Financial Services Bill
Lord Newby Excerpts(11 years, 6 months ago)
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Baroness Turner of Camden
My Lords, I am a bit concerned about the wording of Amendment 27 with which this amendment is grouped. It refers to,
“the ease with which consumers … may wish to use … services, including consumers in areas affected by social or economic deprivation, can access them”.
I am very concerned, as many of us are, with people who are perhaps in a rather vulnerable situation being persuaded into services that are really not appropriate for them. This wording here at least lays that open so it would be possible for consumers who are affected by social or economic deprivation to be persuaded into services which are certainly not available or should not be available for them because they are not really suitable. This particular wording gives that impression and I am not very happy about it.
Lord Newby
My Lords, the question of access to financial services is obviously one that the House has considered very carefully as we have been going through the Bill. We all agree that it is very important that consumers, irrespective of where they live, their income levels, or any other characteristics, should have access to the financial services they need. However, while we have agreed on the principle, we have found it less easy to reach the same consensus on what should happen if the needs of people for access to financial services are not being met.
In debate in Committee, my noble friends Lord Sharkey and Lady Kramer in particular spoke eloquently about the problems caused by a lack of access to basic financial services in deprived communities and by a lack of lending and funding for SMEs in those same communities—a state of affairs that can further inhibit growth. The noble Baroness, Lady Hayter, offered her support in speaking up for the importance of ensuring access to financial services for everyone. I know this is a subject also very close to the heart of the right reverend Prelate the Bishop of Durham and I am delighted to be able to be the first Member of your Lordships’ House to congratulate him from the Dispatch Box on his new appointment.
Lord Newby
I will reiterate that I agree with these important points. Access to financial services is crucial. However, the Government have had concerns about the role assigned to the Government as opposed to the regulator in addressing these issues. We have made the point on several occasions that while the Government believe that the regulator has a role in promoting access and helping the most vulnerable, this should extend only as far as the FCA making sure that markets deliver, and that supply and demand meet people’s needs. Where effective competition cannot deliver, the Government, not the regulator, should step in.
To put beyond doubt that we want the regulator to play a role in promoting access where markets already exist, the Government have tabled Amendment 27 that would add a new “have regard” to the FCA’s competition objective. The Bill already states that in considering whether there is effective competition, the FCA may have regard to,
“the needs of different consumers who use or may wish to use financial services”.
The new “have regard” inserted by Amendment 27 complements this by setting out that the FCA may have regard to,
“the ease with which consumers, including those in areas affected by social or economic deprivation, can access the services they may wish to use”.
Lord Deben
I can see what my noble friend is arguing. However, at no point do I see where the FCA is supposed to say about its own activities that they may be good for perfection but may reduce access. It is really a question of the non-accountability for the costs which the FCA lays on an industry. There does not seem to me to be a precise way—perhaps he would like to point to it—when its own activities and regulatory costs are assessed in that way. Proportionality is one word, but there are many occasions on which it looks as if the cost of regulation itself reduces accessibility to poorer people.
Lord Newby
Perhaps the noble Lord will look at the government amendment, which refers to the need for the FCA to consider,
“the ease with which consumers who may wish to use those services, including consumers in areas affected by social or economic deprivation, can access them”.
The ease with which consumers can access products is affected directly by the costs that might be imposed by the FCA. This puts a duty on it to consider how its own costs, and not just the product characteristics, impact on consumers in those communities. I think what is required is there.
Lord Flight
It seems to me that the FSA is already doing this. It is weighing access against consumer risk. It said that you cannot market UCIS, VCTs or EIS to other than sophisticated investors because it has been judged that it is better to ban unsophisticated investors completely from being able to use these products as they are too high risk for them. That judgment has been made already.
Lord Newby
I am sure that the noble Lord is right. However, with this amendment, we are seeking to address the problem that people in deprived communities are denied access to many of the products that are available in more affluent communities. We want to give the FCA a nudge towards trying to see how simple products and various other products can be developed, which will support people in deprived communities. It does not in any way detract from the FCA’s requirement to protect unsophisticated investors from sophisticated investment products.
The challenge that this amendment seeks to deal with is that, for many people in deprived communities, the range of products available, even simple products, is very limited. We want to see how we can help to ensure that the regulatory framework does not keep that straitjacket as tight as it sometimes has been.
I hope that I have been able to persuade your Lordships that the government amendment will have a material impact on access in deprived communities. I hope that I have also been able to reassure noble Lords that what they intend to provide through Amendment 25F is already enshrined in the Bill and that the noble Lord will be persuaded to withdraw his amendment.
Lord Sharkey
I support Amendment 27 and I am grateful to the Minister for bringing it forward. It is a significant and important change. As we discussed in Committee, we believe that the question of ease of access to financial services is key to a proper and robust regulatory system. Ease of access to financial services absolutely needs to be a factor in any consideration of whether competition is effective or not. Nowhere is this more true than in areas of social and economic deprivation. There is already evidence of market failure in precisely these areas, to which we will return in some detail with Amendment 28A.
I am very glad to see that in this amendment the Government propose to put explicitly into the Bill consideration of ease of access to financial services in areas affected by social or economic deprivation.
Lord Newby
“(ea) the differing expectations that consumers may have in relation to different kinds of investment or other transaction;”
Lord Newby
My Lords, this group of amendments concerns social investment, a topic that we have already spent considerable time discussing during the various stages of the Bill. It is an important issue, and one that the Government have given considerable thought to, and so it is only right that we return to it at Report.
There is one point that we have made on numerous occasions and that I would like to reiterate before I turn to the detailed amendments. There is no doubt in my mind that the Government are committed to supporting the nascent social investment sector and will stand firmly behind it. However, we must not forget that this is, after all, not something in which consumers engage for purely altruistic reasons. If that were the case, individuals would simply donate or gift their money. That means that we must offer the appropriate protections to consumers entering into a social investment, as we would expect for any other financial transaction. As my noble friend Lady Kramer noted in our discussion on 25 July,
“we have no wish to expose people to scams or to create an opportunity for this to be used as a back door to taking unfair advantage. That is extremely important”.—[Official Report, 25/7/2012; col. 717.]
I could not agree with her more.
I turn to the government amendments in this group. Amendment 26 adds a new “have regard” to the list of matters which the FCA must consider when assessing what constitutes an appropriate degree of consumer protection. In future it will need to consider the different expectations of consumers in relation to different types of financial advice. This is intended to ensure that the regulatory approach takes into account that consumers might have non-financial—for example, social—goals.
Amendment 45 will add a new regulatory principle to proposed new Section 3B which applies to both the PRA and FCA and will require them to have regard to the different nature and objectives of different financial services businesses. This is intended again to make clear that there should not be a one-size-fits-all approach to regulation.
Noble Lords will be aware that these amendments do not refer to social investment specifically. That is because we want them to apply across the board rather than exclusively to social investment. We want the regulator to take a measured and targeted approach to regulating both alternative and existing firms and business models and protecting their consumers, and we do not want this to be limited to social investment alone. For example, there are other innovative sectors that would benefit from this, such as peer-to-peer lending. Incidentally, I can confirm to the House today that the Government will be transferring the regulation of peer-to-peer platforms to the FCA as part of the wider consumer credit transfer in April 2014.
My noble friend Lord Sassoon promised an update on two matters of policy concern that my noble friend Lady Kramer and others have raised on previous occasions. My officials have been working very closely with the Cabinet Office and the FSA over recent weeks and months. On suitability, I hope noble Lords will be pleased to hear that the FSA has confirmed that its assessment is that the existing rules do not restrict advised sales of social investment products. I have therefore agreed with the FSA that it will find a suitable way of communicating this to the industry and to consider whether anything more needs to be done to increase certainty for industry, because I know that that has been a major issue. To decide on the best way forward, the FSA will liaise with industry and other interested parties in the coming months.
On financial promotions, at this point the Government are not proposing to make any changes either through the Bill or through secondary legislation. We are alive to the potential for consumer protection concerns to arise in this area, and the potential for any instances of consumer detriment to have a highly damaging impact on a nascent sector. However, the issue is still being actively debated and is open for consideration as part of the Cabinet Office’s red tape challenge. Interested parties may make representations on the issue until the final panel meeting takes place at the end of the month.
There are also opportunities to explore whether there are any other, non-legislative ways of mitigating costs to social investment offerings of complying with the financial promotions regime, for example working with larger firms which may be able to provide assistance with compliance or approval. I encourage large firms to step up their efforts in this area. Finally, I can confirm that the FSA will provide a named contact to industry and other interested parties on matters relating to social investment. I hope that I have given noble Lords some reassurance that progress is being made in this area.
Lord Hodgson of Astley Abbotts
My Lords, my Amendment 31 is sandwiched between the two government amendments in this group. I think it is important not to look a gift horse in the mouth. Amendment 26, which adds to the consumer protection objectives, and Amendment 45, which adds to the regulatory principles, are a substantial improvement. The situation is certainly a great deal better than it was when we were in Committee and we had to rely on proposed new Section 137R, which is entitled “General supplementary powers”. Therefore, I am most grateful to my noble friend, the Bill team and the Government for the thought that they have given to this matter.
I shall speak briefly to Amendment 31. I recognise what my noble friend Lord Newby has said—that the Government have got it. By “got it”, I mean they understand the importance of creating a regime which, while recognising the need for proper consumer protection, will provide an appropriate regulatory structure, which in turn will not impede the proper and measured development of social investment. I hope that the Government will keep up the pressure and continue to stress this policy clearly and strongly to a wider audience. The wider audience has two major parts to it. The first is the regulator, which my noble friend referred to.
The Financial Services Authority very kindly arranged for me to meet two of its staff between Committee stage and now. They were interested, considerate, and keen to learn. However, without being in any way critical, they were a long way down the learning curve as far as social investment was concerned. When I discussed with them what their other responsibilities were, which included RDR, I was worried as to how they would be able to give sufficient time to the work that will be needed to provide and develop a proper regulatory framework for the issue of social investment. We have heard already this afternoon about the size and complexity of RDR and one is worried that social investment will be squeezed as a result. I hope that when my noble friend responds to my brief remarks he will feel able to stress again the importance that the Government place on the FCA in future and the FSA now in devoting the necessary time to the intellectual heavy lifting required to establish the right regulatory framework. This is not just a UK-centric issue; we have the thought leadership on social investment here in the UK, and some of the most innovative ideas have been pioneered here and are now being copied around the world. There is a real opportunity for the UK to lead the way in creating a new asset class, and we must not let it slip by allowing the regulator to put the issue into the “too difficult” tray.
The other audience that I hope the Government can spend some time persuading is that of the professions. If the Government want the social investment market to grow, there are many professional groups that have the power to help or hinder—inter alia, financial advisers, bankers, accountants, lawyers, auditors and investment managers. Each of these groups will have their individual concerns, the intellectual heavy-lifting required to devise rules and procedure for the new activity and the inevitable risks in anything new. The argument will run among some in each of those groups that we could stand back until it is clear that the social investment market will take off. In part, this reluctance to move forward is one reason why it is not taking off.
There are plenty of examples of how the attitudes in the professions have impeded this development. We came across a charity that wanted to make an investment of between £50,000 and £75,000 in activities in Nepal. It was told that if it was going to do that it would have to take a due diligence programme, which would have cost about £25,000. The result was that instead of making an investment, it gave a grant. It is those sorts of attitudes that one has to tackle—and it requires a fresh type of thinking. That example will not be dealt with by my amendment, but my amendment was designed to help to create an atmosphere in which social investment can become a mainstream rather than peripheral activity. That is why my preference has always been to have the words “social investment” in the Bill.
As I have said many times in the Chamber, I have been involved in the private equity industry for most of my career. It is worth remembering that all these concerns, worries and questions arose 30 years ago as private equity investment got under way, with doubts about interim valuations, suitability and investor protections. We overcame the doubters then to the great benefit of the UK and, in doing so, made the UK a world leader in private equity—and we can do the same with social investment, if the Government are prepared to make their support and encouragement clear. Nevertheless, I recognise that the social investment movement is at a very early stage. There are great hopes for it, but it is still a very fragile flower. That is why my amendment, while mentioning social investment directly, is entirely permissive; it does not require the regulator to do anything now.
It would be helpful if my noble friend the Minister could confirm that, in relation to the consumer protection objective, the Government recognise the different expectations that the social investors may have; that in relation to the competition objective, they recognise the importance of community finance provision to the financially excluded; and that in relation to the regulatory principles, they recognises the different natures and objectives of social investment businesses. I would be most grateful if he could do this when he comes to reply. Notwithstanding that, I again reiterate my thanks to the Government for the improvements that they have made.
Lord Newby
My Lords, I thank all noble Lords who spoke on these amendments. The noble Lord, Lord Hodgson of Astley Abbotts, asked for specific confirmation about the Government’s approach in respect of consumer protection, regulatory principles and competition. I am very happy to confirm that, in respect of consumer protection, the Bill will now require the regulators to consider expectations; the regulatory principles, ditto. As far as the competition objective is concerned, it will consider access in general terms. I hope that I have satisfied him on those points.
On his concerns in respect of the regulator and the professions, I am not at all surprised at what he said about the regulators being on a learning curve—not least because this is a rapidly growing, innovative area which has been very small. Because I think it is rapidly growing, and because we are giving it a bit of a push, I think that the regulator will be required to take it more seriously. I think that all those involved in the sector now have a lever to apply to the FCA to ensure that it does not get submerged as an area of interest.
As far as the professions are concerned, as I said earlier, the one area where we are hoping that some of the larger firms will get involved—particularly in terms of bringing products to market—is where the bank can act as an umbrella under which social investment projects can seek funding, so they themselves do not have to go through huge regulatory hoops. We are at a very early stage in evolving a mechanism for doing quite a lot of these things because they are so new.
The noble Lord, Lord Flight, raised the point about sophisticated investors; he said these were sophisticated investments. The noble Baroness, Lady Kramer, answered him in large measure, because although they are sophisticated—in the sense that you might lose all your money—we do not envisage that, unlike many sophisticated products, they will be restricted to people putting in very large amounts of money. We hope they will be projects that will attract relatively small sums, albeit with the acknowledgment that there may be a very considerable risk attached to the investment.
Lord Flight
I thank the noble Lord for giving way. It seems clear to me that, whether spoken or unspoken, government policy is to keep unsophisticated investors away from any form of higher risk investment. You do it by the RDR getting rid of the majority of IFAs; you do it by banning the ability to market VCTs—pretty low risk—and EIS to unsophisticated investors. Both of these could be quite small investments. I think the Minister has followed the logic that if that is the policy, it does not fit to say, “Ah, but it is perfectly all right to market a new concept which people will not particularly understand, or understand that they might lose all their money”. In the spectrum of risk, it is a relatively high risk investment. As far as I can see, the policy is all over the place.
Lord Newby
It is not all over the place because people who are investing in these products are doing so for different motives. They are doing so because they want a project to be successful and to achieve a social outcome. That is not the kind of product that one normally associates with a product that is limited to sophisticated investors, so I think that the noble Lord is talking about two different sorts of products entirely. Very often, the products that are marketed to sophisticated investors have the attraction that, if all goes well, they will bring a larger than average rate of return. Nobody expects the kind of products we are talking about here ever to be generating vast returns for anybody; that is not their purpose. The purpose is to get new money into socially desirable areas of activity. There is a distinction and I hope that he is persuaded that we are not all over the place.
Although I was beguiled, as always, by my noble friend Lord Phillips’ comments about my accepting Amendment 31, I am sorry that I am not able to do so. I think that our amendment does the business.
Lord Phillips of Sudbury
I am terribly sorry to interrupt my noble friend. He says that Amendment 26 does the business. With respect, Amendment 31 is a very gritty one: it simply gives the Government of the day the chance to amend, or add to, the crucial provisions by order. Surely that is desirable, because we wait to see how all this is going to work out.
Lord Newby
Yes, we do indeed, but the government amendment is broader and gives considerable flexibility to the FCA in the way that it deals with this new mandate.
The noble Baroness, Lady Noakes, raised the question of what happens if consumers have unrealistic expectations, and she thought that this could, in effect, be a dangerous amendment. I do not think that it is, because I do not believe that this is the way that the amendment will be interpreted by the FCA when it looks at products in this area and gives advice about them. While I can see where she gets the arguments from, I am confident that the FCA will ensure that we do not have the kind of dangerous consequences which she mentions.
Baroness Noakes
I thank the Minister for that, but how can he be confident that the FCA will—for all time—interpret the words in the way that he wishes them to be interpreted?
Lord Newby
My Lords, it is very dangerous to be confident about anything for all time, but if you turn the proposition of the noble Baroness on its head, is it conceivable that the FCA would interpret this clause at any point in a way that would be dangerous? Frankly, I cannot see why it would. One can never say absolutely that in 50 years’ time—assuming that this piece of legislation is on the statute book—interpretations might be exactly the same as they are today, but it would be perverse to think that the FCA would interpret this provision in a way that opened up the dangers about which the noble Baroness is concerned.
Lord McFall of Alcluith
My Lords, I support the amendment and the proposition of the noble Baroness, Lady Noakes. If we look at the history of prudential regulation and consumer interest, we find that prudential regulation has trumped conduct of business for a number of years. I suggest that the PRA will be a more enhanced body than the FCA and therefore will win out all the time. Therefore, what the noble Baroness is saying about a broader range of opinion is extremely important. We need to look at the history of the representation of consumers in the financial services industry over a number of years. I lobbied the FSA for years to get a consumer representative on board. It came back to me very excited one day and said, “We have someone on board”. However, one out of 12 or one out of 13 is inadequate. It is very important that we redress the asymmetry of knowledge that is at the centre of selling because we have to restore trust and confidence in the industry, and to do that we have to balance the needs of the industry with those of the consumer. Therefore, I could not agree more with the need to have broader representation. That would put the status of the PRA at one with that of the FCA so that they served the interests of the industry and the consumer.
Lord Newby
My Lords, the Government obviously recognise that consumers have an interest in the outcome of the PRA’s actions and decisions. In particular, consumers will be beneficiaries of a safer and more stable financial system. However, the PRA will not focus on consumer protection as an end in itself. That will be the job of the FCA.
New Section 3D in the Bill requires the PRA and the FCA to co-ordinate their functions in areas of common regulatory interest where one may have relevant expertise or a material adverse impact on the objectives of the other. This means that while it is right that the PRA must focus on its safety and soundness objective, where its actions may impact adversely on consumer protection it will need to listen to the FCA, which obviously has the lead consumer protection objective. As the regulator with expertise and analytical capacity in relation to consumer protection, it is right that the FCA should consider stakeholder perspectives, including the views of the consumer panel, come to a balanced view and then communicate this view to the PRA. I do not think that it would be sensible to require the PRA, which will not have detailed expertise in general consumer issues, to consider separate consumer representations and potentially develop an alternative rival consumer view about the best way to deliver consumer protection.
For these reasons, I cannot support the amendment. I hope the noble Baroness will be satisfied that the system will enable all consumer concerns to be represented to the PRA, but that that will be done through the principal channel of the consumer panel that the FCA is to establish.
Baroness Hayter of Kentish Town
My Lords, I thank the noble Baroness, Lady Noakes, and my noble friend Lord McFall for their support. I am sorry the amendment does not find favour with the Minister. I think he misunderstands. If he thinks consumer protection is just about conduct, he does not understand the impact of things that the PRA will be doing. The FCA will put only a combined view to the PRA; it will not put the consumer viewpoint.
If we listen to the Minister, the PRA will still listen to consumers but through newspapers, through lobbying, through letters, and so on. I would like something different: a grown-up dialogue between the consumer panel and the PRA, rather than the sort of campaigning that the rest of us have done as lobbyists for many a year. I still hope for that. Therefore, I would like to test the opinion of the House.
Lord Newby
My Lords, we can indeed all agree on the importance of financial education so that young people and adults are able to take responsibility for their finances and make informed financial decisions or, to repeat what the noble Lord, Lord Flight, said, know what they are investing in. I absolutely agree with the noble Lord, Lord Deben, about schools getting better at teaching the necessary tools of life. He mentioned cooking. Before I took up this post, a number of years ago I was an adviser to the School Food Trust, which has been extremely successful at starting cooking clubs across the country. We are looking to provide the same kind of experience in financial literacy.
There are a number of ways in which we can do this, one of which is through the formal curriculum. The All-Party Parliamentary Group on Financial Education for Young People is one of the largest in Parliament and it has been giving guidance to the Department for Education about financial education and the curriculum. Another is to consider how we can insert financial literacy into school life in a way that young people will find engaging. In that regard, the work by organisations such as the Citizenship Foundation and some of the banks has been really valuable. The Royal Bank of Scotland’s money sense for schools programme and Nationwide’s financial skills programme provide materials which make the subject interesting and bring it to life. That is very important. It is worth underlining that £25 million of initiatives by the financial services sector took place last year.
The amendment requires the FCA to work with the Department for Education. The FCA is the regulator but the Money Advice Service is the appropriate body to work with the DfE at an operational level on matters of financial literacy. The Money Advice Service was established by the FSA and its objectives are set out in new Section 3R of FiSMA, as inserted by Clause 6 of the Bill. Those objectives specifically include a requirement to promote,
“the publication of educational materials or the carrying out of other educational activities”.
