Financial Services (Banking Reform) Bill
Debate between Lord Eatwell and Lord Deighton(10 years, 5 months ago)
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The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, this amendment brings forward the timetable of the independent review to be held of ring-fencing. As the House will recall, the Government previously amended the Bill to provide for an independent review of ring-fencing, once the ring-fence has come into force. Following the recommendation of the Parliamentary Commission on Banking Standards, our original amendment provided that the review be conducted no later than four years after the ring-fence had come into effect. This was to allow the ring-fence time to bed down before being reviewed.
The Government have, however, listened to arguments from the Opposition that the review should be held sooner. Two years is a long enough period over which to observe the operation of the ring-fence, and assess its effects. The knowledge that ring-fencing will soon be reviewed may also be a further encouragement to banks to comply faithfully with the ring-fence.
This amendment therefore requires that the independent review of the ring-fence be held within two years of the ring-fencing taking effect, rather than four years. This is a sensible change and one that we hope illustrates the Government’s constructive approach to reasonable suggestions from all sides.
Lord Eatwell (Lab)
My Lords, everyone in the House has from time to time expressed the view that this is a great experiment. We are not quite sure how the ring-fence will work and therefore it is appropriate that that it be monitored promptly and on a regular basis. I think this is a very sensible amendment—I would do, since I moved a version of it earlier—and I urge the House to support the Government.
Lord Eatwell
My Lords, I am delighted to support Amendment 26, which stands in the names of the noble Lord, Lord Deighton, and of my noble friend Lady Hayter of Kentish Town. She is very sorry she cannot be in her place this evening to say this herself, but she is very grateful to the Government not only for accepting the essence of her amendment, moved at Report, but also for turning in some far better drafting than she could have done. This was done under some tight time pressures, for which we are grateful to both of the Ministers concerned and to their staff. My noble friend cannot be here to thank the Government herself because she is at a Labour Party fundraising event to help fund the campaign to expel the Government from office, but in the mean time she does sincerely want her appreciation for the help to be recorded.
The impact of the amendment is that, in future, consumers with complaints against claims management companies will be able to take these to the Legal Services Ombudsman to be resolved. They will therefore get redress when there is judgment in their favour. This will also help to drive up standards. By reporting repeat offenders to the regulator, it will help to get some of the CMC sharks out of the business. So congratulations to both to the noble Baroness, Lady Hayter, and to the Government for accepting the essence of her amendment.
Lord Deighton
My Lords, I know it is getting late, but as this group of amendments draws to a close, I hope you will permit me to spend a few moments reflecting on the changes that this Bill has undergone since it first arrived in this House, and to thank all those who have contributed to it in that time. On Second Reading in July, my noble friend Lord Newby remarked that the great strength of this legislation was due in no small part to the intense degree of scrutiny that it had undergone on its journey to this House, and the constructive spirit in which those of all political colours had contributed to it. This is surely even more true of the Bill that leaves this House today.
My first thanks must go to the members of the Parliamentary Commission on Banking Standards, represented in this House by the noble Lords, Lord Turnbull, Lord McFall and Lord Lawson, the noble Baroness, Lady Kramer, and the most reverend Primate the Archbishop of Canterbury. The central role that they have played in shaping this legislation is one of the things that has made this Bill so unique; indeed, the great majority of the amendments that it has undergone in this House directly implement the recommendations of the Commission’s final report on professional standards and culture in the banking industry. These measures are not only the crowning achievements of this piece of legislation, but the final piece in this Government’s ambitious four-stage programme of reform for the banking sector.
Many of the noble Lords in this Chamber today will have contributed to the first stage of that reform, the Financial Services Act 2012, which recast the regulatory architecture for financial services. This Bill, as it was introduced in another place, made provision for the second stage of that reform, the implementation of Sir John Vickers’s recommendations on structural reform of the banking sector, and the Bill that leaves this House today puts in place the two final pillars of that legislative programme, overhauling the culture of the banking industry, and driving out competition to improve outcomes for consumers. Of course, the Government’s commitment to implement the recommendations of the Commission’s final report through this Bill has meant that the task of scrutinising these incredibly important measures has fallen largely to this House.
I shall respond to the noble Lord, Lord Brennan. As I understand it the explanatory notes have already been written for the amendments, and they will be published tomorrow. As always, my officials are a little bit ahead of the game, but we absolutely take on board the need to communicate this effectively, both to the other place and more broadly to the City.
All these changes are a challenge to which this House has ably risen, but I must thank all noble Lords for their patience in giving such careful consideration to this wide-ranging and important set of provisions, particularly with the number of amendments that have been introduced, the speed with which drafts have been turned around, and the speed with which noble Lords have been asked to absorb so much information. In particular I must thank the opposition Front Bench, led by the noble Lord, Lord Eatwell, for its thoughtful and constructive contributions to the debate. I thank my noble friend Lord Newby for his support, without which it would not have been possible to provide the House with the level of response that it deserves, and my officials for their consistent hard work. Special thanks must go to parliamentary counsel for their heroic efforts in drafting amendments with such speed and precision.
