Banking: Regulation
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Lord Newby
My Lords, one of the general problems that we are grappling with is that bankers seem to think that they live in a different world to the rest of us and that they should be able to avoid not just censure but charges if they have done something that is criminally wrong. That is why in the recent Financial Services Bill we introduced new provisions to deal with people who have manipulated the LIBOR rates so that, when the whole episode is fully looked into, if criminal action is necessary, it will for the first time be able to be taken against people who have cheated the system.
Lord Peston
My Lords, bearing in mind the global nature of the whole financial services sector, and certainly of the banking sector, in the Government’s opinion does any central bank or other financial regulator, acting on its own, have any chance of success? Must not the future basis of regulatory policy be one of international co-operation between the regulators and the central banks?
Lord Newby
Yes, my Lords, I completely agree. One of the things that the banking crisis has demonstrated is that the banks understand the international situation better than Governments understand it. One of the things that we have been trying to do, both through the EU and internationally, is to close that gap. No doubt the noble Lord has seen the article in the FT today by Paul Tucker from the Bank of England and Martin Gruenberg, the chair of the Federal Deposit Insurance Corporation in the States, which looks specifically at how you deal with resolving problems concerning the largest systemically important banks in the world.
Financial Services Bill
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Lord Barnett
My Lords, the amendment relates to something originally in the Bank of England Act 1998 which should not have been there in the first place. My noble friend Lord Peston and I tried very hard for it not to be put in but failed at the time. I hope that we will be more successful today.
The words “subject to that” should never have been there in the first place. All they mean is that the Governor of the Bank of England—and we will have a new one next July—will have his hands tied fast. He must first get stability—that is, control inflation—and only then can he look at the Government’s economic policy. Frankly, I would prefer that he looked at someone else’s economic policy than that of the present Government because I am not very happy with it. However, that is how it should be: the governor should look at the Government’s economic policy—and given what we heard in the Autumn Statement, someone else certainly needs to look at the situation and at this Government’s economic policy.
The new governor may be as good as everyone says—I hope he is—but I think what he can do with the economy has been massively overstated because that is primarily the responsibility of the Chancellor of the Exchequer. Sadly, the present Chancellor—whose first line in the Autumn Statement should have been an apology—has said everything is marvellous. It is hard to believe that anyone could do that, but the Chancellor did it.
It would help if the new governor had at least a responsibility to look at the economy to see whether he can help the Chancellor. It would be helpful to the Government to have the words deleted and that is all I am seeking to do. I shall not take up any more of the House’s time. I beg to move.
Lord Peston
My Lords, I wish to add two or three remarks to what my noble friend Lord Barnett has said.
On any logical grounds, “equal weight” is precisely what the Government would want to see in this part of the Bill. One feels that somehow the computer got jammed and “subject to that” got stuck in all over the place for no good reason. I would be surprised if the Minister is not sympathetic to the amendment.
I wish to make two remarks in regard to the prospective governor. First, I know that he felt it was right for him to appear before the Treasury Select Committee in the other place in order that its members should know who he was. Bearing in mind the vast amount of work that noble Lords have put in to this Bill, which is devoted overwhelmingly to the Bank of England, and given that, with much regret, we will be dealing some day with a Bill about the Bank of England without the Minister being the lead figure, I would like to go on record as saying that it would be a good idea if the prospective Governor of the Bank of England appeared before your Lordships’ Economic Affairs Committee so that he could become known to us as well as to the other place.
My second remark is in favour of the prospective governor. Eyebrows have been raised that he is being paid approximately £600,000 for this job, which is a lot of money—certainly to an impoverished ex-professor. None the less, given that the prospective governor could earn between £10 million and £15 million per annum—most of which, I would guess, would end up being tax-free—someone ought to reassure him that, if anything, we are getting a bargain and he is doing us a favour rather than us doing him a favour by appointing him.
The Lord Bishop of Guildford
My Lords, those of you who were present for prayers earlier this afternoon will have perhaps noted the irony with which this Prelate quoted from Psalm 15, which speaks about taking money upon usury. In rabbinic and Jewish interpretation that is interpreted as “not unreasonable” usury.
I have to express my gratitude to the Government and the Minister for this excellent amendment. I do so on behalf of the Bench that I sit upon and especially on behalf of the right reverend Prelate the Bishop of Durham, who has had unfortunately to go home for urgent diocesan business, otherwise he would have been making some of the comments that I have been making. I will not go into the detail but I will make one final comment—on the way that your Lordships’ House conducts its business when we are at our best. This seems to me to be a very good example of that. We had an amendment and then rational discussion in debate at various levels—Cross-Bench, opposition, government—and then we had an excellent amendment. For that I thank the Government and all who have taken part in this important debate.
Lord Peston
My Lords, I start by congratulating my noble friend Lord Mitchell and the noble Lord, Lord Sassoon, on a very great achievement. However, as everybody seems to understand the amendment in every way except for me, I have three questions in case I have misunderstood what the noble Lord said.
I read the amendment as saying that it gives the FCA the power to do all the things that we want it to do. However, I was not very clear whether he was then saying that, under its consumer protection mandate, it follows immediately that it must exercise that power. This is our favourite “may” and “must” question. You can give someone power but they may not use it. However, am I right in understanding that this amendment, coupled with the whole of the rest of the remit for the FCA, essentially means that it will now have to go into this field and deal with it in the way suggested, or is it still up to it whether it bothers with it? I would like the answer to that question.
The second question we had—if we recall our little debate on this last week—was on the concept of transparency. The great reason why this is a racket is of course that the average consumer/borrower who is not an expert in this field does not know until he has signed up what he is signing up for. Am I right in assuming that this amendment will make sure that the one thing that would happen as a result of this—do not let us worry for the moment about bankruptcy and all that for these firms—is that consumers will definitely know what they are letting themselves in for? Certainly my attempt to look up at least one site on this showed that you do not get to what you are letting yourself in for until you are virtually locked in. Am I right that this amendment is both transparent in general and also transparent with regard to what you have let yourself in for?
I do not say this in a negative way in terms of saying we do not want this; this is a tremendous achievement. I am looking for a bit of enlightenment to make sure that I understand what it means.
Lord Barnett
My Lords, perhaps I may add to what my noble friend Lord Peston has said. I will not repeat the may/must argument; it has been well enough made, and I hope that we will get a reply from the noble Lord, Lord Sassoon. Incidentally, in congratulating my noble friend Lord Mitchell, perhaps it is right that I should also congratulate the noble Lord, Lord Sassoon. This may be our last exchange before he retires.
The noble Lord, Lord Sassoon, mentioned the assumption that the FCA will now have the powers to deal with these unscrupulous people regarding payday loan schemes. As my noble friend Lord Mitchell said, they will have lots of good lawyers because when people have many profits to defend, as they do, they tend to use lots of lawyers. While I am not a lawyer, I hope that the noble Lord’s lawyers have indeed drafted this correctly. I know that these things can never be done tightly enough and that once lawyers get involved it finishes up in the courts for somebody else to decide. That is bound to happen and I am not blaming the noble Lord, Lord Sassoon, or his legal advisers for it. In my experience, when court actions involve lawyers on two sides in major cases, both advise their clients that they are right and that they should go to court about it. That becomes very expensive and they eventually resolve it only in the court.
As the noble Lord, Lord Sassoon, said, although he is confident about this provision, it is nevertheless not a silver bullet. Does he think that the advice he has been given will result over the next few months or weeks in the lawyers worrying about it? At the end of the day, will we require secondary legislation to deal with this? I hope not—I hope that the lawyers have it absolutely right this time. However, as the noble Lord said, one of the worries is the law of unintended consequences.
This is such a complex area but I like the point that my noble friend Lord Mitchell made about what happens in, I think, Canada.
Lord Barnett
I understand that I must not do that, so I will mention the question that I would have asked him. There are going to be investigations into the LIBOR scandal. Will they include looking in detail at whether there is anybody else liable or culpable in this regard? It clearly is a scandal of its own to say that nobody knew anything about it. I will leave it at that. I hope that the Government will produce sensible secondary legislation in the way we hope when we pass this Bill.
Lord Peston
My Lords, I will make a brief personal remark to the noble Lord, Lord Sassoon, who I believe is about to retire as a Minister after the passage of the Bill. My words are those that David Ricardo wrote to Thomas Malthus in the very last letter he wrote to him:
“And now, my dear Malthus, I have done. Like other disputants, after much discussion we each retain our own opinions. These discussions, however, never influence our friendship; I should not like you more than I do if you agreed in opinion with me”.
I hope that he will accept that message.
Banking: National Savings & Investments
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Lord Sassoon
My Lords, NS&I takes index-linked and fixed-interest savings certificates on and off sale. When they were last on offer, during 2011, demand reached completely unprecedented levels. It meant that the sales volumes far exceeded what was anticipated and what represented value for money in terms of the target that the Treasury set for NS&I.
Lord Peston
My Lords, I nearly forgot my question. The Minister referred to looking askance at his answer. I must say that I associate myself with my noble friend. Is he not aware that a more positive response would have been to say, “Yes, it is an extremely good idea to improve the range of savings products out of fairness to small savers. It will raise the propensity to save and increase the flow of funds to the Treasury”. In the light of the most ludicrous Autumn Statement in living memory, I would have thought that the Treasury would like to have all the help that it can possibly get.
Lord Sassoon
My Lords, there are 26 million savers with NS&I. We take their interests very seriously. They have over £100 billion invested. It is one of the largest savings organisations in the country, and that will continue.