The Money Advice Service has been engaged with officials from the DfE and has provided a written response to the department’s invitation to engage in the debate on financial education in the curriculum. It will continue this engagement when the formal consultation on the national curriculum takes place in the new year.
I am extremely sorry that the noble Lord, Lord Flight, has not had a reply from my right honourable friend David Laws in the terms that he would wish. The Department for Education has attempted, through the new EBacc, to make sure that all children have basic academic skills at school. The life skills we are now talking about need to be added to those parts of the curriculum that are not given statutory cover. However, curricula are definitely beyond my pay grade and the exact way in which we ensure that financial literacy is better promoted in schools is an issue that the Money Advice Service and the Department for Education need to be engaged in.
I agree with the noble Lord, Lord Flight, on the importance of financial education and on the need to improve the way in which we teach it in schools, but I do not think that his amendment is the way we will achieve it. I hope the other ways that I have mentioned will prove more effective and that my noble friend will feel able to withdraw the amendment.
Lord Flight
My Lords, I accept that the amendment is not appropriate, although it was the only way in which I could raise the issue. I would like to think that the Treasury will be motivated to co-operate with the Department for Education to address this issue. That is the only way in which we will make significant progress. I beg leave to withdraw the amendment.
Lord Newby
“( ) the ease with which consumers who may wish to use those services, including consumers in areas affected by social or economic deprivation, can access them,”
Financial Services Bill
Lord Newby Excerpts(11 years, 6 months ago)
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Lord Sharkey
My Lords, this amendment has two purposes. The first is to make sure that relevant data on each bank’s performance are in the public domain. This will make it possible to have an informed debate on whether the banks are competing effectively in the interests of consumers, as the FCA is required to promote. At the moment, all we have is aggregated and regional data. We do not know to what extent, or even whether, the banks are effectively competing, or indeed whether they are properly engaged in all the areas where we might want to see effective competition.
In a more general sense, increasing the amount of data on bank activity in the public domain is a very good thing. We need banks to change their practices, and their culture and transparency is a critical part of doing exactly that. We need to be able to see the changes in both practice and culture and not have to rely just on assertions that changes are taking place. For example, we need to see evidence that, as it says in the coalition agreement, the banking system serves businesses and not the other way round. Exactly the same applies to ordinary customers, too.
The second purpose is to focus attention on banks’ lending to SMEs. Your Lordships will have heard many times about the absolutely critical role of SMEs in our economy, and of their role as key providers of jobs. The importance is hard to exaggerate. Our economic recovery and our enduring economic health depend on the performance of our SMEs, as it always has. The ONS data for July 2011 show that SMEs provide 60% of all jobs in the private sector and generate 49% of private sector turnover. The BIS economics paper of 16 January this year re-emphasises the importance of SMEs to the economy, but goes on to say that,
“there are a number of structural market failures restricting some viable SMEs from accessing finance”.
The report notes that access to debt finance is now harder than before the credit crunch.
In 2007-08, 90% of SMEs seeking finance obtained it. This figure now stands at 74%—and, crucially, the total stock of lending to SMEs is in decline, especially to those with a turnover of less than £1 million. To place this in a long-term context, the Breeden report of March this year estimates that by 2016, if things go on as they are, there will be a shortfall of between £26 billion and £59 billion in the finance needed by SMEs for working capital and growth. The Government are very clearly alive to these problems and hope, as we all do, that the Funding for Lending scheme will succeed in making a real difference in funding for SMEs.
The data provided by the banks on lending to SMEs are provided on an aggregated basis. That means there is no information to allow assessment of performance and suggestion of improvement, or to show which banks are performing better than others or, critically, which are effectively absent from which areas. We do not know which banks are supporting—and to what extent—the third sector in taking advantage of the new rights conferred under the Localism Act. To do all this properly, we need access to disaggregated data and data on a postcode level so we can see clearly which banks are doing what and where with the vital SMEs. We need this data so we can identify in detail the areas of market failure and therefore of competitive failure, which the Government acknowledge do exist.
The SMEs are vital to the economy and to jobs. Funding SMEs is vital to their performance. Underfunding, which is the current situation, threatens our economic recovery and the creation of jobs. There is evidence of market failure and of a failure of competition. The amendment will allow us to identify that failure and will provide us with the information to help put right that failure. It will help promote effective competition, as the Bill requires the FCA to do, and it will help fulfil the coalition agreement’s pledge to develop effective proposals to ensure the flow of credit to viable SMEs.
Of course, I hope that my noble friend will agree to this amendment, but it has occurred to me that he may have one or two reservations about doing so. In particular, he may worry that the amendment imposes too onerous a burden on the banks. He may worry that the publication of a bank’s performance may somehow be prejudicial to its commercial activities. I hope that I can give him some comfort on both points.
The burden that this amendment imposes on the banks is not onerous. The FCA may decide, in general, what data it considers to be relevant. I am sure that, in general, it will take into account the burdens imposed. Specifically, publishing the disaggregated and postcode-level data on lending to SMEs imposes, if anything, a trivial additional burden on the banks. The BBA already publishes aggregated data on a quarterly basis, which includes lending to SMEs on a regional basis. By definition, disaggregated data exist before they can be aggregated. Surely, the banks know the postcodes of their customers—except, it appears, for some HSBC Cayman Island accounts.
For the worry that publication of disaggregated data may somehow be prejudicial to the bank’s commercial activities, it is hard to make a convincing case. Exactly like all other large, competitive organisations, the banks will already have detailed research on what their competitors are up to with SMEs—or, if they do not, they are even less competent and less competitive than we might have supposed. The amendment simply puts that information into the public domain.
The amendment is not onerous. It simply requires more transparency from the banks in the interest of more effective competition. It requires, in particular, more transparency about the banks’ support for the SME sector. We would all benefit from that, and people and businesses in deprived communities would benefit greatly. Even the banks would benefit from a move to greater transparency.
I very much hope that the Minister will be able to agree to this amendment or to assure the House that at Third Reading the Government will bring forward something equivalent. I beg to move.
Lord Newby
My Lords, it might be to the benefit of the House if I give the Government’s response to this amendment now. In responding to an earlier amendment, I said that the FCA would necessarily need to gather data from industry to understand what existing provision there was and whether it met the needs. But we need to make proper provision for any data requirements. Normally, that is in the FCA’s rulebook, or covered by commitments made by industry to provide and publish relevant information, working through trade bodies as appropriate. Ideally, we would not need to legislate to make that happen.
Let me be clear on our position: the Government agree that we should be able to see where provision is lacking, particularly where there are areas where bank lending is simply not being offered or getting through. Getting this data in the public domain will help to crystallise the problem, and what should be done about it by industry and by the Government if necessary.
I can confirm today that we will be working with industry, through the British Bankers’ Association and other interested parties, to get a commitment from the banks that they will publish more granular data. This will build on the work that industry is already doing and will deliver publication of the kind of data that all sides of the House clearly want to see. The members of the business lending taskforce already publish subregional aggregated lending data on an annual basis. While this is a good first step, I think we all agree that it is not enough. Therefore, we will work with industry to collate and publish lending data that is disaggregated by institution and presented on a postcode-level basis.
The Government will take this forward as an urgent and pressing matter. In reiterating our commitment to make progress in this area, I confirm that should our negotiations with industry fail to deliver—I sincerely hope that that does not happen—the Government will introduce amendments to the Banking Reform Bill along the lines proposed in the amendment we are debating today, to ensure that the data, in disaggregated and postcode-specific form, are published.
I hope that this reassures noble Lords that the Government share their commitment to making progress in this area and that the noble Lord will be prepared to withdraw his amendment in light of this commitment.
Lord Newby
Lord Newby
These amendments relate to the matter raised by the noble Lord, Lord Davies of Oldham, during earlier discussions of the FCA’s objectives. At the time, the noble Lord made the point that it seemed odd that the new section in this Bill setting out a number of indicative and non-exhaustive matters that may be considered to fall within the definition of financial crime should not include a matter of grave concern; namely, the financing of terrorism. My noble friend Lord Sassoon wholeheartedly agreed at the time that this was an odd state of affairs and promised to return to the matter on Report. That is why I am today tabling these two amendments, which have the effect of adding the financing of terrorism to subsection (3) of new Section 1H in Clause 6. This brings the provision very much into the 21st century and reflects the reality that we need our regulators to be ever more vigilant and do what they can to reduce the extent to which the financial system and firms within it can be used to finance terrorism.
I should stress that the list describing what may be considered to constitute financial crime is indicative and non-exhaustive and that there is no question that the FSA at present does not have the mandate to act in this space. It absolutely does. However, I agree with the noble Lord that this is very much a change worth making. I beg to move.
Lord Eatwell
My Lords, I am amazed at the inability of the Treasury to get this one right. My noble friend Lord Davies of Oldham pointed out that the definitions, even in this indicative list of financial crimes, do not accord with our international obligations to the Financial Action Task Force. The FATF defines the crucial area of international financial crime as money laundering, the financing of terrorism, with which the Government have now caught up, and the financing of the proliferation of weapons of mass destruction. Why are the Government not following the definition given in our international obligations? Why do they not consider including the financing of the proliferation of weapons of mass destruction—one of our key international obligations—as appropriate in the indicative list?
Lord Newby
My Lords, it is an indicative list. We have added to it on the basis of comments by the noble Lord, Lord Davies of Oldham. It is a non-exhaustive list and the question of weapons of mass destruction is already covered by the powers that we have. There can be no question but that the authorities will be bearing down very heavily if they think there is any question of the financing of weapons of mass destruction.
Lord Newby
(d) the financing of terrorism.”
Lord Newby
Lord Newby
My Lords, this group of amendments includes the government amendments which introduce a practitioner panel for the PRA. Government Amendments 32 to 36, 38, 39 and 64 introduce a standing practitioner panel for the PRA and make consequential amendments, for instance to make clear that there are now two practitioner panels—the PRA practitioner panel and the FCA practitioner panel.
We have always recognised that robust consultation arrangements will be vital if the PRA is to regulate effectively. The approach as originally envisaged in the Bill was to have a high-level duty to consult, giving the PRA substantial flexibility as to how that consultation was carried out. To ensure accountability, that approach also required the PRA to report on its consultation arrangements.
However, having listened to the arguments advanced by noble Lords, and in particular my noble friend Lady Noakes, I am persuaded that it is right that Parliament should set out more detail for the PRA about how it should go about that consultation. A standing practitioner panel will be well placed to monitor cumulative burdens of regulation and give advice to the PRA on an ongoing basis about the effectiveness of its co-ordination with the FCA.
Of course, the Government expect that the PRA will consult much more widely and draw on the expertise of academics and others and the Bill does not take away from its power to do so. The new panel will be a useful addition to these arrangements, and I hope that these amendments meet the concerns that the noble Baroness raised at an earlier stage.
I turn briefly to Amendment 37A, tabled by my noble friend Lord Flight. This would have a very similar effect to the government amendments except that it specifies that the FCA may appoint persons to the PRA’s panel. The PRA panel is, of course, intended to give advice to the PRA about the best way to achieve its objectives, and, as such, it is right that the PRA should appoint people who it thinks are appropriate to the panel. The FCA’s objectives and its expertise will be quite different and I do not think it is appropriate to have the FCA appointing people to the PRA practitioner panel.
Overall, I think that the Government’s proposed approach works well, and I am not persuaded that my noble friend’s amendment improves upon it. I hope that, having seen the government amendments and heard my explanation, my noble friend will feel able to withdraw his amendment.
Lord Flight
My Lords, I am delighted to see that my Amendment 37A has effectively been reproduced by the Government. I apologise as I note that my amendment states, “The FCA may appoint”, whereas it should refer to the PRA. I had taken the same wording for the PRA panel as for the FCA panel. It is healthy to have this structure, which will give people greater confidence to work with the PRA.
Baroness Hayter of Kentish Town
My Lords, as I said earlier today, it feels rather wrong to establish a PRA practitioner panel while excluding the views of those whose money and savings are at the heart of this industry and who depend on well regulated companies for their well-being. It also looks a bit too cosy a set-up between the regulator and the regulated community with no user-interest input. So, while we do not oppose these amendments, we do not think that they are a balanced response to the demand for the PRA to listen to those who work in financial services.
We know from the Treasury Select Committee report on RBS of the silos that existed even within the FSA between its prudential and conduct sections. With the move to two regulators, physically a mile apart, there is an even bigger risk of such silos. This will not be helped by having two separate practitioner panels, so that even within the industry there will be a split between those addressing one regulator and those focused on the other. This will be the case as regards numerous issues, including, for example, benchmarking. The proposal is for LIBOR to be overseen by the FCA, and therefore have input from the FCA practitioner panel, but how it is working out in practice, the inputs to it and the use made of it will be the preoccupation of that part of the regulated community represented by the PRA practitioner panel. This proposal might therefore not be the best that the Government could have come up with. It was not the first choice of the industry and it would not have been our first choice.
Lord Newby
I am grateful to the noble Lord, Lord Flight, for his support for what we are seeking to achieve. I am not surprised by the comments of the noble Baroness, Lady Hayter. However, I hope that the House will feel able to support these amendments.
Lord Newby
Lord Flight
My Lords, Amendments 36A and 36B are, to some extent, alternatives. I prefer Amendment 36A. As an objective for the PRA, it simply provides that the authority should be,
“seeking to sustain and encourage a competitive banking industry”.
Part of financial stability is a competitive banking industry. A considerable element of the problems that the banking industry got into were, to my mind, the result of a cartel, and cartels always cause trouble. Therefore, if you want a safer banking industry, you want it to be reasonably competitive. As it stands today, the British banking industry is not particularly competitive. I have forgotten the precise figures, but four banks have a very substantial proportion of the total deposit base. I should declare an interest as the senior NED of Metro Bank, which is pioneering banking competition—with, I am glad to report, considerable success—as a straightforward traditional retail bank.
However, I hope that the Government might at least consider Amendment 36A, which is not imposing anything particularly demanding on the PRA but which rightly includes that provision as one of the objectives in order to create a safer banking climate. Amendment 36B provides a wider definition of the banking objective of creating a competitive banking industry and, effectively, narrows the definition to the taking of deposits. It is based on the special PRA insurance objective.
Lord Newby
My Lords, I shall speak to the government amendments in this group and then I shall address the amendments in the name of my noble friend Lord Flight. In Committee we debated several amendments relating to whether the PRA should have a competition objective. Since then, the Government have considered further how the PRA should take account of competition considerations in its work, and decided to introduce provisions that, broadly speaking, require the PRA to be aware of the adverse effect that its actions can have on competition, and to minimise this wherever possible. In my view this strikes the right balance, ensuring that the PRA contributes to the creation of a more competitive environment in banking, but not to the detriment of safety and soundness. The PRA will have to explain how any rules it proposes to make are compatible with this new duty, as with its other regulatory principles.
I hope the new requirement addresses concerns that the PRA’s focus on safety and soundness will mean that it could impede competition within the financial services firms that it regulates or that it will ignore the impact of its actions or inactions on competition; for example, in setting barriers to entry for new entrants to the banking sector. In support of the new “have regard” requirement on the PRA, we are also introducing a requirement for the PRA’s annual report to include how it has complied with this new duty.
I turn to the amendments of my noble friend Lord Flight. As my noble friend Lord Sassoon stated in Committee, the FSA was required to balance multiple competing objectives and this led to a lack of institutional focus on prudential matters. Therefore, the Government remain firm on their decision that the PRA should have a single general objective against which it can be held to account by Parliament and the wider public. Giving the PRA a competition objective would also risk a new confusing overlap with the FCA’s competition objective, given that all firms regulated by the PRA will also be regulated by the FCA. As I have said, in our view a new “have regard” requirement strikes the right balance, ensuring that the PRA will provide an appropriate level of regulatory support to the need to have a more competitive environment in banking, but not to the detriment of safety and soundness.
Earlier in debates on this subject my noble friend Lord Flight suggested that there is a cartel operating in the banking sector. The OFT, rather than the FCA or indeed the PRA, has enforcement powers in relation to the prohibition of anticompetitive agreements, including cartels, in the Competition Act 1998. In addition, under the Enterprise Act 2002 it is a criminal offence for an individual to engage dishonestly in cartel activity and the Government are amending this provision to make prosecutions easier, via the Enterprise and Regulatory Reform Bill. If there is a cartel in any area of financial services then this is properly for the OFT to investigate as it has the appropriate expertise and powers. However, where I do completely agree with the noble Lord, Lord Flight, is that there are not enough banks. Whether it is Metro Bank or any of the other banks that are now getting established, there is general agreement that a more diverse and competitive banking sector will be very much to the benefit of the consumer. Therefore, while I thank the noble Lord, Lord Flight, for his amendments, we are unable to accept them and I hope that they will not be pressed.
Baroness Kramer
My Lords, I speak in support of the noble Lord, Lord Flight. I appreciate that the Government have moved in a significant way in their Amendment 37. What they have put in place is a sort of passive language that the PRA will not stand in the way and be an obstacle to the competition objective of the FSA. I would, however, very much like the Government to look at this again and see if they can turn it into the active, preferably with the same language as they use for the FCA, so that the two are aligned. The underlying reason for this is very straightforward. The PRA is the body that issues bank licences and is therefore significantly in control of the process that leads to more or fewer banks in this country. Its history has been one of discouraging the appearance of new banks. One in the last 137 years is really not the kind of target or the rate at which we want to continue in the future in order to have a more competitive environment. We need to be aware that competition is one of the underpinnings of banking reform—not competition for its own sake but competition because it impacts on standards and because it impacts on the potential for banks that provide customer service. It impacts across a whole range of behaviours, all of which are deeply embedded in the banking reform that everyone in this House is seeking.
Rather than just speak on my own account, I can refer this House to others who have spent more time than I going in detail through these issues. Having looked through many of the issues, the Treasury Select Committee of the other place, in its Financial Services Bill Report of May 2012—so it is recent—concluded:
“It remains our view that competitive markets need both freedom to exit and freedom to enter. The Bill contains no proposal for specific objectives related to competition for the Prudential Regulation Authority. We recommend that the House of Lords consider amending the Bill to make competition an objective of the Prudential Regulation Authority”.
So, that is a significant step on from the concession that the Government have made so far.
I believe that in this House many have a great deal of respect for Sir Donald Cruickshank and the work that he has done on competition. It is something of a scandal that a report produced more than a decade ago has seen so little action when evidently, in hindsight, it has been shown to have got to the heart of many of the issues. I quote from recent comments that Sir Donald has made to the Parliamentary Commission on Banking Standards:
“I can tell you that if the Financial Services Bill becomes an act in its present form, with that wording for the FCA relative to competition, it will have a minimal impact on the decisions of the FCA, because it is not a primary objective—it is qualified”.
The fact that it is not a primary objective of the FCA adds to the argument for introducing language for the PRA; it is an alternative mechanism if the FCA language is to stand. Sir Donald went on to say:
“If a regulatory body that is overseeing the activities of a sector of the economy that is central to the operation of the state does not have a competition objective … it is very likely that competition will be muted. Because it is then in the interests of both the regulated and the regulator to keep competition muted. It is easier for both parties … It would be extraordinarily difficult for the PRA in this case, if it thought that its objectives might be better delivered via better competition in a particular sector of the economy, to act to achieve that”.
His final comment was that,
“my preference would be to have both the PRA and the FCA with precisely the same competition objective and powers so that when they are asked to act together, they do so within the same framework vis-à-vis competition. Then, if there are real tensions between their other objectives, we have the FPC and the Bank itself moderating the answer”.
Lord Newby
(b) the need to minimise any adverse effect on competition in the relevant markets that may result from the manner in which the PRA discharges those functions.(2) In subsection (1)(b) “the relevant markets” means the markets for services provided by PRA-authorised persons in carrying on regulated activities.”
Lord Newby
Lord Newby
Lord Flight
My Lords, I rise to speak most strongly in favour of my noble friend Lord Hodgson’s amendment. I hope that the Government will heed what he said. First, it is quite clear—you have only to look it up in the dictionary—that “proportionate” does not mean “reasonable and fair” as well. It has an arithmetic type of meaning. Secondly, my understanding when my noble friend Lord Sassoon was working on his plans for regulatory reform was very much that we wanted to have a well equipped central bank regulator of banks that would act in a judgmental way and be bright enough to see problems coming, not work on a box-ticking basis, and head them off as, in the past, various central banks have done quite successfully. You really cannot have a judgmental regulator without the inclusion of “reasonable and fair” in their objectives.
I add to some of the figures quoted from the FT Weekend. It was not just about New York; it also pointed out that the number of people working in the financial services industry in Hong Kong is now larger than that in London and indeed that London has lost about 100,000 jobs in the financial services industry since 2007.
