Financial Services Bill

Lord Hodgson of Astley Abbotts Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, when one is the 36th and last speaker in a debate of this length and quality, inevitably most of one’s foxes have been shot—in many cases, in fact, not so much shot as riddled. I do not want to trespass on the kindness of the House, especially at this late hour, by repeating familiar arguments.

I declare an interest: I am chairman of two firms that are regulated by the FSA, and until recently I was chair of a third. I want to make three points about the Bill: my gloss on the architecture; something about the philosophy and culture that are currently around in the Financial Services Authority and which I fear may be transmitted to the new bodies; and an area that has been less well covered today—the question of social impact investment, which is important for the future.

I first became involved in City regulation some 12 years ago. I was one of the first directors appointed by the Bank of England to the then new Securities and Investments Board. Experience has taught me since then, and I have served on regulatory boards since, that every crisis is always followed by cries to move the architecture around and change the bodies. Indeed, the SIB itself was the result of a crisis—a rather minor one by today’s standards—in that the Bank of England suddenly became enthusiastic when it found that, rather unpleasantly, its own pension fund had been adversely affected by the activities of a firm called Barlow Clowes. The Bank immediately agreed that there needed to be one central regulator, with subsidiary regulators that could carry on more specifically focused activities. In the end, there were three such: the Securities and Futures Authority, the Investment Management Regulatory Organisation and the Personal Investment Authority. In fact, this was a triple-peak regulatory system as opposed to a double-peak one.

Why did that system not prove successful? In a word, to follow what the noble Lord, Lord Desai, said: Barings. The overnight collapse of one of Britain’s most historic merchant banks caused ripples of concern. The need for reform was given further impetus by the view that the subordinate regulators were too introverted—my noble friend Baroness Noakes referred earlier to regulatory capture—and not sufficiently accountable. We have had echoes of that today, and no doubt we will continue to in our discussions about the Bill. It was felt that a unitary approach should overcome these problems, and the FSA was the result. Now, with the events of 2008, that in turn has proved to be found wanting, and we are now going back to a more diversified structure.

The danger of changing a structure in response to a specific crisis is that you create one that is too backward-looking. In essence, generals tend to fight the battles of the previous war. The three issues that I hope that we can explore in Committee are whether the structure permits or encourages peering into the fog of the future and taking preventive action; how the relationships between the FPC, the PRA and the SCA will be integrated and managed in a way that does not place a double or triple regulatory burden on the regulated firms; and, as many noble Lords have said, whether the system contains a sufficient element of accountability.

So much for structure. I turn to the second issue, regulatory focus and culture, which the noble Lord, Lord Eatwell, referred to in his opening remarks, and many other noble Lords have referred to subsequently. In my view, the relationship between the Financial Services Authority and regulated firms has deteriorated in recent years. At root, the authority has given undue weight to just one of its regulatory objectives—protecting consumers. That is a perfectly respectable objective but one to which the authority has given huge weight, and in consequence it has placed insufficient weight on its other objectives, especially the need to weigh the cost of regulation, encourage innovation and consider London’s competitive position. In short, the FSA has become process-driven and risk-averse.

That focus on process has led to a number of undesirable consequences. First, there has been an increasing reluctance by firms to maintain an open relationship with their regulator. Any admission of weakness, however slight, is seized upon by the regulator, and no credit is given to the firms for having identified the weakness in the first place. That is an unproductive way to behave.

Secondly, there has been a dramatic increase in Section 116 investigations. Section 166 of FiSMA permits the FSA to require a skilled person investigation. It is clear from debates at the FiSMA proceedings that this idea should be used sparingly, but investigations are increasingly being thrown around like confetti. It is not just the cost of the investigation or the diversion of management time; it is the feeling abroad in the City that Section 166 achieved very little other than providing the regulator with cover, so that if something subsequently goes wrong he can say, “We had a Section 166 investigation. What more could we do?”.

Thirdly, and finally, there is an abuse of power—and I use this phrase carefully—by the SIF committee. Where a person has a particularly influential position in the company, he or she requires specific approval by the FSA via the SIF committee. The SIF committee is a star chamber. It is as simple as that. Individuals can be left in regulatory limbo for months. I know of one man who has been in regulatory limbo for 11 months without recourse or redress and without being able to find out what he has been accused of because confidentiality is required by the FSA while the procedure investigation is going forward.

