EU: UK Net Contributions
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Lord Vinson
To ask Her Majesty’s Government how the rise in the UK’s net annual contributions to the EU budget to over £10 billion per annum (as set out in the Pink Book 2012) relates to public sector cuts in other areas.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the UK’s net contributions to the European Union have indeed increased over recent years. This is mainly the result of unacceptable increases in the annual EU budget and to changes to the calculation of the UK abatement, agreed by the previous Administration. This Government’s top priority is budgetary restraint, thereby ensuring that the EU budget contributes to domestic fiscal consolidation.
Lord Vinson
I thank the Minister for his considered reply. Does he appreciate that while we practise austerity here in the UK, our net contribution to the EU has doubled since 2006 to over £10 billion a year? The UK has to borrow every penny of it from others, thus increasing our national indebtedness. As our Government were outvoted in their attempt to reduce the 2013 budget, will the Minister strive to get a better deal in the forthcoming negotiations, not least by withholding our £5 billion a year contribution to the structural funds? If invested here in our infrastructure, it would help to create over 250,000 badly-needed jobs.
Lord Sassoon
My Lords, as the House is aware, we are coming up to the negotiations of the multi-year financial perspective. That agreement requires unanimity of member states. My right honourable friend the Prime Minister has made it clear in a statement, jointly with other European colleagues, that the maximum acceptable expenditure increase through that period is a real freeze in payments. That continues to be the Government’s position. As for structural funds, we cannot just opt out of any particular area of EU expenditure, although I agree that in the area of structural and cohesion funds, it is absurd that so much money is recycled from wealthy member states back into other wealthy regions of Europe. That is one of the many issues that need to be addressed.
Lord Pearson of Rannoch
My Lords, to put this question into everyday perspective, do the Government accept that £10 billion per annum equates to the annual salaries of 91,320 nurses being thrown away down the Brussels drain—or policemen, soldiers, or any other public servants at £30,000 per annum? Does this Question not remind us that there is no such thing as EU aid to the United Kingdom? For every pound that Brussels sends us, we have sent them £2.20.
Lord Sassoon
My Lords, the UK benefits from its membership of the EU. The UK should make a proper contribution to the net EU budget, but we have to see that the completely unacceptable proposals from the European Commission for the next multi-year period are reined back. The Commission’s proposals, as opposed to a real freeze, would mean an increased UK contribution of £10 billion, or £1.4 billion a year. That is indeed many nurses, policemen and other front-line public servants.
Lord Wigley
My Lords, the Minister said that the UK benefited from membership of the EU, and I think that many people will be glad to hear him say that. However, will he confirm that it is not just the rich regions of Europe that benefit from the structural funds? In fact, Wales, with the lowest GVA per head of any country or region in the UK, gets considerable benefit. If there were to be changes in this direction, can he give a guarantee that those sums will still come to Wales?
Lord Sassoon
My Lords, I certainly accept that money should be targeted at the regions where it is most needed. I merely say that recycling money into the wealthiest regions seems like wasteful activity.
Lord Dykes
Can my noble friend reassure the House that there will be a friendly compromise on this matter when the full negotiations take place?
Lord Sassoon
I would love to see that happen. Of course, I cannot give any assurances about how it will play out.
Lord Davies of Oldham
My Lords, of course we agree that the European budget needs to be tightly controlled and, if possible, redirected towards jobs and growth. We are not too confident that this Government will produce the same priorities. However, can the Minister confirm that the Prime Minister will be calling on his many friends among the leaders in Europe in this negotiation?
Lord Sassoon
What I can confirm is that the UK’s priorities for expenditure include the following: substantial cuts to the common agricultural policy. However, I agree with the noble Lord that priorities for the UK include growth and competitiveness, climate change and external action. I am not going to speculate on how the negotiations will play out.
Lord Hamilton of Epsom
Will my noble friend confirm that, in the absence of any compromise, what is being asked for by the European Commission is a 6.8% increase in the budget? Is this not an extraordinarily high figure which shows an unbelievable insensitivity to the problems that Governments are facing across the EU as they try to rein back their deficits?
Lord Tebbit
My Lords, did my noble friend say—did I hear him correctly—that this proposal requires unanimity? If so then surely there is no need to negotiate. All one has to do is simply say no.
Taxation: International Companies
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Lord Harries of Pentregarth
To ask Her Majesty’s Government what steps they are taking to ensure that international companies pay a fair proportion of United Kingdom tax.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the vast majority of taxpayers pay the right tax at the right time. However, the Government are alert to the risk that some companies may try to structure their tax affairs so that profits from UK-based economic activity are not taxed here. The UK has specific tax rules to combat tax avoidance by international companies and fully supports the Organisation for Economic Co-operation and Development initiative on base erosion and profit shifting, which has been endorsed by the G20.
Lord Harries of Pentregarth
My Lords, I am very glad to hear that the Government are alert to the situation of international companies, but would the Minister agree that, when they are being assessed for tax purposes, they should be required to reveal every country in which they are operating and the tax they pay in each country, with full financial details of their own company and link-companies? In addition to insisting on this for UK purposes, would the Government be prepared to work for an international agreement so that all transnational companies were required to give a fully transparent country-by-country report for any country in which they operated?
Lord Sassoon
My Lords, I certainly agree with the underlying premise behind the noble and right reverend Lord’s question, which is that there is still a lot more work to be done in this area. The international tax architecture was developed in an age of fixed factories and plant and machinery, with much less interconnectedness. Now we live in a connected, corporate world in which internet commerce and so on make it much more complex. That is why the OECD is again looking fundamentally at whether countries have the right weapons, whether it is tax treaties, under which the exchange of information would come; transfer pricing; aggressive tax planning; or harmful tax practices. I certainly agree that tax information is important to that but, as far as the authorities are concerned, that really comes under the tax treaties and the work that the OECD will be looking at.
Lord Barnett
Does the Minister accept that the Prime Minister’s, and indeed the Chancellor’s, definition of aggressive tax avoidance needs clarifying? In any case, does he accept that all tax avoidance schemes are always one step ahead of the Treasury and the Inland Revenue? Would it not be sensible and simple—all past Governments have always refused to do this—to have simple legislation to say that any tax avoidance scheme has to be approved by HM Treasury? Would that not solve the problem?
Lord Sassoon
The noble Lord, Lord Barnett, always wants me to be clear and simple, so the answer is no to his first two questions. On the third question, he has an underlying, quite proper, concern, which is why the work that Graham Aaronson has done for the Government on a general anti-avoidance rule, the so-called GAAR, is a very important part of ongoing work.
Lord Campbell-Savours
What are the Government going to do about Starbucks and its transfer pricing arrangements?
Lord Sassoon
My Lords, the noble Lord does not expect me for one moment to start commenting on the tax affairs of any individual taxpayer. As a general response, it may interest the House that the 800 or so largest companies that come under the large business service of HMRC to be assessed pay £136 billion in corporation tax, PAYE and VAT each year. Almost 50% of that tax comes from foreign-owned businesses, so I do not think we should have in mind that foreign-owned companies as a group are somehow doing something that we have to be vigilant about. We must keep this in proportion.
Lord Avebury
My Lords, do the OECD rules apply to internet-based companies, such as Amazon, and when will they come into effect?
Lord Sassoon
My Lords, a series of measures has been agreed internationally through the OECD over many years. The fiscal affairs committee of the OECD is having a new look at this, and this work was endorsed by the G20 at the Los Cabos meeting in June, to get those rules into a fit state for the 21st century. They are the rules that govern the relationships between countries and the base on which all companies should operate their tax regimes, but they need to be modernised.
Lord Davies of Oldham
My Lords, in responding to an earlier question, the Minister said that there was much work to be done in this area. Who is to do it? What is the point of the Government cutting Inland Revenue staff when there is so much work to be done? Staff concerned with revenue collection can collect 30 or 100 times the annual salary they receive.
Lord Sassoon
I am very grateful, as I often am, for the question asked by the noble Lord, Lord Davies, because it enables me to tell the House, as I have done before, that £900 million has been reinvested in the compliance activities of HMRC precisely because we need to do more work to attack avoidance, evasion and criminal attacks on the tax system. Compliance revenue has more than doubled in six years so that by 2014-15 an additional £7 billion per annum will be coming in. The noble Lord’s concerns are quite right, and this Government are very actively on the case.
Lord Campbell-Savours
My Lords, the Minister did not answer my question on transfer pricing, which is the mechanism used to avoid paying corporation tax. Why will he not answer my question?
Lord Sassoon
Because, forgive me, there are other Peers wanting to get in. I completely agree with the noble Lord that transfer pricing is one of the most serious areas that need to be looked at, which is precisely why each one of those 800 large companies has a dedicated tax professional looking at this area. The focus on transfer pricing has meant that in the past four years £4 billion has been recovered precisely by going after transfer pricing schemes. On average, £1 billion a year is coming in through effective action.
Financial Regulators: Examinations
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the qualifications for the appointment or advancement of individuals employed by financial regulators are a matter for the regulator concerned. All newly recruited supervisory staff in the FSA are required to undergo mandatory assessments at the end of their probation to demonstrate that they have sufficient technical knowledge to carry out their roles. Thereafter, an annual assessment of technical competency is conducted to ensure that key supervisory staff can evidence that they continue to meet the required standards.