Within the territory—I may have made the point in a different way before—I perceive that what happened is that light-touch regulation got a bad name and should never have been what it turned out to be. The reaction to that has been regulators turning macho. The reaction to that has been even very large and proper businesses saying, “We do not want to discuss things with the regulators. We are not going to voice our objections. We will shut up because we are frightened we will be picked on if we cause trouble”. Again, I would like to see the regulators state publicly that they want to discuss things with the industry, they welcome comments and are certainly not in the business of taking it out on firms just because they may disagree with what the regulator proposes. We have an extremely unhealthy situation right now where there is not dialogue or constructive reaction and discussion to the proposals coming out of the regulator.
I repeat: my noble friend Lord Hodgson has got it absolutely right. The amendment is fundamental to the reforms going through, if they are to work as I believe the Government intend.
Lord Newby
My Lords, these amendments again look to amend the proportionality principle to which both regulators are required to have regard when carrying out their general functions. Noble Lords will not be surprised to hear me say that that principle will play an extremely important role in the new regulatory system. It ensures that the regulators must consider whether the burdens they impose will be proportionate to the benefits that are likely to result. I am sure that that principle is universally accepted.
Amendment 42 specifically adds a requirement for the regulators to have regard to being “reasonable and fair”, as well as “proportionate”. Noble Lords will remember that my noble friend Lord Sassoon expressed support for the sentiment behind the amendment at an earlier stage. I am sure that all noble Lords would accept that nobody from this Dispatch Box would be a proponent of a new regulatory system we were creating if for one second we thought that the regulators would act in a way that was unfair or unreasonable.
Does the Bill achieve that objective? We believe that it does. The regulators will not be required to have regard to being fair and reasonable; they will have legal duties to be fair and reasonable; they go further than the amendment proposes. As we explained at an earlier stage, the regulators will have a duty under public law to act reasonably; they are also under a duty to comply with the rules of natural justice, so they will be required to follow procedures and processes that are fair.
My noble friends Lord Hodgson and Lord Flight gave a definition of proportionality. The definition that they gave was narrower than most people’s view of what proportionality means. In certain circumstances, it is a mere mathematical concept, but if I say that I am going to give a proportionate response to something that someone does to me, it is not simply calibrated or adding up figures; I think that it is seen in common parlance as being synonymous with a reasonable and fair response. As I said, the requirement on the regulators under public law to act in that way underpins that thought.
I have considerable sympathy, however, in respect of the threats that London faces as a pre-eminent financial centre. It is not surprising that Hong Kong and Singapore are growing very quickly, given what has happened to the economies in those parts of the world. You would expect growth there, although London is contracting in part because some of the activities that have been undertaken in London are no longer either profitable or, in some cases, credible. When one sees, for example, UBS downsizing significantly in London, it is not doing it because of the regulatory regime; it is doing it for fundamental business purposes, against which these provisions would have no bearing.
Where I agree with my noble friends is that we must ensure that the mindset of regulators in the UK is not negative. It has always been our intention that they would adopt a judgment-based approach; that has been stated on many occasions. That is the key to effect a change of culture in the way that the regulators work. If the amendment would have that impact, the Government might be more sympathetic to it. We simply do not believe that it would. As I said, we believe that the Bill will require the regulators not just to act proportionately but, under their more general duties, to act reasonably and fairly as well. On that basis, I hope that my noble friend will feel able to withdraw the amendment.
Lord Hodgson of Astley Abbotts
My noble friend will not be surprised to hear me say that I am extremely disappointed with that response. I thank my noble friend Lord Flight for his helpful comments, in particular, about effective regulation being a two-way street where people communicate issues and problems that they are facing, not in fear that they will have the book thrown at them but because it is in the regulators’ and regulatees’ interests to address problems and find solutions before they become unmanageable.
My noble friend falls back on the legal words that the regulator has to be fair and reasonable and that there is natural justice. I prefer his point about mindset. The fact is that “proportionate, fair and reasonable” imposes a different mindset on the regulator than “proportionate” on its own. He and the Government may have convinced themselves that the threat to London is coming from the natural effluxion of economic activity to the Far East. I think that they are in danger of being sadly mistaken. We have a chance in this Bill to address the problems that have bedevilled us until recently and to set out our stall for a new, judgment-based, regulatory regime, philosophy and approach. By these as by a series of other decisions taken by the Government, we are missing an opportunity which we will greatly regret having not taken in the years ahead. However, the hour is late, and though I am sorely tempted to divide the House just to have my own bit of testosterone, I beg leave to withdraw the amendment.
Lord Newby
“( ) the desirability of sustainable growth in the economy of the United Kingdom in the medium or long term;”
Lord Newby
My Lords, we all accept that the financial services sector is integral to the prosperity of the wider economy. However, we have also seen what happens when light-touch regulation and excessive risk-taking by financial institutions conspire to produce the perfect storm, culminating in the recent financial crisis. The aftermath of this, of course, is still an impediment to growth in the UK. An appropriately regulated financial sector will be key to the economy’s resurgence, and I am confident that the reforms that we are making to the regulatory system in this Bill will ensure this.
However, at Second Reading and in Committee, my noble friend Lord Sassoon listened to concerns from noble Lords on all sides of the House that the regulators would be excessively focused on their remits and would act in a disproportionate way which might constrain the financial services sector from acting to support activity in the wider economy. That is why a commitment was made to return with an amendment that would require the PRA and FCA to consider the wider impact of their actions.
Amendment 44 delivers on this commitment. It requires the FCA and PRA to have regard to the desirability of sustainable growth in the economy of the United Kingdom in the medium or long term. This is a concept with which of course it would be extremely difficult to disagree. Sustainable economy growth is desirable, and it is important that the regulators will now be required to show how they have considered this in carrying out their general functions.
To a certain extent, this gets back to the amendments that we have just debated. The regulators should not be the agents of the industry that they regulate. Regulation itself is not about enhancing the international competitiveness of our domestic financial sector, even if that is an outcome when regulation is proportionate and effective. This amendment recognises the link between an apparently appropriately regulated financial sector and the growth of the wider economy, and requires that the regulators bear it in mind. That is why the amendment I have tabled strikes an appropriate balance: it creates an expectation that the regulators must think carefully about the impact that their regulation may have on the wider economy; this is absolutely right. Seen in the light of the recent financial crisis, it is clear that taking appropriate regulatory action in good time would have served to safeguard sustainable economic growth in the medium to long term. This amendment will ensure that the regulators consider the wider economic impact of their actions. I beg to move.
Lord Hodgson of Astley Abbotts
My Lords, despite my disappointment over the last three amendments, I congratulate the Government on having brought forward this amendment. It follows the Government’s sensible decision earlier in the passage of the Bill to give the Financial Policy Committee an explicit objective of growth and employment. This amendment achieves a sensible and pragmatic solution, takes account of the needs of the economy and the priorities of business and the financial sector, and at the same time allows regulators rightly to focus on their important consumer protection and financial stability objectives.
There is a small sting in the tail for the Minister. Given that this is a new requirement for the regulators, I encourage him to ask the FCA to come forward with its vision of how it will interpret its regard to economic growth. The regulator is already up and running in shadow form, with designated leadership teams already starting to set out publicly their approach. It is clearly important that the will of the Government and indeed of Parliament is incorporated in that regulatory planning. I applaud the Government for bringing forward this amendment but would argue that in order to achieve their desired goal of supporting growth, work needs to begin now to set out how the regulators will interpret and implement this new requirement.
Lord Tunnicliffe
It is not often that I rise to offer sympathy to the Minister. He was quite right to say that the generality of this amendment, which in my recollection came from all sides of the House, particularly from these Benches, was stressed by us in another place. Every now and then, one has to look at a massive Bill such as this and recognise that the final test of all legislation is that it contributes to the general good. I think that the two lines of this growth amendment produce the right reminder to the regulators that they have to contribute to the general good—I share the emphasis placed by the noble Baroness, Lady Kramer, on the medium and long term—and I warmly welcome it.
Lord Newby
I am grateful for the contributions from all noble Lords who have spoken. I do not want to go into a lengthy response at this time of the evening, but not because I do not feel that we know the answers to the questions. I shall deal with a couple of specific points that were made. My noble friend Lord Hodgson asked in particular about crowd sourcing. To a certain extent, my noble friend Lady Kramer dealt with that. Government Amendment 26, which we debated earlier this evening, goes some way to recognise the validity of crowd sourcing. As my noble friend Lord Hodgson will know, there is already one fully authorised, equity-based crowd-funding platform operating here and growing. We will continue to consider how we can help this and other platforms grow. It is all part of increasing diversity of funding, which we strongly support.
My noble friend Lady Noakes asked whether this amendment relates to the financial services sector as it relates to the rest of the economy and whether the Government accept that sustainable growth in the financial services sector is desirable. We agree that it is crucial. The financial services sector plays a major part in the UK economy, not just in helping the rest of the UK economy to grow, but in its own right. It is a very significant source of export earnings. The whole of the Bill is designed to provide regulatory underpinning that will mean that the financial services sector is safe and secure and can grow in the medium and long term. I hope that with those comments the House will feel able to support the amendment.
Lord Newby
“(da) the desirability where appropriate of each regulator exercising its functions in a way that recognises differences in the nature of, and objectives of, businesses carried on by different persons subject to requirements imposed by or under this Act;”
Lord Newby
Lord Newby
My Lords, no one would doubt the importance of stewardship and of ensuring the proper conduct of those authorised persons who manage investments on behalf of others, including in relation to the exercise of voting rights. Stewardship is also a matter for a wider range of authorities than the financial regulators—in particular, the Financial Reporting Council which has issued a stewardship code.
Amendment 46A would require the regulators to include in their MoU provision about the exercise of their functions relating to stewardship. This amendment is based on the premise that the PRA has a role in stewardship. I do not think that this is a correct premise. First, only the FCA will have any powers in relation to listed companies themselves. The PRA has no responsibilities in relation to listing. Secondly, the regulated activities which cover managing investments are not PRA-regulated activities. The PRA will need to regulate an authorised person who manages investments only if the firm also has a permission to carry on a PRA-regulated activity, such as accepting deposits or effecting or carrying out contracts of insurance. In those cases, the PRA will be the prudential supervisor and the MoU will already cover the co-ordination of FCA and PRA interests in these firms.
Amendment 79B would make clear that the FCA’s powers to make general rules include the ability to make rules relating to stewardship. I can assure the noble Baroness that the amendment is not needed. First, there is no doubt that the FCA’s general rule-making powers extend to making rules about stewardship. New Section 137A to be inserted into FiSMA 2000 under Clause 23 of the Bill is quite clear. It states:
“The FCA may make such rules applying to authorised persons … with respect to the carrying on by them of … activities … as appear to the FCA to be necessary or expedient for the purpose of advancing … its operational objectives”.
Secondly, the FCA’s powers essentially follow the existing FSA powers. The FSA has already made a rule which requires UK-authorised asset managers to put statements of commitment to the FRC’s stewardship code on its websites or, if an asset manager does not commit to the code, to provide its alternative investment strategy there. I expect the FCA to continue with this rule. Far from any suggestion that the responsibility will fall through the cracks between the two regulators, it is absolutely clear that the FCA will take on the FSA’s existing powers in respect of stewardship and ensure that they are properly implemented. I hope, therefore, that the noble Baroness will agree to withdraw her amendment.
Baroness Hayter of Kentish Town
I thank the noble Lord, Lord Newby, for that. Of course, he did not answer the point that I made. When research is done, it is found that details of the “the comply or explain” commitment are not on the web—neither what is being complied with in the code nor what is there instead.
However, I thank him for the clarity of his answer that it is an FCA responsibility. That rather begs a question that I asked in Committee, and to which I may return, that the code is the responsibility of the Financial Reporting Council, which gets no mention in this Bill. In Committee, the Government refused my suggestion that there should be an MoU between the FCA and the FRC, which is regrettable. The importance that the noble Lord has said about the code and the ability of the FCA to make rules, including the commitment to follow it, strengthens the case for a better connection between them. I at least thank him for clarity on that, but we may need to come back to look at the FCA aspects. For the moment, I beg leave to withdraw the amendment.
Lord Newby
“(1) The regulators must prepare and maintain a memorandum which describes in general terms—
(a) the role of each regulator in relation to the exercise of functions conferred by or under this Act so far as they relate to with-profits insurers, and(b) how the regulators intend to comply with section 3D in relation to the exercise of those functions so far as they relate to the effecting or carrying out of with-profits policies by with-profits insurers. (2) The memorandum required by this section may be combined with the memorandum required by section 3E.
(3) If the memorandum required by this section is contained in a separate document, the PRA and the FCA must publish the memorandum as currently in force in such manner as they think fit.
(4) Subsections (1) to (3) apply only if the effecting or carrying out of with-profits policies is a PRA-regulated activity.
(5) For the purposes of this section—
(a) a “with-profits policy” is a contract of insurance under which the policyholder is eligible to receive a financial benefit at the discretion of the insurer;(b) a “with-profits insurer” is a PRA-authorised person who has a Part 4A permission, or permission resulting from any other provision of this Act, relating to the effecting or carrying out of with-profits policies (whether or not the permission also relates to contracts of insurance of other kinds).(6) The Treasury may by order amend the definition of “with-profits policy” applying for the purposes of this section.”
Lord Newby
The government amendments in this group make a change to the way that with-profits policies will be regulated under the new framework. We had a very useful debate on this subject in Committee. As my noble friend Lord Sassoon stated at the time, with-profits policies give rise to a particular risk of unfairness because the benefits that policyholders receive are largely at the discretion of the firm. The tensions between the firm treating current and future policyholders fairly, and maintaining safety and soundness, are especially acute. It is therefore difficult to separate the prudential and conduct issues in the regulation of “with-profits”, much more so than in any other type of financial services business. The Government’s main objective, therefore, is to ensure that there is clarity in decision-making in this area. The approach that was originally envisaged in the Bill was that this clarity would be delivered by giving the PRA sole responsibility for ensuring an appropriate degree of protection for policyholders in relation to the making of discretionary payments.
The noble Baroness, Lady Drake, raised a number of concerns including the possibility that excluding the FCA from decision-making would lead to consumer detriment, as the prudentially focused culture of the PRA may lead it to pay insufficient attention to the fairness element of policyholder protection. The Government have now given further consideration to this, and on balance we agree that this is an area where the Bill could be improved. We have therefore brought forward amendments that will ensure that both the FCA and the PRA have a responsibility in relation to the regulation of with-profits, rather than giving sole responsibility to the PRA. This will mean that the FCA has a full role in consumer protection, as it does in other firms. The PRA and FCA will have to put in place an MoU setting out their respective responsibilities in this area.
However, to preserve the sense that there should be a final decision-maker, the PRA will be given the power to require the FCA to refrain from actions that conflict with its general or insurance objectives, for example if it considers the FCA action could harm the safety and soundness of a particular with-profits insurer or with-profits insurers generally. To ensure scrutiny and accountability, any such veto must be published unless the PRA considers it is against the public interest to do so. The Government’s view is that this approach strikes the right balance between giving the FCA a much stronger mandate, and preserving clarity of decision-making and responsibility in this exceptionally complicated area. I hope that the amendment meets the noble Baroness’s concerns, and I beg to move.
Lord Tunnicliffe
My Lords, I thank the Government for bringing forward this group of amendments, which meets the concerns raised by the noble Baroness, Lady Drake. I particularly thank the Minister for mentioning her in his speech. She regrets that she cannot be here, but I am sure she will feel her efforts were worthwhile by resulting in this group of amendments.
Lord Newby
Lord Newby
Baroness Hayter of Kentish Town
My Lords, we have spoken already about the need to have information from banks about their lending to different communities and sizes of business. The noble Lord, Lord Newby, said that the FCA will collect data about access to financial services. In the amendments we seek to obtain information to identify how well markets are working for lower-income communities. This is therefore broader than simply small businesses, and is about whether lower-income households can get credit, insurance, saving products and banking services. We know already, for example, that about 1.5 million people have no bank account, but we need to know more about what other groups are excluded from such services and products. We therefore ask for the FCA—which will be able to obtain the information—to research and assess whether such needs are being met and to include its findings together with any strategy for dealing with identified unmet need in its annual report. If the FCA is doing its job, it will do this anyway, but this is belt and braces so let us write down our expectations of it in this regard. I beg to move.
Lord Newby
My Lords, having agreed earlier today that we want to require the FCA to obtain and publish these data, obviously we have considerable sympathy with these amendments to the extent that they seek to flesh out how that remit should be undertaken. However, that is the end of the good news because we think that the amendments are in part unnecessary and in part inappropriate because they are too prescriptive.
We believe that there is no need for a specific provision relating to the annual report for the FCA because in paragraph 11(1)(b) of Schedule 3 we state that the annual report must cover,
“the extent to which, in its opinion, its operational objectives have been advanced”.
Given that in a series of amendments today we have strengthened the role of the FCA in looking at disadvantage and making that a new area where the FCA has a very specific responsibility, it will have to report in those areas in any respect.
Amendment 61B is very prescriptive. Our view is that with the FCA reporting on this, as with many other things that it will report on, the Bill itself should not have detailed prescription as to how the FCA should do its work. It has a legal requirement to report and it is up to the FCA to respond as it thinks fit. If there is any sense that it is falling down on its objectives, it will be reporting to Parliament and will be questioned by Parliament and Parliament will have the opportunity to raise with representatives of the FCA on a regular basis how it is meeting this and any other of its statutory objectives. I hope that the noble Baroness will feel that the outcomes that she seeks will be achieved in any event and that she can withdraw her amendment.
Baroness Hayter of Kentish Town
My Lords, I warmly thank the Minister because sympathy was much more than I got when I spoke on consumer input to the PRA. So I think that I will bank that one. I thank him, too, for endorsing the spirit of my amendments on the record so that when the report comes out people will be able to quote his very wise words that that was what we were looking to the FCA for. With that, I beg leave to withdraw the amendment.
Lord Newby
“19A (1) The FCA must in respect of each of its financial years pay to the Treasury its penalty receipts after deducting its enforcement costs.
(2) The FCA’s “penalty receipts” in respect of a financial year are any amounts received by it during the year by way of penalties imposed under this Act.
(3) The FCA’s “enforcement costs” in respect of a financial year are the expenses incurred by it during the year in connection with—
(a) the exercise, or consideration of the possible exercise, of any of its enforcement powers in particular cases, or(b) the recovery of penalties imposed under this Act.(4) For this purpose the FCA’s enforcement powers are—
(a) its powers under any of the provisions mentioned in section 133(7A),(b) its powers under section 56 (prohibition orders), (c) its powers under Part 25 of this Act (injunctions and restitution),(d) its powers under any other enactment specified by the Treasury by order,(e) its powers in relation to the investigation of relevant offences, and(f) its powers in England and Wales or Northern Ireland in relation to the prosecution of relevant offences.(5) “Relevant offences” are—
(a) offences under FSMA 2000,(b) offences under subordinate legislation made under that Act,(c) offences falling within section 402(1) of that Act,(d) offences under Part 6A of the Financial Services Act 2012, and(e) any other offences specified by the Treasury by order.(6) The Treasury may give directions to the FCA as to how the FCA is to comply with its duty under sub-paragraph (1).
(7) The directions may in particular—
(a) specify descriptions of expenditure that are, or are not, to be regarded as incurred in connection with either of the matters mentioned in sub-paragraph (3),(b) relate to the calculation and timing of the deduction in respect of the FCA’s enforcement costs, and(c) specify the time when any payment is required to be made to the Treasury.(8) The directions may also require the FCA to provide the Treasury at specified times with specified information relating to—
(a) penalties that the FCA has imposed under this Act, or(b) the FCA’s enforcement costs.(9) The Treasury must pay into the Consolidated Fund any sums received by them under this paragraph.
19B (1) The FCA must prepare and operate a scheme (“the financial penalty scheme”) for ensuring that the amounts that, as a result of the deduction for which paragraph 19A(1) provides, are retained by the FCA in respect of amounts paid to it by way of penalties imposed under this Act are applied for the benefit of regulated persons.
(2) “Regulated persons” means—
(a) authorised persons,(b) recognised investment exchanges,(c) issuers of securities admitted to the official list, and(d) issuers who have requested or approved the admission of financial instruments to trading on a regulated market.(3) The financial penalty scheme may, in particular, make different provision with respect to different classes of regulated person.
(3A) The financial penalty scheme must ensure that those who have become liable to pay a penalty to the FCA in any financial year of the FCA do not receive any benefit under the scheme in the following financial year.”
Lord Newby
My Lords, this group of amendments provides for new arrangements for the use of revenue from financial services fines. In future, regulatory fines revenue in excess of enforcement case costs for the year will go to the Consolidated Fund. The new arrangements will apply to all fines imposed by new FCA and PRA and to fines imposed by the Bank of England in the course of exercising its regulatory powers in relation to financial services. This will apply to FSA fines received from 1 April 2012, so the measure will include the penalty imposed on Barclays in relation to the attempted manipulation of LIBOR.
Under the current arrangements, where enforcement action results in a firm paying a financial penalty, this is applied as a discount to fees paid by other firms in the following year. Without reform, unprecedented fines such as the Barclays fine would have represented a significant windfall to regulated firms. We have of course thought carefully about the impact on those firms which obey the rules. Compliant financial services firms will still be protected from costs directly attributable to the misconduct of others, as the regulators will be able to net off enforcement case costs before handing over penalties to the Treasury and provide a rebate to compliant firms the following year. However, in future, any benefit above these costs will go to the taxpaying public, rather than the financial services industry.
