Entrepreneurs’ Relief

Debate between Lord Flight and Lord Newby

Thursday 26th February 2015 Lords Chamber

[Lord Newby]

My Lords, the Burt report contains a whole raft of really interesting proposals, which the Government will consider. The latest figures that I have show that some 990,000 SMEs are led by women. At about 20% that is a record high, as far as I am aware.

[Lord Flight (Con)]

My Lords, are the Government aware of the tremendous success of entrepreneurial endeavour—

[Lord Flight]

Excuse me. I apologise for my extremely embarrassing mobile phone. Is the Treasury monitoring the extent of entrepreneurial activity and success in this country? Never in my lifetime have I known such an explosion of entrepreneurship, particularly among all the new technologies, where other government measures are helping. This is a sort of Schumpeterian thing that is happening, which ensures our future. I find it quite difficult to access detailed figures—for example, on how many of the 1.5 million new companies over the last two years are new enterprises or other things. Is the Treasury monitoring the amazing thing that is happening in this country?

[Lord Newby]

My Lords, the Treasury is keeping records and noting the number of businesses. There are a record number of private sector businesses in the country at the moment, with an increase of 760,000 compared to 2010. There is of course a whole raft of measures, from having a long-term economic plan that has kept interest rates low to much more specific measures to support small business, which is helping this phenomenal growth.

Small Business, Enterprise and Employment Bill

Debate between Lord Flight and Lord Newby

Wednesday 7th January 2015 Grand Committee

[Lord Flight]

My Lords, as I have already pointed out, Amendment 25 really goes with Amendment 5. Very simply, and hence why it comes up in this section of the Bill, it endeavours to slightly widen the size of SME which can benefit from the provisions on credit information availability by substituting the R&D tax credit definition of an SME for the definition currently pertaining in the Bill.

There is quite an important point here, which is that the crucial measure of the ability of a company to command lending services is really its EBITA. Most companies with an EBITA below £5 million have problems in sourcing capital investment finance. Basically, the argument runs that the definition used for an SME is really too small and that small and medium-sized businesses are in just as much need of assistance in sourcing credit and investment as are smaller companies.

[Lord Newby]

My Lords, I begin by repeating that the Government are completely committed to ensuring that SMEs can access the finance that they need to grow and create jobs. That is why the Bill seeks to build on the progress that the Government have already made on this agenda by bringing forward further innovative solutions to ensure that businesses can borrow and succeed. These include ensuring that alternative lenders can access credit information on smaller businesses to help them make lending decisions, and creating a new process for rejected smaller businesses to be offered the opportunity to use government-designated platforms that will help match them with alternative lenders. I will go through the amendments in turn.

Amendment 18A relates to providing financial advice as part of the finance platform offer. The new process provided for by Clause 5 has been designed to address a specific problem affecting smaller businesses’ ability to secure finance: namely, the evidence suggests that a smaller business will go straight to its main bank when it needs to borrow. If the banks says no, the business will give up its search there in the belief that it is already at the end of the road, as the noble Lord, Lord Mitchell, pointed out when we discussed an earlier amendment. However, alternative sources of finance for smaller businesses are coming on stream all the time.

The new process will address this problem by requiring banks to offer businesses that they reject for borrowing a new option alongside making an appeal or going to see a broker. To be clear, going to designated platforms will be a route that rejected businesses can take alongside or in tandem with existing avenues available to them, such as seeking professional advice. It is right therefore that the platforms process remains focused on addressing the issue of access to finance, which is where the real problem is. Of course, platforms will also be able to add additional services on top of the minimum legislative requirements—the Government want to give platforms freedom to compete with each other to offer the best possible service. My noble friend will therefore be pleased to know that the Government’s discussions with the industry have indicated that the majority of providers interested in securing designation intend to support advice for businesses as part of their value added services. However, we do not believe that adding the specific amendment that he suggests is something that we should contemplate at this point.

Amendments 19 and 24 relate to parliamentary scrutiny. I hope that noble Lords will be reassured by, and be happy about, the government amendments that we have just debated, which accept the recommendation of the Delegated Powers and Regulatory Reform Committee to move to the affirmative procedure. The only thing I would say about Amendment 19 is that, in speaking to it, the noble Lord said something slightly different from what the amendment says. The amendment says that the Government should report on the number of times the regulations are used within a year. It does not say that it should be a broader report of the sort that he suggested in his speech. It is unlikely that these provisions will be used many times in a typical year, and the very fact that they will now be dealt with by affirmative resolution means that Members of both Houses will have a much clearer sense of exactly what has happened in any given year, because those who are interested in them will have been debating them.

Banking Act 2009 (Restriction of Special Bail-in Provision, etc.) Order 2014

Debate between Lord Flight and Lord Newby

Monday 15th December 2014 Grand Committee

[Lord Newby]

My Lords, as I was saying, the BRRD is part of this global push to make banks resolvable. It is designed to ensure that European member states have a harmonised set of resolution tools that can be used to manage the failure of a bank. It also puts in place mechanisms to facilitate co-operation between member states in planning for and managing failure. It covers banks, building societies, investment firms and banking group companies. The BRRD builds on the existing UK resolution regime in the Banking Act 2009, ensuring that many of the powers introduced in the UK will be replicated across the EU.

I now turn to each of the instruments in turn. First, the Bank Recovery and Resolution Order makes substantial amendments to the Banking Act 2009 to ensure that the UK special resolution regime is fully consistent with the BRRD. It inserts a new section into the Banking Act 2009 which gives the Bank of England a set of pre-resolution powers. They are designed to be used where, in the course of resolution planning, barriers to the effective resolution of the firm are identified.

These powers enable the Bank to require a firm to take action to ensure that the Bank could use its resolution powers effectively in the event that an institution fails. Where barriers have been identified, the Bank may, for example, direct a firm to dispose of certain assets or cease lines of business or change its legal or operational structure. To support these new powers for the Bank of England and its exercise of the stabilisation powers, the order gives the Bank new powers to gather information from firms. This includes a power to appoint an investigator to investigate a possible failure to comply with a direction. It also includes a power to apply for a warrant to enter premises in order to obtain documents that are required for the exercise of its functions.

Failure to comply with a requirement of the Bank of is an offence. This section replicates existing offences in the Financial Services and Markets Act 2000, which relate to requirements imposed by the PRA or the FCA in their role as regulator. Here, however, it relates to requirements imposed by the Bank of England. The Bank of England may delegate its enforcement of these powers to the PRA or FCA.

The order makes some amendments to the special resolution objectives, set out in Section 7 of the Banking Act. These amendments are designed to ensure full compliance with the BRRD, providing clarity and certainty for firms. There is nothing which fundamentally changes the objectives, which include ensuring the continuity of banking services, protecting financial stability and public funds and protecting depositors covered by the Financial Services Compensation Scheme.

The order adds a new section to the Banking Act 2009, which requires that relevant capital instruments of the firm—that is common equity, additional tier 1 capital and tier 2 capital—are either cancelled, reduced or converted into common equity at the point where a firm fails. This ensures that capital instruments do the job they are intended to do, which is to fully absorb losses at the point of failure. This write-down must occur before or at the same time as a stabilisation power is used. It may also happen in the absence of any resolution, either because the write-down is enough to restore the viability of the firm or because the firm is entering insolvency instead of being resolved.

The BRRD also introduces a new stabilisation option, the asset management vehicle. The Bank of England may transfer certain assets of the failing firm into an asset management vehicle, where they are then sold or wound down over time. This prevents destabilisation of the market through the immediate sale of the assets. It also prevents the assets being sold at an artificially low price.