Lord Flight
My Lords, can I ask the Minister whether he thinks it slightly inconsistent that no examinations need to be passed by people working as regulators, whereas under the RDR reforms the regulators require all financial advisers, irrespective of age, cleanness of record and experience, to take examinations? As a result, over 20,000 will be stepping down at the end of the year because they feel that they are too old to take examinations, many of which are not relevant to their particular expertise. We are likely to end up with financial advice being available only to the wealthy in our community.
Lord Sassoon
My Lords, I certainly do not agree with my noble friend’s conclusion on this. As he well knows, one of the conclusions of the retail distribution review was that the role of financial adviser should be properly professionalised. I have seen comparisons being made between the professionalisation of financial advisers and of lawyers and accountants. Although these are matters of judgment for the FSA, the authority deems it appropriate that exams should play a part in this. I understand from the FSA that the final rules setting out the new qualification requirements were made in January 2011, two years before the requirements are to come in. On top of that, an indicative list of level 4 qualifications has been available since the end of 2009. The FSA’s research shows that, up to the spring of 2012, 71% of advisers had already qualified, and the expectation is that 93% are on track to secure the appropriate qualification in time. The final point I would make to my noble friend—again, I am sure that he is aware of it—is that, as well as taking examinations, financial advisers also have the option of an alternative assessment procedure.
Lord Peston
My Lords, having spent a great many hours with the Minister, the noble Lord, Lord Flight, and others on the Financial Services Bill, perhaps I may ask the Minister whether he will remind the House of the enormous power being given to the financial regulators. I have been looking into it. It may be that never in the history of our country has anyone had the regulatory power that these people have. It is a power either to do good, of course, or to get a lot of things wrong, to the benefit of our chief competitors in Frankfurt and Wall Street. Surely the Government must take a much more positive view of what sort of people are working for financial regulators and themselves take some responsibility to see that they are people with a broad range of experience who do not wish to see our financial services sector destroyed?
Lord Sassoon
My Lords, as well as getting the architecture of supervision and regulation right—on which this House has rightly spent many hours and to which the noble Lord, Lord Peston, has made some important contributions—the Government should within that appoint to those bodies an appropriate board with appropriate expertise and experience. It would then rightfully be up to the two successor bodies to the FSA to decide how to equip their staff properly to do the job. The FSA’s approach to testing and competence will be continued by the FCA. The FCA is also exploring whether to have training externally accredited, which the FSA has not done up to this point. The PRA, on the other side, is developing a comprehensive strategy, including a three-year training programme for new graduates. These matters are therefore being taken extremely seriously by both the successor bodies, which is how it should be.
Lord Sharkey
My Lords, it seems clear that the FSA was blind to the moral and ethical failings of the banks as well as to their regulatory failings. How will the FCA do better in this respect? It is all very well worrying about the locks on the stable door, but should we not also be worried about the mindset of the horse?
Lord Sassoon
My Lords, one of the things that is very striking about the FSA is the speed with which it put in place an inquiry into what had gone wrong on Northern Rock. It was very frank about its failings and has changed an awful lot of things already. One should be fair to the FSA and recognise that it acknowledged the failings of its supervisory regime, which is already reflected in differences to its approach to training and continual assessment.
Baroness Wall of New Barnet
Would the Minister like to hazard a guess as to why the FSA, unlike many other professional organisations, feels that it is not important for the public to recognise the skills of those individuals by the qualifications that they hold, particularly in such an important area?
Lord Sassoon
My Lords, as I have said, I understand that the FCA is thinking about whether its training could be externally accredited. So it is indeed thinking ahead to whether that could be a possibility.
Lord Elton
My Lords, in his initial reply, my noble friend said in effect that there would be a benchmark after the first year’s work in a regulator and at subsequent stages, but nothing about the benchmark for new entrants. Further to his answer to the previous question, does he not agree not merely that the public need reassurance but that the practitioners need to have respect and to be in awe of the regulators and of their qualifications? Otherwise, there will be considerable discontent and a good many mistakes made.
Lord Sassoon
My Lords, the House can of course be assured that the FSA would not seek to recruit, let alone retain, any individuals who were not competent to carry out their duties. What I said in my first Answer was that, at the end of the probationary period, an assessment is done, so it certainly does not wait until the end of the first annual assessment.
Baroness Hayter of Kentish Town
My Lords, in his Answer, the Minister talked about technical qualifications. Surely, given where we are after LIBOR and everything else, we need a code of conduct that also covers ethical issues. Qualifications are needed for that not just, as is proposed, under LIBOR. Does he not agree that it should be provided in the Financial Services Bill for everyone working in banking?
Lord Sassoon
My Lords, I am sure that they take account of the judgments that need to be made on the ethical front, but they should not be in the Bill before the House.
Financial Services Bill
Lord Sassoon Excerpts(12 years, 1 month ago)
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Lord Tunnicliffe
I spent some years sitting on the Benches opposite facing the noble Baroness, Lady Noakes, and it comes as a refreshing new experience to find myself so frequently in agreement with her on this Bill. I am sure that will distress her as much as it is distressing me. Unfortunately, her caveating remarks are every bit as important as the lead remarks recommending the amendment.
We would not be able to support the amendment as drafted because, as she rightly points out, it could involve a direction to the MPC. This part of the Bill is a limiting list. The noble Baroness may want to consider either extending the list—we would look at that with great interest—or reversing it and extending the powers to the whole of the activity as her present amendment does and then caveating it with a number of areas where this power could not be used. This is a very useful amendment to develop the debate. I look forward to the Minister’s reply and thank the noble Baroness for proposing it.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, first let me be clear that I do not believe that it would be appropriate to extend the scope of the power in the way that is suggested by this amendment. It would make the power unusable. I was going to remind my noble friend, but she already made the point, that the Treasury already has a very broad power of direction over the Bank. As my noble friend pointed out, Section 4 of the Bank of England Act 1946, which continues and will continue to be operative, as my noble friend says, allows the Treasury to,
“give such directions to the Bank as ... they”,
the Treasury,
“think necessary in the public interest, except in relation to monetary policy”.
I think we are all agreed that the amendment was not intended to cover monetary policy.
Lord Tunnicliffe
Does the noble Lord agree that every Committee that has looked at this and reported and all professional commentators take the view that the power is so wide and so nuclear that no Chancellor would ever use it?
Lord Sassoon
My Lords, the noble Lord, Lord Tunnicliffe, is getting ahead of me. That was precisely what I was going on to explain. He is absolutely right that the power has never been used. Even at the height of the recent financial crisis, the then Chancellor felt unable to use this power to direct the Bank. Indeed, Alistair Darling’s book is rather interesting on this point. He explains in it that he was told,
“that it might be legally possible”,
to direct the Bank, but that,
“there would be wider implications of such an action. We had set great store by making the Bank independent and a public row between myself and Mervyn would have been disastrous, particularly at this time”.
The 1946 Act direction power is considered, and was considered by a Chancellor very recently, to be such a nuclear option because it is so broad that it would be very difficult to use. This means that any use of the power would likely be interpreted as the Chancellor overruling decisions and judgments that should rightly be for the Bank. This would be seen as a direct challenge to the Bank’s independence and a judgment on the competence of the Bank’s senior executives, which could cause a crisis in leadership in the Bank and a serious loss of public confidence. That line of thinking has prevented Chancellors from using the 1946 Act power in the past, as the fallout could be more damaging than the situation that they might be trying directly to address.
That risk was recognised by the Treasury Committee. That is why their report recommended that,
“the Chancellor should be granted a power to direct the Bank in a crisis which is free of the problems associated with the power under the 1946 Act”.
That is why the new power of direction in Clause 57 is designed to be a targeted and usable power. There will still be the power in the 1946 Act, for the reasons that underlie what my noble friend and the noble Lord, Lord Tunnicliffe, said. It is probably worth maintaining that reserve power somewhere in the system, albeit with the caveat that it is difficult to see the situation in which it might be exercised.
On the other hand, and going to the heart of who is in charge and who is responsible for what is in the new system, it was muddled and confused under the tripartite system but we want to make it much clearer in the new system that the Chancellor and the Treasury are principally there as guardians of public funds. That is why the specific direction in Clause 57 is designed that way. It is targeted. It does not allow the Treasury to overrule the Bank’s decisions and judgments; it allows the Treasury to take the decisions that are rightly for the Government to take. It is designed to allow the Chancellor to intervene to require the Bank to take specific action in a crisis management situation where public funds are at risk. That is why the power covers only the Bank’s crisis management functions, specifically the provision of liquidity and the operation of the special resolution regime. Again, I hope that that helps the noble Lord, Lord Peston, with the intended scope of this.
Lord Peston
My Lords, the noble Lord has clarified that very well. I take it that there would still be, as happens all the time, informal meetings between the Chancellor and the Governor, where the Chancellor might say, “Well, it is your decision but I am a bit worried about this or that”. Nothing will infringe on that because, as the noble Lord well knows, no system can work without informal and off the record meetings and things of that sort. This will not get in the way of what one might call ordinary human behaviour.
Lord Sassoon
No, indeed. The next time, in another context, the noble Lord challenges me about why we are not disclosing more meetings, I shall remember what he just said about informal and confidential meetings. It is important that they happen. Having seen how things happened before and how they happen now, it is striking to see the much greater regularity of meetings between the principals—they are critical—than happened at some periods in the past. That is very important as a background in peacetime as well as in crisis time.
