Financial Services Bill

Lord Eatwell Excerpts

Consideration of Commons amendments
Wednesday 28th April 2021 Lords Chamber

[Baroness Kramer (LD)]

My Lords, we will not challenge this Motion. I cannot say that it goes as far as reassurance, but I think we are in a much better place to have the consultation and its characteristics in statute on the face of the Bill. I particularly thank the Minister and his team. I suspect they have been instrumental in making sure that the concerns, from all sides of the House, were communicated back to the Treasury and the Treasury team.

The Minister today repeated a number of the statements that the Economic Secretary made in the other place when he addressed this issue. I will highlight a few that were of particular importance to me. The FCA recognises that,

“the level of harm in markets is still too high and is committed to—”—[Official Report, 24/4/21; col. 867]

taking further actions. That is an important statement to have on the record. I am slightly concerned, however, that the focus of the FCA should not exclusively be on asymmetry of information. Asymmetry of information is fundamental and important, but it is far from everything. The Economic Secretary said that

“the FCA will consult in May on clear proposals to raise and clarify its expectations of firms’ actions and behaviours, and on any necessary changes to its principles to deliver this.”—[Official Report, Commons, 26/4/21; col. 84]

I hope that will not be confined simply to asymmetry of information, but as the Economic Secretary said, and the Minister today said, Parliament wants to be assured that the FCA’s ongoing work will lead to meaningful change. I think that reflects some of the frustrations expressed in this House of having had eight consultations to date and relatively little action. I hope this will lead to a great change.

In the amendment in lieu—this is perhaps something the noble Lord, Lord Eatwell will address more extensively than I—the fact that all consumers are part of the consideration is an important one. I want to use this opportunity to underscore to the Minister how urgent and significant this issue is.

When the Government’s amendment in lieu was passed, I got an email from one of the leading financial services lawyers in the country, and two things are pertinent. It said that it looks like this one is headed for the long grass again. I think that is partly because we are looking at action in 2022 and not immediately. The reason for that level of concern was, apparently, that audit firms are now saying that any credit risk between the client and the authorised firm should be counted as client money within the meaning of CASS—the protection of client assets and money. This is storing up some big problems when one of these babies—we are talking about firms that collectively have well over £10 trillion in assets under management—goes down and a judge finds that the trust is bust because they comingled client money with money that is not. Lehman Brothers, here we go again. I went immediately to the FCA site, and it is an excellent but sad example of the very limited powers that the FCA has to deal with such situations, because of the regulatory perimeter that limits a great deal of their potential for action to their definition of consumers. The issue has always been that that is a very narrow definition of consumer.

Every day we wait for a duty of care to become embedded in the system, we run significant risk. It is a risk that none of us wants—it has the potential to be limited to a small pool of clients, but also to knock the economy off its paces once again. It is important that there is an element of urgency built into all of this, that the issue is taken seriously and that there is not an attempt to narrow examination by and the focus of the FCA to simply something like asymmetry of information, but to consider the much wider picture before we end up with another crisis none of us wants.

[Lord Eatwell (Lab)]

My Lords, while we on this side of the House were hoping for action rather than further consultation, and we remain somewhat puzzled as to exactly what further the FCA has to learn that was not learned in the consultation of 2018 when it published a discussion paper entitled with some prescience, A Duty of Care and Potential Alternative Approaches. None the less, despite our desire for action and puzzlement in that respect, we welcome the tenor of the Government’s amendment.

In particular, I congratulate the Government on the clear acknowledgement that real harm is done today to millions of users of financial services by this famous asymmetrical relationship in financial transactions and that harm is done to those excluded from access to financial services. As evidence of this acknowledgement, I refer to the remarks just made by the noble Earl, Lord Howe, and also the remarks by the Economic Secretary to the Treasury, referred to by the noble Baroness, Lady Kramer. For example, Mr Glen said:

“The Government agree with the concerns that … this harm may in part stem from an asymmetry of information between financial services firms and their customers. The risk is that many firms may seek to exploit this asymmetry. The FCA is well aware of how informational asymmetries and behavioural biases can influence consumer behaviour, and is committed to ensuring that these issues are addressed where it considers that they may result in harm”.—[Official Report, Commons, 26/4/21; cols. 83-84.]


All I can say to that is: “Quite right too”.

I am particularly pleased that in new subsection 2(b) in their amendment, the Government refer to the need to extend the duty of care to “all consumers”. I urge the FCA to ignore the suggestion that a duty of care might be limited to “particular classes of consumer”. That way lies unnecessary complexity and the potential for error and injustice. Any inclusive list of “particular classes” is also a list that excludes. Confining the duty of care to particular classes would also eliminate the peculiar advantages of principles-based regulation, namely the flexibility of the principle in an industry of which persistent innovation is a defining characteristic. This is an advantage not to be sacrificed lightly.

In the debates on this issue—including those in the other place—not only Mr Glen, but the noble Earl, Lord Howe, the noble Baroness, Lady Kramer, and several noble Lords have referred to the prevalence of asymmetric information in retail financial services. As we know, this renders markets inefficient. In retail financial markets, asymmetric information results in excessive risk being loaded on to consumers. A duty of care will rebalance risk by shifting the balance of risk from the consumer back towards the provider, which in an efficient market is where it should be.

However, the FCA must be alert to a potential consequence. This may well result in some financial services providers deciding to withdraw from the provision of services where previously they happily dumped the risk on consumers. This increase in exclusion would be contrary to the intent and spirit of the Government amendment. We should therefore emphasise that having the status of an authorised person in financial services is a privilege, and with that privilege comes responsibility. Indeed, as Mr Glen remarked in the other place,

“authorised persons owe a duty of care to consumers.”—[Official Report, Commons, 26/4/21; col. 84.]

He is quite right. It is the responsibility of financial institutions providing financial services not to withdraw but, on the contrary, to play their full part in tackling financial exclusion. I am sure that the FCA will address this issue as it draws up its new general rules on the level of care.

Financial Services Bill

Lord Eatwell Excerpts

Report stage
Wednesday 24th March 2021 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I shall be very brief. I spoke on this issue at length in Committee. The Government may take note that every single speaker today from across the House has supported the concept of a duty of care and non-exploitation and has urged the Government to act.

In all the speeches, both before today and referenced again today, we have heard about this chain of malfeasance, whether it has been described as scandal or fraud or an abuse of customers. Clearly, the existing legislation does not work, or we would not have this kind of history with new scandals cropping up, sadly, on a regular basis. Like it or not, treating customers fairly is interpreted by both the industry and the regulator as exceedingly light touch, to be offset by the “caveat emptor” principle—the taking of personal responsibility—to which the noble Baroness, Lady Tyler, referred. This is unacceptable. This Government often say that they focus on outcomes. The outcomes have been unacceptable. Look at the outcomes and the chain of scandals. Here is the opportunity to act.

In response, the Minister might say that there are effective tools, such as the senior managers and certification regime. Anyone who has followed the progress of this Bill and the amendments through Committee will have heard how that has broken down. It has, in effect, become something of a busted flush. The Minister might say that scandals have been picked up very early because we have working whistleblowing channels. Again, from listening to the discussion throughout Committee stage, it is clear that this scheme is not working. The analysis in the Gloster report reinforces that.

We do not need a ninth consultation. Every time there is another major scandal, the FCA’s response is to have another consultation. In the end, there is something like a freckle of movement. This issue needs to be seized by the scruff of the neck and resolved before more people suffer injury. The regulator needs to be put on the front foot. By supporting this concept and this amendment or something equivalent to it, the regulator will finally be put on the front foot and the industry will recognise that it has been duly warned and must reconsider the way in which it behaves.

I hope that we shall hear from the Minister that we shall see an equivalent proposal at Third Reading because, if not, I will not hesitate to ask all my colleagues and every Member of your Lordships’ House to support any decision by the noble Lord, Lord Stevenson, to move this to a Division.

[Lord Eatwell (Lab)]

My Lords, during our debates on this Bill, we have referred several times to the success of principles-based regulation in this country. We have contrasted it with the more prescriptive regulatory structures introduced within the European Union. The idea of a duty of care is a prime example of principles-based regulation because it presents a principle from which particular actions can be derived. It is now very important, given the financial stresses created by the pandemic to which several noble Lords have referred in their contributions to this debate. This is but one example of the unexpected pressures in the financial system that arise on a regular basis, not least because of the fintech innovations referred to earlier which require a flexible, principles-based approach. The strength of this approach is that is encompasses financial innovation—the changes to which many noble Lords have referred.

I understand that later in the consideration of this Bill the Government will bring forward measures to regulate the “buy now, pay later” market. This would already have been encompassed in a duty of care. It would not have slipped through the gap. If there had been a general duty of care in place, consumers would have received some degree of protection already.

One of the striking things about the issue of a duty of care and the FCA rulebook is that a number of measures that amount to a duty of care exist in the rulebook already. There are “know your customer”, “treating customers fairly” and the consumer credit rules, which require assessment of creditworthiness. What is striking is that this specific list has gaps in it.

Many noble Lords referred to the examples of malfeasance; it is this structure that creates the environment for and encourages malfeasance. It encourages testing of boundaries and of gaps. If there were instead a broad principle it would significantly discourage that persistent, competitive drive to test the gaps that exist in the current list of consumer protection measures in the FCA rulebook.

It is not simply that the lack of a duty of care creates the inability to deal with malfeasance; it actually creates it by the structure it presents for a very competitive market. We all know that this particular structure—having a specific list of something in a legal document—always raises the question of what has been left out. That is exactly the case in the FCA rulebook. It lacks the firm foundation of principle.

In Grand Committee, the noble Baroness, Lady Penn, was quite right to argue in summing up that

“the FCA is already taking steps to ensure that financial services firms exercise due care and regard when offering products, services and advice to consumers.”

She was right that there is a list, but she was quite wrong to then argue that a statutory duty of care

“does not add to the FCA’s existing powers in this area.”—[Official Report, 22/2/21; col. GC 116.]

Of course it does. It must do, in one of the most dynamic industries in the United Kingdom, associated with innovation, change and competition. It is the very nature of successful principles-based regulation that actions should derive from general principles.

The FCA lacks this statutory declaration of general principle. This is why Macmillan Cancer Support’s campaign Banking on Change was necessary, and why it is so important to place a general principle of duty of care on the statute book. My noble friend Lord Stevenson has made a very specific offer to the Minister with respect to Third Reading. I strongly urge her to accept it.

[Baroness Penn (Con)]

My Lords, I am grateful to the noble Lords who have put forward this amendment, and I appreciate the strength of feeling that exists around this important issue. I also pay tribute to the arguments made in previous stages of this Bill, including in Grand Committee. Noble Lords have spoken passionately about the need to tackle issues of consumer harm that exist in the financial services industry, and I agree that it is essential that this issue is addressed effectively.

The Government are committed to ensuring that financial services consumers are protected and that steps are taken quickly to address issues when they are identified. The noble Lord, Lord Eatwell, argued for a principles-based approach to financial services regulation. That is what is contained in the FCA’s principles for business, which govern financial services firms’ treatment of their customers, as well as the specific requirements in the FCA’s handbook.

I hope noble Lords will not mind if I set out the principles of business, because that will help us in considering the amendment. The principles include:

“A firm must conduct its business with integrity … A firm must conduct its business with due skill, care, and diligence … A firm must pay due regard to the interests of its customers and treat them fairly … A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair, and not misleading … A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client … A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.”


These fundamental principles aim to protect consumers who often have less knowledge and expertise than the firms providing them services.

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[Baroness Kramer (LD)]

My Lords, my noble friend Lady Bowles has already indicated that she does not intend to call a Division on this amendment, which I think is right. However, this is probably one of the most important amendments that we have discussed under the umbrella of the Bill. It opens up a new area to consider: how we make our regulators accountable and whether the committee system and traditional structures of Parliament can do the whole job or whether support is needed from some additional bodies. What the noble Lord, Lord Davies, called an outside pair of eyes on this issue could be extremely useful to Parliament by bringing a particular expertise. There could be periodic reviews, looking, for example, not at the decisions made by the regulator but at its capacity and mode of operation—those core issues which determine whether a regulator is effective. The noble Lord compared it to a visit from Ofsted, which is probably a little light-touch and simple but it takes the conversation in the right direction.

I have a strong suspicion that three or four years from now, we will be back to this discussion and looking much at an independent arrangement to look at our various regulators in order to provide information when appropriate to Parliament, so that it can get on with the areas of scrutiny in which it has most capacity, which is to ensure that the rules fit with the mandate that Parliament has given it in primary legislation. This is an extremely important area with some very interesting thinking.

