Financial Services Bill

Debate between Lord Eatwell and Earl Howe

Report stage
Wednesday 14th April 2021 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, Amendments 24 and 25 develop the notion of an information system—the information that will be provided by the FCA, PRA and the Government to feed into an assessment of the performance and impact of the financial services sector and the regulators. Amendment 37 goes much wider, as one might have gathered from its presentation, seeking to make, or ask for, a general economic assessment of the role of financial services generally within the UK, particularly the impact of the various regulators and the Treasury.

One of the themes particularly around the discussion of Amendment 37 was that this is not done. There are shelves of academic books that do this, and there are libraries of this material, but what has not happened is that it has not been brought together and assessed in a decision-making environment on a regular basis. The problem with Amendment 37 is that it asks the FCA and the PRA to—to use a phrase that has become popular today—mark their own homework. They are not really the right people to assess themselves; there are plenty of research institutes around this country that do a first-class job of assessing exactly these issues. However, we have not brought them together very well. What is so valuable about Amendments 24 and 25 is that they are targeted on that bringing together—bringing information into what I have called the “New Scrutiny”.

I would be interested to hear the Minister reflect, when he sums up, on the information role that is represented by the amendment of the noble Baroness, Lady Neville-Rolfe, and the role that that sort of information system will play in our regulatory future.

[Earl Howe (Con)]

My Lords, Amendments 24, 25 and 37 return to an issue that I know is of keen interest to many in this House. They seek to introduce requirements to publish reports on the impact of financial services regulation and to undertake assessments of the impact of the financial services sector on the UK more broadly.

The noble Baroness, Lady Bennett of Manor Castle, many not feel able to assent to what I am about to say, but, as we consider this topic, we should remind ourselves of the vital role that the financial services sector plays in our economy, employing more than 1 million people nationwide. It is also a critical source of tax revenue, which has proved especially important during these difficult times. We can argue about how we should calculate the precise amount of such revenue, but, by any measure, it is very substantial. We also should not forget the role that the sector plays in enhancing the nation’s standing abroad. The UK exported over £50 billion-worth of financial and insurance activities in 2019, a trade surplus of £41 billion.

Amendment 24 would require the Government to publish a report on the “impact of measures” taken by the FCA, PRA and the Government to regulate this most important financial services sector. In particular, it seeks understanding of the impact of measures on small businesses, innovation and competitiveness. Amendment 25 would add “consumer protection” to the list of things that the Government would be required to report on.

Lest there be any doubt, the Government are wholly committed to ensuring that the financial services sector supports competition, innovation and competitiveness. I hope that this is evidenced by the last set of remit letters issued to the FCA and the PRA by the Chancellor, which requested that the regulators have regard to these three priorities when advancing their objectives and discharging their duties.

In respect of reporting, the FCA and the PRA both have a statutory objective to promote effective competition. What does that involve? It involves promoting a financial services framework that supports new firms to enter the market and grow, promotes innovation and allows successful, innovative firms to grow and thrive. Those, surely, are the key aims for the sector when we talk about effective competition.

I remind my noble friend Lady Neville-Rolfe that both regulators are obliged to prepare annual reports that analyse the extent to which their objectives, including this competition objective, have been advanced that year. Those reports are in turn laid before Parliament for scrutiny. Moreover, I should say to her that, under the Financial Services and Markets Act, the FCA and the PRA are required to publish cost-benefit analyses when proposing new rules. The regulatory initiatives grid, a relatively recent innovation, sets out the regulatory pipeline that allows the financial services industry and other interested parties to understand and plan for the timings of initiatives that may have a significant operational impact. The grid is published at least twice a year, so Parliament has a forward look at upcoming proposals in a material and transparent way.

Turning to my noble friend Lady Neville-Rolfe’s point about small firms, in my letter to her of 2 March, I set out the Government’s actions to support smaller innovative firms to grow to their full potential, including through the FCA’s regulatory sandbox and our support for the fintech sector. The amendment would therefore duplicate reporting obligations and arrangements that already exist.

I should also note the new accountability frameworks that the Bill puts in place for prudential measures. These require the FCA and PRA to have regard to UK competitiveness, among other things, when making rules to implement Basel or the investment firms prudential regime. Furthermore, the regulators will then be required to report on how having regard to competitiveness has affected their proposed rules.

On consumer protection, which is the subject of the amendment, let me first reassure noble Lords that the protection of consumers is at the heart of our existing regulatory framework. The FCA has an operational objective to secure an appropriate degree of protection for consumers and is required under the Financial Services and Markets Act 2000 to consult a consumer panel on the impact of its work. The panel ensures that consumers play an integral role in the regulator’s rule-making and policy development.

The FCA has repeatedly demonstrated its commitment to consumer protection. One of the key areas of focus in the FCA’s Business Plan 2020/21 is,

“ensuring…that the most vulnerable are protected”.

The FCA has also recently published guidance on how firms can treat vulnerable customers fairly. As consumer protection is one of the FCA’s statutory objectives, as set out in FSMA 2000, the FCA must already report on how consumer protection has been advanced in its annual report, as outlined earlier. Therefore, as with a previous amendment, the amendment would duplicate reporting that already exists. As regards the PRA, it is important to remember that it already has an important role in protecting consumers indirectly by promoting the safety and soundness of PRA-authorised firms. This means that consumers are protected from the significant distress and suffering caused by disorderly bank failures.

I now turn to Amendment 37, which would require regular reports on the impact of the financial services sector on a range of topics, including economic development and regional inequality. I have already set out some examples of the overwhelmingly positive impact that the sector has on jobs, productivity and tax revenues across the whole UK.

Financial Services Bill

Debate between Lord Eatwell and Earl Howe

Report stage
Wednesday 24th March 2021 Lords Chamber

[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.

Financial Services Bill

Debate between Lord Eatwell and Earl Howe

Committee stage
Wednesday 10th March 2021 Grand Committee

[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.

--- Later in debate ---

[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

Debate between Lord Eatwell and Earl Howe

Committee stage
Monday 8th March 2021 Grand Committee

[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 ---

[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.

Financial Services Bill

Debate between Lord Eatwell and Earl Howe

Committee stage
Monday 1st March 2021 Grand Committee

[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.