I hope that is clear. The Bank is in charge of operating the resolution regime, but the Chancellor must agree to any use of public funds and has the final say when they are used. Even setting aside the unintended drafting of Amendment 190ZE to include a power that would be even more widely drawn than the 1946 Act, the targeted power that we have drawn is the appropriate one. If we had drawn the power more widely to allow for future proofing, as my noble friend puts it, I would be standing here defending why we had left such an important area open in the Bill. It is better to draft such a power related to the system as we know it. It is broadly future proofed in the sense that there is a clear distinction between the use of public funds and other matters, and after that helpful debate I hope that my noble friend will withdraw her amendment.
Lord Barnett
I thought that the Minister in his earlier answer was about to say that the meetings between the Governor and the Chancellor would be available on the web. The other day he rather misled me and probably the House when he said, in answer to my question about a meeting between the OBR and the Chancellor and how often he had had meetings in the last 12 months, that it was all transparent and on the web. I am no expert in these matters, but I spent quite a bit of time on the web and could not find it there. I asked my noble friend Lord Peston, who is perhaps better on the web. He too spent a lot of time on it and still could not find it, either transparently or non-transparently. Can the Minister explain to the House whether it is misleading to suggest that these things are transparent on the web?
Lord Sassoon
My Lords, although I believe that we are allowed to use portable electronic devices in the Chamber, I cannot in 30 seconds find it. I can assure the noble Lord, Lord Barnett, that it is done on either a quarterly or six-monthly basis. I do not know whether the search was made on the OBR website or the Treasury website, but my recollection is that the OBR releases something on its website periodically. I will find the appropriate link and let the noble Lords have it.
Lord Peston
I understood him to say the other day that it was on the Treasury website and I wasted three-quarters of an hour this morning. There is lots of good stuff on it. You can spend a happy day searching the Treasury website, but it did not contain anything that the Minister had told us it did contain. We can leave it at that.
Lord Sassoon
I apologise if I directed people to the wrong website. I will find the right one, which I think might be the OBR’s own website.
Lord Tunnicliffe
My Lords, the intention behind this amendment is twofold. It is to bring more players into the decision about an early notification and to bring in the requirement for early notification. Touching first on bringing new bodies into this, the clause effectively brings the FPC, the FCA and the PRA into the early notification procedure advocated in this clause. The essence of our concern has been rehearsed around the House. It is that the Bill gives enormous power to the Governor of the Bank of England and, in a crisis, he effectively ends up as the gatekeeper of information flowing from the Bank to the Government. We believe that there should be ways of making this gate wider and that where the FCA and the PRA—I shall talk about the FPC in the next amendment—believe that an early warning is required, they should have a duty to consider the circumstances; and where they believe that it makes sense, they should have a duty to communicate that to the Treasury or the Secretary of State. This would clearly require them, as part of their function, to be proactive in their stance when they are horizon-scanning or looking forward at various risks.
The second part of the amendment is about the essence of an early warning. The concept of an early warning is that it is a warning short of a formal notice. The amendment lowers the bar from the form of words in the Bill that implies the “probability” of a material risk or the requirement of the use of public funds to the “possibility”. It echoes the concerns of the Treasury Select Committee in its 21st report which was published on 8 November 2012. Its recommendation at paragraph 166 was:
“We are concerned that the formal notification of a material risk to public funds may still not give the Chancellor enough time to consider other policy options. The Treasury needs to know as early as reasonably possible when it might receive a notification. We therefore recommend that the forthcoming legislation also require the Bank to give the Chancellor an early warning of the possibility that a notification of a material risk to public funds may need to be given, and full information about the circumstances”.
We very much agree with that recommendation and in this amendment we seek to give effect to it.
The process of crisis that we are debating will probably involve protecting the activation of the proactive intervention framework. The noble Baroness, Lady Noakes, knows what I am talking about because she is familiar with the document, The Bank of England, Prudential Regulation Authority: Our Approach to Banking Supervision, published in May 2011. The PIF is described on page 18. It describes five stages of escalation, which presumably are the key stages that lead up to a crisis. There is almost a presumption that there is a clear difference between normal business and a crisis. I hope it never happens, but if it did, it would be an escalating situation. Some of the stages of the proactive intervention framework will be in private. Some will not want to be the subject of a notice, as the final notification as envisaged in the Bill should be. The ability and duty of the Bank to give a notice of possibility would allow those private activities, in the early stages of the PIF, to take place, alerting the Government that they have to start thinking about the possibilities and how they may develop.
The counterargument often revolves around the fact that the Chancellor and the Governor of the Bank of England talk to each other. Of course, at the moment we have two most charming individuals and I am sure that they have useful conversations. However, once again, if you go into the evidence of the Select Committee and its comments, clearly this has not always been true. I am rather sorry that the noble Lord, Lord Lawson, is not in his place so that he could reflect on the events of 1984 when he had to find a great deal of money to save a failing bank and, according to the Select Committee, was advised of that requirement on the morning of the crisis. Equally, one cannot read Alistair Darling’s book without a clear feeling that the day-to-day communication between the Governor of the Bank of England and the Chancellor was less than warm. Certainly, it was not enough to leave one comfortable that the necessary preliminary warning that this amendment envisages would take place at an informal level.
As this crisis gathers, one has to presume a situation that relationships could really be quite bad. They could be in seven years’ time. The new governor might turn out to be less charming than the present one. The Chancellor of the day could well be less charming and communicative than the present one. In fact, there could have been a total breakdown of trust between them. It has happened in the past. This amendment would require a preliminary notice and there would be a dereliction of duty if the Government did not provide this preliminary notice. This mechanism would allow the Government to start their preliminary thinking and consider mitigation measures other than the expenditure of public money—as envisaged in the Bill —and give the lead times necessary. Crucial is a situation of no surprise. We are very uncomfortable about the sense behind some of the remarks, and the extent to which the governor is the gatekeeper of information to the Government. We believe the Government should be equally sensitive and concerned and I commend the amendment to the them.
Lord Sassoon
My Lords, I am genuinely puzzled about this amendment. I know that it was put forward in another place by Mr Leslie, the colleague of the noble Lord, Lord Tunnicliffe, and that it is designed to implement a Treasury Select Committee recommendation to create an early-warning mechanism of a risk to public funds. No one would be keener than me to have such a mechanism in place if I believed that it was necessary because I thought that the Treasury would not, under the provisions of this Bill, get sufficient early warning.
However, this provision and the question of an early warning do not rely on what I think we all agree is very important; namely, that there is constant dialogue about a whole range of things between the Treasury and the authorities, including the Bank. The question of an early warning does not rely on that, although we would expect it to carry on because it is working well at the moment.
I believe that the amendment is unnecessary and inappropriate. Therefore, let me carefully go through why. First, as the Government made clear in their response to the Treasury Select Committee, the duty on the Bank to notify the Treasury of risks to public funds already achieves this aim. The existing duty is already designed to give the Treasury an early warning of a potential risk to public funds. That is because Clause 54 sets an extremely low bar for notification; for example, when the Bank or the PRA looks at the position of a firm or a group of firms, if it thinks that a possible future scenario could lead to a situation in which the Treasury might reasonably be expected to decide to use public money to protect stability or the public interest, a notification must be made.
I do not think that the bar could be set much lower than that. For example, in the type of scenario described by the noble Lord, where the Bank is aware that at some point in the future a risk to public funds could arise, the Bank should be making a notification of a risk to public funds under the existing duty in Clause 54. I am happy to put that on the public record again. The Bank completely accepts that and there is no debate about the interpretation of the duty under Clause 54.
With this amendment, the noble Lord also risks undermining the clarity and force of the statutory duty to notify the Chancellor of risks to public funds by broadening the grounds on which it could be triggered to include risks to the FCA’s objectives which do not involve public money. Just as in the previous debate we were talking about issues which related to the line between risk to public money and other matters, again, in relation to this particular early warning, the duty is drafted very deliberately with the line drawn, which is not reflected in the noble Lord’s amendment.
Lord Tunnicliffe
I feel that the words used by the Minister are quite a shift. He referred to a “possible future scenario”. As I read Clause 54, it is much closer to a probable future scenario. Will he explain to me—I am sure that he is much more familiar with the Bill than I am, much as I have tried to study it in the past few days—where in statute I can draw the comfort that a possible very low bar to notification is emphasised.
Lord Sassoon
My Lords, the fact is that a regulator would have to look at future scenarios when it is thinking of its duty under Clause 54. The clause refers not to a situation that has arisen but to,
“a material risk of circumstances”,
which links it, as I have said, to the provision of financial assistance. It is clear and simple. There is a lot of other stuff in Clause 54(1), but the key things are,
“that there is a material risk of circumstances within any of the following cases”,
which are then explained in detail. As understood by the Government and the Bank, this is a forward-looking statement and requirement, which obliges them to think about possible future scenarios that could lead to the situations that are then developed in Clause 54. Of course, the duty in Clause 55 is to notify any changes to that.
Lord Tunnicliffe
I think that some of what the Minister has just said is quite a shift from what Clause 54 says. I would be delighted if he came forward on Report with some amendments that contained a duty to look at scenarios and a duty to bring forward a notification at the point of a possibility. There has been considerable debate in another place and in various committees, as to what “a material risk” means. There is a commitment in Clause 61 that it must be in the MoU, but as I search the MoU I cannot find it coming readily out to me—I shall be asking about that later. I invite the Minister to consider what he has said and see whether he can improve the legislation so that there will be no ambiguity about the test that the Bank has to apply in bringing forward a notification.