For this year, the Government have announced that £35 million received this year from fines imposed for attempted LIBOR manipulation and other unacceptable behaviour will be used to support Britain’s Armed Forces community. Additionally, £5 million will go towards the creation of the new, ground-breaking First World War galleries at the Imperial War Museum. I beg to move.
Lord Flight
My Lords, I just want to say that clearly the Government could do with the money, but the original arrangements where, in essence, fines revenue benefited the clients of financial institutions—because it is always ultimately the clients who pay for everything—seemed to be fair and appropriate. There is less logic for saying that the fines revenue should benefit citizens as a whole rather than that it should benefit the clients of all the institutions that have to bear regulatory costs, which clearly get reduced if the fines go as they did go. I rather assume that the logic is that the Government need all the revenue they can get, but with whom was this discussed to reach this conclusion? Certainly, at the time of FiSMA, I remember there was quite a bit of debate about the subject and it was concluded that the proposed arrangements then were the fair ones.
Lord Newby
Possibly the new component in the equation is just the scale of the fines that we have seen. The Government took the view that, in those circumstances, the taxpaying public as a whole should get the benefit rather than that there should be a rebate to the industry. I hear what the noble Lord says about policy-holders benefiting from that. Of course, there is a large overlap between people who have financial services products and the electorate as a whole. It is not a complete overlap. It is one of those issues where it is simply a judgment call and the Government’s judgment was that, in future, where a significant amount of money is levied as fines, the benefit of that revenue should flow to the community as a whole.
Lord Newby
“(1A) Anything done or omitted by a person mentioned in sub-paragraph (1)(a) or (b) while acting, or purporting to act, as a result of an appointment under any of sections 166 to 169 is to be taken for the purposes of sub-paragraph (1) to have been done or omitted in the discharge, or as the case may be purported discharge, of the FCA’s functions.”
Lord Hodgson of Astley Abbotts
I will briefly support my noble friend’s amendment. There has been quite a lot of talk about how the Bill is oriented towards banking and that particular sector of the financial services industry. The insurance industry—particularly the life insurance industry, which marches to the beat of several different types of drum, one of which, in respect of solvency, my noble friend referred to—needs to make sure that its voice can be heard, because it is such a critical part of our savings industry. While one does not wish to be too prescriptive in the way these bodies are made up, I am sure that some reassurance to the life insurance industry that its particular expertise and particular needs will not be overlooked would be welcome and desirable.
Lord Newby
My Lords, the Government absolutely agree that insurance expertise should be represented on the PRA board. That is why my noble friend Lord De Mauley said when we previously debated this matter that the Bank had committed to that principle and that there would be insurance expertise on the PRA board. However, we believe that it is up to the Bank to ensure that the board has the right balance of skills and experience to enable it to make effective decisions and deliver its objectives in respect of all the firms it regulates. The trouble with the amendment is that if we were to require in the Bill that the board should have insurance expertise, people would rightly ask why the Government had not made similar provision for other sectors such as mutuals and investment banks. We do not think that that is a sensible way to go. However, with the commitment that there will be insurance expertise on the PRA board, I hope that the noble Lord will feel able to withdraw his amendment.
Baroness Noakes
Before my noble friend sits down, when we discussed this matter before, the Minister replied in the same terms as the noble Lord, Lord Newby, has today, and said that there would be insurance expertise on the board. I sought to clarify whether that would include the non-executive component or whether there was a possibility that there would be simply an executive member. Subsequent to the Committee stage, the noble Lord, Lord De Mauley, wrote to me—I am not sure whether the letter has been circulated more widely—to say that the intention was that there would be an insurance non-executive member. Will the Minister confirm that that is still the Government’s intention?
Lord Newby
My Lords, nothing has changed since the point at which the noble Lord, Lord De Mauley, wrote his letter.
Lord Flight
Is it felt that a single representative is sufficient in relation to the overall size of the board?
Lord Newby
My Lords, neither the Government nor the Bank have said that there will never be more than one insurance representative on the board. The commitment is the other way round. We have said that there will be at least one insurance representative on the board. At some points there may be more than one, but whether or not that is ever the case, there will always be one. That is the core commitment that we wish to make.
Lord Flight
I thank the noble Lord for his comments and beg leave to withdraw the amendment.
Lord Newby
Small and Medium-sized Enterprises
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Lord Sharkey
To ask Her Majesty’s Government what additional funding to small and medium-sized enterprises, particularly in deprived communities, has resulted from the Funding for Lending scheme.
Lord Newby
My Lords, the Funding for Lending scheme is not specifically targeted at particular regions or sectors of the economy; it is designed to incentivise banks to increase lending in aggregate, which will of course have a positive effect on the economy as a whole. The early indications have been encouraging but it is too soon to judge the impact of the scheme. The Bank of England will publish quarterly net lending figures for each participating bank from 3 December.
Lord Sharkey
I thank the Minister for that Answer. However, the fact is that the Bank of England’s last quarterly report shows that the stock of lending to SMEs continues to decline. It also shows that the number of loan applications themselves is down. I note that only 50% of SMEs had ever heard of Project Merlin. Could the same lack of awareness of Funding for Lending be contributing to the problem? Do the Government know how many SMEs are aware of this scheme? What are the Government doing to make sure that they are aware of the scheme?
Lord Newby
My Lords, the figures so far published do not take account of the impact of Funding for Lending, which only opened in August, and not least because it takes some time for loan approvals under the scheme to be finalised. I absolutely agree that promoting the scheme will be crucial. We are encouraged by the steps that the banks and building societies have already taken to do so, including double-page advertisements in national newspapers and promoting mortgage products very actively, not least through their websites. The Bank of England is administering the scheme but the Treasury is directly involved in monitoring it via a joint oversight board with the Bank.
Lord Mitchell
My Lords, Funding for Lending is the very latest of a whole plethora of programmes announced by the Government to stimulate SMEs. But here is the truth: very little of the money is getting through to the SME community. Why is that? It is because the chosen method of distribution is through the high street banks, and their interest is more in stuffing their own balance sheets rather than advancing funds for SMEs. When will the Government realise that the banks are chronically risk-averse and ill suited to this important task?
Lord Newby
My Lords, it is simply not true that the banks are stuffing their balance sheets as a result of this scheme. This scheme gives the banks incentives to lend, not to stuff their balance sheets. There is considerable evidence that the banks are offering loans to SMEs at significantly lower interest rates and offering new mortgage products. These are already beginning to generate new business.
Lord Methuen
Is the Minister aware that Rolls-Royce, in order to fund its suppliers, has lent them £500 million, because the banks are not doing so?
Lord Newby
My Lords, it is a very sensible approach for large companies to provide credit down the supply chain. It is not just Rolls-Royce—many other companies are doing the same, and I think that they should be encouraged to do more of it.
Baroness Wall of New Barnet
My Lords, I agree with the Minister that the banks are lending to small and medium-sized business. However, they cannot get the money for progressing their businesses where they are situated. I have recent experience in visiting a number of small engineering companies which are being offered money to move and establish bigger premises but not to develop where they are. It is becoming quite a problem for such companies.
Lord Newby
I do not think there is any general principle involved in that. The new products being designed under Funding for Lending would enable SMEs to get additional capital where they are. For example, RBS has introduced a new scheme under this programme that will cut the rate of lending by between 1% and 1.6% for small businesses and abolish arrangement fees for new loans. Those are not limited to companies that are moving but apply equally to companies which want to expand where they are.
Lord Flight
My Lords, the scheme makes lending very attractive to banks because the cost of funding is remarkably low, but there are many situations where what is wanted is equity rather than loan capital. Will the Government review some of the changes to the EIS arrangements for providing equity, where the changes in loss relief and the latest FSE changes in marketing EIS are discouraging the raising of equity capital for small businesses under the EIS scheme?
Lord Newby
My Lords, there has been a long-standing problem in small businesses raising equity in the UK. The EIS is one component in doing that. Of course, as we look towards next year’s Budget, we are reviewing all programmes that might offer any capacity to increase the flow of funds into small businesses.
Baroness Brinton
My Lords, given that the ITEM club has just predicted that lending to SMEs by banks will fall to a six-year low this year, with 38% of applicants being rejected in quarter 1, and given that banks seem to be using money from the Bank of England to lend rather to homeowners with equity, will the Minister consider ring-fencing a good proportion of the Funding for Lending scheme funds specifically for SMEs?
Lord Newby
My Lords, I think that a large proportion of these funds will be used for SMEs. That is why the banks have introduced new products specifically for SMEs following the introduction of the programme. I have already referred to RBS. Lloyds has done a similar thing and is reducing the interest that SMEs pay by 1%. Lloyds has placed double-page ads in some of the papers, which noble Lords may have seen. So the banks are directly targeting at SMEs a significant proportion of the funds that will now be available.
Lord Barnett
My Lords, given the urgent need for lending now, how soon does the Minister expect the first scheme to be in operation? Are the banks likely to offer 100% guarantees or will they require deposits?
Lord Newby
The scheme is already in operation and the process under which the loans are approved is going through. I do not know whether the noble Lord meant 100% in respect of mortgages as opposed to loans but, for mortgages, the scheme is being made available for first-time buyers, particularly in respect of the Government’s new buy scheme.
Financial Services Bill
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Baroness Noakes
My Lords, I shall also speak to Amendments 190B and 192ZA in this group. These amendments, and others in the group, concern the inquiry and investigation provisions of Part 5. I should say at the outset that I regard the provisions of Part 5 as crucial to the Bill. The earlier parts of the Bill created new regulations with very significant powers, and it is entirely likely that the new regulators will make mistakes in the use of those new powers and that things will go wrong, so we need strong provisions in the Bill—
Lord Newby
My Lords, I remind your Lordships that if you are leaving the Chamber, please do so as quietly as possible.
Baroness Noakes
My Lords, I was saying that Part 5 of this Bill is crucial because it sets up the provisions that will deal with things when they go wrong—if the regulators make mistakes or if things do not turn out well. Part 5 ensures that there are proper investigations and proper reporting of those investigations. I remind the Committee that there have been problems in this area in the very recent past. It took the heroic efforts of the Treasury Select Committee in another place to get the FSA’s report on the failure of RBS into the public domain. We still have nothing on HBOS. The FSA’s reports on both RBS and Northern Rock were internal reports, and therefore non-independent. The Bank of England, which will be the new home for the PRA, is not itself a beacon of good practice when it comes to reviews of its own performance. So we need to be sure that we get this part of the Bill absolutely right.
I welcome the new duties in Clauses 69 and 70 on the FCA and the PRA to investigate and report on possible regulatory failures. I similarly welcome the powers in Clause 73 which allow the Treasury to direct the regulators to carry out investigations in certain circumstances. However, internal investigations will often not be good enough, which is why in principle the powers in Clause 64 are very welcome. These allow the Treasury to arrange independent inquiries where there have been certain events which, to paraphrase, threatened the stability of the financial system or risked or caused significant damage to the interests of consumers or businesses.
The first amendment that I tabled to Clause 64 was Amendment 192ZA, which is one of our familiar and much-loved may/must amendments. I could see no circumstance in which the Treasury, having satisfied itself that a public inquiry is in the public interest, should have any optionality about whether to set up an independent inquiry. Amendment 192ZA would change that “may” into a “must” so that, if the public interest test is met, the Treasury must set up an independent inquiry. Having looked at this a second time, however, I tabled Amendment 190AA, which would replace subsection (4) and turn it round. Under my proposed new subsection (4) the Treasury must arrange an inquiry unless it believes that the inquiry is not in the public interest. I believe that this more naturally represents the thought process that would go on in the Treasury; that is, the Treasury would order an inquiry unless there was a sound reason for not doing so. For good measure I have also tabled in this group Amendment 192ZA, which is another may/must amendment, this time to Clause 73, which allows but does not require the Treasury to direct the FCA or the PRA to carry out an internal investigation. My amendment would require a direction.
I am aware that the wording and structure of Clause 64 follow that of Section 14 of FiSMA. However, I do not believe that that is necessarily conclusive. The new duties set out in Clauses 69 and 70 in respect of regulatory failure positively require the PRA and the FCA to organise investigations in specified circumstances. The only let-out is if the Treasury directs them that they are not required to carry out investigations. Can the Minister explain why “must” is the correct formulation for the PRA and the FCA, but not the correct formulation for the Treasury?
I hope that the Minister will explain the relationship between Clause 64 and Section 14 of FiSMA. It seems to me that Section 14 becomes redundant when this Bill is made law, but I could not find any provision for its repeal. So I ask my noble friend whether it is to remain in force, and if so, for what purpose?
Lastly, I ask the Minister to explain in what circumstances the Government would intend to use the independent inquiry route in Clause 64, as opposed to the self-investigation route in Clauses 69, 70 and 73. I tried to research how often Section 14 of FiSMA has been used but drew a blank; in fact, I am not sure that it has ever been used. I hope that the Minister will be able to explain in what circumstances the Government would want to use the independent inquiry route, rather than relying on self-investigation. For example, given the circumstances surrounding the financial crisis, would they have thought it appropriate to have ordered an independent inquiry—that is, one not left simply to the regulator concerned—or do the Government believe that self-inquiry is the appropriate route? If there is no independent inquiry for something as grave as the financial crisis that we have recently experienced, what is Clause 64 for? I look forward to hearing my noble friend’s response. I beg to move.
Lord Newby
My Lords, I will start by giving the Government’s response to the first of these two amendments, and then come to the specific points that have been raised by a number of noble Lords.
As noble Lords have pointed out, Clause 74 provides in some detail how investigations should be conducted in order to deliver transparency and confidence, which, as I think everybody agrees, well conducted and appropriate inquiries should bring about. Amendment 192A seeks to add to these requirements by setting out that,
“the regulator must have regard to its regulatory principles”
in carrying out these inquiries, and to act proportionately, reasonably and fairly. I agree that high standards of conduct should apply as much to the conduct of an investigation as to the regulator’s normal regulatory work, but the noble Lord, Lord Hodgson, will probably not be totally surprised when I say that there are two reasons why the amendment is not necessary.
First, on proportionality, we do not believe that it is necessary to put this in the Bill again because the regulator already has to have regard to the regulatory principles in exercising its general functions, and the regulatory principles include proportionality, under proposed new Section 3B. Proportionality is already built in to the way that the regulator does everything so we do not think it is necessary here.
Secondly, as the noble Lord has set out, and we have set out before, public law already requires regulators to act reasonably, and the principles of natural justice require the regulator to deliver procedural fairness. The noble Lord talked about the problem of judicial review. I think everybody agrees that if you have to initiate a judicial review, this is an extremely expensive, long, drawn-out process, but if the noble Lord’s amendment was accepted, my understanding is—I may be wrong—that if the regulator were to be challenged it would be under a judicial review anyway, so the same problem would arise. The noble Lord, Lord Flight, said that this amendment was a question of belt and braces. We agree, but in legislation you do not need belt and braces—you need a good belt or good braces, and we think we have got that.
The other thing that is possibly slightly confusing is that the investigations we are talking about in this part of the Bill are investigations into regulatory failure rather than the conduct of firms. The noble Lord, Lord Peston, asked whether an investigation would come into the public domain. The real concern, which we have debated before, relates to the conduct of business of a company—has it been misbehaving?—which is different from the issue of regulatory failure, which is what Clause 74 deals with.
Lord Peston
The noble Lord did say that this will be an investigation into regulatory failure. Therefore, the investigator is investigating himself or herself. After all, who has failed? It is the regulator.
Lord Newby
My Lords, we come to the noble Lord’s point which concerns Clause 73(2)(b). The architecture is that the regulator will look at the failure of firms and regulatory failure. We have seen this with the work the FSA did on RBS. It produced a comprehensive report on what it saw as regulatory failure. Although there were arguments about what would or would not be published, in terms of whether the regulator did a good job and whether it is capable of doing so, the answer we would draw from that investigation is that it did do quite a good job. There will be many cases when it is appropriate for the regulator to look back at what has happened in the past—
Lord Peston
I am sorry to interrupt the noble Lord, but I am trying to get some sense of reality about this. It is the Treasury that considers that something needs to be done. Therefore, the Treasury must suspect something. Where, for example, does the Treasury get its information from, for it to feel that it has to issue this directive? What does the Treasury know that the regulator did not? Then it tells the regulator to look at something because it observes regulatory failure. The whole thing seems to be an intellectual mess. That is my point. It is not necessarily the point that was made by the noble Lord, Lord Hodgson. Like my noble friend Lord Davies, I am keen to have a powerful and effective regulatory system. I am also keen that we do not have a botch of a regulatory system. What we have said on the previous two Committee days on the Bill is that we think quite a few aspects of this are a botched job. Is that going too far in criticising? I do not think so.
Lord Newby
My Lords, the noble Lord asks a number of questions. First, why might the Treasury have a role and why is the regulator not doing it already? There may be a number of occasions when the Treasury first gets information from somebody and wants to tell the regulator. There are some occasions when the Treasury might want to prod the regulator into action. I have been critical of occasions when I felt the regulator has not moved as quickly as I would have liked in undertaking investigations. This part of the Bill enables the Treasury to give it a kick if it is needed. The other point, which is a valid point, is that if there is a really serious problem of regulatory failure, this is not the only way in which the Treasury can make sure that an investigation is undertaken. The Treasury can appoint any kind of investigator that it wants. This part of the Bill simply explains how the Treasury operates and the rules which apply if there is a lesser regulatory failure which probably happened some time in the past, where it seems appropriate for the regulator to have a look. I understand the noble Lord’s concerns, but he should not be as worried as he is.
I will respond to the second amendment in this group, which we have not debated at great length. It seeks to add to the grounds on which the regulator may decide to postpone or suspend an investigation if the investigation did not meet the principles by which the investigator must abide. Unlike with the previous amendment, where we agree with what the noble Lord seeks to achieve but do not think that he needs to have his belt and braces, we think that this amendment could have perverse and unexpected effects by enabling the regulator to stop an investigation for any reason it wanted. For example, it could realise that an investigation was going to be very time-consuming and burdensome, perhaps because of the level of detail involved. Under this proposal, it could end an investigation and argue that it was doing so because the investigation breached its principle on economic and efficient use of resource. For those reasons, we cannot support that amendment.
A number of noble Lords, including the noble Lords, Lord Hodgson and Lord Flight, expressed broader concerns about the FSA and the noble Lord, Lord Hodgson, quoted Lex in aid of that. The noble Viscount, Lord Trenchard, and the noble Lord, Lord Peston, said that the FCA should have regard to competitiveness. These are broader issues that go beyond the scope of the amendments, but on the concerns expressed by Lex, I can understand why people are at this stage worrying about whether the balance that the regulators strike between the interests of the firms and those of the consumers of their products is right. We are pretty confident that it will be. The noble Lord, Lord Davies, pointed out that it is important that the regulators are rigorous and balance the interests of the firms and those of their consumers. The way in which the Bill is structured should enable them to do that and we are confident that they have that very much in mind.
Competitiveness has been debated previously and we have already agreed that we will look at this issue, particularly the degree to which the PRA and FCA should have regard to the importance of economic growth. We have said that we will return with further amendments in this area on Report, when we will no doubt have an extremely interesting debate on them. For today, however, I hope that the noble Lord, Lord Hodgson, will decide not to press his amendments.
Lord Hodgson of Astley Abbotts
My Lords, I am grateful to my noble friend Lord Newby for that extensive and courteous response. I am grateful to the noble Lord, Lord Flight, and the noble Viscount, Lord Trenchard, for their support. I can accept that this is a part of the Bill where the particular concerns that I have do not weigh as heavily as they did on the regulatory principles on page 28 of the Bill which we debated before we broke for the Summer Recess. I am happy to withdraw my amendment today, but I am not yet convinced that “reasonably and fairly” is not a useful addition in some part of the Bill even if it is not here. I beg leave to withdraw the amendment.
Lord Newby
“( ) In subsection (6), after “filed” insert “(in Scotland, lodged)”.”
Lord Newby
My Lords, this small group of government amendments are of a purely technical nature. Amendment 193J amends Section 120 of the Banking Act 2009 to reflect the terminology of Scottish law, under which documents are “lodged” with the court.
Amendments 201A, 201B and 201C are concerned with the rulebooks that the new authorities will use. The FSA’s rulebook is currently made up of around 9,000 pages of rules. In the new system, these rules will become FCA rules, PRA rules, rules shared by both the FCA and the PRA, or Bank of England rules in relation to recognised clearing houses. Noble Lords will no doubt be aware that the Government intend that the new regulatory system will be put in place on 1 April next year. The Government are working closely with the FSA and the Bank of England on the practical aspects of transition to the new regulatory system, while listening to representations from industry on how disruption can be minimised in the run-up to the new system being put in place.