The Bill that leaves this House today is completely transformed from the one that arrived here five months ago, and it is hard to imagine how it could have reached its present state without the contribution of those that I have but briefly mentioned. It is a vital addition to the statute book, whose importance is hard to overstate. I beg to move.
Financial Services (Banking Reform) Bill
Debate between Lord Eatwell and Lord Deighton(10 years, 6 months ago)
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Lord Eatwell
My Lords, I was a member of the original regulatory decisions committee at the Financial Services Authority, which noble Lords may remember was set up after FiSMA ran head first into the human rights legislation because the regulator was in many cases judge and jury. The RDC was set up as a filter, to be an independent assessor of regulatory decisions by the various divisions of the FSA and to stand as a relatively simple procedure prior to the final stage of going to a tribunal if agreement could not be reached between the regulator and the regulated person. In that respect the RDC and the old FSA worked moderately well—but only moderately.
It did not work so well for two reasons. First, there was considerable confusion over its independence. The noble Lord, Lord Turnbull, has, in this amendment, quite rightly emphasised that the RDC should be independent of the various regulatory authorities. The second reason it did not work very well is, unfortunately, contained within the amendment, which states:
“A majority of the members of the Committee must be persons”,
with,
“no professional connection with … financial services”.
I am afraid that that, on the old RDC, caused us a lot of difficulty. Many of the cases which were quite complicated, with respect to financial services, took a long time because people who were very bright and committed but who had had no previous connection with the industry took a long time to get up to speed on the relevant issues that were considered. That condition in the old RDC arose because the FSA was succeeding the self-regulatory organisations. Therefore that was an overreaction to the role of the self-regulatory organisations such as the Securities and Futures Authority, which I also had the honour to serve on. That was abolished at that time and the reaction was, “Let’s have people from outside the industry in this particular role”.
Therefore, the idea of an independent RDC is a good one. That would avoid some of the very great expense of going to tribunal, where there might be disagreements, and it would also have the great advantage, which the noble Lord, Lord Turnbull, pointed out, of balancing the views of various regulators in any particular case. Of course, that was not necessary under the FSA, but it will be necessary under the new structure. This is worthy of very careful thought and consideration. It could be a very useful, positive step within the sequence of enforcement activities by the regulator.
Lord Deighton
In the spirit of the noble Lord’s approach, which was to move on from the specific amendment, I will not read out my speaking note, as entertaining and well structured as it is. I thank the noble Lord, Lord Eatwell, for his valuable experience here. I feel as the noble Lord does—something in here needs to be sorted out, but at the moment we are not exactly sure quite what the right thing is. However, it is certainly likely to involve a review, as is recommended as part of the amendment. Therefore I am more than happy, in preparation for Report—I am sorry, I mean Third Reading—to see what we can come up with together on a review.
Financial Services (Banking Reform) Bill
Debate between Lord Eatwell and Lord Deighton(10 years, 6 months ago)
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Lord Eatwell
My Lords, I am very grateful to the Minister for that expert summary of a complex set of amendments. However, I hope that I may ask him one question before he sits down. He referred to our Amendment 12, which would shorten the period before a review takes place, and said that he was very sympathetic and receptive to that point. Will he therefore accept Amendment 12?
Lord Deighton
I think the right thing for us to do is to discuss it together with our colleagues from the PCBS. The noble Lord is, of course, entitled to take the amendment to a vote, but I have not yet had the chance to discuss it with PCBS colleagues. The Government have an open mind on the relevant period, so I would prefer a fuller discussion.
Lord Eatwell
Does the Minister mean that he is content to return to this issue at Third Reading?
Lord Eatwell
Thank you very much.
This is a complicated set of interrelated amendments. I congratulate the Government on their Amendments 11 and 16 in which they have moved towards the commission’s position in proposing an independent review. By the way, I did not find any evidence that new Section 142J had been deleted, which was the previous requirement that the PRA conducted the review. Is there supposed to be a PRA review and an independent review? Surely that is not the case. It is not an important point but we should not leave both of them on the statute book. As I say, I did not detect that new Section 142J had been deleted.
We have a coherent package with the nested structure of the ring-fence, the electrification applied to individual groups and the electrification applied to the whole structure of banking—the so-called complete separation. That seems to me a coherent, rational structure which is supported by the review. Therefore, there will be the opportunity to take into account the detailed scrutiny by the ICB and the commission and consider which stage of this nested structure should be accepted. It seems to me that that coherence provides certainty as regards the way forward—not uncertainty, as the noble Lord, Lord Hodgson, suggested—because the review will not throw everything up in the air and lead to more years of parliamentary debate. We have been doing this for three years already, leaving the industry in a state of uncertainty. We should not throw it up in the air again but create a clear, rational structure that has been carefully put together by the ICB and the commission to provide for the review and separation.