The directive introduces a harmonised bail-in power across the EU. Bail-in is a tool which enables the Bank of England to cancel or modify contracts which create a liability for a failing bank. This allows the Bank of England to recapitalise the firm, stabilising it while the fundamental issues that have lead to its failure are addressed. The Government have had a policy to introduce bail-in powers for some time. Following significant progress on bail-in at an international level, and as part of the negotiations on the BRRD, the Government introduced bail-in powers via the Financial Services (Banking Reform) Act 2013. This order amends those provisions to ensure full consistency with the BRRD. In order to ensure that the bail-in is effective, it is necessary to prevent counterparties of the firm in resolution from closing out their contracts in order to avoid being subject to bail-in. The order therefore specifies that a range of contractual termination rights do not arise solely by virtue of the fact that a stabilisation power has been exercised.

The Bank of England is also given a power to impose a temporary stay on contractual obligations and security interests to which the firm in resolution is a party. This allows a short period while the firm is being stabilised, during which those obligations need not be met. This stay is very strictly limited in time to avoid having a disproportionate effect on affected parties.

This order also gives the Bank of England powers enabling it to support a resolution carried out in a foreign country. Where the Bank is notified by a foreign jurisdiction’s resolution authority that it has taken action to resolve a firm, the Bank must make an instrument that either recognises that action or refuses to recognise it. Recognition of a foreign resolution action will confirm that it has effect in the UK. This provides legal certainty about the effectiveness of resolution actions in other jurisdictions, reducing the risk of challenge and making cross-border resolution more effective. The Bank of England may refuse to recognise a third country’s resolution action, or any part of it, where certain conditions are met. These include a determination that the recognition would have an adverse effect on financial stability in the UK or the rest of the EEA, or that UK or other EEA creditors would be treated less favourably than non-EEA creditors with similar legal rights. The Treasury must approve any refusal by the Bank of England to recognise a third-country resolution action.

I move on to the second order, which puts in place safeguards for certain liabilities that may be subject to the bail-in tool in the event of failure. It protects certain types of set-off and netting arrangements that are respected in the event of insolvency. The provisions here ensure that they are also respected in bail-in. The order requires that liabilities relating to derivatives or financial contracts or covered by certain master agreements must be converted into a net debt, claim or liability prior to bail-in. Other types of liability covered by the safeguard must be treated as if they had been converted into a net liability. The order also puts in place arrangements for dealing with any breach of the safeguard. Where there has been a breach, the affected party is entitled to have that breach remedied. The remedy aims to ensure that the affected party is returned to the position that they would have been in had the safeguard not been breached.

The third order requires compensation arrangements to be put in place following the use of the bail-in powers. They are designed to ensure that the shareholders and creditors of the firm do not receive less favourable treatment than they would have done had the institution simply failed, without the exercise of the stabilisation powers. This is commonly known as the “no shareholder or creditor worse off” safeguard.

The fourth order implements the requirements of the BRRD on depositor preference. The majority of deposits in the UK, including all deposits of individuals, are protected by the Financial Services Compensation Scheme up to a value of £85,000 per depositor per institution. The Financial Services (Banking Reform) Act 2013 enhanced this protection by amending the Insolvency Act 1986 to add deposits covered by the Financial Services Compensation Scheme to the list of preferential debts. These debts are paid out first in insolvency, and are entitled to be paid out in full before other creditors receive any payments. This means that the majority of depositors in UK banks already have their deposits preferred.

The depositor preference order creates a new category of preferential debts, called secondary preferential debts. These are paid out after ordinary preferential debts but before other debts. All existing preferential debts, including covered deposits, will be ordinary preferential debts. The order designates amounts in deposits eligible for protection from the FSCS but above the £85,000 compensation limit as secondary preferential debts. Only deposits of individuals, micro-businesses and SMEs are given this preference. This change further reduces any chance that these depositors will be exposed to loss if the firm fails and either enters insolvency or is resolved using the powers in the Banking Act. This furthers the objective of protecting depositors.

I apologise for speaking at such length, but as the orders make extensive revisions to existing legislation I felt that they merited a thorough run-through. Taken together, they significantly enhance the UK’s resolution regime. Along with the other reforms that have been implemented to date, they will equip us well to deal with future bank failures in a way that protects taxpayers and the financial stability of the UK.

[Lord Flight (Con)]

My Lords, I would just like to put on record some concerns about the bail-in arrangements and what they are broadcast as achieving.

My first point is that, as the CEO of the Association of Corporate Treasurers recently said to the Lords EU Economic and Financial Affairs Sub-Committee, once there is any whiff of concern about a bank, any company will withdraw its deposits immediately. It is not going to hang around and wait for the bank to be subject to a bail-in. One thing that the bail-in arrangements do is actually accelerate the possibility of runs on banks. It will not be just corporate deposits; any form of lending to a bank will be subject to bail-in. If there is any whiff of trouble about that bank, that money will be withdrawn as soon as possible.

The second point, which perhaps has not been learnt from the recent banking crisis, is that the key thing that hugely accelerated the downturn in the economy in 2009 was allowing the money stock and the money supply to contract substantially, just as happened in America in the 1930s. If you are going to do a bail-in on a bank and its capital is going to get exhausted, it will have to contract its balance sheet dramatically, all other things being equal. While I note the comment that the Bank of England will come in and help, effectively it would have to be the state that came in and recapitalised banks or, again, the result would be a massive contraction of the money supply if any of the major banks were in trouble and thus required bail-in. Unless that happened, again, it would have the knock-on effect of a major economic contraction.

The bail-in arrangements make sense—we know what they want to achieve, which is to eliminate or at least reduce the extent to which the taxpayer has to bail out banks in a crisis—but people are kidding themselves if they believe that it is as simple as that. Fundamentally, even as a result of how the bail-in arrangements operate, unless the Government are there to replenish capital—whether they do so as the Bank of England or directly—you would have a huge monetary contraction, which would be damaging to the economy.

--- Later in debate ---

[Lord Newby]

My Lords, I thank noble Lords who have spoken on the debate on these orders. Their concerns fall into two parts. The first relates to whether this is a sensible way to do it, and what the negative consequences will be, and the second is a series of practical issues raised by the noble Lord, Lord Tunnicliffe.

The noble Lord, Lord Flight, said that these provisions could accelerate the possibility of runs on banks when it looks as though they are getting into difficulties but before we have got to resolution, and that if you get to resolution there will be a contraction of the money supply. If you have a banking crisis, whatever you do in advance, or even during the crisis, it will be extraordinarily difficult to deal with the crisis without there being costs somewhere. We are trying, with this regime, to ensure that the costs are minimised, for several reasons, and that the concept of “too big to fail”—that is, that the Government should be required to bail out banks if they get into difficulty—should no longer obtain.

First, we want the very fact that these provisions exist to have some impact on behaviour before we get to a crisis. We hope that well before you get to a crisis, shareholders and creditors will hold banks to account to a greater extent as regards their decisions. I hope that these provisions will give them an incentive to do that.

As regards the money supply, the Monetary Policy Committee monitors the money supply as part of its objectives and has a number of tools at its disposal to deal with that. Of course, resolution itself is intended to protect financial stability rather than the money supply, but the Bank has other tools in its locker to address the position as regards the money supply.

[Lord Flight]

If a bank loses its capital—and there are rules about how many multiples of its capital its expansion can be—it has to contract its expansion dramatically. That is the key problem: if you have a bail-out situation, it will most certainly remove all the bank’s capital, and that bank will have to contract dramatically. The question is: how will that be handled as regards the money supply?