The amendments will give greater precision to the transition of the rulebook by enabling the new regulators to adopt relevant sections of the FSA rulebook, and its supporting materials, by designating the relevant regulatory material to the PRA and/or the FCA, or the Bank, and to make any necessary modifications. The amendments also permit the FSA and the PRA to appoint a set of persons to undertake this designation exercise. The recruitment processes to appoint members of the boards of the new regulators are well under way and the amendments will permit the future PRA and FCA boards to be appointed so that they, rather than the current boards, can make the decisions on the designation of rules.
The new rulebooks will not come into force until 1 April next year but we need the new boards to be able to make and publish their new rulebooks as early as possible in advance of 1 April next year so that industry and the public have certainty and sufficient notice to get ready. These are technical but practical and helpful amendments and I beg to move.
Lord Davies of Oldham
My Lords, it may be a source of some surprise on the Government Bench that I rise to speak on these purely technical amendments, but I merely ask Ministers to recognise that, their having looked kindly on three amendments that I proposed earlier today, I have kept my silence on three groups of amendments that they proposed and which have gone through without dissent.
Lord Newby
“(2A) If an order under this section makes provision by virtue of subsection (2)(b) enabling the FCA to exercise any of its powers under sections 205 to 206A of FSMA 2000 (disciplinary measures) by reference to an act or omission that constitutes an offence under CCA 1974, the order must also make provision by virtue of subsection (2)(d) ensuring that a person in respect of whom the power has been exercised cannot subsequently be convicted of the offence by reference to the same act or omission.”
Lord Newby
My Lords, the Government are bringing forward amendments to Clause 91 in response to concerns raised by the Delegated Powers and Regulatory Reform Committee. I am very grateful to that committee, chaired by my noble friend Lady Thomas of Winchester, for its close and rigorous scrutiny of the powers that Clause 91 will confer and for the committee’s useful suggestions, which have informed the government amendments that I am now bringing forward.
Clause 91 enables the Treasury to make further provision about consumer credit following the transfer of regulation from the OFT to the FCA. It is necessary to take a power in this instance because the precise amendments that we will need to make to FiSMA and the Consumer Credit Act to effect the transfer will depend on the detailed proposals for the new FCA consumer credit regime, on which we will consult next year. These amendments clarify and put certain limits on how the power may be exercised.
Amendment 194A responds to the committee’s concern about the risk of double jeopardy. The amendment provides that, where criminal sanctions under the Consumer Credit Act and regulatory sanctions under FiSMA are available to the FCA in relation to the same act or omission, a person may not be convicted if he has been the subject of regulatory sanctions under FiSMA. This approach reflects that taken in Section 41 of the Regulatory Enforcement and Sanctions Act 2008, which the Delegated Powers Committee helpfully highlighted in its report as a useful precedent.
The second set of amendments in this group responds to the committee’s concern about the need to introduce certain constraints on the power in Clause 91 to ensure that it continues to be exercised in accordance with current government policy. Government Amendments 196ZA to 196ZC require the Treasury to have regard to the importance of securing an appropriate degree of protection for consumers and the principle that a burden imposed should be proportionate to its benefits.
These new duties to have regard reflect the two values underpinning the Clause 91 power. First, the Government remain very conscious of the fact that the primary rationale for the transfer of credit regulation to the FCA is to strengthen consumer protection. Thus, the requirements in the Consumer Credit Act should be repealed only where their effect can be replicated in an FCA rulebook under a FiSMA-based regime or where they are no longer appropriate. Secondly, this duty to have regard confirms that the Government remain committed to ensuring that regulatory burdens on small businesses are proportionate to the benefits.
I hope that these amendments adequately address the committee’s concerns. I beg to move.
Lord Stevenson of Balmacara
My Lords, in keeping with our previous remarks, I think that we have very little of substance to make in the way of comment on these proposals, as set out by the noble Lord. As he said, they are largely technical and clarificatory, and they focus on the good work done in the committee, which we all welcome.
Lord Newby
Lord Newby
My Lords, the amendment suggests that the FCA should make rules about the maximum cost and duration of a loan. Obviously the Government share many of the noble Lord’s concerns about some practice in the payday lending sector, including poor affordability checks, particularly in relation to rolling over loans and the unfair treatment of customers in financial difficulty. The noble Lord is absolutely right: what we have seen in the last year or two has been an explosion of this kind of loan, available within minutes over the internet. That is the new, all-pervasive problem. I, too, looked at taking out a loan and the companies vied not only to let me have a loan, but to do so quickest—almost saying how many minutes. Some would do it in half an hour, some in 15 minutes. That is a new development. I did not have to go to Walthamstow; I could do it sitting at my desk while doing other things. That is a particularly seductive approach and one of the reasons the sector has grown so quickly. It also has an aura of simplicity and respectability, which going into a shop in a high street to get a loan does not necessarily have.
The Government and I are extremely sympathetic to many of the things that the noble Lord seeks to achieve. As we see it, one of the key benefits of transferring consumer credit to the FCA is that it will equip that regulator with better tools than exist at the minute to keep up with this kind of development, particularly the new developments in respect of the internet and via text messaging. The FCA will also have greater resources to supervise the compliance of these firms and a much wider range of powers to take action when it spots a problem, either at a firm-specific or sector-wide level.
Lord Borrie
My Lords, my noble friend Lord Stevenson has made some very powerful points with his criticism of the behaviour, over a period of time, of debt management companies—any company that eases, or purports to ease, the problems of debtors by making a plan for them to pay off their debts. What a debt management plan offers is, or may be, perfectly good and in the interests of the debtor. I would not like it to be the case that the only people in that business are not-for-profit organisations, even those such as the excellent one, StepChange, which my noble friend is involved with. He is quite right in criticising the commercial debt management companies that have been operating so far; but they have not operated without restraint, because, as he indicated, the Office of Fair Trading has been concerned with a number of their practices, including misleading advertising and exorbitant charges. A number of debt management companies have had their consumer credit licences removed after evidence was presented.
My concern about my noble friend’s amendment is not over the prohibition of specified fees for debt management or the other details of this clause that he would like to insert into the Bill. I am all in favour of those. However, I am not very keen—and my noble friend has not mentioned them—on the opening words of the proposed clause, which are:
“Phasing out commercial debt management”.
I do not want to see commercial debt management phased out so that it does not exist, as I do not believe that charitable organisations can provide for all the needs that debtors legitimately have and the services that they could legitimately seek and benefit from, assuming there were adequate controls over debt management companies, as there are for other firms who have to have a consumer credit licence.
The suspension of consumer credit licences, which we dealt with half an hour ago, and the increasing powers of the FCA compared with the Office of Fair Trading should do a great deal to help. It may be that an amendment of the kind that my noble friend is putting forward would be a helpful advance, but I hope he does not stick to the opening words about the “phasing out” of commercial debt management.
Lord Newby
My Lords, the Government obviously sympathise with the concerns about some of the practices in the fee-charging debt management sector, which this amendment seeks to restrict and ultimately close. Debt management firms by their very nature deal with some of the most financially vulnerable consumers in the country. It is therefore absolutely vital that there is an appropriate regulatory framework in place to make sure that these firms treat their customers fairly.
We also need to do more to make sure that there is effective signposting to free-to-customer debt advice options, such as the services provided by organisations like Citizens Advice and StepChange, of which the noble Lord is such a distinguished chair. The Government are therefore working with the debt management sector towards a protocol of best practice for the industry. The OFT has also recently updated its guidance for debt management firms, expanding on the practices that the regulator considers “unfair or improper” and could cause a business to lose its licence.
It is right that, from April 2014, the FCA’s more proactive and intrusive regulatory approach, and the stronger and more sophisticated regulatory powers available under FiSMA, will extend to the debt management sector. I can give the noble Lord that assurance. The rules that the FCA will be able to make could indeed cover many of the points in his amendments, but at this point, in advance of the powers being moved across and in advance of any consultation on the details of the rules, we think it would be inappropriate to set those out in the Bill.
Lord Newby
My Lords, this amendment seeks to codify a process for switching bank accounts and—as with a number of other amendments—we sympathise with the intention behind what the noble Lord, Lord Flight, is seeking to do, but I do not think the amendment is technically necessary for reasons which I will explain. As the noble Lord pointed out, there has been a great deal of progress since the Independent Banking Commission recommended that a new switching redirection service should be set up to ease the process of switching current accounts. The Payments Council has committed to delivering that recommendation. The new switching service will provide a safe, hassle-free and convenient service for customers to switch their bank accounts in no more than seven working days.
We believe that, working with the industry, the Payments Council is on track to deliver the new service by September next year. As the noble Lord, Lord Flight, said, all the major current account providers in the UK have signed up and the Treasury is keeping the pressure on the Payments Council via monthly working-level meetings and quarterly reports. The banks which have not yet decided to join, the 3%, obviously cover a very small percentage of the market. The reason for their having declined is usually that they do not yet offer a current account or because they are unable to update their systems in time. The Payments Council plans to launch a second wave of switches, possibly in the first quarter of 2014, to accommodate those institutions, while allowing sufficient time for the switching service to prove its stability. So we hope that the small rump will be included in the system by the first quarter of 2014.
The noble Baroness described the problems that she has had in switching her bank account. I had a better experience. When I decided to combine my bank account with that of my wife—after more than 30 years of marriage—I found that, broadly speaking, I got the service envisaged in the Payment Council’s new approach. The problem I had was that although the bulk of my direct debits were satisfactorily dealt with, for reasons which were completely unclear a small number were not. Of course, one finds that out only when one gets a stiff letter saying that some essential thing which you are funding on an ongoing basis is about to be revoked because you have cancelled it. In my case, the problem was not that the intentions were dishonourable, it was simply that the system was not as effective as the two banks would have liked me to believe.
The noble Lord, Lord Flight, demonstrated the value of competition in the banking sector, in that Metro Bank seems to have achieved something in respect of money-laundering that the serried ranks of the established banks have failed to do, which is to have a simple way to prove who you are to their satisfaction. No doubt noble Lords such as me have experienced this bizarre situation in the past couple of years. I have been rung up by my bank to say that because I am a politically sensitive person, I had to prove my bona fides to the bank. Given the nature of the bank, which I had better not name, my response was to say, “I think you had better prove your bona fides to me”, which did not go down desperately well. Of course, it did not have to and I did.
The noble Baroness asked a very important question: can we trust all the banks to do that in a timely manner and in a way that does not cause the sort of problems that she had? I point out that the drafting of the FCA’s competition objective at new Section 1E(2)(b) requires the FCA to have regard to the ease with which consumers can switch providers in considering the effectiveness of competition. So the importance of removing barriers to switching in promoting effective competition is hardwired into the legislation. The FCA will have a lean to require the banks to behave in an efficient and effective way.
In the light of all those considerations, I hope that my noble friend will feel able to withdraw his amendment.
Lord Flight
My Lords, the first point I would like to stress is that, as I understand it, the Payments Council’s proposals do not involve grandfathering anti-money-laundering. I will take that up further, but if we do not get that, it ends up achieving very little. The noble Lord has in part answered my second point: if you start off with domestic competition being an objective of the FCA, part of achieving that has to be being able to move bank accounts easily. I hope that the empowerment that the FCA has in this area, to which the Minister referred, will be adequate.
As I said earlier, this is essentially a probing amendment, but it is important. Going back to why banks make a great problem of anti-money-laundering, it is because they do not want to lose customers. It is not a question of cracking anything marvellous; anti-money-laundering requirements were wonderful for financial services businesses. They made it a hassle for everyone to move their custom somewhere else. Those businesses are not stupid. Indeed, I have regarded anti-money-laundering as almost a plot by the whole financial services industry to strengthen their oligopoly.
The Payments Council measures are crucial, and I hope that the Treasury will clarify that point in its discussions with the council. Having said that, I thank the noble Baroness, Lady Hayter, for her support—I agreed with everything she said, in truth—I hope that the profile of this issue will be raised and I beg leave to withdraw the amendment.
Arrangement of Business
Lord Newby Excerpts(11 years, 6 months ago)
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Lord Newby
My Lords, as the Question for Short Debate in the name of the noble Lord, Lord Luce, will now be taken as last business, the time limit for the debate becomes 90 minutes rather than 60 minutes. Speeches should therefore be limited to six minutes except for those of the noble Lord and the Minister, which remain limited to 10 and 12 minutes respectively.
Infrastructure (Financial Assistance) Bill
Lord Newby Excerpts(11 years, 6 months ago)
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Lord Newby
My Lords, I am delighted to be able to open the proceedings on the Infrastructure (Financial Assistance) Bill. The purpose of the Bill is to help accelerate significant investment in major infrastructure projects and it will increase the number of homes being built and occupied.
Before I set out the main features of this legislation in more detail, I briefly remind your Lordships’ House of the Government’s commitment to delivering a sustainable, private sector-led recovery. This will be possible only by maintaining our credible fiscal stance and so keeping interest rates low. We want to see a recovery that is balanced across industrial sectors and across geographic regions. To achieve this ambition—
Lord Newby
I hope that my speech will answer the noble Lord’s question adequately.
Firms will have access to the communications and transport networks that they need, wherever in the UK they happen to be, enabling Britain to compete on the world stage.
Our national infrastructure plan published last November sets out an ambitious but credible roadmap to deliver on that vision—a pipeline of upcoming investment worth £257 billion in crucial large-scale projects, of which more than two-thirds will typically be financed and delivered by the private sector.
A number of key infrastructure projects close to starting construction are being delayed because of the difficulties they face in securing the finance and investment required, and the housing market continues to suffer from an undersupply of homes to meet the UK’s demographic needs. Even under favourable credit conditions, raising the amount of private finance required to deliver these projects and to meet our overall infrastructure investment goals would be a challenge. However, the disruption caused by the instability of international financial markets and the adverse effect that this is having on long-term debt provision have not abated. Proactive, decisive action by the Government is therefore needed now. The Bill will allow us to take that action and will bring forward the investment needed.
The principal aim of the Bill is to make investment in major infrastructure and housing schemes possible. The Government have agreed in principle, subject to strict approvals criteria, to make financial support available to infrastructure projects using the strength and credibility of our balance sheet to support the investment that we need.
Through this Bill, guarantees provided by the Government will help to ensure that where projects are struggling to access private finance due to adverse credit conditions, these projects can now go ahead. It authorises the Treasury and, where appropriate, other Secretaries of State to incur expenditure necessary for providing financial assistance.
The Bill will allow the Government to support crucial investment in key areas of economic and public service infrastructure: utilities, such as energy and telecommunications; transport, such as railways and roads; infrastructure to provide public services, such as hospitals and schools; and housing development to deliver much-needed homes.
The Treasury estimates that up to £40 billion of investment in infrastructure and an additional £10 billion in housing investment could be accelerated under the guarantee schemes using the powers in the Bill. Importantly, we will put in place strict guidelines and eligibility criteria for the schemes to protect the taxpayer and ensure that the Exchequer does not take on unacceptable fiscal risks.
Any proposal that receives a guarantee from Infrastructure UK will as a minimum have satisfied the following requirements. It must be nationally and/or economically significant; financially credible; good value for money for the taxpayer; not solely dependent on a guarantee to proceed; and ready to start construction within 12 months. Any proposal that receives a housing guarantee from the Department for Communities and Local Government will, as a minimum, need to deliver an agreed number of new homes; undergo an investment appraisal and full due diligence and be subject to ongoing monitoring requirements; meet a risk capital contribution at the outset; and provide recourse to the secured housing assets.
Since the projects that we expect to back will be structured to minimise the potential losses to the Exchequer, there will be minimal impact on public sector net borrowing as a result. The exception is under the extreme circumstances that a guarantee is called upon or other forms of financial assistance are provided, but we expect such circumstances to be rare. Furthermore, the Government will levy a commercial charge. This will cover the services received by infrastructure providers and beneficiaries of the private rented sector housing guarantee. It will ensure that companies pay a fair price for the benefits that they receive, and that taxpayers receive a fair price for any risk being taken. It will also ensure that schemes do not fall foul of EU state aid rules.
The Bill raises a number of questions. The first and most fundamental is: will it work? Is there any evidence that the guarantee being offered will really facilitate the speeding up of infrastructure projects? There is already substantial evidence that it will. Infrastructure UK has received some 60 enquiries from projects that might qualify, and more are expected. There is also strong interest across the housing sector. Negotiations on these projects are ongoing so it would be inappropriate at this point to run down a list but, as an example of the kind of thing that is likely to benefit, we have indicated that the Crossrail rolling stock and depot services procurement meets the eligibility criteria.
A number of people have asked why the Bill is necessary at all. Can the Government not already do this kind of thing without explicit legislative cover? The Treasury and Secretaries of State already have common-law powers to make guarantees, make loans and give other financial assistance. In addition, some Secretaries of State have express statutory powers to support infrastructure. However, the Treasury does not have the authority to incur expenditure in relation to guarantees on the scale that I have outlined. Moreover, there is a longstanding convention—
Lord Peston
The noble Lord was kind enough when I asked him why we needed a Bill to point me to an answer given in the other place, which I have to tell him I found completely incomprehensible. I am still stuck. Will he say in terms that we need a Bill because of the scale of the operations? Is he willing to place on record that that is the point and it is the size of the operations which requires legislation? I find that very odd but at least I would like to hear him say it.
Lord Newby
It is partly the scale of the operations and the length of the guarantees, and also because the current rules have gaps in them, as I understand them, or there are certain parts of the whole infrastructure world, as it were, that are not covered by the existing rules. To finish my sentence, there is a longstanding convention known as “Baldwin cover”, dating back to 1932, that Governments should not rest significant and regular expenditure under common-law powers on the sole authority of general supply legislation. That is the noble Lord’s point. It is significant and regular guarantees, not expenditure, that could have a very long period of operation.
Questions have also been raised about what kinds of project can potentially be covered by this legislation. In particular, the Institution of Civil Engineers has asked about what constitutes a nationally significant project—a phrase that does not appear in the Bill but did appear in last year’s national infrastructure plan. I should make it clear that projects that could potentially benefit from this Bill are not limited to the nationally significant projects identified in the national infrastructure plan. In addition to the areas covered by the plan, we will be prepared, for example, to look at waste management and university projects that are economically viable and simply want for finance. As to the scale of project that can potentially benefit, again there is considerable flexibility. A project does not necessarily have to be valued at several hundred millions of pounds to be considered.
The Bill is one part of the Government’s overall approach to ensuring that the United Kingdom invests in the infrastructure that it needs for the future. I look forward to our debate today and I commend the Bill to the House. I beg to move.
Lord Newby
My Lords, as predicted this has been an extremely interesting debate. I think I have been grilled by three LSE professors, which is probably par for the course in your Lordships’ House. I will do my best to respond to many of the questions raised. As an introduction, I have two points for the noble Lord, Lord Adonis. First, as far as I am aware, under the previous Labour Government’s plans there was an intention to have significant reductions to the deficit, about which not one word escaped the noble Lord’s lips. Presumably, had he had some ongoing responsibility he would have been trying to make sure that all that reduction had no impact on infrastructure spending. But that was wishful thinking. There would have been significant changes in infrastructure spending, even if the noble Lord was still in his former position.
Another point was made earlier by my noble friend Lady Maddock. Labour's record on housing and other areas of infrastructure expenditure, particularly social housing, hardly stands forensic scrutiny. It has certainly left us with a legacy on housing which we are struggling to put right.
The noble Lord asked a plethora of questions and I can respond to only some of them. His concern for the A14 is touching. I can confirm that it is a priority project. The Government announced in July that there will be support for an upgrade of the A14. As he surmised, the proposed scheme involves tolling. We are continuing to work on the funding package and are focusing on finding ways to bring forward construction earlier than 2018 by, among other things, streamlining the planning and procurement processes and identifying local contributions to the costs of the scheme. As my noble friend Lady Gardner of Parkes said, although circumstances are different in Australia, if other countries can do tolling it should not be beyond our ability.
The noble Lord asked about airport capacity and was scathing about the fact that we have now embarked on a review. Sadly, he did not tell us what Labour’s policy was in terms of hub airport capacity. The fact that I do not know what it is is no doubt a failure on my part. He also asked about HS2 and I can assure him that we are expecting a Bill on HS2 in the next Session. The Government are pressing ahead with the scheme.
The noble Lord referred to the fact that some 63 of the projects in the national infrastructure plan had vanished. That is true. It is the nature of large projects: some are brought forward and disappear and others come forward that were not there then. He will be relieved to know that next month there will be an update on the national infrastructure plan and he will be able to see not just which projects have dropped out but which new ones have dropped in.
The noble Lord asked why a second Bill concerning infrastructure was coming forward with infrastructure in the title—the Growth and Infrastructure Bill. That Bill has a completely different purpose from this one, although they have a single objective, which is to bring forward economic activity. That Bill deals with the planning and other non-financial constraints around getting housing in particular going. This Bill is purely a financial Bill.
My noble friend Lady Gardner of Parkes raised the desirability of getting more small builders operating. We agree. There has been a big reduction in the small building sector. We intend to support the establishment of a debt aggregator, which is an inelegant phrase. Such a body will be able to raise relatively large volumes of finance to lend to organisations such as builders needing smaller amounts of funding than a typical bond. It acts as a collective that will allow the money to filter down.