The ordering of amendments before us makes our consideration a little awkward because we first have to consider my amendment on separation, Amendment 3 —which is identical to the commission’s amendment, Amendment 6—and then talk about the review. However, in the light of the care and consideration that the commission has given, I am content to fully support the commission’s position on the triumvirate of ring-fencing, group separation and full separation. I therefore wish to test the opinion of the House on Amendment 3.
Financial Services (Banking Reform) Bill
Debate between Lord Eatwell and Lord Deighton(10 years, 7 months ago)
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Lord Deighton
The first thing we have to determine is what we are proposing to do with the good bank/bad bank. Does the split make sense and on what basis does it work? We will subsequently look at what we do with the separate parts.
Lord Eatwell
My Lords, that was not a very satisfactory answer. First, market sensitivity is an extraordinary red herring. Whoever wrote that bit should not be allowed to write any bits again. This is not about market sensitivity: it is about the overall structure of the banking sector and any issues of market sensitivity would, of course, be kept carefully out. Anybody would do that, so it is a really silly argument.
Turning to the good bank/bad bank story, value for money with respect to the disposal of assets is obviously an important component, but so is the future of the banking industry and its performance in relation to the UK economy as a whole, especially its support of the real economy in the provision of financial services. That aspect does not seem to have been considered. After all, the good bank/bad bank story is essentially a defensive move. It is dealing with a bank which is hampered—or potentially hampered; we will see what the report says—by its current mixture of assets and liabilities, particularly non-performing assets. The good bank/bad bank split is a defensive measure; a device for ensuring that you have an operation in the good bank which we hope can start increasing lending, as the noble Lord, Lord Lawson, said, particularly to the SME sector.
However, Amendment 103 is asking for something different, which the Minister did not actually address. It is asking for some thought about what the structure of the banking industry should look like in future. Are we simply going to repair what we have in the best way we can or do we want something really different? Could progress towards that “something different” be made in the sale of state-owned assets? It seems to me that that was what the noble Lord, Lord Turnbull, was talking about when he referred to the second element of the banking commission’s recommendations. Clearly, this recommendation has not been taken on board by the Government. Perhaps it has simply been overlooked; they might look at it now and think more seriously about it. I am sure that we will be returning to this issue later. In the mean time, I beg leave to withdraw the amendment.
Financial Services (Banking Reform) Bill
Debate between Lord Eatwell and Lord Deighton(10 years, 7 months ago)
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Lord Deighton
My Lords, I welcome the engagement of noble Lords on this critical issue of the leverage ratio and the FPC’s toolkit. Everybody agrees the importance of making sure that our financial institutions are appropriately capitalised. There is no dispute about that and the lessons we should have learnt from the financial crisis. The real question—and again my noble friend Lady Noakes hit the nail on the head—is about the journey we take to get there, how it integrates with what is going on in global standards, and what powers the FPC and the regulators already have to ensure that we are in the right place in the mean time. I think that also comes back to the points made by the noble Lord, Lord Brennan.
I shall try to give some context, particularly for those who are not so familiar with all the aspects. With each of these amendments, I ask myself what the point of substance is between the amendment and the Government’s position and whether I can reconcile the two with the existing actions we are taking. In this case I have been able to comfort myself that adequate protections are absolutely in place, given the objectives of this amendment.
The FPC has two main sets of powers at its disposal. The first is a power to make recommendations. This includes recommendations to both the PRA and the FCA. They can be made on a “comply or explain” basis. The second set of powers, which we are talking about here, is to give directions to regulators to adjust specific macroprudential tools. Amendment 93 proposes that the Government give the FPC direction powers to implement a minimum leverage ratio in the UK. Before explaining why the amendment is not necessary or desirable, let me explain the international and domestic context, beginning with the international.
In order to address recognised problems with the system of risk-weighted capital requirements—which we have all talked about and acknowledged—the Basel III accord recommends a complementary binding minimum leverage ratio. Again, we have all agreed that the right way ahead is for the two to work together, so there is no dispute about that. That standard comes into force in 2018, following a final calibration of the leverage ratio in the first half of 2017 so that we get it right. Separately, at the European level the European Banking Authority will undertake a review of the leverage ratio with a view to the European Commission introducing legislation in 2017. The Government agree, and have consistently argued, that banks must be subject to the binding minimum leverage ratio requirement, which supplements the risk-weighted capital requirements as set out by the Basel III accord. Therefore the Government fully anticipate the development of internationally agreed minimum standards of leverage.
The Government take the view—and we believe that the regulators agree—that the optimal approach to creating a lasting binding minimum standard is to work towards international agreement and its implementation through legislation. As Mark Carney wrote in the Financial Times on 9 September:
“Yielding to calls for unilateral action to protect domestic systems would risk fragmenting the global system, slowing global growth and job creation”.