[Lord Newby]

I accept that, my Lords, but if a bank gets into difficulties there are only two broad ways of dealing with it. One is for the Government to bail it out, and the other is for it to contract its capital in the way that the noble Lord describes. I think that there is a consensus internationally that we must get to the position that these orders will bring us to, where the primary responsibility will fall on the banks. As I say, it inevitably has an impact on the money supply—I do not deny that for a minute—but the simple point I was making is that the Bank of England has other tools in its locker to look at money supply.

National Minimum Wage

Debate between Lord Flight and Lord Newby

Thursday 6th November 2014 Lords Chamber

[Lord Newby]

My Lords, there are a number of reasons. One was that it was introduced at a time when the economy was growing, which made it easier for people to pay higher wages. That is why I am so pleased that the economy is growing so strongly now, which means that wages are rising again.

[Lord Flight (Con)]

My Lords, have the Government looked at the possibility of varying the minimum wage to reflect the cost of living in different parts of the country?

[Lord Newby]

My Lords, this has been looked at on a number of occasions and has always been rejected.

Bank of England

Debate between Lord Flight and Lord Newby

Thursday 30th October 2014 Lords Chamber

[Lord Newby]

I am not sure that that is a general principle that one would wish to apply more widely.

[Lord Flight (Con)]

My Lords, I agree with the Government’s view about retaining the well tested name, but would the Government also consider retaining in full, or restoring, the Bank of England’s lender of last resort powers, which have served this country’s banking system well for 150 years?

Banks: Bridging Finance

Debate between Lord Flight and Lord Newby

Monday 20th October 2014 Lords Chamber

[Lord Newby]

The noble Lord knows that 1.7 million households are waiting for social housing in the UK, and the spare room subsidy is intended to help move people into accommodation in those circumstances. I think that he would agree with me that the fundamental challenge that we in all parties face is how to increase the flow of housing, not just in aggregate but so that it is designed to meet the different requirements of different groups, including the elderly.

[Lord Flight (Con)]

My Lords, other than a few of the more enlightened ones, banks are now refusing to provide mortgage loans to anyone over 70. It is very well to say that banks can exercise discretion here, but when they are told by the regulator that that is what the regulator wants, not surprisingly they want to protect themselves, so they say, “Well, we’ll do what we’re told”. If they do otherwise, they put themselves out on a limb if something goes wrong. Basically, the regulator needs to be advised to make it clearer that it wants to see banks use their initiative.

[Lord Newby]

My Lords, as I said earlier, many lenders appear to be approaching the rules in a way that is against the spirit set out by the FCA. The FCA is reviewing the way the mortgage market review rules operate, and I hope that there will be some movement there. A number of banks and smaller building societies, in particular the Family Building Society and the Bath Building Society, of course do not have any age limits in their lending policies.

Finance: Fiscal Devolution

Debate between Lord Flight and Lord Newby

Wednesday 9th July 2014 Lords Chamber

[Lord Newby]

My Lords, the principle that operates if one is devolving tax revenue to a lower tier of government is that the amount of tax devolved is subtracted from the amount of grant which that tier of government would otherwise be getting. Therefore, at the start of the process at least, there is no net shift of revenue from one area to another.

[Lord Flight (Con)]

My Lords, will the Government consider allowing our cities to raise their own municipal bond funding, as is the case in the US and as was the case in this country in the greater days of our cities? It has only had to be done through gilts since after the Second World War.

Financial Services (Banking Reform) Bill

Debate between Lord Flight and Lord Newby

Wednesday 27th November 2013 Lords Chamber

[Lord Flight (Con)]

My Lords, I support what the noble Lord, Lord Brennan, had to say about the card payment system. Having looked at it in some detail, it strikes me that it is a classic situation of, “If it ain’t bust, don’t fix it”. There are so many other priorities that I urge the Government to think again about this one.

[Lord Newby]

My Lords, I think the burden of the case of the noble Lord, Lord Brennan, is that the Government are acting disproportionately in seeking to regulate something that is working very well and, in doing so, if they are not careful, they will cause major problems to a system that is currently without major problems. I hope I can reassure him that the principles that he set out at the end of his speech are ones that the Government share. There is no sense in which this regulator is being established with a remit to deal in the heavy-handed way that he fears. Given that we want to cover all payment systems, it would have been remiss to have excluded credit card payment systems. There is, however, no sudden plan to start a new, hugely intensive regime.

The noble Lord made the perfectly valid point that the regulator is slightly unusual in that it not only is a classic regulator but has a function to promote innovation as well. He raised a perfectly valid concern about the staff and whether we will be able to find people with the relevant expertise. We believe that there are people who have the relevant expertise and that it is an extremely interesting area in which innovation can be developed. The FCA will therefore be successful in finding staff who have the expertise and can do the job satisfactorily.

As I say, I am content that we are acting proportionately. We are not going to disrupt a system that is working well and we will be able to find people with the relevant expertise to manage it.

--- Later in debate ---

[Lord Flight]

My Lords, I simply add that there is surely a strong duty of care to the depositors, whose money a bank is lending. The bank has a balancing role of looking after the interests of its depositors and looking after the interests of its loan customers. I also echo the point made by the noble Baroness, Lady Cohen. The “treat your customer fairly” principle has been applied across the financial services sector and I think that, in the main, the investment management industry has put it into practice well. However, it is a nightmare to police. If the individuals are not going to be motivated to act properly, then the law, or whatever is in the regulations, will not necessarily lead to that. We can say that we will pass a law and everything will be wonderful but the question is: will people behave correctly?

[Lord Newby]

My Lords, I am sorry that when we discussed this amendment on a previous occasion, the Government failed to convince the noble Lord, Lord Eatwell, that his amendment was not necessary. I hope that I will have more success this time because I believe that the amendment is neither necessary nor helpful.

We all share the objective of driving up standards in banking and improving the treatment of customers. That is why the Chancellor set up the Parliamentary Commission on Banking Standards and why we have accepted the vast majority of its recommendations. However, we remain unconvinced that the noble Lord’s amendment will add anything meaningful to these reforms.

The regulator’s FSA Principles for Business already includes what is virtually a fiduciary duty. Principle 10 states:

“A firm must arrange adequate protection for clients’ assets when it is responsible for them”.

As other noble Lords have mentioned, these high-level principles also already include the principle that:

“A firm must pay due regard to the interests of its customers and treat them fairly”.

I am not sure how the noble Lord’s amendment would improve standards or help bank customers; nor do I think that he has explained what the new duties on firms really mean. When he spoke in Committee, he said:

“This will increase consumer protection and help to restore confidence of the retail customer in banks. It will raise standards of conduct because banks will know they are responsible for acting according to these duties”. —[Official Report, 23/10/13; col. 1092.]

But my question is: how will it do that? How will it, as he hopes, stop the kind of scandals that we have had in the past? I think that that is an extremely difficult question for the noble Lord to answer in that neither “fiduciary duty” nor “duty of care” in this context describes a specific, precise obligation. As I have explained before, regulators’ rules provide very specific obligations.

I should add that the Official Opposition in the other place seemed to understand this difficulty. When an identical amendment was considered in Committee there, the opposition spokesperson, Cathy Jamieson MP, acknowledged the risk of unintended consequences or lack of clarity. She emphasised that the purpose of the amendment was to ensure that,

“customers are looked after and that banks are clear about their responsibilities and remember the part of the contractual relationship with customers that is about looking after their money”.—[Official Report, Commons, Financial Services (Banking Reform) Bill Committee, 16/4/13; col. 247.]