This is the philosophy that is prevalent in the regulator at present, and it is one that may be transmitted to the new organisations. Therefore I agree with my noble friends Lord Hunt and Lord Flight when they call for proportionality. Looking through the Bill, I see Clause 5 and the references there, but we will really need to bottom out the practical implications of the statement of intent and what they are going to mean on the ground in the operation of the City of London.

I now turn briefly to my third topic: social impact investment. It is something that the Government are very keen to encourage but about which the Bill is almost entirely silent. The social investment process poses particular challenges for all trustees, as well as for grant-giving foundations, especially those with a permanent endowment, but the real regulatory crunch and challenge that is relevant to this debate lies at the interface between the charity and its individual supporter or investor. The missing piece in the jigsaw at present is the ability to approach individuals about social impact investments without the need for a full Companies Act prospectus, the cost of which renders almost any scheme uneconomic. We are therefore in the counterproductive and counterintuitive position that an individual can give his or her money to a project and be certain that he or she will not get it back, but he or she cannot lend or invest it if there is any prospect of any return at all. That cannot be a sensible way of proceeding to try to encourage our fellow citizens to put money behind social impact projects that this country badly needs.

I hope that in Committee we can discuss how we can help the social impact butterfly out of its chrysalis. We will need to create an appropriate position for the regulator and perhaps establish a class of individual supporters or investors, perhaps by creating a self-certified social investor along the existing lines of the self-certified sophisticated investor. To be fair to my noble friend on the Front Bench, it is not up to the Treasury alone. Contributions will be required from other government departments—BIS, the Ministry of Justice and the Cabinet Office—as well as, as we have covered this evening, from the professions: actuaries, investment managers and accountants. In my view, it will probably take a generation for the social impact investment movement to reach its full potential, but we need to plan now, and financial regulation, more than any other sector, holds the key, so I hope my noble friend will be able to help us during the passage of the Bill to speed this process on its way.

I do not doubt that the events of 2008 showed weaknesses in the regulatory structure and that we will need to give the Bill very careful consideration and examination in Committee if we are to manage to create the delicate balances between risk and reward and in doing so avoid hamstringing the dynamism of the City of London.

Economy: Government Policies

Lord Hodgson of Astley Abbotts Excerpts

Thursday 24th March 2011 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, I, too, thank my noble friend for giving us the opportunity to debate this important topic today.

With the passing of time, the reality of the economic record and performance of the previous Labour Government becomes clearer. Having inherited a decent economic situation in 1997, it is a pretty depressing story. To be sure, there were some nuggets amid the dross—the decision to stay out of the euro and handing over the setting of interest rates to the Bank of England— but the underlying theme was that the man in government, whether central or local, knows best. Complexity was piled on complexity, needing armies of enforcers. Measures were so complex that they often missed their target. They were presided over by a man who claimed that he had abolished boom and bust—hubris indeed.

Today, one of the most amazing features is the collective amnesia that seems to have overtaken the Labour Party on that whole matter. As the noble Lord, Lord King of Bridgwater, reminded us, the perilous situation in which we remain appears to the Labour Party to be nothing to do with its record in government but merely the result of a malign alliance between sub-prime mortgages in the US and rapacious bankers elsewhere in the world.

For me, the most depressing statistic of the past 12 years—here I echo my noble friend Lord Trenchard—has been the shift in employment from the private to the public sector. As my noble friend told us, more than 1 million jobs went out of the productive economy into the state sector, so that there are now parts of the country in which 40 per cent or even 50 per cent of the people employed are employed by the state. That trend leads to madness and is certainly no way to build a prosperous Britain.

I particularly welcome the Chancellor's efforts to rebalance the economy by stimulating private sector economic activity. It is true that because, as his Labour predecessor told him when he took office, there is no money, these measures are necessarily modest, but cuts in corporation tax, extending EIS tax relief, relief for small businesses from further regulation and so on are all very welcome.

