Financial Services Bill

Lord Lucas Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Lucas]

My Lords, it is very important that when we come to the Report stage of this Bill and the arguments that we will doubtless still be having with our Front Bench, we vote according to our expertise and not our politics. We are holding ourselves out in this House to be a source of expertise. The debate, at least until now, has demonstrated that to excess. If we allow ourselves, when it comes to votes, to be pushed around by our Whips, we become a mere House of politics, which is what Mr Clegg wishes to make us. If we are to be a House of politics let us be elected and get it done with. If we are going to be a House of expertise, it is important that when an argument has been won in this House and the Government still resist it, our views make their way down to the other end. I very much hope that when my noble friends and I come to discuss such important points as the duties and responsibilities on regulators, and we have reached a settled conclusion in this House, we vote that way and do not let ourselves be put off by spurious political considerations. We are a House of expertise. We should be proud of it and we should live up to it.

It seems to me that many of those who have spoken have focused on the way in which duties are placed on the various regulators. This is crucial; things obviously have to be divided between ministries and responsibilities are given out to one or another. The same happens with bits of ministries, but if you do not allow some overlap, you get situations like the current spat between the UK Border Agency and BIS where the UK Border Agency regards university students as some kind of poisonous plague and BIS, quite rightly, wants to encourage as many as possible. We need the UK Border Agency to have regard to the effect of its policies on the economy as a whole rather than just on immigration. You need to blur the boundaries from time to time and to place responsibilities on agencies that go beyond the powers that they actually have, so that they take into account the wider effects of what they do. The case has been very well made today that we must have regard to that consideration in this Bill.

I will focus mostly on minutiae. The big picture has been well covered by people who know it better than I do. I reassure my noble friend the Minister that during the Committee stage I will not try to insert any of these peculiar particular considerations into the Bill, other than making sure that the regulators, when they are created, have the power to deal with these things without having to come back for primary legislation. The three things that concern me particularly are high-frequency trading, consumer regulation and disintermediation. High-frequency trading has got to the point where stock exchanges—I do not know whether this is true of the London Stock Exchange, but it certainly is for some of the American exchanges—are allowing privileged access to data streams to high- frequency traders. These people with their computers are sitting co-located with the Stock Exchange. They are getting the data before anyone else, so the common experience of a pension fund manager trying to shift a block of a few million shares is that the market moves ahead of them because the high-frequency trader can see what is happening. This is licensed insider trading. The only people who benefit are the few running these specialist computer installations. The people who suffer from it are all of us through lower returns on pension funds. It is a thoroughly undesirable activity.

I am no friend of the Tobin tax; I can understand why people want to impose it but I do not think that it would work. However, we have to find a way, either through looking at the definition of insider trading which, it seems to me, high-frequency trading is well over the boundary of in some instances, or by looking at things like instant registration of share ownership. Why not update that so that companies have much more control of who is on their register rather than having a sea of unregistered deals out there? Why not bring company registers up to date and see what benefits that might give? I want the regulatory authorities to be able to explore those sorts of questions. It will take time but I do not want them to find that they are limited in what they can do in the way they are at the moment with consumer regulation.

There is a boundary between what the FSA can look at and what it cannot when it comes to collective investments. You would think when you read the pages of the Guardian or similar newspapers with their whole-page spreads for tropical forestry investments that they were collective investments. They are in the sense that a lot of people are piling into them all together. But because the investment at the end of the day is in individual named trees, the FSA cannot touch it. These are the most monstrous scams and people will suffer because of them. There was a supplement in the Guardian that must have had five or six whole pages of advertisements for these things. Why the Guardian deserts its responsibility to its readers to that extent I do not understand, but at some point these things get big enough so that the FSA should take an interest. I do not want it to be hobbled by provisions saying that there are artificial boundaries that the FSA cannot cross. It must be able to look at the effects that these products have on consumers, the likelihood of disaster and misbehaviour, the way in which they are sold to unsophisticated customers rather than sophisticated customers and say, “This looks like an area that we should investigate and therefore we can”, rather than being obstructed by technicalities.