Lord Peston
My Lords, perhaps I can help the Minister—it is not a question of persuading him to say yes or no at the moment. Looking at Clause 54, I take “material risk” to mean a significant probability; “possible” is much less than that. I think that my noble friend suggests in his amendment that Clause 54 would be strengthened if we went down the “possible” line, the technical point being—and I do not press it—that there is deep philosophical argument, particularly within probability theory, about the difference between possible and probable.
I interpret the amendment to mean that if the relevant body—whether the Bank of England or another regulator—is looking at a specific part of the financial services sector, or even a specific firm within it, it should let the Government know that it is doing so and that one definitely possible outcome is a need for the use of public funds. The amendment, as I understand it, is simply an attempt to be helpful to HMG when it comes to the control of public money. The Minister may say, “We do not want to know about possibles; we only want to know when the real demand for the money is coming”. That may be his argument, but that is the difference—am I not right?—as to what we are talking about here.
Lord Sassoon
Perhaps I did not make sufficiently clear the rather obvious point that we need to look at the heading of Clause 54, “Duty of Bank to notify Treasury of possible need for public funds”. At the risk of stating the obvious—it seems that we need to come back to the obvious—this whole duty is about the notification of a possible need for public funds. If we wanted to say “probable need for public funds”, the Bill would say “probable” in the clause heading, but it does not, it says “possible”. I advise the noble Lord that we are looking at the heading of Clause 54 in part 4 on page 134 of the Bill.
Lord Peston
Forgive me. I am willing to accept that I am wrong. I agree that the top line says “possible” but “material risk” is what goes into the material section of the Bill. That seems to me to undermine the clause heading. That seems to me the real point. Why have the Government put in “material risk” if they meant possible risk?
Lord Sassoon
My Lords, there are some points where, frankly, I have to take the advice of the legal experts here, which I have done. Frequently Bills, this one included, contain constructions which follow some sort of drafting formula and are sometimes difficult to understand. As I say, my starting point is that if I really thought that the Treasury was not going to get the sort of early warning which the noble Lord, Lord Tunnicliffe, and the Treasury Committee rightly ask for, I would propose a government amendment. I take the point that “possible” appears in a heading and not in Clause 54(1) but it is very clear from the heading that we are talking about the material risk in the context of the possible need for public funds. I assure the Committee that all the advice that I have been given is to the effect that this will achieve the purpose that the noble Lord, Lord Tunnicliffe, desires. Finally, I draw the noble Lord’s attention to paragraph 13 of the draft MoU to find the interaction between the MoU and these issues. On the basis of those explanations, I hope that the noble Lord will feel able to withdraw his amendment.
Lord Tunnicliffe
My Lords, this has been a useful debate. However, members of the Treasury Committee are concerned that there is confusion about material risk. We will come to the extent to which the MoU does or does not define that. I believe that a Prime Minister once said, “Circumstances, old boy, circumstances”. As I said, I am happy to accept the Minister’s assurance that the legislation will work under the present charming governor and charming Chancellor, but it needs to be future proof. The words that the Minister used in connection with this important point were reassuring but they need to be in the Bill if they are to persist beyond the tenure of the present Government. I hope that he will consider bringing forward an amendment to achieve that. In the mean time, I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, I am very happy to accept the spirit in which the noble Lord, Lord Davies of Oldham, has spoken to the amendments in the name of his noble friend Lord Tunnicliffe. However, the rather hesitant and apologetic tone in which he presented them would make it all the more surprising if I were to say that they found favour with me. They do not, but I will take them seriously because although they replicate amendments that were debated in Committee in another place, of course we as a Government should respond to them.
Why do I believe that it would be a mistake to include the FCA as a full participant in the crisis management MoU? The issue goes right to the heart of what the new regulatory architecture is trying to achieve. The Government are committed to moving away from a tripartite model where accountability was confused and diluted, and responsibilities were overlapping and unclear. There cannot be an issue in the Bill that goes closer to the heart of it than the MoU. A key element in achieving the clarity of responsibilities that we need is making the Bank a single point of accountability for financial stability. We debated that, and it goes to the heart of the architecture. This will help to ensure clarity and focus of communication; it will reduce the potential for delay or confusion; and it will provide the best chance of delivering a timely and successful solution to a risk to public funds. The construction of the MoU, and who is and who is not a party to it, flows directly from that central part of the architecture which this Bill seeks to put in place.
Of course there will be occasions on which the FCA might need to be involved in discussions around financial crisis management. For example, the FCA might have a role in identifying how a scenario might impact on the interests of consumers and in suggesting what action should be taken to protect those interests. However, the FCA does not need to be one of the primary participants in the MoU for those interactions to take place. The legislation provides explicitly for this co-operation between the participants to the MoU and the FCA to be covered in the MoU. That is why, as I am sure the noble Lord, Lord Davies of Oldham, will have noted, paragraph 34 of the draft memorandum sets out that the Bank and the Treasury will involve the FCA and other organisations as necessary. Again, I fully understand and respect the substantive point made by this amendment but it is dealt with through the obligation in the legislation for the co-operation. It is backed up by a paragraph in the draft MoU and that is where we believe it should rest in a way that is compatible with this greater clarity of responsibilities that we have to get into the new system.
To underline the point, the FCA does not have a significant role in the crisis management itself. It is not responsible for responding to or managing serious threats to stability—that is for the PRA and the Bank— nor for prudentially regulating firms that are likely to pose a risk to public funds; a matter for the PRA. Therefore, the FCA does not need to be a primary participant in the crisis MoU alongside the Treasury and the Bank of England. Indeed, I would suggest to the Committee that, if the FCA were included in this way, it would force the FCA to be a participant in meetings and discussions where it had no clear role.
The approach taken by the Bill is the most sensible solution. It ensures an appropriate level of FCA engagement in crisis management, without requiring the conduct regulator to get involved in aspects of crisis management where it has no remit or expertise. I would hope that, on the basis of this explanation of the rationale for the position, the noble Lord would feel able to withdraw the amendment.
Lord Blackwell
Before the noble Lord responds, clearly one area where the FCA has particular responsibilities are competition issues relating to the industry. Can my noble friend put on the record that, if a competition issue is raised in a crisis management situation, there will be an explicit expectation that the FCA would be involved it that?
Lord Sassoon
My Lords, I believe that paragraph 34 of the MoU is sufficiently widely drawn that the MoU will provide for the Bank and the Treasury to involve the FCA in that circumstance. However, we do not specify, and it would not be right to specify, the particular circumstances because the competition and other remits are made clear in the general objectives and obligations that the authorities are under. I do not believe that there is any lacuna in that respect.
Lord Flight
My Lords, I want briefly to support the Government’s position here. I am one of the few people still around who participated in the lifeboat back in 1974 in the wake of the secondary banking crisis then. Although I felt that the Bank of England had been less than perfect in allowing that crisis to develop, the way in which it handled it was first class. It did not cost the taxpayer a penny and the lifeboat got to grips and sorted out the various banks that were, in essence, bust.
The fears that I expressed in the other place at the time of the FiSMA about the tripartite agreement were exactly what transpired. The three parties failed to reach agreement, as I think is now widely recognised and known, and it is a miracle that the banking system did not actually collapse because it was dangerously close to doing so. In a banking crisis which is not about, if you like, conduct and how customers are treated, but for whatever reason is about the potential pack of cards implosion of the banking system, it is crucial that it is the banking regulator entity—in essence the Bank of England in consultation with the Chancellor of the Exchequer of the day—that has clear authority to get on and take the necessary measures promptly.
Lord Davies of Oldham
My Lords, I am not sure that we are disputing that last point. We are arguing that there may be a crisis in which the contribution of the FCA would be of considerable importance. Perhaps the Minister will answer this point for the clarification of the Committee and all those interested in this matter. We are not quite clear why the other regulator, the PRA, operates in a different fashion from the FCA with regard to the consultation on the memorandum. I should like the noble Lord at least to identify that factor.
Lord Sassoon
I am not quite sure I have understood what clarification the noble Lord is asking for. The simple fact is that we are talking about a memorandum to do with crisis management. Crisis management is to be led by the Bank of England under the clear responsibilities that we have in this framework and therefore the memorandum is focused entirely on matters where the responsibility lies between the Bank and the Treasury in so far as public money is at risk. We are talking about matters where essentially the FCA is an ancillary party because dealing with crisis management is not the FCA’s principal role. It has a lot of other responsibilities in the new system, but crisis management is not one of them. That entirely drives the logic behind who is and who is not party to the MoU. I do not know whether that helps the noble Lord.
Lord Davies of Oldham
The Minister is always helpful, if not always totally convincing. We shall think further about this matter and the answers he has given today. For the time being, I beg leave to withdraw the amendment.
Lord Davies of Oldham
My Lords, again I apologise to the Committee that this amendment is also a casualty of the fact that we ought to have tabled and discussed it the other evening in the context of Clause 54, but in fact we failed to do so. I would therefore ask the Committee to show a degree of patience and bear in mind the content of Clause 54 which, as the Minister has already identified, is absolutely critical to this part of the Bill. We want to make our argument as it relates to Clause 61 because that is where the amendment is actually located. However, Clause 54, which sets out the circumstances under which a decision is made to notify the Treasury about the need for financial assistance to address a risk to public funds, is the background to the amendment.