Financial Services Bill
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Lord Davies of Oldham
My Lords, given the persistence of my noble friends in debates throughout the Bill as regards “may” and “must”, I imagined that their efforts would result in one signal victory, and this is it. We appreciate the Government’s movement on this point.
I accept what the noble Lord, Lord Sassoon, said about the public interest being considered before a matter is laid before Parliament, but that in normal circumstances Parliament should be informed. I am very grateful to him for the fact that the assurances which he gave in Committee have been amply fulfilled with these amendments.
Lord Peston
My Lords, my remarks will change the atmosphere of “love fest” between the two Front Benches with regard to the “may/must” question. There seems to be a semantic problem here in that “must” appears in new Section (2) proposed by Amendment 107D, which one could interpret to mean must. Unfortunately, however, new Section (3) proposed by the same amendment converts “must” into “may”, because it says that if the measure is not in the public interest the “must” does not apply. That shows how difficult it is to draft Bills, particularly in circumstances such as these. I assume that lawyers will flourish when they read “must” in proposed new Section (2) and then discover that the Treasury has decided that it is not in the public interest to publish a direction, and therefore “must” no longer applies. I thought that I ought to add that to the otherwise very pleasant interchange to which I have been listening.
Lord Sassoon
My Lords, it may be helpful to the House if I speak early in this debate. The amendment explores how the FCA will regulate the payday lending sector. The Government have been clear from the outset that the FCA should be able to take action to address the problems that are rife in the payday loans sector and, indeed, in the consumer credit sector more widely. That is why the Bill in its current form already empowers the FCA to make rules regarding the regulation of payday loans when credit regulation is transferred to the FCA in 2014.
I welcome the opportunity to debate this important issue. The Government are, like all of us, concerned about the appalling behaviour of some firms in this sector and the harm that vulnerable consumers suffer as a result. I shall say up front that, if the noble Lord agrees to withdraw this amendment, I will table a government amendment for debate at Third Reading that will address the issues raised by the noble Lord. The Government will go further, not only embedding stronger payday loan regulation in primary legislation but ironing out the potential weaknesses that they see in today’s amendment.
I cannot accept the noble Lord’s amendment as I think that the Government can, with the additional resources provided by officials and parliamentary counsel, improve on it in a number of ways. But, first, allow me to put on record three important points about the problems in the payday loans sector and how the Government will ensure that the FCA will be able to address these problems. Just last week, the OFT set out a wide range of concerns about detrimental practices in the payday loans sector, from firms failing to perform adequate checks that customers can afford a loan to a lack of forbearance when consumers are in financial difficulty. While restrictions imposed on the cost and duration of credit may address some of these problems, it is clear that regulation of the high-cost credit market as a whole needs to improve. Compared to the current regulatory regime under the OFT, the FCA will have a broader and more effective toolkit to monitor and tackle developments in the market and to supervise practice among firms. Its consumer protection objective provides the FCA with the mandate to use those powers and tools.
Secondly, capping the cost of credit and the number of times the loan can be rolled over is a major market intervention. It could bring huge benefits for consumers, as a recent study in Japan has indicated, but experience in Germany and France has shown that there can be equally momentous unintended consequences, including reduced access to credit for the poorest and most vulnerable consumers, even driving them to illegal loan sharks. These international lessons demonstrate that we need robust evidence to support any decision to introduce such a cap.
As noble Lords may be aware, the Department for Business, Innovation and Skills has commissioned research from Bristol University into the impact of a cap on the total cost of credit. This is one of the most comprehensive pieces of research undertaken into the UK high-cost credit market. I am pleased to confirm that the research will be published in the next few weeks and will enable the Government and, in future, the FCA to take an evidence-based approach to regulating the high-cost credit market and, in particular, to assess the pros and cons of a cap on the cost of credit.
However, we need to ensure that the FCA grasps the nettle when it comes to payday lending and has specific powers to impose a cap on the cost of credit and to ensure that the loan cannot be rolled over indefinitely should it decide, having considered the evidence, that this is the right solution. In this, I am entirely in agreement with the noble Lord. So, while I support the spirit of the amendment, I cannot accept it as it is framed as it may have unintended consequences and introduce loopholes which could be exploited by unscrupulous firms. For example, the amendment refers to the,
“maximum duration of a supply of a product or service”.
Firms might offer an ostensibly new product or agreement in order to circumvent the cap on the duration of the agreement. The amendment also focuses on the terms of the credit agreement and does not pick up charges imposed under connected agreements, which may often be significant. Again, this would open up a potential loophole for firms to exploit.
However, the Government believe that there is scope to go further than this amendment and to put in place stronger, automatic consumer protections and make the deterrent effect more robust by providing that a breach of these rules would make the agreement unenforceable by the lender. I will draft an amendment and discuss it with the noble Lord, Lord Mitchell, to ensure that it fully meets his concerns, as I believe it will—I believe it will go further—and I can confirm explicitly that it will cover both the total cost and total duration of credit.
Lord Sassoon
If the noble Lord will permit me, I will allow him to intervene in a moment, but let me conclude my argument.
Our objectives here are the same: they are to ensure that consumers of financial services have access to credit when they need it and at a price they can afford; and to ensure that the regulator is under a clear obligation, and fully empowered, to ensure that consumers are protected. I hope and expect, therefore, that when the noble Lord, Lord Mitchell, sees the draft amendment he will feel able to add his name to what the Government propose.
Lord Peston
What the noble Lord said is extremely welcome and conciliatory to all of us. However, he left out one part: when will the rest of us get to see this draft amendment—I believe it is proposed that Third Reading should be next Wednesday—so that we, too, can scrutinise it to see whether it meets the requirement? One of the most compelling parts of the noble Lord’s argument was how difficult this area is—I thought it was all very simple—and he outlined a series of problems which he claims that he and his officials will solve. Has he actually solved them? Does the draft amendment exist and will we see it no later than, say, this Friday?
Financial Services Bill
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Baroness Hayter of Kentish Town
My Lords, I thank the Minister for what I think he thought was reassurance on this amendment. Nevertheless, he will not be surprised to know that I still find it regrettable that it makes permissive, rather than obligatory, the publication of names and details where a firm has been obliged to withdraw a misleading advertisement rather than withdrawing it voluntarily.
At the very least we seek an assurance from the Minister that the default is publication, with non-publication being the exception, rather than each finding of misleading ads having then to consider whether publication of the fact should proceed. Otherwise, it is a complete reversal of what I think the Government seek to do. Had the Government accepted my amendment earlier, which would have introduced a code of conduct for financial services, we may have had to rely much less on this, because there would have been fewer ads to withdraw.
I will take only two seconds here. I was very interested to read on Thursday that the Chancellor of the Exchequer accepted the need for professional standards to keep banks’ behaviour in check. It is a shame that he did not tell his noble friends beforehand, otherwise perhaps the Minister could have accepted our amendments. Perhaps, in compensation, the Minister will take a moment when replying to indicate what sort of organisation the Chancellor envisaged should be set up to ensure professional standards in the banking industry.
This is of course relevant to the Bill because it is about preventing bad behaviour, whereas the amendment that the noble Lord has just moved is about dealing with something after the event. For the moment, will the Minister assure the House that the default position will be to publish the findings on misleading promotions, with details being withheld only in exceptional circumstances?
Lord Peston
Partly because of the noise I did not quite get all the argument that the noble Lord was putting forward. Is his argument that the FCA thought there was a problem, got involved, then heard some cogent reasoning from the firm concerned and therefore felt that there was no need for this to become public knowledge? That, I think, is the noble Lord’s argument, but there is one bit that troubles me. Would firms—and consumers, for that matter—not benefit if they knew about the problem and discovered that there was a good case for not proceeding with it? In other words, one of the things that we lose from not making what happened public is that, outside of this, no one gets to learn anything from what happens. Can I persuade the Minister just to respond to that?
I agree with my noble friend on the Front Bench, of course, that if we had had a code of conduct in the first place, along the lines that she suggested, we would not have a problem anyway.
Lord Hodgson of Astley Abbotts
I understand that my noble friend on the Front Bench is saying that you would not need to publicise it because there was no problem. All you would be doing is raising concerns in the minds of the consumer about a problem that in fact did not exist, because the regulator was satisfied by the explanation it had received from the firm in question. It would be entirely inappropriate to raise questions about a firm’s probity and behaviour when there was no problem in any case and the regulator was convinced of that fact.
Lord Peston
That is totally—going back into the history of economic thought—to misunderstand the most fundamental contribution that Adam Smith made to economics, which is that it is the consumer who matters and not the firm. The noble Lord and several other noble Lords on that side have spent a large part of the debate on this Bill deciding that the firm was what mattered. The fact is that the consumer is what matters, and the consumer needs to know that there was a problem in principle even though it turns out that there was not a problem in fact. I think the noble Lord is also arguing that one is not allowed to speak twice because we are on Report—I thought he was shaking his head when I got to my feet again—but I had not yet finished. However, I am finished now.
Lord Sassoon
It did go through my mind to ask my noble friend Lord Newby to assure me that we were back on Report—because we went back into Committee mode for a bit last week—so I am grateful to the noble Lord, Lord Peston, for confirming that we are indeed on Report.
As I said in our previous discussion on professional standards, and as the noble Baroness knows full well, the Joint Committee of the two Houses is working away on this—indeed, I think it is sitting again this afternoon; I am looking around to see who is here and who is not in their place—and it will come forward with its suggestion as to what would be the appropriate body for professional standards.