Of course, that is what we all want. That is why the Government introduced the regulatory reforms and new properly focused regulators. The FCA, in particular, will focus on protecting consumers and maintaining market integrity.

This Bill will take the process further by strengthening the regime of individual accountability and standards for those who work in firms, in line with the recommendations of the Parliamentary Commission on Banking Standards. These rules will be specific. They will be precise. They will set out the responsibilities of banking staff and senior persons to their customers. Moreover, they will be enforceable by the regulator. If they are broken, those people will be punished and could be subject to fines or public censure.

If we were to have the general duty of care or fiduciary duty as set out in the amendment, how would that be enforced? In law a fiduciary duty is enforced by the person to whom the duty is owed taking action in the courts. Does the noble Lord really believe that those people, some of the most vulnerable at the sharp end of bank practices, are likely to pursue their bank through the courts? Instead, the Government’s reforms have established a regulator with real teeth, of whom the banks will genuinely be scared—indeed, I think they are. Bolstered by a clear and binding set of banking standards rules, which specify codes of conduct and personal responsibility through the senior persons regime, this will mean a real change for consumers. The noble Lord referred to the SEC introducing a fiduciary duty in the United States. The proposed fiduciary duty in US securities law is not comparable. The proposal, on which incidentally the SEC itself has not yet taken any clear position, extends only to covering activities that involve giving advice. In any case, in the UK, when a firm provides advice to a customer, a duty of care already exists under the general law. In that respect, the US is simply looking to catch up.

To sum up, attempting to add duties of care or fiduciary duties of the kind proposed in this amendment would add nothing to the existing protections for customers. It is unnecessary and would not add any clarity to existing requirements. I hope, therefore, that the noble Lord will withdraw the amendment.

Financial Services (Banking Reform) Bill

Debate between Lord Flight and Lord Newby

Tuesday 26th November 2013 Lords Chamber

[Lord Flight]

My Lords, these amendments have the support of the Law Society of England and Wales as well as that of Scotland—certainly for Amendment 27. The issue is pretty clear. The objective is to ensure that the provision of legal advice is not to be construed as taking decisions or participating in the taking of decisions, and for situations where solicitors or other legally qualified professionals frequently give advice on decisions which a bank or other institution may take. They do not make the decisions, but purely advise on legal issues where the Bill is currently unclear as to whether advising would be included in,

“participating in the taking of decisions”.

Amendment 27 seeks to clarify the position.

There is an irony here in that, as I understand it, Clause 15 creates a broad definition of a senior management function, and the term,

“participating in the taking of decisions”,

as currently drafted will capture legal advice. This could have some perverse results and disproportionate consequences, and a danger that all legal advice is considered as participating in decision-making. If that were to be the case, all banks’ lawyers might need authorisation from the Financial Conduct Authority to give legal advice, whereas of course they are already regulated through the Solicitors Regulation Authority.

[Lord Newby]

My Lords, I understand the concern of the noble and learned Lord and that of the Law Society about the position of lawyers under the new regime, and I hope very much to be able to reassure him.

Amendment 27 would amend Clause 15, which inserts new Section 59ZA into FiSMA, which provides the definition of a senior management function. A person becomes a senior manager only if they perform a function which has been designated by a regulator as a senior management function and have been approved to perform that function by the appropriate regulator on the application of the authorised person; that is, the firm concerned. A senior management function is one that will,

“require the person performing it to be responsible for managing one or more aspects of the authorised person’s affairs”,

and that,

“those aspects involve, or might involve, a risk of serious consequences—

(i) for the authorised person, or

(ii) for business or other interests in the United Kingdom”.

It is therefore highly unlikely that the regulators would designate being a legal adviser as a senior management function simply because giving advice does not constitute management as set out in the definition of senior management.

Clause 22 inserts new Section 64A into FiSMA, which allows the regulators to make rules of conduct for approved persons, including senior managers, and for bank employees. This implements the Parliamentary Commission on Banking Standards recommendation regarding the introduction of a “licensing regime”. This broadens the population who can be subject to the regulators’ rules, which could for example now apply to an in-house legal adviser in the capacity of an employee. In addition, the regulators already have a broad power to require firms to provide information, as set out in Section 165 of FiSMA. However, the regulators cannot make rules which would trump the protection of legal privilege. Section 413 of FiSMA provides expressly that no power under the Act can be used to require the disclosure of “protected items”. These are defined in terms which are materially identical to the definition of items subject to legal professional privilege in Section 10 of the Police and Criminal Evidence Act 1984. Consequently, FiSMA already prevents the regulator from obtaining legally privileged material.

The noble and learned Lord’s amendment would also introduce a protection against the disclosure to the regulator of “excluded materials” as defined in Section 11 of the Police and Criminal Evidence Act 1984. This includes personal records generated in the course of business and held in confidence, human tissue and journalistic material held in confidence. Clearly, the regulators would not request some of the categories of material included in this section. However, in relation to confidential information such as that compiled during the course of business, it might be appropriate, and indeed sometimes essential, for the regulators to receive it. However, FiSMA itself provides strong protection for confidential information received by the regulators when carrying out their regulatory functions. Section 348 of FiSMA prevents any such information being disclosed to a third party except for very narrow purposes. Further, where any such information constitutes personal data, it would be subject to the Data Protection Act.

The noble and learned Lord asked whether Section 413 of FiSMA covers communications as well as documents. I can give him that assurance. The section is not limited to documents, so regulators cannot require the disclosure of privileged communications. With those reassurances, I hope that the noble and learned Lord will feel able to withdraw his amendment.

Banking: Co-operative Bank

Debate between Lord Flight and Lord Newby

Wednesday 30th October 2013 Lords Chamber

[Lord Newby]

My Lords, the banking Bill incorporates many of the proposals of the Parliamentary Commission on Banking Standards. On switching, a new seven-day switching service was introduced last month. In its first month, there has been an 11% increase compared with the previous year in the number of people who switched their bank accounts. One would expect that number to increase as the service becomes better known. This year the big change in terms of new entrants to the market is that the regulators have greatly reduced the time that it takes to become a new bank and greatly reduced the amount of money it takes to establish a new bank. Those are key drivers for getting new competitors into the market.

[Lord Flight (Con)]

My Lords, as the noble Lord, Lord Sharkey, has pointed out, it is perhaps somewhat of an irony that the Co-op Bank should being bailed out by hedge funds. The crucial point is that the Government have made clear that the time of taxpayers bailing out banks is over. Bluntly, if a bank cannot organise its own financial affairs, the resolution mechanism is the only alternative.

[Lord Newby]

My Lords, one of the key purposes of the Financial Services (Banking Reform) Bill is to provide, in ring-fenced retail banks, relatively risk-free places for ordinary customers to put their money. Beyond that, the key thing is that the Bill’s resolution provisions will require banks to put in place mechanisms to be activated if they got into financial difficulties, such that they would not need to come to government in those circumstances.

Financial Services (Banking Reform) Bill

Debate between Lord Flight and Lord Newby

Tuesday 15th October 2013 Lords Chamber

[Lord Newby]

The definition relates to deposit-taking, retail and wholesale.

[Lord Flight]

Could I add my support? It seems to me that it is in investment banking territory where there is the greatest scope and where there has been the most inappropriate behaviour. It was Lehmans that nearly brought the whole system down. Part of the intent of the ring-fence is that what is in it is much simpler banking. The whole argument does not stand up unless investment banks are very much covered by the new regime.

