what the Government have said on every previous occasion when this point was made. I agree entirely that frequent communication between Treasury Ministers and the senior executives of the central bank and financial regulators is important. However, there is absolutely no need to legislate to ensure that the deputy governors of the Bank and the chief executive of the FCA can speak directly to the Treasury. There is categorically nothing prohibiting that in the legislation or anywhere else. In fact, Treasury Ministers regularly meet the current deputy governor for financial stability and senior executives in the FSA. Senior Treasury officials maintain a virtually constant dialogue with the deputy governors and senior FSA figures via meetings, phone calls and e-mail. The same was true under the previous Government. I was a senior Treasury official in this area for three years. There were many things that did not work well under the previous regime—that is why we are changing it—but I know perfectly well from experience over a long period that official contact with deputy governors works extremely well. I see no reason why that should change in future. It has existed over a considerable number of years and is just a natural part of the way the system operates.
In a financial crisis where public funds were at risk, if one of the deputy governors or the CEO of the FCA felt that there was something that the Treasury should know about, they would of course be able to speak to the Treasury directly. They are senior figures who are well aware of their responsibilities and quite used to making their feelings felt. In the case of the deputy governors, as well as the CEO of the FSA and the future FCA, they will be in front of the Treasury Select Committee. It is extraordinary to suggest in some way that legislation should be required to allow those senior figures in the system to make their views clear, as they have always done in the past.
However, when it comes to the statutory duty to notify the Chancellor formally of a risk to public funds, this responsibility is rightly given to the Bank of England as an institution. In practice, I would expect that in most cases a notification would be made by the governor personally to the Chancellor, but there is no reason why one of the deputy governors cannot send it on behalf of the Bank. The key thing is that it must be a decision of the Bank. As the Government have made clear on multiple occasions, the Bank must come to a view internally about the best way to fulfil the duties and responsibilities that are placed on it, including the duty to notify the Chancellor of risks to public funds.
On the basis of that further explanation of the position, I ask the noble Lord to withdraw Amendment 190ZEF.
Lord Davies of Oldham
I am grateful to the noble Lord, who seems to have retaliated because of my failure to give him alpha plus last time by suggesting that I am guilty of excessive plagiarism in my arguments this time. If that proves to be the case, I apologise. However, I insist that he at least accepts that in tabling and speaking to these amendments we think that there is real substance to them and that the Government have a case to make in answer to them. I am grateful for the way in which he has presented that case.
Lord Davies of Oldham
My Lords, I rise briefly to say that it gives me considerable and indeed a rare pleasure to agree with the noble Lord, Lord Flight, and we support his amendment.
Lord Newby
My Lords, what we are talking about here is how we make sure that all those who should be consulted are consulted in respect of the work of the European supervisory authorities, the EU institutions and other international organisations. We are talking about the international dimension of the work of the financial services authorities as opposed to the domestic work that we have been looking at up to now.
We agree absolutely that consultation is an important part of the formulation of policy at the international level as well as the domestic level. It is perhaps worth starting by saying a bit about the way in which the international bodies themselves have sought to consult. The EU, following the Lamfalussy report in 2001, has increasingly appointed expert groups comprising industry, academics and consumers as the first stage of formulating policy. The UK has provided many distinguished members of those working groups. For example, the Commission set up a financial services user group, whose members included Mick McAteer, who was a founder director of the Financial Inclusion Centre, and Robin Jarvis, professor of accounting and head of SME affairs at Brunel University. We have therefore had strong UK representation on those European bodies for a long time.
One of the other main pillars of the international regulatory framework is of course the Basel Committee on Banking Supervision. It has consulted widely on its proposals for Basel III, and the Financial Stability Board’s charter clearly states:
“In the development of the FSB’s medium- and long-term strategic plans, principles, standards and guidance, the FSB should consult widely amongst its Members and with other stakeholders including private sector and non-member authorities”.
So at the international level, there has been growing recognition that the board itself needs to consult, and in many ways that will be the most effective level of consultation in respect of provisions that the board is making.
National regulators also have an important role to play in the consultation and feed their views through to the European supervisory authorities. The FSA already takes that responsibility extremely seriously, and the PRA and the FCA plan to do the same.
The regulators will be required to consult on any proposed new rules that are required to implement EU or international regulatory initiatives, except in cases of urgency. The FSA already does that. For example, in July this year, the FSA published a consultation asking for views on how to transpose Solvency II into the UK rulebook. In addition, the FCA and PRA’s contributions to international policymaking processes will be informed by engagement on an ongoing basis with the industry and other relevant bodies. That means that the views of affected parties will be considered at all stages of the policymaking process.
The UK practice has been a mixture of formal and informal consultation, which has meant that the regulatory bodies—the FSA and the Treasury—when going into negotiations in Brussels or at Basel, have taken a lot of trouble to gauge the views of the UK financial services sector and have sought to reflect them effectively. I may be wrong, but I think that the sector feels that that is the case.