I hope that the Treasury takes note. It would be lovely if it was picked up in the financial framework review, but that might be hoping for too much. That review has gone on a very limited and very traditional route. It would be good to challenge it with some new thinking, and to open its process to break through and work out how effective accountability can be put in place. This affects our fundamental economy and the capacity of a Government to deliver on public services, so the consequences are significant. Real attention paid to this area would be exceedingly welcome.

I will not pick up the other scrutiny issues because we will deal with those on the second day on Report. I will discuss some of the letters we have had from the regulators then. However, I want to put down a marker that this is an area and a thought process that must be taken seriously. I hope that the Government see that as an opportunity.

[Lord Eatwell (Lab)]

My Lords, I was tempted to start my speech with the famous quotation from Juvenal, “Who guards the guardians?”. But, given the strictures by the Leader of another place against speaking in foreign languages—although he was referring to Welsh—I will instead begin with a different quotation, from the late Lord Keynes. In the introduction to The General Theory of Employment, Interest and Money, he says:

“It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics.”


Well, we have certainly had many examples of regulators believing foolish things. The sorry history of the regulatory response to the role of credit derivatives in the expansion of credit in the run-up to the financial crisis of 2007 to 2009 is a clear example of the folly of thinking alone. Hence, a periodic review of the thinking of regulators—whether the prudential regulator or the conduct of business regulator—would certainly be worthwhile; it would be a useful challenge to groupthink.

However, this particular aspect is not best achieved by three independent persons, because there would be a grave temptation to appoint three expert regulators—just the sort of people who would think in the same way. However, they would, no doubt, come up with recommendations that deal with the operational objectives in this amendment, so I see the review activity as falling into two parts: the operational assessment; and the core policy issues, about which I would have less confidence in the approach of the three independent persons. Peer reviews are all very well, but I assure you that any academic economist will tell you that they not only tend to embody the status quo but often stifle innovation and can perpetuate error.

That is why I and others in the House have argued that the intention of the amendment with respect to policy would be best met by a parliamentary scrutiny committee. It is the nature of parliamentarians to be sceptical, to pose without embarrassment the naive question, to entertain the views of mavericks and free-thinkers, and to relate the performance of any organisation to its statutory objectives—after all, they are responsible for the statutes. So we have two tasks before us: a review, as proposed in the amendment, which would be a valuable check and assessment of operational matters; and the review of policy and thinking, which could be the regular component of the work programme of a scrutiny committee.

But first, of course, we need the acknowledgement from Her Majesty’s Government that they would support the foundation of such a scrutiny committee, giving it appropriate powers to work with the regulators in an effective and constructive manner and to commission regular reviews of policy issues of the sort sought by the noble Baroness, Lady Bowles. We will discuss this matter later; so much hangs on the issue of the general scrutiny of the activities of regulators, voiced by Members on all sides of the House, that we will certainly return to this matter later in consideration of the Bill.

[Earl Howe (Con)]

My Lords, as the noble Baroness, Lady Bowles, has helpfully explained, the amendment seeks to introduce a statutory obligation for the Treasury to launch an independent review of the financial services regulators every two or three years, and sets out the topics that such a review would need to cover.

I will begin by saying that I absolutely understand where the noble Baroness is coming from in tabling the amendment; indeed, having yesterday reread the two very eloquent speeches she made on the subject in Grand Committee, and having listened today to the noble Lord, Lord Davies of Brixton, my mind, like that of the noble Lord, Lord Eatwell, also turned to the Roman poet Juvenal’s famous question. The noble Baroness is concerned about the need for oversight of those who oversee, and I entirely appreciate her reasons for wanting reassurance on that issue. However, where she and I differ is over her contention—express or implicit—that there is currently a deficiency of mechanisms to provide meaningful oversight of the regulators and to ensure that they are working effectively. I set out a number of these mechanisms in Grand Committee; they include tools both for examining detailed operational or policy matters and for scrutinising more general, overarching issues. This I think was part of the distinction made by the noble Lord, Lord Eatwell.

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[Baroness Kramer (LD)]

My Lords, I am grateful to the noble Baroness, Lady Noakes, for bringing forward these amendments. I have to confess that I am not keen on Amendment 5 because it seems that it would create an opportunity for various institutions to use the change in the benchmark in a way that would be abusive to a customer, who would then have no redress.

Amendment 5 goes too far, but Amendment 6 makes perfect sense to me. Frankly, I find it extraordinary to think that the Government have not seized it and put “government” in front of it. We will face tough legacy contracts and there needs to be a sensible and appropriate way to deal with them. Amendment 6 captures that exactly as it should. I hope very much that the noble Baroness, Lady Noakes, will get a positive reply on Amendment 6 from the Government, otherwise there will be litigation and a mess, and I am not sure that that helps anybody.

[Lord Eatwell (Lab)]

My Lords, we should all be grateful to the noble Baroness, Lady Noakes, for her persistence in this vital area. She is quite right that the clock is ticking: with nine months to go, we really need to do something about this issue; to do otherwise would be irresponsible.

Amendment 4 is valuable in defining continuity of contract, but there remains a problem that it does not and cannot solve: if the foundation of a contract is changed, its value can change. That leads on to Amendment 5. Here, I regret to say that I differ with the noble Baroness, Lady Noakes, and with the noble Baroness, Lady Bowles. It is surely the responsibility of Parliament in this case primarily to protect the retail investor, as it is the retail investor who is not the professional, who typically does not have the same information as the professional and who is likely to be more financially vulnerable, not least because retail investment is dominated by pension savings. I therefore conclude that the provision of a safe harbour is inappropriate in this case and would be looking instead for some mechanism of reconciliation rather than prevention of claim.

However, I am delighted to express my support for Amendment 6—which is not surprising as my name is on it. Here the noble Baroness, Lady Noakes, has actually saved the Government from considerable embarrassment by presenting an amendment which succinctly encapsulates, without being prescriptive, the issues the FCA must address in facing the difficulties created by the replacement of Libor: continuity of contract and reconciling the damages. Unlike Amendments 4 and 5, Amendment 6 incorporates those. I express strong support for Amendment 6 and recommend it wholeheartedly to the Government. In terms of the buffet approach, it is the healthy option.

[Baroness Penn (Con)]

Noble Lords will remember from previous stages that the Bill provides the FCA with the powers to manage an orderly wind-down of a critical benchmark such as the Libor benchmark.

In 2015, the Financial Stability Board recommended a transition away from certain interest rate benchmarks, including Libor, to alternative rates based on active and liquid underlying markets. In 2017, the FCA secured agreement from the panel banks that contribute to Libor that they would continue submissions until the end of 2021, providing time for firms to move away from use of the Libor wherever possible.

However, it has been clear for some time that there will be certain “tough legacy” contracts that will be unable to transition away from Libor in time. It is for the benefit of these contracts that the Bill grants the FCA the power under Article 23D of the Benchmarks Regulation to direct a change in how a benchmark is calculated, so that the benchmark can continue for a limited time after banks stop providing their contributions. The Bill therefore represents a critical step in providing for a smooth transition away from Libor, mitigating the risk of the financial instability and market disruption that could be caused by a disorderly transition or end to Libor. It has been widely welcomed by the financial services industry and internationally.

The proposed amendments seek to supplement the Bill’s provisions, reducing further the scope for uncertainty, contractual disputes or litigation between parties over the reference to a benchmark within a contract where the FCA has directed a change in the methodology on which the benchmark is calculated. Amendment 4 seeks to provide for contract continuity where the FCA uses its Article 23D power to impose a change in the methodology of a critical benchmark, providing that parties must interpret references to that benchmark in their contracts as references to the revised benchmark. Amendment 5 seeks to reduce the scope for litigation where the FCA has exercised its Article 23D power on a critical benchmark, providing a safe harbour for the use of that benchmark.

As stated in Committee and in the other place, the Government are committed to ensuring that an appropriate framework is in place for the orderly wind-down of Libor. We take this matter very seriously. As my noble friend Lady Noakes noted, the Government’s consultation on this issue has only recently closed, on 15 March. The consultation responses have underscored that there are complex and wide-ranging policy and legal considerations that must be fully understood before taking any further action on this issue. That range of considerations and views has been illustrated by the range of views expressed in this evening’s debate, but my noble friend Lady Noakes is correct to say that the industry has indicated, including through its responses to the consultation, that it is supportive of the approach set by the Government in the consultation.

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[Lord Eatwell (Lab)]

My Lords, the measures in this Bill that refer to Gibraltar essentially create a single financial market, and an essential component of a single financial market should be a single registry standard. So I want to ask the Government about their approach to this. When they decided to promote the measures in the Bill in support of Gibraltar, did Her Majesty’s Treasury conduct a review of the Gibraltar registry, and could the Minister tell us the result of that review? For example, could he tell us whether the Gibraltar registry is as transparent as that of Companies House?

Noble Lords will be well aware, after Committee, that my opinion of the Companies House registry is pretty low, in particular regarding its inability to provide a verified register of beneficial ownership, which is at the foundation of the right reverend Prelate’s concern with tax issues. So could the Minister assure us that the Gibraltar registry has a verified register of beneficial ownership, as well as being transparent?

[The Minister of State, Cabinet Office (Lord True) (Con)]

My Lords, I certainly regret, along with others, that the right reverend Prelate was unable to be here to speak to his amendment, but we fully understand the reasons for that. Obviously, the House has great respect for his expertise in these financial matters. We are grateful to the noble Lord, Lord Sikka, for delivering aspects of his speech.

In response to the noble Lord, Lord Sikka, who raised an issue relating to state aid, I should say for the record that the issue he raised is a legacy state aid issue, relating entirely to the period when the UK was a member of the European Union. The Government of Gibraltar have already recovered some of the aid and continue to work to recover the outstanding aid, in compliance with the European Commission’s decision to bring this case to a satisfactory conclusion as fast as possible.

Financial Services Bill

Lord Eatwell Excerpts

Committee stage
Wednesday 10th March 2021 Grand Committee

[Baroness Kramer (LD)]

My Lords, in many of the groups of amendments to the Bill we have discussed the issue of accountability, and it has been a very important discussion. However, we have also discussed the necessity to have proper evidence and information to make that accountability worthwhile, valid and effective. These amendments follow exactly that direction.

One of the pleas that I will put in is that an impact assessment should be studied and then reviewed. The noble Lord, Lord Tunnicliffe, is not speaking in this group of amendments but I can think of numerous occasions when he has spoken on a financial services Bill and pointed out that the information in the assessment did not seem to answer any of the obvious questions that a sensible person would ask in order to understand the regulations involved. I would join him in that. We seem to have narrow definitions of what an impact assessment is, and it seems to me that it should do what it says on the tin. It ought actually to assess the impact in a way that is meaningful to the regulation or piece of legislation in front of us.

This push for evidence and information, and quality in both, is an important thrust of the conversations and debates that we have had around the Bill. I very much hope that Ministers take that on board, because this is starting a pressure that will not go away. In fact, for the Government, if they want to produce the highest-quality legislation possible, the discussion created by developing a high-quality impact assessment will lead in the end to far better legislation.

[Lord Eatwell (Lab)]

My Lords, my initial reaction to the amendment of the noble Baroness, Lady Neville-Rolfe, was to puzzle over exactly what sort of impact assessment she had in mind. Was she perhaps thinking of the famous remark by the noble Lord, Lord Turner, that the banking sector in the UK does much that is not socially useful? After all, the ultimate rationale for regulatory activity is the enhancement of the common good—the goal of good government.

However, this debate has clarified the issue before us, which is that an effective impact assessment requires not just thorough analysis but a definition of an objective or, perhaps, objectives. The lack of clear objectives is the key weakness of Amendment 103. Amendment 104, therefore, is much stronger in that it lays out a number of objectives against which an impact assessment might be calibrated. The key to resolving the dilemma—I apologise for sounding a bit like a broken record—is to take the parliamentary role referred to in Amendment 103 and combine it with the sense of Amendment 104. An effective parliamentary process and, dare I say, a parliamentary committee, could define the objectives to be addressed in any impact assessment of the type referred to in Amendment 103—“We want to know the impact of this regulation on problem x, y or z”—and then seek annual reviews focusing on matters that are deemed to be important at any given time, thereby avoiding the template issue referred to by the noble Baroness, Lady Noakes.

That is what is missing from the amendment—a means of making the impact assessment an effective means of acquiring information and an insight into the thinking of regulators, which can then be scrutinised in a coherent and consistent manner.