Once that minimum is agreed domestically, the Government propose—and this directly addresses the point made by the noble Lord, Lord Eatwell—to furnish the FPC with a specific macroprudential tool to vary the leverage ratio, through time, obviously subject to it not falling below the minimum.
However, the question raised by the amendment is: what powers do the regulators have to take action on leverage between now and 2018 in advance of the introduction of that internationally agreed binding minimum requirement through European legislation? Let me reassure noble Lords that the regulators already have extensive powers to address the issues raised by this amendment. The FPC has broad powers to make recommendations to the regulators, on a “comply or explain” basis, including on leverage. The PRA has all the powers necessary—which we have talked about—under Section 55M of the Financial Services and Markets Act 2000 to require individual firms to take specified actions, including on leverage. Under Section 137G of FiSMA it may make rules in pursuance of its general functions, including rules on leverage ratios.
The killer fact, if I may call it that, is that on 20 June—interestingly, one day after the publication of the PCBS report containing this recommendation—the PRA announced that it would require eight major UK banks to meet a tougher leverage ratio than that prospectively required by Basel III. They have already done that. That action followed a March 2013 recommendation from the interim FPC to the PRA to consider applying higher capital requirements to any major UK bank or building society with concentrated exposures to vulnerable assets, or where banks were highly leveraged relating to trading activities. Put simply, the regulators already have the powers to do what the noble Lord appears to be suggesting in advance of international agreement.
Lord Eatwell
I am intrigued by that argument. The noble Lord started off with a powerful argument for the necessity of a leverage ratio that is allied with risk-weighted assets and other measures. He is now saying that we do not need it because it is all there already. Why, then, are we even bothering to think about introducing it in 2017 or 2018? As he said, we have all the powers already. He is absolutely contradicting himself in a single speech. Will he also address the fact that the Bank of England’s response today to the banking commission’s final report states that the FPC will publish its assessment of the appropriate level of the leverage ratio by the end of this year? When the FPC publishes that assessment, what will the regulators and the Treasury do about it?
Financial Services (Banking Reform) Bill
Debate between Lord Eatwell and Lord Deighton(10 years, 7 months ago)
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The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, I turn to Amendments 24 to 37. A central principle of ring-fencing is that ring-fenced banks must be independent from the rest of their groups, so that the failure of another member of the group cannot spread to—and bring down—the ring-fenced bank. Under existing pensions law, if a ring-fenced bank continues to share a pension scheme with other parts of its group then, if another group member were to fail, the entire liability for the scheme could fall on the ring-fenced bank as the “last man standing”. If this liability were sufficiently large, it could then threaten the viability of an otherwise healthy ring-fenced bank. Allowing ring-fenced banks to remain liable for a group pension scheme would thus leave open a potential avenue of contagion from the group to the ring-fenced bank.
It is for this reason that the ICB recommended that ring-fenced banks’ liabilities to group pension schemes should be removed or mitigated. Proposed new Section 142W, as currently set out, therefore gives the Treasury the power to require that ring-fenced banks make arrangements to ensure that they cannot become liable for the pension liabilities of any non-ring-fenced entity, or that they minimise such potential liabilities if they cannot entirely prevent them arising. This could involve segregating an existing pension scheme into discrete sections, or splitting it into two separate schemes. Restructuring would largely be executed through the existing means allowed for under pensions legislation.
The amendments to the powers as currently set out do not change the overarching policy objective. They simply ensure that the powers are wide enough to make sure that that objective is met in all scenarios. Under the existing drafting, the Bill allows the Treasury to make regulations requiring ring-fenced banks to make arrangements in relation to potential statutory liabilities they have to multi-employer schemes.
These amendments expand the scope of the power, allowing the Treasury to make regulations requiring that a ring-fenced bank ensure that it cannot become liable for the pension liabilities of non-ring-fenced banks, or at least minimise its potential liabilities to them, whether the liabilities are statutory—such as those which arise under the employer debt legislation—or non-statutory, such as can arise under contractual arrangements such as guarantees. The amendments also allow the Treasury to make regulations including provisions to help the banks to achieve the required separation of pension schemes, such as enabling the trustees to split the scheme or transfer assets and liabilities to a new scheme; and providing that a ring-fenced bank can make an application to the court if it is unable to reach agreement with a third party about the terms on which it should be released from a contractual arrangement or guarantee giving rise to potential pension liabilities.
In addition, the amendments enable the Treasury to make regulations requiring banks to do all they can to obtain clearance from the Pensions Regulator for any restructuring undertaken to comply with ring-fencing, to ensure that pension scheme members are adequately protected. This strengthens the existing provision in the Bill which only allows the Treasury regulations to require that a bank apply for clearance.