Regarding the question asked about why the MoU does not deal with PRA-FCA co-ordination with the ERAs, the PRA-FCA memorandum of understanding is covered in new Section 3E(3)(a) on page 31 of the Bill. I am afraid that I cannot read that out at the moment, but I refer noble Lords to it.
My noble friend Lord Sharkey asked an extremely good question but, as I have explained regarding the way that the authorities are approaching co-ordination, even though not every last detail will be set out in a memorandum of understanding—and some clearly are—the authorities plan to take consultation extremely seriously. Apart from anything else, they have learnt through harsh experience that unless they have done that and are able to carry the industry with them, it just stores up more problems for the future.
I am convinced that the culture of the regulators is that they consult widely with relevant stakeholders and will continue to do that, and that it is not necessary to have an explicit provision in the Bill to ensure that that continues well into the future.
Economy: Deficit Reduction
Lord Davies of Oldham Excerpts(11 years, 10 months ago)
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Lord Sassoon
My Lords, I am not going to give a commentary on the IMF’s forecasts, or anybody else’s. We should wait until 5 December to see what the Office for Budget Responsibility has to say in its renewed forecasts.
Lord Davies of Oldham
My Lords, are we not experiencing a double-dip recession that is longer than any since the war, and is it not the case that forecasts are belied by the facts? The Government are borrowing £9.3 billion more in the first four months of this year than in the same period last year. How on earth can the Minister pretend that the present policy is working?
Lord Sassoon
My Lords, we have only to wait until 25 October to learn the third-quarter growth number; then we will know the latest state of play in the economy. As to the question about levels of debt, I find it extraordinary that a Front-Bench opposition spokesman should give us a lecture on debt plans. Does the noble Lord, Lord Davies of Oldham, recognise the recent IFS analysis of Labour’s plans, which said that under the so-called Darling plan, total accumulated debt would be £201 billion higher than under the present Government’s plans? That level of debt would see the AAA rating gone for a very long time and would see almost £4,000 of debt per man, woman and child in this country added to the debt load we inherited. Is that what the noble Lord is advocating?
Financial Services Bill
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Lord Peston
My Lords, I am a bit puzzled about the wording in the relevant paragraph. Of course, I agree with what my noble friend says about consultation. However, can the Minister explain why the word “would” appears in line 5 rather than “should”? Even if the Treasury thinks the order would have the described effect, it must certainly believe that it should have the effect. What is the point of the order if it does not achieve what it is trying to achieve? I am a bit puzzled about the word “would”. My noble friend’s amendment would make much more sense if “should” were inserted instead of “would”.
That leads me to my attempt to get my mind around what would actually happen in this case. It is immensely difficult because the provision substitutes material in this Bill for material in legislation that we do not have before us, which is always a problem. However, if we ask ourselves, “When would any of this order-making process occur?”, presumably the answer would be that it would occur when various outside bodies say that this matter is not being regulated, but must be regulated. In other words, what precedes the consultation is the fact that it is not certain at all that the Treasury would take the initiative in this. It is the acting body and is therefore the one that has to act when it comes to producing the orders.
Therefore, the built-in logic behind the entire new paragraph is the consultation process. Indeed, it is also part of the spirit of the age. One can go further and say that not merely is consultation part of the spirit of the age, but that interested bodies would undoubtedly be aware of these orders. Even if the Treasury does not consult them, those bodies will ensure that the Treasury knows what they think because they will get in touch with the Treasury and say either, “What you are doing is a good thing and we would like to support you”, or, “You do not know what you are doing and you ought to do it in a different way”. What my noble friend is putting forward helps the Bill to become much more sensible in practical terms, and it would become a fortiori more sensible if we were allowed to amend the language by inserting “should” for “would”. I think that would make infinitely more sense.
Lord Davies of Oldham
My Lords, I am grateful to both my noble friends who have spoken on this issue and very much agree with the arguments they presented. Amendment 149AB in my name merely seeks to take this matter one obvious stage further. My noble friends have put the emphasis on effective consultation so that the Treasury presents a position that is the result of informed judgment. However, the other part of informed judgment is that Parliament should reach a decision on what the Treasury has arrived at regarding such an important matter as the powers to amend Schedule 6 of the Financial Services and Markets Act. The Bill significantly changes the architecture, which is a phrase frequently used by the Minister. With our amendment, we are merely seeking assurance that, after effective consultation and deliberation by the Treasury, the orders are put before Parliament, whereby its views can be heard before anything comes into effect.