The same appears to be true of some wine investments. This is not something that is without its extensions. The noble Lord, Lord Whitty, raised the interesting question of customer data and how Tesco Bank would be able to combine my liking for baked beans with my banking records. I can see why that would be useful. You say a lot about yourself in your pattern of purchases. Doubtless it could use that in judging my creditworthiness. Perhaps it is a good idea that it should, but we jolly well ought to debate it. Whatever financial regulator we create ought to be able to deal with that sort of emerging problem as it comes along.

Lastly, I come to disintermediation. I shall not take long because Andrew Haldane of the Bank has said such wise things about it. We have to make sure that the regulators we produce can unblock the road. At the moment they are in a totally ridiculous situation. The Treasury says people like Zopa and Funding Circle, which are disintermediating between members and borrowers, cannot have tax offset. If you make a capital loss because some of your loans go bad, you cannot offset that against the interest you have earned. So, this restricts these operations to only the finest possible lending. It also says that they cannot put their products into ISAs or similar things. It says they cannot do these things because they are not regulated and they are not regulated because the Treasury will not let them be regulated. We invented this disintermediation. I think that I am right in saying that Zopa was the first in the world. It is as if we had invented Google and then prevented it doing business. There are now hundreds of these things all around the world, but we have a block on the development of our own industry, which could be a fundamentally good thing that would offer new opportunities.

When the right reverend Prelate the Bishop of Durham comes to look at community lending, he will see that we will be able to produce the sort of disintermediation structures that work at a local level. When the sector becomes sizeable it will start to reduce the burden on the Treasury of the £85,000 guarantee, because the direct system will not qualify for that. We will start to attack the whole problem of lending short and borrowing long, because if we do it through the likes of Zopa or Funding Circle we will take the time risk but we will have a tradable asset. Therefore, we will get rid of the systemic risk that caused such great problems in the banking sector. We ought to encourage these things, but the Treasury has put a total block on their development and as a result the rate of growth in this country of that kind of business is terribly slow.

We must make sure that in producing new structures we are conscious of the fact that there will be people who will want to innovate in disintermediation. It is not only mechanised lending that is capable of disintermediation; investment management is also capable of it. We are conscious that investment managers as a class earn very large rewards. We are beginning to see disintermediation at the seed capital end of things. I am associated with one such firm. It would be nice to see that in mainstream investment management. We ought to be able to disintermediate annuities. Old people want income, young people want capital. That is a classic disintermediation opportunity, but it will be possible only if we write the regulations correctly. Otherwise, we will put young firms at a total disadvantage compared with the established, regulated operations against which they are trying to compete. The Bill ought to be on the side of innovation and dispersing rather than concentrating risk, but at the moment it may not be.

--- Later in debate ---

[Lord Bilimoria]

My Lords, perhaps I may add that this came to a head with the Welfare Reform Bill, which was committed to a Grand Committee. I remember what a stand-off there was between the Opposition and the Government. That was a sad day for this House. In the end a compromise was reached so that much of the Bill was debated on the Floor of the House. We must be careful about the signal we send out to the country about the priority of something as major as this crisis, which has brought the country to its knees. We must be careful of the message we send out before we make this decision.

[Lord Lucas]

My Lords, we have to face the fact that we do not do as good a job in Grand Committee as we do in a Committee of the Whole House. There is no opportunity for Peers widely to participate in Grand Committee in the way that there is in the Chamber. Given the importance of the Bill and the depth of interest in it, I hope very much that the Government will listen to what has been said.

[Lord McFall of Alcluith]

My Lords, perhaps I may remind the House that Finance Bills in the other place are accorded the greatest status by being debated on the Floor of the House. If we are going to have equal status in terms of the scrutiny and examination of this Bill, the least we can do is send a message to the other place that we take this seriously, and that it has to be done on the Floor of the House.