[Earl Howe (Con)]

My Lords, as my noble friend Lady Neville-Rolfe has explained, these amendments bring us to the question of how we report on the impact that regulation has on firms. Every noble Lord who has spoken today has referred to the value of impact assessments for Parliament and the Government in particular, and I do not dissent from that general proposition. My noble friend Lord Trenchard in particular spoke about the value of measuring the burden imposed by certain EU rules when we were an EU member. I hope that it is of comfort to him if I remind him that the Chancellor has said that decisions about financial services regulation after the end of the transition period—we have of course now passed through it—would be based on what was right for the UK, taking account of what is necessary to ensure financial stability, market integrity and consumer protection.

Amendment 103 would require the Government to lay impact assessments for each of the regulations made under the Bill. It would also require the PRA and the FCA to publish any rules made using the powers in the Bill in draft, alongside an impact assessment. I do not believe that the amendment is necessary, as the Government and the regulators are already committed to identifying and publishing the expected impacts of subsequent rules and regulations made under the Bill.

The Government have of course published an impact assessment alongside the Bill. In line with the guidance set out in the Government’s Better Regulation Framework, the impact assessment sets out HM Treasury’s current understanding of the costs and benefits of the measures. Where appropriate, further details will be set out in the impact assessments that will accompany the secondary legislation made under the Bill. I remind my noble friend Lady Neville-Rolfe that the regulators are required by FSMA 2000, with some very limited exceptions, to undertake a cost-benefit analysis for proposed new rules, and to publish those alongside their draft rules as part of their consultation. The PRA and FCA have already published their first consultations on the draft rules that they intend to make in relation to the prudential measures in the Bill, and they include comprehensive cost-benefit analyses.

Amendment 104 would require the Secretary of State to report on the impact on business that measures taken by the regulators and the Government to regulate financial services may have, and particularly to report on the impact on small businesses, innovation and competitiveness. We have spoken at length in this Committee about competitiveness, and I hope that I have demonstrated how importantly the Government take this issue. Additionally, my noble friend Lady Penn recently wrote to my noble friend Lady Neville-Rolfe about how the Government support smaller financial services firms.

I am sure that my noble friend Lady Neville-Rolfe does not need to hear me say that the Government are committed to ensuring that the financial services sector supports competition and innovation, allowing new firms to compete and grow. Of course, both the FCA and the PRA have a statutory objective to promote effective competition.

In earlier debates, we have talked about the new accountability frameworks that the Bill puts in place for the prudential measures. Those require the PRA and the FCA to have regard to UK competitiveness, among other things, when making rules to implement Basel or the investment firms prudential regime. They are required to report on how having regard to that has affected their proposed rules. The FCA and PRA are of course already required to prepare annual reports, which are laid before Parliament for scrutiny. These reports cover the extent to which the regulators’ objectives, which include promoting effective competition, have been advanced, and how they have considered existing regulatory principles in discharging their objectives.

On this basis, I hope that my noble friend Lady Neville-Rolfe agrees that I have said enough to make her feel comfortable in withdrawing her amendment.

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[Baroness Kramer (LD)]

I was in the middle of saying that we need the FCA to be much more aggressive and transparent in its pursuit of wrongdoing within the financial services industry. I gave the example of what I considered to be real weakness in the way that it handled the HBOS Reading fraud and in its treatment of Jes Staley, chief executive of Barclays. As we discussed earlier, he was fined by the PRA and FCA, under the senior managers and certification regime, something in excess of £600,000 for, among other things, hiring private detectives to try to hunt down the identity of an internal whistleblower.

I note that it was the US authorities—one of the New York regulators, I think—that fined Barclays $15 million for the same behaviour, not the UK authorities. Some Members of your Lordships’ House may be aware that the US regulators visit the UK—I have certainly met with the CFTC when they have been doing this—in order to get the message over to bankers here that, if they come across any wrongdoing that potentially has an impact on the United States, as well as informing the UK regulators they should also make immediate contact with US regulators, who start from a position that they will be far more aggressive in hunting down wrongdoing.

I am afraid that the reputation of the UK for hunting down wrongdoers is not good. I wish we did not see ourselves in that position. That is one of the reasons why I am hopeful for an office of the whistle- blower. If there is any suspicion that a Minister had intervened inappropriately, it is through a whistleblower that that information would be exposed. We need an absolute safe haven for such a whistleblower to make contact, in order for that exposure to happen. Again, I look forward to hearing from the Minister how the Ministerial Code impacts on a situation such as this. If it does not, or is ineffective, the answer seems to me to be: strengthen the Ministerial Code.

[Lord Eatwell (Lab)]

My Lords, my noble friend Lord Sikka has made a powerful case for greater transparency in regulatory matters. I think it is clear to everybody that nothing undermines confidence in the regulatory system so much as the sort of cases to which my noble friend referred. What is often evident is that these matters eventually come out, and so the traditional rule that the cover-up is worse than the original transgression exerts itself once again.

The Government have made a virtue of transparency and openness in several aspects of the regulatory system. Not least, for example, we have discussed in this Committee the case of beneficial ownership, and we heard the noble Baroness, Lady Penn, make the argument for transparency of the beneficial ownership record of Companies House as a great virtue at an earlier stage of our considerations. Surely that commitment to transparency should be quite general, covering all regulatory matters, and not limited just to selected parts of the regulatory system.

[Earl Howe (Con)]

My Lords, Amendment 107 would require the FCA to make a public statement on the nature of any intervention a Minister may make into an FCA investigation into an individual firm.

The current legislative framework established the FCA as an independent, non-governmental body responsible for regulating and supervising the financial services industry. I listened with great care to the noble Lord, Lord Sikka but, with respect to him, and without belittling the value of lessons from history, the examples of investigations that he cited are ones that are unrelated to investigations carried out by the Financial Conduct Authority. That is a key point because, although the Treasury sets the legal framework for the regulation of financial services, it has strictly limited powers in relation to the FCA.

The Treasury is the FCA’s sponsor in government but, in view of the regulator’s independence, it is not appropriate for the Treasury or Ministers to seek to intervene in individual cases. In particular, the Treasury has no general power of direction over the FCA. I will write to the noble Baroness, Lady Kramer, on the content of the Ministerial Code, but I am not aware of any loopholes in the code that would permit the kind of conduct that has been talked about.

We are talking here about an independent organisation. The independence of the FCA is vital to its role. Its credibility, authority and value to consumers would be undermined if it were possible for the Government to intervene in its decision-making. I realise that the noble Baroness, Lady Bennett, has some mistrust of Government Ministers, but I hope that that fact is of at least some reassurance to her.

That is not to say that the FCA is not accountable for its actions when investigating potential wrongdoing or malpractice by firms because, equally, the noble Baroness, Lady Bennett, should be reassured that the FCA is governed by the framework of duties set out in legislation by Parliament. It would be unlawful for it to act outside this framework in order to further vested interests. The decisions of the FCA can be subject to judicial review and, under legislation, the FCA must maintain arrangements for the investigation of complaints.

In the event of a significant failure to secure an appropriate degree of protection for consumers, where those events might not have occurred but for a serious failure in the regulatory system, Section 73 of the Financial Services Act 2012 imposes a duty on the FCA to investigate. Situations can arise in which the Government determine that it is appropriate to intervene. In such situations, the relevant legislation—Section 77 of FSMA —provides a mechanism for the Treasury to direct the FCA to conduct an investigation where it suspects that there may have been regulatory failure.

Under Section 77, the Treasury can require the regulators to conduct an investigation into relevant events where the Treasury considers there to be a public interest. In addition, Section 77 investigations can consider aspects outside the regulatory system as established by FSMA, allowing a comprehensive review to be undertaken in the public interest. However, it is important to note that a Minister cannot use a Section 77 direction to do anything else at all, or to stop the FCA doing anything else.

The most recent example of Section 77 in action was in relation to the regulation of London Capital & Finance, when the Economic Secretary to the Treasury laid a direction before Parliament on 23 May 2019, and formally directed the FCA to launch an independent investigation. The direction was public and transparent, as we would always expect to be the case. The report was laid before Parliament on 17 December 2020.

I hope that this has clarified the legal underpinning of the FCA’s independence, and the very limited powers that Ministers and the Treasury have in this area. I hope that what I have said has reassured the noble Lord that appropriate legislation is in place, and that he is content to withdraw his amendment.

Financial Services Bill

Lord Eatwell Excerpts

Committee stage
Monday 8th March 2021 Grand Committee

[Baroness Kramer (LD)]

My Lords, in this area I cannot pretend to have the scope of knowledge or the expertise of my noble friend Lady Bowles or the noble Lord, Lord Sikka, but I have a great deal of sympathy with their amendments which comes from long frustration with trying to deal with banking standards. I probably had some small part to play in the focus that the Parliamentary Commission on Banking Standards applied to looking at IFRS and other banking frameworks. I would defy almost anybody looking at the published accounts of Northern Rock, HBOS or RBS to have identified how fragile those institutions were and how easily they would crack the moment any pressure was applied to the very fragile arrangements they had in place. It is no wonder that it was missed by the regulators if they were looking at the disclosures that came from those institutions. They were not falsified; it is just that working your way through the disclosures very often discloses very little.

I spent a good part of my banking career trying to extract real and consistent information from accounting statements. That was largely in the States, so we were using GAAP, which I think many people will acknowledge tells one a lot more than IRFS ever does, but a bank has the resource to do that kind of deconstruction for a potential or existing credit client. Investment firms have the resources to do that kind of deconstruction, and so do regulators, but for any normal investor, and certainly for any smaller creditor such as a trade creditor, it is impossible to have those resources, as it is for any normal politician, even if in the end we carry the buck, in a sense, for whether or not we have a system that works. Over many years, the only clients who ever handed me a straightforward deconstructed set of accounts were Warren Buffett and Charlie Munger, who headed up the GEICO insurance subsidiary. They did it simply because they felt that bankers should know what was going on. That is a good enough recommendation for any company or regulator.

[Lord Eatwell (Lab)]

My Lords, I have sympathy with the concerns behind these amendments. As the noble Baroness, Lady Bowles, and my noble friend Lord Sikka have spelled out so clearly, there is an intimate link between accounting standards and effective prudential regulation. It is probably true that nothing has a greater impact on policy than the manner in which relevant variables are measured.

That relationship between accounting standards and prudential regulation has been exposed just this last week with the collapse of Greensill Capital, a supply chain financing firm. Its business model was based on flaws in UK accounting—that was how it worked. As the Financial Times reports:

“While a company that uses supply-chain finance owes money to a financial institution, accountants do not class these facilities as debt. Instead a company typically books the money owed in the ‘trade payable’ or ‘accounts payable’ line of its balance sheet, mingled in with all the other bills owed to suppliers. While a footnote to the accounts might explain how much of this line is made up of money actually owed to financial institutions, rather than suppliers, there is no requirement to disclose it.”


Lack of disclosure means that the supply chain has proved popular with struggling companies looking to mask their mounting borrowings. When nervous lenders remove these facilities from heavily indebted companies, it can create an effect similar to a bank run on their working capital position, whereby that quasi bank run then escalates into risk to the financial services sector. Who really suffers? Typically, it is the SMEs at the origins of the supply chain. Greensill is not an isolated example. Parliamentary investigations into the collapse of the Carillion group, already mentioned, found that it made heavy use of the Government’s supply chain finance programme. MPs investigating the outsourcer’s demise said that the scheme allowed it to “prop up” its failing business model.

This is a major concern in the prudential management of the financial services sector in the UK. If accounting standards and methods do not accurately represent the fragility or strength of an institution, especially a financial institution, they severely compromise our efforts at prudential regulation.

A quite different prudential and market conduct risk created by accounting standards arises from the fact—again already mentioned—that while the UK’s accounting standards apply IFRS, the US maintains its own GAAP different standard. Are the UK Government pursuing negotiations with the US Administration to encourage the adoption of a common standard, perhaps one that accurately represents the risks present in financial institutions?

The issues raised by the noble Baroness, Lady Bowles, and the noble Lord, Lord Sikka, require urgent consideration, not just by the accounting profession but by Her Majesty’s Treasury and by the prudential regulators.

[Earl Howe (Con)]

My Lords, as we have heard, Amendments 74 and 77 concern accounting standards. I have listened carefully to what the noble Baroness, Lady Bowles, and other Members of the Committee have said. It is perhaps best to begin by making a key distinction: the objective of accounting numbers is to show a true and fair financial position of a company; the objective of regulatory capital numbers is to provide information to the regulators in meeting their supervisory objectives. These are different numbers used for different purposes.