Lord Sassoon
My Lords, I shall try to assure the Committee that none of the amendments is necessary or appropriate. If the noble Lord, Lord Peston, will forgive me, I am not sure that we have a procedure for oral amendments. No doubt we shall have some interesting discussions about “must” and “may” later in this Committee session. Looking at this paragraph, in my opinion, x or y “will” be the case and, when written the other way, the word turns into “would”. If an opinion is that something will be the case, then “would” rather than “should” is entirely appropriate here. However, I have now fallen into the trap of getting into a debate on this non-amendment. Of course, if the noble Lord really insists, what can I do but give way?
Lord Davies of Oldham
“( ) In seeking to ensure an appropriate degree of protection for consumers, the PRA and FCA shall—
(a) require banks to provide clear and prominent warnings to consumers where deposits are not covered by the Financial Services Compensation Scheme; and(b) make and maintain effective arrangements to consult consumers on the prominence and method of such warnings.”
Lord Davies of Oldham
My Lords, Amendment 153A relates to that part of the Bill which refers to passporting, where a UK-authorised firm may be eligible to carry out its permitted activities in any other EEA member state, subject, of course, to its fulfilment of the requirements under the scope of the relevant single market directive. We are concerned about consumer protection for firms operating in other EEA states which originate in this country. The amendment, which is quite clear and self-explanatory, requires either the FCA or the PRA to require banks to provide clear and prominent warnings to customers where deposits will not be covered by the Financial Services Compensation Scheme. Everyone will know the anxieties that have occurred as a result of the proliferation of a vast range of banking activities. This is a question of the basic operation of the bank elsewhere, and we think that the Bill should contain a fundamental identification of the obligation of banks so that customers know exactly where they stand with regard to any resources they may have committed to the banks. I beg to move.
Lord Sassoon
My Lords, I completely agree about the importance of such warnings and clarity about what compensation schemes apply to particular bank accounts, which is precisely why it is already covered in the FSA’s handbook. As the noble Lord, Lord Davies of Oldham, may not be aware, section “Comp 16” of the FSA handbook requires precisely what the noble Lord requires. Firms from the EEA passporting into the UK are required to inform customers that they are covered by their home state’s scheme. Firms from outside the EEA are required to be separately authorised in the UK, so that they are covered by the FSCS. We completely agree on the importance of this and of raising consumer awareness of it. Again, lots of good stuff went on in many areas during the summer and this is another one. If the noble Lord and the Committee generally want to look at the press release, it was put out on 31 August and sets out details of the FSCS awareness campaign. The notes to editors in it make clear the different health warnings that have to be put down for UK branches of EEA banks and the precise form of words. I do not happen to bank with one of those banks; I bank with a British bank which now adds an extra page—it is not great for the environment, but the extra page sets out the details of the coverage of the FSCS and EEA banks are now required to do something similar.
The noble Lord makes a very good point, but I believe that we should leave it to the FSCS and the regulators to do what they are already doing, rather than writing inflexible requirements into legislation. The advantage of the current approach, as I am sure he will acknowledge, is that the regulator and FSCS can adapt their approach over time, but it is a useful matter for us to have spent four minutes on and I hope that the noble Lord is able to withdraw his amendment.
Lord Desai
I do not carry my bank statement with me, but I do carry my debit card.
Lord Davies of Oldham
My Lords, I am grateful for the additional contributions from the noble Lord, Lord Marlesford, and my noble friend Lord Desai, who at least emphasised the justification for our concern that we should make this issue as explicit as possible. My amendment would put it in the Bill. I accept what the Minister says on the enhanced flexibility of it being within the framework of the relevant regulators, but at times we need to assure the country that we are addressing ourselves to the very real anxieties that people have in the context of developments in recent years, particularly when considering this Bill. I accept the Minister’s remarks. He may be somewhat relieved that my batting average dropped below 100 as soon as I lost the first amendment this afternoon. It was some relief to me; even Don Bradman, after all, had an average of only 99.94, so I do not mind if it declines a little further, given the assurances that the Minister has given to the House.
Lord Davies of Oldham
“( ) provide for a requirement that an employee representative should be a member of the remuneration committee of a relevant body corporate; and( ) provide for a requirement that the remuneration consultants advising on remuneration policy shall be appointed by the shareholders of a relevant body corporate.”
Lord Davies of Oldham
My Lords, this amendment raises issues of enormous significance in this Bill and of course with regard to financial services generally. The whole nation is all too aware of the need for effective action on the remuneration of directors of companies.
In 1980, the median pay of the highest paid directors in FTSE 100 companies was £63,000; by 2010 it was £3 million. In 1980, the median wages were £5,400; in 2010, £25,900. In other words, the ratio of directors’ to employees’ median pay rose over the 30-year period from just 11 times to 110 times. That cannot be justified by any concept of performance of the companies. The same thing, of course, happened elsewhere. It is not just the United Kingdom. Almost the same figures are to be seen in the United States over that period.
