Financial Services (Banking Reform) Bill

Lord Newby Excerpts

Wednesday 23rd October 2013 Lords Chamber

[Lord Higgins]

My Lords, we have had a fascinating debate within a debate between the noble Viscount and my noble friend Lord Lawson. I merely make one or two points. It seems to me that there is a case for a remuneration code. In a way we could let the amendment end after subsections (1) and (2) and leave it to the FCA and PRA to take a view. It raises the question of whether, after they have done so, the code they come up with ought then to be considered further in this House. I leave that on one side.

As far as culture is concerned, what my former constituents regard as unfortunate is the whole culture of bonuses. I think that they take very strongly the view that the people concerned should be paid a rate for the job and then get on with it. Rather than specify, as this amendment does, that a proportion must be in the form of remuneration which is variable, I think they would rather the opposite—or at any rate, that the proportion which is variable should be limited.

There are, of course, very real practical problems concerning remuneration in a company which is clearly going on the rocks, when one needs to recruit someone to sort it out. That is a particular case. More generally, we could usefully consider the points made by the noble Lord, Lord Turnbull. The argument for his attitude, if I understand it correctly, on variable remuneration is, “If it is variable, we can claw it back at some later stage”, but that may be a long while after the actual events have taken place. There is also the problem of companies being not just too big to fail but, as has been said on previous occasions, too big to manage. Part of that problem is that we are looking at remuneration for banks which are in that situation. What has become clear in recent events is that people have been paid very large sums when the organisation they are asking to manage is not capable of being managed at the size that it is. Be that as it may, there is a case for a remuneration code, but we should probably leave it to the bodies concerned, which are suggested in this amendment.

[Lord Newby (LD)]

My Lords, we have had an extremely wide-ranging debate on many aspects of bankers’ remuneration. I remind the House of the two specific amendments in front of us. The first imposes a duty on regulators to prepare an additional code on remuneration in relation to senior managers of banks, while the second proposes additional powers for regulators to claw back deferred remuneration of employees of banks that require state aid.

The statutory requirement on regulators to prepare another remuneration code aims to implement a set of remuneration reforms similar to those recommended by the Parliamentary Commission on Banking Standards. I will explain why the existing remuneration code, current rule-making powers and further regulatory action in response to the parliamentary commission provide a clear basis for the implementation of these proposed reforms.

The existing remuneration code addresses the commission’s objectives for regulating remuneration in a way that combines a concrete legal basis with a rigorous system for application. The remuneration code is made under the rule-making powers given to the regulators in the Financial Services and Markets Act 2000, including Section 137H, which extends the provision which may be included in remuneration rules. Any breaches of the regulator’s rules, including breaches of the remuneration code, can be punished with serious sanctions. The code reflects the Financial Stability Board’s principles and standards for sound compensation practices, and European legislation under CRD IV. So this is a code established under statute and therefore might not in any way be thought to be ephemeral.

The content of the existing code already goes a long way to addressing the content proposed in the amendment and, where that is not the case, the regulators have indicated their intention to consult further on any necessary changes. So, for using profits to calculate pay, the existing code states that firms must assess current and future risks, and the need for consistency with the timing and likelihood of the future revenues. This clearly requires firms to calculate profit-based remuneration carefully with regard to risks to the bank. On the balancing of risk and reward, the code makes extensive reference to the close relationship that remuneration and risk considerations must have. Reward calculation based on profit and non-financial metrics must encourage effective risk management and not constitute a risk itself.

On pay deferral, the code specifically requires that at least 60% of variable remuneration above £500,000 or to a director of a significantly-sized firm is deferred over a period of not less than three to five years. On top of the existing requirement, the regulators have said in their response to the PCBS that they will consider adding to their code requirements on deferral. In this area, the existing code is already rigorous and set to become even more so. Regarding the issue of variable pay for non-executive directors, the PRA has stated clearly in its response to the PCBS that there is currently a presumption that this practice should not take place and that this will continue to be the case.

The FCA is conducting a thematic review of sales-related incentives and assessing what action would most effectively prevent those presenting conduct and stability risks. This could include further high-level remuneration principles for staff not subject to the full remuneration code. Additionally, the PRA and FCA have stated that they will update the remuneration code following consultation next year. This review will take into account the PCBS recommendations, including those on a greater use of instruments such as bail-in bonds to tackle the practice of compensating recruits on change of employment and greater and more granular disclosure by remuneration committees in banks’ annual reports.

Therefore, to specify in primary legislation exactly what the code should cover on top of the rigorous current approach seems unnecessarily rigid. The exact content of the code will need to be updated from time to time, including in the light of international best practice. Ensuring that the regulators have the necessary powers and authority to undertake such changes in a timely manner is crucial—and that is already achieved in FiSMA. Overprescribing in primary legislation risks adding an unwieldy layer to what is already an effective process.

I believe we have already given the regulators the necessary powers to apply rules to manage financial stability risk and promote responsible behaviour in banks. The existing code is based on internationally agreed principles and is responsive enough to incorporate new provisions when called for. Indeed, nowhere is this clearer than in how the PRA and FCA revisions of the code, and the FCA thematic review, will take account of the parliamentary commission’s recommendations.

On the subject of the clawback of deferred remuneration at banks in receipt of state aid, I should begin by being clear that the Government perhaps more than that of any other country, recognise the consequences of bailing out financial institutions. We have been clear that individuals must be held accountable for misconduct and that there should be no rewards for failure. The Government agree that there should be specific powers available for the regulator in relation to remuneration at banks where they require state assistance. The ability to reduce or revoke deferred remuneration when a bank requires state aid would further strengthen accountability and complement the extensive reforms which the Government have undertaken to remove the implicit taxpayer guarantee.

However, regulators already have the power to require the cancellation of deferred remuneration and loss of office payments where a bank requires state-aid support under their existing powers. In the PRA code, specific provision is made for the reduction of deferred remuneration where a bank suffers subsequent poor performance. Additionally, the reforms introduced under the EU capital requirements directive IV have reinforced existing rules on pay at banks in receipt of state support so that: bonuses are strictly limited where inconsistent with the maintenance of a sound capital base and timely exit from government support; regulators will be able to require banks to restructure remuneration in a way that is aligned with sound risk management and long-term growth; and directors should not receive a bonus unless justified.

The Government sought to build on these measures to strengthen further the accountability of individuals who are responsible for an institution which requires government intervention by requesting the PRA to consider the PCBS recommendations on this issue. In response, the PRA has stated that following consultations next year revisions to its code will strengthen and broaden the circumstances in which unvested awards can be reduced and vested awards clawed back. The PRA is also considering to whom these rules should apply and whether further powers are desirable in this regard.

However, extending these powers to cover the removal of pension benefits which have not yet become payable, but which the individual concerned has a contractual right to receive, is difficult. That would restrict the rights of the individual concerned under the European Convention on Human Rights to the “peaceful enjoyment” of his or her possessions. The Government do not consider that this would be appropriate. The PRA will consult further on these issues early next year, including on the details of how the powers should be drafted and the population of staff to whom it should apply.

The noble Lord, Lord Turnbull, specifically asked to whom the remuneration code applies. The code currently applies—and will continue to apply—to around 2,700 firms, including all banks, building societies and capital adequacy directive investment firms. That includes broker-dealers and asset managers—such as most hedge fund managers and all USIT investment firms—as well as some firms which engage in corporate finance, venture capital and the provision of financial advice, brokers, multilateral trading facilities and others. In terms of who is covered within those firms, the code defines “Remuneration Code Staff” to include,

“senior management, risk takers, staff engaged in control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on the firm’s risk profile”.

Some of the principles in the code must be applied to the whole firm, including those on guaranteed variable remuneration and the more general principles around risk management et cetera.

The right reverend Prelate talked about the culture in the banking sector and changes that he is seeing in Birmingham, which he hopes are the start of a process. I think we would all agree that that is desirable. In some of the big banks at least, there has undoubtedly been a noticeable change in culture in recent months and years. The right reverend Prelate and a number of other noble Lords talked about the overall level of remuneration. That is a matter for the bank’s shareholders but the Government and my colleague in another place, Vince Cable, have strengthened the powers of shareholders to require boards to explain and get approval for what they plan to do on remuneration. That has considerably increased transparency and, I hope, might have a moderating influence.

The noble Lord, Lord McFall, asked whether the regulator would have access to Barclays management information, to know how it makes its money. I think we talked a bit about this in an earlier debate. The PRA has access under Section 165 of FiSMA to require banks to provide it with all the information or documents that it reasonably requires for its function. That is a very broad power and would cover the information referred to.

The nub of our argument, as the noble Lord, Lord Turnbull, rightly pointed out in his opening speech, is that we have a code. It is operating with increased rigour and will be amended next year to take account in detail of what the parliamentary commission has said. That being the case, we do not need any further provision.

--- Later in debate ---

[Lord Turnbull]

Amendment 97 would create a regime of special measures. In the report of the Parliamentary Commission on Banking Standards, from paragraph 966 onwards, we argued that regulators should have a power to give notice to a bank where they believe that the bank’s systems, professional standards and culture do not provide sufficient safeguards. First, they could require an independent investigation, and then require a remedial programme of corrective action. This would be seen as a precursor to enforcement. It is basically a way of trying to avoid getting into the morass of enforcement. A similar regime is operated in the US by the office of the controller of the currency. It is called the safety and soundness plan.

Although the amendment refers to the PRA or the FCA, I believe that it would work best if the special measures plan was jointly owned. The twin peaks system of regulation has its advantages but there was always a danger that with each regulator focusing on its specific areas of concern, between them they would fail to capture the bigger picture. There could be a more generic problem of standards and culture and this would be an opportunity to work collectively and engage with the bank.

It may well be that yet again the response is that regulators have these powers already. Indeed, if they believe that the way that a bank is being run is a risk factor, they can impose a capital add-on. However, the argument against all these cases where we have these powers already comes back to if that is case, how did we get into this problem in the first place? What we are trying to establish is whether things will be different in the future. It would help us judge that better if the PRA/FCA could produce a working document on how they envisage using powers of this kind—a special measures regime—where they are looking for generalised improvements in the culture and the way that a bank is being managed. I beg to move.

[Lord Newby]

My Lords, we agree with the spirit behind the special measures proposal, as the noble Lord expected, but we do not believe it is necessary to give the regulators new powers in this area. They already have the powers to do everything the PCBS has asked. We have therefore been working with them on how they could respond to the recommendation using their existing powers.

The regulators published their responses earlier this month. These responses explain that both the FCA and PRA can, and in fact do, use the powers that they already have to do many of the things that the PCBS recommended and that are included in the amendment. The regulators have a significant range of powers to identify and tackle serious failings, either to rectify existing problems or prevent further consumer loss or reputational damage to markets. In fact, the regulators are able to replicate all the steps outlined in the amendment using their existing powers.

For example, the regulators already have the ability to give notice to a firm through an appropriate mechanism, be it a letter or an e-mail, as a matter of course if they have any concerns or think there may be a problem. The regulators will look to engage with the firm to address the concerns they raise. Whenever it is appropriate, the regulators may request information from the firm under Section 165 of FiSMA. If, following an investigation, the regulators believe further action is needed, the PRA and FCA can use their powers under Sections 55M and 55L of FiSMA to impose requirements on firms to undertake or cease a particular action. These powers can certainly be used to require a bank to adopt additional safeguards or to strengthen its existing safeguards.

Similarly, the regulators can appoint an independent person to undertake investigations using their power under Section 166 of FiSMA to commission a skilled persons report, or under Section 167 to conduct an investigation into the business of an authorised person. Both the PRA and FCA are committed to doing so in instances that they believe add substantially to their understanding of an issue. However, we do not think it is appropriate that the use of an independent person should be a requirement in all cases. There are some instances where the necessary information will be available from other supervisory sources making any such requirement unnecessarily costly and counterproductive.

Finally, there are already duties in regulations made by the regulators that require firms to deal with their regulator in an open and co-operative way. It may be that the noble Lord has not had a chance to look at the responses from the regulators and that, having done so, he will be satisfied, or, equally, that he would like further clarification. I suggest to him and any other noble Lords who have a particular interest in this matter that, if they have any further concerns having looked at those documents, we would willingly arrange a meeting with the Treasury to discuss any further elaboration that the noble Lord feels would help clarify how the system is going to work. Given that the powers exist, we really believe that the special measures powers envisaged in the amendment are unnecessary, and I therefore ask the noble Lord to withdraw it.

Financial Services (Banking Reform) Bill

Lord Newby Excerpts

Wednesday 23rd October 2013 Lords Chamber

[Lord Watson of Invergowrie (Lab)]

My Lords, I support my noble friend Lord McFall and his colleagues on Amendment 98. I am also in favour of the two amendments tabled by the noble Lord, Lord Phillips of Sudbury. My noble friend drew on his experience as a member of the banking commission when he talked eloquently about the serious matters behind LIBOR and the other issues that contribute to the need for serious whistleblowing legislation to protect those who are, in effect, doing the country a great service.

In reading out those e-mails, my noble friend Lord McFall described the situation very graphically. At one stage I thought that he was going to break into the voice of Robert de Niro or Al Pacino, but his dulcet Dunbartonshire tones were sufficiently menacing to get across the message that the people involved in this crime were playing no games at all, and that it was very serious.

The seriousness of the whole question of LIBOR was brought home to many of us yesterday when we opened our newspapers and saw photographs of people who had been appearing in court charged with offences related to the LIBOR scandal. The first thing that struck me was that the people were relatively young. The “ringleader”, if that is the appropriate term, is barely in his thirties now and was in his twenties in 2008 when the offences were committed, and the other two are not much older. Surely there were older, more experienced people further up the chain who must have known what was going on. If they did not know, they certainly should have done. That is the heart of the matter with regard to whistleblowing. Those responsible have to be held to account.

Amendment 98 works by adding excluded activities under FiSMA or the Financial Services Act 2012 to the list of justifications for making what is known as a qualified disclosure. As noble Lords may know already, the list includes reporting that someone’s health and safety is in danger, damage to the environment, and a criminal offence that a company is not obeying the law or that someone has covered up wrongdoing. Those are generic terms, but many of them would apply to the finance sector. For the new banking system to work well and be policed effectively, protections have to be in place for staff who believe that wrongdoing exists in their organisation and they are not prepared simply to sit on their hands or, as happens in many cases, simply leave the job in the hope of finding employment somewhere else because they fear the consequences of raising the issue.

This amendment is a further attempt to trigger a cultural change in financial services, which I think noble Lords on all sides have acknowledged is necessary. A bank employee may well wrestle with their conscience before deciding to break ranks; it is inevitable that they would. If an honest trader suspects that wrongdoing is under way and is considering informing the authorities, surely protections have to be in place for him or her to guard against a situation where they are held to be at fault. They are the victim because they perhaps lose their job, which in banking, of course, could be a very well paid job indeed. Once the word goes round that someone has left a bank or financial institution for this reason, how difficult will it be for him or her to find other employment?

The LIBOR scandal illustrates the importance of making it easier to report wrongdoing. At the time that we now know the LIBOR rate was being manipulated, certain newspapers did speculate about the accuracy of those claims, and indeed about the accuracy of the LIBOR rate itself. But as we know, no one came forward because no one had the confidence, even if they had the evidence, to break the surface and bring the scandal out into the open. It would have been much easier had it been brought into the open then rather than when it eventually emerged. Surely it is essential that people feel confident about being able to do that in the future.

Amendment 98 simply seeks to bolster the maintenance of law and order, something that I suggest we are entitled to expect that the Minister and his colleagues would agree with. The amendment would make it easier for the regulator and banks’ own compliance teams to do their job. We have heard from my noble friend Lord Brennan that this is being done very effectively in the USA. How could the coalition oppose it being introduced in this country as well?

[Lord Newby (LD)]

My Lords, the amendment would introduce a system under which the regulators would be able to award compensation against a firm that mistreated a whistleblower. Whistleblowing is an important issue and the Government agree that we need to have a proper system for protecting whistleblowers in the financial services industry as elsewhere. However, I do not think that the noble Lord’s amendment would be a helpful addition to the legislative framework, particularly at this point. Let me explain why.

In the summer, the Government launched a call for evidence on the whistleblowing framework to see whether there was a case for reforming the law protecting whistleblowers. This will be able to take account of submissions from the financial services regulators as well as from other interested parties. The call for evidence closes on 1 November and, once the evidence has been assessed, the Government will consider what if any action needs to be taken. It would not be sensible to prejudge the outcome of the call for evidence and implement changes without first looking at all the evidence available to support any changes. Moreover, the Government do not think that it would be appropriate to have different laws or protections for whistleblowers in different sectors. It would not be right to suggest that whistleblowers were more deserving of protection in some sectors than in others. I am sure that this is not what the noble Lord intended, but there is a risk that giving the regulators a special role in protecting whistleblowers in the financial services sector will be seen as special treatment for that sector.

Finally, this power does not seem consistent with the role and competence of the financial services regulators. There is a comprehensive system of protection for employees in employment law, which applies across the board, protecting workers in every sector. It provides a route of redress using employment tribunals for individuals who have suffered a detriment or dismissal as a result of blowing the whistle.

[Lord Lawson of Blaby (Con)]

I think my noble friend may have slightly missed the point. It is well documented that what happens normally is not that the whistleblower is dismissed—then, of course, there is the protection of employment law—but that he is stuck in that job and will never ever have any further promotion. I may be wrong, but I do not think there is any redress under employment law for that.

[Lord Newby]

My Lords, to the extent that there is or is not redress for that, the review which is under way will be looking at that element of the system as well as everything else. The evidence submitted, including by those who are keen to see the law changed and strengthened in that respect, will be able to take account of all that.

[Lord Phillips of Sudbury]

I am sorry to interrupt my noble friend again but it is important for the House to know a little more about this public consultation. I suspect that not one single person here tonight is aware that there is a consultation out there and that it is closing in a matter of a few days. Can the Minister tell us how widely this has been advertised, because it is news to me?

[Lord Newby]

My Lords, I am very happy to write to the noble Lord about the process that has been followed up until now. The whole process of this Bill has demonstrated, as the noble Lord has said, that there is tremendous activity—whether in terms of the regulators producing documents or of other regulatory initiatives, which are very hard to keep up with. I will ensure that we write as a matter of urgency to all noble Lords about this exercise.

Before coming on to what the regulators are already doing in this area, I want to stress the basic point about this review. First, it is wide ranging. Secondly, it aims to beef up the current system. Thirdly, it will apply across the board because the Government do not believe that the financial services sector has a different status in terms of whistleblowing to, say, the oil and gas sector or the pharmaceutical sector. What we need is a common approach across all sectors.

The FCA is already extremely active in supporting and encouraging whistleblowing. The number of whistleblowing contacts received is growing rapidly. There was a 370% increase between 2007 and 2012. The SEC has done very well. It received 3,001 reports in 2012. In the same year, the FSA received 3,929 reports. The impression has been given that the Americans have this system which is generating huge quantities of people coming forward and that the City is absolutely in fear to the extent that no one is coming forward. The figures totally contradict that view. I am not saying for a minute that the system is perfect, cannot be improved or will not be improved, but that the numbers of people coming through in the City are higher than is the case in the States. The FCA’s whistleblowing procedures have been revised to actively track whistleblowing outcomes across the FCA while cases are actively monitored to provide feedback, wherever legally possible, to whistleblowers.

On the point that the noble Lord, Lord Brennan, raised, the regulators have a role in enforcement and protection. The Dodd-Frank Act brought in protections for whistleblowers which, to a considerable extent, already existed in the United Kingdom. The American scheme is of course not what is proposed in the UK, as the noble Lord said. Under that scheme, whistleblowers can receive a proportion of any penalty received from successful enforcement action arising from tips that they provide. That is different from what this amendment proposes. Although the PCBS said that it would like research to be undertaken in this area, it did not suggest an incentive scheme. The regulators are undertaking research, as requested by the parliamentary commission.

The regulators are therefore already doing a lot, including undertaking research, while the Government are undertaking a review of the whole issue across all the sectors. In the light of that, I hope that the noble Lord will withdraw his amendment.

[Lord McFall of Alcluith]

My Lords, the Government’s response to every amendment is, “Manana, manana”. There is nothing in the response but, “Tomorrow, tomorrow”. There is, for example, a public consultation that we know nothing about. As noble Lords have said tonight, this is a very modest proposal. The Minister really has the wrong end of the stick here when he asks why we should protect whistleblowers in the financial services industry and what is different here from in the oil and gas industry. The Government themselves think that it is different. Why? Because they appointed the noble Lords, Lord Lawson and Lord Turnbull, and me to a Parliamentary Commission on Banking Standards, along with Members of the House of Commons. We spent a year of our lives—10,000 questions and 180 hours in committee—before presenting a report to the Government. That is why the financial services industry is different from others.

[Lord Newby]

My Lords, is the noble Lord seriously suggesting that whistleblowing in the financial services sector—we are talking about whistleblowing here—is of a different order of public interest from whistleblowing in, say, the pharmaceutical or oil industry?

[Lord McFall of Alcluith]

We have had the biggest financial crisis ever but not one whistleblower. That is the magnitude of the problem which the Minister does not grasp and that is why we looked at this issue. Goodness gracious, look at the fines: £85 million for Barclays and £13 billion for JP Morgan today. There is a litany we could go through, so what is the problem?

The Government set up a commission to look at culture and standards. What did the Parliamentary Commission on Banking Standards find? It found that the culture was rotten and the standards were abysmally low. This whistleblowing amendment—a modest amendment—is being put forward to ensure that we have a better culture, and that we have legal and compliance teams in companies that might have the nerve and confidence to go the FCA and say, “Look, there is wrongdoing in this company and we do not feel that we can assuage our conscience on this. We need to report it to the FCA to ensure that we have a better organisation here”. This has failed totally. That is the magnitude of the problem facing us and that is why we have this modest amendment.

The USA was mentioned. We had two witnesses before us from the USA who were very clear that we did not scrape the ground with the FSA. My noble friend Lord Brennan has given his wisdom on the situation in the USA tonight. We are asking the Government and the FCA to look at the experience in the USA to see if that aspect can be adapted. As the noble Lord, Lord Phillips, said, his charity did not have one person from the City. That backs up the evidence that we heard and gives the initiative to the FCA. That is the purpose of this amendment.

We received representations from trade unions in a sub-committee evidence session. The trade unions were very clear to us that their members at the grass-roots level felt pressurised but were scared stiff to do anything about it. I have a number of examples but will give the Minister one in particular. An individual I have known in my own town of Dumbarton for years, who worked in one of the banks for 25 years, left to become a care worker at less than half the salary. I asked her why she left. She said, “John, I was being forced every week to sell products that were not only unsuitable for people but were making their lives miserable. I could not partake in that, so I left”. There was someone who had been committed for 25 years being pressured on issues like that. Surely we should have a system to say “That person has given loyal service. That’s a person who wants to serve their bank and their community. Let’s establish an appropriate structure so that we protect that person, and also make the company better”.

I suggest to the Minister that there is a link between the almost £30 billion that we will be paying out in fines for PPI and the conduct of a company. If the proper procedure was in place and that information came up from the bottom, we probably would not have the abysmal situation we have with the £30 billion.

This amendment is about not just changing the culture and standards but helping the safety and soundness of companies. It was a responsibility given to us, the Parliamentary Commission on Banking Standards, by the Government to give recommendations to change the culture. This is a sound way of doing that and I would have expected a more sympathetic and engaging response from the Minister than we received tonight.

--- Later in debate ---

[Lord Eatwell]

My Lords, this amendment refers to portable account numbers. I am sure that noble Lords will have read in yesterday’s Financial Times the story about the voluntary endeavour by the banks to increase the possibility of customers switching their accounts from one bank to another. The current switching drive does not include portability of account numbers. As the Financial Times boldly declared:

“Account switching drive fails to dislodge customers”.

The general assessment is that the complications associated with the non-portability of account numbers—that is, the complications of changing account numbers—are a significant disincentive to customers to switch their account from one bank to another. This is of course a considerable diminution of competition. The Government have argued very strongly that they are in favour of competition and choice in the retail sector. The noble Lord has repeated that position in discussing some of the amendments that we have already looked at this evening. However, here there is a clear opportunity to increase the possibility of competition in a very concrete way through the portability of account numbers.

The noble Lord will recall how successful this process has been in the telephone industry. The portability of telephone numbers has very evidently provided a significant competitive boost, which suggests that being able to move a number would increase competition significantly in the banking industry as well. I understand that this would be more difficult within the banking industry. For example, the amendment refers specifically to both portable account numbers and sort codes. That makes the issue more difficult because two individuals who bank at different banks may have the same account number but, of course, different sort codes; their entire identification is in the combination of the two. Therefore, a new means of identifying the core bank would have to be developed, and I understand that that would have various knock-on effects.

However, the idea that this would all cost £5 billion, as has been argued by the banking industry, seems to be vastly overstated. We had the same situation with telephony. We were told that this process was going to cost an enormous amount but, in the end, introducing transferable telephone numbers resulted in a tiny proportion of the costs which the industry had said it would need to incur.

Therefore, if we are really going to get competition and choice for the consumer, this seems to be a necessary step. The attempt to develop such competition through facilitating switching but without portability has, it seems, failed. Given that, if the Government are really going to put themselves on the side of the consumer in a competitive market, it is their responsibility to require the possibility of portable account numbers. I beg to move.

[Lord Newby]

My Lords, it goes without saying that the Government are fully behind the objective of increasing competition in banking and making sure that customers who wish to switch banks can do so without impediment. The notion of portable account numbers was considered by the Independent Commission on Banking and in its final report the ICB chose to recommend a new account switching service over portable account numbers. It considered that such a service, if designed correctly, would provide the majority of the same benefits as portability, but with significantly reduced risk and cost.

The Government acted quickly on this recommendation to secure a commitment from the banking industry to deliver current account switching in two years. This was an ambitious timetable for such a big project, but the banks have met the challenge. The new current account switching service was launched on schedule in September and covers almost 100% of the current account market. It has been designed to meet all the ICB’s criteria for tackling customer concerns over switching and to give customers the confidence they need to make the banks improve their services by ensuring that their customers can vote with their feet.

However, it is important that the new system delivers on its promises. That is why the Government continue to engage closely with the Payments Council, which has delivered the service on behalf of the industry, on the progress of switching.

[Lord McFall of Alcluith]

The noble Lord mentioned the Parliamentary Commission on Banking Standards and talked about account portability. But that was not as firm a recommendation as he has suggested, because one of the questions we asked was: why can the banks not allocate an account number that works in the way that mobile telephone numbers do, so that people can swap them around in the same way? The banks replied that the IT costs would be too high, but a cursory examination—that is all we did—of the IT aspect indicated that there were legacy problems with the IT. As we have seen with the horrendous examples involving RBS and others, the IT system is in a very poor state. So now is the ideal time to raise our ambitions and ensure that we get for bank customers the portability that telephone customers have.

[Lord Newby]

My Lords, I did not mention the parliamentary commission; I was referring to the Independent Commission on Banking. None the less, I shall come to the substantive point that the noble Lord has just made.

As I was saying, to aid transparency we have asked the Payments Council to publish statistics regularly, including switching volumes on a monthly basis and more detailed statistics every quarter, which include data on awareness and confidence in the new service. The Government consider that making this information public is the best way to hold the current account switching service to account. As has been mentioned, the Payments Council has just published the first set of data, covering the four-week period following the switching service becoming fully operational. The numbers show that 89,000 switches were completed—an 11% increase on the 80,000 completed during the same period last year. I am a great fan of the Financial Times, but to describe a scheme that has been running for a month as a failure, when it has already got 9,000 extra people to switch, is clearly complete rubbish.

Account portability is a more complicated issue. I am not necessarily disagreeing with the noble Lord, Lord McFall, but the only way to make a properly informed assessment as to whether, or how, steps towards portable account numbers should be taken is to conduct a comprehensive analysis. I must say, almost in parenthesis, that I do not believe that the analogy with telephone numbers takes us as far as might appear at first sight. For a start, as an individual I am quite happy if lots of people know my telephone number —but I am very unhappy if anybody knows my bank account details. This means that I have a completely different view about how I want to deal with that account. That is one of a number of different reasons why this is a complicated issue. It is not, however, an issue that the Government have just pushed to one side. We have made a commitment to ask the new payment systems regulator to undertake the comprehensive analysis that is required.

There has not yet been a proper study of account portability in the UK, but it is clear that operating the payments systems alongside account portability would be one of the significant challenges. That is why we think that the payment systems regulator is the right body to carry out this work. It will have the appropriate expertise and will be able to give an independent view. To be clear, the payment systems regulator will have the powers described in subsection (2) of the proposed new clause. There would be no need to confer new powers on the regulator in order to implement the recommendations of a review. In order to get a complete picture of what benefits account portability could bring, the experience of the current account switching service will need to be fully considered. Therefore, the Government expect the success of the switching service to be firmly within the scope of the payment systems regulator’s view of portability. The switching service is new and the regulator is not yet established. In our view, the logical step is to let them both become properly established and bedded in and then have a proper and comprehensive analysis. On the basis of that, a decision can be taken.

[Lord Eatwell]

The noble Lord just said that the payment systems regulator is going to be asked to do this. What timetable is the regulator going to be given?

[Lord Newby]

The regulator will be asked to make this one of its top priorities once it has been established, but it is impossible to say at this point that it will have to do it within three or six months. We think that that would be overly prescriptive. However, it is one of the priority tasks that it will be given from its inception.

[Lord Eatwell]

My Lords, that is why the amendment specifies 12 months. It seems that what the Government are saying is that they are behind the concept of competition but they are not behind the means of making that concept actually work. However, I must say that it is encouraging that the payment systems regulator is being asked to study this matter. It would be more encouraging if we were given some clarity that this will not simply be kicked into touch but will actually be presented to Parliament within a given timescale.

This is a matter of considerable importance if the Government are serious about competition and giving competitive advantage to consumers. It is therefore a matter to which we must inevitably return. In the mean time, I beg leave to withdraw the amendment.

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[Lord Eatwell]

My Lords, I am delighted that the Liberal Democrats are coming behind the proposals developed by my noble friend Lord Mitchell. I hope they acknowledge his success in having the various clauses limiting payday loans and high-cost credit agreements inserted during the passage of the Financial Services Act 2012.

Given that that Act is now in place and the measures advanced by my noble friend Lord Mitchell are on the statute book, the argument of the noble Lord, Lord Sharkey, as I understand it, is about why nothing is happening and why there is a lack of movement towards getting appropriate regulation in place. If he is indeed correct that things are moving so slowly—I have no reason to believe that he is not—the Government owe him an explanation as to why that is the case. Obviously, one is sympathetic to getting my noble friend Lord Mitchell’s measures going as fast as possible, but I have a couple of questions about the amendment.

First, do we really feel that there is a simple read-over between state government in the United States and a local authority in the UK? It seems that we pile responsibilities on local authorities without giving them sufficient funding, in many cases, to fulfil their responsibilities. I do not see that the amendment provides for any resources to go to local authorities to enable them to do the job.

Secondly, as far as I understand it, quite a lot of payday lending is done online. The amendment will do absolutely nothing to address loans that are made online because it is all geographically defined. A payday lender may have a registered address but that may have absolutely nothing to do with the location of the customers of that payday lender. The disjuncture between the registered address and the location of the customers suggests that knowledge of local needs would not necessarily be very relevant in such a case.

I am very sympathetic to the need to get things moving and look forward to the Government telling noble Lords how energetic they are being and giving us some concrete evidence of how my noble friend Lord Mitchell’s measures are being effectively brought into being. I would also like the Government to consider whether the noble Lord, Lord Sharkey, has, with the notion of the local authority—or indeed any other authority—identified a means of getting things moving more quickly.

[Lord Newby]

My Lords, the Government wholeheartedly agree with my noble friend that consumers must be protected when they borrow from payday lenders and use other high-cost forms of credit. As noble Lords have pointed out, the Government fundamentally reformed the regulatory system governing these lenders to protect borrowers by transferring the regulation of consumer credit to the Financial Conduct Authority in the Financial Services Act 2012.

The FCA takes up this new regulatory responsibility on 1 April but has already demonstrated that it is serious about cracking down on high-cost lenders. It is absolutely unfair on it to say that nothing has happened since the Act was passed last year.

On 3 October, as the noble Lord, Lord Sharkey, has pointed out, the FCA set out an action plan on high-cost lending to protect consumers, with tough new rules covering a number of issues, including a limit on rollovers and restricting the use of continuous payment authorities. These proposals have won widespread support and will profoundly change how this industry operates. I completely agree with the noble Lord, Lord Sharkey, that self-regulation has failed, but the industry is not going to be self-regulated any more.

Turning now to the noble Lord’s amendment specifically, I am surprised that he thinks that local authorities should be given additional responsibility for regulating high-cost lenders. I can see why it might work in the States, and having looked at the Florida scheme I completely agree that it has been an extremely successful scheme there. I hope that there are a number of additional elements of that scheme that might, in time, be introduced into the UK. However, I frankly cannot see the case for duplicating regulatory effort within such a small geographic area of the UK, especially as consumers will find this confusing. Nor can this be considered a good use of public funds, given that the FCA, which is fully funded by the industry, already has this responsibility.

Most payday lenders have a national reach, especially the biggest players which dominate the market and, by definition, those which are online, so it does not make sense to permit scores of local authorities, in addition to the FCA, to all regulate the same lender. We believe that a well-resourced and empowered single national regulator will provide the best outcome for consumers. Consumers will be better protected by having a regulator with the resources, expertise and national consistency of the FCA. I am not convinced of the benefits for consumers of a federal approach to regulation. In fact, this could lead to more consumer harm; payday lenders are more likely to target consumers in local authority areas where the authority is less active.