My noble friend also asked about the green belt and infilling. We are committed to safeguarding the green belt, but we recognise that there is some previous developed or brownfield land in many green belt areas that could be put to more productive use. We are encouraging councils to make best use of this land while protecting the openness of the green belt in line with the requirements of the National Planning Policy Framework.
The noble Lord, Lord Desai, accused us of doing a U-turn, or perhaps he congratulated us—I am not absolutely sure. He said that one of the problems is that the system is flush with money and he asked what the market failure is. There are two components, possibly. First, many companies are short of confidence to invest, largely because of the international economic situation. And secondly, the banking sector has not fully recovered from the great heart attack of 2008 and long-term lending in particular has not returned to the conditions that we saw before the crash. This is trying to help make it easier for banks which are very unwilling at the moment to lend in the long term, even for projects which in normal times they would lend on. As I mentioned in my opening speech, the volume of interest we have had suggests to us that this will be effective. The noble Lord said that many people are stuck because they cannot get a bank loan, which is undoubtedly the case. That is because of the problem that I referred to that the financial markets are not in a normal mode for long-term lending.
My noble friend Lady Maddock helpfully referred to the fact that the Government are committed to building 170,000 new social homes during the course of this Parliament. But she made the point that there are 390,000 new households being formed every year. We have a big problem and it is partly a cultural problem across the political parties. In the 1950s parties had in their manifestos figures indicating the number of houses that they were going to build. This was one of the key things that made Macmillan’s career. Housing has slipped down the political agenda and different sectors—health and education, for example—are vying for funds. We are all having to reassess the urgency of the need to get more funding into housing. It is a long-term issue and it is becoming more and more clear that it is a difficult issue; all parties, if you look at their performance in recent years, have tended to give it a broadly equal degree of priority, but it has probably not been a high enough degree of priority.
The noble Lord, Lord Giddens, asked me four exam questions and I will do my best to answer at least some of them. He asked about priorities and how Infrastructure UK decides between all the proposals coming forward. We have set out a menu of things, all of which are important, but there is not any artificial predetermination of priorities before we see what the applications say. Every application will be looked at on its merits.
Lord Newby
That is a philosophical question, almost. When is a menu a plan and when is it not a plan? If I am making a dish, it very often lists a number of things that are absolutely required to make a successful dish but it does not necessarily say in what order I need to chop them up. The menu taken together would undoubtedly represent the implementation of a very significant plan.
Lord Adonis
Is the Minister not confusing a menu with a recipe? A recipe is the plan; a menu is options which then lead to recipes thereafter, if I can be philosophical.
Lord Newby
I am always in awe of the culinary skills of the noble Lord, Lord Adonis, and am extremely grateful for that way of looking at it. However, whether it is a plan, recipe, menu, or none of the above, the key thing is that, as far as risk is concerned, which was the second question that I wanted to address, the Treasury will be responsible for managing the risk and assumes the contingent liabilities. Value for money, as I said earlier, is key.
The noble Lord, Lord Giddens, asked about the pension infrastructure platform, about which I should perhaps have said more. As he may know, last week, seven pension funds announced that they would be initial subscribers to the platform. They will each invest at least £100 million. We hope that the system will be up and running early next year and that it will be the first element of a much larger fund. As to why we think that pension funds might now get involved in this kind of investment whereas they have not in the past, the answer is that, in the past, they have been able to get better returns through conventional means of investing the money. At the moment, with interest rates so low, they are getting very low returns. The other problem that they have had is that, where they have gone via private equity houses which have managed infrastructure programmes, they have often found that the programmes have not worked very well and that they have been charged an arm and a leg for it. So this is a way for the funds, with support from the Treasury, to get into what could be very important new form of investment without what they have seen as being the unreasonable cost of going down a purely private sector route.
The noble Lord also asked about the relationship between this Bill and the energy Bill. The purpose of the energy Bill is to set a framework for investment in the energy sector over the medium term. Once the energy Bill, which will come forward relatively soon, is enacted, and against the framework that that Bill sets out, people looking to invest in the energy sector can form a view about what they want to do and individual projects will be eligible for support under the Bill.
The noble Lord, Lord Skidelsky, started with three nonsenses and will not be surprised that the Government do not agree absolutely with everything that he said. I find it almost incredible to think that if the Government had not been seen to get the fiscal position under control, interest rates would not have gone up. Even if they had not gone up to the levels that they are at in Greece or Spain, a single percentage point increase in interest rates, among other things, costs mortgage holders in the UK an extra £12 billion a year and would over the course of a Parliament, with all other things being equal, cost the Government about £25 billion. These are very important considerations. Interest rates would almost certainly have been higher if we had turned on the tap.
On his proposal for a British investment bank which would raise money in the private market, the noble Lord will not be surprised to know that the Treasury view is that, if that bit of the state is raising money in the private market and conventional government borrowing is happening in the same private market at the same time, the markets will judge the pair of them together as a common pool of demand from the UK Government. Therefore, we could not segregate borrowing for a British investment bank without it having consequences for the way in which all government borrowing was viewed.
The noble Lord asked how many of the net gains in employment were self-employed or part time. There is a false assumption that working for oneself or working part time are somehow second-class things to do or things that people do not necessarily choose to do. Some people are forced to do one or the other. However, when I was made redundant in the last property crash in 1992, I in effect became self-employed by setting up my own company and it was one of the better things that I have ever done. It did not mean that I was economically out of the market or that I was not able to grow anything. Many people who become self-employed find that they are successfully self-employed. Equally, many people who work part time—and even the Guardian accepts that the figure is at least 80%—do so through choice rather than because they are forced to.
Lord Skidelsky
Would the Minister be kind enough to answer my question? What proportion of the Prime Minister’s 900,000 new jobs are part time and what proportion are full time? Further, are those employed under government work schemes included in the figure of 900,000?
Lord Newby
I am afraid that I do not have those figures to hand but I will write to the noble Lord.
The noble Baroness, Lady Wheatcroft, raised concerns about continuing the old system of PFI. Many people share her concerns about the way that PFI has worked, and in any future schemes I know that the Government will seek to avoid the problems of the past in that respect.
The noble Lord, Lord Berkeley, asked several questions, one of which concerned the criteria were for which projects come forward. As I said in my opening remarks, the five principle criteria are that the schemes be nationally or economically significant, financially credible, good value for money for the taxpayer, not solely dependent on a guarantee to proceed, and ready to start construction in 12 months. He asked whether the £50 billion affects the PSBR. The answer is that it affects the PSBR only if guarantees are called upon. My understanding is that if it is a contingent liability, this does not affect what I still think of as the PSBR.
The noble Lord, Lord Berkeley, also asked about the Thames tunnel and whether we might have an independent review. Living as I do on the Thames and being subject to many public meetings about the Thames tunnel, it seems to me that the current programme of proposals on the tunnel involves a huge amount of consultation and much discussion of alternatives. Having got this far on what seems to be an unavoidable necessity, I certainly would be extremely loath to think that we had to go back to the drawing board and start again with an independent inquiry.
Lord Berkeley
Could the Minister answer my question about whether there will be a review or abolition of the Green Book?
Lord Newby
It will not be abolished. I will pass on the noble Lord’s concerns to my colleagues in the Treasury, who I am sure are already aware of them.
This is an important and much needed Bill. It will allow critical infrastructure projects that are being held back by adverse credit conditions to proceed and will support much needed investment in the rented housing sector. It contains measures that will support growth, jobs and families, all at minimal cost to the taxpayer. It will help to unlock the investment that the UK urgently requires to make it one of the predominant places in the world to do business, and to support sustainable growth that is balanced across sectors and regions. I request that the Bill be given a Second Reading.
Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.
Financial Services Bill
Lord Newby Excerpts(11 years, 7 months ago)
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Lord Newby
My Lords, amendments to probe the role of the FPC in triggering a public funds notification under Clause 54 were also laid in Committee in the other place. They were inaccurate then and they remain inaccurate now, primarily because these amendments would have no legal effect. The FPC does not have any powers under Parts 1 to 3 of the Banking Act 2009. So in referring to the powers of the FPC under those provisions, the amendment refers to powers that simply do not exist.
The thrust of the noble Lord’s amendment is that the FPC should be able to give notification of risks to public funds separately from the Bank itself. As we have explained previously, the new system that the Government are putting in place is based on making the Bank a single point of accountability for financial stability. Consistent with this, we are making the Bank, and the Bank alone, responsible for notifying the Chancellor of risks to public funds. This is because, as we have seen so strikingly with the tripartite system, the risk of splitting responsibilities over various institutions is that each one thinks that one of the others is responsible, or blames another, when things go wrong, thereby allowing serious risks to fall through the gaps. This will require the Bank and its senior management team to identify and evaluate risks emanating from all parts of the financial sector, working closely with the PRA, the FCA and the FPC.
However, the statutory responsibility for formally notifying the Chancellor must be clear and unequivocal. It is not that the FPC is going to be separate somehow from the Bank and, given that the governor in his new enhanced role is going to chair the FPC, if the governor, representing the Bank, goes to speak to the Chancellor under the terms of Clause 54 he, of necessity, will also be representing the views of the FPC.
We therefore think that the amendment is unnecessary and inappropriate, and ask the noble Lord to withdraw it.
Lord Tunnicliffe
My Lords, the essence of this situation was caught in the last part of the noble Lord’s response. If the governor goes to see the Chancellor and, say, does not represent the FPC’s view, that would to some extent be unthinkable. However, our concern is if he does not go to see the Chancellor—that he listens to the debate at the FPC and may find himself in a minority, but still concludes that he has no responsibility to share FPC’s doubt with the Chancellor. We are not talking about competing roles where it is not clear who is responsible. We are not in any way challenging the split of responsibilities set out in the Bill. We accept that the Bank has the executive responsibility to take action in a crisis. We accept that there need to be rules about where the Chancellor comes in and has executive responsibility.
This is not about who is responsible, other than the points raised by the noble Baroness, Lady Noakes, earlier in the debate, where we may think the line has to be moved about a bit on direction. We are not, broadly speaking, challenging the thrust of the Bill and the division; we are challenging the idea that only the Governor of the Bank of England can advise the Chancellor that there is a gathering crisis that may involve the use of public funds. We believe that it is safer to have more bodies involved in that situation and we particularly believe the best qualified body in the land should have a duty to consider whether there is a crisis situation developing and should have a right, if it considers that to be true, to advise the Chancellor.
I can see that I am not persuading the noble Lord but nevertheless the point is important and valid. We may come back to it on Report but in the mean time I beg leave to withdraw the amendment.
Lord Newby
My Lords, we have stated many times during this debate that the Government place great importance on effective co-ordination between the relevant authorities. We accept that this will be particularly important with regard to crisis management. That is why the Bill places a legal duty on the Treasury, the Bank and the PRA to co-ordinate their functions, and requires that they prepare a memorandum of understanding setting out how they intend to co-ordinate in a crisis management situation.
Obviously in such a situation the Treasury, Bank and PRA will need to be in regular contact. These events are often by their nature fast-moving or take place outside office hours. The protocols in place for ensuring co-ordination need to be flexible to accommodate this uncertainty. A committee is not necessarily the most appropriate way to deal with every crisis. For example, setting up a formal committee for a crisis event that lasts the duration of a weekend would be overly bureaucratic and cumbersome if the event required a particularly swift and flexible response.
These crises require that. They require frequent and immediate contact between Ministers and senior officials at the Treasury and senior executives at the Bank of England. Each financial crisis situation is different, and sometimes the circumstances will mean that a formal committee process would not be appropriate. If you look at three events which have either been, or had the potential to trigger, a financial crisis, without going into the details you can see how greatly they differ. There was for example BCCI, which was referred to earlier. There were the concerns in the immediate aftermath of the 7/7 bombings. There was the RBS crisis. These happened at different times of the day and at different points in the week. Some were put to one side relatively quickly while others have had long-term consequences. In those circumstances, it is difficult to imagine how you could set out in a memorandum of understanding either how a committee might be formed—we do not think that you always need one—or, if one is formed, how it will be convened and would function.
The memorandum of understanding is currently 39 paragraphs long. I do not know whether, when the noble Lord, Lord Tunnicliffe, was doing his training on the plane or when he was at London Underground, they had instruction manuals and crisis manuals. From working in humble PR, I recall that crisis management plans there ran to page after page. An MoU would not be the right place for these plans. This is not to say that the authorities do not plan. I can reassure the noble Lord that the authorities now have regular war games to prepare for a range of financial crises and participate in a range of cross-governmental operational crisis war games. This is to try to make sure that when a crisis explodes its participants have some preparedness for how they can respond.
That is different from saying that you need a committee in every case, even though we have said in the memorandum that in some cases you might. Certainly it is different from saying that in a memorandum of this scope and length you could set out how a committee could be convened and function. I hope that the noble Lord will be reassured that officials are spending quite a lot of time in crisis management planning and that that is the appropriate way of making sure that we are ready to deal with a crisis, rather than having the formal structure that his amendment would require.
Lord Tunnicliffe
My Lords, I thank the noble Lord for his response. I am reassured to a degree about the issues. We are not likely to press this further. The Committee might be reassured if he could flesh out some stronger sense of the preparedness and if he could write us a note that sets out the levels at which people are involved. I am not asking him to make a commitment now. He does not have to do anything as dangerous as that.
The thoughtfulness that has gone into the pre-crisis preparation is crucial. So many organisations fail to do it properly. British Petroleum successfully wrote off something like a quarter of its value through not having an adequate level of preparedness. In the defence sphere, for instance, the committee systems within government for national security and so on are documented as part of the strategic defence plan. Anything the Minister can do to add to our understanding of the depth and height of this preparedness and who is involved would be reassuring. With that request, I beg leave to withdraw the amendment.
Lord Tunnicliffe
My Lords, the MoU is an important document. We believe that it is incomplete. Earlier, we suggested that it should have some additions relating to what I will call, more generally, emergency preparedness, if only to acknowledge that there should be an acknowledgement that there is a duty to do that. There is a real question mark over whether the commitment to explain material extent is fulfilled in Clause 61(2)(a). I have read the memorandum with care and I do not see in which paragraph that commitment is discharged. I should be grateful if the noble Lord could bring that out in his response. I see curiosity spreading across the faces of the Government.
Lord Newby
For clarification, will the noble Lord repeat which duty he is referring to?
Lord Tunnicliffe
Clause 61 is entitled “Memorandum of understanding: crisis management”. Clause 61(2) states:
“The memorandum must, in particular, make provision about—
(a) what the Treasury and the Bank regard as a material risk for the purposes of section 54(1)”.
We have had quite a debate about material risk but I cannot see which paragraphs of the memorandum address that duty. I should be grateful if the Government would flesh that out. I do not want to cause the Government undue problems. We would be very happy to see a letter setting that out, although a response now would be delightful. The memorandum is important. It will change because, in my view, it already has question marks over it as it stands, but also because the world will change and, as the world changes, the Government, the Bank and the Treasury will want to change the memorandum. It is crucial that Parliament is involved in such an important document.
This MoU deserves to be a formal document and it deserves to be approved by both Houses. The amendment is a standard amendment such as we find in these situations. It requires an affirmative resolution, first, to register the document and, secondly, to allow for when it might change. I cannot see why it is being resisted. The concept of an MoU is entirely sound but the document, frankly, should be more formal than it is at the moment. Its alteration in the future should be by affirmative resolution of both Houses. I beg to move.
Lord Newby
My Lords, I shall start by answering the noble Lord’s question as to where in the memorandum of understanding the question of material risk appears and where it is defined. The principal paragraphs dealing with this matter are paragraphs 8 to 18, but paragraphs 13 to 16 set out the matters that the Bank should take into account in determining the material risk.
The Bill does not actually say that the memorandum of understanding has to define material risk. It says that it must,
“make provision about … what the Treasury and the Bank regard as a material risk”,
which is a slightly different requirement. The paragraphs in the memorandum of understanding to which I have just referred do exactly what the Bill requires the Treasury to do.
Lord Tunnicliffe
Forgive me—the noble Lord was going faster than my brain. Will he repeat the paragraph numbers that cover the point?
Lord Newby
The whole section is headed “Notification by the Bank of a risk to public funds” and it runs from paragraph 8 to 18. It explains the background and sets out, particularly in paragraphs 13 to 16, the matters that the Bank needs to take into account in determining whether the material risk test is met.
The amendment would transform the MoU into a statutory instrument. In our view, that would severely limit the usefulness of the MoU as secondary legislation is, like primary legislation, extremely prescriptive. It sets out what must and must not be done and confers powers that have legal effect. Although we agree that clear responsibilities are important for effective crisis management, we believe that the Bill sets out the framework for this extremely clearly and the MoU then fleshes that out. That is the role of an MoU. It goes beyond what must, in all cases, be done or not done. It allows the authorities to set out what is likely to happen in given situations and why that is the case and provides an insight into the aims of the authorities involved. We do not believe that it would be possible for the MoU to fulfil this purpose effectively if it were required to be in the form of secondary legislation. That is because it is difficult to impose clear legal constraints on how a crisis is managed because of the wide variety of situations that could be considered as a crisis, each requiring bespoke handling that suits the characteristics of that particular event. Earlier I talked about the different kinds of financial crises we have had in recent years which I think exemplify that point.
It is our view that the MoU should be a living, responsive document, able to change as is needed. Requiring that it should be a piece of secondary legislation would severely curtail the authorities’ ability to change the MoU as circumstances change. As things stand, the MoU can be changed within a matter of days. That requires no huge amount of legal input because it is a working document about how to handle a crisis. That is very different from dealing with a statutory instrument which goes through a different formal process. It would be difficult to deal with a statutory instrument when the House is not sitting and that would be inappropriate.
The Bill already provides for the MoU to be laid before Parliament. It will then be open to scrutiny. The Treasury Select Committee will be able to scrutinise it, as will the Economic Affairs Committee in this House if it decides to do so. In my view, that is the best way to get parliamentary input rather than through an overprescriptive and inappropriate statutory instrument. In view of those arguments, I hope that the noble Lord will withdraw his amendment.
Lord Tunnicliffe
My Lords, my experience is that statutory instruments do not have to be that inflexible. Statutory instruments that have to have early effect can be laid and come into effect immediately, if that is appropriate. However, they do require formal scrutiny by Parliament. I have not won many points today and I am not going to win this one. I beg leave to withdraw the amendment.
Lord Davies of Oldham
My Lords, I rise briefly to say that it gives me considerable and indeed a rare pleasure to agree with the noble Lord, Lord Flight, and we support his amendment.
Lord Newby
My Lords, what we are talking about here is how we make sure that all those who should be consulted are consulted in respect of the work of the European supervisory authorities, the EU institutions and other international organisations. We are talking about the international dimension of the work of the financial services authorities as opposed to the domestic work that we have been looking at up to now.
We agree absolutely that consultation is an important part of the formulation of policy at the international level as well as the domestic level. It is perhaps worth starting by saying a bit about the way in which the international bodies themselves have sought to consult. The EU, following the Lamfalussy report in 2001, has increasingly appointed expert groups comprising industry, academics and consumers as the first stage of formulating policy. The UK has provided many distinguished members of those working groups. For example, the Commission set up a financial services user group, whose members included Mick McAteer, who was a founder director of the Financial Inclusion Centre, and Robin Jarvis, professor of accounting and head of SME affairs at Brunel University. We have therefore had strong UK representation on those European bodies for a long time.
One of the other main pillars of the international regulatory framework is of course the Basel Committee on Banking Supervision. It has consulted widely on its proposals for Basel III, and the Financial Stability Board’s charter clearly states:
“In the development of the FSB’s medium- and long-term strategic plans, principles, standards and guidance, the FSB should consult widely amongst its Members and with other stakeholders including private sector and non-member authorities”.
So at the international level, there has been growing recognition that the board itself needs to consult, and in many ways that will be the most effective level of consultation in respect of provisions that the board is making.
National regulators also have an important role to play in the consultation and feed their views through to the European supervisory authorities. The FSA already takes that responsibility extremely seriously, and the PRA and the FCA plan to do the same.
The regulators will be required to consult on any proposed new rules that are required to implement EU or international regulatory initiatives, except in cases of urgency. The FSA already does that. For example, in July this year, the FSA published a consultation asking for views on how to transpose Solvency II into the UK rulebook. In addition, the FCA and PRA’s contributions to international policymaking processes will be informed by engagement on an ongoing basis with the industry and other relevant bodies. That means that the views of affected parties will be considered at all stages of the policymaking process.
The UK practice has been a mixture of formal and informal consultation, which has meant that the regulatory bodies—the FSA and the Treasury—when going into negotiations in Brussels or at Basel, have taken a lot of trouble to gauge the views of the UK financial services sector and have sought to reflect them effectively. I may be wrong, but I think that the sector feels that that is the case.
Regarding the question asked about why the MoU does not deal with PRA-FCA co-ordination with the ERAs, the PRA-FCA memorandum of understanding is covered in new Section 3E(3)(a) on page 31 of the Bill. I am afraid that I cannot read that out at the moment, but I refer noble Lords to it.