Of course, it is not as if the crisis that we have gone through in the past five years has enormously changed things. In the past two years we have gone through a double-dip recession. We have seen FTSE share prices stagnating. We have seen significant public sector cuts and rising unemployment. The increase in pay for FTSE 100 chief executives in this period has been 12%, lower than in some years in the past, but how on earth can one justify these increases against an economy that is underperforming and companies that are inevitably reflecting such poor returns?
It would be remiss if this Bill did not quite specifically address the issue of directors’ pay. One important dimension of this is contained in the first part of this amendment; namely that,
“an employee representative should be a member of the remuneration committee”.
I am not holding out any great hopes that one individual on any remuneration committee is going to work wonders, but I am saying that it would force the remuneration committee, and directors, to take recognition of the absurdities of the past three decades and get things back into some proper balance between achievement and remuneration.
The second point of the amendment is also fairly clear. This situation has developed partly because the remuneration committees are not only hopelessly unrepresentative of the company, they are unrepresentative of anything or anyone except those who are benefiting from these high rates of pay. Consequently, there is an inevitable dynamic to build lavishly on the past. I do not excuse the public sector from this. We have seen it in the public sector, with similar increases in the relationship between chief executives of local authorities and the median pay of their workers—not in the same proportions as in industry and finance but nevertheless significant and unjustifiably so. You see the same factors at work; namely, that the remuneration committee is not significantly representative, and that the remuneration committee says, “Of course, in order that the reputation of our organisation should be enhanced or at least match a comparable organisation, we have to show that we pay our chief executive significant sums”.
We have got to get a grip on this situation. This Bill provides for remuneration to be considered. This amendment makes quite explicit two bases on which the Bill could be significantly and precisely amended to improve things. I beg to move.
Lord Sassoon
Again, my noble friend is ahead of me and I shall not make that point—I am addressing some very narrow and specific matters—but he is completely right that we could debate whether the interventions already being made are appropriate. He may say that that they are excessive; I would say, “Well, that is for the FSA and there are important issues”. But, yes, the FSA is very active in this area, specifically on remuneration consultants.
The suggestion that remuneration consultants be appointed by shareholders was looked at in the consultation but it was not widely supported. I am sorry that the noble Lord, Lord Davies of Stamford, did not spot it, but the proposal has been the subject not only of debate in this House in the past but of the recent consultation. It was not widely supported because of the costs associated with the appointment process and issues to be resolved about the remit and the flexibility of the proposal to accommodate new work. The benefits of the requirement would be uncertain.
However, a majority of respondents to the consultation said that more transparency over the use of remuneration consultants would be beneficial. Suggestions of areas for more transparency included appointment processes, advice provided, fees paid and management of conflicts of interests. The Department for Business is looking at ways in which it can improve transparency in the use of remuneration consultants by companies.
I am grateful to the noble Lord for raising these important issues, which are being taken forward in a wider context. The FCA will have all the powers that it needs to act in this area, as it does already—and as my noble friend pointed out—the FSA. I hope that, on the basis of that information, the noble Lord will feel able to withdraw his amendment.
Lord Davies of Oldham
Of course I shall withdraw the amendment, but not because the noble Lord, Lord Flight, has persuaded me that the FSA has been so much a busybody, so interfering and so effective that remuneration has never been an issue in the financial services. That argument runs counter to the facts on remuneration on which the nation as a whole has a firm grip.
I of course accept the chiding of the noble Baroness, Lady Noakes, that the Bill concerns only the financial services sector. I also hear from the Minister that it is extremely dangerous to take the first step because you might then stumble into the second step, and I am not sure that the Government are that committed to any significant strides forward on that at the present time. However, if the Minister is able to assure me that the development of ideas in the Department for Business is such that we are going to see legislation which gives some effect to the principles that I have adumbrated this evening and which helps to resolve what for the nation looks an outstanding scandal with regard to the issues of distribution of resources in our society, I go home with a little consolation and withdraw my amendment.
Lord Davies of Oldham
“137QA Advisory fees in respect of mergers and acquisitions
Either regulator may make rules (“fee structures in respect of mergers and acquisitions”) about the advisory or consultancy fee arrangements where an authorised person contracts a third party to give advice on the possibility of a merger or acquisition of control of any other body corporate.”
Lord Davies of Oldham
My Lords, I assure the Committee that I shall be brief, being cognisant of the passage of time. The amendment is simply the product of the FSA’s report—a report of great significance in which the noble Lord, Lord Flight, would be interested—into the RBS and its merger with ABN AMRO. We all know the significance of that merger and the disaster which befell RBS as a result of it. All that my amendment does is reflect the fact that the fees for the advice on that merger were extraordinarily high, disastrous though the merger proved to be. I merely suggest an amendment to the Bill which would add to the list of general rules the power for either regulator to make rules about consultancy fee arrangements in respect of mergers and acquisitions, and I think that the time is ripe for that. I beg to move.
