Financial Services Bill

Lord Flight Excerpts

Monday 12th November 2012 Lords Chamber

[The Lord Bishop of Durham]

My Lords, my name is down on the amendment. I thank the noble Lord, Lord Newby, for that most helpful intervention, which essentially satisfies what I hoped for with the amendment. I also thank the Minister and other noble Lords for their kind remarks earlier.

It is particularly important that this information is available not only for this House and the public but also for the FCA itself in view of the very welcome earlier amendment about the access to finance in areas of social deprivation. For that to be effective, the FCA itself will require these kinds of data. Having them available is not only useful to us but ensures that the FCA’s regulatory obligation can be fulfilled and that it will feel an obligation to make sure it is fulfilled. It prevents regulatory comfort, which is often as much a danger as regulatory capture. The noble Baroness, Lady Hayter, spoke in those terms on an earlier amendment.

I am particularly conscious of this in the area where I live—in the smaller towns of the north-east, the ex-pit towns and pit villages and de-industrialised areas—where access to finance for SMEs, especially the very small SMEs, is almost non-existent. This will reveal that kind of problem extremely clearly. Recently, through a social enterprise, we were able to support someone who had been seeking £200 for 18 months in order to start his own painting and decorating business. Such a small amount has enabled him to become self-sufficient, with an order book full until next May. It is that kind of thing that can make a significant difference in the small economies of the more rural areas of my diocese and other places like it. I thank the noble Lord again for the assurance that he has given the House and we look forward to seeing the results.

[Lord Flight]

My Lords, perhaps I may just add a brief comment. I had a conversation this morning with the entrepreneur Luke Johnson. He made a point to me that resonated strongly. Would it not be a good idea if we could organise key entrepreneurs to take up the challenge of different towns around the country to give a lead in entrepreneurial rejuvenation? I can certainly think of examples, particularly Swindon in the past, where that sort of principle has worked extremely well. Then the SME lending makes more sense.

[Baroness Kramer]

I join the strong voices that we have heard so far on the amendment and again thank the Minister for the commitment that he has made on behalf of the Government to meet the essential needs that the amendment sought to fill. Amendment 27, which we discussed earlier, in effect wills the end. Amendment 28A in effect wills the means. Providing the database that tells us where the market is failing means that not just the regulator but also many other parties can begin to step in to take action to fill that gap.

Many people know that this has the nickname of the CRA amendment because the focus on making sure that data are exposed comes out of the Community Reinvestment Act in the United States. It started out as a civil rights measure but has ended up exposing vacuums in lending across that country and action has been taken that follows on. I suspect it will be the work of many years, quite frankly, to help to build the appropriate financial institutions to provide these services. It may be that it is not necessarily the major banks themselves. It may be the major banks working in partnership with community development institutions, social entrepreneurs, charities and local communities. There may be many varieties of response. In the United States we have seen that response happen and we need that response here.

We have been in the frustrating situation since the crisis of 2007 of looking at the small businesses that are the backbone of any country’s economy and recognising that they have not been able to expand at their potential rate because of the lack of credit availability. That is merely one example. Again, many individuals turn to payday lenders and others with absolutely extortionate interest rates and borrow just to be able to function financially. Frankly, if you can repay a payday lender, you can certainly repay a properly priced loan. This proposal lets us address that.

I wanted to make two comments on the CRA, reflecting communications that I have had with the United States over the past week. The first is an e-mail from John Taylor, president and CEO of the National Community Reinvestment Coalition. In his e-mail of last week, attempting to explain to me how this programme had worked there, he said:

“The success of the CRA cannot be overstated. Where once lenders feared to tread, they now make loans. CRA requires that such loans be made in a safe and sound manner, which is why so few CRA mortgage loans were involved in the recent widespread fiasco in the US mortgage industry”.

It is exactly that which we seek to come out of this—organisations and arrangements that are capable of lending into these areas where the big banks have chosen not to tread. They can do it in a safe and sound manner, which many general lenders might decide is beyond their particular capabilities—but at least we can get institutions that can fill the gap.

My noble friend Lord Sharkey talked about the importance of public awareness and the ability to put data into the public arena. I am quoting now from the manual of the National Community Reinvestment Coalition from 2007, which says:

“If banks and regulators are the only stakeholders involved in a secretive or mysterious CRA process, chances increase that CRA exams and merger applications become rubber stamps without imposing meaningful obligations to serve the community. On the other hand, if the general public is actively engaged in providing thoughtful and penetrating insights and comments on bank performance, CRA becomes a rigorous process, holding banks accountable to serving community needs. Consequently, bank lending, investing, and services increase for low- and moderate-income communities”.