Bank of England: Monetary Policy Committee

Debate between Lord Flight and Lord Newby

Monday 14th October 2013 Lords Chamber

[Lord Newby]

My Lords, I am sure that the noble Lord welcomes the fact that, for the first time, the Bank of England is looking at the employment rate as a way of deciding on the speed at which interest rates might change. I am sure he would agree, as Keynes probably would, that the quickest way to bring the rate of unemployment down is to get the growth rate moving more quickly. I am sure that he will be pleased that all the projections of growth are now being revised rapidly upwards. The IMF, for example, last week revised upwards its growth rate for this year from 0.09% to 1.4% and for next year from 1.5% to 1.9%.

[Lord Flight (Con)]

In the discussions that the Minister is having with the Chancellor and the Governor of the Bank of England, are they focusing on what the extent is of imported inflation or deflation compared to domestic inflation? It was largely a failure to understand that domestic inflation was far higher than the mixed bag that led monetary policy under the previous Government to go off the rails.

[Lord Newby]

My Lords, in recent years, there has been a very different mix of imported and domestic inflation, and we have not seen any significant degree of domestically generated inflation. That remains pretty much the same today. Fortunately, we are a very long way from the 1970s and 1980s, when domestically generated inflation was the single biggest problem of macroeconomic management.

Taxation: Tax Collection

Debate between Lord Flight and Lord Newby

Thursday 4th July 2013 Lords Chamber

[Lord Newby]

My Lords, this is exactly the issue which the OECD is looking at currently. Along with the French and the Germans, we have made a significant financial contribution in terms of getting experts working on this. There are a number of ways of dealing with it. The noble Lord suggests one way. The key thing is that we rapidly come up with new rules and get them implemented at an international level.

[Lord Flight]

Pertinent to the last question, some 20 years ago when transfer payments were introduced, I acted for the company that I was running in discussing with the Inland Revenue, as it was at the time, how they would operate. The arrangements were not based on legal matters, but on commercial reality. We went through each area of activity to see what was going on where and what would be a fair allocation of costs, revenues and profits. I cannot understand why transfer payments are not operated thus today. Will the Minister say whether we are operating transfer payment regimes in the way that they were intended and started 20 years ago?

[Lord Newby]

There is considerable scope for HMRC to undertake the kind of discussions that the noble Lord describes. The additional resources that we put into compliance have been spent in no small measure dealing with exactly that. The amount of revenue that we have been able to recover has increased by a number of billions, but this does not deal with problems such as the ones that my noble friend Lord Teverson has described.

Economy: Fiscal Framework

Debate between Lord Flight and Lord Newby

Tuesday 4th June 2013 Lords Chamber

[Lord Newby]

I will say yes to that as well. However, the Government completely agree with the point that the IMF made about the desirability of bringing forward infrastructure expenditure. That is why last year we put in place the infrastructure guarantee programme, which is already bearing fruit with the allocation of £1 billion to the Northern line extension to Battersea, and the recently announced £75 million to be given to Drax power station for its partial conversion to biomass.

[Lord Flight]

My Lords, does the Minister agree that running a deficit of over £100 billion when it was planned as roughly half that sum and creating money to the extent of £380 billion is extremely flexible in terms of policy? Some might even view it as rather excessively Keynesian.

[Lord Newby]

Clearly some do view it as that. It is worth bearing in mind that while we are reducing our deficit to the 3% EU Maastricht target over the period to 2017-18, even the relaxation that the EU has agreed in recent weeks with France, Slovenia, the Netherlands and Spain will get them back to a target of borrowing of less than 3% by 2015 or 2016. It is therefore taking us a lot longer. The Government have agreed to phase down borrowing over a much longer period than is allowed even under the reduced timetable elsewhere in the EU.

Public Service Pensions Bill

Debate between Lord Flight and Lord Newby

Tuesday 15th January 2013 Lords Chamber

[Lord Newby]

We look forward to that intellectual exercise. I think that I had just about dealt with Amendment 71A. Amendment 118A, to my mind, is grouped with Amendments 67B and 69A. They all relate to the same point about being able to constrain payments. All the considerations that apply to Amendment 67B and 69A apply to Amendment 118A as well.

[Lord Flight]

My Lords, the Minister has done a pretty effective job in removing the practicality of my amendment. I will just make the point about pensions in payment. I accept the argument that a contract is a contract, but for new people joining the public sector, a term of their employment could be that their pension right includes the possibility that, if their pension arrangements were in a mess, their pension could be reduced. In the case of an existing contract, I grant that it cannot be removed.

To the extent that it is possible, there ought to be broad similarity between what happens in the private sector and what happens in the public sector. Obviously, in the private sector, if a final salary scheme gets into a mess and the employer cannot finance the deficit, even though it goes to the Pension Protection Fund, people will not necessarily continue to get their full pensions with inflation increases and so forth. I think it is worth looking at seeking to design a scheme that is reasonably fair on both sides. I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Flight and Lord Newby

Monday 26th November 2012 Lords Chamber

[Lord Eatwell]

My Lords, the government Front Bench should calm down and allow us to conduct this discussion broadly under Report mechanisms but in a way which takes us forward on what, as my noble friend has said, is an enormously complicated Bill.

I am afraid that I think the proposal of the noble Lord, Lord Flight, is unfortunate and I cannot support it. It is unreasonable to provide this sort of protection to financial advisers, who should take full and appropriate care in the advice that they give. If they have taken full and appropriate care, they will be able to defend themselves at a later stage against the problem that the noble Lord, Lord Phillips, raised a few minutes ago, but I think it inappropriate that they should not be sensitive to potential comeback for advice which is inappropriate and misconceived.

[Lord Newby]

My Lords, when we debated this issue in Committee, my noble friend Lord Sassoon made it clear that this was an important issue for the regulator to review. The FSA has now committed to consider whether to investigate the case for a longstop as part of its business planning for 2014-15.

The amendment deals with the Limitation Act. It is important to be clear about both the nature of the issue and why I do not think that requiring the regulators to apply the Limitation Act when making rules provides the solution.

First, it is important to be clear that time limits apply for consumers bringing complaints to the FOS. These are: six years from the event that the consumer is complaining about, or, if later, three years after the consumer became aware, or ought to have become reasonably aware, that they had cause for complaint. The question which we are now debating is whether there should be a further absolute or overriding limit, possibly of 15 years. This is an extremely important question for the regulator to review and it is clear that it needs to take into account the particular features of financial services and financial service products in doing so.

When the FSA considered the issue previously, it noted that the long-term nature of some financial services products means that it can take many years for consumers to be made aware that they may have suffered detriment. An example from recent years includes inappropriate pension advice to switch from one investment or one type of pension to another. Consumers did not necessarily realise that this advice was inappropriate until many years later and as they approached retirement. This kind of advice was the subject of the FSA’s pensions review covering the period 1988 to 1994, and concerns about advice given in this period came to light only some years later. Advice from this period is still the subject of consumer complaints now.

It is important to realise that many of the matters that the FCA or PRA, or indeed the FOS, which is also relevant here, will be dealing with will not be subject to the Limitation Act at all. The Act applies to certain causes of action in private law, such as actions for breach of contract or negligence, but the FOS is required to determine cases by reference to what is,

“fair and reasonable in all the circumstances of the case”.

In some cases, there will be no private law course of action and so nothing for the Limitation Act to apply to.