Sadly, although professional standards are enormously important and they absolutely need to be raised in the industry, that does not mean that we do not need the construct that we are talking about in this clause. However, I can confirm to the noble Baroness that I expect that the default will be to publish and that there will be only limited circumstances, of which I have described one—although I cannot think of many others—in which it would wish not to publish. Indeed, other provisions in the Bill require the FSA to have regard to the desirability in more general terms of publishing as a back-stop.
Baroness Garden of Frognal
I think that the rule applies also to the mover of the amendment.
Lord Peston
I am sorry; I am a bit lost on the procedure here. I was under the impression that if someone was moving an amendment he could be asked any number of questions and reply to them. When did we invent a rule that said that we could not ask questions and ask the person moving the amendment to answer them? I am not convinced that we are not making a new rule here. By the way, that is not my speech, which I am about to make.
Baroness Garden of Frognal
My Lords, on Report the mover may reply to any questions at the end but does not reply individually in the course of the debate.
Lord Peston
I hate to prolong this but I am not certain that that is right. How are we to conduct the clarification of the amendment if we do not get an answer to an early question in order to ask a later one? I am totally lost as to how we are handling this. We should not forget that this is an immensely complicated Bill and many of us have had great difficulties dealing with it. I have a question for the noble Lord, Lord Flight, just to clarify matters and it may be that someone else will build on that, but we are being told that we cannot do that. That does not seem to be a very helpful way of dealing with this Bill.
Baroness Garden of Frognal
I am sorry to intervene again on the noble Lord, Lord Peston, who has many more years of experience of this House than I do, but this is not the form that Report stage takes. The mover may reply to questions at the end of the debate, but the debate does not go backwards and forwards in the way that it does at other stages of the Bill.
Lord Stewartby
My Lords, I must be very brief and I shall speak only once. I want to say something in support of my noble friend Lord Flight, who made a very strong case. I have never been able to understand why financial advisers alone have no longstop for their potential liability in future years. I hope that this opportunity of having legislation which is relevant can be taken to set that right.
Lord Peston
Perhaps I could just ask my question now, please. When the noble Lord, Lord Flight, talked about financial advisers, was he talking only about people who advise and receive a payment for their advice, or does his amendment cover those who give advice without payment?
Lord Peston
My Lords, Report is a very late stage of a Bill. I must confess that one of the benefits of my noble friend’s amendment is that I realise yet again that I do not understand a vital section of the Bill. Before elaborating on that, I will say that I entirely agree with the noble Viscount, Lord Trenchard, that competitiveness in this area, as in virtually every other area, is of the essence. If we are interested in protecting the consumer, the best way of doing that is with competition between the suppliers of whatever is being supplied.
My noble friend’s amendment is about co-ordination of the FCA and the competition authorities. My difficulty—and I am sure that I am at fault, and not the drafters of the Bill—is that this whole section of the Bill does not seem to be specifically about the relationship between, in this case, the regulator and the competition authorities, or about the provision of financial services. I am puzzled, and so the Minister replying from the Front Bench could help me a great deal if he explains why subsection (5), lines 33-35, refers to,
“the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom”.
In other words, it looks as if this is a directive to I do not know who, to do with competition throughout the economy. It does not say “through the acquisition of financial services”, let alone my noble friend’s additionally vital point: financial services and banking services. I therefore make a plea for clarification of what this is about.
The central question is that although we favour competition, the one area we do not favour is competition between the regulators and the competition authorities. If there is one area where competition would not be appropriate, it is that one. They need to get their act together and decide who does what. What bothers me is that, even within the context of my noble friend’s amendment, it is not clear what the memorandum of understanding would have as its basic principle. Wearing my economics hat, I am inclined to say that when it comes to competition the dominant authority should be the competition authority. I am not sure whether my noble friend took that view, or whether he left it as an open question, but it is certainly something on which we need to take a view.
I can find no other way of interpreting the Bill, because it is all about advice to the regulator. My reading of the Bill is that the role of the competition authority is to warn the regulator that what you are doing may distort, limit and damage competition generally. In other words, the lead body in this is the competition authority. I put these as statements, but they are meant to be put interrogatively. In order to understand this section of the Bill, I would like to know the answers to my questions. Who is to take the lead on this? Who has most responsibility to promote competition, and who must therefore take heed of the other if what they are doing will damage competition?
I am sorry that this is all a bit convoluted, but I am not to blame for that. What is to blame is that this Bill is a mess, as my noble friend Lord Barnett and I keep pointing out. It was drafted too quickly, it has not been thought through, and there is no better example of that than this section.
Lord Phillips of Sudbury
My Lords, I understand why this amendment has been brought forward. My concern is that the FCA has three operational objectives under new Section 1B(3) to be inserted into FiSMA; namely, consumer protection, integrity and competition. I am not entirely satisfied that Amendment 86A necessarily protects the integrity objective. I have been concerned throughout the Bill that, as between these three objectives, integrity is the absolute necessity of any financial market and has been woefully lacking in recent years. If the Minister has a view on whether Amendment 86A respects the integrity objective, I am sure that the House will be grateful to know the Government’s view. Otherwise, I am concerned on that basis.
Lord Barnett
My Lords, this whole section implies that the regulator is not necessarily the OFT. I thought that the regulator of the Competition Commission was the OFT. I am now totally bemused as to whether the OFT or the FCA is the main regulator.
Lord Barnett
The FCA is the regulator but the OFT is referred to throughout this section of the Bill. Now, under new Section 140A, we have the FCA as well. This new section is headed, “Interpretation”, which should be interpreting for us—although I am blessed if I am interpreted in that sense. Consultation between the bodies must be sensible. I assumed that that would happen and I assume that the Minister will tell us that this amendment again is unnecessary and therefore should not be in the Bill. The officials should reply to this debate because only they understand what is being talked about because they drafted it. I assume that the Minister was not responsible for the drafting: he has enough to do without drafting a Bill of this size.
Who is the regulator here? If it is the FCA, what is the OFT doing? Perhaps the Minister will tell us. Who is the lead regulator? Is it the FCA, as is implied here, or the OFT? I am totally confused but, no doubt, he will be able to explain everything because it is written there in front of him.
Lord Peston
I am having great difficulty remembering what the rules are. If the Government meant that, why did they not say it? The subsection refers to “any goods or services”, not “any financial services” or “only financial services”. I assumed that it had a meaning, but the Minister is now telling me that it does not. Is he sure that he wants to give the answer that he is giving?
Lord Newby
My Lords, I am sure that the phrase has a meaning, and I like to think that it is the meaning that I just ascribed to it. I will look at it again, and if I find that I have misled the noble Lord and the House, I will write to him. As with so much of the Bill, this is an extremely technical section. However, I am assured and believe that it relates only to the financial services sector.
I referred to the comments of the noble Lord, Lord Borrie, about the importance of allowing the competition bodies to take the lead in certain cases. That in part answered the question of the noble Lord, Lord Barnett, about who was the main regulator. The main regulator is the body that is best capable of dealing with each issue. In some cases that will be the FCA, and in others, it will be the OFT or its successor. For the time being, the OFT and its successor and the FCA will have powers in this area. The logical thing is to let them exercise those powers in the way that will use their experience most effectively.
Lord Peston
The Minister does not seem to have answered my other main question. The title of the new section is,
“Advice about effect of regulating provision or practice”.
It refers to advice that the competition authority gives to the regulator; that is what the section is about. Am I right in my interpretation that the section is about the activities of the regulator in damaging competition, rather than about the activities of financial services providers? I sought clarification from the Minister on whether the words in the new section mean what clearly they say about advice from the competition authorities to the regulator. That is what it says.
Financial Services Bill
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Lord Peston
My Lords, my contribution is also entirely interrogative. I have a lot of questions. I shall put the matter in context. Before we started today's proceedings, I thought that this was all very straightforward and simple but I now realise that I did not understand any of it at all. I am not certain that I am alone in not understanding it. I shall go through my questions and give some examples to elucidate them. First, I may have missed the noble Lord, Lord Sassoon, making the relevant statement, but can noble Lords assume that everything in these amendments has been agreed by Mr Wheatley and that he also agrees that they do every single thing that he wanted done? That was not said, but I assume that perhaps we are to take that for granted. My second question, which was not in my original notes, but I listened to what was said, is: do these amendments go well beyond what is in the Wheatley report? I would like an answer to that. My third question is: why are we talking about benchmarks? That was the first thing I scribbled when I saw the amendment. Why are we using this expression? It is so broad that it seems to me to cover all sorts of things that have nothing to do with LIBOR. My main puzzle is that I thought that this was all about LIBOR, exactly LIBOR, no more than LIBOR and no less than LIBOR, but it seems to me that it is about 101 other things.
In order to elucidate that, perhaps I may give some examples. I am sticking to the investment paragraphs, whereas my noble friend Lord Eatwell rightly says that benchmarks are used for all sorts of contracts, not just investment contracts. Let us stick with investment contracts. Suppose a firm issues a long-term bond which is specified in the following way: “This firm agrees to pay the holders of this bond 5% interest over its life”, say 25 years, “plus the rate of rise of the GDP deflator”. That seems to me to be a good way of issuing a bond and raising money. Does the GDP deflator, and do all those who set the GDP deflator, come into the scope of this Bill? I can see nothing that stops them coming into the scope of the Bill, but those people are the Office for National Statistics and if the Government manipulate the GDP deflator by subsidising certain key elements of it, the Government may face criminal charges. I have seen nothing in this Bill to stop that happening. I mention that because the GDP deflator happens to be my favourite price index as compared with the CPI and the RPI, but it would apply just as well to them.