Lord Sassoon
My Lords, the Government’s view is that, in general, decisions about advisory arrangements and consultancy fees are commercial decisions for firms themselves. However, the regulators could in fact already make the rules described in this amendment under the general rule-making power if they judged that was an appropriate way to advance their objectives. For example, if the PRA was satisfied that there was a problem with advisers being incentivised to advise in favour of high-risk mergers and acquisitions in a way that threatened the safety and soundness of PRA-authorised persons, it could step in to make rules to regulate the appointment of advisers.
Respecting the brevity with which this amendment was introduced, I should probably leave it at those two key reasons why we believe that it is redundant. I ask the noble Lord, Lord Davies of Oldham, to consider withdrawing it.
Lord Davies of Oldham
My Lords, I will certainly withdraw the amendment, having benefited from the clarity of the Minister’s reply—although I cannot say that I agreed with it.
Lord Davies of Oldham
“( ) Before the end of 2013, a regulator may, in consultation with HM Treasury, ask the Competition Commission to provide a report giving section 140B advice with reference to the Independent Commission on Banking recommendations on competition.”
Lord Davies of Oldham
My Lords, I am once again jettisoning a whole sheaf of notes in deference to the hour that we have reached. Amendment 173E, as part of the competition scrutiny provisions included in this Bill, calls for the Competition Commission, in consultation with the Treasury, to publish a report by the end of 2013 providing advice about the effect of regulating provision or practice,
“with reference to the Independent Commission on Banking recommendations on competition”.
The intention of the amendment is clear. It is to ensure that we make progress with regard to competition in banking, to show that we are in earnest about the necessity for early reforms and to use this Bill and the competition procedures within it to ensure that the maximum pressure is brought to bear on the competition authorities—and of course, behind them, the Government—to take as early action as is possible to remedy what the nation expects to be remedied in the light of the experience of the recent past. I beg to move.
Lord Sassoon
My Lords, this amendment is identical to one tabled in Committee in another place, where my honourable friend the then Financial Secretary set out the reasons why the amendment is not appropriate. There are three such reasons. First, 2013 is the wrong time for a review of progress against the ICB recommendations. The ICB report itself recommended that the earliest that the market should be reviewed is in 2015, when it will be clearer whether its recommendations have led to improved market conditions. Secondly, there is no convincing reason why this review, if there is to be one, should be limited in scope to the ICB recommendations themselves. There may be new issues that the ICB report had not considered in depth and which it would be expedient to review at that time. Thirdly, we do not need this provision to ensure that the banking sector receives appropriate scrutiny from the competition authorities in the short term. The OFT, for example, launched a review of the personal current account market in July this year, which is likely to consider some of the issues covered by the ICB. The OFT has a power to refer markets to the Competition Commission at any time if it considers that a feature of the market,
“prevents, restricts or distorts competition … in the UK”.
I am very happy to give those reassurances and clarifications to the noble Lord in the hope that he will withdraw his amendment.
Lord Davies of Oldham
My Lords, of course I will withdraw my amendment. However, the noble Lord should not anticipate that when a Minister speaks in the Commons, the Opposition automatically assume that he has always produced exactly the accurate response to our amendments, which we then accept, and that we are duly grateful for the greater wisdom of the Administration. Far from it—we often derive some considerable satisfaction from pressing them at some length on another occasion. However, on this occasion I have not got any length. I beg to withdraw the amendment.
Taxation: Avoidance
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Lord Sassoon
I suspect that it would be very difficult to estimate the benefits of the non-dom tax regime. The principal benefit is that we derive an enormous amount of business and employment from the fact that this country is relatively open to non-doms, and those benefits we must retain while at the same time making the non-doms pay their fair share. That is why the annual charge of £50,000 has been introduced by this Government and why we are clamping down on areas such as avoidance of stamp duty. We need to strike the right balance.
Lord Davies of Oldham
My Lords, the House will have noted that the noble Lord who supports UKIP is in favour of rich people not paying taxes against a background of the nation expecting the Government to pursue a vigorous drive to ensure that those liable for tax pay tax. The Minister indicated somewhat complacently that at 7.9% the deficit is lower than in some other advanced countries. But would he indicate whether that figure has been going down since this Government came into office and whether he anticipates a better figure two years from now?
Lord Sassoon
My Lords, the estimate of the tax gap in 2004-05 was 8.5% and it is now 7.9%. It still means that there is a tax gap of £35 billion, which HMRC will vigorously pursue. That is why only this week we made further announcements and consultations to make sure that aggressive tax schemes and the people who market them are targeted more effectively and why HMRC has reinvested £900 million of its spending in this spending round to target this area.