It is also worth remembering that the Limitation Act is very context-specific legislation. Time limits vary considerably according to the nature of the claim; for example, the time limit for libel is one year whereas for negligence it is six years. The time limit also varies on the facts of the case. For example, it is extended in certain cases involving fraud or where the claimant has a disability. Even the 15-year, longstop period that applies in cases of negligence has exceptions—for example, for claims involving personal injury. Therefore, it would be particularly inappropriate as a guide for the FCA in its rule-making powers. It would be next to impossible for the FCA to know how the Limitation Act would apply to all the cases that could be subject to any proposed rule. Far from bringing the financial services into line with other sectors, we would, in our view, be failing to acknowledge that in financial services, as in other sectors, there are many claims to which the Limitation Act does not apply.

Having said that, the regulator will look again at the case for a longstop. In view of my arguments and this commitment by the regulator, I hope that my noble friend will feel able to withdraw his amendment.

[Lord Flight]

My Lords, the key point here is that, in setting the rules for the Financial Ombudsman Service, the FSA decided that no reasonable limit would be provided and that complaints should be brought for an unlimited period of time. This is effectively where the financial adviser industry does not, therefore, have the protection of the statute of limitations.

This area needs to be looked at urgently. I repeat that looking at it in Section 204 is not urgent enough because, assuming that the RDR reforms are not changed, a large number of financial advisers will be going out of business in 2013. For their clients, the best hope is that it will be possible to sell those businesses on to somebody else, but obviously none of them can be sold if there is an unknown exposure to complaints down the line. For better or worse, it is well known that the industry feels extremely upset about the fact that it is picked on in this particular way.

I can see that I will not be able to persuade the Government to do anything immediately and that what we have is at least better than nothing. However, I repeat my exhortation that the Government should consider working with the FSA for a greater urgency in this matter so as it might be addressed coincidently with the RDR. I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Flight and Lord Newby

Monday 12th November 2012 Lords Chamber

[Lord Newby]

Perhaps the noble Lord will look at the government amendment, which refers to the need for the FCA to consider,

“the ease with which consumers who may wish to use those services, including consumers in areas affected by social or economic deprivation, can access them”.

The ease with which consumers can access products is affected directly by the costs that might be imposed by the FCA. This puts a duty on it to consider how its own costs, and not just the product characteristics, impact on consumers in those communities. I think what is required is there.

[Lord Flight]

It seems to me that the FSA is already doing this. It is weighing access against consumer risk. It said that you cannot market UCIS, VCTs or EIS to other than sophisticated investors because it has been judged that it is better to ban unsophisticated investors completely from being able to use these products as they are too high risk for them. That judgment has been made already.

[Lord Newby]

I am sure that the noble Lord is right. However, with this amendment, we are seeking to address the problem that people in deprived communities are denied access to many of the products that are available in more affluent communities. We want to give the FCA a nudge towards trying to see how simple products and various other products can be developed, which will support people in deprived communities. It does not in any way detract from the FCA’s requirement to protect unsophisticated investors from sophisticated investment products.

The challenge that this amendment seeks to deal with is that, for many people in deprived communities, the range of products available, even simple products, is very limited. We want to see how we can help to ensure that the regulatory framework does not keep that straitjacket as tight as it sometimes has been.

I hope that I have been able to persuade your Lordships that the government amendment will have a material impact on access in deprived communities. I hope that I have also been able to reassure noble Lords that what they intend to provide through Amendment 25F is already enshrined in the Bill and that the noble Lord will be persuaded to withdraw his amendment.

--- Later in debate ---

[Lord Newby]

My Lords, I thank all noble Lords who spoke on these amendments. The noble Lord, Lord Hodgson of Astley Abbotts, asked for specific confirmation about the Government’s approach in respect of consumer protection, regulatory principles and competition. I am very happy to confirm that, in respect of consumer protection, the Bill will now require the regulators to consider expectations; the regulatory principles, ditto. As far as the competition objective is concerned, it will consider access in general terms. I hope that I have satisfied him on those points.

On his concerns in respect of the regulator and the professions, I am not at all surprised at what he said about the regulators being on a learning curve—not least because this is a rapidly growing, innovative area which has been very small. Because I think it is rapidly growing, and because we are giving it a bit of a push, I think that the regulator will be required to take it more seriously. I think that all those involved in the sector now have a lever to apply to the FCA to ensure that it does not get submerged as an area of interest.

As far as the professions are concerned, as I said earlier, the one area where we are hoping that some of the larger firms will get involved—particularly in terms of bringing products to market—is where the bank can act as an umbrella under which social investment projects can seek funding, so they themselves do not have to go through huge regulatory hoops. We are at a very early stage in evolving a mechanism for doing quite a lot of these things because they are so new.

The noble Lord, Lord Flight, raised the point about sophisticated investors; he said these were sophisticated investments. The noble Baroness, Lady Kramer, answered him in large measure, because although they are sophisticated—in the sense that you might lose all your money—we do not envisage that, unlike many sophisticated products, they will be restricted to people putting in very large amounts of money. We hope they will be projects that will attract relatively small sums, albeit with the acknowledgment that there may be a very considerable risk attached to the investment.

[Lord Flight]

I thank the noble Lord for giving way. It seems clear to me that, whether spoken or unspoken, government policy is to keep unsophisticated investors away from any form of higher risk investment. You do it by the RDR getting rid of the majority of IFAs; you do it by banning the ability to market VCTs—pretty low risk—and EIS to unsophisticated investors. Both of these could be quite small investments. I think the Minister has followed the logic that if that is the policy, it does not fit to say, “Ah, but it is perfectly all right to market a new concept which people will not particularly understand, or understand that they might lose all their money”. In the spectrum of risk, it is a relatively high risk investment. As far as I can see, the policy is all over the place.

[Lord Newby]

It is not all over the place because people who are investing in these products are doing so for different motives. They are doing so because they want a project to be successful and to achieve a social outcome. That is not the kind of product that one normally associates with a product that is limited to sophisticated investors, so I think that the noble Lord is talking about two different sorts of products entirely. Very often, the products that are marketed to sophisticated investors have the attraction that, if all goes well, they will bring a larger than average rate of return. Nobody expects the kind of products we are talking about here ever to be generating vast returns for anybody; that is not their purpose. The purpose is to get new money into socially desirable areas of activity. There is a distinction and I hope that he is persuaded that we are not all over the place.

Although I was beguiled, as always, by my noble friend Lord Phillips’ comments about my accepting Amendment 31, I am sorry that I am not able to do so. I think that our amendment does the business.

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[Lord Newby]

My Lords, we can indeed all agree on the importance of financial education so that young people and adults are able to take responsibility for their finances and make informed financial decisions or, to repeat what the noble Lord, Lord Flight, said, know what they are investing in. I absolutely agree with the noble Lord, Lord Deben, about schools getting better at teaching the necessary tools of life. He mentioned cooking. Before I took up this post, a number of years ago I was an adviser to the School Food Trust, which has been extremely successful at starting cooking clubs across the country. We are looking to provide the same kind of experience in financial literacy.

There are a number of ways in which we can do this, one of which is through the formal curriculum. The All-Party Parliamentary Group on Financial Education for Young People is one of the largest in Parliament and it has been giving guidance to the Department for Education about financial education and the curriculum. Another is to consider how we can insert financial literacy into school life in a way that young people will find engaging. In that regard, the work by organisations such as the Citizenship Foundation and some of the banks has been really valuable. The Royal Bank of Scotland’s money sense for schools programme and Nationwide’s financial skills programme provide materials which make the subject interesting and bring it to life. That is very important. It is worth underlining that £25 million of initiatives by the financial services sector took place last year.