The nub of the amendment is, of course, that the noble Lord has framed it to ensure that the Secretary of State imposes a cap on the cost of high-cost credit. While I entirely support the noble Lord’s ambition to bring down the cost of such loans, I am not convinced that the best way to do that is via a mandatory cap. The Government do not believe that current evidence provides sufficient justification to support a cap on the cost of credit.

The noble Lord has referred to the work commissioned by the Government from the University of Bristol. It does not, as he says, say that the main arguments against a cap on the rate relate to loan sharks. It does point out that although that may happen in some cases, lenders may try to bypass the cap by introducing other charges or fees which are not subject to it. Evidence shows that, with a cap in place, lenders may be less likely to show understanding if customers get into repayment difficulties.

While the Government are not convinced that a mandatory cap is the best overall solution for consumers now, they have made it clear that the FCA has a specific power to impose a cap in future, should it decide that it is needed to protect consumers. The FCA has already committed to start analysis on use of this power from April 2014.

Capping the cost of credit is a major intervention with potentially profound consequences for consumers, so it is right that the FCA contemplates use of this power in a responsible and evidence-based way, which is what it will now do. Noble Lords should not be in any doubt about the FCA’s commitment to using its powers to protect consumers whenever it feels it is necessary. The Government stand ready to support the FCA to ensure the best overall outcome for consumers.

I know it is extremely frustrating that we have not got a comprehensive solution in place, but the Government have moved with considerable alacrity in setting up a new, effective regulatory framework. The regulator has acted quickly to set out proposals and on that basis, I hope that the noble Lord will feel able to withdraw his amendment.

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[Lord Eatwell]

My Lords, my noble friend has made a very strong case. He needed to add one other element to persuade the Government, which is that this would enhance competition. If one improved information in this way, then, given the enhancement of consumer choice, the competitive objective of the Government would be better served. This would be a diminution of some of the severe problems of asymmetric information that distort competition in financial services, especially retail financial services. If it was developed with care it would be a considerable boost to the overall efficiency of retail financial services in this country.

It is very easy to say, “The time is not ripe; it is not really quite the time; there are unintended consequences”. All that is required is a consistent bias towards transparency. The Government should approach this issue by saying, “In principle, we are in favour of transparency”. The argument should be made for not being transparent. In other words, the strong case has to be made for not revealing something. The fundamental prejudice should be that this information should be transparent. Effective transmission of information is a key element in creating an efficient market and enhancing the competitive goal that the Government claim to be their own.

[Lord Newby]

My Lords, as the noble Lord, Lord McFall, pointed out, we debated this issue at great length during proceedings on the previous Financial Services Bill. Sections 348 and 349 of FiSMA govern the treatment of confidential information obtained by the regulators and the ability of the regulators to disclose such confidential information. The noble Lord argued at the time, and repeated today, that there was inadequate transparency and insufficient disclosure of information in the financial services regulatory regime. This led to the argument that Section 348 should be amended to make it as unrestricted as possible.

In response, the Treasury undertook a careful review of Section 348 and its associated provisions. The review concluded, first, that it would be difficult to amend Section 348 without negative consequences. Scaling back Section 348 would increase the risk that firms would become less willing to share information with the regulators, undermining those important relationships and the regulators’ ability to protect consumers. Secondly, even with Section 348 in place, the FCA could and should do more to increase transparency.

With that in mind, the Government decided at the time not to amend or delete Section 348 but agreed with the FSA, as it then was, for it to carry out a fundamental review of how transparency would be embedded in the new FCA regime. This was published as a consultation in April of this year and received positive feedback from consumer groups—that is, the very people the new or changed approach was intended to benefit. The review covered use of disclosure as a regulatory tool by the regulator, disclosure of information by firms, both voluntarily and as a result of FCA rules, and transparency on the part of the regulator.

In terms of publishing details of enforcement action, the FCA is already required to publish details and information about decisions and final notices that it considers appropriate. It can also publish the fact that a warning notice has been issued in respect of disciplinary action. In response to the recent PCBS recommendation that it should require firms to publish more information, the FCA has outlined its plans to issue a call for evidence next year on data that it should require firms to publish to help consumers better understand the firm and product quality.

I hope the noble Lord will agree that this is exactly what the PCBS was seeking to achieve and that it can be done without further amendment to Section 348.

[Lord McFall of Alcluith]

My Lords, again the Government’s response is a little timid. However, the hour is late. It is an appropriate time to say, “Mañana” and we will fight it another day.

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[Lord Turnbull]

My response to that is that it is completely unsatisfactory. We shall need to come back to it. I hope that there can be some discussion, maybe with officials in the Bill team. I am not satisfied that applying these various provisions simply to deposit takers covers all the areas of conduct that really need to be covered.

One other issue came to light in the course of this evening’s discussions about the remuneration regime. The noble Lord, Lord Newby, read out a list of people who are covered. Those are the people who are covered by the current remuneration regime. What was being proposed in my amendment was in effect a senior tier particularly for banking. Once you do that, you have to find a definition of a bank. I thought that we were a bit nearer to getting an answer until I heard from the noble Lord, Lord Eatwell. It is something we need to sort out, otherwise we shall find a serious area of misconduct in an investment banking area only to be told that when we legislated we forgot to cover these kinds of people. That would be completely unacceptable.

[Lord Newby]

My Lords, I thought that I read out virtually verbatim last week what the noble Lord has read out from the Bank of England. We are going to confirm that in a letter. However the most important point is the one that the noble Lord, Lord Turnbull, raised about the scope of the senior managers regime and the criminal offence that goes with it. I can confirm now what I attempted to say last time, that my Treasury colleagues are considering the scope of the new regime and of the new criminal offence of reckless misconduct in the management of a bank in the light of the previous debate. I can assure the House that they take your Lordships’ views extremely seriously.

[Lord Turnbull]

I infer that I should pay more attention to the letter of the noble Lord, Lord Newby, of 22 October than I should pay to the Bank of England’s response, because I think the former is a more constructive response than that of the Bank of England. On that basis, I beg leave to withdraw Amendment 104E.

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Moved by

[Lord Newby]

105: Before Schedule 2, insert the following new Schedule—
ScheduleBail-in stabilisation optionPart 1Amendments of Banking Act 20091 The Banking Act 2009 is amended as follows.
New stabilisation option: bail-in2 After section 12 insert—
“12A Bail-in option
(1) The third stabilisation option is exercised by the use of the power in subsection (2).
(2) The Bank of England may make one or more resolution instruments (which may contain provision or proposals of any kind mentioned in subsections (3) to (6)).
(3) A resolution instrument may—
(a) make special bail-in provision with respect to a specified bank; (b) make other provision for the purposes of, or in connection with, any special bail-in provision made by that or another instrument.(4) A resolution instrument may—
(a) provide for securities issued by a specified bank to be transferred to a bail-in administrator (see section 12B) or another person;(b) make other provision for the purposes of, or in connection with, the transfer of securities issued by a specified bank (whether or not the transfer has been or is to be effected by that instrument, by another resolution instrument or otherwise).(5) A resolution instrument may set out proposals with regard to the future ownership of a specified bank or of the business of a specified bank, and any other proposals (for example, proposals about making special bail-in provision) that the Bank of England may think appropriate.
(6) A resolution instrument may make any other provision the Bank of England may think it appropriate to make in exercise of specific powers under this Part.
(7) Provision made in accordance with subsection (4) may relate to—
(a) specified securities, or(b) securities of a specified description.(8) Where the Bank of England has exercised the power in subsection (4) to transfer securities to a bail-in administrator, the Bank of England must exercise its functions under this Part (see, in particular, section 48V) with a view to ensuring that any securities held by a person in the capacity of a bail-in administrator are so held only for so long as is, in the Bank of England’s opinion, appropriate having regard to the special resolution objectives.
(9) References in this Part to “special bail-in provision” are to provision made in reliance on section 48B.
12B Bail-in administrators
(1) The Bank of England may, in a resolution instrument, appoint an individual or body corporate as a bail-in administrator.
(2) A bail-in administrator is appointed—
(a) to hold any securities that may be transferred or issued to that person in the capacity of bail-in administrator;(b) to perform any other functions that may be conferred under any provision of this Part.(3) The Bank of England may appoint more than one bail-in administrator to perform functions in relation to a bank (but no more than one of them may at any one time be authorised to hold securities as mentioned in subsection (2)(a)).
(4) Securities held by a bail-in administrator (in that capacity, and whether as a result of a resolution instrument or otherwise) are to be held in accordance with the terms of a resolution instrument that transfers those, or other, securities to the bail-in administrator.
(5) For example, the following provision may be made by virtue of subsection (4)—
(a) provision that specified rights of a bail-in administrator with respect to all or any of the securities are to be exercisable only as directed by the Bank of England;(b) provision specifying rights or obligations that the bail-in administrator is, or is not, to have in relation to some or all of the securities.(6) A bail-in administrator must have regard, in performing any functions of the office, to any objectives that may be specified in a resolution instrument.
(7) Where one or more objectives are specified in accordance with subsection (6), the objectives are to be taken to have equal status with each other, unless the contrary is stated in the resolution instrument.
(8) See sections 48I to 48K for further provision about bail-in administrators.”
3 After section 8 insert—
“8A Specific condition: bail-in
(1) The Bank of England may exercise a stabilisation power in respect of a bank in accordance with section 12A(2) only if satisfied that the condition in subsection (2) is met.
(2) The condition is that the exercise of the power is necessary, having regard to the public interest in—
(a) the stability of the financial systems of the United Kingdom,(b) the maintenance of public confidence in the stability of those systems,(c) the protection of depositors, or(d) the protection of any client assets that may be affected.(3) Before determining whether that condition is met, and if so how to react, the Bank of England must consult—
(a) the PRA,(b) the FCA, and(c) the Treasury.(4) The condition in this section is in addition to the conditions in section 7.”
Further provision about the bail-in option4 After section 48A insert—
“Bail-in option48B Special bail-in provision
(1) “Special bail-in provision”, in relation to a bank, means any of the following (or any combination of the following)—
(a) provision cancelling a liability owed by the bank;(b) provision modifying, or changing the form of, a liability owed by the bank;(c) provision that a contract under which the bank has a liability is to have effect as if a specified right had been exercised under it.(2) A power to make special bail-in provision—
(a) may be exercised only for the purpose of, or in connection with, reducing, deferring or cancelling a liability of the bank;(b) may not be exercised so as to affect any excluded liability.(3) The following rules apply to the interpretation of subsection (1).
1. The reference to cancelling a liability owed by the bank includes a reference to cancelling a contract under which the bank has a liability.2. The reference to modifying a liability owed by the bank includes a reference to modifying the terms (or the effect of the terms) of a contract under which the bank has a liability.3. The reference to changing the form of a liability owed by the bank, includes, for example—(a) converting an instrument under which the bank owes a liability from one form or class to another,(b) replacing such an instrument with another instrument of a different form or class, or(c) creating a new security (of any form or class) in connection with the modification of such an instrument.(4) Examples of special bail-in provision include—
(a) provision that transactions or events of any specified kind have or do not have (directly or indirectly) specified consequences or are to be treated in a specified manner for specified purposes;(b) provision discharging persons from further performance of obligations under a contract and dealing with the consequences of persons being so discharged. (5) The form and class of the instrument (“the resulting instrument”) into which an instrument is converted, or with which it is replaced, do not matter for the purposes of paragraphs (a) and (b) of rule 3 in subsection (3); for instance, the resulting instrument may (if it is a security) fall within Class 1 or any other Class in section 14.
(6) The following liabilities of the bank are “excluded liabilities”—
(a) liabilities representing protected deposits;(b) any liability, so far as it is secured;(c) liabilities that the bank has by virtue of holding client assets;(d) liabilities with an original maturity of less than 7 days owed by the bank to a credit institution or investment firm;(e) liabilities arising from participation in designated settlement systems and owed to such systems or to operators of, or participants in, such systems;(f) liabilities owed to central counterparties recognised by the European Securities and Markets Authority in accordance with Article 25 of Regulation (EU) 648/2012 of the European Parliament and the Council; (g) liabilities owed to an employee or former employee in relation to salary or other remuneration, except variable remuneration;(h) liabilities owed to an employee or former employee in relation to rights under a pension scheme, except rights to discretionary benefits;(i) liabilities owed to creditors arising from the provision to the bank of goods or services (other than financial services) that are critical to the daily functioning of the bank’s operations.(7) The following special rules apply in cases involving banking group companies—
(a) a liability mentioned in subsection (6)(d) is not an excluded liability if the credit institution or investment firm to which the liability is owed is a banking group company in relation to the bank (see section 81D);(b) in subsection (6)(i) the reference to creditors does not include companies which are banking group companies in relation to the bank.48C Meaning of “protected deposit”
(1) A deposit is “protected” so far as it is covered by the Financial Services Compensation Scheme.
(2) A deposit is “protected” so far as it is covered by a scheme which—
(a) operates outside the United Kingdom, and(b) is comparable to the Financial Services Compensation Scheme.(3) If one or both of subsections (1) and (2) apply to a deposit, the amount of the deposit “protected” is the highest amount which results from either of those subsections.
(4) In subsections (1) and (2) and section 48B(6)(a), “deposit” has the meaning given by article 5(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544), but ignoring the exclusions in article 6.
48D General interpretation of section 48B
(1) In section 48B—
“client assets” means assets which the bank has undertaken to hold on trust for, or on behalf of, a client;“contract” includes any instrument;“credit institution” means any credit institution as defined in Article 4.1(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council, other than an entity mentioned in Article 2.5(2) to (23) of Directive 2013/36/EU of the European Parliament and of the Council; “designated settlement system” means a system designated in accordance with Directive 98/26/EC of the European Parliament and of the Council (as amended by Directives 2009/44/EC and 2010/78/EU);“employee” includes the holder of an office;“investment firm” means an investment firm as defined in Article 4.1(2) of Regulation (EU) No 575/2013 of the European Parliament and of the Council that is subject to the initial capital requirement specified in Article 28(2) of Directive 2013/36/EU of the European Parliament and of the Council;“pension scheme” includes any arrangement for the payment of pensions, allowances and gratuities;“secured” means secured against property or rights, or otherwise covered by collateral arrangements.(2) In subsection (1)—
“assets” has the same meaning as in section 232(4) (ignoring for these purposes section 232(5A)(b));“collateral arrangements” includes arrangements which are title transfer collateral arrangements for the purposes of section 48.(3) For the purposes of section 48B(6)(h), a benefit under a pension scheme is discretionary so far as the employee’s right to the benefit was a result of the exercise of a discretion.
48E Report on special bail-in provision
(1) This section applies where the Bank of England makes a resolution instrument containing special bail-in provision (see section 48B(1)).
(2) The Bank of England must report to the Chancellor of the Exchequer stating the reasons why that provision has been made in the case of the liabilities concerned.
(3) If the provision departs from the insolvency treatment principles, the report must state the reasons why it does so.
(4) The insolvency treatment principles are that where an instrument includes special bail-in provision—
(a) the provision made by the instrument must be consistent with treating all the liabilities of the bank in accordance with the priority they would enjoy on a liquidation, and(b) any creditors who would have equal priority on a liquidation are to bear losses on an equal footing with each other.(5) A report must comply with any other requirements as to content that may be specified by the Treasury.
(6) A report must be made as soon as reasonably practicable after the making of the resolution instrument to which it relates.
(7) The Chancellor of the Exchequer must lay a copy of each report under subsection (2) before Parliament.
48F Power to amend definition of “excluded liabilities”
(1) The Treasury may by order amend section 48B(6) by—The Treasury may by order amend section 48C or 48D.
(a) adding to the list of excluded liabilities;(b) amending or omitting any paragraph of that subsection, other than paragraphs (a) to (c).(3) The powers conferred by subsections (1) and (2) include power to make consequential and transitional provision.
(4) An order under this section—
(a) must be made by statutory instrument, and(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.(5) The Treasury must consult before laying a draft order under this section before Parliament.
48G Priority between creditors
(1) The Treasury may, for the purpose of ensuring that the treatment of liabilities in any instrument that contains special bail-in provision is aligned to an appropriate degree with the treatment of liabilities on an insolvency, by order specify matters or principles to which the Bank of England is to be required to have regard in making any such instrument.
(2) An order may, for example, specify the insolvency treatment principles (as defined in section 48E(4)) or alternative principles.
(3) An order may specify the meaning of “insolvency” for one or more purposes of the order.
(4) An order may amend sections 44C(4) and 48E(4).
(5) An order —
(a) is to be made by statutory instrument, and(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.48H Business reorganisation plans
(1) A resolution instrument may require a bail-in administrator, or one or more directors of the bank, to—
(a) draw up a business reorganisation plan with respect to the bank, and(b) submit it to the Bank of England within the period allowed by (or under) the instrument.(2) “Business reorganisation plan” means a plan that includes—
(a) an assessment of the factors that caused Condition 1 in section 7 to be met in the case of the bank,(b) a description of the measures to be adopted with a view to restoring the viability of the bank, and(c) a timetable for the implementation of those measures.(3) Where a person has submitted a business reorganisation plan to the Bank of England under subsection (1) (or has re-submitted a plan under subsection (4)), the Bank of England—
(a) must approve the plan if satisfied that the plan is appropriately designed for meeting the objective mentioned in subsection (2)(b);(b) must otherwise require the person to amend the plan in a specified manner.(4) Where the Bank of England has required a person to amend a business re-organisation plan, the person must re-submit the amended plan within the period allowed by (or under) the resolution instrument.
(5) Before deciding what action to take under subsection (3) the Bank of England must (for each submission or re-submission of a plan) consult—
(a) the PRA, and(b) the FCA.(6) A business reorganisation plan may include recommendations by the person submitting the plan as to the exercise by the Bank of England of any of its powers under this Part in relation to the bank.
(7) Where a resolution instrument contains provision under subsection (1), the instrument may—
(a) specify further matters (in addition to those mentioned in subsection (2)) that must be dealt with in the business reorganisation plan;(b) make provision about the timing of actions to be taken in connection with the making and approval of the plan;(c) enable any provision that the Bank of England has power under paragraph (a) or (b) to make in the instrument to be made instead in an agreement between the Bank of England and the bail-in administrator.(8) For the purposes of subsection (2)(b) the viability of a bank is to be assessed by reference to whether the bank satisfies, and (if so) for how long it may be expected to continue to satisfy, the threshold conditions (as define in section 55B of the Financial Services and Markets Act 2000).
48I Bail-in administrator: further functions
(1) A resolution instrument may—
(a) authorise a bail-in administrator to manage the bank’s business (or confer on a bail-in administrator any other power with respect to the management of the bank’s business);(b) authorise a bail-in administrator to exercise any other powers of the bank;(c) confer on a bail-in administrator any other power the Bank of England may consider appropriate;(d) provide that the exercise of any power conferred by the instrument in accordance with this section is to be subject to conditions specified in the instrument.(2) A resolution instrument may require a bail-in administrator to make reports to the Bank of England—
(a) on any matter specified in the instrument, and(b) at the times or intervals specified in the instrument.(3) If a resolution instrument specifies a matter in accordance with subsection (2)(a), it may provide for further requirements as to the contents of the report on that matter to be specified in an agreement between the Bank of England and the bail-in administrator.
(4) A resolution instrument may—
(a) require a bail-in administrator to consult specified persons before exercising specified functions (and may specify particular matters on which the specified person must be consulted);(b) provide that a bail-in administrator is not to exercise specified functions without the consent of a specified person.48J Bail-in administrator: supplementary
(1) A bail-in administrator may do anything necessary or desirable for the purposes of or in connection with the performance of the functions of the office.
(2) A bail-in administrator is not a servant or agent of the Crown (and, in particular, is not a civil servant).
(3) Where a bail-in administrator is appointed under this Part, the Bank of England—
(a) must make provision in a resolution instrument for resignation and replacement of the bail-in administrator;(b) may remove the bail-in administrator from office only (i) on the ground of incapacity or misconduct, or (ii) on the ground that there is no further need for a person to perform the functions conferred on the bail-in administrator.48K Bail-in administrator: money
(1) A resolution instrument may provide for the payment of remuneration and allowances to a bail-in administrator.
(2) Provision made under subsection (1) may provide that the amounts are—
(a) to be paid by the Bank of England, or (b) to be determined by the Bank of England and paid by the bank. (3) A bail-in administrator is not liable for damages in respect of anything done in good faith for the purposes of or in connection with the functions of the office (subject to section 8 of the Human Rights Act 1998).
48L Powers in relation to securities
(1) A resolution instrument may—
(a) cancel or modify any securities to which this subsection applies;(b) convert any such securities from one form or class into another.(2) Subsection (1) applies to securities issued by the bank that fall within Class 1 in section 14.
(3) A resolution instrument may—
(a) make provision with respect to rights attaching to securities issued by the bank;(b) provide for the listing of securities issued by the bank to be discontinued. (4) The reference in subsection (1)(b) to converting securities from one form or class into another includes creating a new security in connection with the modification of an existing security.
(5) The provision that may be made under subsection (3)(a) includes, for example—
(a) provision that specified rights attaching to securities are to be treated as having been exercised;(b) provision that the Bank of England, or a bail-in administrator, is to be treated as authorised to exercise specified rights attaching to securities;(c) provision that specified rights attaching to securities may not be exercised for a period specified in the instrument.(6) In subsection (3)(b) the reference to “listing” is to listing under section 74 of the Financial Services and Markets Act 2000.
(7) The provision that may be made under this section in relation to any securities is in addition to any provision that the Bank of England may have power to make in relation to them under section 48B.
48M Termination rights, etc
(1) In this section “default event provision” has the same meaning as in section 22.
(2) A resolution instrument may provide for subsection (3) or (4) to apply (but need not apply either).
(3) If this subsection applies, the resolution instrument is to be disregarded in determining whether a default event provision applies.
(4) If this subsection applies, the resolution instrument is to be disregarded in determining whether a default event provision applies except so far as the instrument provides otherwise.
(5) In subsections (3) and (4) a reference to the resolution instrument is a reference to—
(a) the making of the instrument,(b) anything that is done by the instrument or is to be, or may be, done under or by virtue of the instrument, and(c) any action or decision taken or made under this or another enactment in so far as it resulted in, or was connected to, the making of the instrument.(6) Provision under subsection (2) may apply subsection (3) or (4)—
(a) generally or only for specified purposes, cases or circumstances, or(b) differently for different purposes, cases or circumstances.(7) A thing is not done by virtue of a resolution instrument for the purposes of subsection (5)(b) merely by virtue of being done under a contract or other agreement rights or obligations under which have been affected by the instrument.
48N Directors
(1) A resolution instrument may enable the Bank of England—
(a) to remove a director of a specified bank;(b) to vary the service contract of a director of a specified bank;(c) to terminate the service contract of a director of a specified bank;(d) to appoint a director of a specified bank.(2) Subsection (1) also applies to a director of any undertaking which is a banking group company in respect of a specified bank.
(3) Appointments under subsection (1)(d) are to be on terms and conditions agreed with the Bank of England.
48O Directions in or under resolution instrument
(1) A resolution instrument may—
(a) require one or more directors of the bank to comply with any general or specific directions that may be set out in the instrument; (b) enable the Bank of England to give written directions (whether general or specific) to one or more directors of the bank.(2) A director—
(a) is not to be regarded as failing to comply with any duty owed to any person (for example, a shareholder, creditor or employee of the bank) by virtue of any action or inaction in compliance with a direction given under subsection (1)(a) or (b);(b) is to be immune from liability in damages in respect of action or inaction in accordance with a direction.(3) A director must comply with a direction within the period of time specified in the direction, or if no period of time is specified, as soon as reasonably practicable.
(4) A direction under subsection (1)(a) or (b) is enforceable on an application made by the Bank of England, by injunction or, in Scotland, by an order for specific performance under section 45 of the Court of Session Act 1988.
48P Orders for safeguarding certain financial arrangements
(1) In this section “protected arrangements” means security interests, title transfer collateral arrangements, set-off arrangements and netting arrangements.
(2) In subsection (1)—
“netting arrangements” means arrangements under which a number of claims or obligations can be converted into a net claim or obligation, and includes, in particular, “close-out” netting arrangements, under which actual or theoretical debts are calculated during the course of a contract for the purpose of enabling them to be set off against each other or to be converted into a net debt;“security interests” means arrangements under which one person acquires, by way of security, an actual or contingent interest in the property of another;“set-off arrangements” means arrangements under which two or more debts, claims or obligations can be set off against each other;“title transfer collateral arrangements” means arrangements under which Person 1 transfers assets to Person 2 on terms providing for Person 2 to transfer assets if specified obligations are discharged.(3) The Treasury may by order—
(a) restrict the exercise of any power within the scope of this paragraph in cases that involve, or where the exercise of the power might affect, protected arrangements;(b) impose conditions on the exercise of any power within the scope of this paragraph in cases that involve, or where the exercise of the power might affect, protected arrangements;(c) require any instrument that makes special bail-in provision to include specified provision, or provision to a specified effect, in respect of or for purposes connected with protected arrangements;(d) provide for an instrument to be void or voidable, or for other consequences to arise, if or in so far as the instrument is made or purported to be made in contravention of a provision of the order (or of another order under this section);(e) specify principles to which the Bank of England is to be required to have regard in exercising specified powers—(i) that involve protected arrangements, or(ii) where the exercise of the powers might affect protected arrangements.(4) References to exercising a power within the scope of paragraph (a) or (b) of subsection (3) are to making an instrument containing provision made in reliance on section 12A(3)(a) or 44B (special bail-in provision).
(5) An order may apply to protected arrangements generally or only to arrangements—
(a) of a specified kind, or (b) made or applying in specified circumstances.(6) An order may include provision for determining which arrangements are to be, or not to be, treated as protected arrangements; in particular, an order may provide for arrangements to be classified not according to their description by the parties but according to one or more indications of how they are treated, or are intended to be treated, in commercial practice.
(7) In this section “arrangements” includes arrangements which—
(a) are formed wholly or partly by one or more contracts or trusts;(b) arise under or are wholly or partly governed by the law of a country or territory outside the United Kingdom;(c) wholly or partly arise automatically as a matter of law;(d) involve any number of parties;(e) operate partly by reference to other arrangements between parties.(8) An order—
(a) is to be made by statutory instrument, and(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.48Q Continuity
(1) A resolution instrument may provide for anything (including legal proceedings) that relates to anything affected by the instrument and is in the process of being done immediately before the instrument takes effect to be continued from the time the instrument takes effect.
(2) A resolution instrument may modify references (express or implied) in an instrument or document.
(3) A resolution instrument may require or permit any person to provide information and assistance to the Bank of England or another person, for the purposes of or in connection with provision made or to be made in that or another resolution instrument.
48R Execution and registration of instruments etc
(1) A resolution instrument (other than an instrument that provides for securities to be transferred) may permit or require the execution, issue or delivery of an instrument.
(2) A resolution instrument may provide for any provision in the instrument to have effect irrespective of—
(a) whether an instrument has been produced, delivered, transferred or otherwise dealt with;(b) registration.(3) A resolution instrument may provide for the effect of an instrument executed, issued or delivered in accordance with the resolution instrument.
(4) A resolution instrument may—
(a) entitle a person to be registered in respect of a security;(b) require a person to effect registration.48S Resolution instruments: general matters
(1) Provision made in a resolution instrument takes effect despite any restriction arising by virtue of contract or legislation or in any other way.
(2) A resolution instrument may include incidental, consequential or transitional provision.
(3) In relying on subsection (2) a resolution instrument—
(a) may make provision generally or only for specified purposes, cases or circumstances, and(b) may make different provision for different purposes, cases or circumstances.48T Procedure
(1) As soon as is reasonably practicable after making a resolution instrument in respect of a bank the Bank of England must send a copy to—
(a) the bank,(b) the Treasury,(c) the PRA, (d) the FCA, and(e) any other person specified in the code of practice under section 5.(2) As soon as is reasonably practicable after making a resolution instrument the Bank of England must publish a copy—
(a) on the Bank’s internet website, and(b) in two newspapers, chosen by the Bank of England to maximise the likelihood of the instrument coming to the attention of persons likely to be affected.(3) Where the Treasury receive a copy of a resolution instrument under subsection (1) they must lay a copy before Parliament.
48U Supplemental resolution instruments
(1) This section applies where the Bank of England has made a resolution instrument (“the original instrument”) with respect to a bank.
(2) The Bank of England may make, with respect to the bank, one or more resolution instruments designated by the Bank of England as supplemental resolution instruments.
(3) Sections 7 and 8A do not apply to a supplemental resolution instrument (but it is to be treated in the same way as a resolution instrument for all other purposes, including for the purposes of the application of a power under this Part).
(4) Before making a supplemental resolution instrument the Bank of England must consult—
(a) the PRA,(b) the FCA, and(c) the Treasury.(5) The possibility of making a supplemental resolution instrument in reliance on subsection (2) is without prejudice to the possibility of making a new instrument in accordance with section 12A(2) (and not in reliance on subsection (2) above).
48V Onward transfer
(1) This section applies where the Bank of England has made a resolution instrument (“the original instrument”) providing for securities issued by a specified bank to be transferred to any person.
(2) The Bank of England may make one or more onward transfer resolution instruments.
(3) An onward transfer resolution instrument is a resolution instrument which—
(a) provides for the transfer of—(i) securities which were issued by the bank before the original instrument and have been transferred by the original instrument or a supplemental resolution instrument, or(ii) securities which were issued by the bank after the original instrument;(b) makes other provision for the purposes of, or in connection with, the transfer of securities issued by the bank (whether the transfer has been or is to be effected by that instrument, by another instrument or otherwise).(4) An onward transfer resolution instrument may not transfer securities to the transferor under the original instrument.
(5) Sections 7 and 8A do not apply to an onward transfer resolution instrument (but it is to be treated in the same way as any other resolution instrument for all other purposes, including for the purposes of the application of a power under this Part).
(6) Before making an onward transfer resolution instrument the Bank of England must consult—
(a) the PRA,(b) the FCA, and(c) the Treasury.(7) Section 48U applies where the Bank of England has made an onward transfer resolution instrument.
48W Reverse transfer
(1) This section applies where the Bank of England has made an instrument (“the original instrument”) that is either—
(a) a resolution instrument providing for the transfer of securities issued by a bank to a person (“the transferee”), or(b) an onward transfer resolution instrument (see section 48V) providing for the transfer of securities issued by a bank to a person (“the onward transferee”).(2) In a case falling within subsection (1)(a) the Bank of England may make one or more reverse transfer resolution instruments in respect of securities issued by the bank and held by the transferee (whether or not they were transferred by the original instrument).
(3) In a case falling within subsection (1)(b), the Bank of England may make one or more reverse transfer resolution instruments in respect of securities issued by the bank and held by the onward transferee.
(4) A reverse transfer resolution instrument is a resolution instrument which—
(a) provides for transfer to the transferor under the original instrument;(b) makes other provision for the purposes of, or in connection with, the transfer of securities which are, or could be or could have been, transferred under paragraph (a).(5) Except where subsection (6) applies, the Bank of England may make a reverse transfer resolution instrument under subsection (2) only with the written consent of the transferee.
(6) This subsection applies where the transferee is—
(a) a bail-in administrator, or(b) a person who is not to be authorised to exercise any rights attaching to the securities except on the Bank of England’s instructions.(7) The Bank of England may make a reverse transfer resolution instrument under subsection (3) only with the written consent of the onward transferee.
(8) Sections 7 and 8A do not apply to a reverse transfer resolution instrument (but it is to be treated in the same way as any other resolution instrument for all other purposes including for the purposes of an application of a power under this Part).
(9) Before making a reverse transfer resolution instrument the Bank of England must consult—
(a) the PRA,(b) the FCA, and(c) the Treasury.(10) Section 48U applies where the Bank of England has made a reverse transfer resolution instrument.”
Transfers of property5 (1) After section 41 insert—
“41A Transfer of property subsequent to resolution instrument
(1) This section applies where the Bank of England has made a resolution instrument.
(2) The Bank of England may make one or more property transfer instruments in respect of property, rights or liabilities of the bank.
(3) Sections 7 and 8A do not apply to a property transfer instrument under subsection (2).
(4) Before making a property transfer instrument under subsection (2) the Bank of England must consult—
(a) the PRA,(b) the FCA, and(c) the Treasury.”(2) In section 42 (supplemental property transfer instruments)—
(a) in subsection (1) for “12(2)” substitute “12(2) or 41A(2)”;(b) in subsection (4) for “and 8” substitute “, 8 and 8A”;(c) in subsection (6) for “or 12(2)” substitute “, 12(2) or 41A(2)”.(3) After section 44 insert—
“44A Bail in: reverse property transfer
(1) This section applies where the Bank of England has made a property transfer instrument in accordance with section 41A(2) (“the original instrument”).
(2) The Bank of England may make one or more bail-in reverse property transfer instruments in respect of property, rights or liabilities of the transferee under the original instrument.
(3) A bail-in reverse property transfer instrument is a property transfer instrument which—
(a) provides for a transfer to the transferor under the original instrument;(b) makes other provision for the purposes of, or in connection with, the transfer of property, rights or liabilities which are, or could be or could have been, transferred under paragraph (a) (whether the transfer has been or is to be effected by that instrument or otherwise).(4) The Bank of England may make a bail-in reverse property transfer instrument only with the written consent of the transferee under the original instrument.
(5) Sections 7 and 8A do not apply to a bail-in reverse property transfer instrument (but it is to be treated in the same way as any other property transfer instrument for all other purposes, including for the purposes of the application of a power under this Part).
(6) Before making a bail-in reverse property transfer instrument the Bank of England must consult—
(a) the PRA,(b) the FCA, and(c) the Treasury.(7) Section 42 (supplemental instruments) applies where the Bank of England has made a bail-in reverse property transfer instrument.
44B Property transfer instruments: special bail-in provision
(1) A property transfer instrument under section 12(2) or 41A(2) may make special bail-in provision with respect to the bank (see section 48B).
(2) In the case of a property transfer instrument under section 12(2), the power under subsection (1) to make the provision described in section in section 48B(1)(b) (see also rule 3(a) and (b) of section 48B(3)) includes power to make provision replacing a liability (of any form) of the bank mentioned in subsection (1) with a security (of any form or class) of the bridge bank mentioned in section 12(1).
(3) Where securities of the bridge bank (“B”) are, as a result of subsection (2), held by a person other than the Bank of England, that does not prevent B from being regarded for the purposes of this Part (see particularly section 12(1)) as being wholly owned by the Bank of England, as long as the Bank of England continues to hold all the ordinary shares issued by B.
44C Report on special bail-in provision
(1) This section applies where the Bank of England makes a property transfer instrument containing provision made in reliance on section 44B.
(2) The Bank of England must report to the Chancellor of the Exchequer stating the reasons why that provision was made in the case of the liabilities concerned.
(3) If the provision departs from the insolvency treatment principles, the report must state the reasons why it does so.
(4) The insolvency treatment principles are that where an instrument includes special bail-in provision—
(a) the provision made by the instrument must be consistent with treating all the liabilities of the bank in accordance with the priority they would enjoy on a liquidation, and(b) any creditors who would have equal priority on a liquidation are to bear losses on an equal footing with each other.(5) A report must comply with any other requirements as to content that may be specified by the Treasury.
(6) A report must be made as soon as reasonably practicable after the making of the property transfer instrument to which it relates.
(7) The Chancellor of the Exchequer must lay a copy of each report under subsection (2) before Parliament.”
(4) In section 48A (creation of liabilities), in subsection (1), after “44(4)(c)” insert “, 44A(3)(b)”.
Compensation6 (1) In section 49 (orders)—
(a) in subsection (1), for “three” substitute “four” and for “and property transfer instruments” substitute “, property transfer instruments and orders and resolution instruments”;(b) after subsection (2) insert—“(2A) A “bail-in compensation order” is an order establishing a scheme for determining, in accordance with section 52A, whether any transferors or others should be paid compensation.”
(2) After section 52 insert—
“52A Bail-in option
(1) Subsection (2) applies if the Bank of England makes—
(a) a resolution instrument under section 12A(2),(b) a property transfer instrument under section 41A(2), or(c) a supplemental resolution instrument under section 48U(2).(2) The Treasury must make a bail-in compensation order (see section 49(2A)).
(3) A bail-in compensation order may include provision for—
(a) an independent valuer (in which case sections 54 to 56 are to apply);(b) valuation principles (in which case section 57(2) to (5) is to apply).”(3) In section 53 (onward and reverse transfers), in subsection (1)—
(a) after paragraph (f) insert—“(fa) the Bank of England makes a reverse property transfer instrument under section 44A(2),(fb) the Bank of England makes a supplemental property transfer instrument by virtue of section 44A(7),”;(b) omit the “or” after paragraph (g);(c) after paragraph (h) insert—“(i) the Bank of England makes an onward transfer resolution instrument under section 48V(2),(j) the Bank of England makes a reverse transfer resolution instrument under section 48W(2) or (3), or(k) the Bank of England makes a supplemental resolution instrument by virtue of section 48V(7) or 48W(10).”(4) In section 54 (independent valuer)—
(a) in subsection (1), after “compensation scheme order” insert “or bail-in compensation order”;(b) in subsection (4)(b), after “order” insert “or bail-in compensation order”.(5) In section 56 (independent valuer: money), in subsection (2)(b) for “or third party compensation order” substitute “, third party compensation order or bail-in compensation order”.
(6) In section 57 (valuation principles), in subsection (1), after “order” insert “or bail-in compensation order”.
(7) After section 60 insert—
“60A Further mandatory provision: bail-in provision
(1) The Treasury may make regulations about compensation arrangements in the case of—
(a) resolution instruments under section 12A(2) and supplemental resolution instruments under section 48U(2), and(b) instruments (made under any provision) that include special bail-in provision.(2) Regulations may—
(a) require a compensation scheme order, a third party compensation order or a bail-in compensation order to include provision of a specified kind or to specified effect;(b) make provision that is to be treated as forming part of any such order (whether (i) generally, (ii) only if applied, (iii) unless disapplied, or (iv) subject to express modification).(3) Regulations may provide for whether compensation is to be paid, and if so what amount is to be paid, to be determined by reference to any factors or combination of factors; in particular, the regulations may provide for entitlement—
(a) to be contingent upon the occurrence or non-occurrence of specified events;(b) to be determined wholly or partly by an independent valuer (within the meaning of sections 54 to 56) appointed in accordance with a compensation scheme order or bail-in compensation order.(4) Regulations may make provision about payment including, in particular, provision for payments—
(a) on account subject to terms and conditions;(b) by instalment.(5) Regulations—
(a) are to be made by statutory instrument, and(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.60B Principle of no less favourable treatment
(1) In making regulations under section 60A the Treasury must, in particular, have regard to the desirability of ensuring that pre-resolution shareholders and creditors of a bank do not receive less favourable treatment than they would have received had the bank entered insolvency immediately before the coming into effect of the initial instrument.
(2) References in this section to the initial instrument are—
(a) in relation to compensation arrangements in the case of property transfer instruments under section 12(2), to the first instrument to be made under that provision with respect to the bank;(b) in relation to compensation arrangements in other cases, to the first resolution instrument to be made under section 12A with respect to the bank.(3) The “pre-resolution shareholders and creditors” of a bank are the persons who held securities issued by the bank, or were creditors of the bank, immediately before the coming into effect of the initial instrument.
(4) References in this section to insolvency include a reference to (i) liquidation, (ii) bank insolvency, (iii) administration, (iv) bank administration, (v) receivership, (vi) composition with creditors, and (vii) a scheme of arrangement.”
(8) In section 61(1) (sources of compensation),—
(a) omit the “and” at the end of paragraph (c);(b) after paragraph (c) insert—“(ca) bail-in compensation orders,”;(c) after paragraph (d) insert, “, and(e) regulations under section 60A.”(9) In section 62(1) (procedure), omit the “and” at the end of paragraph (b), and after that paragraph insert—
“(ba) bail-in compensation orders, and”.Groups7 (1) After section 81B insert—
“81BA  Bail-in option
(1) The Bank of England may exercise a stabilisation power in respect of a banking group company in accordance with section 12A(2) if the following conditions are met.
(2) Condition 1 is that the PRA is satisfied that the general conditions for the exercise of a stabilisation power set out in section 7 are met in respect of a bank in the same group.
(3) Condition 2 is that the Bank of England is satisfied that the exercise of the power in respect of the banking group company is necessary, having regard to the public interest in—
(a) the stability of the financial systems of the United Kingdom,(b) the maintenance of public confidence in the stability of those systems,(c) the protection of depositors, or(d) the protection of any client assets that may be affected.(4) Condition 3 is that the banking group company is an undertaking incorporated in, or formed under the law of any part of, the United Kingdom.
(5) Before determining whether Condition 2 is met, and if so how to react, the Bank of England must consult—
(a) the Treasury,(b) the PRA, and(c) the FCA.(6) In exercising a stabilisation power in reliance on this section the Bank of England must have regard to the need to minimise the effect of the exercise of the power on other undertakings in the same group.”
(2) After section 81C insert—
“81CA  Section 81BA: supplemental
(1) This section applies where the Bank of England has power under section 81BA to exercise a stabilisation power in respect of a banking group company.
(2) The provisions relating to the stabilisation powers and the bank administration procedure contained in this Act (except sections 7 and 8A) and any other enactment apply (with any necessary modifications) as if the banking group company were a bank.
(3) Where the banking group company mentioned in subsection (1) is a parent undertaking of the bank mentioned in section 81BA(2) (“the bank”)—
(a) the provisions in this Act relating to resolution instruments are to be read in accordance with the general rule in subsection (4), but(b) that is subject to the modifications in subsection (5);and provisions in this Act and any other enactment are to be read with any modifications that may be necessary as a result of paragraphs (a) and (b).(4) The general rule is that the provisions in this Act relating to resolution instruments (including supplemental resolution instruments) are to be read (so far as the context permits)—
(a) as applying in relation to the bank as they apply in relation to the parent undertaking, and(b) so, in particular, as allowing any provision that may be made in a resolution instrument in relation to the parent undertaking to be made (also or instead) in relation to the bank.(5) Where the banking group company mentioned in subsection (1) is a parent undertaking of the bank mentioned in section 81BA(2) (“the bank”)—
(a) section 41A (transfer of property subsequent to resolution instrument) applies as if the reference in subsection (2) to the bank were to the parent undertaking, the bank and any other bank which is or was in the same group; (b) section 48V (onward transfer)—(i) applies as if the references in subsection (3) to “the bank” included the bank, the parent undertaking and any other bank which is or was in the same group, and with the omission of subsection (4) of that section, and(ii) is to be read as permitting the transfer of securities only if they are held by (or for the benefit of) the parent undertaking or a subsidiary company of the parent undertaking;(c) section 48W (reverse transfer) applies as if the references in subsections (2) and (3) to “the bank” included the bank, the parent undertaking and any other bank which is or was in the same group.(6) Where section 48B (special bail-in provision) applies in accordance with subsection (4) (so that section 48B applies in relation to the bank mentioned in section 81BA(2) as it applies in relation to the parent undertaking mentioned in subsection (3)), the provision that may be made in accordance with section 48B(1)(b) (see also rule 3(a) and (b) of section 48B(3)) includes provision replacing a liability (of any form) of that bank with a security (of any form or class) of the parent undertaking.
(7) Where the banking group company mentioned in subsection (1) is a parent undertaking of the bank mentioned in section 81BA(2)—
(a) section 214B of the Financial Services and Markets Act 2000 (contribution to costs of special resolution regime) applies, and(b) the reference in subsection (1)(b) of that section to the bank, and later references in that section, are treated as including references to any other bank which is a subsidiary undertaking of the parent undertaking (but not the parent undertaking itself).”(3) In section 81D (interpretation: “banking group company” etc)—
(a) in subsection (6), for “, 81C” substitute “to 81CA”;(b) in subsection (7) for “section 81B” substitute “sections 81B to 81CA”.Banks regulated by the Financial Conduct Authority8 In section 83A (modifications of Part 1 as it applies to banks not regulated by the Prudential Regulation Authority), in the table in subsection (2) insert the following entries at the appropriate places—