Financial Services Bill
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Lord Davies of Oldham
“( ) money laundering and the financing of terrorism”
Lord Davies of Oldham
My Lords, I beg to move Amendment 118F tabled by my noble friends Lord Eatwell and Lady Hayter. I assure the Committee that, as time is pressing, this contribution will be brief. We are rather more interested in the Government’s response at this stage, which we hope will be as positive as their responses have been to the last few amendments, and I hope that I can ride that happy tide until lunchtime.
The Bill defines financial crime as including an offence involving,
“fraud or dishonesty … misconduct in, or misuse of information relating to, a financial market, or … handling the proceeds of crime”.
We wish to add to that list money-laundering and the financing of terrorism. It will be evident to all noble Lords why we should put the emphasis on these two issues at present.
There was cross-party agreement on terrorist asset-freezing during the passage of the Bill passed at the beginning of this Parliament. It had a considerable genesis in the work which Labour Ministers had done in the previous Government but the Bill was taken through by the Conservative Government and of course we fully supported it so that it became an Act. The Act’s purpose was to continue the asset-freezing regime that we had previously sought to put in place. Of course, this amendment is moved two days after the allegations of money-laundering activity at HSBC made in a Senate committee hearing led to a matter that has exercised this House over the past couple of days—that is, the position of the Trade Minister. I do not want to dwell on that—it is something to be dealt with on other occasions—but the issue is clearly pertinent, and terrorism is bound to be at the forefront of all our minds against the backdrop of the enormous security arrangements which we are obliged to make for the Olympic Games.
The Bill seeks to define financial crime and lists three categories of crime, which I am sure the noble Lord will say are not meant to be totally exhaustive. However, the list surely ought to contain the two issues to which I have given expression and which are contained in the amendment. Why refer to fraud and dishonesty but not to money-laundering or the financing of terrorism? I am sure that the Minister has thought about these issues deeply and will have a convincing reply. However, it may just be that on this occasion he will say that he will consider the matter further and that we can come back to it on Report. I beg to move.
Lord Sassoon
My Lords, I can be brief on this. As the noble Lord, Lord Davies of Oldham, has explained, the amendment seeks to add money-laundering and the financing of terrorism to the list of matters that are considered to constitute financial crime. First, I should make it clear that the FSA is already able to take action in both these areas because the definition here is broad and the list of matters is indicative and not exhaustive.
On the issue of money laundering specifically, financial crime is defined as including the offence of,
“handling the proceeds of crime”.
Money laundering is plainly part of that—it is one way in which a person can handle the proceeds of crime—so there is no need to list it separately in the Bill.
Turning to the next part of the amendment, it struck me as somewhat odd that the definition of financial crime did not list as major an element as terrorist financing. It seemed a strange omission. I did a bit of research and actually the definition, which is picked up in the draft Bill, stems from FiSMA, the previous Government’s Bill drafted in the late 1990s. I do not intend to be critical of the drafting of the previous Bill but it was drafted when terrorist financing was not as significant a concern as it has since become. I think it would be a good thing to include terrorist financing in the non-exhaustive list in this Bill. The world has moved on. I can confirm that we will consider whether and how to amend the Bill on Report to include terrorist finance in Section 1H.
I am sorry that the noble Lord, Lord Davies of Oldham, seemed to think that I would not pick up his excellent suggestion that we have a look at this again. I am very receptive to all good ideas from the Committee, big and small. I am very sorry that the noble Lord, Lord Peston, is not in his seat because this is one of many concessions and willingnesses to listen to arguments. I should make it clear that I cannot promise that I will continue in this end-of-term spirit for the rest of the day. Even though this will make no substantive changes to the duties and objectives of the FCA, I am grateful to the noble Lord for drawing it to the attention of the Committee and I would ask him to withdraw his amendment on the basis of the assurance I have given him.
Lord Davies of Oldham
My Lords, there is a character in “Cabaret” who expresses herself with “I am overwhelmed,” and that is the only phrase I can think of that is apposite at this moment. I am very glad that I am able to catch the Minister in his wonderfully benign mood. If he can just sustain it to the end of the day we can probably deliver this part of the Committee stage by 7 pm. He has given warning that not all amendments will commend themselves to this extent but I am glad that this one has. I am grateful for his response and I beg leave to withdraw the amendment.
Financial Services Bill
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Baroness Noakes
My Lords, I support Amendments 144K and 144L, which are driving in the same direction, particularly in relation to insurance. Insurance companies have been the orphans: they have been tossed around Whitehall with the DTI and the Treasury; then they went to the FSA, where they were not the most important part of the FSA’s responsibilities; and now they know that they are being taken, rather grudgingly, into the Bank of England. They are worried that the particular features of their industry will not be given due weight, so the appearance of somebody with the requisite experience at board level is a minimum requirement. Because of the degree of concern in the industry, I do not think that it is enough simply to say, “Well, the Bank will do the right thing”—as I am sure the Minister is going to tell us in a minute. It is right that the Bill should reflect the concerns that exist in the industry.