Amendment 74 proposes a kind of conflation of those purposes by requiring UK banks to align their accounts prepared under international accounting standards with their regulatory capital equivalent where the regulatory capital number is lower. My noble friend Lady Noakes rightly made the point that I have just made: these accounting standards are international. It is in the UK’s interests to maintain convergence with international accounting standards—IFRS—set by the International Financial Reporting Standards Foundation. The IFRS bring consistency to financial statements and allow investors easily to compare the financial statements of companies across the world. It is therefore consistent with the Government’s aim of ensuring that the UK retains its reputation as a global hub for business for the UK to continue to adopt these standards.

The amendment would result in financial statements of UK banks not being prepared in accordance with those international accounting standards. UK banks wishing to maintain listings abroad would however still need to prepare a second set of financial statements. The UK prudential regime for banks is supported by detailed regulatory reporting. It is these reports and other data gathered from firms that are the basis for prudential regulation, and not financial statements and annual reports.

A subset of the information contained in the regulatory reporting is published in the form of what is referred to as Pillar 3 reports. These reports include details of the regulatory capital held by banks. Therefore, while Pillar 3 reports are not identical in form to financial statements prepared for accounting purposes, they already provide a significant amount of the information sought by this amendment.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, once again, I am moving outside of any area where I can claim expertise. Essentially, I have no problem with short selling in the right place and time and under the right regulations, but I am concerned that, in the current environment, any move to look at the regulations again would listen more closely to the noble Lord, Lord Sharpe, the noble Viscount, Lord Trenchard, and the noble Baroness, Lady Noakes—in other words, look for opportunities to reduce the restrictions on short selling.

We have had a number of exchanges on short selling in the Chamber. The noble Lord, Lord Leigh of Hurley, is particularly vocal, and I do not think that I represent him unfairly by saying that he believes that the restrictions on short selling that were set in place in 2012, which severely limited naked short selling on AIM, are too onerous and that relaxation would be a good thing. He would argue for bringing more liquidity into AIM. I remember that campaign, which was strong and led by companies that were either listed on AIM or wished to be so but that were concerned about becoming the target of speculators who were not interested in supporting sustainable growth but were very interested in bubbles. Of course, this is a risk that goes alongside naked short selling in particular.

I suspect that this issue will be reviewed; I am sure my noble friend Lady Bowles is right that it should be done in a much wider context—I think the noble Lord, Lord Holmes, agreed with that. But I would not work on the assumption that this comes from a concern that rules need to be tightened and safeguards increased; this will very quickly become a process of trying to see whether we can return to the old animal spirits and largely casino-like speculation that once fired London so powerfully and which many of us think largely contributed to the financial crash in 2007-8. While I understand the concerns of the City of London that it needs to make itself more of an exception in order to gather increasing amounts of business, I am rather disturbed if that mode of exception is to allow a great deal more risk to be taken in ways that then impact on the real economy.

[Lord Eatwell (Lab)]

My Lords, this request for a review of short selling is essentially a request to focus on just one of the aspects of the financial markets today that may contribute to enhanced instability in times of stress. It is not just short selling that involves the sale of borrowed assets—this is what the repo market, for example, is all about. The repo market was central to the dangerously short-term funding of the banking sector in the run-up to the financial crisis of 2007-9.

Of course, short selling is prominent because it is a factor in falling markets, when money is being lost, as opposed to similar practices in rising market bubbles, when money is being made. Of course, the short sellers sometimes get their comeuppance, as has been mentioned by several noble Lords in reference to the case of GameStop. The fundamental question is not whether short selling is a process that can be abused—of course it can. What is important is whether the very existence of the practice contributes to market instability and risk or, as has also been argued, to price discovery and greater liquidity.

Those questions may be asked of many practices in our financial markets today, and, at a time when the UK is rethinking its economic and financial future after leaving the European Union, perhaps the time is right for such a wider review of permitted practices. This could begin with consideration of the impact of trading in borrowed assets—as well as, of course, naked transactions—in forward markets.

Since the liberalising years of the 1970s and 1980s, a wide range of these market practices have developed, with potentially serious destabilising consequences—indeed, we have seen these. As such, does the Minister agree with the many noble Lords who have argued that it is time to stand back and think through whether matters have gone too far, are just right or have not gone far enough? Perhaps such a review is too specific for the regulatory framework review that is going on at the moment because, after all, that is about the framework. However, it is necessary to consider, from time to time, practices that will inevitably have downsides but may also have upsides. That sort of consideration should not be delayed at a time when market regulation is changing significantly, with the exit from the European Union.

[Baroness Penn (Con)]

My Lords, it is important to stress, as a number of noble Lords have done, that short selling is a legitimate investment technique that can contribute to orderly and open markets supporting many consumers. Taking short and long positions can ensure that investors are able to manage risk and volatility in their portfolio, particularly during uncertain times; for example, if a firm has purchased a large number of shares, that firm might want to short some of those shares if they have a volatile price.

As my noble friend Lady McIntosh of Pickering ably set out, the UK’s regulatory regime for short selling is predominantly set out in the short selling regulations, which were introduced in 2012 to regulate short selling practices while safeguarding companies and the financial system. Among other things, it requires persons to notify the FCA of the size of their short positions in shares traded on a UK trading venue. It also gives the FCA various powers to intervene in response to exceptional circumstances that pose a serious threat to financial stability or market confidence in the UK. These include requiring the notification or disclosure of short positions, as well as restricting short selling to periods of up to three months. Furthermore, the FCA can temporarily prohibit or restrict short selling when the price has fallen significantly during a single trading day relative to the closing price of that instrument on the previous trading day. This regime is working as intended, providing the necessary safeguards to allow the operation of a fair and effective market. The Government continue to work closely with the regulators and market participants to monitor the effectiveness of the entire regulatory regime to ensure that legislation continues to be fit for purpose and delivers on its objectives, in particular to support economic growth and maintain financial stability.

As my noble friend Lady McIntosh of Pickering noted on the example of GameStop, the UK short selling regime was not breached because it does not apply to shares admitted to trading on US trading venues. Furthermore, the regime that I have just set out that applies to short selling would mean that in such a scenario in the UK the FCA would have been able to identify short positions building up and would have been able effectively to engage with the firms holding the short positions in that case.

I am not sure that I recognise the characterisation of the Bank for International Settlements’ report set out by my noble friend Lady McIntosh of Pickering, but I will happily write to her on that matter.

A number of noble Lords have spoken, from different perspectives, in favour of a review of short selling. In response to a number of direct questions about what jurisdictions such a review would look at or whether it would look at relaxing or shoring up such regulations, at this point the Government do not see this issue as the most pressing area of financial services regulation to look at. We see no need to conduct a review of this legislation at this time, so I ask my noble friend Lady McIntosh to withdraw her amendment.

--- Later in debate ---

This is a live arrangement that constantly tries to strike that balance between proper information co-ordination and groupthink, and that is the territory on which we need to remain. I am very concerned about any change that drives us towards a more unified regulatory structure where inevitably one group begins to take the lead and dominate the other. We need that balance to make sure that challenge remains in the system and that conduct, which has always been the Cinderella activity, is on a par with prudential regulation.

[Lord Eatwell (Lab)]

My Lords, those of us who were involved in the discussions on the Financial Services Act 2012 will no doubt remember the debate in which the noble Lord, Lord Sassoon, then speaking for the Government, revealed that the principals of the tripartite committee—the noble Lord, Lord King, Gordon Brown and Howard Davies—had never met. He then revealed that the committee had slowly moved down in terms of the seniority of the officials who attended, and it was basically steadily downgraded into complete irrelevance. It was a co-ordinating committee between the Bank of England, the Financial Services Authority and the Treasury, and it did not meet. What this suggests to me is that an effective committee to deal with some of the issues of co-ordination, which have been referred to by the noble Lord, Lord Blackwell, in moving his amendment, must have an organic purpose identified and shared by the participants. There must be, if you like, some enthusiasm about the operations of the committee which encourages everyone to participate fully.

In the discussion we have had on this amendment, I have been struck by the nostalgia for the FSA. I shared with the noble Baroness, Lady Noakes, the feeling that breaking up the FSA was unnecessary. Indeed, I think it was mainly done to show that something was being done rather than having to face up to the intellectual, analytical and groupthink failures to which the noble Baroness, Lady Kramer, referred. However, if there is the problem which the noble Lord, Lord Blackwell, has identified, the noble Baroness, Lady Noakes, has once again come up with the right answer, which is that there would be an organic interest of both to work together if they had to report to a suitably well-resourced and tough parliamentary committee which then ensured not only that the conditions of the MoU were being followed but that other identified overlaps were being dealt with in a productive way. So I think we come back once again to the debate we had concerning parliamentary scrutiny and identify, yet again, a positive role for Parliament in this respect.

[Earl Howe (Con)]

My Lords, this debate has taken us back to a number of the issues that were brought sharply into focus during the passage of the Financial Services Act 2012. It has been useful. I therefore begin by assuring the Committee that the Government agree that we now have an important opportunity, not least in the wake of our exit from the EU, to review our regulatory framework and ensure that it is high-quality, agile and fit for the future. I assure my noble friend Lord Trenchard in particular that we will progress the future regulatory framework review as a priority and take specific action in high-priority areas, as I have set out in previous debates. I hope noble Lords will forgive me if I do not rehearse the remarks that I made in our earlier debate on competitiveness—a subject to which we will return, I am sure.

Amendment 86 seeks to establish a new joint co-ordination committee for the PRA and FCA to ensure that their activities are consistent and proportionate. Of course, the Government agree that it is important that the PRA and FCA work closely together and take a co-ordinated approach to the regulation and supervision of firms. However, I respectfully submit that this amendment is not necessary to ensure that that is the case. As my noble friend Lord Blackwell noted, the PRA and the FCA have different statutory objectives, which will naturally—and, on occasion, rightly—lead to differing priorities as these objectives are pursued.

I note the reservations expressed by my noble friends Lady Noakes and Lord Trenchard. However, this model was agreed by Parliament in the Financial Services Act 2012 as part of the post-crisis reforms, and the Government and regulators have taken a number of actions to support and improve co-ordination between the institutions while they carry out their different objectives. I believe that this addresses in a very real way the issue that my noble friend Lord Blackwell seeks to highlight through his amendment.

As mentioned in the amendment itself, there is already a memorandum of understanding between the FCA and the PRA, as set out in the Financial Services and Markets Act as amended. The MoU sets the framework for co-operation on a number of issues, particularly dual-regulated entities. In April 2020, the regulators introduced the new Regulatory Initiatives Grid, supported by a senior co-ordinating forum. The grid’s purpose is to increase co-ordination across the regulatory landscape. It provides a user-friendly overview of upcoming changes to allow the sector to plan for the future more effectively.

The senior co-ordinating forum is chaired jointly by the chief executive of the FCA and the chief executive of the PRA. It discusses the combined impact of regulatory initiatives across the financial services sector, and seeks to allow the Government and regulators to identify and address any peaks in regulatory demands on firms. The forum also provides a clearer picture of upcoming initiatives so that firms are better placed to plan for them, supporting the regulatory principles of proportionality and transparency.

I hope that those remarks are helpful in providing the background to the co-ordination that we have seen put in place and that, therefore, my noble friend Lord Blackwell will feel sufficiently reassured to be able to withdraw his amendment.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, I shall begin by addressing Amendments 100 and 105, which would require reports that would be both useful and interesting. However, I want to pick up the point that was made by the noble Baroness, Lady Noakes, who essentially took the position—I understand its logic—“Why bother to seek equivalence from the EU?” I think she said, “They wish us ill and see a competitive advantage in not offering equivalence.” However, I do not think she listened carefully to my noble friend Lady Bowles, who comes with a great deal of experience from the EU. The point my noble friend made is that in the EU, which is a rules-based organisation —that is its absolutely core fundamental structure—it is quite hard to offer equivalence to a financial centre where those who are regulating it make it very clear that they want great flexibility to be able to make change very easily and with very little process. That is what we are doing with this Bill.

Essentially, we are removing the normal parliamentary processes that would have been engaged in the process of changing regulation and leaving it in the hands of the regulator, with, as we have all discussed, virtually no accountability to Parliament. It seems from what we read that a 12-week consultation would be about all that is required for a regulator to change the rules, compared with the process in the EU, which people may regard as cumbersome but which has with it extensive consultation, engagement and oversight, and which flushes out exactly what is associated with, what is involved with and what the consequences are of that rule change. We will now have light-touch rule change—that would be an accurate way to describe it. In an atmosphere where there is very little trust—the language certainly has not been that which would develop and promote trust—I can certainly see why the EU would be uncomfortable with the idea of offering equivalence in those circumstances. Therefore, it is not a determination to do us ill but, to a significant degree, some shock that change will happen so often that it will have very little idea of the rule base that applies in the UK and certainly will not understand its various ramifications.