Let us go further. In order to produce stability in its enterprise, suppose a firm says, “I will pay you 3% per annum over the lifetime of this contract, which we wish to last for five years, plus the rate of rise of the GDP deflator. Will you agree to that?”. That relates to a question that occurred in your Lordships' House yesterday. It is the kind of wage contract many of us would like to see used in order to stabilise the economy but I can see nothing that prevents such a contract coming under the scope of this Bill. To my noble friend Lord Eatwell, I say that it is not just a matter of commodities trading, but it seems to me there is nothing in the Bill that prevents almost anything that is index linked coming under its scope. Am I right that this goes well beyond LIBOR? I would take the view that it should not; that is not what we are here for.
Those are my contributions, they are all interrogative and I am perfectly happy to be told that I have misunderstood everything that is going on here. I do however agree with my noble friend Lord Barnett that I may misunderstand it, but the lawyers involved in this kind of activity will not and they are going to look for trouble. Has the Minister asked his officials to guarantee that no trouble can arise in that way within this part of the Bill?
Baroness Noakes
My Lords, I ask my noble friend a simple question, for which I apologise for not having given him notice. It is a question I had intended to raise in respect of an earlier amendment but for various reasons I was not here when that amendment was dealt with. It relates to the definition of financial crime. The FCA has, as one of its integrity objectives, the financial system not being used for a purpose connected with financial crime, and financial crime is defined in new Section 1H. An amendment moved by my noble friend earlier was to include terrorism financing in the definition of financial crime. It seems to me that the definition as it stands does not automatically include the new offences that are created in this rather large group of amendments, which we can shorthand as the LIBOR offences, because it would not otherwise have been within the remit of the FCA. I would be grateful if my noble friend would answer that point.
Lord Sassoon
My Lords, I was rather getting into the swing of this. I have never had so many questions in such a short time and I was waiting for more to come. Noble Lords know that I usually try to group my answers together in some coherent way, but the questions have come so thick and fast that I fear that in answering as many as I can the answers may not be grouped together quite as efficiently as I would like.
Let me start with the definitional issues around what we are trying to cover here. First, to the noble Lord, Lord Barnett, benchmark may be defined by Chambers Dictionary, on Google and in many other places, but it has never before been defined in FSMA and I think it is necessary to have a FSMA definition. I am sorry the noble Lord went to all these other sources and did not look at the very particular definition in the Bill, but that is where these amendments start. The noble Lord, Lord Eatwell, asked if the definition was wide enough and the noble Lord, Lord Peston, takes the view we should only be talking about LIBOR so the definition may be too wide.
Lord Peston
All I was saying was I thought that the Bill team, when we met them, told us that these amendments dealt with LIBOR, end of story. I am asking whether they deal with lots of other things. I am not saying it is wrong to do so, I am simply asking.
Lord Sassoon
Again, to an extent the noble Lord, Lord Eatwell, pre-empts what I was going to say. First, let me deal with this question about the international situation, which I believe I addressed in my opening remarks. We have identified a clear problem with a critical benchmark, LIBOR. We intend to fix it. Work is going on in the international arena to look at questions of benchmarks more generally. As and when there is a conclusion, that will then be factored in as to whether within this framework there is more to be done to regulate other benchmarks. Of course, if through applicable international rules there were some change to the framework required, which we do not anticipate, we could also change the framework through primary legislation.
In the mean time, having identified LIBOR, we will have a consultation. That will be an opportunity to people to give their views about what other benchmarks, if any, should be regulated. I do not see any contradiction in my remarks with my right honourable friend the Financial Secretary’s remarks at all. We will see what the international community comes up with as IOSCO and the FSB look at these matters.
The noble Lord, Lord Eatwell, is of course right that the definition here is one of the more difficult ones. I will have a look again to see whether anything of the sort that he suggests might be missed out is not covered. Although clear understanding is that the word “investment” as taken sometimes in a common- sense way does not necessarily fit with some of the examples that he gave, I will take it away and have a look at it again to make sure that it does cover everything.
On the series of petroleum-related examples that the noble Lord gave, I am not going to say whether the manipulation of the Californian electricity market would fit within the regulations because that is beyond the scope of what we are talking about, but let me talk about the gas market. I do not want to pre-empt the specifics of the gas market review, but I am quite clear that, between the provisions that we are putting in place in this Bill, and those to which I have already drawn attention and the powers of Ofgem, we will be covered.
Also in this definitional area, one or two questions were asked about GDP and RPI. In particular, the noble Lord, Lord Peston, asked about references to the GDP deflator. Since the GDP deflator is not set by reference to the state of a market but is wholly different, I do not see that coming within the scope of what we are looking at here. GDP is clearly a matter for the ONS; it is not derived from the markets in the sense that we are talking about here.
Lord Peston
The answer is that it is. It is a price index, and all price indexes are derived from markets because markets set prices. There is no question that it is not an index. I think that this is a matter of language and we hope that the Minister will clarify it for us. Will he also point to where in any amendment that he has put down the acronym LIBOR appears?
Lord Sassoon
The definition of “benchmark”, as we have already been through, has a number of legs to it, the first of which is that it is set by reference to the state of the market. Even if for the moment we park that one, we then come to the investment-related test, for which the GDP deflator would not apply. I know that in the example which the noble Lord gave it was part of something else, but the mere fact that it is part of something else does not mean that the GDP deflator is covered by the definition here.
On why LIBOR is not mentioned anywhere, which it is not, it is precisely because we are putting in place a framework. The secondary legislation, which will be preceded by a consultation coming very shortly, will be around what the first regulated benchmark should be. The Government will propose that it should be LIBOR and at this stage only LIBOR, but we will ask whether anything else should be covered. That is why LIBOR is not mentioned in the Bill; it will come in the secondary legislation.
Lord Peston
Am I right, therefore, that anybody looking at the Bill would not know that it had anything to do with LIBOR? I am pretty sure that I must be. They will know now, because the Minister has told us, but why does he not then put it in his amendments? What we are discussing is a badly drafted Bill that could be improved if it merely contained the sentence, “The object of all of this is to deal with the LIBOR problem”, and he could then deal with it via secondary legislation. No one would have known about any of that until we had this debate in your Lordships’ House—which is why we are here, I suppose.
Lord Sassoon
My Lords, the problem that we are trying to deal with is that it has been revealed this summer that benchmarks are open to the sorts of abuse that need to be dealt with. We are putting in place a framework that enables abuse or potential abuse of benchmarks to be dealt with. There was never any intention to put in LIBOR. I expended about 1,900 words explaining why we were doing this and I probably mentioned LIBOR a dozen times. I hope that the noble Lord is now clearer. I see that he is; I am grateful. That probably deals with the main definitional and scope questions.
Lord Peston
I take it that the people who have already behaved in a criminal way can be prosecuted under the criminal law as it is. In other words, there is no need for retrospection because there is a criminal law sitting out there waiting. For all we know, it is already dealing with them.
Lord Sassoon
I am grateful to the noble Lord. As I have answered before in Questions on the LIBOR issue and as I said earlier, there are potentially other offences which may have been committed, and the prosecuting authorities and investigators are looking to see whether anybody could be charged under pre-existing law, so I am grateful for that clarification. The point is that it would be much more effective to have a targeted offence, which is what we are putting in place here.
Turning to Amendment 80A, under which the noble Lord, Lord Eatwell, would like the FCA to have the ability to refer to codes published by the Financial Reporting Council, as well as the body responsible for setting the benchmark, I believe that Amendment 80 already allows the FCA to make such a reference since it would be able to make,
“reference to any code or other document published by the person responsible for the setting of the benchmark or any other person”.
As Amendment 80 stands, the FCA is able to refer to a code issued by the FRC or any other body.
Having said that, while from time to time the Financial Reporting Council publishes codes and documents relating to standards of corporate governance and so on, it is unlikely that they will be directly relevant to the setting of specific benchmarks. Of course, as the noble Baroness, Lady Hogg, is here, if she would like to correct me I am very happy to be corrected, but I think that is very unlikely. The intention of the provision in the Bill is to allow the FCA to make reference to detailed codes, allowing the detailed instruction of how, when and to whom information should be provided to a benchmark. I certainly do not anticipate that the FRC would publish codes relating to benchmarks in that detailed way. I therefore do not believe that the amendment extends or affects the powers of the FCA to make the rules in any material way, and I cannot accept it.
I spoke earlier of my gratitude—and this has been repeated by other noble Lords—to the noble Baroness, Lady Hayter of Kentish Town, for spotting the small drafting mistake, and confirm my intention to accept her proposed Amendment 80B. I encourage her to move it.
I now turn to Amendment 80C and the recommendation that the BBA transfer responsibility for administrating LIBOR to a successor body. I have already dealt in some detail with aspects of this, but let me go through it again. The nomination for that successor body will be determined through an open and transparent tender process that will be run by an independently chaired committee comprised of respected individuals from the financial services industry and the UK authorities. As I have already said, I am delighted that the noble Baroness, Lady Hogg, has agreed to chair that committee. The committee’s work is in its preliminary stages, but further information will of course be published in due course. I acknowledge the noble Lord’s concern that there is a risk that a suitable rate administration will not be willing or able to administer LIBOR; I firmly believe, however, that this risk is of very low probability. As I said, a considerable number of expressions of interest have already been received.