Lord Davies of Oldham
My Lords, it is for the Minister to respond to those arguments for the specific interests regarding representation on the PRA, and I will be very interested in his response. The concern of the opposition amendments in this group is of a rather more general nature with regard to governance, which, as the principal rule by which it is all going to operate, is of the greatest significance.
Amendment 139B would ensure that each regulator must act in a way which follows principles of good governance, including having regard to the UK corporate governance code. I hope that the Minister will find no difficulty at all in accepting that broad principle on which the regulator should operate. Our two other amendments, Amendments 144M and 146A, are rather more specific.
Amendment 144M extends the principles to which the Bank must have regard when making public appointments to the PRA. The Bill states that it must have regard to general principles. We want them spelt out more specifically; that is why we have proposed the insertion of the words, “merit, fairness and openness”, in front of “good practice”, to give specific illustration of what we mean by good practice in this area.
Amendment 146A is a minor addition but an important public safeguard with regard to remuneration. No one in this House can ignore that remuneration at any level in financial services is an issue of great public concern and therefore will certainly be of concern with regard to the governing body of the PRA. At present, the PRA must pay its members,
“such remuneration as may be determined by the Bank”.
We want to add,
“with the approval of the Treasury”,
so that we have the necessary public safeguards on this issue.
Lord Teverson
My apologies to my noble friend Lady Kramer. I am thinking ahead and getting too far ahead in my own mind.
Amendments 144C, 144D, 144E, 147D and 147E refer to Schedule 3 and are very much in the area of the annual duties of the FCA and the PRA to make public their actions over the previous year. Apart from producing annual accounts, three methods of accountability are mentioned in Schedule 3. There is the annual report, which is the responsibility of both the FCA and the PRA; there is a public annual meeting for the conduct authority, but not for the PRA; and there is a consultation process for the PRA on the annual report that is followed by a further report by the PRA on that consultation. It seems to me that all three processes are not only admirable but essential for the full accountability of these important and key organisations both to the industry and the public.
My amendments would put the same responsibilities on both those organisations so that the FCA will also have a consultation process on its report, and a report on that, and the PRA would also have an annual public meeting. I note with interest the Minister’s remarks about one size not necessarily fitting both these organisations because they are very different. Clearly their responsibilities, actions and how they work are different but, in terms of their responsibilities to the broader industry and to the public, their responsibilities are very similar. That is why I think it is important that, as in my amendment, the Prudential Regulation Authority should have an annual public meeting. Again, the reasons seem to me to be pretty straightforward. Although the PRA has a relatively limited clientele compared with the FCA, its work, as we have seen through the financial crises of the past few years, is very relevant to the remainder of the financial services industry, customers of those institutions and to all taxpayers, who at the end of the day, if the regulators of those major institutions have been ineffective, carry the can for the cost of that regulation not working. For those reasons the very admirable process of annual accountability should be reflected in both organisations. On that basis I hope that the Minister will look favourably on these amendments.
Lord Davies of Oldham
My Lords, I have little to add to this debate. I will keep my remarks very brief, but they are remarks of some cheer. I never thought that I would from this Dispatch Box congratulate the noble Lord, Lord Flight, on an amendment, but I very much approve of his Amendment 130B, and the precision with which he spoke, as well as the noble Baroness, Lady Noakes, who has made such a contribution to our proceedings today.
Lord Sassoon
My Lords, I fear that again this is going to be relatively long one in which I will not be able to satisfy all my noble friends. I hope that my arguments will speak for themselves, but I have a suspicion that I might not quite be able to do it. Let me give it a go, because this is a series of important amendments.
Amendment 130B would add to the efficiency principle to which both regulators will be required to have regard when carrying out their general functions. The efficiency principle ensures that the regulators should have regard to using their resources in the most efficient and economic way. This is the principle in FiSMA at the moment, but we are going further. We have made the accounts of the FCA and the PRA subject to audit by the National Audit Office and provided that the NAO will be able to carry out value-for-money studies into the new regulators, as we discussed earlier today. This ensures an important line of accountability for the regulators to Parliament, through the Public Accounts Committee, in how they use public money.
If the regulators are required to consider minimising burdens on firms without any counterbalancing provision, they may be distracted from pursuing their focused objectives, particularly if one considers that minimising burdens on firms could be used as a rationale for inappropriate regulatory forbearance. Instead, the proportionality principle ensures that costs of individual regulation are balanced against the pursuit of regulatory objectives that will benefit the whole financial system and its consumers, by requiring the regulators to consider whether the burdens imposed on firms will be proportionate to the benefits brought about by that imposition.
