Financial Services Bill

Debate between Lord Holmes of Richmond and Lord Hodgson of Astley Abbotts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Monday 22nd February 2021 Grand Committee

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, this is the first time I have spoken in Committee, so I draw the Committee’s attention to my entry in the register. I will speak to my two amendments in this group. Amendment 87 is broadly drafted and follows on from the line of discussion and approach taken by my noble friend Lord Blackwell. By contrast, Amendment 106 is a highly specific focused proposal for improving the UK’s regulatory regime, on which I seek the Government’s response.

To take these in order, the purpose of Amendment 87 is to require the FCA and the PRA to take into account the impact on the UK’s competitiveness of any regulatory measures they seek to impose, and in particular, under proposed new subsection (2)(b), to assess the overall cost-benefit ratio of the UK’s compliance regime.

I know that even raising this issue risks one being labelled the money launderer’s or financial criminal’s friend. I plead not guilty to that, but I seek to ensure that our compliance regime is and remains cost effective. As evidence that I am not soft on financial crime, I draw the Committee’s attention to the fact that I have put my name to Amendment 84 in the name of the noble Baroness, Lady Bowles, which seeks to make failure to prevent financial crime a criminal offence, which we will discuss at a later date.

First, I want to consider culture. For too long it has tended to be argued that any money spent on compliance is money well spent. As business practices evolve so to, and quite rightly, should compliance practices, but no one has the responsibility to step back and consider whether some of the requirements of an earlier age remain effective and are still needed—so one has ever-increasing layers of regulation. Regulators are, by their very nature, risk averse. But somehow we have to create a climate in which we can find the right balance between a financial services industry which on the one hand might be seen as a system like the wild west, driving business away, and, on the other hand, a system so muscle-bound by regulation that the consequent time, expense and administrative hassle have an equally deterrent effect. It is to establish a formal mechanism to address this challenge that I have tabled Amendment 87.

We may well be told by my noble friend when he replies to this debate that the regulators are now well aware of this challenge. Of course, that is to be welcomed, but I question how far down that organisation this new mood or culture or approach has spread—and, no less importantly, how far it has spread into the compliance departments of the regulated firms. Too often, waving the regulatory stick has come to be seen as some sort of virility symbol.

The professional body, the Office for Professional Body Anti-Money Laundering Supervision, or OPBAS, in its latest annual report in March last year pointed out, in terms of disapproval, that 41% of professional bodies being supervised did not take any kind of enforcement action. No attempt was made to suggest what target figure was the right one; there was just the impression that not enough was being done and efforts and money spent must be increased. However, if you look at the list of professional bodies being supervised, it is not clear why many of them would need to take enforcement action except on the rarest of occasions. For example, one body being supervised is the Faculty Office of the Archbishop of Canterbury. I doubt that enforcement by the most reverend Primate the Archbishop of Canterbury needs to be a frequent event.

The second general point is that, too often, the attitude among regulators is, “What I have, I hold.” The House will have heard me before on several occasions speak about the poor cost-benefit ratio of the present suspicious activity report regimes, or SARs. Every year the number of SARs rises; in 2019, it reached 573,085, about 2,300 per working day. What use is made of these? The cost of all this to the regulated entities and so to consumers and clients is huge. Let us suggest that each SAR costs £250; that would create a total cost of £143 million for the sector, its customers and clients. Interestingly enough, that is almost exactly the same figure as the total money recovered by the National Crime Agency, cited in the same report, which was £150 million. Therefore, there is equality of cost, and there really seems little benefit at present.

However, to suggest that the system needs an overhaul and pandemonium breaks out. As the NCA report says,

“SARs intelligence has been instrumental”—


note the word “instrumental”—

“in locating sex offenders, tracing murder suspects, identifying subjects suspected of being involved in watching indecent images of children online and showing the movement of young women being trafficked into the UK to work in the sex industry.”

There is no mention at all of financial crime, but the clear inference is that if you wish to challenge the SARs regime, you are abetting these appalling crimes. No wonder that people are nervous about challenging the status quo.

Finally, all this feeds into the compliance departments of regulated firms. For the past 14 years, I have been the treasurer of the All-Party Group on Extraordinary Rendition. I remain extremely supportive of the group, but I would ask for a change, and I am pleased to say that the noble Baroness, Lady Kramer, has kindly agreed to take over. Accordingly, she will take over the bank account of the group and will assume signing authority. The fact that we are both politically exposed persons—PEPs—is causing enormous difficulty. It could be argued that the noble Baroness and I could use the APPG’s bank account for money laundering and financial crime generally, but the fact that we have fewer than 20 transactions per annum would suggest a limited scale for what we are going to do. However, it is clear that the noble Baroness and I will be faced with a paper trail of considerable proportions. It is this sort of mindless form filling and box ticking that is being repeated millions of times over and somebody, somewhere, needs to be charged with addressing this problem.

I turn finally to Amendment 106. It has the specific purpose of trying to improve London’s competitive position by removing, wherever possible, the obvious inequities, unfairnesses and inappropriateness of a one-size-fits-all approach by the regulators and creating in its place a regulative framework that is appropriate and effective as regards those to be regulated.

This amendment concerns the insurance sector, which is a key part of the UK’s financial services industry, and I have been helped with the wording of this amendment by the London Market Group. The group brokers in the main deals of sophisticated corporate clients, who have professional advisers at their disposal. As the FCA’s own wholesale insurance broker market study in 2019 demonstrated, these clients seek the services of a London market broker not because they are want to manage issues caused by information asymmetry—something that we have heard about already this afternoon—but because they recognise that the advanced expertise housed within broking firms can assist them in reaching the optimal outcome for their risk-management programmes. They are not consumers, but they need protection in the way that individual or less sophisticated corporate customers may do.

However, the FCA makes almost no distinction between the way it supervises the London market broker, active in the specialty markets in London, and the way it supervises a retail insurance broker dealing with an individual’s domestic and motor insurance requirements. Amendment 106 is drafted to ensure that that there are no regulatory loopholes that the mal-intentioned can exploit by those with malefic intentions. Proposed new subsection (2)(c) makes clear the distinction between retail and professional clients, while subsection (2)(d) asks whether the client has professional advisers and whether they are PRA or SCR regulated; and importantly, subsection (2)(e) covers any potential impact on the UK’s financial stability.

This amendment does not break new ground because the concept of the experienced investor is already well established. Those who qualify in this category can be offered opportunities to participate in new issues and refinancings with the minimum of fuss. Such a minimalist approach would never be appropriate for the general public. That is the approach the amendment adopts as regards the insurance industry. It makes a clear distinction between the different requirements of the professional and the general client. I hope that my noble friend will be able to give this amendment a fair wind.

[Lord Holmes of Richmond (Con) [V]]

My Lords, in participating with pleasure in this group of amendments, I declare my interests as set out in the register. I congratulate my noble friend Lord Blackwell on how he introduced the group and I agree with everything that he said—and indeed what is contained in the amendment tabled by my noble friend Lord Bridges.

I also endorse what my noble friend Lord Blackwell said on our view of the Basel framework, not least in terms of the issue of software. This is an excellent example of our move towards standards which really deliver, rather than standards which are perceived to be but are not necessarily higher or greater than other regulatory frameworks.