That, I would argue, is what we all wish to see and seek to achieve with this amendment and with the Government’s commitment that stands in its stead.

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[Lord Newby]

My Lords, this group of amendments includes the government amendments which introduce a practitioner panel for the PRA. Government Amendments 32 to 36, 38, 39 and 64 introduce a standing practitioner panel for the PRA and make consequential amendments, for instance to make clear that there are now two practitioner panels—the PRA practitioner panel and the FCA practitioner panel.

We have always recognised that robust consultation arrangements will be vital if the PRA is to regulate effectively. The approach as originally envisaged in the Bill was to have a high-level duty to consult, giving the PRA substantial flexibility as to how that consultation was carried out. To ensure accountability, that approach also required the PRA to report on its consultation arrangements.

However, having listened to the arguments advanced by noble Lords, and in particular my noble friend Lady Noakes, I am persuaded that it is right that Parliament should set out more detail for the PRA about how it should go about that consultation. A standing practitioner panel will be well placed to monitor cumulative burdens of regulation and give advice to the PRA on an ongoing basis about the effectiveness of its co-ordination with the FCA.

Of course, the Government expect that the PRA will consult much more widely and draw on the expertise of academics and others and the Bill does not take away from its power to do so. The new panel will be a useful addition to these arrangements, and I hope that these amendments meet the concerns that the noble Baroness raised at an earlier stage.

I turn briefly to Amendment 37A, tabled by my noble friend Lord Flight. This would have a very similar effect to the government amendments except that it specifies that the FCA may appoint persons to the PRA’s panel. The PRA panel is, of course, intended to give advice to the PRA about the best way to achieve its objectives, and, as such, it is right that the PRA should appoint people who it thinks are appropriate to the panel. The FCA’s objectives and its expertise will be quite different and I do not think it is appropriate to have the FCA appointing people to the PRA practitioner panel.

Overall, I think that the Government’s proposed approach works well, and I am not persuaded that my noble friend’s amendment improves upon it. I hope that, having seen the government amendments and heard my explanation, my noble friend will feel able to withdraw his amendment.

[Lord Flight]

My Lords, I am delighted to see that my Amendment 37A has effectively been reproduced by the Government. I apologise as I note that my amendment states, “The FCA may appoint”, whereas it should refer to the PRA. I had taken the same wording for the PRA panel as for the FCA panel. It is healthy to have this structure, which will give people greater confidence to work with the PRA.

[Baroness Hayter of Kentish Town]

My Lords, as I said earlier today, it feels rather wrong to establish a PRA practitioner panel while excluding the views of those whose money and savings are at the heart of this industry and who depend on well regulated companies for their well-being. It also looks a bit too cosy a set-up between the regulator and the regulated community with no user-interest input. So, while we do not oppose these amendments, we do not think that they are a balanced response to the demand for the PRA to listen to those who work in financial services.

We know from the Treasury Select Committee report on RBS of the silos that existed even within the FSA between its prudential and conduct sections. With the move to two regulators, physically a mile apart, there is an even bigger risk of such silos. This will not be helped by having two separate practitioner panels, so that even within the industry there will be a split between those addressing one regulator and those focused on the other. This will be the case as regards numerous issues, including, for example, benchmarking. The proposal is for LIBOR to be overseen by the FCA, and therefore have input from the FCA practitioner panel, but how it is working out in practice, the inputs to it and the use made of it will be the preoccupation of that part of the regulated community represented by the PRA practitioner panel. This proposal might therefore not be the best that the Government could have come up with. It was not the first choice of the industry and it would not have been our first choice.

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Moved by

[Lord Flight]

36A: Clause 6, page 29, line 19, at end insert—
“(c) seeking to sustain and encourage a competitive banking industry”

[Lord Flight]

My Lords, Amendments 36A and 36B are, to some extent, alternatives. I prefer Amendment 36A. As an objective for the PRA, it simply provides that the authority should be,

“seeking to sustain and encourage a competitive banking industry”.