However, in a sense it really does not matter. I find it quite shattering that we have a Government—the noble Baroness, Lady Noakes, seems to be aligned with them—who say, “We are really not interested in being able to sell our services into the second-largest economy on the globe”—whether measured by population or in terms of GDP. That is a huge and significant market. We have never been successful at selling financial services into the United States, partly because it has its own, very stalwart financial services sector. I suggest that selling financial services into China will be exceedingly difficult over many years. China will wish to develop its own financial centre; it has Hong Kong. We begin then to look at countries across Asia and in South America. However, I think we will find very shortly that they intend to develop their own financial centres. When I have talked to people in India, they would be willing to do some work here with people in the UK but they want to develop Mumbai. We are seeing a regionalisation of economic blocs, which will lead to a rise of significant financial centres in other locations across the globe. There is a real danger in dismissing with a wave of the hand the customers who sit on our doorstep, who have traditionally been our core customers, and saying, in essence, “It really doesn’t matter whether we are able to sell them services. Let’s look elsewhere.” I am not sure that “elsewhere” looks quite so promising.

What I found most interesting in this whole debate was a very different set of questions raised by my noble friend Lady Bowles. To me they were, if you like, the financial services equivalent of the chlorinated chicken question. As we go out and seek to sell our financial services more broadly, presumably, many of those locations will turn to us and say, “You can sell to us provided we can sell to you. We’re developing our financial sector and we would like to have access to your markets.” My noble friend was asking: what standards will we be using to determine that reciprocity? As I say, it is the chlorinated chicken question. We have not heard much—or anything, frankly—from the Government about what standards we will apply under those circumstances.

It seems to me that, when we assert that we can find markets all over the globe that will take the place of the EU—and that this can be done rapidly and very easily—we have to answer that question. Are we going to have to pay the price of providing reciprocity to financial centres whose standards do not meet our own? What are the consequences of that if those entities are then freely able to enter the UK market? We have a long history of concern about money laundering and market abuse. There are very serious questions associated with that; I would like to begin to hear some answers.

[Lord Eatwell (Lab)]

My Lords, I have been very struck by this particular debate and the positions taken by Members of the Grand Committee. I approach this question of our future financial services relationship with the European Union with a sort of historical perspective. In a way, the financial services industry in this country is unique in the history of financial centres in that it is a financial centre without any significant savings or economic hinterland. The great financial centres of history—be it Venice, Amsterdam, 19th-century London or 20th/21st-century New York—have thrived on a powerful flow of domestic and imperial savings, and have tended to fade when that flow has dried up.

The fact that the City of London has continued to thrive even as Britain has lost its Empire and the UK economy has lost its dominant position is no doubt due to a remarkable concentration of talent and entrepreneurship; to the remarkable luck of widespread access to financial markets around the world; and to becoming, as the noble Viscount, Lord Trenchard, pointed out, the financial centre of the European Union. The international liberalisation of the 1980s and the creation of the European single market gave the City access to that economic hinterland and the opportunity to provide financial services throughout an open market.

As we know, the openness of the European market for financial services to the UK is now in question. As this Bill makes clear, access that was previously open is now potentially closed and hanging on this delicate thread of equivalence. It is interesting to see that the Bill is nervous about equivalence. On page 65, we read that

“the FCA must consider, and consult the Treasury about, the likely effect of the rules on relevant equivalence decisions.”

On page 82, we read that

“the PRA must consider, and consult the Treasury about, the likely effect of the rules on relevant equivalence decisions.”

That nervousness is well founded. I agree with the noble Lords who have been critical of the European Union that the likelihood of equivalence being the foundation of successful financial activities for the City’s continuing growth in Europe is at least in great doubt. Indeed, just imagine the chief executive of a big international bank or an asset manager with a large number of employees in London telling the board of directors that they are planning their long-term investments on the shaky foundations of a political equivalence ruling by Brussels.

At the moment, the only thread that seems to be at least holding and maintaining the potential of access to a market of 500 million people is the memorandum of understanding, which was due in June but is still apparently debated. However, a draft that was leaked to the Politico website

“states categorically that equivalence findings remain unilateral decisions, meaning the U.K. would have no recourse if the EU opted to withdraw it.”

The draft does propose the creation of an EU-UK financial regulatory forum but this resembles the arrangement with the United States that is defined as “strictly informal”. I think that access will be diminished, perhaps significantly. That is the only certain conclusion we can make. Perhaps the Minister will tell us more about the progress of the memorandum of understanding when he sums up.

Financial Services Bill

Lord Eatwell Excerpts

Committee stage
Monday 1st March 2021 Grand Committee

I hope that this amendment drives the Government to sit back and think. Accountability is not criticism. We do not say to our schools, “You’re bad schools, therefore we have accountability”. Accountability is an important part of the general dynamic, and in this area of financial regulation, oversight, encouragement, advice and review have to be deeply embedded in the system. So I hope very much that people will take the import of this amendment and be supportive of it.

[Lord Eatwell (Lab)]

My Lords, one of the most important elements in this amendment is set out in the explanatory statement provided earlier by the noble Baroness, Lady Bowles, which says that the proposed general review is

“not linked to specific fault or failure”.

When we consider the history of the development of both international and domestic financial regulation, it has almost always been reactive: a model of crisis, then response. As a result, regulatory reform has typically been made in an atmosphere of crisis rather than an environment of thorough, calm consideration. So a periodic report by a skilled group might enable our regulatory system to get ahead of change in financial markets rather than persistently lag—and change, as we know, is persistent and indeed accelerating.

Another important factor that favours the proposals by the noble Baroness, Lady Bowles, is the extraordinary complacency evident in the documents issued with the Bill and in those issued so far that are associated with regulatory framework review. Organisations that in the past displayed a total lack of understanding of systemic risk in the markets they were supposed to be regulating should not resist external scrutiny and advice from well-informed parties; indeed, such external scrutiny would be in the national interest.

However—I am afraid I now come to that word—given the assurances of the Minister in summing up the debate we had on parliamentary scrutiny, I wonder whether we are at risk of creating too many committees and too many reviews. A well-resourced parliamentary scrutiny committee, which I trust the Minister has in mind, would recruit expert, experienced advisers to help them in the discharge of their responsibilities and would conduct periodic reviews. I must say that I was struck by the comment by the noble Baroness, Lady Kramer, that the buck stops with Parliament; indeed it does. I therefore suggest that it would be more fruitful for this Committee to concentrate on ensuring that well-resourced parliamentary scrutiny is indeed introduced, rather than taking the path suggested by the noble Baroness.

[Earl Howe (Con)]

My Lords, this amendment would require an independent review of both the FCA and the PRA every five years, and it sets out a number of things that the review would have to cover. The FCA was created to ensure that relevant markets work well. In practice, that means regulating the conduct of firms to make sure that the financial services sector is serving the interests of individuals, businesses and the economy as a whole. It has a broad remit and is responsible for regulating nearly 60,000 firms.

I accept the point made by the noble Baroness, Lady Bowles: the recent investigations by Dame Elizabeth Gloster and Raj Parker have shown that the FCA does not always get this completely right. However, the FCA is wholly committed to learning from past mistakes. It is addressing the recommendations in both these reports and we can see that commitment being translated into action.

The FCA has set out how it will accelerate its ongoing process of reform, including through its transformation programme led by the new CEO, Nikhil Rathi. It has committed to provide public updates on progress every six months, and it is right that the Government and Parliament hold it to account on delivering these important changes. The FCA absolutely knows what it needs to do, and that it needs to do it under a spotlight, both from the Treasury and from Parliament.

That is one part of my answer to my noble friend Lady Noakes, who asked me how the Government assure themselves that the regulators are fit for purpose. But the noble Baroness, Lady Bowles, spoke about the need for assurance and the noble Baroness, Lady Kramer, similarly, on the need for accountability. I reassure all three noble Baronesses that there already exist a number of mechanisms to hold regulators to account, both to Parliament to the Treasury. I believe that these existing mechanisms are sufficient to achieve the outcomes that this amendment is aiming at. I touched on some of these points in my previous remarks to this Committee, but I will attempt to provide a short summary here.

First of all, the regulators are required to produce annual reports and accounts, which are laid before Parliament by the Treasury and certified by the National Audit Office. The regulators are subject to full audit by the National Audit Office, and the NAO has the associated ability to launch value-for-money studies on the FCA and PRA. The FCA is subject to scrutiny via departmental Select Committee hearings, including the Public Accounts Committee and the Treasury Select Committee, which holds regular six-monthly meetings with the FCA CEO and Chair. The Treasury Select Committee scrutinises the appointments of the FCA Chair and CEO posts, and the Treasury has direct control over appointments to the FCA board and powers under the Financial Services Act 2012 to commission reviews and investigations.

The Treasury is also able to launch investigations under Section 77 of the Financial Services Act 2012 where it suspects there may have been regulatory failure. There are a number of informal mechanisms as well: there is nothing to prevent a Select Committee of either House launching inquiries, taking evidence on them, and reporting with recommendations; that is a decision for them. In speaking to Parliament about this Bill, both the PRA and FCA have stressed that they are committed to appropriate parliamentary scrutiny and will always respond to requests for engagement. Combined, these measures ensure that there is sufficient independent scrutiny of our regulators.

I am the first to agree that this is particularly important in light of Dame Elizabeth Gloster’s findings, but I reassure the Committee that, in addition to these measures, the Economic Secretary meets frequently with the FCA CEO to monitor progress on these critical reforms and ensure that the FCA remains focused on effectively delivering against its objectives. Of course, however, as we have discussed, the future regulatory framework review is considering the appropriate accountability mechanisms for the regulators, so this will provide an opportunity to consider these issues further. I hope that these remarks are helpful and sufficiently reassuring to the noble Baroness to enable her to withdraw her amendment.

--- Later in debate ---

I have no grip on what the degree of exposure is for small businesses. We know that this is global, as it involves not just UK businesses and citizens, and the outstandings on a daily basis calibrated to Libor exceed $35 trillion. How this is going to work its way through, I honestly do not know, but if it goes nastily wrong and small businesses are exploited as a consequence, that will be a second set of stains on London, and I do not want to see that.

[Lord Eatwell (Lab)]

My Lords, the Libor scandal has precipitated a regulatory nightmare. How is the FCA to fulfil its statutory responsibility to ensure that markets function well when one of the foundation stones of those markets, the Libor benchmarks, are to be discontinued and replaced by untried underpinning?

The change in benchmarks is not only a problem for individual contracts, it is a systemic risk that the measures in the Bill do not—the FCA itself admits—entirely mitigate. To quote the FCA:

“Where parties to contracts referencing LIBOR cannot reach agreement on how those contracts would operate in the event of LIBOR’s cessation, discontinuation could cause uncertainty, litigation or loss of value because contracts no longer function as intended. If this problem affects large volumes of contracts it could pose risks to wider market integrity of contracts/financial instruments.”


The section in the Bill dealing with benchmarks attempts to limit the potential damage. The FCA describes one area of potential damage in these terms:

“This is to cater for a scenario where either a benchmark administrator informs the FCA of its intention to cease publication of a critical benchmark, or where contributors to the benchmark have notified the administrator of their intention to withdraw submissions to the benchmark before the relevant provisions in this Bill are commenced.”

Note that this is a plausible scenario in the FCA’s view.

How is it to be met? Among other measures there is the totally unrealistic proposal in Clause 9(3) that the FCA

“compel the administrator to continue publishing the benchmark”.

I cannot think of anything more likely to precipitate the systemic events that the FCA wishes to avoid. Then, remarkably, it amends Article 22(b) so that the FCA must provide

“a written notice stating that it considers that the benchmark is not representative of the market or economic reality that it is intended to measure or that the representativeness of the benchmark is at risk”.

What do we think that would do to the markets?

Despite the attempts in the Bill to deal with the cessation of the publication of a benchmark, there is, as the House of Commons Library notes suggest,

“risk of legal challenge and prolonged market uncertainty”.

That is the core of the problem that the Libor scandal has precipitated. I admit that the clauses in the Bill do their best to mitigate the risk, but even the authors of this section know that there is no entirely satisfactory solution. All they can do is cross their fingers and hope for the best.

The greatest risks are in retail markets: the ordinary family investor or, more pertinently, the ordinary family’s pension fund and, as the noble Baroness, Lady Kramer, said, small companies. They are the ones who are really at risk. There is nothing in this Bill to protect retail customers from that risk. When the Minister replies to this debate, perhaps she could reflect on the protection that should be provided for retail customers should the worst fears of the FCA be realised.