“Section 8A	Subsection (3)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.”
“Section 41A	Subsection (4)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.”
“Section 44A	Subsection (6)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.”
“Section 48H	Subsection (5)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.
Section 48U	Subsection (4)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.
Section 48V	Subsection (6)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.
Section 48W	Subsection (9)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.”
“Section 81BA	Subsection (5)(b) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.”

Recognised central counterparties9 In section 89B (application of Part 1 of the Act to recognised central counterparties)—
(a) in subsection (1), before paragraph (a) insert— “(za) subsection (1A),”;(b) after subsection (1) insert—“(1A) The provisions relating to the third stabilisation option (bail-in) are to be disregarded in the application of this Part to recognised central counterparties.”;
(c) in subsection (2), in the substituted section 13(1), for “third” substitute “fourth”.Insolvency proceedings10 In section 120 (notice to Prudential Regulation Authority of preliminary steps to certain insolvency proceedings)—
(a) in subsection (7)(b)(ii), after “Part 1” insert “(and Condition 5 has been met, if applicable)”;(b) after subsection (8) insert—“(8A) Condition 5—
(a) applies only if a resolution instrument has been made under section 12A with respect to the bank in the 3 months ending with the date on which the PRA receives the notification under Condition 1, and(b) is that the Bank of England has informed the person who gave the notice that it consents to the insolvency procedure to which the notice relates going ahead.”(c) in subsection (10), omit the “and” at the end of paragraph (b), and after paragraph (c) insert “, and(d) if Condition 5 applies, the Bank of England must, within the period in Condition 3(a), inform the person who gave the notice whether or not it consents to the insolvency procedure to which the notice relates going ahead.”;(d) After subsection (10) insert—“(11) References in this section to the insolvency procedure to which the notice relates are to the procedure for the determination, resolution or appointment in question (see subsections (1) to (4)).”
State aid11 After section 256 insert—
“State aid256A State aid
(1) This section applies where—
(a) the Treasury are of the opinion that anything done, or proposed to be done, in connection with the exercise in relation to an institution of one or more of the stabilisation powers may constitute the granting of aid to which any of the provisions of Article 107 or 108 of the Treaty on the Functioning of the European Union applies (“State aid”), and(b) section 145A (power to direct bank administrator) does not apply.(2) The Treasury may, in writing, direct any bail-in administrator, or any director of the institution, to take specified action to enable the United Kingdom to pursue any of the purposes specified in subsection (3) of section 145A (read with subsection (9) of that section).
(3) Before giving a direction under this section the Treasury must consult the person to whom the direction is to be given.
(4) The person must comply with the direction within the period of time specified in the direction, or, if no period of time is specified, as soon as is reasonably practicable.
(5) A direction under this section is enforceable on an application made by the Treasury, by injunction or, in Scotland, by an order for specific performance under section 45 of the Court of Session Act 1988.”
Other amendments of the Act12 (1) Section 1 (overview) is amended as follows.
(2) In subsection (2)(a), for “three” substitute “four”.
(3) For subsection (3) substitute—
“(3) The four “stabilisation options” are—
(a) transfer to a private sector purchaser (section 11), (b) transfer to a bridge bank (section 12),(c) the bail-in option (section 12A), and(d) transfer to temporary public ownership (section 13).”(4) In subsection (4)—
(a) for “three” substitute “four”;(b) before paragraph (a) insert—“(za) the resolution instrument powers (sections 12A(2) and 48U to 48W),”;(c) in paragraph (b), after “33” insert “, 41A”.13 In section 13 (temporary public ownership), in subsection (1), for “third” substitute “fourth”.
14 In section 17 (share transfers: effect)—
(a) in subsection (1), after “order” insert, “or by a resolution instrument”;(b) in subsection (5), after “order” insert “or a resolution instrument”;(c) in subsection (6), after “order” insert “or a resolution instrument”.15 In section 18 (share transfers: continuity), after subsection (5) insert—
“(6) This section applies to a resolution instrument that provides for a transfer of securities as it applies to a share transfer instrument (and references to transfers, transferors and transferees are to be read accordingly).”
16 In section 21 (ancillary instruments: production, registration etc), after subsection (5) insert—
“(6) This section applies to a resolution instrument that provides for a transfer of securities as it applies to a share transfer instrument.”
17 In section 44 (reverse property transfer)—
(a) in subsection (2), after “more” insert “bridge bank”;(b) in subsection (3), after “more” insert “bridge bank”;(c) in subsection (4), for “A reverse” substitute “A bridge bank reverse”;(d) in subsection (4A)—(i) after “make a” insert “bridge bank”, and(ii) in paragraph (b), for “the reverse” substitute “the bridge bank reverse”;(e) in subsection (5), for “a reverse” substitute “a bridge bank reverse”;(f) in subsection (6), for “a reverse” substitute “a bridge bank reverse”;(g) in subsection (7), for “a reverse” substitute “a bridge bank reverse”;(h) in the heading, for “Reverse” substitute “Bridge bank: reverse”.18 In section 63 (general continuity obligation: property transfers), in subsection (1)(a), for “or 12(2)” substitute “, 12(2) or 41A(2)”.
19 In section 66 (general continuity obligation: share transfers)—
(a) in subsection (1)(a), after “13(2)” insert “, or which falls within subsection (1A)”;(b) in subsection (1)(d)(i), after “11(2)(a)” insert “, or in a case falling within subsection (1A)”;(c) after subsection (1) insert—“(1A) A bank falls within this subsection if a resolution instrument (or supplemental resolution instrument) has changed the ownership of the bank (wholly or partly) by providing for the transfer, cancellation or conversion from one form or class to another of securities issued by the bank (and the reference in subsection (1)(b) to “the transfer” includes such a cancellation or conversion).”
20 In section 67 (special continuity obligation: share transfers), in subsection (4)(c), after “order” insert “or resolution instrument”.
21 In section 68 (continuity obligations: onward share transfers), in subsection (1)(a), after “transferred by” insert “a resolution instrument under section 12A(2) or supplemental resolution instrument under section 48U(2) or a”.
22 In section 71 (pensions), in subsection (1)—
(a) omit the “and” at the end of paragraph (b);(b) after paragraph (c) insert “, and(d) resolution instruments.”23 In section 72 (enforcement), in subsection (1)—
(a) omit the “or” at the end of paragraph (b);(b) after paragraph (c) insert “, or(d) a resolution instrument.”24 In section 73 (disputes), in subsection (1)—
(a) omit the “and” at the end of paragraph (b);(b) after paragraph (c) insert “, and(d) resolution instruments.”25 In section 74 (tax), in subsection (6), for “or 45” substitute “, 45, 48U or 48V”.
26 After section 80 insert—
“80A Transfer for bail-in purposes: report
(1) This section applies where the Bank of England makes one or more resolution instruments under section 12A(2) in respect of a bank.
(2) The Bank of England must, on request by the Treasury, report to the Chancellor of the Exchequer about—
(a) the exercise of the power to make a resolution instrument under section 12A(2),(b) the activities of the bank, and(c) any other matters in relation to the bank that the Treasury may specify.(3) In relation to the matters in subsection (2)(a) and (b), the report must comply with any requirements that the Treasury may specify.
(4) The Chancellor of the Exchequer must lay a copy of each report under subsection (2) before Parliament.”
27 In section 81A (accounting information to be included in reports under sections 80 and 81)—
(a) in subsection (1), for “or 81” substitute “, 80A(2)(b) or 81”;(b) in the heading, for “and 81” substitute “, 80A(2)(b) and 81”.28 In section 85 (temporary public ownership), in subsection (1), for “third” substitute “fourth”.
29 In section 136 (overview), in the Table in subsection (3), for “152” substitute “152A”.
30 After section 152 insert—
“152A Property transfer from transferred institution
(1) This section applies where the Bank of England—
(a) makes a resolution instrument that transfers securities issued by a bank (or a bank’s parent undertaking), in accordance with section 12A(2), and(b) later makes a property transfer instrument from the bank or from another bank which is or was in the same group as the bank, in accordance with section 41A(2).(2) This Part applies to the transferor under the property transfer instrument made in accordance with section 41A(2) as to the transferor under a property transfer instrument made in accordance with section 12(2).
(3) For that purpose this Part applies with any modifications specified by the Treasury in regulations; and any regulations—
(a) are to be made by statutory instrument, and(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.”31 In section 220 (insolvency etc), after subsection (4) insert—
“(4A) The fact that ownership of an authorised bank is transferred or otherwise changed as a result of a resolution instrument (or an instrument treated as a resolution instrument) does not itself prevent the bank from relying on section 213.”
32 In section 259 (statutory instruments)—
(a) in the Table in subsection (3), in Part 1, in the entry relating to section 60 for “Third party compensation” substitute “Third party compensation: partial property transfers”;(b) in the Table in subsection (3), in Part 1, at the appropriate places insert—

“48F(1) and (2)	Power to amend definition of “excluded liabilities”	Draft affirmative resolution
48G	Insolvency treatment principles	Draft affirmative resolution
48P	Safeguarding of certain financial arrangements	Draft affirmative resolution
52A	Bail-in compensation orders	Draft affirmative resolution”
“60A	Third party compensation: instruments containing special bail-in provision	Draft affirmative resolution”;

(c) in the Table in subsection (3), in Part 3, at the appropriate place insert—

“152A

Property transfer from transferred institution

Draft affirmative resolution”;

(d) in subsection (5), after paragraph (d) insert—“(da) section 60A (special resolution regime: instruments containing special bail-in provision),”;(e) in subsection (5), after paragraph (k) insert—“(ka) section 152A (bank administration: property transfer from transferred institution),”.33 In section 261 (index of defined terms), in the Table, at the appropriate places insert—

“Bail-in compensation order	49”
“Resolution instrument	12A”
“Special bail-in provision	48B”.

Part 2Modification of Investment Bank Special Administration Regulations 201134 (1) This section modifies the application of the Investment Bank Special Administration Regulations 2011 (S.I. 2011/245) (“the regulations”) in cases where a resolution instrument has been made under section 12A of the Banking Act 2009 with respect to the investment bank in the relevant 3-month period.
(2) In subsection (1) “the relevant 3-month period” means the 3 months ending with the date on which the FCA receives the notification under Condition 1 in regulation 8 of the regulations.
(3) In their application to those cases, the regulations have effect with the modifications in sub-paragraph (4); and any enactment that refers to the regulations is to be read accordingly.
(4) In regulation 8 (in its application to those cases)—
(a) in paragraph (5)(c)(ii), for “appropriate regulator” substitute “Bank of England” and after “notice” insert “and the appropriate regulator”;(b) in paragraph (6), omit sub-paragraph (a) (but continue to read “that” in sub-paragraph (b) as a reference to the insolvency procedure to which the notice relates);(c) after paragraph (6) insert—“(6A) Where the FCA receives notice under Condition 1, it must also inform the Bank of England of the contents of the notice.
(6B) Where the Bank of England receives notice under subsection (6A), it must, within the period in Condition 3, inform the person who gave the notice and the appropriate regulator whether or not it consents to the insolvency procedure to which the notice relates going ahead.””

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Moved by

[Lord Newby]

106: Before Schedule 2, insert the following new Schedule—
ScheduleConsequential amendments relating to Part 4Financial Services and Markets Act 20001 (1) Section 59 of FSMA 2000 (approval for particular arrangements) is amended as follows.
(2) In subsection (1), for the words from “the appropriate regulator” to the end substitute “that person is acting in accordance with an approval given by the appropriate regulator under this section.”
(3) In subsection (2), for the words from “the appropriate regulator” to the end substitute “that person is acting in accordance with an approval given by the appropriate regulator under this section.”
2 (1) Section 59A of FSMA 2000 (specifying functions as controlled functions: supplementary) is amended as follows.
(2) In subsection (1)(a) and (b), for “significant-influence” substitute “senior management”.
(3) After subsection (3) insert—
“(3A) “Senior management function” has the meaning given by section 59ZA.””
3 (1) Section 63 of FSMA 2000 (withdrawal of approval) is amended as follows.
(2) In subsection (1A)(a), for “significant-influence function” substitute “relevant senior management function”.
(3) For subsection (1B) substitute—
“(1B) In subsection (1A) “relevant senior management function” means a function which the PRA is satisfied is a senior management function as defined in section 59ZA (whether or not the function has been designated as such by the FCA).”
4 In section 63A of FSMA 2000 (power to impose penalties), in subsection (2), for paragraph (b) substitute—
“(b) P, when performing the function, is not acting in accordance with an approval given under section 59.”5 (1) Section 66 of FSMA 2000 (disciplinary powers) is amended as follows.
(2) In subsection (3), for paragraph (ab) (and the “or” following it) substitute—
“(ab) impose, for such period as it considers appropriate, any conditions in relation to any such approval which it considers appropriate;(ac) limit the period for which any such approval is to have effect;”.(3) In subsection (3A), for “restriction” substitute “condition”.
(4) In subsection (3B), for “or restriction” substitute “, condition or limitation”.
(5) In subsection (3C), for “restriction” substitute “condition”.
(6) In subsection (3D)—
(a) in paragraph (a), for “or restriction” substitute “, condition or limitation”,(b) omit the “or” at the end of paragraph (a),(c) in paragraph (b), for “restriction” substitute “condition”, and(d) after that paragraph insert—“(c) vary a limitation so as to increase the period for which the approval is to have effect.” (7) In subsection (9), for “restriction” substitute “condition”.
6 (1) Section 67 of FSMA 2000 (disciplinary measures: procedure and right to refer to Tribunal) is amended as follows.
(2) In subsection (1), for “or (ab)” substitute “, (ab) or (ac)”.
(3) In subsection (2A), for “restriction” (in both places) substitute “condition”.
(4) After subsection (2A) insert—
“(2B) A warning notice about a proposal to limit the period for which an approval is to have effect must state the length of that period.”
(5) In subsection (4), for “or (ab)” substitute “, (ab) or (ac)”.
(6) In subsection (5A), for “restriction” (in both places) substitute “condition”.
(7) After subsection (5A) insert—
“(5B) A decision notice about limiting the period for which an approval is to have effect must state the length of that period.”
(8) In subsection (7), for “or (ab)” substitute “, (ab) or (ac)”.
7 In section 69 of FSMA 2000 (statement of policy), in subsection (1)—
(a) in paragraph (a), for “or restrictions” substitute “, conditions or limitations”;(b) omit the “and” at the end of paragraph (b);(c) in paragraph (c), for “restrictions” substitute “conditions”;(d) at the end of paragraph (c) insert “; and(d) the period for which approvals under section 59 are to have effect as a result of a limitation under section 66.”8 In section 138A of FSMA 2000 (modification or waiver of rules), in subsection (2), before paragraph (a) insert—
“(za) rules made by either regulator under section 64A (rules of conduct);”.9 In section 138D of FSMA 2000 (actions for damages), in subsection (5), before paragraph (a) insert—
“(za) rules under section 64A (rules of conduct);”.10 In section 140A of FSMA 2000 (interpretation), in the definition of “regulating provisions”—
(a) in paragraph (a)—(i) omit sub-paragraph (iii), and(ii) in sub-paragraph (iv), omit “64 or”;(b) in paragraph (b), omit sub-paragraphs (ii) and (iii).11 In section 347 of FSMA 2000 (the record of authorised persons etc.), for subsection (9) substitute—
“(9) “Relevant authorised person”, in relation to an approved person, means the person on whose application approval was given.”
12 In section 387 of FSMA 2000 (warning notices), in subsection (1A), for “or 55I(8)” substitute “, 55I(8) or 61(2D)”.
13 In section 388 of FSMA 2000 (decision notices), in subsection (1A), for “or 55I(8)” substitute “, 55I(8) or 61(2D)”.
14 In section 395 of FSMA 2000 (supervisory notices), in subsection (13), after paragraph (a) insert—
“(aa) 63ZC(4), (8) or (9)(b);”.15 (1) Section 415B of FSMA 2000 (consultation in relation to taking certain enforcement action) is amended as follows.
(2) In subsection (4)—
(a) in paragraph (b), for “significant-influence” substitute “relevant senior management”, and(b) omit the definitions appearing after that paragraph.(3) After subsection (4) insert—
“(5) In subsection (4)—
“arrangement” has the same meaning as in section 59; “relevant senior management function” means a function which the FCA is satisfied is a senior management function as defined in section 59ZA (whether or not it has been designated as such under section 59(6B) or (6C)).”16 In Schedule 1ZA to FSMA 2000 (the Financial Conduct Authority), in paragraph 8(3)—
(a) in paragraph (b), omit “64 or”;(b) in paragraph (c)(i)— (i) after “section” insert “63ZD,”, and(ii) omit “64,”.17 In Schedule 1ZB to FSMA 2000 (the Prudential Regulation Authority), in paragraph 16(3)—
(a) omit paragraph (b);(b) in paragraph (c)(i)— (i) after “section” insert “63ZD,”, and(ii) omit “64,”.Financial Services Act 201218 In section 14 of the Financial Services Act 2012, omit subsection (4).
19 (1) Section 85 of the Financial Services Act 2012 (relevant functions in relation to complaints scheme) is amended as follows.
(2) In subsection (4)—
(a) in paragraph (b), omit “64 or”;(b) in paragraph (c)(i)— (i) after “section” insert “63ZD,”, and(ii) omit “64,”.(3) In subsection (5)—
(a) omit paragraph (b);(b) in paragraph (c)(i)— (i) after “section” insert “63ZD,”, and(ii) omit “64,”.”

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Moved by

[Lord Newby]

111: Schedule 2, page 34, line 11, at end insert—
“2A (1) Part 25 of FSMA 2000 (injunctions and restitution) is amended as follows.
(2) In section 380 (injunctions), in subsection (6)(a), omit the “or” at the end of sub-paragraph (i) and after sub-paragraph (ii) insert “or
(iii) which is imposed by Part 7 of the Financial Services Act 2012 (offences relating to financial services) and whose contravention constitutes an offence under that Part;”. “(3) In section 382 (restitution orders), in subsection (9)(a), omit the “or” at the end of sub-paragraph (i) and after sub-paragraph (ii) insert “or
(iii) which is imposed by Part 7 of the Financial Services Act 2012 (offences relating to financial services) and whose contravention constitutes an offence under that Part;”.(4) In section 384 (power of FCA or PRA to require restitution), in subsection (7), omit the “and” at the end of paragraph (a) and after paragraph (b) insert “or
(c) a requirement which is imposed by Part 7 of the Financial Services Act 2012 (offences relating to financial services) and whose contravention constitutes an offence under that Part.””

[Lord Newby]

These amendments address a minor and technical point in connection with Sections 380, 382, and 384 of FiSMA, which govern when the regulators may seek an injunction or a restitution order from the court, or require restitution themselves. To exercise these powers, the regulator must demonstrate that the person concerned has contravened a “relevant requirement”. The current definition of “relevant requirement” in FiSMA does not include the new offences created under Part 7 of the Financial Services Act 2012, which deal with misleading statements, misleading impressions, and misleading statements in relation to benchmarks such as LIBOR. This means that regulators are unable to seek an injunction or restitution in relation to these offences. That was not the Government’s intention. These amendments correct this oversight by extending the definition of “relevant requirement” to bring these offences within the scope of the regulators’ powers to seek an injunction or restitution. I commend these amendments to the House.

Amendment 111 agreed.

Moved by

[Lord Newby]

112: Schedule 2, page 34, line 11, at end insert—
“2B (1) In Schedule 1ZA to FSMA 2000 (the Financial Conduct Authority), paragraph 20 (penalties) is amended as follows.
(2) In sub-paragraph (3)(b), after “this Act” insert “or under a provision mentioned in sub-paragraph (4A)”.
(3) In sub-paragraph (4), after paragraph (c) insert—
“(ca) its powers under the relevant competition provisions (as applied by Part 16A of this Act),”.(4) After sub-paragraph (4) insert—
“(4A) “The relevant competition provisions” are—(a) section 31E of the Competition Act 1998 (enforcement of commitments);(b) section 34 of that Act (enforcement of directions);(c) section 36 of that Act (penalties);(d) section 40A of that Act (penalties: failure to comply with requirements);(e) section 174A of the Enterprise Act 2002 (penalties).”(5) In sub-paragraph (5)—
(a) in paragraph (a), for “FSMA 2000” substitute “this Act”,(b) in paragraph (b), for “that Act” substitute “this Act”,(c) in paragraph (c), omit “of that Act”, and(d) after paragraph (c) insert— “(ca) offences under Part 1 of the Competition Act 1998,(cb) offences under Part 4 of the Enterprise Act 2002,”.”

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Moved by

[Lord Newby]

113A: Clause 17, page 28, line 38, leave out subsections (2) and (3) and insert—
“(2) A statutory instrument containing an order or regulations under this Act is subject to annulment in pursuance of a resolution of either House of Parliament, unless—
(a) the instrument contains only provision made under section 21 (commencement), or(b) the instrument is required by subsection (4) or any other enactment to be laid in draft before, and approved by a resolution of, each House.(3) Subsection (4) applies to a statutory instrument that contains (with or without other provisions)—
(a) regulations under section 8 (building societies: power to make provision about ring-fencing);(b) an order under section (Meaning of “payment system”)(4) (meaning of “payment system”);(c) an order under section (Power to make further consequential amendments) (power to make further consequential amendments) that amends or repeals primary legislation;(d) an order under paragraph 6 of Schedule (Conduct of FMI administration) (conduct of FMI administration).(4) A statutory instrument to which this subsection applies may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.
(5) In subsection (3)(c) “primary legislation” means—
(a) an Act of Parliament,(b) an Act of the Scottish Parliament,(c) a Measure or Act of the National Assembly for Wales, or(d) Northern Ireland legislation.”

[Lord Newby]

My Lords, these are technical amendments relating to a number of the new powers introduced to the Bill as a result of the Government’s amendments in your Lordships’ House.

Amendment 113A amends Clause 17 of the Bill to specify the procedures applying to statutory instruments made under the new powers. It provides that the affirmative resolution procedure will apply to: orders made by the Treasury to exclude certain systems from the definition of “payment systems” for the purposes of the new clauses establishing the new payments regulator; orders to make amendments, which are consequential to the Bill, to other primary legislation, under the power introduced by the second amendment in this group, to which I will return in a minute; and orders made under paragraph 6 of the schedule on the conduct of financial market infrastructure administration, which allows the Treasury to make further modifications to primary legislation to make appropriate provision for FMI administration. Orders made under other provisions of the Bill will be subject to the negative resolution procedure, unless they are required to be made using the affirmative procedure, or they are commencement orders.

Amendment 114 enables the Treasury to make amendments consequential to the Bill—and any statutory instruments made under it—to other primary and secondary legislation. For example, it is likely that this power will be used to bring other legislation in line with the terminology of the new senior managers regime. This power can be used only in certain circumstances and the Treasury can make orders under the power only if it considers it necessary or expedient to do so as a consequence of a provision in the Bill. Furthermore, the power applies only to legislation which is made before the Bill is passed, or which is made in the same Parliamentary Session in which the Bill is passed. I beg to move.

[Lord Eatwell]

My Lords, first, with respect to Amendment 113A, it is useful to see the use of the affirmative procedure here. However, the noble Lord will recall that the Delegated Powers Committee recommended an amendment which referred to the amendment of clauses that deal with ring-fencing. I asked more than two weeks ago how the Treasury would react to the Delegated Powers Committee in this respect and was told that I would receive a reply. I have not, as yet, received a reply. As we are now reaching the end of the Committee stage, it would be very helpful to know whether the Government are simply ignoring the Delegated Powers Committee, in which case we would require an explanation, or what the Government intend to do about this.

On Amendment 114, these powers are sometimes referred to as Henry VIII powers. Given this new clause, the good King Henry would regard it as rather excessive and would be taken aback by the power that the Treasury takes,

“amending, repealing, revoking or applying with modifications any enactment to which this section applies”.