Part of financial stability is a competitive banking industry. A considerable element of the problems that the banking industry got into were, to my mind, the result of a cartel, and cartels always cause trouble. Therefore, if you want a safer banking industry, you want it to be reasonably competitive. As it stands today, the British banking industry is not particularly competitive. I have forgotten the precise figures, but four banks have a very substantial proportion of the total deposit base. I should declare an interest as the senior NED of Metro Bank, which is pioneering banking competition—with, I am glad to report, considerable success—as a straightforward traditional retail bank.

However, I hope that the Government might at least consider Amendment 36A, which is not imposing anything particularly demanding on the PRA but which rightly includes that provision as one of the objectives in order to create a safer banking climate. Amendment 36B provides a wider definition of the banking objective of creating a competitive banking industry and, effectively, narrows the definition to the taking of deposits. It is based on the special PRA insurance objective.

[Lord Newby]

My Lords, I shall speak to the government amendments in this group and then I shall address the amendments in the name of my noble friend Lord Flight. In Committee we debated several amendments relating to whether the PRA should have a competition objective. Since then, the Government have considered further how the PRA should take account of competition considerations in its work, and decided to introduce provisions that, broadly speaking, require the PRA to be aware of the adverse effect that its actions can have on competition, and to minimise this wherever possible. In my view this strikes the right balance, ensuring that the PRA contributes to the creation of a more competitive environment in banking, but not to the detriment of safety and soundness. The PRA will have to explain how any rules it proposes to make are compatible with this new duty, as with its other regulatory principles.

I hope the new requirement addresses concerns that the PRA’s focus on safety and soundness will mean that it could impede competition within the financial services firms that it regulates or that it will ignore the impact of its actions or inactions on competition; for example, in setting barriers to entry for new entrants to the banking sector. In support of the new “have regard” requirement on the PRA, we are also introducing a requirement for the PRA’s annual report to include how it has complied with this new duty.

I turn to the amendments of my noble friend Lord Flight. As my noble friend Lord Sassoon stated in Committee, the FSA was required to balance multiple competing objectives and this led to a lack of institutional focus on prudential matters. Therefore, the Government remain firm on their decision that the PRA should have a single general objective against which it can be held to account by Parliament and the wider public. Giving the PRA a competition objective would also risk a new confusing overlap with the FCA’s competition objective, given that all firms regulated by the PRA will also be regulated by the FCA. As I have said, in our view a new “have regard” requirement strikes the right balance, ensuring that the PRA will provide an appropriate level of regulatory support to the need to have a more competitive environment in banking, but not to the detriment of safety and soundness.

Earlier in debates on this subject my noble friend Lord Flight suggested that there is a cartel operating in the banking sector. The OFT, rather than the FCA or indeed the PRA, has enforcement powers in relation to the prohibition of anticompetitive agreements, including cartels, in the Competition Act 1998. In addition, under the Enterprise Act 2002 it is a criminal offence for an individual to engage dishonestly in cartel activity and the Government are amending this provision to make prosecutions easier, via the Enterprise and Regulatory Reform Bill. If there is a cartel in any area of financial services then this is properly for the OFT to investigate as it has the appropriate expertise and powers. However, where I do completely agree with the noble Lord, Lord Flight, is that there are not enough banks. Whether it is Metro Bank or any of the other banks that are now getting established, there is general agreement that a more diverse and competitive banking sector will be very much to the benefit of the consumer. Therefore, while I thank the noble Lord, Lord Flight, for his amendments, we are unable to accept them and I hope that they will not be pressed.

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So I ask the Government—while accepting that they may not do so today—to keep in mind that moving from a passive to an active at the PRA level could open up competition within the banking sector. The resistance that we have seen for over a hundred years suggests that there is very high resistance to a competitive environment, and this is an opportunity to change that.

[Lord Flight]

I thank the noble Baroness, Lady Kramer, for her support, and I agree with everything that she has said. I would just add the following point. I think that government policy is perhaps not wholly joined up in that I had a party from BIS come to see me as it was conducting an investigation into the problems with licensing new banks—how long the process took and what issues might be addressed to increase competition and make it, in a safe way, easier for new banks to get started. BIS is aggressively pursuing a more competitive banking system, and although I welcome the Government’s passive guideline for the PRA, it seems to me that it is slightly unnecessarily muted.

I was delighted to read an article on the noble Lord, Lord Sassoon, in yesterday’s Sunday Telegraph. In relation to the PRA it said:

“In particular, the test”—

of its success—

“will be whether competition in the banking sector improves. ‘One of the mysteries or tragedies of the banking system is how few new entrants there have been over many decades’”.