Although the Government can set the mood and prime the pump, reviving the economy will need a much greater contribution from the private sector banks than there is at present. Here I follow my noble friend Lord Newby. When he winds up the debate, my noble friend will reply that the banks have promised to lend an additional £190 billion to SMEs. That is quite true, but stating the quantum is not the whole answer. The equally important issues are, first, the process by which the funding is obtained, secondly, the time it takes to complete it and, thirdly, to whom it is being offered.

The past few years have seen the end of what has been called relationship banking for SMEs. In prior years, the bank manager would get to know his customer over a period of years and would have a certain amount of latitude on extending credit facilities on his own initiative. Certainly his assessment of the credit-worthiness and likely success of the borrower would be taken into account in any lending decision. That is no longer the case. Now it is all down to credit scoring. The credit committee knows nothing about the business. It does not know whether the applicant has been a customer of the bank for five minutes or 50 years; it is all down to the credit score. In effect, the relationship manager in most of these banks now fulfils a function akin to the speak-your-weight machine that you find on a seaside pier.

Then there is speed. SMEs are time constrained. They do not always plan ahead as well as they should, so speed of response is very important. While it is true that the banks have made some progress in this regard since the darkest days of 2009, there is more to be done. Then there is the question of which firms will get the funding. Let me illustrate with a practical example. A firm of my acquaintance needs occasional short-term funding for one to seven days, usually of about £1 million. It is well secured and is therefore low risk. The firm decided that, in order to allow for a margin of error, the application to the bank should be for a credit facility of £2 million. You may imagine its surprise when the credit facility offered was £5 million and a covering note suggested that the bank would happily entertain a request for £10 million. Inquiries revealed that this lending would qualify to be part of the bank’s contribution to the £190 billion and because it was very low risk, so the higher the amount it could attribute to it, the better. I hope that my noble friend will monitor carefully not just the quantum of lending but the process by which it is made available and its destination.

This promise by the banks, like the Chancellor’s Budget, addresses the short-term tactical challenges. Looking further ahead, if we are truly to rebalance the economy, there will need to be much higher capital investments by SMEs in the future than in the past. This will require the availability of longer-term funding facilities than envisaged by the £190 billion pot. That in turn poses a challenge to the banks under the matching liquidity provisions envisaged by the Basel 3 proposals. I trust that the Government are keeping this longer-term issue firmly in mind as they navigate their way through the choppy short-term seas.

Financial Crime: Legislation

Lord Hodgson of Astley Abbotts Excerpts

Thursday 17th March 2011 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, it gives me great pleasure to be the first to congratulate my noble friend on her extremely and expectedly impressive speech. She has given us the grand sweep, as I would have expected. I am afraid that I will take a slightly different tack. I will give a worm’s-eye view. Before I adopt the position of the worm, I need to declare some interests, because I am a director of, and am involved with, companies that export goods and services around the world. I am anxious about some of the practical implications of the Bribery Act and the money-laundering regulations. However, I shall focus on the bribery ambiguities to which my noble friend referred a few minutes ago.

To cut to the chase, I urge my noble friend the Minister, who was for a number of years our distinguished representative on the Financial Action Task Force, to hold his nerve, continue with the period of consultation and extend it if necessary, because it is absolutely vital that we get the guidance right, particularly in respect of small and medium-sized businesses, which are not surrounded by armies of lawyers and advisers to provide them with comfort.

I do not want my noble friend to think that I am soft on bribery. It corrupts the recipient and also the giver. In my experience, firms that are slack about oversees payments are often slack about internal procedures such as management expenses, and sometimes confuse what is the company's—the shareholders’—money and what is the management’s. But—and this is a very big but—the Bribery Act poses considerable challenges for UK-based small and medium-sized companies. The crux of the problem is Section 7, which creates the new offence of failure to prevent bribery and is linked to Section 8, which defines “associated person” very widely.

