Financial Services Bill

Lord Hodgson of Astley Abbotts Excerpts

Wednesday 24th October 2012 Lords Chamber

Moved by

[Lord Hodgson of Astley Abbotts]

192A: Clause 74, page 145, line 20, at end insert—
“( ) In carrying out an investigation, the regulator must have regard to its regulatory principles and act proportionately, reasonably and fairly.”

[Lord Hodgson of Astley Abbotts]

My Lords, after that diversion through a possible Division and a discussion of batting averages, I rise to move Amendment 192A and shall also speak to Amendment 192B. We discussed, in relation to the previous amendment moved by my noble friend Lady Noakes, whether an investigation should take place. My amendments are concerned with Clause 74 and the way investigations take place once they are under way—the conduct of investigations, as in the heading of the clause.

At our Committee session just before we rose for the Summer Recess on 25 July, I moved a series of amendments which were designed to ensure that the regulatory approach was properly balanced and appropriate. Those amendments related to a point some way back in the Bill, on page 28, where we were looking at the regulatory principles to be applied by both regulators. My noble friend, who is not here at present, was able to reassure me on a number of the amendments that I moved, but on one I fear he failed. I argued that it was not sufficient for a regulator to be only proportionate in his activities; he also needed to be reasonable and fair. I then gave the Committee some practical examples of where, in the view of many in the financial services industry, the regulator may have been acting proportionately but was not acting reasonably or fairly. Therefore, my Amendments 192A and 192B are concerned with Clause 74, which relates to the conduct of investigations, and they seek to bring those two words into the phraseology of the clause.

At present in Clause 74 the wording is quite strange in the sense that in subsection (2) the regulator has only to,

“have regard to the desirability of minimising any adverse effect that the carrying out of the investigation may have on the exercise by the regulator of any of its other functions”.

It says nothing about the investigated firm; it refers only to the duties and responsibilities of the regulator. When my noble friend on the Front Bench comes to reply to the debate, it would be helpful if he could explain the exact purpose of this clause and what its practical effect would be.

Amendment 192A is designed to make it clear that investigators must be not only proportionate but, for the reasons that I have made clear, fair and reasonable in their work. Amendment 192B amends subsection (3) of the clause and provides for the postponement or suspension of the investigation where those regulatory principles are not being met.

When we discussed the “fair and reasonable” issue on 25 July, one reason that my noble friend gave was:

“The provision itself in Amendment 134 is unnecessary”.

He went on to say:

“The regulators have a duty under public law to act reasonably and can be challenged in the Upper Tribunal or by way of judicial review if they fail to discharge that duty, which would be broadly the case if the requirement were on the face of the Bill. The regulators are already under a duty to comply with the rules of natural justice—in other words to follow procedures and processes which are fair”.—[Official Report, 25/7/12; cols. 794-5.]

My noble friend read his speaking note beautifully but he cannot really believe its consequences. He is far too experienced a campaigner to consider that judicial review provides an answer to a firm that has been unfairly and disproportionately treated. A judicial review will take months and perhaps years to complete, whereas the effective life of a financial services firm in these circumstances can be measured in days. Confidence, as all of us who work in the City know, is an essential part of any firm’s reputation. Confidence is a fragile flower and news of an impending judicial review will cause it to wither and die. Indeed, fighting the regulator by means of a judicial review will increase the damage to the firm. Even if, after several months, the judicial review finds in favour of the firm, the firm will most likely then be only a pile of ashes.

When my noble friend replied, he said that “proportionate” equalled “fair” equalled “reasonable”, so I have since spent a little time with the Shorter Oxford English Dictionary. At page 2372—so “shorter” is not very short—“proportionate” is defined as:

“That is in … proportion (to); appropriate, proportional, corresponding”.

The example given there is:

“The toll … on the canal is proportionate to weight”.

In other words, there is a fixed relationship. There is no flexibility. There is the weight of the goods and that is what is going to be charged.