The noble Lord, Lord Sassoon, added:

“I would like to see a world much more like the US where thresholds for new entrants are lower, not higher, because they are less systemically risky”.

Again, the noble Lord, Lord Sassoon, seems to be equally of the opinion that a more competitive banking industry is a desirable objective.

I should explain that I was using the term cartel not in a legal sense but purely reflecting that where four organisations have about 80 per cent of the business they automatically tend to behave as a cartel. If one looks at the history one will find that, first, the abolition of banks giving any services to their customers was started by Lloyds and followed by everyone else, and likewise with the abolition of banking charges. So if there are four key players the others always have to follow whatever the lead one does. They are not necessarily collaborating. It was an economic point that I was seeking to make, not a banking point.

I shall withdraw the amendment although I think that merely asking the PRA to encourage a competitive banking industry is fairly mild. I greatly welcome the Government finally crossing the line and giving the PRA some kind of competitive objective. I hope that before the Bill is enacted the Government might reconsider, as the noble Baroness, Lady Kramer, commented, moving from a rather strange, passive, tortured objective to a simple, non-too-pushy, positive objective. I beg leave to withdraw the amendment.

Amendment 36A withdrawn.

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[Lord Flight]

My Lords, I rise to speak most strongly in favour of my noble friend Lord Hodgson’s amendment. I hope that the Government will heed what he said. First, it is quite clear—you have only to look it up in the dictionary—that “proportionate” does not mean “reasonable and fair” as well. It has an arithmetic type of meaning. Secondly, my understanding when my noble friend Lord Sassoon was working on his plans for regulatory reform was very much that we wanted to have a well equipped central bank regulator of banks that would act in a judgmental way and be bright enough to see problems coming, not work on a box-ticking basis, and head them off as, in the past, various central banks have done quite successfully. You really cannot have a judgmental regulator without the inclusion of “reasonable and fair” in their objectives.

I add to some of the figures quoted from the FT Weekend. It was not just about New York; it also pointed out that the number of people working in the financial services industry in Hong Kong is now larger than that in London and indeed that London has lost about 100,000 jobs in the financial services industry since 2007.

Within the territory—I may have made the point in a different way before—I perceive that what happened is that light-touch regulation got a bad name and should never have been what it turned out to be. The reaction to that has been regulators turning macho. The reaction to that has been even very large and proper businesses saying, “We do not want to discuss things with the regulators. We are not going to voice our objections. We will shut up because we are frightened we will be picked on if we cause trouble”. Again, I would like to see the regulators state publicly that they want to discuss things with the industry, they welcome comments and are certainly not in the business of taking it out on firms just because they may disagree with what the regulator proposes. We have an extremely unhealthy situation right now where there is not dialogue or constructive reaction and discussion to the proposals coming out of the regulator.

I repeat: my noble friend Lord Hodgson has got it absolutely right. The amendment is fundamental to the reforms going through, if they are to work as I believe the Government intend.

[Lord Newby]

My Lords, these amendments again look to amend the proportionality principle to which both regulators are required to have regard when carrying out their general functions. Noble Lords will not be surprised to hear me say that that principle will play an extremely important role in the new regulatory system. It ensures that the regulators must consider whether the burdens they impose will be proportionate to the benefits that are likely to result. I am sure that that principle is universally accepted.

Amendment 42 specifically adds a requirement for the regulators to have regard to being “reasonable and fair”, as well as “proportionate”. Noble Lords will remember that my noble friend Lord Sassoon expressed support for the sentiment behind the amendment at an earlier stage. I am sure that all noble Lords would accept that nobody from this Dispatch Box would be a proponent of a new regulatory system we were creating if for one second we thought that the regulators would act in a way that was unfair or unreasonable.

Does the Bill achieve that objective? We believe that it does. The regulators will not be required to have regard to being fair and reasonable; they will have legal duties to be fair and reasonable; they go further than the amendment proposes. As we explained at an earlier stage, the regulators will have a duty under public law to act reasonably; they are also under a duty to comply with the rules of natural justice, so they will be required to follow procedures and processes that are fair.

My noble friends Lord Hodgson and Lord Flight gave a definition of proportionality. The definition that they gave was narrower than most people’s view of what proportionality means. In certain circumstances, it is a mere mathematical concept, but if I say that I am going to give a proportionate response to something that someone does to me, it is not simply calibrated or adding up figures; I think that it is seen in common parlance as being synonymous with a reasonable and fair response. As I said, the requirement on the regulators under public law to act in that way underpins that thought.