I will give the House an example. I am afraid that it is detailed, but it is the only way to explain the practicalities we face on the ground, where they do not seem as easy as they do in the calm and rarefied atmosphere of your Lordships' House. The company I have in mind is a mid-sized one. It has a good product and it sells well abroad. It is growing and is increasing its employment in the United Kingdom. In short, it is just the sort of company that politicians of all political parties wish to encourage. One of our export markets, which is not yet large but is growing, requires us to pay a transport tax. We pay that through our agent. I am afraid that it is not a tax in the conventional sense. It is a payment to customs officials and to transport union officials to ensure prompt and timely delivery of our goods. We know that our continental European competitors also pay it.

We are advised that when the Act comes into force, the transport tax will constitute a bribe. We do not know whether any comparable legislation will affect our continental competitors; we think probably not. My noble friend referred to the Foreign Corrupt Practices Act in the United States. We know that they will get round this because that Act has a specific carve-out for “facilitation payments”, of which this transport tax would be one. Noble Lords may cite proportionality and ask what UK Government would pursue a minor payment of this nature. Quite so—but one Government might one day do it, and the prospect of 10 years in jail and an unlimited fine concentrates the mind.

However, our major concern lies in a quite different direction. In this market, our major competitor is local and does not pay the transport tax. He ships direct from his factory to the customer. We are advised that there is a considerable risk that this competitor, who will be aware of the transport tax, will make an official complaint to his Government that a UK company has been bribing individuals under the terms of the Bribery Act, and the UK Government will be asked to undertake a prosecution. Who knows what will happen then? My noble friend Lady Williams talked about ambiguities. There are many more like this. They are the sort of practical issues on which our legal advisers will need guidance before they in turn can advise us.

I will make one thing clear. If the guidance does not give us sufficient comfort, we shall withdraw from the market, and from others where we face similar challenges. We will leave them to our competitors. Exporting is hard enough work without risking the very grave penalties that this Act carries with it. Therefore, although we all, understandably and rightly, work ourselves into an indignant frame of mind on what I appreciate is a very important topic, please may we not forget my little company, and thousands like it, which are concerned with how to meet the requirements of the Bribery Act while dealing with the complex and varied demands of customers and social systems in highly competitive markets across the world.

--- Later in debate ---

[Lord Marks of Henley-on-Thames]

My Lords, in no year since the turn of the century have there been more than 25 successful prosecutions for bribery in England and Wales. Indeed, in 2005 there was only one. Those numbers are ludicrously small. Anyone who believes that the numbers reflect a standard of probity in British business that leaves little to be desired is suffering from an excess of complacency or an excess of naivety that leaves them blind to the reality. Those prosecutions were brought under the old legislation, which was principally passed in 1906 and 1889. Those statutes were plainly not fit for purpose. It is a mark of the lack of seriousness with which we have treated bribery, particularly bribery in a commercial context, that it has taken so long to replace legislation which is more than a century old and which produced such a limited response to serious criminal activity.

The OECD anti-bribery convention, to which we are now signatories, marked a milestone in international co-operation in stamping out bribery in international business. However, the UK’s response to its obligations under the convention has to date been mediocre at best. That should all have been set to change with the passage of the Bribery Act last year, yet this admirable legislation has not come into force and we are now entitled to be impatient. It was supposed to come into force last October. In September, a brief consultation on the proposed guidance was announced, which would last until November, with a view to commencement in April this year. The consultation paper had draft guidance annexed to it. In January, further delay was announced and further work on the guidance was said to be needed.

My right honourable friend the Secretary of State for Justice says that we are back on track. He rightly says that corruption is bad for business and that we must be at the forefront of stamping it out, not only in the developing world but in international trade generally. That must mean that he completely rejects the argument that British businesses cannot compete with others that may be corrupt unless they, too, offer bribes. It is that argument that represents precisely the evil that the anti-bribery convention was designed to stamp out.

It is a pity that on occasions in recent months the CBI and the Multinational Chairman’s Group, to which my noble friend referred, have sounded close to rehearsing that argument in seeming to press for further delay and in their complaints about the implications of the Bill. That is the answer to the point powerfully and elegantly but, I suggest, wrongly advanced by my noble friends Lord Hodgson of Astley Abbotts and Lady Wheatcroft. It is no good saying that it is acceptable for small companies to pay small bribes, perhaps disguised as something else such as the transport tax that was referred to, and that it is only large bribes that the Act should outlaw. We have to rely on our markets wanting to buy British goods and services because they are competitive on price and quality.