The enactment applies to,

“any enactment passed or made before the passing of this Act”,

so, presumably, since the birth of Henry VIII. The new clause then refers to,

“any enactment passed or made on or before the last day”.

That I understand. What scrutiny will be given to these measures? We have been through a Committee stage which has identified a consistent rejection of proposals by the banking commission and particularly of the amendments that have been put forward. I have not heard the Government accept a single amendment put forward on behalf of the banking commission—not one—so there has been a consistent rejection of those. Now we are told that we will have the possibility of,

“amending, repealing, revoking or applying with modifications”,

a series of quite controversial measures in which the Government have attempted to water down the proposals of the banking commission. I would like to feel that I could get some reassurance that this power is to be used sparingly and is to be used only if there is some oversight or accountability to Parliament when it is used.

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[Lord Turnbull]

Because of the piecemeal way in which the Bill has been constructed, we now have a piecemeal presentation of the secondary legislation procedure as it applies to each bit—and I have completely lost track of it. The first thing that needs to be done is to set out, for the whole Bill—the bits that were there originally and the bits that have been added—what the secondary legislation provisions are. Then we can make a judgment on whether they are appropriate: whether the right things have been assigned to the negative procedure and the right things assigned to the positive procedure. However, it is virtually impossible to do this on the basis of this piecemeal presentation.

Amendment 114 raises enormous issues. The Minister is shaking his head and may try to reassure us, but there are important provisions here that need to go to various committees which we have set up in this House to examine such things.

[Lord Newby]

My Lords, three issues have been raised. The first is whether we have responded to the Delegated Powers Committee. I explained at some length last week what the Government’s response was. Subsequently, I wrote to the chair of the committee, reiterating what I had said. I am sorry if noble Lords have not seen the letter; I will make sure that it gets to them. I will repeat what I said and what the letter said.

The Government’s view, bearing in mind that the committee said it was for the House to decide and did not make a recommendation on the procedure to be followed, is that, given the technical nature of these statutory instruments, the best way forward, in the light of the Government’s response to the consultation process that they have just completed, is to invite noble Lords who are interested in the secondary legislation to the Treasury to have an informal discussion on the issues, and to see what they feel might be done, and whether any amendments are required. The Treasury does not have a fixed view on the detailed provision of that secondary legislation, and would welcome the further views of Members of your Lordships’ House.

Secondly, I find literally incredible the suggestion of the noble Lord, Lord Eatwell, that the Government took no account of the recommendations of the PCBS.

[Lord Eatwell]

Which amendment proposed by the PCBS have the Government accepted?

[Lord Newby]

The noble Lord may or may not remember that at the start of today’s discussions the noble Lord, Lord Lawson, pointed out that the size of the Bill had expanded multiple times. I admit that part of this relates to the Government’s amendments on bail-in. However, every other amendment is in order to implement a recommendation of the PCBS. That is what we spent nearly all of last week discussing.

[Lord McFall of Alcluith]

There is a real communication problem here. I was at a meeting with the noble Lords, Lord Turnbull and Lord Lawson, and with Andrew Tyrie, and they all complained about the expansion of the Bill from 35 pages to 199. If the Minister, incredibly, is saying that this is to help the Parliamentary Commission on Banking Standards, perhaps the Government should start communicating with us on this, because we are dismayed by the number of pages in the Bill, not accepting of it.

[Lord Newby]

My Lords, I am sorry; with the exception of the bail-in provisions, the expansion of the size of the Bill is specifically in order to implement recommendations of the parliamentary commission, such as the senior managers regime, the criminal sanctions and the enhanced electrification power. The reason that the Government have not today accepted everything that the PCBS has recommended is that we have already accepted the majority of the commission’s recommendations and put them in the Bill. It is simply not the case that we have accepted no recommendations of the parliamentary commission—quite the opposite.

The final issue is specifically about the powers in this amendment. The powers can only be used to make consequential amendments—that is, those which are needed to deal with the provisions passed in the Bill. The example I gave was in relation to the senior persons regime, and I can reassure the noble Lord, Lord Brennan, that there is nothing sinister or unusual in what is being proposed. These powers are commonly taken in Bills which make significant changes to existing law. I am very happy for Treasury lawyers to set out in a letter the precedents that these powers exactly replicate. The hour is late, but I can assure the House that we are not doing anything here that is in the slightest way unusual.

[Lord Eatwell]

Will the noble Lord agree that Amendment 114, at least, should be withdrawn until it can be considered by the Constitution Committee and the Delegated Powers and Regulatory Reform Committee? He has plenty of time to bring it back on Report if he then has substantial justification for it, and it would give considerable comfort to the Committee.

[Lord Newby]

My Lords, I do not think that we need to withdraw the amendment. As I say, it is a standard provision. Interestingly, the specific reason that I gave for requiring it relates to the implementation of a recommendation of the Parliamentary Commission on Banking Standards. However, as I say, this provision is not in any way unusual. Therefore, I do not believe it needs the process that the noble Lord suggests.

Amendment 113A agreed.

--- Later in debate ---

Moved by

[Lord Newby]

114: After Clause 18, insert the following new Clause—
“Power to make further consequential amendments
(1) The Treasury may by order make such provision amending, repealing, revoking or applying with modifications any enactment to which this section applies as they consider necessary or expedient in consequence of any provision made by or under this Act.
(2) This section applies to—
(a) any enactment passed or made before the passing of this Act, and(b) any enactment passed or made on or before the last day of the Session in which this Act is passed.(3) Amendments and repeals made under this section are additional to those made by or under any other provision of this Act.”

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Moved by

[Lord Newby]

115: Clause 21, page 29, line 33, at end insert—
“( ) Section (Building societies) and Schedule (Building societies), apart from paragraph 4 of that Schedule, come into force at the end of the period of 2 months beginning with the day on which this Act is passed.”

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Moved by

[Lord Newby]

118:In the Title, line 4, after “insolvency;” insert “to make further provision about payment systems and securities settlement systems;”

[Lord Newby]

My Lords, this amendment is consequential upon government Amendments 60A to 60YYV introducing a Payments Systems Regulator, and government Amendments 61 to 78, 107 and 108 which introduced a special administration regime for the operators of financial market infrastructure companies. It amends the Long Title of this Bill to reflect the fact that its scope now extends to payment systems and securities settlement systems and therefore ensures that the Long Title matches the content of the Bill. I commend this amendment to your Lordships.

Amendment 118 agreed.

Financial Conduct Authority

Lord Newby Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Naseby]

To ask Her Majesty’s Government whether the Financial Conduct Authority has the authority to assess and monitor consumer finance products and anticipate their compliance with the law and the likelihood of their mis-selling.

[Lord Newby (LD)]

My Lords, the Government have granted the Financial Conduct Authority a product intervention power to protect consumers. This power allows the regulator to mandate, restrict or ban certain features of a financial product, restrict a product’s sale to certain groups of consumers or ban a product outright. This power will extend to consumer finance products when the Financial Conduct Authority takes on responsibility for regulating consumer credit next April.

[Lord Naseby (Con)]

My Lords, that announcement is very welcome, although the delay to next April is one that I do not particularly welcome. Does the Minister recall that the FSA under its watch allowed PPI to happen, costing the banks that mis-sold it well over £1 billion and allowed CPP to sell credit card identity insurance, costing millions of pounds? Although this new body is set up, is it not worrying that the Consumer Panel has yet to meet? Can we have an assurance that practitioners of retail financial services will be on that panel, not least because the retail distribution review is now in force and there will be increasing numbers—millions of our citizens—investing in financial products without taking third party advice?

[Lord Newby]

My Lords, I am sure that the FCA is well aware of the need to have a Consumer Panel that is as broadly based as possible. It is important to recognise that the FCA now has significant new powers: the product intervention power, the ability to ban products and powers to disclose details of warning notices, for example, as well as a power to take formal action against misleading financial promotions and disclose the fact that it has done so. It has more teeth, and all the evidence so far shows that it intends to use them.

[Lord Touhig (Lab)]

My Lords, the case of a man who defaulted on a payday loan of £120 and ended up owing £1,800 was raised by Chris Evans MP, my successor in the other place. The payday loan company in question made 330 attempts to take money from his bank account and charged him £5 on each occasion. They further demanded £178 in interest charges. Some of the tactics employed by the payday loan companies would shame the mafia. Is it not time that we treated them like the mafia, as criminals?

[Lord Newby]

My Lords, last week the Financial Conduct Authority published its first attempt to deal with the problem that the noble Lord raises. It is proposing that it should be possible only to roll over a loan twice and that if a consumer has a CPA with a loan shark—sorry, if it is a loan shark, it probably does not have any CPA—or an entirely reputable company, the number of payments that will be able to be taken under such an authority will be reduced to two. This will therefore deal pretty comprehensively with the specific type of issue raised by the noble Lord.

[Lord Sugar (Lab)]

My Lords, I have seen the suggestions put forward by the FCA on payday loans in an attempt to protect consumers. May I respectfully say that whoever drafted them is a little naïve? Needless to say, those devious people alluded to here will work around them in a few moments. Does the Minister recognise that the only way to solve the issue is to cap the exorbitant interest rates charged and, more importantly, impose strict advertising guidelines where the advertisers are forced to devote as much prominence to warnings as they do to the sales pitch? By that, I do not mean some micro-printing in jargon that is not understood by the average consumer.

[Lord Newby]

My Lords, the FCA has made proposals on advertising, which the noble Lord may have seen. As for a cap on interest chargeable, the view at the moment is that the FCA does not believe that that is the most effective way of capping the total charge made. I am sure the noble Lord will have seen the Which? report in recent days, showing that borrowers from high street banks are sometimes paying as high, if not higher, effective rates of interest on their loans because of other charges. The key thing is to have a cap on the total cost of credit, rather than simply go for a cap on the rate, which payday loan operators certainly can get around by imposing a whole raft of other charges surrounding the conditions of the loans.

[Lord Elystan-Morgan (CB)]

Perhaps I may raise a point that I have raised on previous occasions. That is to say that the debtor is not entirely without protection in our law. As the Minister will know, a judge of the High Court, or indeed a circuit judge, always has the power in dealing with these matters to ask himself the question whether the creditor has acted unfairly or whether there are conditions in the contract that are unfair. If he finds that to be the case, he can do one of two things: he can either rewrite the contract completely or he can refuse all redress to the creditor.

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[Lord Newby]

I am sure that that is the case, but we want to try to ensure that contracts do not have those unsatisfactory features in the first place and that, if they are unsatisfactory, either they are banned, which the FCA will be able to do, or the rules will be set in such a way that they do not become widespread in the first place.

[Lord Davies of Oldham (Lab)]

My Lords, the Opposition are of course pleased to endorse changes to the law that are being effected by the Government at present, although we still doubt whether they are going far enough. However, is there any evidence that changes in the law are effecting the necessary change in culture in the City and elsewhere to ensure that higher standards prevail and that the grievous abuses of the past will not continue?

[Lord Newby]

My Lords, two things have to happen. First, we have to make sure that the regulatory and legal framework is fit for purpose so that people do not adopt unacceptable methods of behaviour in the first place, and if they do, they can be caught and dealt with properly. Secondly, there is a big issue around the culture in the City, which the Parliamentary Commission on Banking Standards discussed at great length and which your Lordships’ House has discussed. The two have to go hand in hand. The pressure that this House and Parliament can put on the banking sector regarding culture should not be underestimated. Debates here are taken seriously by the banks. We need to keep pressure on them whenever we have dealings with them. This must be underpinned by law and by better regulation, but we need both.

Financial Services (Banking Reform) Bill

Lord Newby Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Newby (LD)]

My Lords, it is a great pleasure to respond to this fascinating debate. I should say at the outset that the Government are committed to greater competition and diversity in the UK banking sector, both locally and nationally. Effective competition is essential for ensuring that customers get suitable and affordable products.

It is not true to say that there has been no fundamental thinking by the Government on the structure of banking and the need for greater competition. That is why we asked the Independent Commission on Banking to investigate competition issues in the UK as a key part of its work. Half of its report covered competition issues. It identified a number of issues and areas which needed action and we are taking forward its recommendations for dealing with these. For example, we are removing the competitive advantage big banks get from being seen by the market as too big to fail through the ring-fence. We have secured a new seven-day switching service, delivered by industry to tackle inertia in the personal current account and SME business account market. This service was launched on 16 September. We have introduced a strong competition regulator by giving the FCA an objective to promote effective competition.

The new regulators have already brought forward big changes on the regulatory side through their barriers to entry work. I commend the report that they produced earlier in the year to the noble Lord, Lord Phillips, in particular. This will make it easier for new banks to enter the market, to grow and to compete with the large incumbent banks. These changes have been greatly welcomed by the industry and will make a big difference going forward for those who want to start a new bank, be it to serve the local community or to compete nationally.

I should highlight here the PRA’s consultation on an initial capital exemption for some small specialist banks. The proposed exemption would allow some banks to gain authorisation with minimum capital of as little as £1 million, and to do so much more quickly than has ever been the case in the past. These are not small changes. Within the narrow world of bank authorisation, these are revolutionary changes which will make it much easier for new entrants to come forward. There have been some extremely successful new entrants. Metro Bank is one of the most successful and I suspect that its competitors consider that it is being disruptive by making a number of changes in the way it does banking which will affect the whole system, in many cases for the better.

The actions that we have already taken will be supplemented by what we are doing in the Bill. We are creating a new payments regulator to ensure fair and transparent access for new and smaller banks to the payment systems. We shall discuss that later today. The Government have announced that they will ask the new payments systems regulator to look at the case for and against introducing full account portability as an early priority, as well as the case for requiring the big banks to give up, in whole or part, ownership of the payments systems.

We are giving the PRA a secondary competition objective to strengthen its role in ensuring that we have competitive banking markets. We will provide the FCA with further competition powers so that it has even more appropriate tools in that area.

As to the OFT, it has brought forward its investigation into SME banking and the competition issues affecting these markets. This is arguably the most contentious area in terms of the lack of appropriate products and volume for that market. The study is part of its ongoing programme of work to investigate concerns over competition in banking and to inform the decision on whether key banking markets should be referred to the Competition Commission for a formal market investigation. In January it reported on its review of the personal current account market, so it is not true to say that no work is being done on looking at competition on current accounts.

The review raised significant concerns over concentration levels. However, it concluded that the important changes being implemented, such as the ring-fence and the new account switching service, meant that market referral was not appropriate at this time.

The OFT aims to conclude its programme of work by 2015 and will make a decision then as to whether a market referral to the Competition Commission is needed. In consideration of the significant measures currently being implemented to improve competition, along with the importance of allowing the OFT to complete its current investigations, I hope that the noble Lord, Lord Eatwell, will feel that his Amendment 102 is not necessary and will not seek to press it.

Turning now to Amendment 43, I have already detailed the extensive action the Government are taking to improve competition.

[Lord Eatwell]

I wonder whether the Minister will allow me to comment on the series of measures he just outlined. All are worthy in their little way, but will he acknowledge that the Government have actually rejected the commission’s recommendation that there be,

“a full public consultation on the extent of competition and its impact on consumers”.?

This is what the Government are not giving.

[Lord Newby]

The Government are saying that the OFT is in the process of undertaking a series of pieces of work. We believe that the appropriate way forward is for it to complete that work and to decide whether it wishes to make a referral. We think that that is a sensible approach; it is already in train and we think it should reach its logical conclusion.

To help increase diversity in business lending, the Government have introduced several important schemes, which include the business finance partnership and the introduction of the business bank. The Government are promoting alternative finance to boost overall lending through investments and various innovative non-bank channels, including two peer-to-peer firms, Funding Circle and Zopa, as part of a small business programme. Peer-to-peer platforms enable people to lend money directly to businesses and consumers; they can therefore offer a more effective way for businesses to access finance. They are certainly disrupted in terms of the way in which finance is going directly into many small businesses.

The business bank is drawing together existing government initiatives under one roof and deploying £1 billion of capital to address gaps in the supply of finance to SMEs. So far, £75 million is being invested in venture capital and £300 million in new sources of lending. The Government are also taking action to support local banking—for example, through a credit union expansion project which includes a £38 million funding package from the Department for Work and Pensions.

Community development finance institutions are also providing loans in support of those struggling to access finance from the commercial banks. The regional growth fund is supporting their work through £60 million of wholesale funding and the Government also provide tax relief worth up to 25% on investments. Both credit unions and CDFIs typically operate in quite a tightly defined geographic area and have that special focus.

At national level, both RBS and Lloyds are already in the process of divesting part of their UK banking businesses as a requirement of EU state aid rules, creating new challenger banks. The divestments are part of a package designed to improve competition in the banking sector. The Government have taken the first step to return Lloyds to the private sector and are actively considering options for further share sales. The reintroduction of the TSB brand on the high street is a major step forward for retail competition. This action is further evidence of the Government’s stated aim not to be a permanent investor in the UK banking sector. This is an important step in further normalising the sector and continuing the process of removing government from the extraordinary measures taken during the crisis.

For RBS, the Government are already investigating the case for creating a so-called “good bank/bad bank” split. We will report the findings of this review shortly, later in the autumn. We do not believe that the case for breaking the core operations of any bank in which the Government have a stake into regional entities meets the objectives of maximising the bank’s ability to support the British economy, getting the best value for the taxpayer while facilitating a return to private ownership. The cost of any reorganisation would be attributable to the banks, and, as a result, to the taxpayer. In addition, the time required to execute such a reorganisation would be lengthy, further delaying the Government’s ability to return the banks to private ownership. As a result, the amendment would run directly contrary to the Government’s stated objectives.

This does not, however, mean that we do not see a role for regionally or subregionally focused banks. I have been impressed, for example, by the work of the Cambridge & Counties Bank, which is based in Leicester and is using its local expertise to support SMEs in Leicester and the broader East Midlands region. Its capital comes from a combination of a Cambridge college and a local authority pension fund, which seems to me a model that could with benefit be replicated elsewhere.

I was extremely interested to hear from the noble Baroness, Lady Liddell, about the success of the Airdrie Savings Bank. I am happy to work with officials to see how that bank is faring and whether anything that the Government are doing is making its life unnecessarily difficult.

The challenge, however—looking at that model on the one hand, and on the other saying that in Germany there are a lot of regionally successful banks—is that that is not where we are starting from now. It is very difficult for government to change a culture single-handedly. If banks such as Cambridge & Counties are successful and other people see that they are, we will see more regional banks, but I do not think that government either can or should try to impose a new overall structure on the banking sector against competitive forces and what people in the banking sector want to do.

I do, however, welcome the news that Santander wants to regionalise decision-making. RBS has for some time been trying to re-educate its SME bank managers about the virtues of relationship banking. It is amazing that that was lost, but the penny has dropped, and I very much hope that the statement by Santander is part of a broader process to push down decision-making to regional and local levels.

I hope that I have been able to persuade my noble friend that the Government have considerable sympathy with his amendment, but that much is already happening to bring greater diversity into the banking sector. Frankly, the pace of change—the number of new entrants, the change in the way that the system is operating and the way that people are doing banking—is quicker than at any previous point in our lifetime. I hope that, on that basis, he will feel able to withdraw his amendment.

[Lord Higgins]

My Lords, my noble friend seems to be implying that the study by the OFT is in some sense a substitute for the amendment. In that context, one is bound to ask what the OFT has been doing on this for the past 25 years. Is that what he is saying and, if so, when are we likely to have a decision on whether there should be a referral? Is there any possibility that the OFT report would give us the kind of information asked for in the amendment?

[Lord Newby]

My Lords, as I said, the OFT is undertaking its work and expects to have formed a view by 2015 about whether to have a broader referral. I think that at one level everybody finds it easy to criticise the failures of virtually every regulatory body in the past. It is unfair to suggest that the OFT has learnt no lessons from the past 25 years in the way that it undertakes its work. The Government have considerable confidence in the work that it is now doing.

[Lord McFall of Alcluith]

My Lords, the noble Lord, Lord Higgins, has a real point here. If we look at the timeline with PPI, consumer groups were complaining about it in the late 1990s. There was a supercomplaint in 2005. The Treasury Committee highlighted it in 2003. The OFT and the Competition Commission looked into it. It was 2012-13 before something was sorted out. That is a generation. We are making these points against the background of a sclerotic system and we really need a commitment from the Government that they are considering the matter. Otherwise, we will be back here in 10 or 15 years’ time and nothing whatever will have moved.

[Lord Newby]

My Lords, everybody would have a great deal of sympathy with the general point that the system has worked very slowly in the past. The FSA was extremely slow in many ways, but one of the features of the way the new system works is that a greater degree of urgency is injected. I give as an example the document on consumer credit published by the FCA last week. The FCA does not take responsibility for consumer credit until next April, but well in advance of that date it has produced a comprehensive plan of how it wants to proceed. This is much more rigorous than anything we have seen in that area in the past. To a considerable extent, the regulators have learnt lessons about the need to move with all due deliberation, yet also with due speed.

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[Lord Phillips of Sudbury]

My Lords, if I may, I would add that my noble friend talked of being too slow, but in this debate several noble Lords have made the point that it is not slowness which has afflicted the large clearing banks but immorality. Whether you are talking about trying to manipulate the LIBOR rate or PPI or identity insurance—you can go on and on—there is the sheer scale, impersonality and lack of relationship or any sort of customer allegiance. I fear that these have rotted the foundations of so many of these colossal banks. Does he not therefore understand that the gist of these amendments is to try to replace that state of affairs?

[Lord Newby]

My Lords, as far as immorality is concerned, later we will deal with amendments on the reversal of the burden of proof and on the new criminal offence which will be available should banks behave in a grossly immoral way. That is the way to deal with the narrow point my noble friend makes. The whole question of the culture of the banks is addressed only partially in the legislation because it is by definition a cultural issue. We are taking very significant steps to regulate individual senior managers and hold them to account for what they do in a way that has never been the case in the past. Again, that is quite a revolutionary change. Regarding the specific point raised by the noble Lord, Lord Flight, I believe that local authorities at least can bank wherever they choose, but I will look into the point and write to him. I simply do not know what the position is.

[Lord Sharkey]

My Lords, I will be brief because I see that I am holding back an avalanche of 158 government amendments. There have been a lot of strong, very well argued and diverse views, but there have also been some general themes. For example, there was a feeling that getting close to the customer is absolutely critical. I entirely agree with that. In fact, I fear that without this there is little chance of reforming the banking culture at all. There also seems to have been a general desire in the Chamber to discuss again the issues raised and to see whether on Report there could be a way of advancing some of the arguments put forward today. In the mean time, I beg leave to withdraw the amendment.

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Moved by

[Lord Newby]

44: After Clause 12, insert the following new Clause—
“Part 3Bail-in stabilisation optionBail-in stabilisation option
(1) Schedule (Bail-in stabilisation option) (which contains amendments relating to a new stabilisation option in Part 1 of the Banking Act 2009) has effect.
(2) The Treasury may by order make any provision they consider appropriate in consequence of the application to building societies of the amendments made by this Part.
(3) An order may, in particular, amend section 84 of the Banking Act 2009, or amend or modify the effect of any other enactment to which this subsection applies.
(4) Subsection (3) applies to any enactment (including a fiscal enactment) passed or made—
(a) before the passing of this Act, or(b) on or before the last day of the Session in which this Act is passed.(5) In this section “building society” has the same meaning as in section 84 of the Banking Act 2009.”

[Lord Newby]

My Lords, this clause and the new schedule to the Bill in Amendment 105 have the effect of amending the Banking Act 2009 to provide the Bank of England with a new stabilisation option—the bail-in option. Bail-in involves shareholders of a failing bank being divested of their shares or having their holdings severely diluted and creditors of the bank having their claims cancelled, reduced or deferred to the extent necessary to restore the bank to financial viability. During the financial crisis it was not possible simply to allow banks which failed to enter insolvency, as other companies do when they fail. This is because of how interconnected the banking system is and because of the need to protect the banks’ customers by ensuring that they could continue to access essential banking services. This protection came at a very high cost to the taxpayer. These new powers will provide one solution to that problem by offering an alternative to insolvency which exposes shareholders and creditors to the losses of the bank, while enabling the bank to continue to operate as a going concern. This will help to ensure that taxpayers are never again required to bear all the costs of resolving failing banks.

It has long been the Government’s policy to develop such bail-in powers. This was an important strand of the Government’s response to the recommendations of the Independent Commission on Banking. The UK has also been at the forefront of the international development of bail-in. Along with other G20 countries, we endorsed the Financial Stability Board’s recommendation on bail-in in November 2011. We have also worked hard at ensuring that the EU would agree a feasible and credible bail-in tool, and have made substantial progress recently in this area. We believe that EU agreement on a common resolution recovery directive is near and, for this reason, the Government are now confident enough about the content of the directive to be able to bring forward bail-in powers through this Bill.

On the details of the amendments, paragraph 1 of the schedule introduces the bail-in option as an additional stabilisation option in the Banking Act 2009. When the bail-in option is deployed, the Bank of England can cancel, reduce or defer liabilities of the bank for the purposes of recapitalising it and restoring it to viability. It may also transfer some or all of the bank’s securities to a bail-in administrator to hold securities of the bank, or to perform other tasks as specified by the Bank of England, on a temporary basis. In any event, shares held by the original shareholders would be expected to be transferred or severely diluted in the course of resolution.

Paragraph 3 of the schedule sets out the conditions for use of the bail-in option. These are that the bank is failing or is likely to fail to satisfy the conditions for authorisation, that no action is likely to be taken to restore the bank to compliance and that the exercise of the power is necessary having regard to the public interest in: the stability of financial systems in the UK; the maintenance of public confidence in the stability of those systems; the protection of depositors; or the protection of any client assets that may be affected.

Paragraph 4 defines the power to make a special bail-in provision cancelling, modifying or changing the form of a liability of the bank in resolution. This power can be exercised only for the purpose of or in connection with cancelling, reducing or deferring a liability of the bank in question. Proposed new Section 48B also specifies a set of liabilities that are excluded from the power to make special bail-in provision. These liabilities are excluded for one of two main reasons: either because they would not have been exposed to losses in insolvency or because exercising the bail-in powers on them would be likely to impede the resolution of the firm or create wider market instability. This includes deposits protected by the Financial Services Compensation Scheme or similar overseas deposit guarantee schemes, liabilities to the extent that they are secured, client assets, short-term liabilities owed to certain financial institutions outside the affected firm’s group, certain liabilities arising in respect of central counterparties and settlement systems, and certain debts owed to employees and trade creditors. The Treasury has the power to amend this list by order.

When the Bank of England exercises its special powers to bail in liabilities of a failing bank, it must make a report to the Chancellor explaining why it has done so. A bail-in should in general be done in a way that respects the treatment that creditors would have received if the bank had been allowed to fail and enter insolvency. In terms of economic effects, this means that the failing bank’s shareholders would be divested of their shares, or otherwise have their claims severely diluted, and subordinated debt holders would be exposed to losses. Senior debt holders would generally be exposed to losses only after subordinated debt holders. It would also generally be the case that creditors in the same class would bear losses on an equal footing.

In common with the existing stabilisation options in the Banking Act, the Bank of England may depart from these general principles where appropriate. If the Bank of England does so in exercising the special bail-in powers, this report could explain the reasons for doing so. The Chancellor will lay a copy of any such report before Parliament.

New Section 48H gives the Bank of England the power to require a bail-in administrator or one or more of the directors of the bank to draw up a business plan that includes an assessment of the factors that led to the failure of the firm and outlines a plan for addressing these problems. The plan must be approved by the Bank of England after consulting the PRA and the FCA and may require changes to be made before approving it.

New Section 48L specifies further powers available to the Bank of England, including powers to modify and convert securities that fall within the scope of the bail-in powers. New Section 48N enables the Bank of England to remove a director from a bank in resolution, or to terminate or vary a director’s contract. It also allows the bank to appoint new directors. New Section 48O enables the Bank of England to issue directions to directors of the bank.

New Section 48P gives the Treasury the power to make an order relating to the treatment of protected financial arrangements in a bail-in. Protected arrangements are defined as security interests, title-transfer collateral arrangements, and set-off and netting arrangements. These arrangements are entered into by the counterparties in order to minimise the risks associated with the financial instruments. Therefore it is right that these arrangements are respected to the extent possible while pursuing the special resolution objectives. This is analogous to the existing power for the Treasury under the Banking Act 2009 to specify protections in the case of transfers of some but not all of the business of the bank under resolution.

The Treasury will be required to put in place compensation arrangements for affected shareholders and creditors following an application of the bail-in powers. These will include a no-creditor-worse-off safeguard that broadly provides that no shareholder or creditor should be left worse off as a result of the exercise of the bail-in powers than they would have if the bank had simply failed and entered insolvency. In addition, the Bank of England may exercise the bail-in option in respect of a banking group company if certain conditions are met.

First, the authorities must be satisfied that a bank in the same group meets the conditions for resolution. Secondly, the authorities must be satisfied that acting only in respect of the bank itself is not sufficient to achieve the special resolution objectives. The actions should seek to minimise the effects of the exercise of the power in relation to group companies on other undertakings in the group. It should only be to the extent necessary in order to achieve the resolution objectives.

I apologise for setting out the details of these provisions in some detail, but they are relatively new to your Lordships’ House and one of the essential components of the menu of provisions contained in the Bill to give a safer and more secure banking system. I commend the amendments to the House.

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[Lord Higgins]

My Lords, these clauses give the Bank of England very considerable powers and responsibilities, which we will need to consider very carefully; we are going somewhat into uncharted waters. At a purely quantitative level, will my noble friend, if not today then on some other occasion, indicate how the system would have worked if it had been applicable in the recent financial crisis? That is to say, in the case of the bailed-out banks, would it have been sufficient to mean that there would have been no charge on the taxpayer, or is it likely that there would still have been a charge?

We will consider in particular the question of the hierarchy of debts. The briefs that we have had from the Treasury have been very helpful, but it might be helpful if my noble friend could in some way or another give us some idea of how the new hierarchy is now likely to work or, to avoid any doubt, perhaps to write the hierarchy into the legislation.

Other points give me some cause for concern, some of which have been made by the noble Lord on the opposition Front Bench. It seems that there is still a considerable risk of contagion if one suddenly bails in a particular bank, but the people who are its creditors will have repercussions elsewhere in the banking system. I am not entirely clear to what extent the Government have taken that particular risk of contagion into consideration. These are quite complicated matters, and we look forward with interest to the Minister’s reply.

[Lord Newby]

My Lords, I thank the noble Lords who have spoken on these extremely technical points. A number of the questions were themselves extremely technical, so if I do not answer them fully now I will of course write to noble Lords.

The first question the noble Lord, Lord Eatwell, raised, was the question of contagion. My first point here is a general one. The markets now expect the bail-in powers to be one of the options available if banks get into difficulty. They seem generally to accept this as an option, and they are adjusting their own activities to the extent that they feel that is necessary in recognition that this will now be part of the environment in which they work. However, in an individual case, if the Bank felt that there was a risk to financial stability by exercising the full bail-in option, which covers all the assets or liabilities of the bank, it could decide not to bail in all of them but to be selective in a manner that would reduce the possibility of contagion.

In addition, in circumstances where a bank is going under, if you do not go down this other route, virtually whatever else you do with it, there is a risk of contagion. That is one of the considerations that will be in the mind of the Bank of England. Of course, if the Bank felt that there was a risk to the whole system if a particular bank went down, it has the powers under the Banking Act to nationalise it, which is another way of protecting the system and the stability of the system. This is another possible approach, but under the Banking Act it is now one of only four possible ways of dealing with the problem of a failing bank.

I am sorry if my answers are slightly out of order, but the noble Lord asked what the word “comparable” meant when we talked about other countries’ depositor protection. As he knows, all EU member states have depositor guarantee schemes with a common limit, and all those schemes will be considered comparable. Therefore it covers any schemes that will ensure small depositors in the event that the bank becomes insolvent and unable to pay its debts, in the same way as our FCA.

[Lord Eatwell]

I was thinking of the Crown Dependencies.

[Lord Newby]

I had not realised that the noble Lord, Lord Eatwell, was thinking of the Crown Dependencies. I will write to him about that.

The noble Lord asked whether the concept of no less favourable treatment was appropriate. This concept relates only to the insolvency counterfactual. It is reasonable that an investor should be no worse off due to an action of the authorities than in an insolvency. That is the option that might be facing investors if the bail-in was not taking place.

The noble Lord asked about temporarily high balances. This is an issue that we have debated over the years. As far as bail-in is concerned, the bank will have discretion not to bail in certain liabilities. In terms of the general issue about temporarily high balances, this is being pursued within the context of the EU. There is a very widespread recognition that it would be desirable to get protection for people who have such temporary high balances.

The noble Lord asked about transitional arrangements. The issue of bail-in has been debated at international level for some time. Markets know that bail-in is now an acceptable, and indeed a leading, tool for dealing with large banks in the European fora. We have agreed that there should be no transitional agreements, especially as the counterfactual would be insolvency.

The noble Lord asked about our response to the Select Committee. My noble friend Lord Deighton, as the noble Lord knows, is in China this week, so he will be replying formally when he returns. But the approach that the Treasury has taken so far in terms of working with parliamentarians who have a close interest in these matters has been to circulate draft secondary legislation at the point at which it has gone out for wider consultation. The current consultation exercise on the big draft statutory instruments under this Bill has, I think, now closed. We are drawing up a response to all the stakeholders who have made comments and the intention is that at that point the Treasury will directly contact noble Lords who have expressed an interest so that we can discuss where we have got to and consider any suggestions that noble Lords might have on the secondary legislation.

My view, having looked at it, is that this is highly technical legislation and the best way of getting an input is to have a conversation around it. The Treasury is very open at this point to any suggestions from your Lordships, or indeed Members of another place, in terms of the details of the secondary legislation. They are not set in stone. We are trying to get the best outcome. We think that that more discursive approach in the context of these highly technical instruments is the best way of getting the maximum positive involvement with parliamentarians in the process. As I said, my noble friend Lord Deighton will be writing to the noble Baroness, Lady Thomas of Winchester, about that.