The amendment requires the FCA to work with the Department for Education. The FCA is the regulator but the Money Advice Service is the appropriate body to work with the DfE at an operational level on matters of financial literacy. The Money Advice Service was established by the FSA and its objectives are set out in new Section 3R of FiSMA, as inserted by Clause 6 of the Bill. Those objectives specifically include a requirement to promote,

“the publication of educational materials or the carrying out of other educational activities”.

The Money Advice Service has been engaged with officials from the DfE and has provided a written response to the department’s invitation to engage in the debate on financial education in the curriculum. It will continue this engagement when the formal consultation on the national curriculum takes place in the new year.

I am extremely sorry that the noble Lord, Lord Flight, has not had a reply from my right honourable friend David Laws in the terms that he would wish. The Department for Education has attempted, through the new EBacc, to make sure that all children have basic academic skills at school. The life skills we are now talking about need to be added to those parts of the curriculum that are not given statutory cover. However, curricula are definitely beyond my pay grade and the exact way in which we ensure that financial literacy is better promoted in schools is an issue that the Money Advice Service and the Department for Education need to be engaged in.

I agree with the noble Lord, Lord Flight, on the importance of financial education and on the need to improve the way in which we teach it in schools, but I do not think that his amendment is the way we will achieve it. I hope the other ways that I have mentioned will prove more effective and that my noble friend will feel able to withdraw the amendment.

[Lord Flight]

My Lords, I accept that the amendment is not appropriate, although it was the only way in which I could raise the issue. I would like to think that the Treasury will be motivated to co-operate with the Department for Education to address this issue. That is the only way in which we will make significant progress. I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Flight and Lord Newby

Monday 12th November 2012 Lords Chamber

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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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[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.

Small and Medium-sized Enterprises

Debate between Lord Flight and Lord Newby

Monday 29th October 2012 Lords Chamber

[Lord Newby]

I do not think there is any general principle involved in that. The new products being designed under Funding for Lending would enable SMEs to get additional capital where they are. For example, RBS has introduced a new scheme under this programme that will cut the rate of lending by between 1% and 1.6% for small businesses and abolish arrangement fees for new loans. Those are not limited to companies that are moving but apply equally to companies which want to expand where they are.

[Lord Flight]

My Lords, the scheme makes lending very attractive to banks because the cost of funding is remarkably low, but there are many situations where what is wanted is equity rather than loan capital. Will the Government review some of the changes to the EIS arrangements for providing equity, where the changes in loss relief and the latest FSE changes in marketing EIS are discouraging the raising of equity capital for small businesses under the EIS scheme?

[Lord Newby]

My Lords, there has been a long-standing problem in small businesses raising equity in the UK. The EIS is one component in doing that. Of course, as we look towards next year’s Budget, we are reviewing all programmes that might offer any capacity to increase the flow of funds into small businesses.

Financial Services Bill

Debate between Lord Flight and Lord Newby

Wednesday 24th October 2012 Lords Chamber

[Lord Newby]

My Lords, this amendment seeks to codify a process for switching bank accounts and—as with a number of other amendments—we sympathise with the intention behind what the noble Lord, Lord Flight, is seeking to do, but I do not think the amendment is technically necessary for reasons which I will explain. As the noble Lord pointed out, there has been a great deal of progress since the Independent Banking Commission recommended that a new switching redirection service should be set up to ease the process of switching current accounts. The Payments Council has committed to delivering that recommendation. The new switching service will provide a safe, hassle-free and convenient service for customers to switch their bank accounts in no more than seven working days.

We believe that, working with the industry, the Payments Council is on track to deliver the new service by September next year. As the noble Lord, Lord Flight, said, all the major current account providers in the UK have signed up and the Treasury is keeping the pressure on the Payments Council via monthly working-level meetings and quarterly reports. The banks which have not yet decided to join, the 3%, obviously cover a very small percentage of the market. The reason for their having declined is usually that they do not yet offer a current account or because they are unable to update their systems in time. The Payments Council plans to launch a second wave of switches, possibly in the first quarter of 2014, to accommodate those institutions, while allowing sufficient time for the switching service to prove its stability. So we hope that the small rump will be included in the system by the first quarter of 2014.

The noble Baroness described the problems that she has had in switching her bank account. I had a better experience. When I decided to combine my bank account with that of my wife—after more than 30 years of marriage—I found that, broadly speaking, I got the service envisaged in the Payment Council’s new approach. The problem I had was that although the bulk of my direct debits were satisfactorily dealt with, for reasons which were completely unclear a small number were not. Of course, one finds that out only when one gets a stiff letter saying that some essential thing which you are funding on an ongoing basis is about to be revoked because you have cancelled it. In my case, the problem was not that the intentions were dishonourable, it was simply that the system was not as effective as the two banks would have liked me to believe.

The noble Lord, Lord Flight, demonstrated the value of competition in the banking sector, in that Metro Bank seems to have achieved something in respect of money-laundering that the serried ranks of the established banks have failed to do, which is to have a simple way to prove who you are to their satisfaction. No doubt noble Lords such as me have experienced this bizarre situation in the past couple of years. I have been rung up by my bank to say that because I am a politically sensitive person, I had to prove my bona fides to the bank. Given the nature of the bank, which I had better not name, my response was to say, “I think you had better prove your bona fides to me”, which did not go down desperately well. Of course, it did not have to and I did.

The noble Baroness asked a very important question: can we trust all the banks to do that in a timely manner and in a way that does not cause the sort of problems that she had? I point out that the drafting of the FCA’s competition objective at new Section 1E(2)(b) requires the FCA to have regard to the ease with which consumers can switch providers in considering the effectiveness of competition. So the importance of removing barriers to switching in promoting effective competition is hardwired into the legislation. The FCA will have a lean to require the banks to behave in an efficient and effective way.

In the light of all those considerations, I hope that my noble friend will feel able to withdraw his amendment.

[Lord Flight]

My Lords, the first point I would like to stress is that, as I understand it, the Payments Council’s proposals do not involve grandfathering anti-money-laundering. I will take that up further, but if we do not get that, it ends up achieving very little. The noble Lord has in part answered my second point: if you start off with domestic competition being an objective of the FCA, part of achieving that has to be being able to move bank accounts easily. I hope that the empowerment that the FCA has in this area, to which the Minister referred, will be adequate.

As I said earlier, this is essentially a probing amendment, but it is important. Going back to why banks make a great problem of anti-money-laundering, it is because they do not want to lose customers. It is not a question of cracking anything marvellous; anti-money-laundering requirements were wonderful for financial services businesses. They made it a hassle for everyone to move their custom somewhere else. Those businesses are not stupid. Indeed, I have regarded anti-money-laundering as almost a plot by the whole financial services industry to strengthen their oligopoly.

The Payments Council measures are crucial, and I hope that the Treasury will clarify that point in its discussions with the council. Having said that, I thank the noble Baroness, Lady Hayter, for her support—I agreed with everything she said, in truth—I hope that the profile of this issue will be raised and I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Flight and Lord Newby

Wednesday 17th October 2012 Lords Chamber

[Lord Newby]

My Lords, what we are talking about here is how we make sure that all those who should be consulted are consulted in respect of the work of the European supervisory authorities, the EU institutions and other international organisations. We are talking about the international dimension of the work of the financial services authorities as opposed to the domestic work that we have been looking at up to now.