[Lord Hodgson of Astley Abbotts]

I know that my noble friend has just six minutes, but it is a travesty of what my noble friend Lady Wheatcroft and I were saying to suggest that we were advocating small bribes. From the beginning, both of us have said that we are absolutely against bribery. It is the reality of the situation that we are asking the House to address.

[Lord Marks of Henley-on-Thames]

My Lords, that is what was said, but the description of the transport tax being moneys paid to officials in small amounts to enable goods to be imported into those markets amounts to small bribes. I do not accept that they are acceptable. It is to be conceded by those who take our position that there may be a cost to that strict position, as my noble friends Lord Hodgson and Lady Wheatcroft point out. However, if it is a cost, it is a short-term cost, with the prize of a long-term business environment that is clean. The enforcement of the anti-bribery convention internationally and the Bribery Act in this country is a prize worth gaining.

The delay has been damaging to the reputation of this country and its business. As my noble friend Lady Williams explained, there is great anger with the United Kingdom in the United States and in the OECD. In the United States, the very strong legislation in the Foreign Corrupt Practices Act, which is rigorously enforced by the SEC and other federal enforcement agencies, has brought about a complete change of approach. The United Kingdom’s performance has been seen as hopeless and the delay in passing the Act has been seen as worse than that.

Meanwhile, we have regular reminders of the extent of the problem. Noble Lords have referred to the British Aerospace scandal and, in particular, to the previous Government’s extraordinary decision to stop investigating the Al Yamamah contract for the sale of aircraft to Saudi Arabia. The emergence even now of further evidence, which was highlighted in the past few days by my right honourable friend Sir Menzies Campbell, of a $70 million payment in connection with the contract makes the point

We have recently had the MW Kellogg engineering case, with a £7 million settlement over a contract for a gas liquefaction plant in Nigeria after payment of more than £100 million in bribes by the parent company. We had the disgraceful Innospec case last year, where a British company had paid bribes of $17 million to secure sales in Indonesia of a highly toxic lead fuel additive that is banned in the UK and elsewhere, the bribes having been paid to prevent the chemical from also being banned in Indonesia.

The list goes on. The evil of corruption is a cancer in our international trading system. It must be removed. The anti-bribery convention and the Bribery Act are powerful instruments. In Richard Alderman we have an energetic and effective director of the SFO, but we need the Bribery Act to become law. The guidance is needed fast. It needs to show a commitment to thorough enforcement. It must not be said that it waters down the effect or the effectiveness of the Act. Only in that way can Britain’s damaged reputation for probity in international business be restored.

Banking: Bonuses

Lord Hodgson of Astley Abbotts Excerpts

Tuesday 11th January 2011 Lords Chamber

[Lord Sassoon]

My Lords, clearly it depends on the level of profits they make as to how much they will benefit from the reduction in the rate of corporation tax. We look at the total package of taxation on banks, as we do for the rest of industry. We believe that by introducing in particular the levy on banks, they will be paying a fair share to the Exchequer. We need to take account of the remuneration taxes, continue to consider the costs and benefits and talk to our partners about a financial activity tax, but we must take the whole of the taxation burden on the banks in the round.

[Lord Hodgson of Astley Abbotts]

My Lords, does my noble friend not think it strange that the party opposite seeks to evade any responsibility for the situation in which we now find ourselves? Having created the situation in which the taxpayer has ended up as a very large shareholder in a number of UK banks, is it not now most important that those banks return to profitability so that the share price and the performance of the banks will enable the taxpayer to earn a profit on the investment? To do that, do the banks not need to be properly staffed and remunerated? Will not our proposal enable us to do something to mitigate the disastrous economic incompetence of the previous Government?

[Lord Sassoon]

I am grateful to my noble friend Lord Hodgson and agree with his analysis. We need a successful and vibrant banking system in this country. We need healthy banks across the system, but it is particularly important for the taxpayer that the health of RBS and Lloyds is restored so that they can get a decent return in due course from its interest in those banks.