The noble Lord, Lord Higgins, asked whether bail-in would mean that taxpayers would not have had to make any contribution. It is difficult, if not impossible, to say definitively since we do not know how much could have been bailed in. What is clear is that we would have substantially reduced any government contribution. Loss-absorbing capacity provisions in the Bill will further strengthen that concept. The ICB said that the 17% PLAC proposals would have been sufficient to deal with the problem last time in all but the most extreme cases.

The noble Lord, Lord Higgins, asked about the creditor hierarchy and whether it will be stated in the Bill. We have not stated it in the Bill, but we will be working on the statutory code of practice under the Act when it is enacted. The aim is that it will be set out more fully there.

The noble Lord, Lord Blackwell, asked what protection there was against inappropriate use of the powers by the Bank of England. The conditions before which the Bank can intervene are pretty stringent; they are that the bank is failing or likely to fail and that it is in the public interest to do so. If the Bank operated vexatiously or against the public interest, that would be an inappropriate use of its powers—but so it would if it acted in that manner under any other of its powers. Our view is that the conditions are clear enough and give the Bank sufficiently clear steer that we are reasonably confident that the problem that the noble Lord anticipated would not arise in practice.

The noble Lord, Lord Flight, asked whether the bail-in could work for big international banks. We believe that it could; the UK authorities are working with international counterparts to put in place resolution plans for large banks to ensure that the tool can be applied effectively. We see bail-in as being the leading tool for such banks.

The noble Lord, Lord Eatwell, asked whether bail-in was necessary for all banks, including those outside the ring-fence. The truth is, obviously, that all banks can encounter difficulties, not just retail banks. We believe it appropriate that the Bank of England has the tool available for dealing with non-retail banks as well as retail banks, which this provision would do.

I am not sure that I have answered every last question that I have been asked. To the extent that I have not, I will write to noble Lords.

[Lord Eatwell]

I just take up the Minister on that last point. Surely one of the key arguments about the ring-fence is that there is an implicit guarantee from the public authorities not to allow institutions within the ring-fence to fail. That implicit guarantee is worth a lot of money to those banks that have been too big to fail. Surely the whole point about the ring-fence is that those outwith it would not benefit from that form of public continuity guarantee. But is the noble Lord saying that the Government wish to retain such measures, which would allow them to implement such continuity guarantees?

[Lord Lawson of Blaby (Con)]

The noble Lord, Lord Eatwell, said something which I think is profoundly wrong, but I can understand why he said it. Will my noble friend the Minister make it absolutely clear that it is not the position of Her Majesty’s Government, and it is not the purpose of this Bill, to ensure that no ring-fenced bank will ever be allowed to fail? That is not the position; it must not be the position and I do not believe that it is the Government’s intention.

[Lord Newby]

My Lords, I can confirm what the noble Lord, Lord Lawson says. It is not the intention to have a situation where it is impossible for a ring-fenced bank to fail. What we are doing, particularly through the guarantee scheme, is ensuring that ordinary depositors are protected in those circumstances. Through these potential provisions we hope to ensure that there will be continuity of activity, which might not be the case without them.

In terms of the scope of these provisions, they are the fourth of what are now four options in the Banking Act for dealing with a bank that is in danger of failing. One is sale to another bank; one is the bridge bank and the other is nationalisation. Those measures apply to all banks covered by that legislation. I believe that that extends the measures beyond the ring-fenced banks.

[Lord Higgins]

I am sorry but I am still not clear. Could bail-in provisions be applied by the Bank of England to banks which are not within the ring-fence?

[Lord Newby]

That is what I was attempting unsuccessfully to say.

Amendment 44 agreed.

Moved by

[Lord Newby]

45: After Clause 12, insert the following new Clause—
“Part 4Conduct of persons working in financial services sectorFunctions for which approval is required
(1) Section 59 of FSMA 2000 (approval for particular arrangements) is amended as follows.
(2) Omit subsection (5).
(3) For subsection (6) substitute—
“(6) The PRA may specify a description of function under subsection (3)(a) only if, in relation to the carrying on of a regulated activity by a PRA-authorised person, it is satisfied that the function is a senior management function as defined in section 59ZA.”
(4) After subsection (6A) (inserted by section 5 above) insert—
“(6B) If—
(a) a function of a description specified in rules made by the FCA under subsection (3)(a) or (b) is a controlled function in relation to the carrying on of a regulated activity by a bank, and (b) the FCA is satisfied that, in relation to the carrying on of a regulated activity by a bank, the function is a senior management function as defined in section 59ZA,the FCA must designate the function in the rules as a senior management function.(6C) If a function of a description specified in rules made by the PRA under subsection (3)(a) is a controlled function in relation to the carrying on of a regulated activity by a bank, the PRA must designate the function in the rules as a senior management function.”
(5) Omit subsections (7) to (7B) and (11).”

[Lord Newby]

My Lords, we now turn to the government amendments which implement another important part of the recommendations of the Parliamentary Commission on Banking Standards on senior persons and banking standards rules. This group also contains a number of amendments to the amendments the Government have tabled. I begin by explaining how the government amendments will deliver the goal of improving standards of conduct in banking.

The Parliamentary Commission on Banking Standards concluded that the current system for approving those in senior positions in banks—the approved persons regime—had failed. It saw it as overly complex and unable to ensure that individual responsibilities were adequately defined or that clear expectations were set for those holding key roles. The commission’s central recommendation in this area is for the creation of a senior persons regime applying to senior bankers. The regime for senior managers in banks will have the following features. It will reverse the burden of proof so that senior bankers will have to show that they did what was reasonable when a bank fails to comply with regulatory requirements in their area of responsibility, or face regulatory action for misconduct. It will have mandatory statements of responsibility, so that whenever someone is a candidate to be a senior manager in a bank, the bank will have to set out clearly what aspects of the bank’s business they will be responsible for. There will be powers for the regulators to make conduct rules for senior managers in banks instead of the old system of statements of principles supported by codes of practice. There will be a requirement that the register kept by the FCA must state who is a senior manager in a bank and give details of regulatory action taken against them.

The new regime for senior managers will also retain the tools which the regulators have under the existing approved persons regime. The regulators will also retain their tough powers under FSMA to impose unlimited fines on, or publish notices of censure about, senior managers in banks. It may sometimes still be appropriate for the regulators to approve people to perform functions that are not senior management functions but which still involve important responsibilities. The Government have therefore chosen to retain the power for the regulator to pre-approve individuals to perform functions outside the senior managers regime. It is for the regulators to determine what functions, if any, should be subject to pre-approval outside the senior managers regime. I am confident that noble Lords will agree that retaining this power is a sensible safeguard at a time when concerns about individual standards in financial services remain acute.

In addition to the regime for bank senior managers, the commission also recommended the introduction of a standards regime that would apply to a wider class of individuals who work in banks. The Government have therefore provided the regulators with a new power to make conduct rules for anyone who is employed by a bank, even if they are not a senior manager or other approved person. This is an extension of regulatory power in relation to individuals, and gives the regulators the power to impose a single set of banking standards rules for all who work in banks. Employees of banks could face disciplinary action if they breach these standards rules or if they are knowingly concerned in regulatory breaches by the bank. The regulators will not be compelled to make conduct rules. They will be able, quite properly, to exercise their supervisory judgment to determine who in a bank should be subject to rules, and what standards to impose.

Finally, the commission also recommended including provision for time-limited and conditional approvals of senior bankers, and longer time limits for the regulators to take disciplinary action against individuals. The Government also accepted these recommendations. Accordingly, the Bill will allow the regulator to grant approval to perform senior management functions in banks subject to conditions, as well as to take steps to vary an approval it has already given, for example by imposing new conditions.

Perhaps I may respond to the amendments tabled by the noble Lords, Lord Brennan, Lord McFall and Lord Watson. Amendments 46A, 46B and 47A seek to ensure that responsibility for preventing money laundering and other financial crime is also a senior management function. The Government agree with concerns that underpin these amendments. UK banks should uphold the highest standards in preventing criminal activity, and not facilitate it. Where there is evidence that banks have not lived up to those standards, the people at the top should be held to account. I reassure noble Lords that the new regime for senior managers will deliver precisely that accountability in relation to financial crime. Therefore, while we can all support the result that the noble Lords want to achieve, I can assure them that these amendments are unnecessary and there are no loopholes when it comes to such matters.

I shall try to explain why. The definition of “senior” is quite comprehensive. It encompasses all aspects of the bank’s operations and would therefore include responsibility for aspects of a bank’s operations that are concerned with the prevention of financial crime, where those aspects could involve serious consequences for the bank, for business or other interests in the United Kingdom. The amendments could in fact have the unintended effect of requiring junior staff with specific duties in relation to financial crime to be treated as senior managers. That would run in the opposite direction to what the parliamentary commission intended, which was to focus on senior persons in charge of all aspects of the bank’s activities.

Amendment 53A has two limbs. The first seeks to ensure the operational objectives that the FCA must consider when making rules of conduct for approved persons or bank employees. I can assure your Lordships that this part of that amendment is unnecessary. The reference to the operational objectives in new Section 64A(1) attracts all aspects of these objectives as defined in Sections 1B, 1C, 1D and 1E of FiSMA, without any additional words.

The second limb of Amendment 53A, and Amendment 53B, would require both regulators to use their new powers to make rules of conduct specifically about the conduct of individuals responsible for preventing money laundering or other financial crime. I am not sure what these changes would add. The Fraud Act 2006, the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007 already bite on bank senior managers. Adding regulatory rules mandating compliance with statutory requirements would add little. Further, the regulators already have a power to make conduct rules applying to persons in banks who have responsibility for compliance with money laundering regulations and other laws creating financial crimes. We certainly expect the regulators to use this power to make rules about aspects of conduct that include ensuring that firms comply with their obligations relating to money laundering and preventing financial crime. However, to single these areas out in primary legislation adds little bite to the existing regime and is, we believe, unnecessary. I hope, therefore, that noble Lords will agree not to press those amendments.

I also assure the noble Lords, Lord Brennan, Lord McFall and Lord Watson, that Amendment 54A is unnecessary. The reference to an application for approval in a context which refers to a person approved under Section 59 of FiSMA already always means an application under Section 60. There is no other section under which such an application can be made. I hope, therefore, that the noble Lords will agree not to press their amendment.

Finally, I turn to Amendment 100, tabled by the noble Lords, Lord Eatwell and Lord Tunnicliffe. This amendment is the same as an amendment brought forward on Report in another place. The government amendments, which implement the commission’s key recommendations, go much further than the noble Lords’ amendment, which would really just rename the existing approved persons regime as a “licensed persons regime”, and that is all. It would not deliver the real improvements sought by the parliamentary commission. I hope therefore that the noble Lords will agree not to press this amendment. I beg to move Amendment 45.

[Lord Turnbull]

My Lords, an important finding of the commission was that the existing approved persons regime was flawed. After a debacle wiping billions of pounds off the value of shareholdings, requiring the state to inject billions of pounds into the industry and take huge financial exposures, and after several serious lapses of conduct, according to my researches one person has been fined and another person has negotiated an agreement not to practise.

Our conclusion was that the APR operates mostly as an initial gateway to taking up a post, rather than serving as a system through which regulators can ensure the continuing exercise of responsibility at the most senior levels within banks. A major cause of this flaw was that responsibilities were ill defined and were not joined up, so that those at the top could claim they “didn’t know” or, “It wasn’t me”.

We proposed a two-tier system: a senior persons regime, now called a senior managers regime, covering a meaningful chain of accountabilities, which we wanted to apply to all banks and holding companies operating in the UK; and, below that, a licensing regime, where no prior approval from the regulator would be required to employ anyone but banks would have to take responsibility for ensuring that those they did employ were properly qualified and trained and that they observed a code of conduct. This would apply to those who could seriously damage the bank or the bank’s reputation or harm a customer’s reputation.

The commission welcomes many of the Government’s proposals: defining the functions of senior management; requiring senior managers to have a statement of responsibilities; extending the limitation period for regulators to take enforcement action from three years to six; recording information on a person’s regulatory history so that a new employer can find out important details about whom they are recruiting; and the reversal of the burden of proof on whether a person is fit and proper.

However, serious issues are left unresolved. Amendment 55 provides a definition of a bank to which the regime applies. I found it impossible to discover what the definition means. Does it meet the commission’s objective of covering all banks and holding companies operating in the UK? Would the Minister clarify what he means by “bank”? Could it be a ring-fenced bank, a non-ring-fenced entity conducting investment activities within a group, a whole group or a freestanding investment bank? In our view, the new senior managers regime should apply to all such entities. It would make a mockery of the scheme if, as I suspect may be the case, it applied only to banks taking deposits from the general public—that is, ring-fenced banks. It would be completely unacceptable if the regime did not apply, for example, to the senior managers overseeing the LIBOR traders, to those overseeing rogue traders such as the “London Whale”, to those overseeing the marketing of highly dubious packages of sliced and diced mortgages or to those engaged in the mis-selling of interest rate swaps. I very much hope that the Minister will be able to give us an answer today or address this between now and Report.

There is no mention of the licensing regime, which the commission recommended. The Government said that they would ensure that regulators had the ability to take regulatory action against persons who were not senior persons—senior managers—or who were not subject to prior regulatory approval. There is no mention of the licensing regime in the government amendment. They have come up with something rather different in Amendment 53 on the rules of conduct. It states:

“If it appears … necessary or expedient for … advancing one or more of its operational objectives, the FCA may make rules about the conduct of the following persons”,

and those persons could be any employee of the bank.

I question whether that is the right answer. It is “may” rather than “must”, but I should have thought it essential that the FCA made rules. Is it right that it should apply to all employees from purely backroom or administrative staff? In some ways, the government scheme goes wider but it is possibly too permissive.

The final omission to highlight is that we propose that as well as an initial statement of responsibilities for each manager, there should be a handover note when people change jobs. We think that that is crucial because without it the chain of accountability breaks down, and when someone changes jobs we are back to, “I didn’t know”, or, “It wasn’t me”.

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[Lord Phillips of Sudbury]

My Lords, I support very much what the noble Lord, Lord Eatwell, has just said. We need a clear and authoritative report from my noble friend the Minister as to who is right between the noble Lord, Lord Brennan, who is a highly distinguished lawyer, and those who are advising my noble friend. If there is any doubt about the matter, I see virtue in the amendments put down in the names of the noble Lords, Lord Brennan, Lord McFall and Lord Watson of Invergowrie. I commend the organisations that have helped to craft those important amendments. There again, the noble Baroness, Lady Noakes, seems to make a strong point. If on second thoughts the Minister cannot assure us that the amendment of the noble Lord, Lord Brennan, is superfluous, one would want him to assure the House that the noble Baroness’s concern is superfluous.

[Lord Newby]

My Lords, perhaps I may start by dealing with the three points on which the noble Lord, Lord Turnbull, sought clarification. The first was on the definition of “bank” for the purposes of these amendments. The regime will apply to all UK institutions that have permission to take deposits. That covers ring-fenced banks, other banks, building societies, credit unions and some wholesale deposit takers, but it does not cover things which in popular parlance are called banks but which do not take deposits.

[Lord Turnbull]

If a bank divides itself under the new regime into a ring-fenced bank which takes deposits and puts its investment activities—derivatives, underwriting and proprietary trading—into a non-ring-fenced bank which does not take deposits, does it mean that that mass of activity will not be covered by the regime? Much of the malefaction took place in that area.

[Lord Newby]

My Lords, I repeat: it is limited to banks that take deposits, because the view is that they are of a different order of significance in the system. I think that we have a difference of view.

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[Lord Newby]

I will take it back to the Treasury, but I want the noble Lord to be in no doubt as to what the Government are currently proposing.

[Lord Lawson of Blaby]

May I reinforce what others have said? I am horrified by the Minister’s explanation. He must take it back to the Treasury and get the Treasury to think again. I refresh his memory, for example, about the evidence that we took from UBS. Not only was it culpable to an extraordinary degree in the LIBOR scandal but its top management also said that it knew nothing about what its traders were doing. This was in spite of the fact that when it had its capital-raising exercise, it presented to all the funds that its great profit centre was trading in LIBOR derivatives. Then it said, “We know nothing about it”. This made it immensely culpable. The Minister is saying that if you had a bank that was not taking retail deposits but was doing just that, there would be no individual responsibility at all under this Bill. I am afraid that he must look at that again.

[Baroness Noakes]

Was the Minister talking about retail deposits, as I believe my noble friend Lord Lawson has interpreted him saying, or, as the legislation seems to me to say, about deposit-taking more widely? Deposit-taking is not confined to retail banking on ring-fenced operations. Deposit-taking occurs across the whole range of banking activities, as far as I am aware. Will he clarify to what kinds of activity he intend this to apply?

[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.

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[Lord Eatwell]

As clarification, given what the Minister has said about wholesale deposits, if there was an organisation providing banking services on a fee-based basis, would it be alone? Would it be exempt?

[Lord Newby]

My Lords, unless it was taking deposits it would be exempt under the amendments as they stand. It is fair to say that I have heard what the House has said and I will relay it with all force to my colleagues in the Treasury, who will not have had the privilege to hear it directly.

[Lord McFall of Alcluith]

It would be easy to put a note in the Library about which institutions will be affected and which will not, so that we can see for ourselves and there is no misinterpretation when we look at this further on Report.

[Lord Newby]

I am not sure that I can undertake to give a comprehensive list, but I am sure that I can undertake that we would explain which named organisations fall on both sides of that definition.

The next point made by the noble Lord, Lord Turnbull, was about the licensing regime. He made a common point about “may” as opposed to “must”, something that we debate at huge length. There is no doubt that there will be not a licensing regime in his terms, but there will be rules of conduct that will cover all employees for whom they are relevant. The intention is not for the cleaners to be covered by these rules. It is perfectly well understood with the PRA that it will not only produce the rules but set out the scope of which employees will be covered by them.

The noble Lord asked about the handover note. Our view is that we do not need primary legislation to require handover notes. The regulators can require that in their rules, and I am sure that they plan to. When senior managers take on a new job, new statements of responsibilities are required so that there is absolute clarity on what the senior manager is responsible for. We see these as fulfilling the purpose that he had in mind, and which other people might colloquially think of as a handover note.

The noble Viscount, Lord Trenchard, raised the question about whether British banks would be at a disadvantage. I cannot really add to the comments of my noble friend Lord Lawson and others, other than to say that the Government believe that it is in the long-term interest not only of bank customers but of the City of London that the highest possible standards are followed here. If individual bankers feel that they do not want to operate to the highest possible standards, they should go somewhere else.

The noble Viscount, Lord Trenchard, and the noble Lord, Lord Flight, asked whether the senior management regime undermines collective responsibility. We do not think that it does. It ensures that individuals are held to account when things go wrong. It will not change the way in which decisions are taken in a collective manner.

The noble Lord, Lord Flight, raised a point that has been made a number of times: why did the regulatory system get away with it, and why has no action been taken? The answer is that the restructuring of the system was undertaken to try to ensure that we did not have the same problems again. The Government believe that that is how you stop the laxity of the past, and that we begin to instil a new culture by having different organisations, objectives and rules. The regulatory regime has not gone through this process unamended.

Moving on to the amendments introduced by the noble Lord, Lord Brennan, I assure him that there is no difference of view between him and other noble Lords who supported this amendment about the significance of money-laundering and the need for it to be tackled effectively, nor of the scale of it. The scale of money-laundering is very large, and the Government and the regulators are determined to cut it down.

I would like to make some points against the amendments and in response to some of the things that have been said. The most important point was that raised by the noble Baroness, Lady Noakes. The requirements for senior managers to stay within the law on money-laundering are no different from those to keep to the law in every other area where there is law. The noble Lord has a laudable interest in money-laundering while the noble Baroness is interested in anti-terrorism legislation. There may be an overlap, but they are distinct. Other noble Lords are interested in other things, where bankers have a legal responsibility to keep within the law. Singling out money-laundering, at a point where it is not required in order to be covered by the legislation, serves no useful purpose and can be positively unhelpful. However, I am happy to take up the sensible suggestion from the noble Lord, Lord Eatwell, that we provide a letter of comfort, as it were, between now and Report to confirm that the regulator takes this extremely seriously, and that we begin to explain how the obligation under the law will be undertaken.

The noble Lord, Lord McFall, repeated that in the past the trail could go cold. The great thing about these provisions is that they deal explicitly with that. To say that the trail goes cold will no longer be a defence.

[Lord McFall of Alcluith]

The reason I said that is that Tracey McDermott, the present FCA director of enforcement, came before the committee and answered that question in all honesty. She said that what is needed is a chart of organisations to determine who is responsible for what and a handover document. That is at the start at the moment; it has not been fleshed out. That is the reason why I brought that point to the Minister.

[Lord Newby]

When this amendment is enacted, it will ensure that a senior manager will have his or her areas of responsibility explicitly set out on appointment and that he or she will be held responsible for everything that happens on their watch in that area. It will no longer be a defence to say, “The trail ran cold” or “Nobody told me about it”, as long as they might reasonably be expected to know about it. That is a killer point in respect of this amendment.

The noble Lord, Lord Watson, said that the Government are complacent, as HSBC has shown. It is in part because of the HSBC experience that this series of amendments has been introduced. We are confident that they will stop that happening again.

The noble Lord, Lord Eatwell, set out the arguments for a licensing regime. The Government believe that the code of conduct we are proposing, which will cover all those involved in banking activities, is a proportionate response to the need for the kind of principles followed by people on a day-to-day basis in the banking sector that the noble Lord wants covered by the licensing regime. We are confident that the Government will achieve that.

I hope that I have dealt with most of the points that were raised. I commend the amendment to the Committee.

Amendment 45 agreed.

Moved by

[Lord Newby]

46: After Clause 12, insert the following new Clause—
“Senior management functions
After section 59 of FSMA 2000 insert—“59ZA Senior management functions
(1) This section has effect for determining whether a function is for the purposes of section 59(6) and (6B) a senior management function.
(2) A function is a “senior management function”, in relation to the carrying on of a regulated activity by an authorised person, if—
(a) the function will require the person performing it to be responsible for managing one or more aspects of the authorised person’s affairs, so far as relating to the activity, and(b) 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.(3) In subsection (2)(a) the reference to managing one or more aspects of an authorised person’s affairs includes a reference to taking decisions, or participating in the taking of decisions, about how one or more aspects of those affairs should be carried on.””

[Lord Newby]

My Lords, I beg to move.

Amendment 46A (to Amendment 46)

Tabled by

--- Later in debate ---

Moved by

[Lord Newby]

47: After Clause 12, insert the following new Clause—
“Statements of responsibilities
(1) Section 60 of FSMA 2000 (applications for approval) is amended as follows.
(2) After subsection (2) insert—
“(2A) If—
(a) the application is for the approval of a person to perform a designated senior management function, and(b) the authorised person concerned is a bank,the appropriate regulator must require the application to contain, or be accompanied by, a statement setting out the aspects of the affairs of the authorised person concerned which it is intended that the person will be responsible for managing in performing the function.(a)The administrator must obtain the approval of the Bank of England to any proposals under sub-para. (1).(b)Treat the reference in sub-para. (2)(b) to the objective mentioned in para. 3(1)(a) or (b) as a reference to the objective in section (Objective of FMI administration) of this Act.(c)Ignore sub-para. (3)(b).(a)Before making an application in reliance on this paragraph the FMI administrator must give notice to the Bank of England, which is to be entitled to participate in the proceedings.(b)In making directions the court must have regard to the objective in section (Objective of FMI administration) of this Act.(a)Ignore sub-paras. (1) and (3).(b)The Bank of England may apply to the court for the variation or revocation of any directions given by the court.()“(2) Where a company is in FMI administration, a creditor or member of the company may apply to the court claiming that the FMI administrator is conducting himself or herself in a manner preventing the achievement of the objective of the FMI administration as quickly and efficiently as is reasonably practicable.”()“(1) On an application made by a person mentioned in sub-paragraph (2), the court may provide for the appointment of an FMI administrator of a company to cease to have effect from a specified time.()(2) The persons who may apply to the court under sub-paragraph (1) are— ()(a) the Bank of England;()(b) with the consent of the Bank, the FMI administrator.”(a) Para. 91(1) applies as if the only person who could make an application were the Bank of England.(b) Ignore para. 91(2).(a) in accordance with directions of the Bank of England, and(b) if the Bank is satisfied that they will not prejudice the objective in section (Objective of FMI administration) of this Act.(a) In considering making an order in reliance on section 241 the court must have regard to the objective in section (Objective of FMI administration) of this Act.(b)Ignore subsections (2A)(a) and (3) to (3C).(2B) A statement provided under subsection (2A) is known as a “statement of responsibilities”.
(2C) In subsection (2A) “designated senior management function” means a function designated as a senior management function under section 59(6B) or (6C).”
(3) After subsection (6) insert—
“(6A) Subsection (6) applies to references to a bank as it applies to references to the authorised person concerned.””

[Lord Newby]

My Lords, I beg to move.

Amendment 47A (to Amendment 47) not moved.

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Moved by

[Lord Newby]

48: After Clause 12, insert the following new Clause—
“Power to give approval subject to conditions or for limited period
(1) Section 61 of FSMA 2000 (determination of applications) is amended as follows.
(2) For subsection (1) substitute—
“(1) The regulator to which an application for approval is made under section 60 may grant the application only if—
(a) it is satisfied that the person in respect of whom the application is made (“the candidate”) is a fit and proper person to perform the function to which the application relates, or(b) in a case where the application is for approval to perform a designated senior management function in relation to the carrying on of a regulated activity by a bank (a “bank-related senior management application”), it is satisfied that the condition in paragraph (a) will be met if the application is granted subject to one or more conditions (as to which, see subsection (2B)).”(3) In subsection (2), for “deciding that question” substitute “determining the application”.
(4) After subsection (2A) insert—
“(2B) The regulator to which a bank-related senior management application is made under section 60 may in particular—
(a) grant the application subject to any conditions that the regulator considers appropriate, and(b) grant the application so as to give approval only for a limited period.(2C) A regulator may exercise the power under paragraph (a) or (b) of subsection (2B) only if—
(a) where the regulator is the FCA, it appears to the FCA that it is desirable to do so in order to advance one or more of its operational objectives, and (b) where the regulator is the PRA, it appears to the PRA that it is desirable to do so in order to advance any of its objectives.(2D) Consent given by the FCA for the granting of the application may be conditional on the manner in which the PRA exercises its power under subsection (2B).”
(5) After subsection (3) insert—
“(3ZA) In the case of a bank-related senior management application, the reference in subsection (3)(a) to granting the application is a reference to granting it without imposing conditions or limiting the period for which the approval has effect.”
(6) After subsection (5) insert—
“(6) In this section—
(a) “designated senior management function” means a function designated as a senior management function under section 59(6B) or (6C);(b) any reference to a bank includes a reference to a person who has applied for permission under Part 4A and will be a bank if permission is given.”(7) In section 62 of FSMA 2000 (applications for approval: procedure and right to refer to Tribunal)—
(a) in subsection (2), after “the application” insert “, or to grant the application subject to conditions or for a limited period (or both)”;(b) in subsection (3), after “the application” insert “, or to grant the application subject to conditions or for a limited period (or both)”;(c) in subsection (4), after “the application” insert “, or to grant the application subject to conditions or for a limited period (or both)”.”

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Moved by

[Lord Newby]

53: After Clause 12, insert the following new Clause—
“Rules of conduct
(1) Part 5 of FSMA 2000 (performance of regulated activities) is amended as follows.
(2) Omit sections 64 and 65 (and the italic cross-heading preceding them).
(3) Before section 66 insert—
“Conduct of approved persons and others64A Rules of conduct
(1) If it appears to the FCA to be necessary or expedient for the purpose of advancing one or more of its operational objectives, the FCA may make rules about the conduct of the following persons—
(a) persons in relation to whom either regulator has given its approval under section 59;(b) persons who are employees of banks. (2) If it appears to the PRA to be necessary or expedient for the purpose of advancing any of its objectives, the PRA may make rules about the conduct of the following persons—
(a) persons in relation to whom it has given its approval under section 59;(b) persons in relation to whom the FCA has given its approval under section 59 in respect of the performance by them of a relevant senior management function in relation to the carrying on by a PRA-authorised person of a regulated activity;(c) persons who are employees of PRA-authorised banks.(3) In subsection (2)—
“PRA-authorised bank” means a bank that is a PRA-authorised person, and
“relevant senior management function” means a function which the PRA is satisfied is a senior management function as defined in section 59ZA (whether or not the function has been designated as such by the FCA).
(4) Rules made under this section must relate to the conduct of persons in relation to the performance by them of qualifying functions.
(5) In subsection (4) “qualifying function”, in relation to a person, means a function relating to the carrying on of activities (whether or not regulated activities) by—
(a) in the case of an approved person, the person on whose application approval was given, and(b) in any other case, the person’s employer.(6) In this section any reference to an employee of a person (“P”) includes a reference to a person who—
(a) personally provides, or is under an obligation personally to provide, services to P under an arrangement made between P and the person providing the services or another person, and(b) is subject to (or to the right of) supervision, direction or control by P as to the manner in which those services are provided,and “employer” is to be read accordingly.””(a)The administrator must obtain the approval of the Bank of England to any proposals under sub-para. (1).(b)Treat the reference in sub-para. (2)(b) to the objective mentioned in para. 3(1)(a) or (b) as a reference to the objective in section (Objective of FMI administration) of this Act.(c)Ignore sub-para. (3)(b).(a)Before making an application in reliance on this paragraph the FMI administrator must give notice to the Bank of England, which is to be entitled to participate in the proceedings.(b)In making directions the court must have regard to the objective in section (Objective of FMI administration) of this Act.(a)Ignore sub-paras. (1) and (3).(b)The Bank of England may apply to the court for the variation or revocation of any directions given by the court.()“(2) Where a company is in FMI administration, a creditor or member of the company may apply to the court claiming that the FMI administrator is conducting himself or herself in a manner preventing the achievement of the objective of the FMI administration as quickly and efficiently as is reasonably practicable.”()“(1) On an application made by a person mentioned in sub-paragraph (2), the court may provide for the appointment of an FMI administrator of a company to cease to have effect from a specified time. ()(2) The persons who may apply to the court under sub-paragraph (1) are—()(a) the Bank of England;()(b) with the consent of the Bank, the FMI administrator.”(a) Para. 91(1) applies as if the only person who could make an application were the Bank of England.(b) Ignore para. 91(2).(a) in accordance with directions of the Bank of England, and(b) if the Bank is satisfied that they will not prejudice the objective in section (Objective of FMI administration) of this Act.(a) In considering making an order in reliance on section 241 the court must have regard to the objective in section (Objective of FMI administration) of this Act.(b) Ignore subsections (2A)(a) and (3) to (3C).

[Lord Newby]

My Lords, I beg to move.

Amendments 53A and 53B (to Amendment 53) not moved.

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Moved by

[Lord Newby]

54: After Clause 12, insert the following new Clause—
“Definition of “misconduct”
(1) In section 66 of FSMA 2000 (disciplinary powers)—
(a) after subsection (1) insert—“(1A) For provision about when a person is guilty of misconduct for the purposes of action by a regulator—
(a) see section 66A, in the case of action by the FCA, and(b) see section 66B, in the case of action by the PRA.”;(b) omit subsections (2), (2A), (6) and (7).(2) After that section insert—
“66A Misconduct: action by the FCA
(1) For the purposes of action by the FCA under section 66, a person is guilty of misconduct if any of conditions A to C is met in relation to the person.
(2) Condition A is that—
(a) the person has at any time failed to comply with rules made by the FCA under section 64A, and(b) at that time the person was—(i) an approved person, or(ii) an employee of a bank.(3) Condition B is that—
(a) the person has at any time been knowingly concerned in a contravention of a relevant requirement by an authorised person, and(b) at that time the person was—(i) an approved person in relation to the authorised person, or(ii) in the case of an authorised person that is a bank, an employee of the bank.(4) In this section “relevant requirement” means a requirement—
(a) imposed by or under this Act, or(b) imposed by any qualifying EU provision specified, or of a description specified, for the purposes of this subsection by the Treasury by order. (5) Condition C is that—
(a) the person has at any time been a senior manager in relation to an authorised person that is a bank,(b) there has at that time been (or continued to be) a contravention of a relevant requirement by the bank, and(c) the senior manager was at that time responsible for the management of any of the bank’s activities in relation to which the contravention occurred.(6) But a person (“P”) is not guilty of misconduct by virtue of subsection (5) if P satisfies the FCA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).
(7) For the purposes of subsection (5)—
“senior manager”, in relation to an authorised person that is a bank, means a person who has approval under section 59 to perform a designated senior management function in relation to the carrying on by the bank of a regulated activity;
“designated senior management function” means a function designated as a senior management function under section 59(6B) or (6C).
(8) In this section—
“approved person”—
(a) means a person in relation to whom an approval is given under section 59, and(b) in relation to an authorised person, means a person in relation to whom such approval is given on the application of the authorised person;“employee”, in relation to a person, has the same meaning as in section 64A.
“66B Misconduct: action by the PRA
(1) For the purposes of action by the PRA under section 66, a person is guilty of misconduct if any of conditions A to C is met in relation to the person.
(2) Condition A is that—
(a) the person has at any time failed to comply with rules made by the PRA under section 64A, and(b) at that time the person was—(i) an approved person, or(ii) an employee of a PRA-authorised bank.(3) Condition B is that—
(a) the person has at any time been knowingly concerned in a contravention of a relevant requirement by a PRA-authorised person, and(b) at that time the person was—(i) an approved person in respect of the performance of a relevant senior management function in relation to the carrying on by the PRA-authorised person of a regulated activity, or(ii) in the case of an authorised person that is a bank, an employee of the bank.(4) In this section “relevant requirement” means a requirement—
(a) imposed by or under this Act, or(b) imposed by any qualifying EU provision specified, or of a description specified, for the purposes of this subsection by the Treasury by order.(5) Condition C is that—
(a) the person has at any time been a senior manager in relation to a PRA-authorised bank,(b) there has at that time been (or continued to be) a contravention of a relevant requirement by the bank, and(c) the senior manager was at that time responsible for the management of any of the bank’s activities in relation to which the contravention occurred. (6) But a person (“P”) is not guilty of misconduct by virtue of subsection (5) if P satisfies the PRA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).
(7) For the purposes of subsection (5)—
“senior manager”, in relation to an authorised person that is a bank, means a person who has approval under section 59 to perform a designated senior management function in relation to the carrying on by the bank of a regulated activity;
“designated senior management function” means a function designated as a senior management function under section 59(6B) or (6C).
(8) In this section—
“approved person”—
(a) means a person in relation to whom—(a) the PRA has given its approval under section 59, or(b) the FCA has given its approval under section 59 in respect of the performance by the person of a relevant senior management function in relation to the carrying on by a PRA-authorised person of a regulated activity, and(b) in relation to an authorised person, means a person in relation to whom approval under section 59 is given on the application of the authorised person;“employee”, in relation to a person, has the same meaning as in section 64A;
“PRA-authorised bank” means a bank that is a PRA-authorised person;
“relevant senior management function” means a function which the PRA is satisfied is a senior management function as defined in section 59ZA (whether or not the function has been designated as such by the FCA).””