Amendment 44 in the name of the noble Baroness, Lady Noakes, seeks further to strengthen the defences against the plausible scenario by introducing continuity of contract when a benchmark is changed. This is an undoubtedly worthwhile addition to the armoury. It does not prevent adverse market reaction and loss of value—that problem remains—but at least continuity of contract will be there.

As I see it, Amendment 45 removes protection from the retail customer by preventing

“claim or cause … or liability in damages”.

This may well be unfortunate. The noble Baroness referred to claims companies. Pernicious though they may be, they were often the only recourse of the retail customer. As I understand it, the administrators of benchmarks could implement these changes themselves because powers that are given to them under Article 23D, where they are granted discretion, allow them to implement changes themselves, without concern for any consequent damages inflicted on holders of particular financial instruments. While I understand the thinking behind this safe harbour, I fear that it stands in stark contrast to the lack of protection for retail customers. Having read this section of the Bill carefully, I feel that the benchmark consultation is clearly necessary. The problems have not as yet been solved.

[Baroness Penn (Con)]

My Lords, as this debate has illustrated, when you hear about Libor it is hard not to think about the benchmark’s manipulation in the wake of the financial crisis. However, since then there has been substantial reform to the regulation of benchmarks and significant improvements have been made to the governance and controls around the submission and administration of Libor itself.

As a result of declining activity in the wholesale lending market that Libor seeks to measure, in 2015 the Financial Stability Board recommended a transition away from certain interest rate benchmarks including Libor to alternative rates based on active and liquid underlying markets. As Andrew Bailey remarked in his speech on Libor wind-down last summer,

“Public authorities and market participants … have … been working together to transition away from reliance on Libor for a number of years.”


It remains of the utmost importance that firms continue to prioritise the move away from the use of the Libor benchmark where possible. We need to reduce the number of contracts that refer to the Libor benchmark as much as possible before the agreement between the FCA and panel banks to continue submissions to Libor to facilitate this transition ends. For most Libor currencies, that is the end of this year.

However, it has been clear for some time that there will be certain tough legacy contracts that will not be able to transition away from Libor in time. In May 2020, the Working Group on Sterling Risk-Free Reference Rates highlighted the need for legislation to support these contracts. Without government intervention, parties to these contracts would be left without a means of determining contractual obligations when panel bank submissions cease, resulting in significant disruption.

Shortly after that, the Government announced their plans to give the FCA the powers to manage an orderly Libor wind-down through this Bill in a manner that protects consumers and market integrity. This includes legislation to deal with these tough legacy contracts. The UK was the first country to set out an appropriate regulatory framework to manage the wind-down of critical benchmarks, and this legislation has been very well received by industry.

My noble friend Lord Holmes and the noble Viscount, Lord Trenchard, asked about synthetic Libor. The proposed legislation does not prescribe what a synthetic benchmark might look like but allows the FCA flexibility and discretion as to what methodology change it might choose to impose. For example, the FCA could use this power to direct a change to Libor’s methodology so it is no longer reliant on panel bank submissions. The FCA has recently consulted the market on its proposed policy approach to using this power.

Turning to the amendments, Amendment 44 would require that where the FCA has used the powers given to it in this Bill to impose a change in the methodology of the benchmark, that new benchmark must be interpreted as the same benchmark in any contracts which reference the original benchmark. Amendment 45 seeks to reduce the scope for litigation where the FCA has exercised this power.

Since the introduction of this Bill, the Government have received representations from some key industry participants, highlighting a residual risk of disruption and potential litigation that they are concerned would remain even once the FCA has exercised its powers under this Bill. This risk is separate from the wider risks and impacts on markets that would materialise if the Government had not introduced legislation under this Bill, and it is this potential residual risk that these amendments seek to address. I appreciate noble Lords’ interest in this important issue and I reassure them that the Government are committed to looking at it and, if necessary, providing industry with any reassurance it needs. But I will now turn to the two fundamental reasons why we are unable to accept these amendments.

First, critical benchmarks such as Libor are widely used in a diverse range of products and contracts across the economy, so any action of the kind proposed in this amendment would affect a wide range of individuals and businesses. This must be taken into account before determining whether and how to act. As the noble Baroness, Lady Kramer, and the noble Lord, Lord Eatwell, have described, this would impact people outside the financial services industry.

Secondly, these amendments would intervene directly in private contracts, restricting the ability of contractual parties to seek legal redress were they to disagree with the imposition of synthetic Libor. I am sure that noble Lords agree that any such interference would need to be carefully considered and designed to be as narrow and targeted as possible while achieving the intended effect. It is therefore critical that the Government consider to the greatest extent reasonably possible the full range of Libor-referencing contracts and the impact any legal provisions, such as the ones proposed in these amendments, would have on parties to these contracts before deciding how to proceed on this issue.

For example, I am concerned that Amendment 45 would provide wide legal protection to parties using the revised benchmark against all forms of claim or causes of legal action associated with the exercise of the FCA’s Article 23D(2) power, as opposed to a more targeted form of legal protection. I have not yet been convinced that such a wide-ranging legal protection is appropriate, and it could have serious and significant unintended consequences.

For these reasons, the Treasury published a consultation specifically on this matter on 15 February, which is currently open for responses. This will allow us to properly consider these issues with the benefit of feedback from a broad range of Libor users. As the consultation is still open, I cannot say at this stage whether the responses provide evidence that a provision of this nature is necessary, or how such a provision should be structured, but I reassure noble Lords that the Government take this matter very seriously. Guided by the evidence gathered through this consultation, the Government will be well placed to decide if an intervention along the lines that these amendments intend is appropriate. I therefore ask that these amendments be withdrawn.

--- Later in debate ---

[The Lord Bishop of St Albans]

My Lords, Amendment 46, in my name and those of the noble Lord, Lord Sikka, and the noble Baroness, Lady Bennett of Manor Castle, probes whether the reporting requirements on financial firms operating from Gibraltar in the UK market are sufficiently robust, and it questions whether we might find a way to make them more transparent. The Gibraltar authorisation regime continues the established practice of companies operating from Gibraltar in the UK, which is why it is important to review whether the UK taxpayer receives a fair deal from this arrangement. The Companies Act 2006 already mandates foreign companies to register and file accounts to Companies House, yet some Gibraltar-based companies with registered subsidiaries in the UK have successfully used this system to reduce their tax bill.

Transfer pricing plays a major role in switching money between jurisdictions so that the costs are burdened on the area with the highest tax rates, with the profits channelled to the areas with the lowest tax. This is of course a global issue that requires global tax co-operation, but that does not mean that where possible we as a nation should not take measures to remedy the situation where we can. Financial services are one of Gibraltar’s primary industries, which is why I have tabled the amendment. Ideally, through stricter and more thorough reporting standards between Gibraltar and the UK, these should apply to all sectors. For example, in the online services and gaming industry, transactions are often placed in the UK by customers but processed by servers in Gibraltar, a technicality that allows what in reality is taxable income in the UK to be taxed in Gibraltar.

If such practices are well documented among the online gambling sector, I do not doubt that they extend to the financial sector as well. Without public country-by-country reporting, identifying dubious transfer pricing will continue to remain difficult. However, that should not deter us from strengthening reporting between Gibraltar and the UK, particularly given our official links. Surely it simply cannot be right that some of the major UK gambling firms pay an actual corporation tax in the UK of between 3% and 13% by either headquartering or using subsidiaries based in Gibraltar. Incidentally, we only know this because the size of these firms has brought them under the scrutiny of journalists who have investigated them. Given the commonality of these methods among larger corporations, financial firms of the SME variety could, and possibly do, engage in similar methods.

The fact that companies have been able to rather openly reduce their corporation tax bill by incorporating some of their operations in Gibraltar calls into question the current mechanisms for the effective and proper exchange of information between the two jurisdictions in relation to profits subject to tax. During his evidence session, the Minister said that corporation tax rate was not a factor in relocation to Gibraltar. No doubt, the Mediterranean climate and lifestyle make it a very attractive place to reside. Indeed, I have thought of little else over the recent cold days. However, for the purposes of reducing your corporation tax bill, only a partial relocation is required. Furthermore, Gibraltar provides a unique service in the “non-resident company”, a simple and cheap offshore corporate tax entity that even the most cursory search online will see marketed as an international investment and tax-planning vehicle, with all the usual connotations that this implies.

I do not want the many good people of Gibraltar to confuse my concerns as an attack on their territory, but the continuation of access to UK financial markets by permitted Gibraltar-based persons without a review into the effectiveness of the information exchange and the transparency of reporting requirements between the two jurisdictions will leave open avenues and incentives for businesses to reduce their actual UK tax obligations through Gibraltar-based tax planning. I hope that the Minister will be able to reflect on some of these issues and perhaps help me understand what we can do to improve the situation because we might need to revisit this later on. I beg to move.

[Lord Eatwell (Lab)]

My Lords, the provisions in the Bill dealing with relations with Gibraltar raise a number of intriguing questions. The probing amendment in the names of my noble friend Lord Tunnicliffe and myself is really seeking some answers. The Bill in effect creates a single financial market with Gibraltar, even to the extent of offering customers of Gibraltarian entities access to the Financial Services Compensation Scheme. In doing so, it forges a single market with a different jurisdiction, a jurisdiction that includes a different regulatory authority and notably—as the wording of the amendment in the name of the right reverend Prelate the Bishop of St Albans suggests—a fiscal jurisdiction that diverges significantly from that of the UK. I welcome the right reverend Prelate’s amendment.

When this country was a member of the European single market, there was, in essence, a single regulatory regime in the UK and Gibraltar, although the implementation of EU directives was not entirely uniform. In the Bill, the provisions on Gibraltar have been presented as a continuity measure. However, the UK’s new-found ability and declared intention to deviate from EU rules signals a substantial shift in our regulatory framework and potentially in its interplay with that of Gibraltar. The first part of Amendment 47 asks the Treasury to present in detail its assessment of how compatible the regulatory systems in the UK and Gibraltar actually are. It is important that people have confidence in the firms that will be allowed to operate in the UK. The Gibraltar authorisation regime, as it is called, being introduced by the Bill seeks alignment of law and practice in the UK and Gibraltar, but it does not prohibit Gibraltarian divergence.

I turn to the impact assessment. It is pointed out that the Gibraltarian authorisation regime will be established by a mix of primary legislation, secondary legislation, regulators’ rules, MOUs, policy statements and guidance. Given the unique nature of the creation of the single financial market, it is important that Parliament has the opportunity to assess this plethora of measures; hence the need for a Treasury statement in 12 months’ time.

It is further noted in the impact assessment that about 20% of motor insurance policies in the UK are written with Gibraltar-based insurers. When replying to the debate, will the Minister tell the Committee why he thinks that might be? What are the peculiar advantages of Gibraltar that have attracted such an extraordinarily high proportion of this UK business, and will those peculiar advantages continue as a result of the Bill?

At a time when the entire regulatory framework is under review, the Government might consider this to be the time to reassess the financial services relationships with the Crown dependencies as well. I am aware of the very different legal status of the Crown dependencies from that of Gibraltar and the fact that, given that the Crown dependencies were never members of the European Union, the UK’s exit does not pose the same range of new problems. However, the Minister will be aware that the financial services provided in the Crown dependencies are a vital part of the financial infrastructure of the UK, in particular with respect to the flow of liquidity into the London markets. Will the regulatory framework review cover the issue of the financial market relationships between the UK and the Crown dependencies? The regulatory framework review could take note, for example, of the fact that many regulatory practices in some Crown dependencies, such as the registration of beneficial ownership, are significantly superior to current practice in the UK. Given that the UK Government happily promote financial relations with Gibraltar, even though the Gibraltarian fiscal regime is significantly different from that in the UK, are they considering some enhancement of financial relationships with the Crown dependencies by, say, extending access to the Financial Services Compensation Scheme?

[Baroness Neville-Rolfe (Con)]

My Lords, we have been making slow progress, so I will be brief. I rise to question the appropriateness of these amendments on Gibraltar and the Crown dependencies. I appreciate that the second amendment in the group, Amendment 47, tabled in the name of the noble Lord, Lord Tunnicliffe, is probing in nature and I look forward to the Minister’s reply.