In the unlikely event that there is no appointable administrator, or in the event that we have already discussed that the administrator is appointed and then fails, the FCA will already have power to step in to administer LIBOR, should that be necessary. A disorderly collapse or the unavailability of LIBOR would have severe implications for institutions and financial markets across the globe, as the Wheatley review sets out in detail. It is under the objectives of the FCA, particularly its consumer protection and integrity objectives, that would give it sufficient basis to step in and administer the rate. The FCA therefore would not need any specific legislative power to administer LIBOR, and it is worth reminding ourselves that LIBOR is currently administered by the BBA without a statutory underpinning. We know that this is unsatisfactory, but I am just making the point that the setting of LIBOR itself has never required any statutory powers. I am quite clear that the FCA’s powers, as outlined elsewhere in the Bill, are sufficient for it to undertake such a course of action, although we anticipate that being very unlikely.
I do not wish to put a specific time limit on how long the FCA could maintain the administration of LIBOR, but neither the Government nor the FCA would want the FCA to administer LIBOR in the long term. We want the regulator to concentrate on regulating the market, not to fill a gap in the market on a permanent basis. I do not consider Amendment 80C is needed.
Economy: Quantitative Easing
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The Minister of State, Ministry of Justice (Lord McNally)
I think it is the Liberal Democrats. We have had a Labour Member and a Cross-Bencher.
Lord Sassoon
My Lords, we are putting together a British business bank in order to bring together the various schemes that SMEs and all companies have access to. I entirely agree with my noble friend that this is an ongoing and very serious issue. We will continue to use the strength of the Government’s balance sheet, which is due to the credible deficit reduction plan, to back up schemes such as the infrastructure guarantee scheme, which goes precisely to one part of the demand and need for long-term bank finance. We will, and have already, come forward with schemes, because I completely agree with my noble friend that this is a critical area.
Lord Peston
My Lords, could the Minister just clarify his Answer a little? Is he saying that the economy is now on a continuous expansion path of a sustainable nature, and therefore that everybody else—all the experts who say that there are nothing but bad times ahead—is mistaken? Is that the Government’s view?
Lord Sassoon
My Lords, I merely stated that, on the last numbers from the ONS, the economy is growing again. If we bring this back to the subject of the Question—quantitative easing—the Bank of England’s analysis of 23 August is that economic growth would have been lower in the absence of the asset purchases and unemployment would have been higher.
Financial Services Bill
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Lord Stoneham of Droxford
My Lords, I support the amendment. The issue behind the amendments in this group is that the investment industry’s duties to savers appear to be poorly understood and observed. As the Law Commission has confirmed, where firms are managing other people’s money or giving them financial advice, they have strict fiduciary duties to act in those people’s interests. This includes both individual clients and institutions such as pension funds which represent large numbers of underlying savers.
Fiduciary duties are stricter than FSA rules, yet they are not universally accepted within the industry. There is anecdotal evidence that firms often seek to exclude or restrict their liability for breach of fiduciary duties through contractual terms which may not be read or understood by the lay trustees of pension funds. Even where they are accepted, it is very clear that they are not being applied. In the past week, the FSA has published a “Dear CEO” letter on conflicts of interests among asset managers which found that,
“many firms had failed to establish an adequate framework for identifying and managing conflicts of interests”,
and that,
“in most cases senior management failed to show us they understood and communicated this sense of duty to customers”.
In other words, firms are often not meeting even the FSA’s standards regarding conflicts of interest, which are lower than fiduciary standards.
As these are common law duties, they do not form part of the FSA’s regulatory approach. Indeed, there is confusion over whether it is appropriate for the FSA to enforce them, with some arguing that it is for beneficiaries to pursue court actions if duties are breached.
Where pension savings are concerned, this is unrealistic and unsatisfactory as a means of achieving high standards of care across the market. An explicit, best-interests principle in a Financial Services Bill would give the FCA a powerful tool to ensure that consumers’ interests were protected.
The concern is that the Bill’s new wording is significantly weaker than that proposed by the Joint Committee and may not provide a high enough level of protection for consumers. It lacks clarity in what might constitute an appropriate level of care, thereby leaving open the very question it was intended to resolve. Where those managing people’s long-term savings are concerned, the problem is precisely that there is confusion and misinformation about what is the appropriate level of care. Explicit confirmation that those managing other people’s money must act in their best interests would be a clear and effective way to help achieve the Joint Committee’s intention. Amendment 25D would provide that confirmation, since anyone managing somebody else’s money would meet the criteria of discretion and consumer vulnerability.
The noble Baroness, Lady Hayter, drew attention to the fact that this issue has the potential to seriously undermine the aims of auto-enrolment. In trust-based pension schemes, it is clear that the trustees are there to act in beneficiaries’ best interests. Indeed, as the ABI pointed out in oral evidence to the Joint Committee, one positive feature of the National Employment Savings Trust—NEST—is that it has a trustee structure that looks to protect its members. However, many savers are likely to be auto-enrolled into contract-based pension products where, as things currently stand, no such protection exists. Since the House of Lords considered the Bill in Committee, we have had the Kay review of UK equity markets. It recommended that:
“Regulatory authorities … should apply fiduciary standards to all relationships in the investment chain which involve discretion over the investments of others, or advice on investment decisions. These obligations should be independent of the classification of the client, and should not be capable of being contractually overridden”.
This amendment seeks to address a number of objections to similar amendments raised in the Commons and in the Lords in Committee. First, it does not rely on the term “fiduciary duty” but rather seeks to enshrine the common sense principle that underpins these duties—that where consumers rely on a firm’s discretion, that discretion must be exercised in the consumers’ best interests. Secondly, it would not supersede or restrict the specific standards to be laid down in FCA rules but rather would provide an overarching principle that the FCA should bear in mind when setting those rules. Thirdly, it would not apply across the board but only where appropriate—that is, where consumers have a particular relationship with providers that justifies a best-interest standard.
When we looked at a similar amendment to Amendment 25D in Committee, my noble friend Lord Sassoon expressed sympathy with the intent but argued that it was a matter for the FCA to make detailed rules on, rather than to be included in the Bill. However, as I have already said, part of the problem is that the common law status of fiduciary duties makes it unclear whether it falls within the FCA’s remit to uphold them, hence the need for an explicit reference in the Bill. It has also been suggested that refusal to amend the Bill in this way indicates a lack of political support for robust action to challenge the interests of financial intermediaries. Indeed, this could make the FCA feel that it has limited room for manoeuvre. Therefore, I hope that my noble friend will be more prepared to consider accepting the amendment and, at the very least, that he will give some indication of the support that the Government will give to the full implementation of the Kay recommendations.
Lord Peston
My Lords, in supporting my noble friend’s amendment I reread this section of the Bill, and I realised that I did not understand it at all. On the face of it, we are discussing here the consumer protection objective—that is, a series of statements most of which could be read as totally vacuous. In fact, as I read them again, I immediately thought, “What does it leave the FCA to do, rather than simply tell them?”. There are remarks like:
“the general principle that consumers should take responsibility for their decisions”.
If that is a general principle, why do any of the other principles hold?
There is,
“the needs that consumers may have for the timely provision of information and advice that is accurate”,
and so on. Anyone who knows anything about systemic risk knows that the relevant amount of information is massive and that few people on this planet would be capable of processing it in order to come to a view.
My noble friend’s amendment at least seems to have some impact on the FCA possibly doing something. Reading the Bill, I have great difficulty seeing what the FCA then does. Perhaps the Minister can tell us.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, this is another group of amendments where we have not only debated the issues at length at previous stages but seen broad agreement across the House on the driving principle behind them. The notion behind the amendments is both clear and unarguable. Firms have and should have responsibilities to their customers. I agree that consumers have, all too often, suffered detriment at the hand of financial services firms because the regulator’s overly broad remit meant that such important matters were not given sufficient attention. The main answer to the challenge of the noble Lord, Lord Peston, is that it is for that very reason that we are creating a focused conduct of business regulator with a new suite of powers to tackle firms that do not take their considerable responsibilities in this area seriously.
Lord Peston
Is the Minister telling your Lordships that the FCA will have the power to intervene with specific firms? On the basis of what information, I wonder.
Lord Sassoon
Yes, I can confirm that. The information may come from a whole range of sources. Obviously, consumer complaints could be one source, but I know that the noble Lord postulated a circumstance in which there was no consumer complaint. It will clearly be going in regularly to review how a firm operates and conducts its business. That will be another source of information. I am sure that it will regularly compare products on offer, one against another, and if there are outlying products, that is another source of information. There is a whole range of sources of information. The key thing here is that we have in the FCA a regulator that does not have to be concerned, as the FSA does, with all the considerations of prudential regulation and supervision and can therefore take a much clearer approach. As we discussed, there are specific product intervention powers, which the FSA does not have.
The noble Lord helpfully raises the general background. We are putting the FCA in a much better position to tackle those issues proactively. Specifically, Amendment 25D would insert a factor that the FCA would have to consider when advancing its consumer protection objective. Namely, it would require the FCA to have regard to,
“the general principle that, where consumers properly repose trust in a firm’s discretion and are vulnerable to the exercise of that discretion, the firm has a duty to act in the consumer’s best interests”.