Amendments 131 to 135, in the name of my noble friend Lord Hodgson of Astley Abbotts, look to amend the proportionality principle to which both regulators will be required to have regard when carrying out their general functions.
Given the importance of the proportionality principle to the new structure, I am very glad to have the opportunity to discuss it further via this series of amendments. Amendments 131 and 135 would add to the proportionality principle a requirement on the regulators to consider whether an operational rule or operational requirement is proportionate to the benefits which result from that rule.
I can assure my noble friend that the existing reference to a burden or restriction already includes burdens or restrictions which relate to operational matters. So when the regulators make rules or impose requirements which require firms to alter the manner in which they operate their business, they will be required to have regard to the proportionality principle.
In fact, my honourable friend, the Financial Secretary to the Treasury, tabled amendments to the Bill on Report in another place to ensure that the regulators will have to demonstrate how they have considered such matters when making rules.
Specifically, they will have to set out in the compatibility statements that they are required to publish when consulting on new rules, how they consider the proposals to be consistent with the principles of regulation in new Section 3B, including the proportionality principle. Amendments 131 and 135 pick up the important point that much of it comes in the operational matters but that it is picked up, and specifically that the requirements of the Bill were extended in another place, which makes Amendments 131 and 135—and Amendment 132, which is consequential—unnecessary.
Similarly, Amendment 133 seeks to add “firm” to the proportionality principle, so that the regulators will have to consider the burdens and restrictions placed on firms, adding to the current wording which uses the term “persons”. We may have touched on that before, but again, for the avoidance of doubt, if we have not mentioned that in Committee, I would like assure my noble friend that “person” is defined in the Interpretation Act 1978 as including,
“a body of persons corporate or unincorporate”.
Thus “person” includes individuals and other forms of legal person such as companies, partnerships and unincorporated association. So Amendment 133 is unnecessary.
Finally, Amendment 134 would add the words “reasonable and fair” to the proportionality principle. I agree that the regulators should be both reasonable and fair in the way that they pursue their objectives. I understand my noble friend’s concerns. He has taken us through a number of examples where he feels that the current regime is operating unfairly. I will certainly not detain the Committee by giving the other side of the case in each of those examples, but there is one. Part of what we are doing will work right through the structure only if there are changes of attitudes in lots of ways in which people go about their business.
I appreciate the argument that the best way of making people change their attitudes is to include certain things in the Bill. However, I know that the FSA and the PRA are reading these debates carefully and understand the spotlight that they are under. All these exhortations to them to do what, in this case, is my noble friend’s direction of travel, which I fully appreciate, are being listened to carefully. But the provision itself in Amendment 134 is unnecessary. The regulators have a duty under public law to act reasonably and can be challenged in the Upper Tribunal or by way of judicial review if they fail to discharge that duty, which would be broadly the case if the requirement were on the face of the Bill. The regulators are already under a duty to comply with the rules of natural justice—in other words to follow procedures and processes which are fair.
Amendments 144A and 147C would require the regulators to set out the costs and benefits of the regulation for which they are responsible in their annual reports. The regulators are already required to include in their annual reports a significant amount of information about how they have adopted a proportionate approach to delivering their objectives for the FCA, in new Schedule 1ZA(10) and for the PRA Schedule 1ZB(18). They must set out how they have complied with the regulatory principles, including the proportionality principle.
The financial services regulators are being brought within the statutory remit of the NAO, which I have said before, which will be able to carry out its own value-for-money studies. It would be excessive to add to this an annual requirement for the regulators to conduct their own cost-benefit analysis of the entirety of their regulatory activity.
Amendments 147D and 147E would require the PRA to hold an annual general meeting, as is required for the FCA. Amendments 144C to 144E would require the FCA to put in place arrangements to consult on its annual report, as is required for the PRA.
The Bill provides for the PRA and FCA to take different approaches to annual consultation on the effectiveness of their regulatory approach, and I welcome this opportunity to explain why that is the case. The provisions for an annual meeting under FiSMA provide a useful opportunity for stakeholders to make high-level comments on the FSA’s strategy and approach. Like the FSA, the FCA will supervise the conduct of all financial services firms. Given the wide range of issues under consideration, and the large number of firms, it is useful to have a single annual forum where stakeholders can voice their views. But as I said in discussing the last group, the PRA will be looking in much greater detail at a much smaller number of firms, and will be focused on complex issues of prudential risk. Given the PRA’s narrow focus and the complexity of the prudential issues it will tackle, a written consultation will be a more effective way of obtaining input from industry about how it has performed against its objectives. This will enable firms, consumer groups and others to put in detailed submissions addressing the PRA’s prudential approach in a level of detail that they would not be able to do in an annual meeting.
These are alternative, rather than complementary, mechanisms—horses for courses—and it does not seem necessary to subject both regulators to both mechanisms, and in doing so create additional cost.