Finally, the amendments introduce a power, allowing the Treasury regulations to modify, exclude or apply legislation—including primary legislation—for the purposes of achieving the required separation of pension liabilities. Pension arrangements are inherently long-term in nature, and the Government must be able to respond flexibly to unforeseen developments as banks restructure their pension schemes if they are to ensure that the economic independence of ring-fenced banks is preserved. Regulations made under this power, like all regulations made under proposed new Section 142W, will be subject to the draft affirmative resolution procedure, and can be made only for the specific purposes outlined above. These amendments therefore ensure that proposed new Section 142W is effective in making the ring-fence robust.
Lord Eatwell (Lab)
My Lords, I am grateful to the noble Lord for introducing this set of amendments about pension schemes. The argument for the amendments raises two significant questions. We are talking here about transitional arrangements: about moving from a group pension scheme to what might in future be deemed to be necessarily separate schemes for the ring-fenced and non-ring-fenced components of a group. There must therefore be other transitional arrangements as well—for example, property leases which are relevant to a group. Are they, too, to be separated and decomposed? What are we going to do about all those group liabilities similar to pension liabilities during the period between the implementation of legislation for ring-fencing and the conclusion when ring-fencing has been in place for some time? Over that period, there have to be transitional arrangements. Clearly, pensions are a very special case because the people will presumably stay where they are, but there must be other elements of liabilities which are also rather difficult to untangle. My first question is therefore: what is the Government’s thinking about such transitional problems?
The second question, which is much more specific to pensions and immediately arises, is whether the separation will be to the detriment of members of the pension scheme. This is precisely an area in which scale can become enormously important in a pension scheme, especially with respect to diversifying risk. The sheer scale of a pension scheme can be a component of the commercial success of that scheme. If the scheme is to be broken up, will it be to the significant detriment of the pensioners? There must surely be some consideration of whether it is to be their detriment and, if so, of what measures are to be taken to remove that detriment.
Financial Services (Banking Reform) Bill
Debate between Lord Eatwell and Lord Deighton(10 years, 7 months ago)
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The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, I will consider both Amendments 1 and 2, and I will talk first about Amendment 1, which has been proposed by my noble friend Lord Blackwell. I have much sympathy with the intention behind this amendment and I hope that I can provide some of the comfort that my noble friend seeks. Independent governance is of course key to the integrity of the ring fence to ensure that ring-fenced banks do not simply operate in the interests of their group’s investment bank, in this example, or indeed other parts of the bank, but it is important that any governance requirements are proportionate to the threat to the ring-fence. Where a ring-fenced bank makes up the great majority of a group’s business and the investment bank is therefore small, so the risk of the ring-fenced bank being dominated by the interests of the investment bank is also small.
The Independent Commission on Banking recommended that where the vast majority of a group’s assets were in the ring-fenced bank, requirements for independent governance should be relaxed. The Government accepted that recommendation, and in our June 2012 White Paper we supported,
“flexibility in governance arrangements where a ring-fenced bank represents the overwhelming majority of a group’s business”.
Under the Bill, the precise details of ring-fenced bank governance arrangements, along with other ring-fencing rules, are for the regulator to determine. The Bill sets the objectives that rules must achieve; the regulator then decides what exact structures or restrictions are needed to achieve those objectives. This is appropriate because of the highly technical nature of the issue, and in order to allow requirements to keep pace with developments in a fast-moving market. Rule-making will, of course, require the regulator to exercise its judgment, and proportionality will be central to how it does so. In particular, the regulator will be obliged to consider the costs and benefits of any rules it proposes to make, including ring-fencing rules.
In the case of ring-fencing and governance rules, the Bill also specifically gives the regulator flexibility to consider the proportionality of different requirements. The Bill requires the regulator to ensure “as far as reasonably practicable” that a ring-fenced bank is able to take decisions independently of the rest of its group.
The formulation “as far as reasonably practicable” specifically anticipates circumstances in which certain governance requirements might be impractical or have costs that are disproportionate to their benefits. The case where a ring-fenced bank constitutes the overwhelming majority of a group’s business may be one such circumstance. I hope the noble Lord can therefore feel reassured that the intention of his amendment is already reflected in the Bill. I therefore call upon the noble Lord to withdraw his amendment.
Government Amendment 2 corrects a minor and technical point in connection with new Section 142H, which imposes an obligation on the appropriate regulator to make certain rules requiring that a ring-fenced bank be independent of other members of its group. The clause as currently drafted defines the appropriate regulator only in relation to ring-fenced bodies. However, as new Section 142H also imposes an obligation on the appropriate regulator to make rules applying to authorised persons who are members of a ring-fenced body’s group, but are not themselves ring-fenced bodies, the appropriate regulator needs to be defined in relation to all authorised persons, not just ring-fenced bodies. This is corrected by this amendment, and I commend it to the House.