As I reflected in Committee, this is a cleverly worded amendment and the motivation behind it is noble, but I am still not convinced that it would result in firms acting in the way that the amendment is intended to ensure.
I am clear that the best way for the regulator to ensure that firms act in the best interests of their customers is through detailed, clear and unambiguous rules. Noble Lords have already highlighted the FSA’s “treating customers fairly” principle, under which it has carried out important work to protect consumers. With the renewed focus on consumer protection which I have just highlighted, the FCA will be empowered to go further. The precision attached to rules offers a much more effective shield for consumers than a broad duty, which will be near-impossible for the FCA—or, indeed, firms or consumers—to interpret, given the breadth of interests of different consumers at different times.
Moving to Amendment 26B, we return to the thorny question of fiduciary duty. Amendment 26B is drafted to reflect the recommendations of the Kay review in this area. The Government are in the process of responding formally to the recommendations of the review, and I hope that the House will concede that it would be inappropriate for me to pre-empt that response. I assure my noble friend Lord Stoneham of Droxford that we are taking the Kay review recommendations very seriously and that they will receive a substantive response.
I reassure the noble Baroness, Lady Hayter of Kentish Town, that the regulatory framework that we are establishing will enable the FCA to consider to what extent current regulatory rules in this area support these standards, if they advance its objectives. However, I am concerned that there are aspects of this amendment which would not have the effect that we desire. In particular, the proposal that the regulator gives guidance as to what is the effect of common law, notwithstanding what we have heard, seems very dangerous to me. It risks absolving firms of the duty to consider their role and duty under common law and places the burden on the regulator to outline how the common law applies. Seeking to codify common law in guidance in this way also means that the scope for the common law to develop and adapt to reflect changing circumstances—which is, of course, one of the great virtues of the common law—may be impeded. As a general point of principle, this amendment is unnecessary, because the FCA is empowered to issue such guidance as it sees fit.
The last amendment in this group, Amendment 45A, is another that we have seen before. It would require the FCA and PRA to have regard to,
“the principle that authorised persons should act honestly, fairly and professionally in the best interests of consumers who are their clients”.
Of course firms should act in this way. The right way to ensure that is to empower the FCA, when firms do not act in that way, to act under its consumer protection objective, with strong mechanisms in place to ensure that it co-ordinates effectively with the PRA when it does.
I agree that we want financial services firms to act in a way that puts customers first. It is precisely for this reason that we are creating the FCA as a focused conduct and business regulator. I maintain that the regulatory framework that we are putting in place will lead to better outcomes for consumers, with a focused regulator empowered to act and armed with substantial new powers to ensure that it does. On this understanding, I ask the noble Baroness to withdraw her amendment.
Financial Services Bill
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Lord Peston
My Lords, I rise to support both of these amendments in the names of my noble friends. I think that my noble friend Lady Hayter is right to place all of this in the context of the experience of the past few years. The general proposition on which our discussion must be based is that, if the financial services sector misbehaves, we all suffer—not merely those who buy financial products directly, but everybody in the country. I use the word misbehave advisedly. Systemic risk and systemic events do not appear as if by black magic but result from the way that people who work in the financial sector conduct their business.
Why do they occur? They occur because of the way that people in the sector do things. The solution to the problems must be found partly through regulation, as the Bill recognises. On the one hand, we must bring in regulation to deal with some aspects of this matter. On the other hand, improved behaviour by the enterprises operating in financial services is not merely required but urgently required, as I think my noble friend said. Until recent events emerged I, for one, was not aware of the lack of professionalism and the seeming total unconcern with ethical standards on the part of people in the sector. Whenever I reflect on it, I still find it astonishing that apparently decent people behaved like a bunch of crooks, not to put too fine a point on it. They did not mis-sell products by chance; they deliberately mis-sold them.
Clearly, something must be done. My noble friends are right to see the Bill as the ideal vehicle for doing something, and for tabling amendments to it that would actually achieve something. The object is not to damage the sector, as it is a very important one that earns a lot of money for our economy, but to make it fitter for purpose, if I may use a cliché. My noble friend Lady Hayter is entirely right when she says that as a minimum—I underline “minimum”—there must be a code of conduct which is mandatory and enforceable. I was not clear whether she had in mind all sorts of penalties rather than just the most draconian of all of saying, “You cannot work in this sector again”. Perhaps she will clarify that when she sums up.
I hope that the Government understand all this. Certainly the public understand these problems. I also hope that the Government do not play their usual card and tell us that these amendments are not necessary because buried somewhere in some bit of fine print is an inferior version of what they do. In my judgment these amendments are necessary and the sooner we get them on the statute book, the better.
Lord Phillips of Sudbury
My Lords, I have amendments in the next group and so will keep most of my comments on this aspect of the Bill until then.
I wholeheartedly endorse what the noble Baroness, Lady Hayter, said in moving this amendment and, indeed, what the noble Lord, Lord Peston, has just said. The problem for all of us, most particularly my noble friend the Minister, is to try to contrive a state of affairs for the future which is fundamentally different from that which has prevailed hitherto. I think everybody in the House agrees that we cannot go on as we have done. The City of London, which has been the jewel in our economic crown, is now so tarnished and undermined by its own conduct that its future is far from certain. I have been involved in the City of London since 1964. It has strayed so far from its own mottoes of “My word is my bond” and “May God direct us” as to become almost laughable—indeed, “tragic” is a better word.
Lord Sassoon
My Lords, I always take a lot of notice of my noble friend Lord Blackwell. However, Amendments 25B and 31A raise a very important issue. The revelations during the summer about the attempts to manipulate LIBOR and Euribor demonstrated, if any demonstration were needed, that perhaps a considerable number of individuals in the banking sector have failed to live up to the most basic standards of professional conduct and that must, of course, be put right. We are tabling our amendments to this Bill to bring the setting of LIBOR within the scope of the regulatory regime and make it a criminal offence to attempt to manipulate benchmark rates, but that is only the first step.
The critical issue here, which I think has been rather forgotten in this debate, is that the Government acted very quickly to establish the Parliamentary Commission on Banking Standards and the noble Baroness, Lady Hayter of Kentish Town, made a passing reference to it. The noble Lord, Lord Peston, suggested that I may fob the House off by saying I have another version—he would say an inferior version—of this in the Bill. I absolutely will not say this. I will say there is a superior answer to this very big problem coming from the Parliamentary Commission on Banking Standards. I entirely accept that there is a serious issue to be dealt with but the commission is established, it is doing its work and it will look at precisely what is needed to deal with the challenge.
Lord Peston
I must be a bit thick; I thought that the Parliamentary Commission on Banking Standards was not due to report until this Bill is passed into law. Where will its recommendations, assuming it makes any, then be passed into law?
Lord Sassoon
I will come on to that if the noble Lord, Lord Peston, will hear me out. Of course it is no good having a commission if its recommendations are not going to be taken seriously or enacted if necessary. We should remind ourselves of how this House is represented on the commission. It is quite striking that I do not see my noble friends Lady Kramer or Lord Lawson of Blaby in their places this afternoon, nor indeed the right reverend Prelate the Bishop of Durham or the noble Lords, Lord McFall of Alcluith and Lord Turnbull. Why are they not here? I believe it is because the commission is at work today looking into these very critical questions. Experience and authority is being brought to bear on these issues in order to identify ways to put the highest standards of ethics and professionalism at the heart of the UK banking system and I believe that we should leave the commission to do its work.
I know, as do other noble Lords, that the commission will examine all possible solutions and of course the introduction of codes of conduct should be one of them. We have heard different views about the effectiveness of codes of conduct, but it is quite right for the commission to look at that. The commission has the membership and the tools it needs to do a very thorough job in this area and I do not think we should pre-empt it. It has the power to interview witnesses under oath and to send for the necessary people and papers. It has already heard evidence from, among others, Paul Volcker, the former chairman of the Federal Reserve, Martin Wheatley the chief executive designate of the FCA and from various members of the Independent Commission on Banking. The commission has already gathered an impressive range of written evidence from stakeholders, including the major banks, regulators and consumer groups, and that evidence was published last Thursday.
So, given that the commission’s work is ongoing, it is not the right time to make decisions on this very important matter. To do so would be to pre-empt and undermine the conclusions of the commission, which is investigating this issue so thoroughly.
Lord Sassoon
My Lords, the Government kicked off a number of inquiries and reviews immediately we became aware of the LIBOR scandal. Martin Wheatley, the managing director of the FSA and the chief executive designate of the FCA, carried out one of the reviews which have led directly to the amendments in this Bill. We have acted on his amendments specifically addressing criminal offences and so on around LIBOR in this Bill. We also set up the commission to look at the wider question of professional standards and the way that banking operates and it will report by the end of the year. We will have a legislative vehicle in the new year, if required, to take up its recommendations, which the Government will take very seriously.
It is not that we are dragging our feet or want to stop these issues being addressed. It would just seem foolish to pre-empt a commission of great eminence which is doing enormously important work as we speak. I hope that, on that basis and the confirmation I have given about what is going on, the noble Baroness will be persuaded to withdraw her amendment. While the Government agree with the need to restore public trust in banking, we should not jump to legislate now but do so once the parliamentary commission has had time to do its work.
Lord Peston
I am still a bit lost. As I understand it, the Minister cannot at this point commit the Government to bringing in any specific Bill that they have not brought in yet. However, setting that on one side, the more important point is that all of my remarks, as he will be aware, were addressed to the whole of the financial services sector. Is it possible to have a banking Bill in which amendments will be put down referring to the code of conduct for the whole financial sector? In my view, we will be told that either the short or long Title will not let us do it. That is why I argue that this is the obvious vehicle for this, and nothing the noble Lord has said so far tells me that this is not the obvious vehicle.