Amendment 46 is extraordinary. It targets Gibraltar with new and additional requirements at a time when it is facing particular challenges following Brexit and with a new treaty with the European Union still under negotiation. It seems that there are three arguments against these proposals. First, Gibraltar is autonomous and has its own democratically elected Government, setting their own regulations and taxes. Secondly, reporting regimes on businesses and the individuals who run them are burdensome and costly, and divert management effort from serving customers and building for the future. Thirdly, in the case of Gibraltar we are talking about our good friends. Many British people love and support Gibraltar. Its Government is well led, as I know from taking evidence from the First Minister to the EU Committee of this House and visiting him and his Government with the committee. I know that they have demonstrated their commitment to meeting international standards on issues such as illicit finance, tax transparency and anti-money laundering. I do not believe that there is a case for making things more difficult for Gibraltar’s businesses or those involved with proposals of the kind in this group.

Financial Services Bill

Lord Eatwell Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 24th February 2021 Grand Committee

[Baroness Kramer (LD)]

My Lords, we have, sadly, become used to skeleton primary legislation, with policy embedded in statutory instruments that cannot be amended and cannot be voted down without threats of a constitutional crisis. But at least statutory instruments can be brought before Parliament, and Ministers must then make the case.

This Bill is a new low—skeleton primary legislation, elimination of secondary legislation and policy set in regulators’ rules with no meaningful accountability to Parliament. The accountability set out in the Bill, which largely mirrors proposals in the future regulatory framework review, provides, in essence, just for a bit more explanation by the regulator, the existing right of a parliamentarian to submit evidence to any consultation, and the existing right for committees such as the Treasury Select Committee and the Economic Affairs Committee to question the regulator from time to time. This will be the policy framework shaping a sector of the economy that will fundamentally impact our national prosperity, jobs and public spending.

The Minister was kind enough to meet us, so I can perhaps anticipate some of the arguments that the Government are likely to make. They will argue that the Bill is just a stopgap while consultation takes place, but the consultation under way has multiple stages and will stretch the whole process out for 18 months or two years. By then the horse will have long bolted and procedures will largely have been set in stone. Perhaps the Minister would spell out the timetable—because the Bill looks to me like a template, not a stopgap.

Secondly, the Minister will say that only part of financial regulation is covered by the Bill. But, since it includes all of Basel III, the Bill actually covers almost everything that matters in prudential regulation. I have also heard from parts of industry that a second financial services Bill is on its way. I do not know that; I have not heard it from the Government—but if so, it will have come and gone before the new framework legislation is finalised. Perhaps the Minister would comment on that. It is absolutely clear that what happens with this Bill genuinely matters.

I value consultation—real consultation—but I am saddened because consultation has become a cynical tool to sideline Parliament. “Just give us a free hand now, because we’re doing a consultation.” Colleagues who cover other areas of policy tell me that this is a pattern, and are now concluding that it is cynically being used with a wide range of legislation, to make sure that Parliament is sidestepped.

I suspect that the Minister will argue that the powers being given to the regulators in this Bill, with minimal accountability, are necessary so that the UK can respond to changing events. After all, we have left the European Union and times are going to change. I regard that as nonsense. We are in changing times, but we have proved in the last year that fast-track procedures exist when they are genuinely needed.

I very much welcome the amendments tabled by the noble Baroness, Lady Noakes, also signed by my noble friend Lady Bowles, and the noble Baroness, Lady Bennett. They are tough: they would prevent Schedules 2 and 3 coming into effect before the accountability deficit is sorted. That, I suggest, is what the circumstance warrants.

This group of amendments was revised from Monday, so it now includes proposals detailing how accountability can be structured. We have heard a whole series of brilliant speeches in this debate, so I want to make only some limited comments.

The noble Lords, Lord Tunnicliffe and Lord Eatwell, have tabled a number of amendments laying out process and timetable. I find that extremely constructive. By contrast, the noble Lord, Lord Blackwell, has tabled an amendment that covers similar territory, but with such a light touch that—I hope he does not take this wrongly—I think it will be read as cosmetic. The industry needs to recognise the importance of proper scrutiny and understand that scrutiny in name only will, in the end, do the industry itself no long-term good.

In addition to the procedural amendments, my noble friend Lady Bowles has tackled an equally crucial but often overlooked element of oversight—one that goes to the heart of the matter. It is the need for the regulator to provide the detailed information to Parliament to fully understand and evaluate the evidence, reasoning and consequences of changes to rules. For years this has been done for us within the oversight process of the European Parliament, which has expert resources in depth. My noble friend, in her role in that Parliament, was able to use the information to improve proposals for rules and make them more effective. We have now lost that capacity, and nothing in the Bill or the framework consultation replaces it.

My noble friend Lady Bowles has also proposed amendments that would put this oversight on a regular basis, not just an ad hoc one, and would bring in an independent expert panel to do some of the heavy lifting. As the noble Lord, Lord Holmes, referred to, recently the All-Party Parliamentary Group on Financial Markets and Services addressed similar concerns. I quote from its February report, The Role of Parliament in the Future Regulatory Framework for Financial Services:

“Regardless of the format, the level of technical support available to Parliamentarians in this policy area will be key.”


The APPG goes on to propose secondments from the Treasury to the relevant parliamentary committees to bolster institutional capacity. I personally regard that as the wrong approach—that would be letting foxes into the henhouse—but it makes the point that proper parliamentary oversight requires new expert capability to replace that lost with Brexit. We have expertise within the regulator but we must have it for oversight of the regulator.

Before I finish, I want to refer to Amendment 137, tabled by my noble friend Lord Bruce, which would require the Government to consult on rule changes with the devolved Administrations. It is quite shocking to me that the devolved Administrations are overlooked in the Bill. Scotland is a major player in financial services and that needs to be recognised.

I will listen to the Minister’s response. I hope he will not repeat the airy dismissal that the Economic Secretary in the Commons deigned to give as his response. Voices on all Benches in this House are capable of coalescing around a set of viable amendments on Report that would at least remedy the worst in the Bill. The Government ought to be coming forward with the best.

[Lord Eatwell (Lab)]

My Lords, in due course I will speak to the amendments in the name of my noble friend Lord Tunnicliffe and myself, which, as many noble Lords have commented, would introduce operational proposals that would address the problem of adequate parliamentary scrutiny.

Before I turn to those practicalities, though, I wish to speak to the amendments tabled by the noble Baroness, Lady Noakes, supported by the noble Baroness, Lady Bowles, and the noble Lord, Lord Holmes, which deal with the principles at stake. As we might expect from the noble Baroness, Lady Noakes, her amendments are precise and direct and go to the heart of the matter: the inadequacy of parliamentary scrutiny.

I regret that I was unable to attend the Second Reading debate on the Bill. On reading the report of that debate, it is evident that an overwhelming sentiment in your Lordships’ House was that the procedures suggested by Her Majesty’s Government for the future development of the regulatory powers display a serious lack of appropriate parliamentary scrutiny. The fears expressed at Second Reading can only have been further reinforced by the note entitled “Meeting between the Economic Secretary, Peers, the Financial Conduct Authority and the Prudential Regulatory Authority: Background Briefing for Peers”, and by the document Financial Services Future Regulatory Framework Review Phase II Consultation, published by Her Majesty’s Treasury in October last year. Both documents advocate a degree of parliamentary scrutiny that may at very best be described as minimalist. Seldom can two documents have made the case so eloquently for the adoption of a policy entirely at odds with that which they propose.

The central thrust of government thinking is spelt out in the phase 2 consultation document to which I have just referred. It may help if I quote the relevant passage:

“The Financial Services and Markets Act 2000 (FSMA), and the model of regulation introduced by that Act, continue to sit at the centre of the UK’s regulatory framework. The government believes that this model, which delegates the setting of regulatory standards to expert, independent regulators that work within an overall policy framework set by government and Parliament, continues to be the most effective way of delivering a stable, fair and prosperous financial services sector. The model maximises the use of expertise in the policy-making process by allowing regulators with day-to-day experience of supervising financial services firms to bring that real-world experience into the design of regulatory standards. It also allows regulators to flex and update those standards efficiently in order to respond quickly to changing market conditions and emerging risks. The FSMA model was readily adapted to address the regulatory failings of the 2007-08 financial crisis.”


Commenting further on the manner in which this model was readily adapted to address the regulatory failings of the 2007-08 financial crisis, the authors of this document declare:

“The financial crisis of 2007-08 revealed serious flaws in the UK’s system of regulation, particularly in the allocation and co-ordination of responsibilities across the ‘tripartite’ institutions – HM Treasury, the Bank of England and the FSA … The post-crisis framework reforms were therefore focused primarily on institutional design and allocation of responsibilities.”


So the problem that led to massive regulatory failure and to a regulatory system that failed to protect UK citizens and firms from a near-existential breakdown in the financial system, that heralded a sharp downturn in real income and higher unemployment, and that led inexorably to the disastrous austerity policy was a problem of

“institutional design and allocation of responsibilities”.

There is no mention of the failed analysis, no mention of the pernicious groupthink that infected the analysis of the FCA and the Bank of England, no mention of the fact that warnings from distinguished commentators in academia and in the financial services industry were airily dismissed, and no acknowledgement that our regulators participated in the creation of a procyclical regulatory model that actually made the crisis worse than it otherwise might have been.

If anyone has any doubt that allowing regulators to bring that real-world experience into design of regulatory standards was the foundation of that massive failure, they should consider the words of Alan Greenspan, then head of the US Federal Reserve system—essentially, the western world’s senior regulator—speaking to the banking committee of the US House of Representatives in October 2008. He said:

“This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.”


Where in this document is the recognition that the intellectual edifice collapsed? Where is the acknowledgement that those with real-world expertise did not understand the systemic risks in the industry that they were supposed to be regulating?

All this was clearly set out in the Turner review, published by the FSA in 2009 and seemingly unread by the authors of this document. The review advocated a shift from microprudential regulation that focuses attention on the risks facing individual firms to macroprudential regulation focusing on the risks inherent in the operation of the system as a whole. It is entirely true that implementing that change has proved more difficult than the noble Lord, Lord Turner, could have anticipated. Basel III, the regulatory system lauded in this Bill, was supposed to do the job, but as Professor Hyun Shin, chief economist of the Bank for International Settlements, the home of Basel III, has commented:

“Under its current … form, Basel III is almost exclusively micro-prudential in its focus, concerned with the solvency of individual banks, rather than being macro-prudential, concerned with the resilience of the financial system as a whole. The language of Basel III is revealing in this regard, with repeated references to greater ‘loss absorbency’ of bank capital.”


When we turn to the impact assessment published by Her Majesty’s Treasury to accompany the Bill, we again find many references to the virtues of bank capital, its loss absorbency and the resilience of individual firms. There is, however, absolutely nothing about the attempt to deal with systemic risk using liquidity rules, resolution regimes and comprehensive supervisions. The authors of this document have been rewriting history. They have also failed to learn from history.

Financial Services Bill

Lord Eatwell Excerpts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Monday 22nd February 2021 Grand Committee

[Lord Eatwell (Lab)]

My Lords, in considering this Bill, we are all placed in a somewhat odd position. The Treasury is, right now, conducting a financial services future regulatory framework review. Indeed, phase 2 of consultation on that review concluded just last Friday. While I fully understand that some parts of the Bill before us are associated directly with the UK having left the European Union, other parts are not associated in that way. It is quite likely that we will be back here in a few months’ time debating the same issues all over again when the Treasury decides on its response to the consultation and brings forward legislation to implement the future regulatory framework.

It would be comforting if the Minister could assure us that we are not wasting our time but, of course, she cannot do that, because none of us knows what the final outcome of the regulatory framework review will be. None the less it would be helpful if, when she sums up, the Minister could assure the Grand Committee that the Treasury will treat debates on this Bill as, at the very least, an enhanced consultation to which the Treasury will have full regard when reaching its final conclusions.

Let us get down to business on the amendments in the names of my noble friend Lord Tunnicliffe, the noble Baroness, Lady Bowles, and myself. Every first-year student of financial markets knows that markets in retail products—financial products sold to individuals, households and small businesses—are seriously inefficient. One important reason why they are inefficient is due to asymmetric information, as the noble Lord, Lord Davies, said just now. To put it simply, the seller of the product typically knows much more about the risks involved in making a particular investment or other financial transaction than does the hapless investor. An extreme example of this is to be found when the chief economist of the Bank of England, Andy Haldane, confessed that he did not understand the pension that had been sold to him.