[Lord Newby]

My Lords, I beg to move.

Amendment 54A (to Amendment 54) not moved.

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Moved by

[Lord Newby]

55: After Clause 12, insert the following new Clause—
“Meaning of “bank”
(none) In Part 5 of FSMA 2000 (performance of regulated activities), after section 71 insert—
““Bank”71A Meaning of “bank”
(1) In this Part “bank” means a UK institution which has permission under Part 4A to carry on the regulated activity of accepting deposits.
(2) But “bank” does not include an insurer.
(3) In this section—
(a) “UK institution” means an institution which is incorporated in, or formed under the law of any part of, the United Kingdom;(b) “insurer” means an institution which is authorised under this Act to carry on the regulated activity of effecting or carrying out contracts of insurance as principal.(4) Subsections (1) and (3)(b) are to be read in accordance with section 22, taken with Schedule 2 and any order under section 22.””

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Moved by

[Lord Newby]

58: After Clause 12, insert the following new Clause—
“Offence relating to decision that results in bank failure
(1) A person (“S”) commits an offence if—
(a) at a time when S is a senior manager in relation to a bank (“B”), S—(i) takes, or agrees to the taking of, a decision by or on behalf of B as to the way in which the business of a group bank is to be carried on, or(ii) fails to take steps that S could take to prevent such a decision being taken,(b) at the time of the decision, S is aware of a risk that the implementation of the decision may cause the failure of the group bank,(c) in all the circumstances, S’s conduct in relation to the taking of the decision falls far below what could reasonably be expected of a person in S’s position, and(d) the implementation of the decision causes the failure of the group bank.(2) A “group bank”, in relation to a bank (“B”), means B or any other bank that is a member of B’s group for the purpose of FSMA 2000 (see section 421 of that Act).
(3) Subsections (1) and (2) are to be read with the interpretative provisions in section (Interpretation of terms used in offence).
(4) A person guilty of an offence under this section is liable—
(a) on summary conviction—(i) in England and Wales, to imprisonment for a term not exceeding 12 months (or 6 months, if the offence was committed before the commencement of section 154(1) of the Criminal Justice Act 2003) or a fine, or both; (ii) in Scotland, to imprisonment for a term not exceeding 12 months or a fine not exceeding the statutory maximum, or both;(iii) in Northern Ireland, to imprisonment for a term not exceeding 6 months or a fine not exceeding the statutory maximum, or both;(b) on conviction on indictment, to imprisonment for a term not exceeding 7 years or a fine, or both.”

[Lord Newby]

My Lords, we now turn to one of the key recommendations of the PCBS: the introduction of a new criminal offence of reckless misconduct in the management of a bank. The commission argued convincingly that existing sanctions for financial crime,

“do not cover the apparent mismanagement and failure of control by senior bankers”,

and that the risk of a criminal conviction and a prison sentence would give senior officers of UK banks pause for thought. As the Government made clear in our response to the commission, we believe that there is a strong case for the introduction of such an offence. Serious bank failure results in severe economic disruption and considerable losses for taxpayers.

In line with the commission’s recommendations, the new offence will be applicable only to individuals who are covered by the new senior managers regime. Senior managers could be liable if they take a decision which leads to the failure of the bank or fail to take steps available to them to prevent such a decision being taken. The offence will apply only to behaviour that falls far below the standard that could reasonably be expected of a person in their position, which is a similar test to that for corporate manslaughter. In addition, at the time when the decision was taken the senior manager must have been aware of a risk that its implementation may cause the failure of the bank. Limiting the application of the offence to individuals who are covered by the senior managers regime, and the precise definition of when a bank has failed for the purposes of the offence, mean that those affected should be in no doubt as to their potential criminal liability.

The maximum sentence for the new offence will be seven years in prison and/or an unlimited fine on indictment. This is in line with the recommendation of the commission, which argued that the offence must carry the possibility of a prison sentence to be effective, as with other offences of similar gravity under FiSMA, such as misleadingly manipulating benchmarks such as LIBOR. The commission said that it,

“would expect this offence to be pursued in cases involving only the most serious of failings ... and not predominantly against smaller operators where proving responsibility is easier, but the harm is much lower”.

The Government endorse this position, and the offence will therefore apply to banks and building societies but not to credit unions.

One area where we do not agree with the commission is on its proposal that there should be a time limit of one year within which criminal charges could be brought following successful civil enforcement action. I have considerable sympathy with its arguments that laws forbidding disclosure of information with regard to criminal proceedings could mean that the publication of information around a bank failure—information that it would be in the public interest to release—would be suppressed until court proceedings had concluded. However, it is very unusual to have a time limit on bringing charges relating to serious criminal offences such as this and, given the likely complexities of many of the cases that will be tried under this offence, such a time limit may seriously limit the regulators’ ability to prosecute. The offence introduced by this amendment will be a vital tool in ensuring that those at the top of our banks are focused on taking prudent and measured decisions and in holding them to account for reckless behaviour that falls short of that standard.

I now address the amendments in this group. On Amendment 58, the PCBS recommended an offence of reckless misconduct. In order for a person’s behaviour to be reckless, they must be aware of the risks that they are taking. The insertion of the text proposed by Amendment 58A would allow for the possibility that a manager acting without knowledge of the possible effects of their actions could also be guilty of the offence. A key aspect of making an offence prosecutable is that the person concerned must know that they are at risk of committing the crime. There are other, civil, sanctions, which FSMA provides for, which can apply if a senior manager has acted incompetently rather than criminally recklessly. For example, if a senior manager in a bank fails to comply with binding statements of principle issued by the regulator, they can be penalised. These penalties can be heavy, including up to an unlimited fine. In light of this, I hope that the noble Lord will withdraw his amendment.

On Amendment 58B, we have thought very carefully about the wording of this offence, and have built upon robust precedent where possible. Referring to conduct that is “far below” that which would be expected has precedents in the Law Commission’s proposal for a statutory offence of killing by gross carelessness, and in legislation creating the offence of corporate manslaughter. So we have used this particular phrase knowing that it works and can be effectively interpreted by the courts. The offence must be precise enough to comply with principles of legal certainty and fairness. There is no precedent in UK criminal law for criminalising behaviour that is merely unreasonable. To do so would amount to an indiscriminate diffusion of criminal liability in a way that would make it hard for individuals to know with sufficient certainty when they might be committing an offence.

We also need to be very aware of the incentives that the offence creates. There would be a considerable risk that a broader, vaguer offence would put talented executives off taking on senior management positions, and the Government are keen to get the balance right between punishing genuine recklessness and supporting appropriate risk-taking. This would be a particular risk when people consider whether to take on a senior role in a troubled bank just when it was most important for it to have highly capable leadership.

I understand that the intention of Amendment 58C is to make the offence more objective. First, the reasonableness test as currently drafted gives a clear, objective test of when the crime has been committed by a senior manager. It will enable the jury to consider whether the defendant’s behaviour was reasonable, taking into account the position they were actually in. To be precise, it requires the jury to consider what conduct could, in all the circumstances, reasonably be expected of a person holding the position in the bank which that individual senior manager held.

This amendment would, arguably, remove this clarity and ask the jury to consider whether the person’s behaviour was reasonable in a more general way. Such a test would be likely to be harder to apply to particular cases, and in some cases could be inappropriate. It is important to note that there can be no one clear definition of what could be expected of a person in a senior management position in a bank. Such drafting fails to take account of, for example, which particular senior management role the defendant was undertaking, in what kind of banking institution and what the institution’s business model was. This amendment would change the current reasonableness test to one that it would be extremely difficult for a jury to apply in any meaningful way, making the offence less certain and prosecution more problematic.

On Amendment 59A, the Government are introducing this offence to close a gap in financial crime legislation. There are currently no criminal powers available to sanction senior managers who have recklessly caused their banks to fail. This is a clear shortcoming, which we are now remedying. As we have already debated, though, offences already exist for failing to comply with the Fraud Act, the Proceeds of Crime Act or the Money Laundering Regulations. Individuals can be prosecuted under these Acts, and any sentencing following the successful prosecution of these offences would take into account how serious these breaches were, so it is difficult to see what benefit this amendment would add. Further, if a bank is found to have committed an offence under the Fraud Act 2006 or under the Money Laundering Regulations 2007, senior managers of the bank could also be found guilty if they have consented to or connived in the commission of the offence by the bank. As previously noted, the new senior managers regime will also provide enhanced accountability in these areas. So there is no lack of individual accountability in cases where banks fail to comply with the requirements of the 2006 Act or the 2007 Regulations.

We believe that we have introduced a sensible definition and an important piece in the jigsaw of improved accountability for individuals by our amendments, and I commend them to the House.

Amendment 58A*

Moved by

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[Baroness Noakes]

My Lords, my first thought on seeing this new offence relating to bank failure was to be mildly appalled at something that might possibly impinge on one’s personal life, but I have tried to put that to one side and to look at this clause dispassionately. What concerns me is a point raised by the noble Lord, Lord Phillips of Sudbury, which relates to causation. That is mentioned several times in this clause, but one of the conditions in subsection (1)(d) of the new clause proposed by Amendment 58 is that,

“the implementation of the decision causes the failure of the group”.

Is it clear that single decisions cause failures of the nature that we are talking about? I ask him to think, in the context of the failures that existed in the wake of the 2008 financial crisis, whether any one of those, had they occurred today and been dealt with under existing legislation, could have technically satisfied the wording in this offence. Even in the simplest case of failure, which was probably Northern Rock, it was not as simple as one decision or even one group of decisions. There were multiple points of decision which contributed. Certainly, when one gets to something as complicated as the failure of Lehman Brothers, I would be absolutely astonished if anybody could have pointed to one decision causing one failure.

[Lord Newby]

My Lords, I will try to sum up some of those points. One of the big challenges that we faced in producing the exact terms of this amendment was to produce a sanction which is a credible offence and could be successfully prosecuted. Setting the conditions to include that in all the circumstances the individual’s conduct fell far below what could reasonably be expected of them and that they were aware of the risk that a decision could cause the bank to fail gives us the clarity that we need. This will capture behaviour which in normal parlance or in normal view would be considered reckless.

The noble Lord, Lord Brennan, said that he was keen that this new offence should make people think. It will make people think, but equally it must have within it a degree of certainty that means that an offence could be prosecutable. This necessarily circumscribes the way in which we define it.

I can confirm to the noble Lord, Lord Eatwell, that his interpretation of the provisions in the Bill is correct.

[Lord Lawson of Blaby]

May I ask my noble friend one question? The commission’s recommendations refer to this as reckless misconduct. The word “reckless” is very important. Speaking to this, the Minister used the word “reckless”, but I do not see it in the amendment. Can he explain why?

[Lord Newby]

Yes, I hope I can. As I was just saying, we had to put in the Bill a form of words that would create a credible offence that could be successfully prosecuted. The two requirements that an individual’s conduct had to fall far below what could reasonably be expected of them and that they were aware of the risk they were taking, would, in the view of the lawyers, capture recklessness. It is a definition of recklessness without the use of the word. The wording gives a greater chance of having a credible offence than using the word “reckless”. It is an attempt to make sure that we have got something that we could use, while capturing the concept.

The noble Lord, Lord Phillips, asked about the difference between the heading and the text. My understanding is that headings of sections of the Bill do not constitute part of the Bill for legal reasons. It may be possible to improve the heading, but the noble Lord should not worry about it. The noble Lord asked whether any restrictions on conditions which were imposed might be made public. At first sight, I cannot see any reason why that should not be the case, but I will write to him to confirm the position.

We have had a good debate on these amendments. I commend the government amendments to the House.

[Lord Phillips of Sudbury]

I do not think the Minister has adequately dealt with the point made by my noble friend Lady Noakes and partly by myself. Surely it is an inescapable point that if you say that someone has to cause the failure of a bank, that is a direct and hugely demanding test. If it had said instead that the decision significantly contributed to the failure of a bank then I think my noble friend and I would be content because it satisfies justice as well as practicality. Is he not concerned that this will undermine the whole purpose of this amendment?

[Lord Newby]

I do not think it undermines the whole purpose of the amendment. It obviously reduces the scope of cases which can be brought under this amendment, but the challenge that the lawyers have had is to make sure, as far as possible, that there is the certainty of what constitutes an offence, which is required under human rights legislation. That has been one of the principle drivers for the particular form of words that we have got. I accept the noble Baroness’s point that in some cases there will be a whole raft of contributory decisions which over a period lead to a bank failing. It will be, I accept, more difficult to bring a prosecution in those cases. It is not inconceivable, however, to argue, without having any particular case in mind, that if a senior executive of a bank persuaded the board to make an acquisition knowing that it was a very risky acquisition which if it went wrong could bring the bank down, that decision would fall squarely, as I understand it, within the scope of the Government’s proposals. I do not think it is outside the realms of possibility that a senior manager in the bank might take such a decision.

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Moved by

[Lord Newby]

59: After Clause 12, insert the following new Clause—
“Interpretation of terms used in offence
(1) This section has effect for the interpretation of section (Offence relating to decision that results in bank failure).
(2) “Bank” means a UK institution which has permission under Part 4A of FSMA 2000 to carry on the regulated activity of accepting deposits.
(3) But “bank” does not include—
(a) an insurer, or(b) a credit union. (4) In subsections (2) and (3)—
(a) “UK institution” means an institution which is incorporated in, or formed under the law of any part of, the United Kingdom;(b) “insurer” means an institution which is authorised under FSMA 2000 to carry on the regulated activity of effecting or carrying out contracts of insurance as principal;(c) “credit union” means a credit union as defined by section 31 of the Credit Unions Act 1979 or a credit union as defined by Article 2(2) of the Credit Unions (Northern Ireland) Order 1985.(5) Subsections (2) and (4)(b) are to be read in accordance with section 22 of FSMA 2000, taken with Schedule 2 to that Act and any order under that section.
(6) A person is a “senior manager” in relation to a bank if, under an arrangement entered into by the bank, or by a contractor of the bank, in relation to the carrying on by the bank of a regulated activity, the person performs a function that is designated as a senior management function—
(a) by the FCA under subsection (6B) of section 59 of FSMA 2000 (approval for particular arrangements), or(b) by the PRA under subsection (6C) of that section.(7) A bank (“B”) is to be regarded as failing where—
(a) B enters insolvency,(b) any of the stabilisation options in Part 1 of the Banking Act 2009 is achieved in relation to B, or(c) B is taken for the purposes of the Financial Services Compensation Scheme to be unable, or likely to be unable, to satisfy claims against B.(8) In subsection (7)(a) “insolvency” includes—
(a) bankruptcy,(b) liquidation,(c) bank insolvency,(d) administration,(e) bank administration,(f) receivership,(g) a composition between B and B’s creditors, and(h) a scheme of arrangement of B’s affairs.”

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Moved by

[Lord Newby]

60: After Clause 12, insert the following new Clause—
“Institution of proceedings
(1) In this section “an offence” means an offence under section (Offence relating to decision that results in bank failure).
(2) Proceedings for an offence may be instituted in England and Wales only—
(a) by the FCA, the PRA or the Secretary of State, or(b) by or with the consent of the Director of Public Prosecutions.(3) Proceedings for an offence may be instituted in Northern Ireland only—
(a) by the FCA, the PRA or the Secretary of State, or(b) by or with the consent of the Director of Public Prosecutions for Northern Ireland.(4) In exercising its power to institute proceedings for an offence, the FCA or the PRA must comply with any conditions or restrictions imposed in writing by the Treasury.
(5) Conditions or restrictions may be imposed under subsection (4) in relation to—
(a) proceedings generally, or(b) such proceedings, or categories of proceedings, as the Treasury may direct.”

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Moved by

[Lord Newby]

60A: After Clause 12, insert the following new Clause—
“Part 5Regulation of payment systemsOverview
(1) This Part contains provision for the establishment of a new body (the “Payment Systems Regulator”) to exercise functions in relation to payment systems.
(2) Section (The Payment Systems Regulator) provides for the establishment of the Payment Systems Regulator.
(3) Sections (Meaning of “payment system”) and (Participants in payment systems etc) contain definitions of “payment system” and related terms.
(4) Sections (Designation orders) to (Revocation of designation orders) make provision about designating a payment system as a regulated payment system.
(5) Sections (Regulator’s general duties in relation to payment systems) to (Regulatory principles) contain provision about the general duties of the Payment Systems Regulator under this Part.
(6) Sections (Directions) to (Amendments relating to Regulator’s competition powers) confer various regulatory and competition functions on the Payment Systems Regulator.
(7) Sections (Complaints by representative bodies) to (Complaints: guidance) contain provision about the making of complaints to the Payment Systems Regulator.
(8) Sections (Meaning of “compliance failure”) to (Enforcement of requirement to dispose of interest in payment system) contain provision about enforcement and appeals.
(9) Sections (Power to obtain information or documents) to (Reports) contain supplementary powers.
(10) Sections (Duty of regulators to ensure co-ordinated exercise of functions) to (Power of PRA to require Regulator to refrain from specified action) contain provision about the Payment Systems Regulator’s relationship with other regulators.
(11) Sections (Regulator’s general duty to consult) to (Competition scrutiny) contain provision about consultation, accountability and oversight.
(12) Sections (Relationship with Part 8 of the Payment Services Regulations 2009) to (Interpretation) contain miscellaneous and supplemental provision.”

[Lord Newby]

My Lords, these amendments will create a new competition-focused utility-style regulator equipped with the full range of powers to tackle the deeply rooted issues in the market for payment system. The Government have serious concerns about the structure of the payment systems market, which sees problems in three main areas: competition, innovation and responsiveness to consumer needs.

Under the existing self-regulatory framework, there is no systematic oversight holding the big banks, payment scheme companies and infrastructure providers to account. Large banks jointly own the payment system companies and the infrastructure provider, and they dominate the Payments Council, the pseudo-regulatory body responsible for setting industry strategy. This allows the incumbent players to erect barriers to entry, preventing challenger banks from competing on a level playing field. It also limits incentives for the systems to innovate and respond to consumer needs, as there is no competitive advantage to any bank in doing so. There are also competition concerns in the international card schemes, as highlighted by the European Commission’s proposed regulation capping multilateral interchange fees. The card schemes have an incentive to increase interchange fees to encourage banks to issue their cards, but merchants have little opportunity to influence this process, and have no real option but to accept the major payment cards.

The first objective of the regulator will be to address the problems arising from imperfect competition. To tackle barriers to entry in banking arising from access conditions for the payment schemes, the payment systems regulator will have powers to tackle anti-competitive fees, terms and conditions, and to mandate access to the core systems. If deemed necessary, it will be able to break up the current ownership structures to create a landscape where fair competition can thrive. Secondly, the regulator will examine issues relating to innovation. Payment systems are characterised by strong network effects. Just as owning a telephone brings little benefit if no one else has one, each user gains added value from a payment system with the addition of further users. The shared ownership of the interbank payment systems by the banks reinforces this, because no single bank stands to gain an advantage over the others by investing in and developing the systems. This tendency to underinvest means that, while there have been some important innovations in recent years, they have too often required the Government’s or the OFT’s intervention to drive change, and the industry has taken too long to realise their full benefits.

The Government want to challenge underinvestment and lack of innovation in the co-owned systems. They want a payments industry that rewards entrepreneurial behaviour and develops systems that are innovative, efficient and effective. Therefore, the regulator will have an objective to promote the development of, and innovation in, payment systems.

The third problem identified in the market is the failure of the industry to respond to end-user needs. This, too, stems from the market’s network characteristics and ownership structures, which mean that failing to respond to end-user needs incurs no competitive disadvantage to any of the banks. This makes it possible for the banks to take decisions about the provision of services, even if this is directly against the interests of the wider public, as we saw in 2009 when the industry attempted to abolish cheques. The Government want to see a market where payment systems work for end-users, rather than one that serves only the self-interest of the big established banks.

Successive Governments and UK regulatory authorities have been trying to find a viable solution for these problems for more than a decade, dating back to Sir Don Cruickshank’s report to the Treasury in 2000 recommending that the Government create a utility-style regulator for payment systems. Instead, however, the process resulted in the creation of the industry-dominated Payments Council. In February, the Chancellor announced that the Government would introduce a new regulator to open up payment systems. Over the summer, the Parliamentary Commission on Banking Standards endorsed the Government’s commitment to bring payment systems into formal regulation. In their response to the final report of the PCBS, the Government confirmed that they will ask the payments regulator, once established, to urgently examine account portability.

I turn to the details of these amendments. They establish the payment systems regulator as a separate legal entity established by the FCA. This provides bespoke objectives and powers to address the distinctive problems in the market for payment systems, and allows for the benefits of close co-ordination with the FCA. The objectives of the regulator will be to promote competition, innovation and the interests of service users. The payment systems regulator will oversee all domestic payment systems brought into scope by being designated by HM Treasury. Initially, it is expected that the main interbank schemes and international card schemes will be designated. Once a system is designated, the regulator will have powers over that system’s operators, infrastructure providers and payment service providers that provide payment services using the system. This new regime will not affect the existing role of the Bank of England under the Banking Act 2009 in overseeing recognised interbank systems for stability purposes. The Bank will be excluded from the scope of regulation in its current capacity as a payments system participant. There will also be a duty for the co-ordinated exercise of functions between the PSR, FCA, Bank and PRA, and a memorandum of understanding setting out how this will happen.

The payment systems regulator will be equipped with a toolkit of regulatory powers enabling it to address the deep, structural issues causing problems in the market for payment systems. To open up access and encourage greater competition, the regulator will be able to intervene and require changes to any anti-competitive fees, or terms and conditions of an agreement for access to a regulated system. It will have powers to require the provision of both direct and indirect access to payment systems. It will also have competition powers to enforce Competition Act 1998 prohibitions against anti-competitive agreements and abuse of dominance, and to make market investigation references to the Competition and Markets Authority. These competition functions will be exercisable concurrently with the CMA. Ultimately, if the payment systems regulator determines that the current ownership structures need to be broken up to achieve adequate competition, it will have the power to require disposals of interests in operators of regulated systems.

In furthering access and competition, the regulator will also address underinvestment by the industry and the slow pace of innovation. There is no shortage of players who want to be able to innovate in this space, and with greater access to the core systems and infrastructure, inventive, entrepreneurial players will be able to bring propositions to market when they have previously been blocked from doing so. Greater competitive pressure on industry participants can be expected to drive up standards and force payment system owners, operators and payment service providers to deliver improvements in the payment systems space. However, in cases where market forces are still unable to play out, if the big incumbent banks resist, the regulator will have powers to drive through improvements as it sees fit, by issuing directions that require or prohibit action by participants in regulated systems, and this includes requiring specific developments to be pursued.

In advancing its service-user objectives, the regulator will be able to require or prohibit the taking of action in the operation, management and development of payment systems. This means that it can prevent the industry ignoring the legitimate needs of consumers—for instance, by trying to abolish cheques. The payment systems regulator will be able to publish details of a compliance failure and to impose financial penalties; if deemed necessary, it will be able to require owners of payment systems to dispose of their interests in them, subject to Treasury approval.

Taken together, these amendments create a strong, competition-focused regulator, which will have the right objectives, functions and powers to ensure that conditions in the payment systems market are such that challenger banks and innovative non-bank players are given a level playing field to challenge the big incumbent banks; innovation takes place to facilitate useful new services for businesses and consumers; and decisions on the provision of payment options are taken in the interests of all users of payment systems, not just the interests of the big banks. I commend these amendments to the Committee.

[Lord Eatwell]

My Lords, I have a number of queries about another set of amendments that are longer than the original Bill. First, I support entirely the notion of establishing a payments regulator, but why is it being established as yet another independent regulator? Surely, covering the activities that it refers to—the nature of markets and settlement systems, which are akin to clearing and settlement in business and financial services in general—is the clear role of the FCA. Why are we establishing an extra organisation? After all, one thing that we have learnt through the financial crisis is that communication between organisations is less than perfect, even in the best of all possible worlds. Surely it would be better if this was simply a division of the FCA rather than an organisation having, as the schedule makes clear, an entirely separate board and chairman. This seems to be a proliferation of institutions with no purpose when we already have the FCA there to do the job.

Secondly, I want to explore the competition objective a little more. It is very clear that enhancing competition by giving access to payment systems is highly desirable. It is also clear that users might benefit from competition. What is not terribly clear is whether we want to have very diverse structures in the fundamental architecture of the payments system, which is absolutely core to the banking system. It recalls to me the early days of the railways when there were more than a dozen railways from London to Brighton, as they all competed with one another. This was not conducive either to the effective development of the railway companies or the provision eventually of a proper service to passengers. Therefore, I am a little puzzled, given the essential role of the payments architecture as being absolutely fundamental to the operation of the banking system, as to whether we want to see diverse structures and how they might be related to one another. I wonder what the Government’s thoughts are on this.

My third point also refers to the nature of fundamental market infrastructure. Within these new clauses it is the responsibility of the regulator to assure maintenance of service. However, another part of the Bill, which we will look at next, is labelled “fundamental market infrastructure” and is also devoted to the maintenance of market service more generally. The responsible authority for maintaining market service is different in the two cases. In one it is the Treasury; in the other it is the Bank of England. Why do we have two different authorities responsible for the maintenance of fundamental market infrastructure when the payments system is undoubtedly part of fundamental market infrastructure? It seems to me that, in inserting this desirable measure into the Bill, the fact that it has created some ambiguities and inconsistencies has not been noticed.

--- Later in debate ---

[Lord Sharkey]

Government Amendment 60U is headed, “Power to require disposal of interest in payment system”. New subsection (2) states:

“The power conferred … may be exercised only if the Payment Systems Regulator is satisfied that, if the power is not exercised, there is likely to be a restriction or distortion of competition in—

(a) the market for payment systems, or

(b) a market for services provided by payment systems”.

How is that a remedy for anything? When it comes to divestment or disposal, is it the Government’s notion that someone will pick up the shares that have been disposed of; and, if so, who will it be? What would be the incentive for anyone to pick them up?

[Lord Newby]

My Lords, I am grateful for the wide welcome given to these provisions.

[Noble Lords]

Oh!

[Lord Newby]

A number of noble Lords raised the same question and have come down on different sides. Should we have a separate regulator or should it be just a division in the FCA? In the end, it was a question about how important we thought the issue was. A division in the FCA would be a division among a lot of divisions. The staff of a division in the FCA would probably be at a somewhat more junior level than that of a chief executive of an important regulator. The priority that the overall body, namely the FCA, would give to this would obviously be somewhat less than a body on its own could give, because the sole concern of the people working for it would be to make the scheme work.

It would have been possible to do it in the FCA. In a sense, you literally pays your money and takes your choice. Our view is that this is a fundamental element of the system that needs shaking up and the best way to do it is to have a group of people whose sole interest—and whose career interest—is associated with making this thing work. That is why the body is being established on its own.

The second question of the noble Lord, Lord Eatwell, was about the definition of competition. As he said, competition in terms of access and users is clearly desirable. Will it be desirable or possible to have diverse structures for all elements of the system? Almost certainly not; some parts of it are a natural monopoly. That is one reason why a regulator is needed. At the moment, you have a natural monopoly controlled by a small group of banks. What we want to do is open up that access but give more scope for looking at options, which at the moment are closed down by the structure. My personal view is that it is highly unlikely that the basic plumbing of the system will replicate the situation in the railways; it would make no sense. However, there may be elements of the payments system, including new forms of payment, which may be susceptible to competition, and we want the regulator to have that in its purview and look at it. There is no suggestion that we are seeking to break up those elements of the system that form a natural monopoly.

The noble Lord also asked about maintenance of service. There is a difference between what the regulator will be doing on a day-to-day basis in making sure that the whole system works effectively and what happens if the whole thing is failing. That is the difference in the second provision, which we will come on to later, about resolution. The people to look after resolution when something has failed are not necessarily the best people to be doing the day-to-day management of it.

[Lord Eatwell]

My Lords, I beg the noble Lord’s pardon, but the question related to a possibility of interruption of service. Amendment 62 states:

“The Treasury may by order designate a company”,

and so on, to maintain the service. We then move on to the next section relating to fundamental market infrastructure, which states that the maintenance of service is the responsibility of the Bank of England. There is an inconsistency here. As regards the issue of the infrastructure as a payments system and the issue of all other aspects of back-office infrastructure, the Treasury is responsible for one and the Bank of England is responsible for the other. However, they are so interrelated and interdependent that it does not really make sense. You have either one or the other. I do not mind which. I would prefer the Bank of England to be responsible because it is closer to the payments system, but you do not have both.

[Lord Newby]

My Lords, I will have another look at that. The noble Lord has a problem which I do not have to the same extent, but he makes a perfectly reasonable point and we will look at it.

The noble Lord, Lord Higgins, asked a couple of questions—one about cost and the other about international payments. The cost of the activities comes from the FCA budget and is therefore borne by the regulated population. It is not known at this stage what the level of fees or the detailed budget will be. These will be determined by the FCA. The regulator will be concerned with UK payments systems only.

[Lord Higgins]

I am not quite clear about who is paying this cost. Am I right in thinking that it is the people using the chequing system? My second question was: is this regulatory system compatible with a change in the underlying system from, say, cheques to the system used in the Netherlands? Thirdly, am I right in understanding that the noble Lord said that this arrangement will cover only domestic, not international, transactions? Should we not be covering both?

[Lord Newby]

It will cover the UK end of international transactions. The counterparty in another country is regulated by that country’s operations, not by the UK end of it. Obviously, close working between both countries is required but we are dealing with the pipes that leave the UK. Once they have left the UK, the pipes are regulated by someone else. As far as cheques are concerned, if there were to be a decision or view expressed that cheques had come to the end of their useful life, it will not fall under the purview of the regulator to effect that change. I think that I am right in saying that the budget forms part of the FCA’s overall budget, as set out in the legislation. Therefore, the overall financial services sector pays into the FCA for a whole raft of specialist functions. This is no different from anything else that is funded by the FCA.

[Lord Eatwell]

Perhaps I may follow that. The overall financial services industry, or that bit of it which is regulated by the FCA, some of which has nothing to do with banking and payments systems, has to pay for this regulator. On top of that, let us remember that he who pays the piper calls the tune. All this stuff about separate careers and career paths is subsumed by the fact that the financial controller of the FCA will control the funds going into this organisation. I take the argument of the noble Lord, Lord Turnbull, about the focus on this role, but I really do not understand why you cannot have a division with a senior figure in charge of it, and therefore some clarity within the FCA.

[Lord Newby]

My Lords, I am extremely sorry that the noble Lord does not understand. We just have a difference of view about that. The noble Baroness, Lady Noakes, asked about the kind of action that the regulator could take and whether it could, in effect, behave unreasonably. The answer is—

[Baroness Noakes]

I did not question whether or not it could behave reasonably because all regulators are supposed to behave reasonably, and can be challenged if they do not. I asked the Minister to address specific points. There are amendments here about granting access and varying the terms of existing agreements. I asked where in the 40, which I am told is now 52, pages of amendments that we are asked to consider in this group are the financial principles that will guide this new regulator in imposing terms for this new access or in varying existing access rights. I was trying to tease out, for example, whether the regulator will have the power to impose subsidies on existing payments regulators or whether he will be required to ensure that the payment system operators can cover their costs. Therefore, I asked: where are the financial principles which the regulator has to use in exercising the powers that are granted by two of the amendments in this group?

[Lord Newby]

I am extremely sorry; I misunderstood the noble Baroness. I think that I shall have to write to her on that point.

My noble friend Lord Sharkey asked whether this was the only case in which a regulator had innovation as part of his remit. I simply do not know but I think that the noble Lord, Lord Lawson, pointed out that, if it were, that might indeed be an innovation. If it is an innovation, we think that it is a good one.

In terms of divestment and who picks up the shares, we are saying that this is something that the regulator should have the power to look at as one possibility. There is no blueprint in Treasury minds as to how he will do it or whether he will do it and, if so, who the beneficiaries will be. It is something that we want to have as an option for the regulator to look at. We want to give the regulator the greatest possible scope to come up with alternative ways of developing the system and possibly of generating new sources of funding for the innovation, which we are also keen on.

I am sure that I have omitted a number of points. My noble friend Lord Phillips raised a question concerning subsection (3) of the proposed new clause in Amendment 60B and I have now forgotten what he asked. Perhaps he would like to ask it again. He is indicating that he would not—that is good.