The amendment seeks to arrive at a clearer definition of what “material risk” means. We have already had one shot at this issue today and I think we made a modicum of progress, but as my noble friend Lord Peston indicated, if we are not careful we might become engaged in a somewhat philosophical debate about the definition of risk. However, the term “material risk” appears in the Bill and therefore we ought to be as clear as we possibly can about what the term means. In the context of the memorandum of understanding, this amendment states that the memorandum needs to make provision for what the Bank and the Treasury regard as material risk. The amendment requires the definition to include risks that significantly impact on the safety and soundness of PRA-authorised persons and factors that put at risk relevant markets functioning well.
These are specifically and deliberately definitions which directly refer to the roles and objectives of the PRA and the FCA respectively. This is because the Opposition argue that the Bill and the draft memorandum are too vague about the role of the FCA and PRA in circumstances of material risk to public funds. I do not think that our discussion earlier this afternoon cleared this matter up. That is why we are once again giving the Minister the opportunity of being clearer about the matter, perhaps. We want to ensure that the Bank—the governor—will involve the FCA and PRA in these matters. The importance of defining material risk, and concerns that the Bill currently falls short on this, was raised by the committee convened to look at the draft legislation. That pre-legislative committee argued that it should be subject to parliamentary approval and should not be left to the memorandum of understanding.
We have parliamentary colleagues who have a real anxiety about this matter. I do not think that the discussions we have had thus far this afternoon allay all those anxieties. However, the Minister may be able to have a better shot at it a second time. I beg to move.
Lord Sassoon
Well, I will have another shot at it, but I do not suppose the schoolmaster opposite will necessarily mark me any better, however well I do. I am under no illusions. Nevertheless, I take this amendment suitably seriously. I will go through the arguments in the expectation that perhaps all will become clear and I will get an alpha plus for this one.
Amendment 190ZEB would link the threshold of the “public funds notification” detailed in Clause 54 to risks that could significantly impact the safety and soundness of PRA-authorised persons or undermine the orderly operation of financial markets.
This amendment would make the public funds trigger confusing, and less, rather than more, effective. I should explain why. The phrase “public funds notification” set out in Clause 54, which is a notification that public funds could be at risk, is precisely that. It is not a notification that there are circumstances in the financial sector that threaten the PRA or FCA’s objective.
The PRA will be responsible for prudential regulation of a large number of small deposit-takers and insurers, many of which can and do fail without any risk to public funds. Requiring the Bank to make a formal notification to the Treasury under Clause 54 every time and any time any of these institutions got into trouble could lead to a relatively large number of notifications where there was in fact no risk to public funds.
Similarly, adding a reference to the FCA’s objective to the definition of material risk in this way would broaden the grounds on which the duty to notify would be triggered to risks which do not involve public money. It would mean that the notification under Clause 54 was not in fact a public funds notification at all. Crucially, this would mean that the Treasury’s power of direction in Clause 57, which is available where there is a live public funds notification, would be available when there is no risk to public funds. I do not know whether that is what was intended here but I hope that the noble Lord would agree that that is not what should be achieved. This matters because decisions to use public funds to resolve a financial crisis are for the Government to take, usually the Chancellor personally. As such, the purpose of Clause 54 is to ensure that the Treasury is always informed when there is a material risk to public funds, and not for other, wider purposes.
Lord Davies of Oldham
This amendment furthers the points that my noble friend and I have already made this afternoon about widening the range of individuals who should be in a position to contribute their knowledge, experience and advice to a crisis management scenario. We remain concerned that the Government have narrowed the point of action in crisis management. I listened very carefully to what the Minister said about the advantages of that narrowness and fully understand it, but I am still unconvinced that the Government have the Bill right about who should contribute fully to the management of what we all recognise is an issue of very great significance to the nation.
The memorandum of understanding on crisis management must, according to the Bill, make provision about obtaining and sharing information. This amendment seeks to facilitate this requirement and enhance the Bill. We need to ensure that certain key personnel can consult directly with the Treasury. The amendment develops our clearly argued concern that reference in the legislation to “the Bank” is too often taken to mean, or certainly risks being interpreted and acted on as meaning, simply the governor. We argue that the Bank’s deputy governors and the chief executive of the FCA should in the Bill be explicitly enabled to consult directly with the Treasury in such extreme circumstances.
We are worried about the concentration of power and feel that relevant alternative voices must be given the opportunity to be heard in the management of an issue of such great concern for the nation. This is particularly important if there proves to be a difference of opinion within the Bank. We know there are differences of opinion in the Bank on very important matters. One would expect that highly capable individuals with different experience would not always reach an identical opinion. If they did, they would not deserve the high position they occupy because they would be merely yes men or, in one or two cases, yes women.
Under the current formulation of financial regulation, the Chancellor can hear directly from the chairperson of the FSA. Under the new system and the memorandum of understanding, the Chancellor could hear from no one but the governor.
In the other place, the Minister said, “Well, of course, the Bank encompasses a range of people”. We are not convinced about that. We do not feel that the position is explicit enough. It does not address the point about including the FCA in the vital process of obtaining and sharing information. Nor does it indicate that, at a moment of great crisis for the nation, voices which might present a somewhat different view from that of the governor will have their position adequately reflected to the Chancellor. In every other aspect of the role that the Chancellor plays, he welcomes engaging with the opinions of a large section of the population, represented by Parliament. We are talking about crisis management here. It is an extremely important dimension. We all recognise the constraints; I am not sure that it is right that the legislation should so circumscribe those who advise the Chancellor. I beg to move.
Lord Sassoon
My Lords, the arguments represented by the amendment have been raised at virtually every stage of this Bill’s progress in both this House and another place. Indeed, my honourable friend the former Financial Secretary speculated that it seemed to reflect the Opposition’s obsession with dominant figures preventing any dissent emerging from within an organisation. That is probably more a reflection of where those concerns are coming from than anything to do with how the Bank of England operates. This is an extraordinary line with which the Opposition persist. I start by repeating what the Government have said on every previous occasion when this point was made. I agree entirely that frequent communication between Treasury Ministers and the senior executives of the central bank and financial regulators is important. However, there is absolutely no need to legislate to ensure that the deputy governors of the Bank and the chief executive of the FCA can speak directly to the Treasury. There is categorically nothing prohibiting that in the legislation or anywhere else. In fact, Treasury Ministers regularly meet the current deputy governor for financial stability and senior executives in the FSA. Senior Treasury officials maintain a virtually constant dialogue with the deputy governors and senior FSA figures via meetings, phone calls and e-mail. The same was true under the previous Government. I was a senior Treasury official in this area for three years. There were many things that did not work well under the previous regime—that is why we are changing it—but I know perfectly well from experience over a long period that official contact with deputy governors works extremely well. I see no reason why that should change in future. It has existed over a considerable number of years and is just a natural part of the way the system operates.
In a financial crisis where public funds were at risk, if one of the deputy governors or the CEO of the FCA felt that there was something that the Treasury should know about, they would of course be able to speak to the Treasury directly. They are senior figures who are well aware of their responsibilities and quite used to making their feelings felt. In the case of the deputy governors, as well as the CEO of the FSA and the future FCA, they will be in front of the Treasury Select Committee. It is extraordinary to suggest in some way that legislation should be required to allow those senior figures in the system to make their views clear, as they have always done in the past.
However, when it comes to the statutory duty to notify the Chancellor formally of a risk to public funds, this responsibility is rightly given to the Bank of England as an institution. In practice, I would expect that in most cases a notification would be made by the governor personally to the Chancellor, but there is no reason why one of the deputy governors cannot send it on behalf of the Bank. The key thing is that it must be a decision of the Bank. As the Government have made clear on multiple occasions, the Bank must come to a view internally about the best way to fulfil the duties and responsibilities that are placed on it, including the duty to notify the Chancellor of risks to public funds.
On the basis of that further explanation of the position, I ask the noble Lord to withdraw Amendment 190ZEF.
Financial Services Bill
Lord Sassoon Excerpts(12 years, 1 month ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Sassoon
“In section 232 (powers of court), in subsection (2), after “director or” insert “other”.”
Lord Sassoon
“In paragraph 6 (status), in sub-paragraph (2), omit “board members,”.”
Lord Tunnicliffe
My Lords, I will not take up the time of the House with detailed comments on the amendment. We have listened to the debate, and all noble Lords who spoke were most persuasive. I hope that the Minister will give careful consideration to their points. We will certainly listen with great care as we decide on the extent to which we may support the noble Baroness, Lady Wheatcroft, if she plans to take the matter further.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the question of the audit of banks is indeed an important one, and one which has recurred in policy debates over the past 20 years. I looked back to see what the Banking Act 1987 had to say on the topic and what Lord Justice Bingham had to say when he looked into the BCCI collapse. Various changes were made at that time and since in FiSMA but it is important that we learn lessons from the recent banking disasters, and I address the particularities of this amendment from a position of agreeing with the considerable concern around this issue. However, I do not believe that the amendment before us completely achieves what we are trying to do.
Clearly auditors are uniquely placed to identify and flag to the PRA current and potential risks in a firm. We would also expect the PRA to share relevant information with auditors, for example where it views a firm’s approach to asset valuation or provisioning to be significantly out of line with its peers. It is worth pointing out that there are areas in which the present regulator, the FSA, believes that auditors should be looking at particular issues and reporting on them and it can require that to be done in rules under Part 22 of FiSMA. So, for example, under the client asset rules, auditors are required to report on whether investment firms have properly segregated their client assets.