Lord Eatwell (Lab)
My Lords, I wonder whether, in his assessment of the amendment of the noble Lord, Lord Blackwell, the Minister might take into account the fact that it was exactly this sort of procedure that led to the steady erosion of Glass-Steagall over the years. There was a tendency continuously to say, “Well, if we have a particular subsidiary, then perhaps we don’t need to have the separation in this smaller subsidiary”. These steady erosions built up over the years, until by the early part of this century, before its repeal, the effectiveness of Glass-Steagall had been completely eroded. Perhaps the Government should take that into account. There is also the point that, if the investment banking services required by a ring-fenced bank are relatively small, they could, of course, always be purchased from another provider.
Finally, the Minister mentioned that the precise definition of the rules of extent and so on will be defined by the regulators and in secondary legislation. I wonder whether it would be appropriate at this moment to take into account the latest report of the Delegated Powers and Regulatory Reform Committee, which has expressed considerable concern about the scrutiny of secondary legislation that will follow from new Sections 142A, 142B and so forth as we are discussing in this particular context. Are the Government likely to accept the enhanced scrutiny proposed by that committee with respect to these particular sections?
Lord Deighton
The resolution powers all relate to the Bank of England’s powers essentially to step in in advance of a bank’s insolvency so that it can change, for example, the creditor arrangements.
The PRA and FCA already have powers to require regulated entities to take actions that would facilitate the resolution of a firm in the event of its failure. This may include requiring it to raise additional capital, issue debt to the market or make structural changes to enable the firm to be resolved.
However, banks may be organised in a number of ways. Many have a structure whereby the bank is owned by a financial holding company, which may not be regulated. Banks may also be part of corporate groups which contain non-corporate banking entities. In these cases, the existing powers may be insufficient to deliver some of the changes that the regulator feels are necessary to make a bank resolvable. This is because the regulated entity may not have the level of control required to make the change. This may be the case where, for example, capital and debt are issued out of the parent undertaking before being downstreamed to a bank. It may also be operational in nature; for example, where a service company which is not owned by the bank but sits in another part of the group provides critical services in the bank.
The amendment will address these cases and ensure that the PRA and the FCA have the necessary powers to make banks resolvable for all types of corporate structure. It amends new Section 142J to ensure that any reviews by the PRA of “ring-fencing rules” under that section must also cover rules made under the power given in new Section 192JA in relation to parent undertakings of ring-fenced bodies.
Lord Eatwell
My Lords, I have enormous sympathy with the amendments and the struggle that the Treasury is having in having effectively to provide rules for parent undertakings in relation to the maintenance of the ring-fence. In many ways, the amendments go at least some of the way to achieving that. However, I should like to ask a question which I asked at Second Reading and which was not answered then. The Minister referred to capital and debt being raised at the level of the parent company and then downstreamed into the ring-fenced entity. If it can be downstreamed, can it not be upstreamed? If that were so, the ring-fence would not exist.
Lord Deighton
It is a valve which goes only one way; it cannot be upstreamed—otherwise the noble Lord is right that the ring-fence would not work.
Lord Deighton
The simple way to look at the amendments is that they are to ensure that both regulators have the flexibility to address every aspect of the group structure to ensure that the ring-fence works. That is why we are trying to give as much flexibility as possible to address even the non-regulated entities within the group.
Lord Eatwell
My Lords, the noble Lord, Lord Higgins, has raised a very important matter with respect to authorities outside the UK. The proposals under Glass-Steagall and under Liikanen are different from the ring-fence—the divisions appear in different places. In those circumstances, “similar powers” seems to be a very weak description, because they are similar but not the same. With respect to resolution powers, which are crucial in the relationship between the parent body and the ring-fenced entity, that seems to create a degree of uncertainty. Can the Minister clarify exactly what that applies to? Presumably, it applies to the home-host division in regulatory responsibility and therefore subsidiaries of UK institutions in other jurisdictions will be regulated by the home regulator. If the home regulator has different rules with respect to the divisions, it seems to me that there will be a degree of confusion as to what is actually being enforced.
I am grateful for the Minister’s clear answer about the valve that goes one way on the raising of debt and capital. I return to my previous question. Let us suppose that we have a group in which the liability structure of the ring-fenced entity is essentially provided from the parent through the one-way valve and then the parent simply stops providing. In those circumstances, the security and stability of the ring-fenced institution would surely be threatened. The ring-fence would not be working simply because the steady flow of financial support for the ring-fenced institution had been cut off.
Lord Deighton
I shall try to go through those points one by one. Just to be clear with respect to the foreign banks, the power we were talking about relates to the Bank of England’s rule-making power over parent companies. It allows the Bank of England to support a resolution being carried out by a foreign regulator where the bank is in a different country. It just allows the support of that resolution going on elsewhere so that we have the kind of international co-operation which is necessary for these resolutions. On the point about Liikanen and the convergence in how we are looking at this around the world, the general view of the officials who are working on the European legislation is that we are sufficiently in tune with where that is heading for these arrangements to work effectively.