[Lord Martin of Springburn (CB)]

I have been very interested in what has been said about the regulator. Obviously the regulator has to work at arm’s length from those he is regulating. If any hospitality is offered to the regulator, is that put in a register that can be seen by the public? In other words, will we have transparency in this matter?

[Lord Newby]

I will write to the noble Lord as I do not have the faintest clue, except to say that I am sure that this regulator will follow the same rules as other regulators, but I simply do not know what their rules are in respect of hospitality. I suspect that, like Ministers, there will be some de minimis figure below which they will not need to make such a declaration and beyond which they will. However, I will check that.

Amendment 60A agreed.

Moved by

[Lord Newby]

60B: After Clause 12, insert the following new Clause—
“The Payment Systems Regulator
(1) The FCA must establish a body corporate to exercise the functions conferred on the body by or under this Part.
(2) The body established under subsection (1) is referred to in this Part as the Payment Systems Regulator.
(3) The FCA must take such steps as are necessary to ensure that the Payment Systems Regulator is, at all times, capable of exercising the functions referred to in subsection (1).
(4) In complying with the duty imposed by subsection (3) the FCA may, in particular—
(a) provide staff to the Payment Systems Regulator, and(b) provide services to the Payment Systems Regulator which the FCA considers would facilitate the exercise of any of those functions.(5) Schedule (The Payment Systems Regulator) (which contains further provision about the Payment Systems Regulator) has effect.”

Financial Services (Banking Reform) Bill

Lord Newby Excerpts

Tuesday 15th October 2013 Lords Chamber

Moved by

[Lord Newby]

61: After Clause 12, insert the following new Clause—
“Part 6Special Administration for operators of certain infrastructure systemsFinancial market infrastructure administration
This Part— (a) provides for a procedure to be known as FMI administration, and(b) restricts the powers of persons other than the Bank of England in relation to the insolvency of infrastructure companies.”

[Lord Newby (LD)]

My Lords, these amendments establish a special administration regime that will apply to operators of recognised interbank payment systems, operators of securities settlement systems and crucial service providers to those operators.

The establishment of this new administration regime, to be known as financial market infrastructure—FMI—administration, is the latest in a series of measures that this Government are bringing forward to ensure that the failure of a single financial institution is not allowed to put UK financial stability at risk.

Underpinning the financial sector are a number of critical pieces of infrastructure that, if allowed to fail, could severely disrupt markets and the normal functioning of the wider economy. The need to ensure that some of these systemically important pieces of infrastructure continue to operate in times of crisis has already been addressed in legislation passed by this Government. However, there remain other pieces of systemically important market infrastructure that have not yet benefitted from statutory provision designed to ensure continuity of service in times of crisis. With that in mind, the amendments forming Part 6 have been tabled in order to ensure the continuity of service provision of recognised interbank payment systems, which facilitate or control the transfer of money between banks and building societies, and securities settlement systems, which enable the title to units of securities to be transferred electronically. These systems are integral to the efficient operation of the financial system, processing transactions worth hundreds of billions of pounds a day. As things stand, in the event that the operator of an interbank payment system or securities settlement system was to become insolvent, it would be likely to enter the normal administration procedure. In such cases, the administrator would be under a duty to look after the interests of the company’s creditors, without concern for implications for the wider economy. In these circumstances, the continued operation of crucial payment and settlement services could be threatened.

Part 6 introduces a special administration regime, known as FMI administration, which prioritises continuity of critical service provision during administration. The key features of this administration are the appointment of a special administrator, who will have an overarching objective to continue critical services during administration; the Bank of England’s ability to apply to a court to place a relevant company into FMI administration with the court appointing the FMI administrator—no one else will be able to institute insolvency proceedings against one of these firms without giving the Bank prior notice; the Bank of England’s power of direction over the FMI administrator; the availability of powers allowing for the property, rights and liabilities of the relevant company to be transferred; and restrictions on early termination of third party contracts.

In addition to operators of relevant systems, FMI administration will also be available in respect of companies that the Treasury designates as crucial service providers to the operators of the relevant systems. Service providers will be designated if the Treasury is satisfied that an interruption in the provision of services would have a serious adverse effect on the effective operation of the relevant system. Insolvency rules made under the powers in Part 6 will be made in due course. These will prescribe certain procedural details relating to the conduct of FMI administration. Different rules will be made in respect of England and Wales, Scotland and Northern Ireland. Any rules made under this power that apply to England and Wales will need to be cleared by the Insolvency Rules Committee before the Lord Chancellor may proceed to make them.

We believe that the likelihood of these powers ever being needed is extremely small. However, if an interbank payment system did get into financial difficulty, it would clearly be in the interests of financial stability that it was able to continue in operation as its financial problems were resolved. The special administration provisions in these amendments would allow this to happen, and I therefore commend them to the House.

[Lord Eatwell (Lab)]

My Lords, I believe that these measures are valuable as an ultimate backstop, as the noble Lord has suggested. I just wonder, as I intimated earlier, whether there is some confusion in ultimate authority, as between the discussions of the payments systems regulator, and the role here, involving the Bank of England and the Treasury, given that the payments regulator will lie outwith both.

[Lord Newby]

My Lords, I will write to the noble Lord on that point. My officials do not believe there is such confusion in reality, but we will seek to clarify this before Report.

Amendment 61 agreed.

--- Later in debate ---

Moved by

[Lord Newby]

62: After Clause 12, insert the following new Clause—
“Interpretation: infrastructure companies
(1) In this Part “infrastructure company” has the meaning given by this section.
(2) “Infrastructure company” means a company which is—
(a) the operator of a recognised inter-bank payment system, other than an operator excluded by subsection (3),(b) approved under regulations under section 785 of the Companies Act 2006 (provision enabling procedures for evidencing and transferring title) as the operator of a securities settlement system, or(c) a company designated by the Treasury under subsection (4).(3) But a company is not an infrastructure company if it is a recognised central counterparty, as defined by section 285 of FSMA 2000.
(4) The Treasury may by order designate a company for the purposes of subsection (2)(c) if—
(a) the company provides services to a person falling within subsection (2)(a) or (b), and (b) the Treasury are satisfied that an interruption in the provision of those services would have a serious adverse effect on the effective operation of the recognised inter-bank payment system or securities settlement system in question.(5) An order under subsection (4) must specify the recognised inter-bank payment system or securities settlement system in connection with which the company is designated.
(6) Before designating a company under subsection (4), the Treasury must consult—
(a) the company to be designated,(b) the person within subsection (2)(a) or (b) to whom the company provides services,(c) the Bank of England,(d) if the company is a PRA-authorised person, the PRA and the FCA, and(e) if the company is an authorised person other than a PRA-authorised person, the FCA.”

--- Later in debate ---

Moved by

[Lord Newby]

79: Before Clause 13, insert the following new Clause—
“Part 7MiscellaneousFunctions of FCA under competition legislation
Schedule (Functions of FCA under competition legislation) (which contains provision conferring on the FCA functions under competition legislation) has effect.”

[Lord Newby]

My Lords, the Government want to see a competitive banking sector that delivers good outcomes for consumers and are taking steps to make that happen. Much has happened already.

We worked with the banking industry to secure from it a new seven-day current account switching service. This service, which launched last month, has made it easier, simpler, safer and faster to switch accounts, and will help to stimulate competition between providers. We also asked the regulators to undertake a review of barriers to entry and expansion in the banking sector. The review, published in March, introduced a range of changes to capital and liquidity requirements and to the authorisations process to make it easier for new banks to enter the market and for smaller banks to compete.

In addition to this, as noble Lords will be aware, we are introducing a ring-fence to remove the competitive advantage that big banks have received, we are creating a new independent payments regulator, and we have already put competition at the centre of the Financial Conduct Authority’s responsibilities by making competition one of its three objectives and giving it a separate competition duty.

However, we believe that more can be done. In addition to giving the PRA a secondary competition objective, we will provide the FCA with new competition powers. These new powers include Competition Act 1998 enforcement powers that are used to address restrictive practices which are engaged in by companies operating in the UK that distort, restrict or prevent competition—for example, ordering that offending agreements or conduct be stopped. They also include power under the Enterprise Act 2002 to carry out market studies and make references to the Competition and Markets Authority for a decision on whether action should be taken.

The FCA wrote to the Chancellor to request those powers. Since being given a competition objective last year, the FCA has worked hard to increase its technical, legal and economic skills and expertise on competition, building its capacity to identify and address competition issues in the financial services markets. The Government are therefore confident that such powers will strengthen the FCA’s ability to ensure competitive banking markets that deliver good consumer outcomes. These changes, which bring the FCA in line with other sector regulators, will enhance the credibility of the FCA and make it easier for it to persuade firms to alter their behaviour voluntarily.

Finally, the changes will enable the FCA to become a member of the European Competition Network, leaving it much better placed to engage with regulatory issues at a European level. In short, giving the FCA these powers is another step taken by this Government that is good for competition. I beg to move.

[Lord Eatwell]

My Lords, I am grateful to the Minister for introducing these amendments. However, can we reflect a little on the rush towards competition? A competitive system, if it is working effectively, is likely to result in the elimination of institutions from time to time, a process that was famously described as “creative destruction”. That sort of process can be seen quite clearly in countries that have large numbers of relatively small banks. Banks fail regularly in the United States—it is quite a common process. The process is, of course, managed effectively because these banks are relatively small. Has some thought been given to the relationship between the size of banking institutions in Britain and the effectiveness of competition? If competition were truly enhanced, one bank managed to eliminate another and both were relatively large, that could be extremely disruptive. This is not to argue against a competitive process but simply to say that it should not be regarded as an exclusive guideline with respect to what are desirable policies. Has the FPC been consulted on these clauses, and what is its view?

[Lord Phillips of Sudbury (LD)]

My Lords, there is an assumption that competition is essentially and necessarily good and that more competition is better. We have had manifest evidence in the past six years in the City—and indeed much longer than that— that there is a point at which competition turns in on itself. Indeed, the values of out-and-out aggressive competition are inimical to the values of integrity and honesty. I want to strike a note of caution, because this word is overdone in terms of its necessary public benefit.

[Lord Newby]

My Lords, we spent the first part of the afternoon talking about how we get more diversity and competition into the sector. Obviously there is a danger that this can go too far. It is important, however, to realise what these powers do. There are two principal powers. First, Competition Act enforcement powers deal with restrictive practices. Most people would agree that, almost by definition, restrictive practices are not a good thing. The second power is the ability to carry out market studies and make references to the Competition and Markets Authority for a decision on whether action should be taken. Earlier we were discussing the need for the Competition and Markets Authority potentially to do just that. These are not powers that are going to force the FCA to put competition at all costs, at any price, ahead of everything else. They are relatively limited and I think we will find that they are beneficial.

Amendment 79 agreed.

Moved by

[Lord Newby]

80: Before Clause 13, insert the following new Clause—
“Competition as a secondary objective of the PRA
(1) For section 2H of FSMA 2000 substitute—
“2H Secondary competition objective and duty to have regard to regulatory principles
(1) When discharging its general functions in a way that advances its objectives (see section 2F), the PRA must so far as is reasonably possible act in a way which, as a secondary objective, facilitates effective competition in the markets for services provided by PRA-authorised persons in carrying on regulated activities.
(2) In discharging its general functions, the PRA must also have regard to the regulatory principles in section 3B.”
(2) In section 3B (regulatory principles to be applied by both regulators), in subsection (1), for “2H(1)(a)” substitute “2H(2)”.
(3) In Schedule 1ZB to FSMA 2000 (the Prudential Regulation Authority)—
(a) in paragraph 19 (annual report), in sub-paragraph (1)—(i) after paragraph (b) insert—“(ba) how it has complied with section 2H(1),”, and(ii) in paragraph (c), omit the words from “and of” onwards, and(b) in paragraph 20 (consultation about annual report), in sub-paragraph (1)(c), for the words from “and the PRA” onwards substitute “and the PRA has facilitated effective competition in accordance with section 2H and has considered the regulatory principles in section 3B”.”

[Lord Newby]

My Lords, this group of amendments proposes changes to the statutory objectives of the PRA and FCA, following the recommendations of the PCBS. The Government recognise the importance of getting the objectives of the regulators right. They have carefully considered the PCBS recommendations. We agree with the PCBS on the need for competition in banking and have made changes to the PRA’s objectives to reflect the important role it can play in this regard. We did not agree, however, with the conclusion to drop the FCA’s strategic objective and so I will start by explaining that.

During the progress through Parliament of the previous Financial Services Bill we listened to concerns expressed as part of the consultation process and made quite substantial changes to the FCA’s objectives as a result. On the strategic objective, the Government took note of calls by the ICB and others that the objective proposed in the draft Bill which was,

“protecting and enhancing confidence in the UK’s financial system”,

needed to be changed. So the FCA was given the strategic objective of,

“ensuring that the relevant markets function well”.

This change has been broadly welcomed by the ICB and by consumer and industry stakeholders alike.

Of course, the FCA is now up and running and the strategic objective does what it was meant to do by acting as a high level mission statement that brings together the diverse aspects of the FCA’s work in to a single focus. We have considered the arguments that the strategic objective makes the FCA’s remit too complex and risks diverting the FCA from its operational objective.

The three operational objectives of consumer protection, effective competition and market integrity are the matters which the FCA must seek to advance, and in doing so it must bear it in mind that ultimately this should be done in a way that ensures that markets function well, rather than being damaged or undermined. This seems straightforward and there are no reports of the strategic objective causing confusion or problems in practice.

There is also a concern, previously raised by the Treasury Select Committee, that because the FCA’s actions have to be compatible with the strategic objective, this objective can trump the other objectives. The structural requirement to pay heed to the strategic objective would only really create a problem if the content of the strategic objective were in conflict with the operational objective. However, the strategic objective of ensuring markets function well reflects the values in the operational objectives and does not undermine them. That is quite deliberate. So the Government do not agree that the FCA’s strategic objective creates a genuine problem.

It is absolutely appropriate that the mission statement of the FCA should be enshrined in statute. And we agree with the ICB and others that it is equally important that the FCA has an overarching aim of making markets work well. So, on balance, we propose that the FCA’s strategic objective should not be removed.

I turn to the second amendment. Strong competition in financial markets is essential for getting good outcomes for consumers. One impact of the financial crisis has been an increase in concentration in core banking markets to levels where they are almost certainly harming competition. The Government are doing a lot to address this. The account switching service, the payment systems regulator and the existing regulators have a role to pay in ensuring a competitive banking market. That is why we have given the FCA a competition objective and duty, and are giving it strong competition powers so that it has the right tools to get the job done.

The PRA’s main responsibility is towards a safe and stable financial sector, and this is right; but prudential regulation, while vital, can run the risk of securing the position of dominant incumbents in the market, deterring new entrants, and hampering innovation. Therefore, it is crucial that the PRA gives close consideration to competition when going about its duties. We believe that the PRA can take a more active role in facilitating competition in banking markets than under the current requirement to have regard to adverse effects on competition. This would build on the important changes made to capital and liquidity requirements and to the authorisation process as a result of the barriers to entry and expansion review in March this year. The Parliamentary Commission on Banking Standards was also of this view; it suggested the PRA be given a secondary competition objective, and the Government have accepted this recommendation.

I therefore welcome the intention behind the amendment tabled by noble Lords, but I regret that I am unable to accept the amendment as drafted, preferring instead the amendment which stands in my name. I suspect that this will come as no surprise to the noble Lord. However, I assure him that the objective behind the two amendments is a shared one. The noble Lord’s amendment is intended to make the competition objective subject to safety and soundness, but I am not convinced that it has this effect in all contexts, and it does not make competition subordinate to policyholder protection when the insurance objective is in play.

There are various functions of the PRA that are exercisable for the purposes of advancing any of its objectives. By including competition in the definition of objectives in Section 2F, the PRA would be able, for example, to impose a requirement on a firm under Section 55M of FSMA solely for competition reasons, and it might be seen as required to do so. That is not, I think, what the PCBS intended by its recommendation for a secondary objective. To require the PRA to create rules and codes solely to advance competition, as I think the noble Lord’s amendment does, would mean the PRA becoming a competition regulator and would risk distracting it from its primary role as a prudential regulator, which is to ensure the safety and soundness of firms.

The Government amendment ensures that the PRA, in the exercise of its general functions such as making rules, must facilitate effective competition while not compromising its vital role in ensuring the safety and soundness of firms. The PRA will remain the watchdog for stability. It requires the PRA to facilitate effective competition, while maintaining the integrity of the two regulators’ clearly defined roles. Our expectation is that this secondary objective will see the PRA staffing up with greater competition knowledge and expertise and embedding a pro-competition mentality throughout the organisation. The PRA will need to ensure that competition will always be a fundamental consideration when making new rules, or determining its policies and procedures, and the PRA will need to use this expertise to keep its prudential rules and regulations under review to see whether changes can be made to provide a better environment for competition.

Finally, the PRA will need to work with the FCA, which has a strong focus on competition, to ensure a cohesive strategy for competition in financial services. I beg to move.

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[Lord Eatwell]

My Lords, I remember discussing this at length during the passage of the previous Financial Services Bill. At that time, I commented that one could often detect whether a proposition made any sense by proposing a negative outcome. If we suppose that the duty is to make the markets work badly, that does not make any sense at all. Therefore, it seems to me that the strategic objective is entirely redundant and serves no useful purpose. Indeed, the idea of changing what were previously operational objectives into prime objectives places competition at that prime level and achieves the objectives which the Government themselves have argued are necessary. For some reason, this issue was never satisfactorily explained previously and has not been satisfactorily explained now. We should apply Occam’s razor and take it out.

[Lord Newby]

My Lords, I am sorry that the noble Lord does not think that the matter has been satisfactorily explained. All I can say is that it has been explained and was debated at great length when we took the Financial Services Bill through the House. Martin Wheatley made it clear that the operational objectives are the key drivers for the FCA’s actions. After taking legal advice, the FCA has subsequently written and confirmed that it is happy with the strategic objective. On that basis, we are happy that the FCA is happy and wish to retain it.

Amendment 80 agreed.

Moved by

[Lord Newby]

81: Before Clause 13, insert the following new Clause—
“Power of FCA and PRA to make rules applying to parent undertakings
(1) After section 192J of FSMA 2000 insert—
“Rules applying to parent undertakings of ring-fenced bodies192JA Rules applying to parent undertakings of ring-fenced bodies
(1) The appropriate regulator may make such rules applying to bodies corporate falling within subsection (2) as appear to the regulator to be necessary or expedient for the group ring-fencing purposes.
(2) A body corporate falls within this subsection if—
(a) it is incorporated in the United Kingdom or has a place of business in the United Kingdom, (b) it is a parent undertaking of a ring-fenced body, and(c) it is not itself an authorised person.(3) The “group ring-fencing purposes” are the purposes set out in section 142H(4).
(4) “The appropriate regulator” means—
(a) in relation to the parent undertaking of a ring-fenced body that is a PRA-authorised person, the PRA;(b) in any other case, the FCA.Rules requiring parent undertakings to facilitate resolution192JB Rules requiring parent undertakings to facilitate resolution
(1) The appropriate regulator may make rules requiring a qualifying parent undertaking to make arrangements that would in the opinion of the regulator allow or facilitate the exercise of the resolution powers in relation to the qualifying parent undertaking or any of its subsidiary undertakings in the event of a situation arising where all or part of the business of the parent undertaking or the subsidiary undertaking encounters or is likely to encounter financial difficulties.
(2) The “resolution powers” are—
(a) the powers conferred on the Treasury and the Bank of England by or under Parts 1 to 3 of the Banking Act 2009, and(b) any similar powers exercisable by an authority outside the United Kingdom.(3) The arrangements that may be required include arrangements relating to—
(a) the issue of debt instruments by the parent undertaking;(b) the provision to a subsidiary undertaking (“S”) or a transferee by the parent undertaking, or by any other subsidiary undertaking of the parent undertaking, of such services and facilities as would be required to enable S or the transferee to operate the business, or part of the business, effectively.(4) In subsection (3)(b) “transferee” means a person to whom all or part of the business of the parent undertaking or the subsidiary undertaking could be transferred as a result of the exercise of the resolution powers.
(5) “Debt instrument” has the same meaning as in section 142Y.
(6) “The appropriate regulator” means—
(a) where the subsidiary undertakings of the qualifying parent undertaking include a ring-fenced body that is a PRA-authorised person, the PRA;(b) where the subsidiary undertakings of the qualifying parent undertaking include one or more PRA-authorised persons but do not include any authorised person that is not a PRA-authorised person, the PRA;(c) where the subsidiary undertakings of the qualifying parent undertaking do not include any PRA-authorised person, the FCA;(d) in any other case, the PRA or the FCA.”(2) In section 192K of FSMA 2000 (power to impose penalty or issue censure)—
(a) in subsection (1), after “section 192J” insert “or 192JB”, and(b) after that subsection insert—“(1A) This section also applies if a regulator is satisfied that a person (“P”) who is or has been a parent undertaking of a ring-fenced body has contravened a provision of rules made by that regulator under section 192JA.””

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Moved by

[Lord Newby]

82: Clause 14, page 27, line 11, at end insert “and
(b) after “213(1A),” insert “234I(2),”.”

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[Baroness Noakes (Con)]

My Lords, I shall not take much of the Committee’s time. Most of these amendments are pretty marginal to this Bill, and, as the noble Lord, Lord Turnbull, said, it feels as if we are refighting the battles that we so much enjoyed on the previous Financial Services Bill.

I should like to make a small contribution on the expertise point. I believe that it is a matter of principle; it is not good to specify in legislation the characteristics that holders of particular offices should have. Things change over time and rapidly become out of date. They are useful things to debate but not in the context of writing legislation. In particular, the non-executive community should be a balance of skills and expertise. To follow the formula here, they have all to be this impossible person in having experience of running large organisations and financial institutions, and expertise in prudential policy. The gene pool is pretty limited on those, and to write that into legislation is a recipe for not being able to fill the posts as they come vacant. I am sure that it is really enjoyable to go back over all those debates that we had and to relive the points that have been raised by the Treasury Select Committee in another place, but for my purposes they are not necessary for this Bill.

[Lord Newby]

My Lords, as noble Lords have said, the governance of the Bank of England was debated at great length just a year ago during the passage of the Financial Services Act. As a result of those debates, the Government accepted that the additional responsibilities for financial stability transferred to the Bank would put strain on its governance structures, and as a result we provided for a powerful new oversight committee, which has been established as a sub-committee of the Bank’s court.

These changes were introduced as recently as April this year and should be allowed time to develop. Making further changes now would serve only to introduce uncertainty into the Bank’s governance at a time of significant change in its senior management. It would also prevent the new system having time to prove itself. Moreover, it is the Government’s view that the amendments would weaken rather than strengthen the Bank’s governance structures.

I shall deal with the amendments in turn. Amendment 83 proposes that the name of the governing body should change from the court to the board of directors. Our view is simple: changing the name of the court would make no difference to how it operates in practice. Indeed, in substance the court now operates along the same lines as a modern plc board. It has a clear division between the role of the chief executive and non-executive chair; it is made up of a majority of independent non-executive directors; and there are formal, transparent appointment procedures for executive and non-executive directors alike.

Amendment 84 proposes that the number of non-executive directors should be reduced from nine to four and would require the appointment of a non-executive chairman. The reduction in the number of non-executive directors would drastically alter the balance of membership of the Bank’s governing body, resulting in an equal number of executive and non-executive members. It is our view that this would significantly reduce the level of independent advice and challenge available to the governors and increase the risk of decision-making becoming dominated by a small group. The court already has a non-executive chair, so we believe this proposal is unnecessary.

Amendments 85 and 86 propose abolishing the new oversight committee and rolling its powers into the proposed new board of directors. This would be a backward step for the accountability of the Bank. The oversight committee, which is made up exclusively of non-executives, was established to provide stronger challenge to the Bank’s executive. It has a clear remit to monitor the Bank’s performance against its objectives and strategy, including the Bank’s monetary and financial policy objectives. In order to deliver these responsibilities, the committee has the power to appoint any person to review any matter. These powers cover not only the Bank’s operational performance but also its policy decisions. These responsibilities are very important to the accountability of the Bank, and the Government believe they must continue to be carried out by a non-executive body independent from the policy-making process. These amendments would transfer the powers of the oversight committee to a board of directors whose membership included the governor and three deputy governors of the Bank. It cannot be right for the governors to have a role in scrutinising the policy processes that they themselves are responsible for administering, especially when the processes in question are of such vital national importance.

These amendments also seek to introduce more specific legislation to govern how the performance of the Bank’s policy functions are monitored. This is unnecessary. The oversight committee already has wide-ranging powers to review the Bank’s performance in relation to any matter, including specific provision to review the procedures of the MPC and Financial Policy Committee. The Government also believe that it is unnecessary to introduce legislation covering requests for information. The current arrangements are effective, and historically the Bank has been very co-operative with both the Treasury and Parliament. Moreover, Parliament already has wide-ranging powers to hold public authorities to account, including the power to call any witnesses to appear in front of any of its committees, as the governors of the Bank of England know only too well.

Amendment 87 would require the Chancellor to appoint an additional external member to the FPC with experience of financial crises. The FPC’s objectives—

[Lord Lawson of Blaby (Con)]

It has not been moved yet.

[Lord Newby]

I believe it is in this group. I hope that noble Lords will not mind if I deal very briefly with it, and we will come back to it if that is the wish of the House. Amendment 87 would require the Chancellor to appoint an additional external member with experience of financial crises. The FPC’s objectives are to exercise its functions with a view to contributing to the achievement of the Bank of England’s financial stability objective and, subject to that, support the economic policy of Her Majesty’s Government, including their objectives for growth and employment. The Government agree with the commission on the importance of ensuring that the FPC has the necessary expertise and experience to understand and draw lessons from history. The current membership of the FPC equips it to do so. In the Government’s response to the PCBS we will take this into account, alongside other relevant factors, when making future appointments to the FPC. However, I do not think it is either necessary or desirable to include a provision of this nature in legislation. It risks constraining the Government’s flexibility, as the noble Baroness, Lady Noakes said, to appoint the best candidates by placing particular emphasis on only one of a number of criteria relevant to the appointment process.

I am also not persuaded that the balance of the FPC should be changed by the addition of a fifth external member. The current composition strikes the right balance between ensuring that there is sufficient input from the Bank, as executive, and internal Bank of England expertise, while supporting the role of the external non-executives in providing a challenge to members’ thinking. Furthermore, the oversight committee, a sub-committee of the Court of Directors consisting of the non-executive directors of the Bank, is able to undertake or commission reviews of the FPC’s performance, ensuring that it is held to account for its decisions. The oversight committee also monitors the processes of the FPC to ensure that all members have the required information and to tackle any emergence of groupthink. In view of these arguments, I hope the noble Lord will withdraw his amendment.

[Lord Lawson of Blaby]

My Lords, my noble friend the Minister has just pathetically addressed Amendment 87. None of his arguments stack up. We are saying here that it would be desirable—I cannot understand why the Government are opposing this—that there should be an additional external member who would have great knowledge and he might even be an academic, which would enormously please the noble Lord, Lord Eatwell. However, he need not be an academic; he could be someone who had a great knowledge of past financial and banking crises.

I think it was the philosopher Immanuel Kant who first observed that the only lesson of history is that no one ever learns the lessons of history. Financial crises are not unique; there have been a series of them over the years, both in this country and in the western world more generally. We commissioned a study of past financial crises. It was conducted by an excellent man, Mr John Sutherland of the Bank of England. It is remarkable how the same mistakes were made time and again. Everyone knows now about the crisis of 2008, but the time will come when that generation will have learnt the lessons of their own lifetime but not of the past, and it would be extremely useful to have someone on the Financial Policy Committee with such knowledge and expertise. It may not prevent a further substantial crisis but it will, at trivial cost, reduce the risk significantly. I cannot understand why the Government object to this.

My noble friend the Minister said that there should not be this guidance; that the Government should be able to appoint the best people. In other words, they should be able to appoint people who have no knowledge of past financial crises. Why do they want to do that? Why on earth is the reason they should want to do that when they have been given this opportunity to buttress all the other excellent measures in the Bill with someone on the FPC who has some knowledge and understanding of previous financial crises? Such knowledge is not widespread among the great majority of people. I have known this neck of the woods for a long time and there is very little knowledge of previous financial crises, yet there is a lot to be learned from them. It seems to me that the Government could easily accept having someone on the FPC who has this knowledge and I cannot understand why they do not do so.

[Lord Higgins (Con)]

My Lords, we are clearly getting a proliferation of Bank of England committees. We have both the Monetary Policy Committee and the Financial Policy Committee. Can the Minister say briefly precisely what the responsibilities will be of the Financial Policy Committee?

[Lord Newby]

My Lords, I will answer that question. The principal role of the Financial Policy Committee and its principal area of responsibility is to maintain the stability of the financial system. That is very different from any of the other committees established by the Bank. As for people on the FPC who have any understanding of financial crises, at the moment, Dr Donald Kohn, for example, clearly falls into the category of people with that ability. The former governor believed that he had extensive knowledge of financial history, and therefore there was and is no lack of it on the relevant committees, even without the provision on the face of the Bill.

[Lord Turnbull]

I listened to the responses to my intervention and divide them into two categories. One is points made by the noble Lord, Lord Eatwell, the Minister and the noble Baroness, Lady Noakes, on specifying expertise and skill. I can see some force in those points. If we are going to have the opportunity, I will try to improve on it. My main area of disagreement is that I just do not agree with the idea that the oversight committee—the repository of who is responsible for reviewing what the Bank has done—should be hived off to a committee of non-executive directors. It should be built into the DNA of the whole organisation. However, I can see I am not going to be able to persuade noble Lords of that, so—

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Moved by

[Lord Newby]

88: After Clause 15, insert the following new Clause—
“Building societies
Schedule (Building societies) (which contains provision about building societies) has effect.”

[Lord Newby]

My Lords, this amendment modernises building societies legislation and enables them to compete on more of a level footing with banks.

In the Government’s founding document, the coalition agreement, we set out our commitment to,

“promote mutuals and foster diversity in financial services”.

This commitment underscores the importance that we attach to the contribution that mutuals make to the economy and shows our determination to support them.

Building societies play a central role in the mutual sector. They provide vital services for their members, taking savings deposits and providing mortgages. Indeed, the sector has come through the financial crisis in good health, and has been responsible for much of the new mortgage lending and lending to first-time buyers in the UK in recent years. Building societies also regularly outperform the other retail banks in terms of customer satisfaction.

The Government are keen to ensure that the sector continues to play an integral role in our financial services sector. That is why, in last year’s consultation The Future of Building Societies, the Government asked the building society sector whether there were any changes to the Building Societies Act which would remove unnecessary limitations or barriers to growth, while preserving the distinctive and traditional building society model. Following that consultation, the Government now propose to make several amendments to the Building Societies Act.

The amendments will, first, make it easier for building societies to communicate with their members electronically rather than by paper. This is obviously in line with what banks can do. Secondly, they will allow societies to create floating charges. At the moment, societies can create fixed charges, but are not permitted to grant security over fluctuating assets. This causes practical difficulties, because floating charges are commonplace in financial services. The ban was originally introduced in 1997 to prevent holders of floating charges taking control of a building society, but due to changes in insolvency law this threat no longer exists.

Thirdly, the amendments will change the classification of small business deposits for the purposes of calculating the proportion of a building society’s funding from wholesale sources. Under the Building Societies Act, no more than 50% of a building society’s funding can be wholesale funding. This amendment will mean that a certain amount of small business deposits will no longer count as wholesale funding. The amendment will give societies greater freedom to source wholesale funding, and creates a bigger incentive for societies to compete for small business deposits.

Fourthly, the amendments will allow owners of deferred shares, which are a type of mutual capital instrument, to be eligible to receive shares or cash payment on a demutualisation, irrespective of how long they have held the shares. This will provide an exception to the existing rule that shareholders must have held shares in the society for at least two years. This exception is necessary to remove the risk that deferred shares which are categorised as tier 1 capital would be degraded to tier 2 capital on a demutualisation, because the holder was not able to be given shares. Fifthly, I should add that our new provision makes it clear that the restriction applies to any right to acquire shares by members, and not just rights to acquire shares in priority to others, as is currently the case. The existing provision has not worked as intended and the amendments also correct that.

Sixthly, the amendments will allow building societies to change their financial year to any day in the year, not just 31 December. That is in line with banks. Seventhly, they will remove the requirement for building societies to provide new members with a copy of the latest summary financial statement. There is no equivalent requirement for banks, and this will have cost benefits. Eighthly, they will remove the requirement for societies to disclose information in their annual business statement about officers who are not directors. Such disclosure is excessive, time-consuming and costly, and there is no equivalent requirement for banks.

Taken together, these amendments provide significant modernisations to the legislative framework for building societies, and I commend them to the House.

[Lord Eatwell]

My Lords, in general these are desirable and beneficial changes, although they do not really represent the great boost to the growth of the mutual sector which we might have expected. However, I want to raise just two major issues. The increase in the use of electronic communication, particularly given the typical customer profile of building societies, raises the possibility that certain members will be disadvantaged with respect to the availability of regular information and of course the summary financial statement, which they should be able to receive in order to understand the overall status and security of their building society. Is the noble Lord content, and can he reassure the House, that there are suitable safeguards so that those who do not have ready access to electronic communication receive appropriate paper copies?

Turning to the issue of owners of preferred shares, can the noble Lord reassure me that the definition of ownership is the same as for those who have held shares for two years? The noble Lord may remember that initially when building societies were demutualised this caused problems, because if Mr and Mrs Smith held a joint account, in fact only Mr Smith was deemed to be the owner. If Mr Smith happened to die within the two-year period, Mrs Smith did not then gain mutualisation advantages. In a Private Member’s Bill which I helped take through the House, we changed that regulation so that in that circumstance both Mr and Mrs Smith would have the advantage if one of them was deceased. Even young Jimmy Smith would have the same advantage if his parents were killed in a car accident. Does the definition of ownership in this case have that broad scope that was specifically created for the demutualisation efforts—in other words, the owners are not the first-named person on the account but can include both a spouse or a partner and a first child?