Lord Sassoon
My Lords, we have published the Bill in draft already, so it is already on the slipway in that sense. I am not equipped to get into questions about what precisely the scope could be in that Bill. I believe it is wide enough. If it is not, the Government will find other legislative vehicles in which to introduce this. However, I am reminded that although I loosely call it the banking reform Bill, it will actually be titled the Financial Services (Banking Reform) Bill and therefore the scope will be plenty wide enough to bring in a code of conduct right across the piece. I hope that provides further reassurance to the House.
Lord Peston
My Lords, I intervene reluctantly, but I see a lack of logic in what was said by the noble Lord, Lord Hodgson. If the amendment of the noble Lord, Lord Phillips, is not needed, and nor is that of my noble friend Lady Hayter, can he give us any explanation of how the criminal—I use that word again—activities of so many people in the City went on for year after year? If everything is fine and we do not need to establish standards, why did the City not behave appropriately? I use the words “the City” to indicate not just one or two people in the City but a culture right across it. It was the atmosphere there, that is what happened and that is why, in the last-chance saloon of your Lordships’ House, my noble friend Lord Phillips and others are trying to do something about it—in order, to put it bluntly, to get the reputation of the City back to where it was decades ago, when most of us were young and could look at it with admiration and pride. We cannot do that now.
Lord Newby
My Lords, perhaps I may remind noble Lords that the rules of the House are that on Report, Members speak once on an amendment.
Lord Peston
We can speak for clarification and to ask questions. We cannot make substantive points.
Lord Sassoon
My Lords, I spoke about the role of the Parliamentary Commission on Banking Standards when discussing the previous group of amendments. I am sorry that the noble Lord, Lord Barnett, doubts the seriousness with which the Government intend to take its recommendations. It is a joint commission of the two Houses—something that any Government would take extremely seriously. We acted to initiate the setting up of the commission so I am disappointed that the noble Lord seeks to tweak my tail on this one. When it comes to a legislative vehicle, I could not have made it plainer that we have already published a draft Bill. The Financial Services (Banking Reform) Bill is on its way. That provides potentially a perfect legislative vehicle if there are things that come out of the commission, as no doubt there will be, that require legislation. The issues raised by Amendments 25C, 25E and 26C are firmly within the remit of the commission and it would be wholly inappropriate for us to jump the gun in a semi-considered way rather than waiting for the magisterial output of the commission in a short time.
Amendment 26D would add a new paragraph (f) to proposed new Section 1D(2) to be inserted in FiSMA 2000 under this Bill. It refers to,
“the fairness and integrity of policy and conduct of those directing or operating in the financial markets”.
That is on the same theme but seeks to place specific emphasis on issues of integrity and fairness by making changes to the FCA’s objectives. As we have heard from my noble friend Lord Phillips of Sudbury, Amendment 27A would specify that, in considering the effectiveness of competition, the FCA may have regard to the extent to which the,
“methods or culture of any competition may undermine the integrity objective”.
I sympathise with the amendment to the extent that it is clear that when the FCA considers taking action, it will need to consider all its objectives. Recent events have demonstrated how important it is that the regulator has a mandate to take action to protect and enhance the integrity of the UK financial system.
The Government have given the FCA the three operational objectives, as we have been reminded, of competition, consumer protection and integrity so that it determines the right balance between them in individual cases. The regulator cannot unduly prioritise any one objective and neglect to consider the others. My noble friend Lord Hodgson of Astley Abbotts has already given another construction, which perhaps is more balanced, of proposed new Section 1B(4) and I am grateful to him for that.
This is a complex interaction of provisions. In one case we are talking about a competition objective but also, in the context of proposed new Section 1B(4), a duty designed to ensure that the FCA considers competition as a means to, and in the context of, delivering other objectives. But that needs to happen only as far as it is compatible with the integrity and protection objectives. I believe that it is a keenly balanced series of interlocking provisions here, of which these are only two. Of course, there are further elaborations of just what the integrity objective and the other objectives involve. Further, it is important to “have regard to” under this new section. I believe that the balance is right and that there is no need to adjust the structure of the competition objective to require the FCA to consider integrity in the way proposed here.
Similarly, the FCA’s integrity objective will come into play when the FCA is exercising its general functions in relation to conduct. While it must think about whether competition is working in the interests of consumers, I do not believe that it is for the FCA to police the markets to establish and enforce what fairness is. I do not believe that fairness should form part of the explanation of the term “integrity”. It is a separate issue.
There are other issues about the interrelationship between the two new authorities. Proposed new Section 3D requires the PRA and FCA to co-ordinate their functions in areas of common regulatory interest where one may have relevant expertise or wherever one may have 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 have to listen to the FCA, which has a strong consumer protection objective.
In summary, I accept the wider point about the importance of these issues. As this short debate has teased out, these issues are very complicated. They are best addressed through the Parliamentary Commission on Banking Standards. In the light of that, I ask the noble Baroness to withdraw her amendment.
Financial Services Bill
Lord Peston Excerpts(12 years, 1 month ago)
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Lord Sassoon
Noble Lords may be aware that a similar amendment to Amendment 2A was tabled and debated in another place. Then, as now, and as I said in Committee, the Government do not believe that such a legislative provision is necessary or appropriate. Starting with the question of knowledge and experience, the Government have repeatedly confirmed their commitment, as I did in words quoted by the noble Lord, to ensuring the appointment of serious, knowledgeable and experienced candidates who have the appropriate qualifications and skills to carry out the functions of non-executive directors of court. These appointments are fully regulated by the Office of the Commissioner for Public Appointments, which ensures a fair, transparent and competitive process. The code is binding and the Treasury is responsible for ensuring its compliance, thereby ensuring that appointments to court are made openly, transparently and on the basis of merit.
Even without a prescriptive legislative obligation, in order to build an effective court the Treasury is mindful of the need to seek not only an appropriate depth but breadth of skills and experience. Ministers can and do take this into account in forming their recommendation without the need to further impose a duty on Her Majesty to form a view as to the candidate’s knowledge or experience before she makes the appointment.
I turn to the question of diversity, which I understand to mean not only of gender, geography or ethnic background but also of sectoral experience, insight and knowledge, as is suggested by Amendment 6A. Court and, in future, FPC appointments are advertised openly, and applications are welcomed from candidates from a variety of backgrounds. For example, the role profile for the most recent court vacancies sought people with substantial experience as board members, as head of function of major financial organisations and as senior managers in a relevant area of public policy, or in the voluntary sector or a trade union.
The latest iteration of the Government’s code of good practice for corporate governance in central government departments clearly states that,
“a board should have a balance of skills and experience appropriate to fulfilling its responsibilities. Moreover, it stipulates that the membership of the board should be balanced, diverse and manageable in size”.—[Official Report, Commons, Financial Services Bill Committee, 21/2/12; col. 22.]
However, given the size of the non-executive contingent on court and the number of external members of the FPC, it would simply not be possible to prescribe a set of criteria to ensure full diversity—that is, to ensure that each and every different background and characteristic is represented on the board and committee —without severely limiting the potential field of qualified applicants. It is therefore a question of judgment.
I stand by exactly what I said in Committee, which is that the Government are committed to ensuring an appropriate breadth as well as depth of skills; and this is as true of the FPC as it is of the court. While I agree entirely with the sentiments and principles behind these amendments, I do not believe that it is necessary or appropriate to legislate to achieve these aims.
I hope that I have provided sufficient reassurance to the noble Lord and that he will be able to withdraw his amendments.
Lord Peston
Could the Minister confirm that all these appointments will be advertised in appropriate places? I think that he said it but I am not sure that I caught what he said.
Lord Sassoon
That is what I said, and I am sure that it will be clear on the record when the noble Lord reads it.
Lord Sassoon
My Lords, Amendments 2B, 2C, 3L, 3M, 6B, 6G and 7F, among others—maybe that is the lot—appeared at the Treasury late yesterday and not all the amendments were discussed in the conversation to which the noble Lord refers. However, there are some important and some not so important matters in these amendments and I will do my best to do them justice.
As we have heard, this amendment relates to the role of Parliament in the appointment of the Governor of the Bank of England and has been the subject of much debate both here and in another place. Specifically, Amendment 2B seeks to secure a debate in another place following the appointment of the governor, something which I do not believe is necessary or appropriate. The Government are committed to maintaining an appointments process that is proportionate and attracts candidates of the highest quality. It is important to ensure the credibility of the candidate and safeguard his or her independence. If the appointment was subject to a debate in another place, I suggest that there is a significant risk of politicising the process and undermining the appointment of the new candidate. Of course, it has been argued that such a debate could enhance the credibility of the candidate but previous governors have achieved credibility without being subject to such a debate. Credibility ultimately stems from effective action to meet the Bank’s objectives. If the appointment were subject to a debate in another place, the candidate would not be present to answer questions or defend him or herself.
The noble Lord, Lord Eatwell, has already quoted me in the previous debate. I quote what he had to say on this matter in Committee on 26 June. He said:
“We do not want to politicise appointments to the extent that has occurred in the United States”.
The suggestion that appointments might end up being considered by the whole House made him “nervous” as it would,
“inevitably be whipped and become very political indeed”.—[Official Report, 26/6/12; col. 165.]