I have considerable sympathy, however, in respect of the threats that London faces as a pre-eminent financial centre. It is not surprising that Hong Kong and Singapore are growing very quickly, given what has happened to the economies in those parts of the world. You would expect growth there, although London is contracting in part because some of the activities that have been undertaken in London are no longer either profitable or, in some cases, credible. When one sees, for example, UBS downsizing significantly in London, it is not doing it because of the regulatory regime; it is doing it for fundamental business purposes, against which these provisions would have no bearing.

Where I agree with my noble friends is that we must ensure that the mindset of regulators in the UK is not negative. It has always been our intention that they would adopt a judgment-based approach; that has been stated on many occasions. That is the key to effect a change of culture in the way that the regulators work. If the amendment would have that impact, the Government might be more sympathetic to it. We simply do not believe that it would. As I said, we believe that the Bill will require the regulators not just to act proportionately but, under their more general duties, to act reasonably and fairly as well. On that basis, I hope that my noble friend will feel able to withdraw the amendment.

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[Lord Flight]

My Lords, I just want to say that clearly the Government could do with the money, but the original arrangements where, in essence, fines revenue benefited the clients of financial institutions—because it is always ultimately the clients who pay for everything—seemed to be fair and appropriate. There is less logic for saying that the fines revenue should benefit citizens as a whole rather than that it should benefit the clients of all the institutions that have to bear regulatory costs, which clearly get reduced if the fines go as they did go. I rather assume that the logic is that the Government need all the revenue they can get, but with whom was this discussed to reach this conclusion? Certainly, at the time of FiSMA, I remember there was quite a bit of debate about the subject and it was concluded that the proposed arrangements then were the fair ones.

[Lord Newby]

Possibly the new component in the equation is just the scale of the fines that we have seen. The Government took the view that, in those circumstances, the taxpaying public as a whole should get the benefit rather than that there should be a rebate to the industry. I hear what the noble Lord says about policy-holders benefiting from that. Of course, there is a large overlap between people who have financial services products and the electorate as a whole. It is not a complete overlap. It is one of those issues where it is simply a judgment call and the Government’s judgment was that, in future, where a significant amount of money is levied as fines, the benefit of that revenue should flow to the community as a whole.

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Moved by

[Lord Flight]

63A: Schedule 3, page 214, line 24, at end insert “and to the desirability of ensuring that at least two non-executive members have experience of insurance business”

[Lord Flight]

My Lords, during the Committee stage of this Bill I made the point that it would surely be appropriate for the life industry to be represented on the PRA board, against the background that the PRA fairly openly was admitting that it did not have much interest in the life industry. It was really concerned with its banking duties. But in the event of severe bear markets in equities, life companies can get into a situation where it is desirable for the solvency rules to be suspended in the short term so as not to have a downward spiral effect on asset values. This amendment simply proposes that there should be at least two non-executive members with experience of the insurance business on the board of the PRA. The Government certainly took the point in principle that the industry should be regulated. This is designed to put modest bones on that. I beg to move.

[Lord Hodgson of Astley Abbotts]

I will briefly support my noble friend’s amendment. There has been quite a lot of talk about how the Bill is oriented towards banking and that particular sector of the financial services industry. The insurance industry—particularly the life insurance industry, which marches to the beat of several different types of drum, one of which, in respect of solvency, my noble friend referred to—needs to make sure that its voice can be heard, because it is such a critical part of our savings industry. While one does not wish to be too prescriptive in the way these bodies are made up, I am sure that some reassurance to the life insurance industry that its particular expertise and particular needs will not be overlooked would be welcome and desirable.

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[Lord Newby]

My Lords, nothing has changed since the point at which the noble Lord, Lord De Mauley, wrote his letter.

[Lord Flight]

Is it felt that a single representative is sufficient in relation to the overall size of the board?

[Lord Newby]

My Lords, neither the Government nor the Bank have said that there will never be more than one insurance representative on the board. The commitment is the other way round. We have said that there will be at least one insurance representative on the board. At some points there may be more than one, but whether or not that is ever the case, there will always be one. That is the core commitment that we wish to make.

[Lord Flight]

I thank the noble Lord for his comments and beg leave to withdraw the amendment.

Amendment 63A withdrawn.