We agree absolutely that consultation is an important part of the formulation of policy at the international level as well as the domestic level. It is perhaps worth starting by saying a bit about the way in which the international bodies themselves have sought to consult. The EU, following the Lamfalussy report in 2001, has increasingly appointed expert groups comprising industry, academics and consumers as the first stage of formulating policy. The UK has provided many distinguished members of those working groups. For example, the Commission set up a financial services user group, whose members included Mick McAteer, who was a founder director of the Financial Inclusion Centre, and Robin Jarvis, professor of accounting and head of SME affairs at Brunel University. We have therefore had strong UK representation on those European bodies for a long time.

One of the other main pillars of the international regulatory framework is of course the Basel Committee on Banking Supervision. It has consulted widely on its proposals for Basel III, and the Financial Stability Board’s charter clearly states:

“In the development of the FSB’s medium- and long-term strategic plans, principles, standards and guidance, the FSB should consult widely amongst its Members and with other stakeholders including private sector and non-member authorities”.

So at the international level, there has been growing recognition that the board itself needs to consult, and in many ways that will be the most effective level of consultation in respect of provisions that the board is making.

National regulators also have an important role to play in the consultation and feed their views through to the European supervisory authorities. The FSA already takes that responsibility extremely seriously, and the PRA and the FCA plan to do the same.

The regulators will be required to consult on any proposed new rules that are required to implement EU or international regulatory initiatives, except in cases of urgency. The FSA already does that. For example, in July this year, the FSA published a consultation asking for views on how to transpose Solvency II into the UK rulebook. In addition, the FCA and PRA’s contributions to international policymaking processes will be informed by engagement on an ongoing basis with the industry and other relevant bodies. That means that the views of affected parties will be considered at all stages of the policymaking process.

The UK practice has been a mixture of formal and informal consultation, which has meant that the regulatory bodies—the FSA and the Treasury—when going into negotiations in Brussels or at Basel, have taken a lot of trouble to gauge the views of the UK financial services sector and have sought to reflect them effectively. I may be wrong, but I think that the sector feels that that is the case.

Regarding the question asked about why the MoU does not deal with PRA-FCA co-ordination with the ERAs, the PRA-FCA memorandum of understanding is covered in new Section 3E(3)(a) on page 31 of the Bill. I am afraid that I cannot read that out at the moment, but I refer noble Lords to it.

My noble friend Lord Sharkey asked an extremely good question but, as I have explained regarding the way that the authorities are approaching co-ordination, even though not every last detail will be set out in a memorandum of understanding—and some clearly are—the authorities plan to take consultation extremely seriously. Apart from anything else, they have learnt through harsh experience that unless they have done that and are able to carry the industry with them, it just stores up more problems for the future.

I am convinced that the culture of the regulators is that they consult widely with relevant stakeholders and will continue to do that, and that it is not necessary to have an explicit provision in the Bill to ensure that that continues well into the future.

[Lord Flight]

My Lords, I made the point that it had worked pretty well so far. However, we are dealing with new regulatory bodies being set up, and I just repeat the point that this Bill is pretty prescriptive in what it requires. I have, I regret to say, encountered some criticism that the FSA has not gauged the views and criticisms of the different bits of the industry adequately with regard to MiFID 2. We have some MiFID 2 proposals from the EU that are likely to be wholly unworkable and could be very damaging to this country by penalising trading between a London-based party and an overseas party. Although the record is pretty good, it is a little disappointing that on an important recent matter I found criticism of the consultation.

I cannot see why we should not put it in the Bill rather than just relying on it happening automatically. It is not a very great issue, but perhaps the Government might think a little further about this. I do not think it is an onerous requirement. In the mean time, I have raised the issue and beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Flight and Lord Newby

Monday 15th October 2012 Lords Chamber

[Lord Newby]

My Lords, I am very tempted to say that I agree with the noble Baroness, Lady Sherlock, and sit down.

[Lord Flight]

Quite right.

--- Later in debate ---

[Lord Flight]

My Lords, I shall not move Amendment 189A. I am now satisfied that the powers here do not contradict or are not repeated by powers under Section 404 and that the potential arrangements of the ombudsman’s power to refer to the FCA are quite helpful. Similarly, I shall not move Amendment 189B.

[Lord Newby]

My Lords, this group is now slightly confusing in that more amendments will not be moved than have been moved. However, I shall do my best to speak to the one that has been moved, but if I find myself speaking to one which will not be moved, no doubt someone will tell me.

On Amendment 188A, which would enable super-complaints to be made to the PRA about the with-profits market, the Government recognise the thrust of the argument that the Bill is drafted so as to give the sole responsibility to the PRA at the moment. However, in the light of our earlier debate about “with profits”—in particular, the points raised by the noble Baroness, Lady Drake—the Government committed to giving further consideration to this matter. I can confirm that the Government intend to amend the Bill on Report to enhance the role of the FCA in “with profits” regulation, in a way that I hope will meet the noble Baroness’s concerns. We will write shortly to the noble Baroness, Lady Drake, on this point and I will of course copy the letter to interested Peers. This may be the first absolutely firm concession that we have made this evening, and I am delighted to be able to do it.

Financial Services Bill

Debate between Lord Flight and Lord Newby

Monday 15th October 2012 Lords Chamber

[Lord Flight]

My Lords, I speak briefly in support of this amendment. Keydata did actually expose a great deal of feeling of unfairness among different parts of the industry. The point was made about the heavy burden on fund managers but SIPP administrators, who are purely administrators and not involved in managing money, are for some reason lumped into the same category as fund managers. There is a very substantial burden on their resources. The whole area wants looking at, particularly if we are increasingly to become a compensation culture and if the sorts of amounts expected from the scheme are going to grow and grow. There is quite a problem and quite an issue to address in deciding how to cut the cake in deciding who, in fairness, should pay what.

[Lord Newby]

My Lords, this amendment seeks to remove the possibility of any element of cross-subsidy between different classes of authorised firms. We do not feel that it is either necessary or helpful. We do not consider that the practice of allowing some cross-subsidies between classes is inherently wrong, and nor should it be prohibited in every case. Not only does the potential for cross-subsidy help ensure a sustainable scheme with lower levy thresholds, but it helps to ensure that the compensation supports consumer confidence in the financial services sector as a whole, by limiting the risk that compensation claims cannot be met. If the scheme has insufficient funds to pay out claims to policyholders of a failed insurer, bank customers are unlikely to have confidence that the scheme will be able to pay out if their bank fails.

As I have already stated, the decision on how the FSCS is funded is best made by the regulators and implemented through their rules. In particular, it is the regulators who understand what is appropriate and affordable by different classes of firms and so are best placed to determine when, or indeed if, cross-subsidisation is appropriate. I equally accept, however, that there is a need for proportionality in the different classes of firms that are expected to contribute. I am well aware, for example, that in the past the building society sector has felt that it has had to pay a disproportionate burden.

However, as I have mentioned, the FSA is consulting on how the FSCS will be funded, although in broad terms, as the noble Lord, Lord Teverson, said, both the PRA and the FCA will have rule-making responsibility for the scheme. The PRA will make rules for deposit takers and insurance providers and the FCA will make compensation rules for all other types of financial activity covered by the scheme.

The best way to deal with the specific issue raised by my noble friend is via the FSA’s consultation on the draft scheme, which I mentioned earlier. It is ongoing—it has several weeks left to go—and it is the best way now of ensuring that the scheme we end up with is the best possible scheme for all the different classes of firms which will be covered by it. On that basis, I ask my noble friend to withdraw his amendment.