I do however have some difficulty with this particular amendment. My noble friend Lady Wheatcroft says that if only provision like this had been in place before or at the time of the crisis the auditors might have given a lot more help which might have prevented some of the disasters. On the other hand my noble friend Lord Lawson of Blaby quotes from your Lordships’ committee’s report which talks of the complacency of bank auditors at the time. Taking as read for the moment that the complacency thesis is the right one, I wonder if that complacency would have run through what was required to be done under a particular provision like this one in the amendment. I think that we are on to something important here but I am not convinced that this quite hits the sweet spot that the Committee is aiming for and that requiring auditors to provide this general narrative report will achieve what we want. Risk assessment is a highly-specialised process and it goes to the heart of the job of the prudential regulator. What I think we want of auditors is to see if there is something more that they can do which supports the prudential judgment rather than cuts across it.
Lord Lawson of Blaby
I am most grateful to my noble friend. Of course this is not the whole answer; I made that clear in my remarks. However, does he not think that this amendment would have been helpful and that it is therefore worthy of support from the Government?
Lord Sassoon
For the reasons that I have given, I am not absolutely convinced that it would have been helpful against the background of complacency of the bank auditors at the time of the crisis. Having said that, I agree with the Committee that there is something here that we need to look at further, so I want to see whether the Bill can and should go further to require the regulator to make the most of the expertise that auditors can undoubtedly offer. I am happy to take this issue away and consider whether there is an amendment that I can bring back at Report that recognises the important role of auditors without cutting across the role of the regulator in the way that I believe this particular amendment may do. I will look at it and come back to the House with something that addresses this area. On that basis I hope—
Lord Oakeshott of Seagrove Bay
It sounds as though the Minister is encouraging the regulator to ask the auditors more questions. If we have complacent auditors, surely it is even more important that they sign something, that their complacency is questioned and that they take more responsibility for their work.
Lord Sassoon
I certainly agree that if we can get more value out of the auditors we should do so. It should be on the basis of something that helps people—I am not sure whether that is the regulator or directly the public—towards a better understanding of the risks embedded in bank accounts. On that basis, as I say, I will take the issue away. I ask my noble friend to withdraw her amendment, which would, of course—I should say for the benefit of my noble friend Lord Marlesford, who asked me to mention credit card debt—wrap up credit card debt and many other things if we can get this right.
Baroness Wheatcroft
I thank the Minister for his reply and for his willingness to at least consider this issue. Like my noble friend Lord Lawson, I do not see this as a total answer to the huge problem. However, I ask the Minister to consider whether the complacency of auditors might have been due to the fact that so little was required of them, and thus requiring rather more might be a step in the right direction. I look forward to hearing what he comes forward with and, if it is not very much, reserve the right to push this a little further. I beg leave to withdraw the amendment.
Lord Whitty
My Lords, since my noble friend is a bit lonely on the Front Bench just now, I intervene very briefly to support her on this. Quite often in regulatory structures the sector regulator is very nervous of referring anything to the competition authorities because it regards that as part of its failure. Under the terms of this amendment, it would be part of the process that was available—I will not say normally, but if necessary—to the FCA to refer things to the competition authority, having itself examined the structure of the market with its concurrent powers.
I am very mindful of an equivalent sector—namely, energy—where one of the problems has been that Ofgem has always refused in effect to refer the structure of the energy market to the competition authorities, even though, I happen to know, at the time the competition authorities or the members of the Competition Commission were very anxious to look at it. We might have to change the form of words slightly but I think this is the better formulation—that the FCA has concurrent powers but that it is not seen as a complete departure for a case to be referred to the competition authorities themselves and that the process is not prolonged.
Lord Sassoon
My Lords, I can see that the noble Baroness is delighted that I am on my feet. I listened to the very clear and detailed arguments that the noble Baroness, Lady Drake, gave in an earlier session, to which we have come back today. I may not always respond there and then but I listen very carefully to everything that is said. However, I do not want to raise the expectations of the noble Baroness on this one.
This amendment seeks, as we have heard, to give the FCA a power to make a market investigation reference to the Competition Commission. I am sure that the Committee is aware that the Joint Committee that scrutinised the draft Bill recommended that the FCA should be given concurrent market investigation reference powers. However, noble Lords will also be aware that the Treasury Select Committee, in its report on the FCA, concluded that the case for the FCA to have market investigation reference powers has not yet been made, and that the issue should be reviewed when the FCA has bedded into its new role.
Having considered the matter very carefully, the Government have adopted the proposal of the Treasury Select Committee. The FCA’s competition objective will require it to keep the markets it regulates under review and it may of course perform its own competition analyses as part of that. The evidence-gathering and analysis carried out by the FCA will support any subsequent intervention by the OFT. For example, on a referral from the FCA, the OFT may have sufficient evidence to launch a market investigation reference almost immediately. There is precedent for this in the OFT’s response to the report of the House of Lords Economic Affairs Committee on the audit market. In the light of the evidence collected by the committee, the OFT felt able to consult on a reference to the Competition Commission without conducting its own market study.
As the Government have made clear in their response to the Treasury Select Committee, we will review the question of the FCA competition powers when it has bedded in to its new role, five years after it comes into being. I hope that with that reassurance, and confirmation that we are following the Treasury Select Committee’s recommendation, the noble Baroness will feel able to withdraw her amendment.
Baroness Hayter of Kentish Town
My Lords, I thank my noble friend Lord Whitty for his support for the amendment. His experience in this field is much greater than mine. I am surprised by the Government’s lack of interest in the relationship between the OFT and the FCA, given its new competition powers. In an earlier debate, the Government would not even agree to an MoU between the FCA and the OFT. I am pleased that the Government will keep the matter under review and therefore accept that there are some issues here. Part of the concern is that, with the merger under the other Bill of the OFT with the Competition Commission, those organisations, as all organisations are when they get together, will be tied up with working that out just at a moment when the FCA has these new competition powers and perhaps would like to use them in the way described. I beg leave to withdraw the amendment.
Lord Sassoon
Lord Sassoon
“In paragraph 3 (status), in sub-paragraph (2), omit “board members,”.”
Lord Stevenson of Balmacara
My Lords, I shall speak also to Amendments 190ZZB, 190ZZC and 190ZCA. Mutual and building societies and the friendly society sector have played an important part in the organisation of savings and investments and the provision of credit in this country for centuries. Their existence, against all the odds on some occasions, has sometimes been a close-run thing and their constitutions and management structures are redolent of an earlier age of prudence and sobriety in financial matters. Many people regret that we do not do more to support this sector. There have been reports and initiatives aplenty in recent years, but not too much action. I am sure that all noble Lords will share our concern that the Bill should not disadvantage these important organisations.
Our amendments therefore have three purposes. The first is to invite the Minister to update us on the question raised in another place about the need to modernise the register of these bodies. As was indicated during the Committee stage debates, credit must be given to the FSA for bringing the registry out of the 19th century and into its present form, but unlike Companies House, where all filings can be done online, at the Registry of Friendly Societies, located at the FSA, it still takes 48 hours to get a search of certain records of a mutual society. In comparison, a search at Companies House is a simple process which takes minutes, if not seconds. Mutual societies deserve a modern registry which can support and promote the mutual society model. The amendments would provide for any function of the FSA in respect of the Registry of Friendly Societies to be transferred to a register established at Companies House, though, of course, we would be happy if the location of the registry could be unchanged. If the Minister could confirm that a modern registry can be established within the FCA, that would satisfy us.
Secondly, this part of the Bill empowers the Treasury to amend by order legislation on mutual societies for a number of different purposes. When this was raised in the other place the issue seemed to be whether the FCA and PRA responsibilities for the functions that we are discussing are broadly the same as those for the plc sector and that there are no anomalies for the mutual sector as opposed to the non-mutual sector. Unfortunately, it is not clear from Hansard whether the Minister was able to clarify whether or not this was the case, so it might be useful if the Minister could outline how the clause affects the mutual sector and confirm that it is simply a technical matter with no new provisions.
Thirdly, Clause 47 introduces provisions for credit unions in Northern Ireland. Credit unions play a very important part in the organisation of savings and the provision of credit in the Province. As I am sure the Minister is aware, some attention was paid to this issue when the matter was debated in Committee in the other place. Subsection (2)(g) lists the Credits Unions (Northern Ireland) Order 1985 as legislation that the Treasury may amend by order. As was raised in the other place, the 1985 order is specifically included in the Northern Ireland Act 1998, established by the Good Friday agreement. Again, therefore, it would be helpful if the Minister could clarify the general position, particularly that subsection (4) is purely an enabling provision that will allow the transfer of functions on an agreed and acceptable basis and will not automatically dictate such.
I take this opportunity to invite the Minister to update us on the outcome of the consultation on the draft mutuals order, and particularly on whether it has now been agreed which matters will go to which body. The Minister will recall that the draft mutuals order talked about transfers to the FCA or the PRA as though the question of which regulator will actually step in at which moment had been left as a rather grey area. As was said when this issue was discussed in another place, surely that ambivalence suggests uncertainty as to what will happen in future, at a time when we should be encouraging the sector to have confidence and to grow. It also seems to run contrary to the commitment on page 9 of the coalition agreement, which states that the Government,
“will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry”.