My noble friend Lord Sharkey asked an extremely good question but, as I have explained regarding the way that the authorities are approaching co-ordination, even though not every last detail will be set out in a memorandum of understanding—and some clearly are—the authorities plan to take consultation extremely seriously. Apart from anything else, they have learnt through harsh experience that unless they have done that and are able to carry the industry with them, it just stores up more problems for the future.
I am convinced that the culture of the regulators is that they consult widely with relevant stakeholders and will continue to do that, and that it is not necessary to have an explicit provision in the Bill to ensure that that continues well into the future.
Lord Flight
My Lords, I made the point that it had worked pretty well so far. However, we are dealing with new regulatory bodies being set up, and I just repeat the point that this Bill is pretty prescriptive in what it requires. I have, I regret to say, encountered some criticism that the FSA has not gauged the views and criticisms of the different bits of the industry adequately with regard to MiFID 2. We have some MiFID 2 proposals from the EU that are likely to be wholly unworkable and could be very damaging to this country by penalising trading between a London-based party and an overseas party. Although the record is pretty good, it is a little disappointing that on an important recent matter I found criticism of the consultation.
I cannot see why we should not put it in the Bill rather than just relying on it happening automatically. It is not a very great issue, but perhaps the Government might think a little further about this. I do not think it is an onerous requirement. In the mean time, I have raised the issue and beg leave to withdraw the amendment.
Northern Ireland: Corporation Tax
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Lord Lexden
To ask Her Majesty’s Government whether, following their recent review, they propose to devolve responsibility for corporation tax in Northern Ireland to the Northern Ireland Executive.
Lord Newby
My Lords, a joint ministerial working group on rebalancing the Northern Ireland economy is currently examining the issues associated with the potential devolution of corporation tax. This group has made good progress but there remain some crucial areas where differences of opinion between the Northern Ireland Executive and Her Majesty’s Government still exist. The group is due to meet again later this week to continue the discussions.
Lord Lexden
I thank my noble friend for his Answer. As this prolonged review finally draws to a close, will he confirm that the Government remain wholly committed to rebalancing the Northern Ireland economy in order to enlarge private sector wealth creation? Will he tell us the last issues that still remain to be resolved by the ministerial group? If the Government decide not to transfer corporation tax to the Northern Ireland Executive, what contingency plans do they have to stimulate the private sector in other ways?
Lord Newby
My Lords, I can confirm that the Government are committed to rebalancing the Northern Ireland economy. The remaining issues, not surprisingly, are financial, and essentially there are two. The first relates to the initial reduction of the block grant, which follows from any devolution of corporation tax to Northern Ireland. There is something called the Azores criteria, which means that if a devolved Administration take full fiscal responsibility for a tax change, they must face a reduction in their block grant equivalent to the current corporation tax take from firms based in Northern Ireland. The second point is about how you deal with the ongoing adjustment over time to take account of inflation. At this point, it is far too early to say what will happen if the working group does not reach a positive conclusion.
Lord Empey
My Lords, first, will the Minister confirm that in the event of the devolution of corporation tax-setting powers to Northern Ireland, the Assembly could set different rates of tax for larger and smaller businesses? Secondly, will the Minister agree that the case for the devolution of these powers is stronger than equivalent demands from the Scottish Government and that Her Majesty’s Government will not be influenced by the campaign for Scottish independence when reaching their decision?
Lord Newby
My Lords, I can confirm that, as the current UK corporation tax system has different rates for smaller and larger businesses, it would be possible in principle if corporation tax were devolved to the Northern Ireland Assembly for two rates to obtain in Northern Ireland. I agree that the argument in favour of the devolution of corporation tax to Northern Ireland is of a different nature to the devolution of corporation tax to Scotland because of the proximity of the Republic of Ireland, which of course has a significantly lower corporation tax rate.
Lord Roberts of Conwy
Will my noble friend take on board the fact that Wales, too, would like to have the power to give variable rates of corporation tax?
Lord Newby
My Lords, of course, considerations of consequentials to Wales are always uppermost in the Government’s mind.
Lord Kinnock
In view of the Government’s ambition to withdraw from certain obligations of membership of the European Union, are they contemplating the possibility that the devolved Administration in Northern Ireland could cut corporation tax to the much lower level that is customary in the Republic of Ireland?
Lord Newby
My Lords, that is exactly what this whole process is about. The complication, as I said earlier, is that if you devolve Northern Ireland corporation tax rate-setting to the Northern Ireland Assembly, you face a significant financial cost to the Northern Ireland budget, which, when last estimated by the Treasury, was thought to be in the region of £300 million.
Lord Alderdice
My Lords, as I listen to the somewhat siren voices on all Benches, I seek reassurance from my noble friend that the interests of the people and of the economy of Northern Ireland will not be set aside because of excessive rigidities in Her Majesty’s Treasury on the one hand, and inappropriate comparisons with other parts of the United Kingdom that do not have, and I trust will continue not to have, an international frontier, on the other.
Lord Newby
Absolutely, my Lords. The key question, as I was just explaining, is financial and is about the consequences for the Northern Ireland Executive’s budget if the tax is devolved. I think that is recognised within Northern Ireland. A recent poll by the Belfast Telegraph showed that, although 30% of those questioned were in favour of this move, a higher number—some 34%—were against it, and an even higher number did not have a view. That just demonstrates that this is a very complicated issue. On the second half of my noble friend’s question, Northern Ireland is clearly in a different position from that of the other nations and regions of the UK, simply because it does not have a land frontier with them but has a land frontier with the Republic of Ireland.
Lord Reid of Cardowan
My Lords, of course this is an extremely complex question, not least because of the implications, as the Minister pointed out, of the Azores judgment and the potential burden on the Exchequer of Northern Ireland. In all these deliberations, will the Government bear in mind that Northern Ireland truly is a unique case, not only because of its border with another sovereign state—it is the only nation in the United Kingdom to have one—but because of the decades of very difficult and dangerous circumstances through which its people have come and because of the economy’s and employment’s ultra-high dependency on public expenditure in Northern Ireland? Will the Government at least look for some additional spark to move the dynamism of the private sector in Northern Ireland for the benefit of all the people there?
Lord Newby
The Government absolutely acknowledge that Northern Ireland is a unique case. That is why, while the whole issue of regional aid in the EU is being looked at at the moment, the Government are working very closely with Northern Ireland officials to consider how best to make the case for Northern Ireland receiving assisted-area coverage over and above that which would normally be provided for the rest of the UK.
Lord Trimble
My Lords, will the Minister tell me whether the Government have obtained assurances from the European Commission that it will not regard this as unlawful state aid? If they take that view, there is absolutely no point in taking it. In view of this issue, can he also say whether it would not be better to accelerate the Government’s programme for reducing corporation tax generally?
Lord Newby
My Lords, the Government are reducing corporation tax and in a relatively short period it will be down to 22%, which makes the differential between Northern Ireland and the Republic that much less than it was in the past. I can assure the noble Lord that, as long as the Azores principles are followed, this will not constitute a call on state aid.
Financial Services Bill
Lord Newby Excerpts(11 years, 7 months ago)
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Lord Hodgson of Astley Abbotts
My Lords, my Amendment 187CA in this group relates to another aspect of the operation of the Financial Services Compensation Scheme. The current wording by which the scheme operates gives it a lot of discretion in the way that the costs of the scheme are allocated. Section 213(5) of FiSMA states:
“In making any provision of the scheme … the Authority must take account of the desirability of ensuring that the amount of the levies imposed on a particular class of authorised persons reflects, so far as practicable, the amount of the claims made, or likely to be made, in respect of that class of person”.
There are two get-outs.
I make it clear that this is not about restricting the rights of consumers to obtain compensation. It is a critical and essential part of maintaining proper confidence in our financial system that there are proper and appropriate ways for people to claim and get compensation for mis-selling or other malfeasance. However, the amendment is about ensuring that the polluter pays. It has become more difficult in recent years to trace the allocations and levies made by the Financial Services Compensation Scheme to the particular class of persons and businesses to which they have been applied. Often, there appears to be a shifting of the pea around the plate, with a disproportionate share landing on those perhaps least able to complain. I hope that my noble friend will listen to the amendment with sympathy. The funding system must reflect the differences in risk and instability posed to the public and to the wider economy by firms and the financial products they offer.
I make it absolutely clear that my amendment does not enforce an unacceptable level of correlation. The words “as far as practicable” will remain, and will therefore provide the scheme with a degree of flexibility—a get-out, if you like. However, the additional words, “take account of the desirability of ensuring”, are too woolly. They lead to situations where people feel that the scheme is not operating fairly. Therefore, I would like to see those words replaced by the single word, “ensure”, as a means of ensuring that the Financial Services Compensation Scheme penalises the polluter and not the wider financial community.
Lord Newby
My Lords, Amendment 187AB, moved by the noble Baroness, Lady Hayter, would require the Government to notify other EU member states that the limits on compensation payments to charities in the event of a loss of their bank deposits should be reviewed. The noble Lord, Lord Peston, asked what on earth this had to do with the EU. I suspect that he, like me, had not heard of the deposit guarantee scheme directive, which is an extremely valuable piece of legislation. It means that across the EU there is a maximum harmonised limit of compensation per depositor in the case of banks or other financial institutions going bust. It makes sure that across the EU there is a common framework for paying out when organisations get into financial difficulties.
Lord Peston
The Minister said that that was a very good idea. I cannot imagine why it is such a good idea. What business is it of the European Union what the taxpayers of an individual country decide they will spend on compensating people who have lost money because of the misbehaviour of banks? Why is it a European issue? I do not want to pursue this because it is a European question that is broader than what the Bill is about. I merely made the rather tart remark that occasionally the overpaid officials in Brussels have to justify their overpaid existence by finding things to do. Otherwise, they might eventually be asked to retire—although I might say that then they get incredibly good compensation arrangements. I was just being my normal tart, nasty self.
Lord Harrison
My Lords, I came to listen to the Statement. However, it may be of interest to some of my colleagues that we on Sub-Committee A of your Lordships’ European Union economic and finance committee are studying the banking union proposals and the recovery and resolution directive. The deposit guarantee scheme is an integral part of Herman Van Rompuy’s proposals, and of the response that we have got from the four presidents. That is the reason I am here today. I was slightly taken aback when my noble friend Lord Peston mentioned charities. As I understand it, the deposit guarantee scheme is a separate matter. The proposal has yet to mature. This will be done in Brussels over the coming weeks and months. I do not know whether that helps.
Lord Newby
My Lords, it is extremely helpful—and it will be done over the coming months. First, it is a single-market measure, not a eurozone measure. The aim is to establish a level playing field for consumers across the EU that is funded not by the state but by the financial services sector wherever the scheme is in operation. This means that as people move around the EU, as they increasingly do, they will know that they will get broadly the same degree of consumer protection wherever they are. That is a good idea, not a bad one. However, whether it is a good or a bad idea, this is the framework within which the deposit protection level operates in the EU, and therefore in the UK. Within the discussions about the directive that are going on at the moment, the level of compensation and the bodies that are eligible for it are being considered.
I say to the noble Baroness that we have listened very carefully to her concerns, and that the Government will consider whether it is appropriate to review the eligible limit to charities in the context of our overall negotiating priorities on this proposal. This is just one of a number of issues that we are considering in the round and as part of the negotiating posture we will take up. I assure her that we will give careful consideration to whether this is the way of achieving what she wants to achieve.
I move on to Amendment 187CA in the name of the noble Lord, Lord Hodgson of Astley Abbotts. This amendment would amend FiSMA to require the regulators to ensure that levies imposed on a particular class of firm reflect the claims made, or likely to be made, on that class. Before I address this amendment directly I would like to use this opportunity to draw noble Lords’ attention to the fact that a draft of the statutory instrument allocating rule-making responsibility for the FSCS between the two regulators will be published on the Treasury’s website this week as part of a broader consultation on draft secondary legislation required by the Bill. I will place copies of this paper in the Library of the House.
I am not entirely convinced by the case for Amendment 187CA. FiSMA already requires the regulators, as the noble Lord, Lord Hodgson, said, to take account of the desirability of ensuring that the amount of levies imposed on a particular class reflects, so far as practicable, the amount of claims made, or likely to be made, in respect of that class. Ensuring that classes are levied in a way that fully reflects claims, or likely claims, as proposed in the amendment is likely to be an impractical and disproportionate approach to evaluating how the fund should be funded. The current drafting in FiSMA reflects my noble friend’s concern but also leaves sufficient flexibility for the expert regulators to use their judgment.
The FSA’s recent consultation document on its funding model in the new regulatory system gives a good indication of the complexity involved in determining the funding model of the FSCS. I have it here, and its 100-odd pages demonstrate that this issue is somewhat more complex than might immediately be apparent. It demonstrates, among other things, how difficult it would be to ensure, in any strict sense, that levies fully reflect claims, or likely claims, on a particular class while delivering a fair and equitable scheme.
I suggest to the noble Baroness that the correct way to address her concerns is to contribute to the consultation on this document, which is open until 25 October. On that basis I would ask her to withdraw her amendment.
Baroness Hayter of Kentish Town
I thank the Minister rather more positively than I did his colleague on the previous amendment. It appears clear that he and the Government have understood the problem and I thank him for agreeing to look at this again. Charities of course, unlike people, do not move around; British charities are only in this country. I thank the Minister for saying that they will look at that. If it is not possible by that method, perhaps he could ask others in the Government if there is another way to assist. That would be extremely helpful. On the basis of that offer I beg leave to withdraw this amendment.
Lord Flight
My Lords, I speak briefly in support of this amendment. Keydata did actually expose a great deal of feeling of unfairness among different parts of the industry. The point was made about the heavy burden on fund managers but SIPP administrators, who are purely administrators and not involved in managing money, are for some reason lumped into the same category as fund managers. There is a very substantial burden on their resources. The whole area wants looking at, particularly if we are increasingly to become a compensation culture and if the sorts of amounts expected from the scheme are going to grow and grow. There is quite a problem and quite an issue to address in deciding how to cut the cake in deciding who, in fairness, should pay what.
Lord Newby
My Lords, this amendment seeks to remove the possibility of any element of cross-subsidy between different classes of authorised firms. We do not feel that it is either necessary or helpful. We do not consider that the practice of allowing some cross-subsidies between classes is inherently wrong, and nor should it be prohibited in every case. Not only does the potential for cross-subsidy help ensure a sustainable scheme with lower levy thresholds, but it helps to ensure that the compensation supports consumer confidence in the financial services sector as a whole, by limiting the risk that compensation claims cannot be met. If the scheme has insufficient funds to pay out claims to policyholders of a failed insurer, bank customers are unlikely to have confidence that the scheme will be able to pay out if their bank fails.
As I have already stated, the decision on how the FSCS is funded is best made by the regulators and implemented through their rules. In particular, it is the regulators who understand what is appropriate and affordable by different classes of firms and so are best placed to determine when, or indeed if, cross-subsidisation is appropriate. I equally accept, however, that there is a need for proportionality in the different classes of firms that are expected to contribute. I am well aware, for example, that in the past the building society sector has felt that it has had to pay a disproportionate burden.
However, as I have mentioned, the FSA is consulting on how the FSCS will be funded, although in broad terms, as the noble Lord, Lord Teverson, said, both the PRA and the FCA will have rule-making responsibility for the scheme. The PRA will make rules for deposit takers and insurance providers and the FCA will make compensation rules for all other types of financial activity covered by the scheme.
The best way to deal with the specific issue raised by my noble friend is via the FSA’s consultation on the draft scheme, which I mentioned earlier. It is ongoing—it has several weeks left to go—and it is the best way now of ensuring that the scheme we end up with is the best possible scheme for all the different classes of firms which will be covered by it. On that basis, I ask my noble friend to withdraw his amendment.
Lord Teverson
My Lords, I thank the Minister for his reply. Obviously I am somewhat disappointed. Clearly the consultation is an area in which the sector and I will participate but there is a real issue around justice and equity in this sector and how the scheme will work. I shall perhaps take the opportunity to speak to him further between now and Report, but, in the mean time, I beg leave to withdraw the amendment.
Financial Services Bill
Lord Newby Excerpts(11 years, 7 months ago)
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Baroness Hayter of Kentish Town
I shall deal with our own amendment in this group, Amendment 187RZA, which is virtually the same as Amendment 187T. We should clarify that our idea is not to cover everything that the FOS produces. The Financial Ombudsman Newsletter is one of the best publications I have seen; it beautifully describes the cases and gives a lot of guidance, with a small “g”. The intention of our amendment is that any guidance is fully consulted upon where such guidance could lead to a “safe harbour”, and should therefore take account of all relevant interests, including those of the industry and consumer groups.
I turn to some of the other amendments tabled by the noble Lord, Lord Flight. Two major changes are suggested that worry us. One would virtually make non-publication the default option, with the Financial Ombudsman Service having to justify in each “particular case” when it wants to publish, having given the respondent—but not, interestingly, the complainant—the right to argue for non-publication. In our view this is not in line with the Hunt report and would not amount to the transparency and openness to which consumers have a right.
The second issue is the one that my noble friend Lady Sherlock has just been talking about—cases that have wider implications, such as PPI, where it soon became evident to the ombudsman that the mischief went far wider than a particular provider. While we welcome an early alert from the Financial Ombudsman Service to the FCA that something is going amiss and that regulatory action or new guidance might be required, it seems to us quite wrong to put on hold an individual’s claim for compensation when they have clearly been mis-sold a product and might be out of pocket. We do not agree that the individual consumer’s justified complaint should be suspended while a large bureaucracy—I am afraid that that is what the FCA will be, with its need to consult and so on—gets its act together.
As we have heard, the ombudsman’s role is to resolve complaints—speedily, we hope—that have not been satisfactorily dealt with by the service provider, which is of course always the first and best option. If PPI is anything to go by, though, the banks could and should have refunded the money themselves pretty speedily and stopped selling the product unwisely. It is this that would have stopped the consumer detriment, and incidentally saved the banks a lot of money further down the track.
Other amendments from the noble Lord, Lord Flight, in this group seek to include the rationale for each published decision to be explained. However, our fear is that this would add considerably to the process for handling cases and undoubtedly to the costs, and we would be surprised if the industry were in favour of that since it funds all this.
By including “operations, policies and procedures”, Amendment 189P would appear to us, as my noble friend Lady Sherlock said, to risk undermining the independence of the ombudsman service. We hope that that was not the intent, but we have a similar concern about Amendment 187S, which would appear to give the regulator the power to decide not only which complaints the ombudsman can decide on but, worryingly, how the ombudsman should do so. That would undermine the very independence of the ombudsman, which is of course meant to serve as an informal alternative to the courts.
With regard to Amendment 187Q, as my noble friend Lady Sherlock also reminded us, the FSA—or, as it will be, the FCA—is already able to make a redress scheme under Section 4 of FiSMA, the effect of which is to bind the ombudsman, so there is probably no need for it.
Lord Newby
My Lords, I am very tempted to say that I agree with the noble Baroness, Lady Sherlock, and sit down.
Lord Newby
Sadly, however, I ought to explain the Government’s view of these amendments. Amendment 187E would require the FOS to exercise its functions in a manner consistent with the FCA’s strategic and operational objectives and the regulatory principles. Obviously the FCA will have an important role making and approving the rules of the ombudsman scheme, and must comply with its regulatory objectives and principles in doing so, but I do not believe that the regulator and the FOS should share the same objectives or be held to the same regulatory principles.
The FOS is not a regulator and should not be expected to act like one. Its role is to provide an impartial alternative dispute resolution service for consumers and firms. It is not a consumer protection body, and I would be concerned that by giving the ombudsman consumer protection objectives we would put that impartiality at risk. Moreover, in practice such a duty would be burdensome and difficult to interpret.
Amendment 187P is similar to Amendment 187, in that it seeks to hold the FOS to the FCA’s objectives and principles. However, it goes further by giving the FCA a role in ensuring that the FOS complies with those objectives and principles, and in carrying out an annual review of the FOS operations, policies, and procedures. The FSA already has a role in overseeing the FOS, which the FCA will retain—appointing and removing the board of the scheme operator, for example. However, the FOS’s claim to impartiality, and hence its legitimacy in making determinations that are binding on firms, is credible only if it is operationally independent of the regulator. This does not mean that it should be unaccountable or free from scrutiny—this is why we have brought in provisions requiring the FOS to be audited by the NAO. Associated with these new powers, the NAO will be able to launch value-for-money studies of the FOS. However, to require the FCA to ensure that the FOS complies with its objectives would require detailed oversight and control of the FOS’s day-to-day operations, which in our view would not be compatible with the FOS’s independence.
Amendments 187F to 187L relate to the new transparency requirements for FOS, under which the ombudsman scheme operator will have a duty to publish a report of determinations unless, in the opinion of the ombudsman, it would be inappropriate to do so. Amendments 187F, 187G and 187H seek to reverse the proposed new provisions, leaving the scheme operator merely with a power to publish determinations if it decides that it is appropriate, and a duty to explain the rationale for publication in that case.
Previously, ombudsman decisions have been published by one or other of the parties involved, leading to a partial and sometimes misleading picture of the way in which the FOS made decisions. Now that the FOS is subject to the Freedom of Information Act, ombudsman decisions may also be published in response to requests for information under that Act, so there is clearly a need for change.