Turning to “reasonable”, the definition is:

“Having sound judgement; ready to listen to reason, sensible”.

That seems to be a slightly different relationship. It is slightly more of a two-way relationship which the definition of proportionate did not imply. So I would argue, despite my noble friend’s persuasive remarks in July, that fair and reasonable are not otiose in relationship to “proportionate”.

--- Later in debate ---

[Lord Peston]

We are indebted to the noble Lord, Lord Hodgson of Astley Abbotts, for raising these matters, although we discussed similar matters last week under the guidance of the noble Lord, Lord Flight, and my noble friend Lady Hayter. The central question here is our fear—fear in the relevant sector as well—that the regulators damage our financial services sector rather than improve its performance. I think that is the theme that lies behind these matters. I have two questions, but I am bad at reading amendments, so I want to be certain about them. Presumably the new subsection proposed in Amendment 192A would come before subsections (1) to (7) in Clause 74. Am I right that it would be the lead-in?

[Lord Hodgson of Astley Abbotts]

Yes.

[Lord Peston]

It would establish the principle which everything else must follow. That is fine; I understand what the noble Lord is saying. That leads me to ask two central questions. In Clause 73, and I think in something similar earlier, subsection (2) refers to “Relevant events” that occur in relation to,

“(b) a person who is, or was at the time … carrying on a regulated activity”.

What worries me as a matter of logic is whether we will end up with the regulator having to investigate him or herself. If these people have not met the standards, who is responsible? They are partly, of course, but this would also be an indication of regulator failure. To my way of looking at it, we have a part of the Bill that is totally bizarre. From a logical point of view, the answer to the question “Quis custodiet ipsos custodes?” is that the regulator is the custodes himself, if you like. I would certainly welcome an analysis from the Minister in his reply which shows that we are not seriously involved in a logical contradiction here.

My second question is whether the fact of an investigation of the kind we are discussing is to be in the public domain. In other words, will it be publicly known that the regulator is investigating one of the things going on here? It may be that I have not read it properly, but is not that itself potentially enormously damaging, again a point that was raised last week? I should like the answer to these two questions. It may be that Treasury officials will have to do a bit of thinking about this part of the Bill when they are not thinking about the logical nature of “may” versus “must”. As I have pointed out before, there is a vast philosophical literature on this. How much of it they will have time to read, I do not know. However, the central point is to get a rational response to the amendment moved by the noble Lord, Lord Hodgson.

[Lord Davies of Oldham]

My Lords, I am grateful to the noble Lord, Lord Hodgson, for identifying this issue, but I must say that if noble Lords opposite do not think that the nation is expecting a Bill and eventually an Act of Parliament that tightens up regulation in the wake of the circumstances we suffered four to five years ago, then all I can say is that such a position is not tenable. The noble Lord, Lord Hodgson, is indicating that the principles of the regulator should be expressed in these terms. Who can be against the principles of fairness? Of course we want and expect the regulators to act fairly, but let us remember that they may be acting under a direction from the Treasury because something has gone wrong. The idea that the first thing the regulator must do is consider the principles on which it must act rather than in fact investigate the nature of the problem, as it has been instructed by the Treasury to do, seems to put the cart very firmly before the horse.

In responding to this amendment, I am sure that the Minister will have some warm words for his noble friends who have spoken in favour of the amendments, but I hope that he will defend the basic objective of the Bill. I shall give way to the noble Lord.

[Lord Hodgson of Astley Abbotts]

I am extremely grateful. I did not want to interrupt his peroration, but dare I say that if he had listened carefully, he would know that I said that this is not about reducing regulatory stringency? I made that absolutely clear and I said it in terms; there is no question about that. This is a question about being fair and reasonable, it is not about reducing regulatory stringency. I do not want that particular line of attack attached to my amendments. I could not be clearer than that, and I think my noble friends on this side of the Committee are all as one so far as that is concerned.