Given that we are talking about transferring responsibilities between regulators, which regulator will be the champion for the mutuals model; who will actively encourage the benefits that can flow from a non-plc corporate form; and will either of the regulators have any responsibilities for such matters or none? I beg to move.
Lord Sassoon
My Lords, the draft mutuals order has been published this evening. My officials will send the noble Lord a link to it in the morning so he can be completely up to date. That cuts through that point: the draft order confirms that the Government are moving steadily ahead with lots of action, and I will briefly remind the Committee of some of it. The order is the next thing that is due to make progress in the Government’s important objective of promoting diversity. As we have discussed before, the important thing, as the noble Lord said, is that we want a level playing field. The Government do not see this Bill as the vehicle through which to promote particular sectors of the financial services industry—I think that the noble Lord understands that—but I will sketch out some of the other things that we are doing.
To reassure the Committee why in my view Amendment 190ZZA is not necessary, the Government have demonstrated a clear commitment to promote mutuality and to diversify and strengthen the mutual sector. We are taking action to give concrete effect to this commitment, including the new requirement in the Bill for the regulators to analyse the impact of proposed rules on mutuals and building societies, so helping with the local level playing field; the protection given to members of Northern Ireland’s credit unions; and legislation to reduce restrictions on the growth of credit unions. The Government are committed to ensuring that building societies continue to operate on a level playing field with banks while maintaining their unique identity—for example, in the draft Banking Reform Bill published last week, we proposed to exempt building societies entirely from the definition of a ring-fenced bank, although changes will be made to the Building Societies Act 1986 to bring it into line with the ring-fencing provisions of the draft Bill, which was the proposal supported by most respondents.
Lord Sassoon
Lord Sassoon
“Power to apply or disapply provision made by or under FSMA 2000
(1) The Treasury may by order provide—
(a) for any relevant provision that would not otherwise apply in relation to transferred functions to apply in relation to those functions with such modifications as may be specified;(b) for any relevant provision that would otherwise apply in relation to transferred functions not to apply in relation to them or to apply with such modifications as may be specified.(2) “Relevant provision” means a provision of, or made under, FSMA 2000.
(3) “Transferred function” means a function that has been or is being transferred by an order under section 47; and section 48(4) applies for the purpose of this subsection.”
Financial Services Bill
Lord Sassoon Excerpts(12 years, 1 month ago)
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Lord Sassoon
“(ba) Part 2A makes provision relating to the winding up, administration or insolvency of UK clearing houses;”
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, this is the first of a number of amendments that will extend the powers under the Banking Act to investment firms and central counterparties to enable their orderly resolution. The financial crisis of 2008-09 highlighted many deficiencies in the regulation of the global financial system. Most importantly, we found that the disorderly failure of systemically important banks could have a catastrophic effect on the stability of the UK and on international financial markets.
To give the Treasury and other authorities the powers necessary to minimise the impact of bank failure on depositors and the system as a whole, the Banking (Special Provisions) Act was introduced in 2008, swiftly followed by the special resolution regime established under the Banking Act 2009. Both Acts enjoyed cross-party support, although of course they benefited from the scrutiny of both Houses. I trust that noble Lords will take a similarly constructive approach to these important amendments.
Establishing the special resolution regime for deposit-takers was an important step towards ensuring that systemic institutions would not fail in a disorderly manner. However, deposit-takers are only part of the financial system. There are other types of financial institution, such as investment firms and central counterparties, whose disorderly failure could also severely disrupt both financial markets and the normal functioning of the wider economy.
Reform is also taking place at a European and global level, and the UK is playing a leading role in these discussions. The UK’s approach is consistent with those set out by the European Commission, the Committee on Payment and Settlement Systems, and the International Organisation of Security Commissions. However, implementation of these reforms in Europe is some way off. Our financial services industry is of huge importance to the UK economy and we believe that any gaps in such resolution powers should be addressed as soon as possible. The Treasury therefore consulted on a number of proposals over the summer, including draft legislation. My officials met with a wide range of industry stakeholders, from investment firms and central counterparties to mixed holding companies and industry representatives. As a result of that consultation, we are now able to proceed with the legislation set out in this group of amendments.
The first group of amendments that I am speaking to today covers the new insolvency regime and arrangements that apply to UK clearing houses and recognised investment exchanges. UK clearing houses form part of the financial market infrastructure that underpins the operations of domestic and international markets. They act as the buyer to every seller and the seller to every buyer in order to protect trading parties from the risk of counterparty default. The role performed by UK clearing houses means that they are particularly exposed to wider market risks, such as the failure of large clearing members.
Recognised investment exchanges, in their capacity as market operators, can operate regulated markets and multilateral trading facilities. These exchanges provide a number of crucial services for the trading of shares, bonds and other securities. Amendment 183ZZA introduces a new subset of recognised clearing houses—UK clearing houses—into the regulatory framework. The reason for this is that it is not appropriate for the Bank of England to exercise the new powers contained in these amendments in respect of foreign clearing houses that are not established in the UK, nor in respect of clearing houses that do not offer central counterparty services. This amendment provides clarity on these points.
Amendments 176A and 176C introduce provisions in relation to the Bank of England’s role in winding-up, administration or insolvency proceedings relating to a UK clearing house. These amendments will ensure that the Bank of England and the Treasury are put on notice of the application for the winding up of a clearing house and have the opportunity to consider whether to exercise a resolution power in order to minimise the impact of failure on financial stability. Amendment 176C allows the Bank of England to direct insolvency practitioners appointed in connection with the insolvency of a UK clearing house. Such directions will build on current provisions governing company insolvency but will allow the Bank of England to direct the insolvency practitioner to take steps to minimise the impact of the insolvency on financial stability. In doing so, the Bank must be satisfied that it is desirable, having regard to the public interest in the maintenance of financial stability.
Amendment 176B allows for the Bank to apply to the court for administration of the clearing house and participate in court proceedings. It also requires that the Bank gives its consent before an administrator is appointed to act for a failed UK clearing house. These powers will enable the Bank of England to respond quickly and decisively when a clearing house is in financial difficulty, managing the safe winding up in a manner that minimises any risk to financial stability and the wider economy.
Finally, Amendments 189BD to 189BL relate to insolvency arrangements for recognised investment exchanges. They expand the scope of Part 24 of FiSMA so that it applies to the insolvency of a recognised investment exchange, as it applies to the insolvency of an authorised person. This means that the regulator will be able to apply to a court for an order placing an investment exchange into an appropriate insolvency procedure. These amendments also ensure that the regulator would be put on notice of an application for an order placing an investment exchange into an insolvency procedure and could participate in these proceedings if it considered it necessary in the public interest. I beg to move.
Lord Peston
My Lords, will the Minister clarify one or two aspects of what he said? Am I right in thinking that the amendments, in so far as one can follow them at all, are relevant when something has already gone wrong; that is, when the institution in question is in trouble and something has to be done to cope with that?
Lord Peston
Am I then also right that other aspects of the Bill are really to stop the problem arising in the first place? Would that be a valid interpretation of the whole legislation?
Lord Sassoon
My Lords, at the risk of oversimplifying matters, yes, indeed. We want a judgment-based system of regulation and supervision that makes it less likely that things will go wrong in the first place. That is entirely correct.
Lord Peston
The Minister must be aware by now that there is no way that he can oversimplify when he is dealing with me. Has a study been done of the costs and benefits of the effects of the amendments? In particular, if a crisis appears that is connected with insolvency et cetera, will costs be involved and who will bear them? I cannot find an answer to that anywhere in the amendments. Is it a responsibility of whoever is administering all this? Further, am I right in thinking that clearing houses will not be saved but essentially go out of business?
Lord Sassoon
My Lords, I can confirm that, as with just about everything that this Government and the previous Government have brought forward, an impact assessment of the measures was done as part of the consultation process. The noble Lord took us back to first principles. What we are trying to achieve in the broad sweep of the construct is for the costs to fall on the industry. The shareholders would be likely to be the first to be wiped out if an investment exchange or clearing house went out of business. That is where the costs would fall. At all times, our principal concern is to make sure that taxpayers are not exposed to material costs such as they were, very severely, in the financial crisis of 2007-08. I hope that that helps the noble Lord.
Lord Flight
My Lords, the Minister referred to EU regulations relevant to the territory. I and colleagues returned the week before last from a visit to Brussels to look at the banking union proposals. The long and short of it appeared to be that ECB supervision proposals might just be achieved, and that the arrangements for a common approach to deposit insurance was unlikely to get anywhere in the foreseeable future, and likewise the arrangements for common resolution systems. What is the Government’s stance? I think it is understood that, as we are outside the eurozone, we will not be part of these arrangements, but there was insistence that the EBA, as a sort of advisory body on top of the ECB, would have the last word over central banks and national regulators with regard to issues in all these territories.
Lord Sassoon
I am grateful to my noble friend for bringing us a summary of the latest intelligence from Brussels. If he will permit me, I shall restrict my comments—because he raises some big questions—to this particular group of amendments. He may want to raise European questions as we go through other topics. On this particular topic, and regardless of whatever areas of the evolving European structure the UK is part of or not part of as the banking union goes ahead, work is already going on at EU level to introduce a resolution regime for institutions such as the ones we are talking about. They recognise, as we do, that central counterparties are critically important. The question, therefore, becomes one of timing—should we sit back and wait for Europe to do it?