Amendment 187J seeks to modify the transparency arrangements to provide anonymity for the respondents except where they agree to be identified. However, in many cases it will not be possible to redact all the information by which a firm could be identified without thereby withholding key elements of the substance of the decision—for example, the content of a firm’s advertising material, policy wordings, and product names—and there is no reason to think a firm’s reputation should be unfairly tarnished by the publication of a decision. However, I entirely agree with my noble friend that there is a case for withholding genuinely commercially sensitive information. The FOS will have the power to do that, and has made it clear in its consultation on transparency earlier in the year that it intends to protect commercially sensitive information.
Amendments 187K and 187L would provide for a minimum period of 28 days between the scheme operator considering a determination for publication and its taking the decision to publish, during which the respondent may make representations. It is of course important that firms get a fair hearing but, as I have said, by the time a decision is published, firms have had many opportunities to explain their side of the case already, and the ombudsman scheme rules already provide for firms to be able to provide sensitive information to the ombudsman in confidence. Given that this route already exists for the firm to identify information that it would be inappropriate to make public, I would be concerned that firms may see a process to make further references, as the amendments propose, as an opportunity to appeal the substance of the decision itself. However, I reassure my noble friend that the FOS would be very open to listening to proposals from firms about how best to ensure that it does not publish sensitive material.
Amendment 187N would require the FOS to suspend cases and refer the matter to the FCA when it encounters an issue with wider implications. Obviously the FOS will encounter issues that demand a response from the regulator, and there need to be clear duties and routes for the FOS to raise these issues with the FCA. I draw my noble friend’s attention to the measures in the Bill that provide for this. In future the FOS will be required to share information with the FCA that it considers relevant to the FCA’s objectives. The FCA is in turn required to take account of this information. In addition, the Bill introduces a mechanism whereby the FOS and the firms concerned can refer issues of mass detriment to the FCA, and the FCA will have to publish a response within 90 days, which is a very much improved procedure over what has obtained in the past. The response from the FCA might set out a timetable for regulatory action that would allow the FOS to consider whether or not to place a hold, or stay, on complaints. I reassure my noble friend that the Government share his concerns, and we think that we have taken measures in the Bill to address them.
Amendment 187Q seeks to require a clarification procedure for regulatory matters arising from complaints to be resolved by the FCA or for the FCA to provide guidance. While supporting the spirit of these amendments, my concern about the clarification procedure proposed is that it would be overly bureaucratic and could blur the distinct remits of the regulator and the ombudsman. The FOS’s role is to provide swift and low-cost dispute resolution. In doing so it must of course take into account, among other things, the relevant law and the regulators’ rules and guidance. It cannot, in practical terms, be expected to refer an issue to the regulator every time it encounters regulatory matters, any more than it could be expected to refer a matter to the courts every time it encountered a legal matter. We have included a package of measures in the Bill to improve co-ordination and co-operation between the FCA and the FOS. These include the new information-sharing and co-ordination provisions, as well as a new mechanism for the FOS and firms concerned to refer issues of mass detriment to the FCA.
Amendment 187S would require the FCA to make the detailed procedural rules for the ombudsman scheme rather than approve rules made by the FOS itself as at present; and to define the factors the FOS must take into account in its “fair and reasonable” test in legislation. On the first part of the amendment, the FSA already makes rules concerning key elements of the FOS’s compulsory jurisdiction. The more detailed rules of the ombudsman’s procedures are made by the FOS itself with the FSA’s consent. This strikes the right balance. As part of its operational independence, the FOS is responsible for preparing the detailed procedural rules which the regulator must approve. The alternative would be for the regulator to be directly responsible for running the ombudsman.
Baroness Sherlock
I support in particular the comment made by my noble friend Lord Kennedy at the end of his contribution. He asked the Minister whether he would meet with my noble friend and other interested Members to consider if not this then what other action can and should be taken. I think that the House would be particularly interested to hear the Minister’s response on that.
It seems quite obvious that as a market the CMC sector simply is not working. Not only are significant numbers of people being pressured essentially into doing things which they do not want to do, but there appears to be no price competition in the market at all. All the evidence shows that consumers are just as likely to use a claims management company which charges 40% as one that charges 15% of any money that they might get back. Many simply are not aware that they could do it for themselves for free by going directly to the ombudsman.
If the Minister is not minded to go in that direction, will he tell the House two things? First, what would the Government be able to do very soon that would have a significant impact on targeting in particular the minority of claims management companies that are behaving very badly? Secondly, will he at least agree to meet interested Peers to discuss that matter very soon?
Lord Newby
My Lords, I share the concerns behind the amendment about the activities of CMCs in relation to financial services products. Like all noble Lords, I have been approached by them with the most spurious and ridiculous arguments about why I should give them details about my financial affairs in return for some often unspecified benefit. We start off by sharing that concern.
I would be more sympathetic to the amendment if I did not think that the Government were already doing something about it. I am very happy to meet noble Lords who would like to discuss the matter, along with colleagues from MoJ, to see what might be done to expedite effective action. But I do not think that it is necessary or appropriate to expect the FOS to step in as a quasi-regulator and make its own conduct rules. The role of the FOS should be to act as an independent dispute resolution service and not to act as a quasi-regulator of CMCs. It is just the wrong organisation to do that.
As I have said, I am sympathetic to what the noble Lord is seeking to achieve and I give an undertaking to set up a meeting to discuss it further. On that basis, I hope that the noble Lord can withdraw his amendment.
Lord Kennedy of Southwark
I thank the noble Lord for his response. I certainly think that we need to work on something. I know he says that things are in place but it is fair to say that they are not working well at the moment and that we need to do much better. On that basis, I beg leave to withdraw the amendment.
Lord Newby
“(ii) in paragraph (b), for “section 315” substitute “provision made by or under this Act”, and”
Lord Tunnicliffe
As a great admirer of the US, I would never underestimate its ingenuity but I did not realise that that had been a principal objective. I thank the noble Lord for my improved education. Returning to my speech, the failure in RBS in particular was once again an internal management problem. The refreshingly honest report of the FSA brings that out but it goes on to criticise its own performance as a regulator. It criticises various ways in which it behaved and its allocation of resources but it also criticises the information that it was able to get during the crisis. That was because firms were unable to provide information that was sufficiently accurate, comprehensible and timely.
The Joint Committee on this Bill took a considerable interest in the whole matter of information and pointed out that in the US the,
“Dodd-Frank Act created the Office for Financial Research which was given responsibility for monitoring of systemic financial risks and, in order to undertake this task, has been given powers for the setting of data standards for the industry. In order to allow effective monitoring of systemic financial risk, the Dodd-Frank Act also requires that OTC derivative contracts are recorded in trade repositories, a step that requires standardisation of reporting across the industry”.
The recommendation from the Joint Committee, which the Government effectively rejected, was:
“The Bill should be amended to place a duty on the Bank of England (or its subsidiary the PRA) to develop information standards for the UK financial services industry and to report regularly on progress in improving these information standards in order to support financial stability”.
This amendment does its best to give effect to that recommendation.
In researching the background to this amendment, I looked over a number of areas but perhaps the most inspirational thing I came across was a speech by Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Securities Industry and Financial Markets Association, “Building a Global Legal Entity Identifier Framework” symposium in New York on 14 March. That is a long introduction but it was called simply “Towards a common financial language”. He contended that a common financial language would improve risk management in firms because of better flows and understanding of information; improve risk management across firms; map the network of financial transactions; and, shock-horror, lower barriers to entry. He pointed out that the information standards and information systems within the industry are probably 10 or 20 years behind those in other industries, and particularly the major distribution industries.
We put forward this amendment and it will no doubt be countered by the noble Lord saying, “Well, they can do this anyway”. We are trying to say something different. We are trying to say that this is not just an enabler but a doer. It is a requirement not just that the PRA has the ability to take a positive role in the matter of information and information standards, but requires it to take a role. It is quite long so I will not go through it in any detail but it requires the PRA to require firms to report; it requires them to set standards in the manner in which they report; it requires that they should have sufficient resources to be able to use that information; and it requires them to publish reports.
The Bill has a purpose. It is about institutions, it is about governance and it is about enabling. The amendment is designed to give it some teeth. It is designed to make a requirement in the Bill. This is a “must” amendment, not a “may” amendment. I beg to move.
Lord Newby
My Lords, as the noble Lord has explained, Amendment 187TE would require the PRA to collect and publish financial transaction data, and require it to maintain the necessary resources to collect and review data from firms. In doing so, it mirrors exactly the provisions of the Dodd-Frank Act and in particular the provision in that Act for the powers within the Office of Financial Research.
We do not think that such a power is necessary because the regulators here have their own powers to gather information, including all the information referred to in the amendment. Indeed in some cases the FSA already requires firms to hold information in particular ways; for example, through rules requiring firms to be able to present a single customer view. The fact that there is now the concept and the practice of a single customer view shows how the system has been able to develop in the light of the stresses and strains that it has found itself under in recent years. Firms already report transaction data and will continue to do so. Specifically mandating the regulator to develop data standards and to publish collected data, as the noble Lord suggests, is not in our view the answer. The legislation will set the regulators clear and deliverable objectives and the regulators already have powers that could be used to require them to hold their data in specific formats if they judge that to be an appropriate and proportionate way of meeting their objectives.
If the FPC requires particular information in a particular format, whether about counterparty exposures or about anything else, this will be provided by the PRA. If for some reason the PRA is not providing the necessary information, the bank has a backstop power to direct the PRA to gather it and provide it. There is a belt-and-braces provision in the Bill.
The regulators will require a whole range of information from firms. It would not be possible or desirable to specify them all in legislation. The legislation gives clear and deliverable objectives and it is up to the regulators to maintain sufficient resources and to gather sufficient information to meet those objectives. They will be held to account for doing so. With that explanation, I hope that the noble Lord will feel able to withdraw his amendment.
Lord Tunnicliffe
My Lords, I have received an unsurprising response. The essence of it is that those powers exist anyway. Perhaps the noble Lord can help me—I am not asking him to do so now—by writing to me setting out where these powers are in the new Bill. I have followed up the invitation of the Treasury and downloaded its very helpful Bill as amended. When you download it, you are told that it is 624 pages long and, therefore, it is not entirely easy to find things. I would be very grateful if I could be told where in FiSMA, as revised, these powers are and which of those powers is new because of the Bill. If there are not new powers because of the Bill, we have had regulators with these powers for a considerable time and as far as I can see we do not have the level of standardisation of data, the matching priority or the counterparty exposure. We do not have anything like the ability to see into the systems that the new American provisions envisage. It is incumbent on us in this country, with our dependence on this important industry and the fact that the real economy depends on it as well, to have provisions which are not only wide in theoretical terms but provide actual knowledge of what is being done to make this industry safer, particularly as regards what this Bill does about making the industry safer. If the noble Lord leaps up now and reads his piece of paper I would not mind.
Lord Newby
Section 165 of FiSMA enables the regulators to require information or documents which may reasonably be required in connection with the discharge of their functions. Section 165A enables the regulators to gather information from certain categories of unregulated firms for financial stability purposes. Section 166 enables the regulators to appoint a skilled person to provide a report into any relevant matter that the authority may specify. The regulators can also make rules requiring firms to hold their data in specific formats, if the regulators judge that to be an appropriate and proportionate way of meeting their objectives. As I have already said, the FSA did so when it introduced the single customer view requirements.
In terms of the system as a whole and what is new about the Bill as regards ensuring that the regulators get the information that they require in order to prevent some of the problems that we have seen in recent years, the whole purpose of the Bill is to put in place an architecture that enables a clearer focus by splitting the regulators into two halves so that they will concentrate on those parts of the industry for which they have now been given specific responsibility. I am sure that having those powers in the legislation, coupled with a new, more laser-like focus on ensuring that the system is safe and secure, will ensure that the concerns of the noble Lord about the information that is collected are not realised.
Lord Tunnicliffe
My Lords, I do not want this to go on, but there is a world of difference between having powers and knowing what people are doing with them. It is absolutely clear where the Americans are coming from; they want something done and they want something changed. I can now try to find these quotes in FiSMA and see how they impact but really I want to know what the regulators are doing. We are not opposing the Bill in general, certainly not in this House, and we wish the Government luck in its implementation, but at the end of the day it only moves people about and has a lot of interconnecting clauses. It does not specifically mandate a requirement to improve the quality of information. Any reasonable observer of the recent crisis has to say that one of the key issues in that crisis was the quality of information moving around within firms, between firms, and between firms and the regulator. The Government have to make a persuasive case that they are doing something about this deficit. Having said all that, I beg leave to withdraw the amendment.
Lord Newby
“( ) at the end of paragraph (i), omit “or”,”
Lord Flight
My Lords, I shall not move Amendment 189A. I am now satisfied that the powers here do not contradict or are not repeated by powers under Section 404 and that the potential arrangements of the ombudsman’s power to refer to the FCA are quite helpful. Similarly, I shall not move Amendment 189B.
Lord Newby
My Lords, this group is now slightly confusing in that more amendments will not be moved than have been moved. However, I shall do my best to speak to the one that has been moved, but if I find myself speaking to one which will not be moved, no doubt someone will tell me.
On Amendment 188A, which would enable super-complaints to be made to the PRA about the with-profits market, the Government recognise the thrust of the argument that the Bill is drafted so as to give the sole responsibility to the PRA at the moment. However, in the light of our earlier debate about “with profits”—in particular, the points raised by the noble Baroness, Lady Drake—the Government committed to giving further consideration to this matter. I can confirm that the Government intend to amend the Bill on Report to enhance the role of the FCA in “with profits” regulation, in a way that I hope will meet the noble Baroness’s concerns. We will write shortly to the noble Baroness, Lady Drake, on this point and I will of course copy the letter to interested Peers. This may be the first absolutely firm concession that we have made this evening, and I am delighted to be able to do it.
Baroness Hayter of Kentish Town
My Lords, in addition to all the comments made by my noble friend Lord Whitty, which we obviously support, I would like to speak for a few moments to Amendment 189BC, which stands in my name. Had that been in place, it would also have provided a route for small firms that were sold totally unsuitable interest rate swaps to have reached a speedy cross-industry solution.
The committee will know that many SMEs took out loan agreements, having been told that they also needed to take out an interest rate swap. Those SMEs, usually with no professional legal or accountancy staff, are sitting targets for financial services companies out to make a fast buck. They need the protection that this amendment could provide. I hope that the Minister will accept it, or a suitable alternative, to ensure that small and medium-sized companies, on whom we all depend to kick start our economy, get easy access to complaint resolution where their interests are damaged.
The amendment would give small firms the ability to complain and bring proceedings—court proceedings if necessary—to ensure that they could get proper adjudication on whether they were indeed mis-sold a particular product. As we have heard, the amendment would require the Government to introduce proposals within three months of Royal Assent to make it easier for groups of small firms to bring collective proceedings before the courts in respect of financial services claims, with the right to opt out for companies not wanting to be party to the outcome of the cases.
The amendment would also empower SMEs to complain to the regulators and to give their representative bodies the right to complain about market failures to the FCA, in the same way in which individual consumers can.
There is a gap in the legislation for small firms wanting to make complaints in their role as consumers of financial products. A case can be made for the representative bodies of small firms being able to take civil complaints. On 22 May this year, the Minister in the Commons, Mr Hoban, said that,
“the provisions in the Bill will not prevent bodies representing small and medium-sized enterprises which fit the relevant definition of consumers from making super-complaints”.
We therefore seek clarity in the Bill to that effect through the amendment.
Mr Hoban also said that:
“what type of consumer body should have access to super-complaints is complex and will require more detailed criteria than can be set out in the Bill.”—[Official Report, Commons, 15/10/12; col. 1031.]
He announced that the Treasury would publish draft criteria “later in the year”.
I might have missed it, but it is now later in the year and I think it is yet to appear. Perhaps the Minister could provide those further details.
Lord Newby
The Government believe that collective proceedings, in the appropriate circumstances, can deliver access to redress and a potential deterrent effect. That is why the Government have been consulting on a range of proposals to make it easier for consumers and small businesses to bring private actions in competition law—including whether to extend to businesses the current right of consumers to bring a collective action following a breach of competition law, and whether to make it easier to bring such actions. The Government are considering the consultation responses and hope to publish their response before the end of the year. We want to take the opportunity to learn from the outcome of that consultation and reflect on the implications for the financial services sector before proceeding to legislation.
The noble Baroness may say that her amendment would provide adequate time for consultation. However, her amendment specifies that small businesses should be able to bring collective proceedings on an opt-out basis. The type of persons who might bring collective actions, whether on an opt-in or opt-out basis, are substantive questions on which BIS has been consulting. We think that it is a lot better to await the outcome of the BIS consultation and reflect on the implications for financial services than to seek to pre-empt that process and require a particular model now. If the Government were to conclude from this exercise that it would be appropriate to bring forward legislation on collective proceedings for the financial services sector, any proposals should then be subject to proper consultation.
As an addendum to the second part of Amendment 189BC, I note that the Bill would not prevent bodies representing small and medium-sized enterprises that fit the relevant definition of “consumers” from making super-complaints. As was explained in another place, the issue of what type of consumer body should have access to super-complaints is complex and will require more detailed criteria than can be set out in the Bill.
We have considered this matter carefully, and I can inform the House that the consultation document that the Government will shortly publish covering this issue will include the proposal that the Treasury should be able to designate bodies that primarily represent the interests of small to medium-sized enterprises as super-complainants and that this will be reflected in the draft criteria.
I hope that, with the reassurance that the Government will consider proposals on collective proceedings carefully and that they will shortly consult on allowing SME representatives to make super-complaints, the noble Lord and the noble Baroness will feel able to withdraw their amendments.
Lord Whitty
My Lords, I was aware and was of course pleased that BIS is once again consulting on this issue. Given the way in which these amendments are framed, the Bill would simply say that the Treasury had the power to bring forward regulations for collective procedures and collective redress on an opt-in or opt-out basis. They do not specify more than that. They do not, unlike my noble friend’s amendment, actually specify a timescale. Having this in this Act would therefore allow the considerations arising from the more general consultation to be tailored to the financial services arrangements without any new primary legislation. I would therefore have thought the Minister would welcome that.
In the discussions in the run-up to the Financial Services Bill in 2010—noble Lords do not often hear me say this—the Treasury was much more progressive on these issues than was BIS. Of course, we are under new management now and maybe that has changed. There are some very special situations in the financial services sector, and we do not want to wait for another PPI, another pension mis-selling, another sub-prime mortgage crisis or whatever where we have to construct from scratch a new system to protect consumers, both business and individual.
These amendments would allow the Minister to do that, after the general consultation if necessary, so I do not accept the argument that we have to wait for that consultation before they are included here. It is clear to me and, I think, to a lot of people that the financial sector needs such provisions, and I would not like to be in a position 18 months down the line where we had to go back to a new form of primary legislation in order to provide them. I therefore advise the Minister to have another look at these amendments, but for the moment I shall withdraw my amendment.
Lord Newby
My Lords, I hope that I can reassure my noble friend. As she says, this amendment removes the provision that specifically aims to allow organisations that wish to act on Money Advice Service’s behalf to do so, even if there is otherwise a limitation on their ability to do this. This is to enable bodies such as charities, credit unions or friendly societies to work with MAS without constraints imposed by, for example, tightly specified charitable objectives. This provision, as my noble friend pointed out, was inserted into FiSMA by the Financial Services Act 2010. I vaguely remember her tabling amendments on that point when the Bill that became that Act was being considered by this House but, as she said, there was insufficient time to debate them during the wash-up.
I think that I can put my noble friend’s mind at rest relatively straightforwardly: there is a direct precedent for what is being proposed here in relation to the National Lottery. National Lottery distributors encountered similar difficulties working with particular bodies whose constitution was narrowly drawn. Accordingly, amendment was made to the National Lottery Act 1993, in Section 25A, to permit charities and similar bodies to act on behalf of the distributor. A similar provision was included in paragraph 7 of Schedule 3 to the Dormant Bank and Building Society Accounts Act 2008. An example of the circumstances in which such a power might be used is where a charity’s objects may be wholly in sympathy with Money Advice Service’s objectives, but when read narrowly the objects are narrower than a particular project on which Money Advice Service wishes to work with the body. This provision lifts that constraint and, given the active interest of a large number of charities in the financial capability agenda, I hope that the noble Baroness would not wish such organisations to be prevented from working with Money Advice Service in future. Having received this explanation, I hope that my noble friend will feel able to withdraw the amendment.
Baroness Noakes
My Lords, that explanation has left me as concerned as I was to begin with. While his examples seek some sort of plausible minor extension of a body’s activities, paragraph 5 is not confined to minor changes to a body’s constitution and it is not confined even to charities whose objectives are related to those of Money Advice Service. It is very broad indeed and would apply under a very much broader basis, including to a large number of bodies set up by statute. I shall consider carefully what my noble friend has said and look at the precedents that he has offered as justification for this, but I have to say that I am not entirely happy with his explanation. I beg leave to withdraw.