I very much agree with that. Therefore, the Government believe that the pre-commencement hearing held by the Treasury Committee strikes the right balance in terms of scrutiny of this executive appointment and allows for a more constructive debate with the candidate in attendance to satisfy the committee’s concerns about his or her personal integrity and professional competence. The Government welcome the Treasury Committee’s ongoing role in holding such hearings and, importantly, as my noble friend Lord Flight reminded us, holding the governor to account throughout his or her tenure. I hope I have provided sufficient reassurance and that the noble Lord feels able to withdraw this amendment.
Lord Peston
I wish to make a comment and ask the Minister a question. My comment is that there are no long words in this amendment. I would have thought that the average person who had been at school could just about understand it in a few minutes of reading it. The idea that the Minister cannot address your Lordships’ House without several days, if not weeks, of Treasury back-up seems to me absolutely preposterous. He should stop bellyaching about this sort of thing.
My question to him is: if this debate took place in both your Lordships’ House and the other place, has it not occurred to him that that debate might be devoted mainly to saying what an excellent appointment has been made in this case, what an extremely good person has been chosen and wishing him well in his very arduous task? Why is the Minister taking it for granted that the debate would be mostly about slagging off whoever the appointed person may be?
Lord Eatwell
My Lords, the noble Lord, Lord Sassoon, has made it clear today that the non-executives will play a major role in the governance of the Bank. This amendment seeks to ensure that non-executives, essentially here in the court, are appointed with the consent of the Treasury Select Committee. The point is being reiterated. Given the powers invested in the Bank, including and especially the FPC powers that have previously rested only with the Chancellor or other elected persons, it is appropriate that there should be some political oversight of the appointments. The Treasury Committee is surely the right place.
What are the major arguments against this pre-appointment scrutiny? First, that the procedure will be unduly intrusive and onerous; and, secondly, that it will be too politicised. As a result, suitable persons will not apply. I think that the arguments in the context of what is being done in this Bill are ill founded. The Government decided to politicise the position of the Bank by giving it powers previously reserved for elected persons. The Government decided to load on to the Bank virtually all regulatory functions and control of monetary and credit policy. In this context, the Government should accept that the Treasury Committee’s scrutiny is entirely appropriate. Let us remember that that committee has played a serious non-partisan role for a number of years, both when chaired by my noble friend Lord McFall and now, as chaired by Mr Tyrie. The committee does an excellent, non-partisan, technical and difficult job. In that context, it could play an important role in monitoring those persons to whom the powers previously assigned to elected persons are now to be given.
While Amendment 2C relates to the non-executive directors of the Bank, Amendment 6B in the group extends the same principle to the independent members of the Financial Policy Committee. If anything, the point is even stronger here, because these are people who will be participating in decisions that directly affect individuals’ lives. The members of that committee will be making decisions about your mortgage rate and the availability of credit in general to individuals in society. It is therefore surely right that appointments should be subject to the consent of the political part of national governance, as represented by the Treasury Select Committee, which is handing over these powers.
Sometimes, we in Britain are a bit overly sensitive about appointments procedures. I remember that university appointments used to be totally confidential to appointments committees. Now appointees have to appear before the whole faculty and the students, give lectures to demonstrate how good they would be and defend themselves.
Lord Eatwell
Yes, it is true. They have to do that prior to any form of appointment. Therefore, the sort of sensitivity I mentioned is overdone. Greater transparency and more robust procedures would serve us well. Most important of all, there must not be an abdication of powers that in the past were reserved to elected persons without some substitution of proper political oversight, as provided for in Amendments 2C and 6B. I beg to move.
Lord Eatwell
My Lords, in the debate that we have just had we heard a lot about the values of the oversight committee and what an important job it has to do. The noble Lord, Lord Sassoon, made some comments about new Section 3C, perhaps inadvertently, while he was reflecting on the group of amendments that we have just looked at. The purpose of this amendment is to ensure that the oversight committee—or hindsight committee, as I think it should be called—has the resources to do its job.
We have to remember that the Bank of England has form in this respect. In the early days of the Monetary Policy Committee, independent members were deliberately starved of resources by the Bank in order to enhance the position of the executive members. We all hope that the Bank has learnt its lesson from the very negative publicity that that incident produced. However, we are now in different territory. The powers are greater, and the responsibilities are wider. Hence it is vital that the oversight committee should be well resourced. New Section 3C refers to the possibility of hiring people to conduct a performance review, but that is one step down the line. The committee needs its own staff to help determine exactly which performances should be reviewed, and who should be asked to do that sort of important secretarial work.
That is the purpose of the amendment before us. It can do nothing but strengthen the Bank of England, making the committee into an effective instrument of retrospective monetary and financial governance. I am sure that that is what the Government would like, so I would like to hear them accept this amendment, or at least give an undertaking to take the idea away and think about it with care. I beg to move.
Lord Peston
My Lords, I support this amendment in substance. The noble Lord will be delighted to hear that I also wish to make a couple of semantic points. My noble friend said that the committee should have its own staff. My view is that it should not only have its own staff but should appoint its own staff, thereby guaranteeing that the staff are its own, work for it and, to use the slang expression, are not “narks” of the governor. Therefore, the noble Lord ought to accept the amendment.
My two semantic points are as follows. First, I find the committee’s name most unattractive. Will the noble Lord ask the Bill team to look up the definition of “oversight” in the dictionary as it has a very definite meaning which I am sure the Government and the Minister do not wish to be associated with this committee. It may not be too late to choose a more felicitous name. I wonder whether I am the only person who has thought what a ridiculous name the committee has.
Secondly, I congratulate my noble friend Lord Eatwell on solving the problem with which, as your Lordships know, the noble Lord, Lord Barnett, and I are obsessed: that is, the “must/may problem”. My noble friend has solved it in a really interesting way. He does not use “must” or “may” but “will”. I would like the Minister to ask the Bill team whether it would consider going down the path of using “will” rather than “must” or “may”.
Lord Sassoon
If the noble Lord, Lord Peston, could persuade his noble friend to rein back to just a couple of amendments a day, I am sure that we could carve out time to look at all sorts of semantics. However, I shall stick to the substance of this amendment, which seeks to place the bank under a statutory duty to ensure that the oversight committee has,
“adequate economic, legal and research support”.
I entirely agree with the sentiment behind this amendment. As we have already discussed this afternoon, the non-executive oversight committee has a very important job to do in reviewing the Bank’s performance and will require access to the information and analytical support that it needs. That is why, for example, the legislation makes it clear that members of the oversight committee have access to the meetings and papers of the MPC and FPC and have a specific remit to commission work and reviews from external bodies and experts.
It is a well established principle that it is the responsibility of the governing body of any organisation to ensure that its members and sub-committees are properly supported. I recognise that the Bank was slow to realise that the external members of the MPC required dedicated resource and support. I am confident that the Bank has learnt its lessons on this. Both the MPC and the FPC members have access to all the analytical and secretariat support that they need. I am wholly confident that the Bank will similarly make support available to the oversight committee to make sure that it is adequately supported without the need for legislation on this point. I hope, therefore, with the further reassurance on that, the noble Lord will see fit to withdraw his amendment.
Lord Kerr of Kinlochard
I think one has to draw a line between the past and the future. I once again found myself very much in agreement with what the noble Baroness, Lady Noakes, said. If a report was made to the oversight committee and it believed it should be published, and the decision goes to the court, as it should because a subset of the court cannot decide that, it seems to me extraordinarily unlikely—almost unthinkable—that the governor, from a position of one or four against nine, would be able to overturn the view of the oversight committee. The decision must be taken in the court, but it will be a very rare occurrence when a decision as to what is the public interest is taken by the executives overturning the majority view of the oversight committee when the issue comes before the court, so I do not understand the amendment.
Lord Peston
My Lords, I do not understand the intervention. Why has the governor been given the power if he cannot use it? If you do not want him to use it you do not give it to him.
Lord Armstrong of Ilminster
My Lords, if I may take the semantic point raised by the noble Lord, Lord Peston, if the word “oversight” is capable of being misinterpreted why not use “supervisory”, which is just the Latin version and means exactly the same without the possible misunderstanding?
Lord Eatwell
My Lords, I must say that I am very happy and I will now read through the Bill with great care and presume that wherever the term “Bank” appears, it means “court”. If that is so, I will check all the various clauses as we go along to ensure that “Bank” means “court” at all stages. If it means “court”, the Bill should say so and be clear—and that is what it is not.
Lord Peston
My noble friend should not really accept this, because no one reading the Bill could conceivably read the word “Bank” to mean “court”. “Bank” means the Bank, and the Bank, in practice, is the governor.
Lord Eatwell
With all due respect to my noble friend, these days, where matters are in dispute about the interpretation of Bills, reference is made to Hansard. The noble Lord has effectively amended this clause in his remarks by saying that “Bank” means “court”. On that basis, we have now clarified this section of the Bill considerably. We have had a successful debate and achieved something valuable.
Given the various comments on the name of the oversight committee, I must confess that until my noble friends pointed it out I had failed to notice the double entendre in that label. I thought that “oversight” meant to oversee or supervise. I take it as meaning “oversee”, and I will not go as far as my noble friends.
I will go through the rest of the Bill, note where it refers to the Bank and either write to the noble Lord or raise in the House those points at which there is ambiguity as to what “Bank” actually means. However, now that we are absolutely clear that in new Section 3D “Bank” means court, I am happy to beg leave to withdraw the amendment.