--- Later in debate ---

[Lord Newby]

My Lords, the noble Lord, Lord Eatwell, asked me two questions. The first one was about electronic communications and the age profile of members of building societies. This is a permissive amendment, and if members wish to be given paper copies of documents then building societies in future will still be required to provide them in paper form. In terms of the owners of preferred shares, I believe that preferred shares are typically owned within the financial services sector, so they are rather different from personal shares. It is obviously a highly technical point, and I will write to the noble Lord about it.

The noble Lord, Lord Higgins, asked whether we were changing the two-year bar in terms of shareholders and votes on demutualisation. No, we are not. For ordinary, individual shareholders in building societies, the rules do not change. There are never more than a very small number of preferred shareholders because they are providing a specific form of financial instrument to building societies. The concern is, as I said, that unless there was an exception to the existing rule, there is a possibility that deferred shares would move from tier 1 to tier 2 if a building society demutualised. There is no prospect of the number of deferred shareholders swaying a result on demutualisation because they are not the same people as the ordinary people who have a retail account at the building society.

As for the point made by the noble Baroness, Lady Noakes, the Co-op Bank is of course not a mutual; it is a straightforward plc. It was originally owned 100% by the Co-operative Group but it is no longer, so to the extent that there may be problems with the Co-op Bank, the mutuality issue is not particularly relevant. However, there is no major relaxation in these provisions regarding the amount of funding. The suggestion that deposits held by small businesses should be treated in the same way as those held by private individuals is just common sense. It does not have a very significant impact on the funding position. I assure the noble Baroness that there is no suggestion that the PRA should reduce the rules around building societies because although many of us are fond of building societies, nobody can claim that they were immune from some of the excesses of the late noughties.

Amendment 88 agreed.

--- Later in debate ---

[Lord Eatwell]

My Lords, I was a member of the first regulatory decisions committee established under the Financial Services Authority. It was established at that time because it was felt that the FSA’s procedures would run counter to the Human Rights Act, in the sense that those procedures were both judge and jury. The role of the committee was to act as an independent assessor of the regulatory and enforcement proposals put forward by the FSA.

It worked reasonably well, at least from the perspective of a member of the committee, but not from the perspective of the FSA; we tended to give it a rather difficult time when we felt that its cases were ill prepared and ill focused. It played a particular role for a short period. Then, after a particular dramatic case was lost by the FSA in the tribunal, the FSA decided that it did not like the RDC being foisted upon it, and the role of the RDC was slowly downgraded. I think that was unfortunate—obviously I do, because I participated in the early days when I thought it was working rather well, but be that as it may.

The role here is slightly different from the challenge role that the RDC played. Will the Minister address the question of whether any effective enforcement role for a regulator is compatible with the Human Rights Act?

[Lord Newby]

My Lords, we have considered extremely carefully all the recommendations from the PCBS. They contain a number of observations about the importance of banking expertise, accountability, clarity of responsibility and consistency of decision-making, which we certainly agree with.

I shall explain how the current arrangements already deliver all those things in a way that is tailored to the regulators’ individual approaches. First, on expertise, the call to create a separate decisions committee solely for the banking sector partly reflects concerns about the level of banking expertise on the RDC. At the FCA, the regulatory decisions committee is responsible for taking enforcement decisions. Its remit extends beyond banking, but that does not mean that it does not contain banking expertise. Indeed, the FCA has recently addressed the balance of expertise on the RDC through the appointment of two new members with banking expertise. At the PRA, of course there is no lack of banking expertise on its decision-making committees.

Secondly, on clarity of roles and responsibility, Section 395 of FiSMA provides for the separation of supervision from disciplinary decision-making. Under the current arrangements, there is also a clear separation of the function of making enforcement decisions from that of judicial consideration of the issue.

I do not accept the argument that the fact that the PRA does not have an RDC gives rise to human rights concerns. We do not believe that there is a problem on that front. The prospect of decisions being appealed to the Upper Tribunal means that the system already provides an independent judicial challenge function to the decision-making process for all financial services cases. The proposed requirement for regulatory decisions to be made by a committee chaired by a person with senior judicial experience, on the other hand, would appear to give this new committee a quasi-judicial role more suitable for an external review tribunal than an internal decision-making body.

On consistency of decision-making, I understand that a key part of the recommendation was to encourage a greater consistency of decision-making across the PRA and the FCA. Unfortunately, I believe that the creation of an additional statutory committee for banks would create only new inconsistency. The new committee relates only to banking, so any enforcement decisions relating to a building society, insurer or investment firm would be made under the existing framework and the FCA would have to maintain the existing RDC. This would mean one body dealing with the breach of a rule by a bank and a different body dealing with the same breach of the same rule by a building society, with potentially different outcomes, which seems undesirable. While I think that the PCBS report contains some useful observations in this area, I believe that the current, flexible arrangements are the right ones. On that basis, I would be grateful if the noble Lord withdrew his amendment.

[Lord McFall of Alcluith]

I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Lawson of Blaby]

My Lords, I shall be brief; the hour is getting late. Like the amendment that I spoke to earlier about the desirability of having somebody on the Financial Policy Committee who had some knowledge of past financial crises, which I regret that the Government have not accepted, this amendment is also a proposal of the Parliamentary Commission on Banking Standards. It is about lobbying. The context of this applies to all bank lobbying, but it is particularly important in the context of what we were discussing last week in Committee, namely the ring-fence. We were very concerned, as my noble friend the Minister will recall, that this should be strengthened and kept under review. We had various proposals to that end.

In the United States, the parallel was the separation through the Glass-Steagall Act of 1933. That, as my noble friend the Minister will be aware, was gradually eroded over time. It was eroded in two ways. First, the banks found ways round it to some extent. More importantly, by extensive lobbying, the banks were able to get the Government of the day to do a little amendment here and a little amendment there, which created loopholes which did not previously exist. We know that, following the recommendation for the ring-fence in the Vickers commission and report, the banks only accepted it with gritted teeth. They were not happy; they accepted it very reluctantly. They will clearly be seeking any way they can, including through lobbying, to get a change here and a change there over time which will enable them to undermine the ring-fence. That is natural; they feel it to be in their interest.

Times have changed. When I became Chancellor 30 years ago, the Bank of England had no responsibility for monetary policy, which was my responsibility. It did however have the dual responsibility of the regulation and supervision of the banking sector, and being the sponsoring department for banks, representing the interests of the banks to the Chancellor of the day. If the banks had points to make in those days, they would go first and only to the Governor of the Bank of England. The governor would assess whether he felt there was merit in what they were saying, and if there was he would go and see the Chancellor and put the banks’ points to him. That has all changed. Now, the banks go directly to the Government of the day. Indeed it is no secret that the carpets in Number 10 and Number 11 Downing Street have been worn almost threadbare by the lobbying of the banks. That caused great concern to the previous Governor of the Bank of England, and we had some concern about it in the commission. We felt that the best remedy was encapsulated in this amendment: that if the Governor of the Bank of England of the day feels concerned, he should be able to flag it up in a public way. The hope is that that deterrent will keep the amount of lobbying within reasonable bounds. There is the opportunity to do that, and indeed there is a requirement to do that.

That is what we are suggesting in this amendment. Even though the hour is late, I hope that my noble friend will reflect seriously on this proposal and the merit of accepting it.

[Lord Newby]

My Lords, I agree with my noble friend that the Governor of the Bank of England should never hesitate to speak out should he have concerns about the influence of lobbying by the financial services industry. However, we do not believe that there is a problem. Indeed, I fully expect that the governor would raise the alarm to both the Government and Parliament if he believed that any particular factor or circumstances, including lobbying by a bank, seriously put at risk the Bank’s ability to meet its objectives.

However, the Government do not believe that it is either necessary or desirable for this specific requirement to be placed on the statute book. The Financial Services Act 2012 brought together responsibility for all aspects of financial stability within the Bank of England group. As a result, the Bank has a statutory objective to protect and enhance the stability of the financial system. The Government are confident that the governor will act appropriately if he believes that excessive lobbing is impeding the Bank’s ability to meet that objective, which would obviously be the case if there was lobbying with the intention of undermining the ring-fence. Indeed, the Bank has already committed to raising the alarm in such circumstances in its response to the Commission on Banking Standards.

Therefore, while we fully accept that one of the roles of the governor is to raise the alarm if he believes that bank lobbying or indeed anything else creates a risk of undermining the stability or regulation of the banking sector, it is simply not necessary to have such a requirement in the Bill.

[Lord Lawson of Blaby]

I have heard what my noble friend has said and I am slightly reassured. I hope that the present Governor of the Bank of England will read those words and will realise that, without it being on the statute book, he has been charged by the Government with a duty to raise the alarm if there is any case of excessive lobbying. I am very glad to have that on the record, and I beg leave to withdraw the amendment.

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[Lord Phillips of Sudbury]

My Lords, after 10.20 pm and with less than a dozen of us still hanging on, I shall be remarkably brief in moving this amendment, which I hope has the advantage of self-clarity.

My starting point is the Financial Services Act 1986, which, as noble Lords will remember, ushered in big bang. Section 63 of and Schedule 1 to the 1986 Act exempted certain City dealing contracts from the effects of the Gaming Acts 1845 and 1892. Up until that time those contracts—which were purely gaming contracts—were unenforceable. Since then, the exemptions have been extended, first by the Financial Services and Markets Act 2000 and further by the Gambling Act 2005.

It is a matter of considerable debate, within the City in particular, about just what the impact of this extremely fast-growing market has been over the years, because fast-growing it has been. I suppose that among all the types of City dealing that have benefited most from exemption from the Gaming Acts there would be much hedge fund activity, which now runs into trades worth trillions of pounds.

It would be beneficial for all concerned to have a review, simply set up and in the hands of the Treasury. The disadvantages of this type of market may be few; they may be beneficial. Many consider that they are a dangerous element in our economic life, because they exaggerate swings and drive markets to extremes. I am afraid that they are susceptible to corruption, in particular, and the most famous or notorious summation of these markets, depending on your point of view, was when Adair Turner—the noble Lord, Lord Turner of Ecchinswell—described them as “socially useless”. I seem to remember from when I was at Cambridge reading economics, ploughing through John Maynard Keynes’s General Theory, that there was one very striking comment in there. I have not quite got it word for word, but the gist is that when the operation of the markets becomes akin to that of a casino, the job is likely to be ill done.

This amendment carries no pre-judgment, but will allow us a cool and collected—and, some would say, overdue—look at the impact of this particular market, the gambling market as you might call it, and see just how it stands. Noble Lords will note in particular that when saying that the Treasury must institute a review of the effects of these gaming contracts, in proposed new subsection (2) of Amendment 91B “effect” is defined as including the,

“social, cultural and ethical effects”,

of this type of gaming business.

As I say, the framework I have provided is a light one. The Treasury will appoint the members of the review committee and describe its terms of reference within the constraints I have put down. In deciding who is going to be part of the review, the Treasury has to consult the Bank of England, the PRA and the FCA. Then there is simply an obligation for the review committee to report within two years of the Act coming into force, and for the Treasury to lay the report before Parliament and then publish more widely. I hope that this will commend itself to the House. I beg to move.

[Lord Newby]

My Lords, this amendment proposes that the Treasury should be required to undertake a review into the effects, including the social, cultural and ethical effects, of exempting certain gaming contracts from the rule which used to provide that no gaming contract or wager can be enforced in a court of law. That exemption applied to certain categories of financial contracts, such as derivative contracts like contracts for differences, which could be regarded as gaming contracts within the meaning of the Gaming Acts because of their characteristics. Only those transactions which were subject to regulation under Financial Services legislation, such as the Financial Services Act 1986, and more recently the Financial Services and Markets Act 2000, ever benefited from the exemption.

However, the law has changed significantly in this area. Since the Gambling Act 2005 came into force, gaming contracts and wagers are now enforceable through the courts, except in Northern Ireland, and the effect of the exemption is therefore limited to Northern Ireland. In the rest of the United Kingdom, there is no difference in the enforceability of derivative investments and other gaming contracts and wagers. Much of the purpose of the review proposed has therefore, in the Government’s view, gone.

It is also unclear what action could be taken following such a review. Trading in financial instruments is subject to European law, and in particular the markets in financial instruments directive. This limits the extent of the action this country could take in relation to financial instruments falling within the scope of the directive. It is unclear what benefits such a review could bring and we suggest that the noble Lord withdraws his amendment on the basis that it is not proportionate or objectively justified.

[Lord McFall of Alcluith]

My Lords, I am surprised that the Minister is saying that we do not know what benefit this could bring. After all this is a derivatives market. We are talking about a derivatives market globally with $66 trillion or more. Not only is there a complexity in that market but there is a total opaqueness. Warren Buffett called derivatives weapons of mass financial destruction. So there is benefit in looking at this issue. Given that the parliamentary banking standards commission’s remit was to look at culture and standards, I would like the Minister to reflect on that issue with culture. In my opinion, culture is about behaviour and ethics is about conflicts of interest. In an opaque market, there are many conflicts of interest, and therefore it would do the Government good to open up this market and see what benefits could result.

The noble Lord, Lord Phillips, has done the Committee a service in this matter. We know that the market will not change overnight, but we must understand what is in the market, particularly the derivatives market. I would like the Government to take this a bit more seriously than the Minister has taken it in saying that we cannot learn anything at all from this.

[Lord Newby]

My Lords, I would not want the noble Lord to think that the Government were being complacent at all about this issue. In particular, I would not want him to think that we were being complacent about the issue of culture. Of necessity, today we have been talking about legislative change but, as we said at an earlier stage, and as the most reverend Primate reminded us at an earlier stage in this debate, the whole question of culture is as important as legislation.

What constitutes culture is a broad, almost philosophical question, but one key thing that is already evident is that some of the more senior managers of some of the bigger banks have recognised that, if we are to get the kind of banking system that the population as a whole is looking for, they need to change their ways. The chief executive of Barclays set out his stall when he was appointed. The way in which he has sought to instil a new culture through the organisation is very impressive. But one challenge that he has, no doubt—we see this not just in the banks but across the world, whenever there is any big change in the way things happen—is how to get a cultural change trickling down the organisation. It is not just a matter of the chief executive, for whom making a statement about culture is relatively straightforward, making that statement; that is happening, to a very acceptable degree. But how can we ensure that the culture that we require of everybody in the banks changes?

One way in which that is going to happen is, one hopes, through the new statement of principles of banking practice that we discussed earlier. If everybody knows when they go into a bank that they are expected to behave in a different way than possibly they thought in the past and they know that, unless they follow a whole series of principles there on a piece of paper, they are liable for disciplinary procedure, they are likely to behave in a more acceptable manner. I am sure that that would be welcome across the country.

The other big thing that we believe can help in terms of culture is the promotion of the mutuals sector that we were talking about earlier. The Nationwide Building Society has always been at the top of the list for customer satisfaction levels, and that shows no sign of diminishing. To the extent that the building society movement continues to grow, so will the culture improve across the system as a whole.

I realise that I have strayed slightly from where the noble Lord started out in terms of derivatives contracts. But for most of the population, it is at the retail end that culture affects them.

[The Archbishop of Canterbury]

My Lords, I am slightly surprised that the Minister should be resistant to what seems to me a very reasonable amendment. One of the dangers that we have faced in the markets over many years is that of parallel markets. The derivatives markets are, as we know, opaque, as has already been remarked on, and we examined them in some detail in the banking standards commission. The computer-driven markets are also very opaque. We examined those markets and remarked that they would constitute the next great crash. When you have these gambling markets on the side that no one quite understands or knows who is participating in them, and which often take place offshore, it seems to me that at the very least there are grounds to hold an inquiry into the effect they are having on market prices through their impact on the shadow market—we should also examine the psychology of the dealers—and on those involved directly in the more regulated market.

One of the great lessons learnt from the events of 2008 was the ineffectiveness of the clearing system for over-the-counter derivatives, which there was no means of settling. That has been one of the major problems for the liquidators of Lehmans. The gambling markets have much the same problem. We are setting up mechanisms—they are being set up internationally—to deal with the settlement of derivatives contracts, but nothing is being done in this parallel market. The noble Lord, Lord Phillips, has made a very useful point, albeit that the hour is late and it is almost 10.40 pm, which may enable this issue to become slightly clearer in terms of understanding what can be done.

[Lord Phillips of Sudbury]

My Lords, I am grateful to the most reverend Primate and to the noble Lord, Lord McFall. However, I am not so grateful to my noble friend the Minister, as I thought that he rather missed the point. The fact that Tom, Dick and Harry can go down to the betting shop or the local casino, run up a debt and be sued for it has nothing whatever to do with the amendment that I propose tonight. As noble Lords have commented, and as is obvious, we are dealing here with huge sums of our money which are gambled, often to the excessive benefit of the gamblers. We do not know how they function and have not looked carefully and closely, as we should, at the impact of this. I refer not so much to the economic impact, although it may be found that the destabilising effects of this market are greater than we realise, but to the ethical, cultural and social effects. For the life of me, I cannot see why a liberal-minded Government should want to staunch such an investigation. I see no downside to it; it would not be expensive and would be simple to operate. It would all be within the purview of the Treasury and it might yield some surprising and valuable results. I therefore hope that the Minister will give this a little further thought, as I am very inclined to bring this back on Report.

[Lord Newby]

My Lords, I am extremely grateful to my noble friend for clarifying exactly what lies behind his amendment. I am sorry if I in any way misconstrued it. The issues that he raises about the social and broader consequences of some aspects of the “socially useless” parts of the financial services world are obviously important. I am somewhat less certain about whether the kind of inquiry that he is seeking would produce any decisive results.

I wonder whether he may wish to consider between now and Report whether there is another means of achieving the same result because these issues are very much in the public domain. A dry inquiry might not get us to the answer that he wanted. I wonder whether there might be some broader inquiry, bringing together groups of people with expertise and concern, possibly moderated by a think tank or charity, to look at some these issues. The membership of such an inquiry would be important in determining the result. Too narrow a membership would tend to produce a series of dry, probably useless, recommendations, whereas a broader group operating in a relaxed and unconstrained manner might produce more wide-ranging and socially useful conclusions.

[Lord Phillips of Sudbury]

I am not sure whether I am supposed to say any more to the Minister except, “Thank you”. I thought that at the end he was arguing my case rather better than I was. I will certainly think between now and next time, and talk with him. I beg leave to withdraw the amendment.

Bank of England: Monetary Policy Committee

Lord Newby Excerpts

Monday 14th October 2013 Lords Chamber

[Noble Lords]

Hear, hear!

[Lord Newby (LD)]

My Lords, I am sure that the whole House will wish to join me in congratulating the noble Lord on his 90th birthday. There are clearly two Barnett formulae. There is first the public one that we regularly discuss in your Lordships’ House, but secondly there must be a secret elixir that enables the noble Lord to continue to play an energetic part in our deliberations undiminished by the passage of the years. We wish him many happy returns.

The UK’s Monetary Policy Framework, set out in the Bank of England Act 1998, gives operational responsibility for monetary policy to the independent Monetary Policy Committee. The Chancellor of the Exchequer has frequent discussions with the Governor of the Bank of England on a wide range of issues in the UK economy.

[Lord Barnett (Lab)]

My Lords, I thank the noble Lord for his initial comments. In the light of those, I had better be kind to him, but I am afraid that when he answered a similar question on 9 July, I believe that he misled the House on an important issue of the independence of the Monetary Policy Committee and the Governor of the Bank of England. I gather that he was depending on a command paper and on an exchange of letters between the Chancellor and the governor, but surely you cannot change a major Act of Parliament—the Bank of England Act 1998—by an exchange of letters and a command paper. That is clearly impossible. Can he explain how he has done that? The independence of the Monetary Policy Committee is important, as the new governor has told the country that he believes in long-term forecasts. He has forecast interest rates which clearly would be affected by QE, on which he is apparently being given unfettered power. Whether or not he has those powers, could the Minister explain and confirm that the Chancellor has agreed to allow the governor and the Monetary Policy Committee unfettered control over interest rates and QE?

[Lord Newby]

My Lords, that is what the Bank of England Act says. The Monetary Policy Committee is operationally independent. The remit of the Monetary Policy Committee has to be set by the Governor of the Bank of England. It has to be renewed every year. It was renewed this year. The difference between this year and previous years is that the Chancellor asked the governor to look at possible methods of forward guidance which would give greater certainty to the markets about the medium-term movement of interest rates and, indeed, QE. That is exactly what the governor did, in line with the request from the Chancellor which was in line with the provisions of the Bank of England Act.

[Lord Bilimoria (CB)]

My Lords, I join in wishing the noble Lord, Lord Barnett, a very happy 90th birthday. He has asked an excellent question in that it relates to forward guidance. For a long time I have been saying that when setting interest rates the Governor of the Bank of England and the Monetary Policy Committee should look not just at inflation targeting but at the wider economy. This is excellent news. However, is it wise that the governor should tie himself down to a specific level of 7% unemployment, after which interest rates are to be raised, unless inflation is going out of control? When does the Minister think that the 7% will be achieved? Secondly, would it not have been wiser to have had a wider remit taking into account other aspects of the economy, not just inflation targeting?

[Lord Newby]

As the noble Lord says, the governor is now looking at unemployment in terms of when interest rates might change, but there is no iron rule that the moment unemployment rates hit 7%, interest rates will go up. There are three potential arguments which would mitigate against that, of which by far the most important is if the outlook for inflation was higher. As to when we might reach 7%, in August when the Bank of England published its report suggesting this, it thought it would be in the third quarter of 2016. The good news is that since then the economy has grown more quickly, and the consensus is now settling around summer 2015.

[Lord Peston (Lab)]

My Lords, will the Minister cast his mind back to when your Lordships debated what is now the Bank of England Act? My noble friend Lord Barnett and I put down an amendment precisely to achieve the flexibility which is in this command paper. We were not told that the flexibility was already there, which is what the command paper says. We were told that we were idiots, and that the remit of the Monetary Policy Committee was to hit the inflation target—only after that could it look at anything else. The Government have produced a sleight of hand here. I favour it, let me add, but it is a sleight of hand.

Will the noble Lord consider the central question which arises in this context, bearing in mind that the two greatest liberal thinkers of the 20th century, Lord Beveridge and Maynard Keynes, both placed the attainment of full employment at the centre of government macroeconomic policy? Can the noble Lord tell us whether under the new regimen that we are now offered, there is any hope within my lifetime—younger Members may have something more to look forward to—that we shall at last get back to what those two great thinkers said: full employment is a must?

--- Later in debate ---

[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.

Care Bill

Lord Newby Excerpts

Tuesday 8th October 2013 Lords Chamber

Moved by

[Lord Newby]

That the amendments for the Report stage be marshalled and considered in the following order:

Clauses 1 to 39, Schedule 1, Clauses 40 to 43, Schedule 2, Clauses 44 to 70, Schedule 3, Clause 71, Schedule 4, Clauses 72 to 86, Schedule 5, Clauses 87 to 94, Schedule 6, Clauses 95 to 99, Schedule 7, Clauses 100 to 103, Schedule 8, Clauses 104 to 116.

Motion agreed.

Financial Services (Banking Reform) Bill

Lord Newby Excerpts

Tuesday 30th July 2013 Lords Chamber

Moved by

[Lord Newby]

That it be an instruction to the Committee of the Whole House to which the Financial Services (Banking Reform) Bill has been committed that they consider the bill in the following order:

Clauses 1 to 7, Schedule 1, Clauses 8 to 16, Schedule 2, Clauses 17 to 21.

Motion agreed.

Economy: GDP Forecast

Lord Newby Excerpts

Monday 29th July 2013 Lords Chamber

[Lord Soley]

To ask Her Majesty’s Government what is their forecast of the maximum public debt–gross domestic product ratio in 2016–17.

[Lord Newby]

My Lords, the Office for Budget Responsibility forecast public sector net debt to be 85.6% of GDP in 2016-17.

[Lord Soley]

In 2010, the Chancellor of the Exchequer promised to eliminate the structural deficit and to reduce the percentage of national debt to GDP. Both of those will now fail to materialise—I would argue, through low growth. When do the Government think that they will achieve them and why do they think that they have failed to achieve them?

[Lord Newby]

My Lords, the figure I gave was for the peak level of net debt. After that, the level will fall. Of course, if growth proves to be higher than forecast, as seems likely, for this calendar year, net debt will be less over the period ahead than has been forecast.

[Lord Higgins]

My Lords, is there not great confusion in the public mind between debt and deficit? Is it not the case that the debt is going up because the deficit has been cut by only one-third and that, consequently, the debt is going up by two-thirds of the rate that we inherited? Does that not show that we must make more determined efforts to cut the deficit and that the idea of Mr Balls that we are cutting too fast and too much is certainly not the case?

[Lord Newby]

My Lords, it is worth reminding the House that in the financial year 2011-12 the net debt was £1,106 billion. On current plans, by 2017-18, when the percentage of GDP starts to fall, it will be £1,637 billion, so the noble Lord makes a valid point.

[Lord Peston]

My Lords, is the noble Lord aware that research evidence shows categorically that if you want to get the debt to GDP ratio down, the vital ingredient is to increase the rate of growth of GDP? That is the way to do it. Measures such as raising taxes or cutting the deficit by cutting large chunks of public expenditure simply do not work. Overall, the lesson we have to learn is that an austerity package is not required; a package concentrating on raising GDP is the correct policy.

[Lord Newby]

I am sure that the noble Lord will therefore have been very pleased to have seen the growth figures last week. I point out to the House that a key factor in growth is the level of interest that people have to pay and that, as a result of the Government’s decisive action in 2010, interest rates have fallen compared with the forecast, as a result of which we will, by 2015-16, have paid £31 billion less in interest payments than was expected in 2010-11.

[Lord Sharkey]

My Lords, what impact will the improved growth figures have on the public finances in general and, in particular, will they allow the Government to do more to help supply funding to SMEs?

[Lord Newby]

My Lords, the increased growth figures will of course have a materially positive impact on the debt forecast going forward. With regard to lending to SMEs, the Funding for Lending scheme was strengthened at the Budget and I am pleased to say that the figures published this morning show that there has been for many months a slight uptick in lending to SMEs.

[Lord McFall of Alcluith]

My Lords, the Minister has recognised that the public debt that this Government inherited in 2010 will be greater when they leave office in 2015. No less a figure than the editor of the Spectator has said that the amount of debt that this coalition Government will borrow will be greater than the total amount of debt of the Labour Government in their 13 years from 1997. Is it not the case that there is not a deficit reduction strategy but a growth reduction strategy, which has been the most successful in history? This Government need to acknowledge that and do something about it.

[Lord Newby]

My Lords, I disagree with virtually all of that. As I pointed out earlier, during the five years of this Government we will have borrowed very significantly more to shore up the economy. That is why debt is higher. I am not sure whether the noble Lord is suggesting that we should have borrowed even more.

[Lord Howell of Guildford]

Is not the noble Lord, Lord Peston, leading us all into a bit of a false dichotomy? Of course we want economic growth, and we are getting a little now. The growth is coming back, as the noble Lord will have seen from the newspapers. Although we would obviously like more of it, growth depends on getting the debt curbed and on getting public expenditure under control. These things are not opposites or choices but all have to go together. Surely the noble Lord, who is a very good teacher and an expert, should be teaching us that. That is what he should be telling your Lordships.

[Lord Newby]

My Lords, the noble Lord, Lord Peston, is an extremely eminent economist and he knows, as a good Keynesian, that the key at this point of the cycle is the change in animal spirits—the sense to which people have confidence to invest. Animal spirits have been very significantly subdued over recent years. There is a suggestion in every single figure that we now see that they are returning to the positive. That, more than any single thing that the Government now do, will be what drives growth forward.

[Lord Hughes of Woodside]

My Lords, the Minister has taken great comfort from the reduction in the amount of interest paid. Does he have any sympathy at all for those on fixed incomes and small and medium savers, for whom the policy of low interest rates has been quite ruinous?

[Lord Newby]

I do, my Lords, but with interest rates you cannot have it both ways. You cannot have low interest rates for people who want to borrow and high interest rates for those who want to save. On balance, the Government’s view is that having had interest rates low has kept families being able to spend, compared with having higher interest rates. For example, a 1% increase in mortgage rates would have added £12 billion per year to interest payments. It would have sucked that out of the economy. If you have that kind of reduction in expenditure and the kind of diminution of growth which it entails it harms everybody, even those who are savers.

[Lord Foster of Bishop Auckland]

My Lords, we all welcome the improved rate of growth, but is it not true that this Government have not yet achieved the rate of growth that they inherited?

[Lord Newby]

We certainly have not seen the rate of growth that we or, indeed, anybody envisaged in 2010, but as the Office for Budget Responsibility has made absolutely clear in a succession of reports, the single greatest check on growth has been the ongoing eurozone crisis because that is where we sell most of our goods.

Taxation: VAT on Retrofitting Buildings

Lord Newby Excerpts

Thursday 25th July 2013 Lords Chamber

[Lord Newby]

My Lords, a reduced VAT rate of 5% already applies to the installation of various energy-saving materials, including insulation materials, in residential properties. There are many instances where people incur expenditure in a way that helps to reduce energy use, but given the current fiscal pressures, it is not possible to relieve such expenditure from tax.

[Lord Empey]

My Lords, as suppressing the demand for energy and encouraging job creation are two of the Government’s key objectives, is there not a strong case for reducing VAT more generally on the retrofitting of buildings as a simple and quick way of ensuring that both these objectives are achieved at minimal cost to the Treasury? Will the Minister not take a leaf out of the Americans’ book and look at this again, as it has been a successful policy across the Atlantic?

[Lord Newby]

My Lords, the Government recognise that energy efficiency has a major role to play in meeting carbon reduction objectives while reducing energy costs for consumers, and the process of doing that can and does generate jobs. That is why we have introduced the Green Deal, which, as noble Lords will be aware, encourages home energy-efficiency improvements, paid for by savings on energy bills. The energy company obligation will work alongside the Green Deal, focusing on hard-to-treat homes and low-income households.

[Lord Marlesford]

My Lords, does the Minister agree that the noble Lord’s reference to the United States is not very relevant because the United States does not have VAT? Indeed, it would do much better if it did have it. Furthermore, does the Minister agree that the Government should be very cautious in extending multi-rate VAT because all sorts of anomalies and complications can follow?

[Lord Newby]

My Lords, I have a great deal of sympathy with the noble Lord because my first job as a new employee was working on VAT. It was very complicated when it was introduced; it has got more complicated since then and should not be allowed to get any more so.

[Lord Howarth of Newport]

My Lords, is it not irrational to have a VAT regime that incentivises demolition and new build and penalises alteration and refurbishment? Is that not just as perverse in relation to heritage conservation as it is to energy saving? Will the Government negotiate with real determination in Brussels to secure a sensible regime?

[Lord Newby]

As the noble Lord said, the VAT regime is an EU regime. Any attempt to change it will require unanimity as it is a tax measure. Opening up the regime would, in my view, open up a Pandora’s box, and I do not recommend that as a policy approach.

[Lord Redesdale]

My Lords, Britain has one of the oldest building stocks in Europe. Does the Minister not agree that the value of retrofitting old buildings is incredibly important? I point to the enormous success of the retrofitting of the Palace of Westminster and congratulate the efforts by the staff to make great savings. However, there are particular problems with the Palace of Westminster. It is a grade 1 listed building, and there is quite a cost burden on retrofitting listed buildings. Can the Government consider a different, deferential rate for all listed buildings because of the cost implication of retrofitting listed buildings?

[Lord Newby]

My Lords, I think that we are all aware of the complications of trying to make a building such as this energy efficient, and I pay tribute to the work being done in that respect. Sadly, under EU legislation, the scope for a reduced rate of VAT on non-residential royal palaces is, I am afraid, non-existent. However, I commend, and refer the noble Lord to, the work that the National Trust is doing on green energy projects—for example, installing a biomass boiler system at Chirk Castle, which just shows what can be done. I remind the noble Lord that the Green Deal will apply to homes that are listed buildings.

[Lord Barnett]

My Lords, is the noble Lord’s strong support for energy saving why his right honourable friend the Chancellor is so strongly supporting shale gas, especially in Lancashire, where many jobs will be created? Lancashire will be very grateful for the support of the Chancellor.

[Lord Newby]

Shale gas is a significant potential new source of energy. As the noble Lord will be aware, we announced a series of measures in the spending review that will facilitate the development of shale gas. We think that it can play an important part in our future energy mix. Of course, the development of it will generate a number of jobs.

[Lord McFall of Alcluith]

In the discussion the other day with representatives of the KfW Bank in Germany, at which the Minister was present, he will have heard them say that one of the most successful schemes the bank has been involved in is a scheme for energy saving and job creation in Germany. Does he not think that there is a lesson here for this country, at a time when the divide between north and south is getting greater, so that we can help rebalance the economy and provide jobs at a local level, thereby having the twin objectives of ensuring economic prosperity and providing insulation for homes for the future?

[Lord Newby]

I completely agree with the noble Lord. Of course, that is why we set up the Green Investment Bank, which is already proving its worth, not only in putting money into green projects on its own behalf but getting a significant multiple of private sector investment coming in to support that government pump-priming.

[The Lord Bishop of Chester]

My Lords, the Minister has twice referred to the Green Deal as the Government’s policy response to the issue. Can he tell the House how the take-up of the Green Deal is progressing in relation to the hopes that were expressed?

--- Later in debate ---

[Lord Newby]

My Lords, the Green Deal is a new project with a 20-year life ahead of it. Up to the end of June, some 44,479 assessments had been made and 3,500 installations had received cashback payments. In addition, 78% of people with a Green Deal advice report said that they had, were getting or would get energy-saving measures installed, which demonstrates a very high level of consumer interest.