[Lord Davies of Oldham]

The noble Lord will forgive me if the consideration that others might have with regard to a regulator potentially operating under direction from the Treasury to deal with a serious situation is that it should be dealing with it quickly and efficiently, and not just having regard to how much it acts appropriately or fairly, in the way in which the noble Lord has indicated. Of course, regulators know that if they act entirely improperly, even unlawfully, legal action will follow against them, but, in a Bill that is concerned to make regulation more effective, it surely cannot be that the principles upon which the regulators must act are more important than the effectiveness with which they carry out their role.

--- Later in debate ---

[Lord Newby]

My Lords, the noble Lord asks a number of questions. First, why might the Treasury have a role and why is the regulator not doing it already? There may be a number of occasions when the Treasury first gets information from somebody and wants to tell the regulator. There are some occasions when the Treasury might want to prod the regulator into action. I have been critical of occasions when I felt the regulator has not moved as quickly as I would have liked in undertaking investigations. This part of the Bill enables the Treasury to give it a kick if it is needed. The other point, which is a valid point, is that if there is a really serious problem of regulatory failure, this is not the only way in which the Treasury can make sure that an investigation is undertaken. The Treasury can appoint any kind of investigator that it wants. This part of the Bill simply explains how the Treasury operates and the rules which apply if there is a lesser regulatory failure which probably happened some time in the past, where it seems appropriate for the regulator to have a look. I understand the noble Lord’s concerns, but he should not be as worried as he is.

I will respond to the second amendment in this group, which we have not debated at great length. It seeks to add to the grounds on which the regulator may decide to postpone or suspend an investigation if the investigation did not meet the principles by which the investigator must abide. Unlike with the previous amendment, where we agree with what the noble Lord seeks to achieve but do not think that he needs to have his belt and braces, we think that this amendment could have perverse and unexpected effects by enabling the regulator to stop an investigation for any reason it wanted. For example, it could realise that an investigation was going to be very time-consuming and burdensome, perhaps because of the level of detail involved. Under this proposal, it could end an investigation and argue that it was doing so because the investigation breached its principle on economic and efficient use of resource. For those reasons, we cannot support that amendment.

A number of noble Lords, including the noble Lords, Lord Hodgson and Lord Flight, expressed broader concerns about the FSA and the noble Lord, Lord Hodgson, quoted Lex in aid of that. The noble Viscount, Lord Trenchard, and the noble Lord, Lord Peston, said that the FCA should have regard to competitiveness. These are broader issues that go beyond the scope of the amendments, but on the concerns expressed by Lex, I can understand why people are at this stage worrying about whether the balance that the regulators strike between the interests of the firms and those of the consumers of their products is right. We are pretty confident that it will be. The noble Lord, Lord Davies, pointed out that it is important that the regulators are rigorous and balance the interests of the firms and those of their consumers. The way in which the Bill is structured should enable them to do that and we are confident that they have that very much in mind.

Competitiveness has been debated previously and we have already agreed that we will look at this issue, particularly the degree to which the PRA and FCA should have regard to the importance of economic growth. We have said that we will return with further amendments in this area on Report, when we will no doubt have an extremely interesting debate on them. For today, however, I hope that the noble Lord, Lord Hodgson, will decide not to press his amendments.

[Lord Hodgson of Astley Abbotts]

My Lords, I am grateful to my noble friend Lord Newby for that extensive and courteous response. I am grateful to the noble Lord, Lord Flight, and the noble Viscount, Lord Trenchard, for their support. I can accept that this is a part of the Bill where the particular concerns that I have do not weigh as heavily as they did on the regulatory principles on page 28 of the Bill which we debated before we broke for the Summer Recess. I am happy to withdraw my amendment today, but I am not yet convinced that “reasonably and fairly” is not a useful addition in some part of the Bill even if it is not here. I beg leave to withdraw the amendment.

Amendment 192A withdrawn.