As the Committee will be aware, if it is the FCA’s strategic objective to ensure that the relevant markets function well, to do so in the presence of asymmetric information it has two broad operational options. Either it should regulate each individual financial product to ensure that the investor is properly informed or it could adopt the principle of Amendment 4—and, indeed, Amendment 1—and make general rules, including the power to introduce a duty of care owed by the authorised persons to consumers. Up to now, the FCA has adopted the former option and dealt with each issue as it arises. By its own admission, this has not gone very well. From its consultation entitled Our Future Approach to Consumers in 2017 through to the feedback statement published in April 2019, the FCA has wrestled with the issue of duty of care, and is still wrestling today. Yet it still persists with its failing approach of regulating each product, and that simply cannot go on.

Action is really imperative, for two main reasons: first, because of the persistent appearance of new products, such as the buy-now, pay-later schemes, which we will discuss later—persistent innovation, which the FCA meets with persistent delay. It is always playing catch-up to introduce the new rules, after taking time for appropriate consultation and so on, to deal with the new threats to the consumer.

The second reason is the now-ubiquitous sale of financial products via the internet, as referred to by my noble friend Lord Blunkett. How many of the Committee have ticked the box verifying that they have read the terms and conditions of internet sales, without a thought of ever doing so? It is the dense and incomprehensible text of those terms and conditions that is so often the electronic embodiment of asymmetric information: the very factors ensuring that the relevant markets do not function well and that the FCA does not perform its strategic objective.

Amendment 4 provides the FCA with the means to end this failure to meet the strategic objective. The enactment of the power to introduce a duty of care would place the responsibility of ensuring that markets function well firmly on the shoulders of those who have the information required to attain that goal. As my right honourable friend Pat McFadden put it when discussing the Bill in another place, with the enactment of a duty of care, financial services providers would necessarily ask themselves the question, “Is this right?” rather than what they ask themselves today, which is, “Is this legal?” That would create a real shift in how business is done. I say to the noble Lord, Lord Blackwell, that this has nothing to do with subsidies and subsidising. It is doing what is right. If the FCA had the power to introduce a duty of care, it could begin to live up to its strategic objective.

I am quite prepared to believe that our drafting of Amendment 4 contains petty infelicities. So what? What is important is the principle that the amendment embodies. I am confident that Treasury officials can always find the appropriate wording. But we are all aware that too many consumers are being treated inappropriately, whether by the mis-selling of products, denial of rights or obstructionist responses to complaints and so on. I am certain that Her Majesty’s Government wish to improve on the consumer protections previously enshrined in EU legislation. The introduction of a duty of care is a safe and sure way forward: a way to ensure that markets function well.

I regret that I cannot agree with the noble Baroness, Lady Bowles, that the duty of care should be extended to the regulator itself. That is unreasonable because it suggests that the regulator should be looking over the shoulder of the participants in every single transaction. That would require regulatory omniscience, and I think it is truly unreasonable. But I would like to say a few words in hearty support of the noble Baroness’s Amendment 72 in this group. Anyone who has laboured as a financial services regulator, as I have, will be well aware of the abuse addressed by this amendment: an abuse that has disfigured the promotion of financial products for far too long.

The failure to deal with this abuse was an important component of Dame Elizabeth Gloster’s investigation into the FCA’s regulation of London Capital & Finance plc. The abuse of promoting non-regulated activities while identifying the promoter—albeit correctly—as a regulated entity must also be addressed by the holistic evaluation of regulated entities, taking into account both regulated and unregulated activities, because, typically, the culture of a firm is not divisible. So, while I support Amendment 72 from the noble Baroness, Lady Bowles, I note that there is more to be done to implement Dame Elizabeth’s recommendations.

[Baroness Penn (Con)]

My Lords, I will start with a word of reassurance to the noble Lord, Lord Eatwell, and others that the Government will consider all the contributions to the debates on the Bill carefully, and in terms of the work they are doing on the future regulatory framework review and the broader regulation of financial services. That is an important point when we discuss these amendments. As the noble Lord just set out, the amendment to introduce a duty of care could be interpreted as quite a different fundamental approach to financial services regulation, which, with that scale of change, might be better considered as part of the future regulatory framework review. However, much work has been done on this subject and I turn to it now.

I will speak first to Amendments 1 and 4, which seek to introduce a statutory requirement for the FCA to make rules requiring authorised persons to adhere to a duty of care when providing a product or service. Amendment 4 would also require the FCA to have explicit regard for vulnerable consumers when discharging its consumer protection objective.

I am grateful to the noble Lords who put forward these amendments, which give the Committee the opportunity to discuss this important issue. I know that it was also discussed during the passage of the Financial Guidance and Claims Act, and the Government pay tribute to the work undertaken by Macmillan, whose “Banking on Change” campaign includes the proposal for a statutory duty of care. I agree with the charity that

“Money worries should be the last thing”


on a person’s mind when they are dealing with cancer, but I emphasise that the FCA is already taking steps to ensure that financial services firms exercise due care and regard when offering products, services and advice to consumers. A statutory duty of care does not add to the FCA’s existing powers in this area, and there are likely to be difficulties in applying a single duty consistently and proportionately to the wide variety of products and relationships in financial services. The Government do not believe that an additional statutory duty of care, as proposed by these amendments, is necessary.

Financial services firms’ treatment of their customers is governed by the FCA through its principles for business, as well as specific requirements in the handbook. The principles for business require firms to conduct their business with due skill, care and diligence, and to pay due regard to the interests of their customers and treat them fairly. The FCA has recourse to disciplinary action against firms that breach these principles.

The FCA has also announced that it will undertake work to address any potential deficiencies in consumer protection, in particular by reviewing its principles for business. The coronavirus pandemic has caused the FCA to delay the next formal stage of this work to allow firms to focus on supporting their customers during this difficult period. However, it remains committed to progressing this work and has announced that it aims to consult in the first quarter of this year.

I reassure the Committee that the Government believe that the FCA already has the necessary powers to ensure that sufficient protections are in place for consumers, and has the will to act, without the need for a statutory duty of care or expansion of the consumer protection objective. The Government will continue to work closely with the FCA to keep the issue under review.

Before I turn to Amendment 72, I reiterate the Government’s sympathy for London Capital & Finance bondholders. In May 2019, the Government directed the FCA to launch an independent investigation into the events relating to the FCA’s regulation and supervision of LCF. Dame Elizabeth Gloster’s investigation was provided to the FCA on 23 November 2020. It concludes that the FCA did not effectively supervise and regulate LCF during the period. She makes nine recommendations for the FCA, focusing on how it should improve its internal authorisation and supervision processes. The Government laid the report, along with the FCA’s response, before Parliament on 17 December. In that Written Ministerial Statement, the Government welcomed the FCA’s apology to LCF bondholders and its commitment to implement all of Dame Elizabeth’s recommendations. Dame Elizabeth also made four recommendations for the Treasury, which the Government have accepted in full.

Turning to the specifics of the amendment, through its rules and guidance the FCA already requires financial promotions to be clear, fair and not misleading. As part of those rules, authorised firms are specifically required to ensure that if they refer to their authorised status in the context of any communications relating to unregulated activities, they make it clear that those specific activities are not regulated. Misleading statements by a firm may involve a breach of the FCA’s existing rules and the FCA has broad powers to enforce against such breaches. Depending on the severity of the breach, it may also be an offence under Part 7 of the Financial Services Act 2012.

The Treasury has committed to keeping the legislative framework underpinning the regulation of financial promotions under review. As part of this, the Treasury is actively working with the FCA to consider whether paid-for advertising on online platforms should be brought into the scope of the financial promotions regime.

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I take very strongly the position that we must not put any regulator, even a strong one, in a position where it is basically being told by the objectives that it can, without parliamentary intervention, set out regulations to match the weakest practice evident internationally. We also have to remember the other recommendations for accountability the Bill puts forward. A lowest common denominator strategy is not acceptable. Very unfortunately, this language, combined with the lack of parliamentary accountability in other parts of the Bill, would allow one to happen. We have to take a very strong stand.

[Lord Eatwell (Lab)]

My Lords, I will begin by speaking to Amendment 102 in my name and that of my noble friend Lord Tunnicliffe. It is a probing amendment and seeks to persuade Her Majesty’s Government to spell out their priorities as a participant in international discussions on the direction and detail of financial services regulation. After all, at the very heart of the Bill is legislation covering a wide range of aspects of international financial regulation.

Her Majesty’s Government being clear about their priorities would greatly assist the Committee. After all, the Bill is about incorporating the conclusions of the Basel Committee on Banking Supervision into UK legislation. What could be more international than that: submitting British law to the decisions of a committee of which Her Majesty’s Government are not a member? That is a rather exotic interpretation of taking back control. It is also about the travails of equivalence and, as amendments in the group testify, the relationship between financial regulation and international competitiveness.

Yet we lack a clear statement of Her Majesty’s Government’s approach to international financial regulation, particularly on its future now that the UK has left the European Union. What are the Government’s regulatory priorities? What are their future plans? In the documents associated with the regulatory framework review, we are given some insights into the Government’s goal for the institutional responsibilities for regulation, but what is the policy framework, not the institutional structure, that will guide their proposed reforms? This probing amendment provides Her Majesty’s Government with the opportunity to clear some of the fog. If noble Lords are to scrutinise satisfactorily the Bill and the outcome of the regulatory framework review when it comes before the House, they need this comprehensive insight into the Government’s thinking.

If we look for the core of Her Majesty’s Government’s international regulatory policy, it is obvious from the Bill that much is to be found in the analysis developed by the Basel Committee. Yet, as is well known, it is European Union directives that most closely follow Basel proposals—exactly those directives from which the Government declare independence and their desire to diverge. However, divergence from EU directives will inevitably involve divergence from Basel. So what is it to be: acceptance or divergence? It would be hugely helpful if the Minister, in summing up, could clarify the position.

Then there is the role of the G7. Ever since the G7 Halifax summit in 1995, following the Mexican financial crisis of the winter of 1994, financial regulation has been an ever-present item on the agendas of G7 meetings. By the way, it is Halifax, Nova Scotia, just in case the people of Yorkshire think they missed something. Given that the UK is to chair the G7 this year, how will Her Majesty’s Government approach questions of post-pandemic regulatory reform now that the UK has an independent voice in these matters? What lead will Her Majesty’s Government provide as chair to our G7 partners on financial regulation?

The issue of country-by-country reporting referred to in the amendment is primarily a question of the taxation of large multinational entities, but there is an important echo of the country-by-country issue in the section of this Bill that deals with insider dealing and money laundering. At the heart of the problem of financial crime is the question of beneficial ownership: an area of regulatory policy within which, as the noble Lord, Lord Callanan—the Minister for Climate Change and Corporate Responsibility—admitted, our framework is “attractive to exploitation”. He is right. Knowledge of beneficial ownership is as fundamental to the prevention of money laundering as it is to the prevention of tax avoidance and evasion. I will return to this issue later in our deliberations. The important point that arises at this time is that this is but one more example among many of the lack of clear policy perspective on behalf of Her Majesty’s Government. I hope that the Minister will be able to respond to the probing amendment and outline that policy perspective.

I now turn to Amendments 2, 3, 6, 7 and 8, all of which deal with the relationship between regulation and international competitiveness. I find myself somewhat out of sympathy with these amendments, primarily because the manner in which the issue of international competitiveness is addressed in the current version of FSMA is about right. In it, competitiveness is already an operational objective of the PRA and the FCA. Given the performance of the City of London over the past 20 years, this objective would seem to have been comprehensively achieved. It may be that the proposers of these amendments fear that the competitive position of our financial services industry will be undermined by the UK having left the European Union, and they are now desperately trying to repair the damage. Let us all hope that they are mistaken. Of course, the key point in FSMA is that competitiveness is subordinate to ensuring that markets function well, as in the case of the FCA, and subordinate to the promotion of the safety and soundness of PRA-authorised persons, as in the case of the PRA. That is surely right.

Similarly, with respect to the attempt by the noble Baroness, Lady Neville-Rolfe, to insert by means of Amendment 7 a competitiveness objective into the Bank of England Act, I cannot agree that Her Majesty’s Government should be ready to rank competitiveness equally with the bank’s statutory objective: to protect and enhance the stability of the financial system of the United Kingdom. Should they be happy to pursue international competitiveness while putting family finances at risk? Should they be happy to pursue international competitiveness by putting the soundness of our financial institutions at risk? I believe not. The current hierarchy of regulatory objectives signals clearly where this country’s regulatory priorities lie.

Let us remember that one of the most overpowering advantages that can accrue to any international financial centre is the reputation that it is well and securely regulated. That is an accolade not to be sacrificed. As has been said already, the danger in these amendments is that of the lowest common denominator. For all the reference to high standards, it is international competitiveness that will be a primary statutory objective, equal to or even above the stable operations of the money markets or the financial risks to which the British people are exposed. That would be unwise.