I was not sure that I entirely followed the risk that the noble Lord, Lord Eatwell, was pointing out. However, risk-fenced banks can of course have equity provided by their parent and, once it is given, it need not be repaid, so the flow can still keep going into the ring-fenced bank.
Lord Deighton
That is part of the resolution process that needs to be sorted out but there is nothing to stop it continuing to go in.
Lord Eatwell
My Lords, I echo the words of the noble Lord, Lord Turnbull. I think this is a significant improvement on the procedures that were previously outlined. I have a number of exploratory questions about this procedure. First, the regulator essentially seems to be judge and jury in this respect. It was the role of the old Regulatory Decisions Committee and, I believe, the ambition of the commission with respect to its development of the Regulatory Decisions Committee to ensure that there was an independent step in any major regulatory enforcement. The main reason why that was introduced into FiSMA was because it was felt that otherwise it would contravene human rights legislation. Are the Government confident that this procedure does not contravene such legislation?
Secondly, with respect to the publication of notices, in the very thorough and welcome briefing that the Minister’s staff provided on these amendments, the Government argued that they would not accept the commission’s proposal that the existence of a preliminary notice or of various stages be publicised. Instead, it was felt that these matters should be kept “secret” until such time as any impact on Stock Exchange listing rules demanded publication that the group was being subjected to such a procedure. It seems to me that this is a slightly dangerous structure. It is a traditional structure of central banks. It has always been strongly opposed by securities regulators which believe much more in transparency in this respect. This lack of transparency is likely to produce rumour and false information in the marketplace. Consequently, if we are going to have this procedure—which I think is well thought out, apart from the one issue that I raised, on which I would like to have assurances—we should make it a transparent procedure because rumours and false information are really damaging to markets. Transparency is always to be preferred, even if that transparency may be extremely uncomfortable for the firm being subjected to this process.
Lord Deighton
On the question of the breach of human rights, we are confident. The RDC still exists, and under this procedure we still have the independent Upper Tribunal. We have looked into that.
On the publication of the initial warning, we are all trying to accomplish the same thing, and it is quite finely balanced as to which way you go. I point out, for the benefit of noble Lords, that of course the regulator has the discretion to publish the initial notice but is not obliged to do so. Therefore, in those circumstances in which it is in the interest of the market to do that, it would do so. One of the principal reasons why we are reluctant to do that is because if you have gone public with the initial warning it may make you reluctant to issue the initial warning and to begin a process because of the consequences of that being out in the public domain. This is a tricky area where the arguments are relatively well balanced. We came out with this option for the regulator to disclose it, which we thought was, on balance, the right thing to do. I beg to move.
Lord Eatwell
The point that the Minister seems not to have taken on board is that the arguments for review and this power have to be seen as a coherent package. The point is that there would be that review; there would be a continuous independent review providing exactly the information that he says is necessary.
Lord Deighton
Yes, there would be a review, but not a proper parliamentary process. The argument I am making is that this is such a switch from ring-fencing to full separation that it should benefit from that full process. While I obviously bow to the experience of my noble friend Lord Lawson, these things, if the circumstances dictate, can be done extremely rapidly, where the circumstances demand that kind of urgent move.
I think it is instructive to compare the process of developing the ring-fencing policy to that of this proposal for full separation. The ICB went through an extensive process of deliberation and analysis, carefully collected data, prepared a full cost and benefit analysis and compared that to full separation. It found that a robust ring-fence will insulate essential retail banking services from shocks originating elsewhere in the financial system. It will enhance the authorities’ ability to manage the failure of a ring-fenced bank, or its wider corporate group, in an orderly way. It will, therefore, deliver the financial stability benefits of separation. Ring-fencing will also preserve some of the benefits of universal banking. I made the argument of diversification and scale, not simply diversity. Customers will be able to access the full range of services from a single group: that is a marketing advantage as well. The frictional costs to the economy of ring-fencing are therefore lower than those of full separation. That is, of course, the reason we did not go for full separation. Further, in the event that the ring-fenced bank runs into trouble while the rest of the group is doing well, other group members can support it. That, of course, would not be possible under complete separation.
On a comparison of the costs and benefits, the ICB chose ring-fencing as the superior policy. The PCBS did not provide any new evidence to contradict this position. In this respect, the noble Lord’s proposal for an independent review of ring-fencing is an admission that the evidence base for full separation does not yet exist. The amendment asks us to put a policy into law and then establishes an independent review process in the hope that it might justify it. For us, this is lawmaking done backwards.
That brings me to the Government’s second and perhaps more powerful reason for rejecting this amendment. Let us imagine that a future Government decided that not ring-fencing, or full separation, but a third policy was appropriate. Imagine, for example, that it decided that a Volcker rule was the right policy, or a shift to full-reserve banking. In either case, a review that was limited to deciding whether to enact a reserve provision for separating ring-fenced banks from their groups would be no use at all, and the power would need to be repealed, along with much of the rest of the Bill. Coming back to Parliament would be the only way to give a future Government wanting to change policy the full range of options.
Therefore, on grounds of both substance and of proper legislative process, the Government continue to oppose a reserve provision for a move to full separation and I therefore urge the noble Lord to withdraw his amendment.
Inequality: Income and Wealth
Debate between Lord Eatwell and Lord Deighton(11 years, 2 months ago)
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Lord Eatwell
The noble Lord has made much in his Answer of the proportion of taxation paid by the highest earners. Is not the reason for this that their gross incomes are excessively high compared to those of others in our society?
Lord Deighton
The noble Lord is correct that it is a simple question of arithmetic. At equal changes, they will make the greater contribution. However, if one looks at the distributional analysis—it is to the Government’s credit that at each fiscal event we lay out the distributional analysis, which is a great step forward—it shows that their increase is proportionally greater than the amounts they have.
EU: Budget
Debate between Lord Eatwell and Lord Deighton(11 years, 3 months ago)
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Lord Deighton
In this budget we are talking about over €900 billion, six separate headings of component parts, and an ‘other items’ budget which includes a range of other things. It is a big and complex budget with many different components. There were lots of parts to the negotiation, and these particular transactions are indeed part of it.
Lord Eatwell
My Lords, given that the EU budget is being reduced in real terms, can the noble Lord tell us what the consequential reductions are in expenditure in the UK?
Lord Deighton
There were three key things that the Prime Minister wanted to protect in terms of the expenditure coming into the UK. The first was to make sure that our universities were very well positioned to bid for the grants available. That part of the budget has gone up and the rewards are based on excellence, so they should do well there. Secondly, he wished to make sure that our farmers are protected in terms of the environmental programmes that they support, which he did. Thirdly and finally, the structural aid that goes to our less well-off regions has been protected at the existing base level of €11 billion.
Economy: Rating Agencies
Debate between Lord Eatwell and Lord Deighton(11 years, 3 months ago)
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Lord Deighton
My noble friend raises the question of monetary policy. We have had a number of debates on creativity to restore a focus on growth and not purely on short-term inflation targeting. All these ideas are welcome and demonstrate the importance of generating growth. We should have the debate but be very focused on sticking to a monetary policy that understands the importance of the medium-term inflation target, while accepting a degree of flexibility around output.
Some specific measures that the Government have taken, such as FLS, were recommended in the Moody’s review as a very positive sign, so other ideas should certainly be debated and considered.
Lord Eatwell
My Lords, could the Minister tell the House whether it is better to borrow to fund the fiscal costs of negligible growth or to fund the expansion in investment and growth?
Lord Deighton
My Lords, I am not sure that I accept the specific question of my noble friend. It is better to have an entirely consistent strategy of fiscal consolidation to ensure that we regain our credibility in the financial markets so that we can continue to borrow at these historic low rates. If we have a choice between funding capital spend—let us call it that—and current spend, all other things being equal, I would choose capital spend. We saw that in the Autumn Statement, when the Government switched £5.5 billion, if my memory is correct, into financing capital spending because that yields better to improve the growth process. However, it all needs to be done in the context of balancing other important consumer and political objectives.
Banking: LIBOR and EURIBOR
Debate between Lord Eatwell and Lord Deighton(11 years, 3 months ago)
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Lord Deighton
My Lords, with respect to the sanctions and penalties, I would point out that there are ongoing criminal investigations with the Serious Fraud Office. Three arrests were made at the beginning of the year, so it is clear that we are determined to follow through on picking up on criminal activity where that can be proven to have taken place.
Lord Eatwell
My Lords, before asking my question, I wonder if the noble Lord could clarify part of his answer to the noble Lord, Lord Bates, where he referred to the “attempted” manipulation of LIBOR. Is he saying that the manipulation failed? Turning to the Question, when I was a member of the Regulatory Decisions Committee of the Financial Services Authority, discounts on penalties were offered for early settlement only in cases where either the firms had reported their own failings or they had offered exceptional levels of co-operation. Did either of these circumstances apply in this case to British banks prior to measures taken by the American authorities?
Lord Deighton
With respect to the noble Lord’s question on whether the attempt was successful, I think that is actually the issue. The FSA’s review found that it was unclear whether the manipulation did result in a change of rates, so that is an open question. On the degree of co-operation shown by the firms under investigation, I understand that the firms were entirely co-operative. Of course, they are all under new management and, effectively, are the new brooms trying to sweep clean. I am afraid that I cannot layer together the timing of that co-operation vis-à-vis the application of the US penalties, but I am happy to look into that and get back to the noble Lord.