I hasten to say that there is absolutely no reason to believe that there is any problem with any of the clearing houses or the recognised investment exchanges, but I would not wish to come here as a Minister in, say, six or nine months’ time and say, “Well, we had identified and Europe had identified this issue; we had a vehicle for legislation but we did not actually take the opportunity”. I recognise the point made by the noble Lord, Lord Tunnicliffe, that we are putting a lot more things in here, but we have a one-off opportunity. It is an important point, and Europe has identified it, but goodness only knows when Europe will get round to implementing it. We believe that we have a solution—it has been consulted on—and if in due course it is not compliant with the way that the EU subsequently does it, we will obviously have to amend things. There is no suggestion, however, that that will be the case because we have been consulting the UK authorities as we go through the design of this.
Baroness Kramer
My Lords, I have not been sure whether to speak to this group of amendments or the following group, or how to organise comments on the clearing houses. I therefore apologise, but given the conversation that has just taken place, I would like to raise a couple of issues. As this process is going forward in terms of supervision, has attention also been paid to Dodd-Frank? Obviously some of the extraterritorial powers that are being sought by the United States on these issues have a very significant impact on the matters that he is dealing with in this and the next group of amendments.
The Minister also said that Europe was being very slow to come to conclusions on how to apply resolution for the clearing houses, but he did not mention that they are also very slow—and appear to have done nothing—to recognise or mitigate the procyclicality impact of the changes he is describing in this move towards centralised clearing houses. We all recognise that the changes stamp down on counterparty risk, but they amplify market risk. Procyclicality is a significant part of that. I think that we have to understand that context if we are to understand the particular measures.
The noble Lord, Lord Flight, raised the issue of co-ordination with other supervisors, but none of these measures seems to address in any way the issue of access to euros for the CCPs, should they require it in another crisis such as the one we saw in 2008. Where are we in the process of negotiating a mechanism that ensures that offshore euro CCPs, such as those in the UK, will be able to access euro liquidity should they need it?
One last issue—and I will try to hold things for the next round of amendments—is that I am unclear as to how these resolutions tie in with banking resolutions or living wills for banks, because the two obviously tie together. If CCPs are placing large amounts of cash and non-cash collateral in banks in the UK as a result of their margin positions, what happens if the bank holding such collateral fails? Is the CCP just one more unsecured creditor? It would be helpful to have some sense of on what side of the ring-fence such accounts would fall for us to understand whether there is a significant risk or a relatively minor one. As I said, I shall hold all comments on the actual resolution mechanism until the next round of amendments.
Lord Sassoon
My Lords, my noble friend asks a lot of important questions but there is a danger of overinterpreting what the clauses achieve. They are to cover circumstances that we do not envisage—although we did not envisage any of the circumstances that occurred in 2007-08, but there is no reason to believe that there is a problem here. As my noble friend says, the clearing houses already have a critical role in the financial architecture; that role is getting even more important as more trading is done on exchange and securities are cleared through the clearing houses.
We are trying here to put in place some mechanisms by which the authorities can step in where voluntary arrangements or insolvency are live. I do not believe that in drawing up the proposals or in consultation on them any difficulty has been identified in relation to the Dodd-Frank rules. Of course the question of procyclicality must be dealt with, but the provisions enabling the authorities to intervene in winding-up, administration or insolvency recognise the importance of clearing houses as they are now. As clearing houses are asked to do more, of course other provisions may be needed, but the provisions are not intended to anticipate some future development of the clearing houses’ role, merely to reflect the situation that we are in already and their structural importance.
Baroness Kramer
Is the Minister saying that the provisions are completely apart from EMIR and the ESMA rules derived from EMIR and that we will have another round, as it were, at some point encompassing those rules?
Lord Sassoon
Yes, I am essentially saying that. This is about clearing houses and recognised investment exchanges that get into trouble, whatever the cause of the trouble. EMIR and related issues raise a whole separate series of questions—including, for example, the question of access to euro liquidity, on which, as I am sure my noble friend knows, we last year started an action against the European Central Bank, which, we believe, is attempting to draw lines across the single market in financial services depending on whether a country is in or out of the eurozone around where clearing houses can operate in the euro. We as a Government firmly believe that the single market requirements are such that a clearing house can operate in the euro wherever it is located in the European Union and that access to euro liquidity and everything else should flow from that.
As to the relationship with the banks, that is not directly relevant to these clauses. An exception to this is where a bank has an important relationship with a clearing house. These new powers mean that the authorities can step in if there are questions of financial stability. We have additional tools in the authority’s kit-bag to deal with a situation which might include the knock-on effect on the banks of their relationship with the clearing houses or vice versa. So it does increase the toolkit.
Lord Barnett
My Lords, this group of amendments seems, at least to me, to emphasise ever more the huge powers that are being given to the Bank of England under this Bill. I am grateful to the Minister for all his clarifications so far, and I take it from what has been said about the European situation that this is not one of those areas where the Government are looking to transfer power away from Brussels. However, my main question is this: given the huge powers that are being given to the Bank of England under the Bill—this might explain why there are so few applicants for the post of governor; it is such a complex job that no one wants it, even with a salary of £300,000 a year and going up all the time—will the Government give new thinking to the whole idea of the extra powers that are being given?
Lord Sassoon
First, my Lords, there is no question in this of anything being transferred to or from the EU. This is just a regime around the winding-up administration for the insolvency of UK clearing houses, so I assure the noble Lord that that issue does not arise. It was his Government—the previous Labour Government—who identified this general area as one that needed to be dealt with, particularly in the context of deposit takers, where the need was identified to put additional provisions in place for resolution regimes. We built on the work initiated by the previous Government and have identified other systemically important parts of the system.
We are talking about clearing houses and recognised investment exchanges this afternoon, and we will go on in a future session to talk about investment banks. We are merely saying that we have identified other areas where the authorities need to have powers similar to the ones that came out of the legislation initiated by the previous Government, and are putting that in place.
As to the cumulative amount of responsibility that we are giving to the Bank of England, we have already in the course of the very useful scrutiny of this Bill made some important changes, including putting the oversight committee in place to respond to the sort of challenge that the ever-nimble-on-his-feet noble Lord, Lord Barnett, raises. I therefore think that we have covered that issue up front in this Bill and that the Government have made some big concessions.
Lord Peston
My Lords, I will not pursue the question of more powers to the Bank of England. After its performance over the last few years, it is the last thing I would do, and I do not think this is the occasion to debate that yet again. However, I am puzzled by two things. I thought that in his reply to the noble Lord, Lord Flight, he said we should not be discussing the European angle and that that would come at some other stage. Is that right? I do not think I misheard him.
Lord Sassoon
No, I said in my reply to my noble friend this afternoon that I would concentrate purely on the European angle of these amendments, which I dealt with. I was not going to be drawn into discussing a whole range of other European matters which my noble friend’s remarks address. It is as simple as that.
Lord Peston
I take it that we are not discussing—because if we were, I would make a speech—the fact that we believe strongly in a single market for financial services but that many of the European countries go to enormous lengths to prevent our highly efficient financial services firms getting into their markets. I would not mind having a debate on that some time during proceedings on this Bill. However, I gather that in the Minister’s view this is not the moment.
Baroness Cohen of Pimlico
Might I ask the Minister for a little guidance? If we are discussing all these amendments together, I have a set of problems that I would like to discuss on Amendment 176D. Is this the moment or are we going to do all the amendments separately?
Lord Sassoon
If the noble Baroness will allow me, we will come to Amendment 176D—I would say in a moment, but it might be a prolonged moment.
Lord Sassoon
“Insolvency23A (1) The following provisions of Part 24 of this Act are to apply in relation to the Bank—
(a) section 356 (powers to participate in proceedings: company voluntary arrangements);(b) section 358 (powers to participate in proceedings: trust deeds for creditors in Scotland);(c) section 359 (administration order);(d) section 362 (powers to participate in administration proceedings);(e) section 362A (consent to appointment of administrator);(f) section 363 (powers to participate in proceedings: receivership);(g) section 365 (powers to participate in proceedings: voluntary winding-up);(h) section 367 (winding-up petitions);(i) section 371 (powers to participate in proceedings: winding-up).(2) Those provisions are to apply as if any reference to an authorised person or recognised UK investment exchange were a reference to a recognised clearing house.
23B In the case of any regulated activity which is carried on for the purposes of, or in connection with, the provision of clearing services, the reference to the FCA in section 375(1) is to be read as including a reference to the Bank.”
Lord Sassoon
“Additional power to direct UK clearing houses
After section 296 of FSMA 2000 insert—“296A Additional power to direct UK clearing houses
(1) The Bank of England may direct a UK clearing house to take, or refrain from taking, specified action if the Bank is satisfied that it is desirable to give the direction, having regard to the public interest in—
(a) protecting and enhancing the stability of the UK financial system,(b) maintaining public confidence in the stability of the UK financial system,(c) maintaining the continuity of the central counterparty clearing services provided by the clearing house, and(d) maintaining and enhancing the financial resilience of the clearing house. (2) The direction may, in particular—
(a) specify the time for compliance with the direction,(b) require the rules of the clearing house to be amended, and(c) override such rules (whether generally or in their application to a particular case).(3) The direction is enforceable, on the application of the Bank, by an injunction or, in Scotland, by an order for specific performance under section 45 of the Court of Session Act 1988.
(4) The Bank may revoke a direction given under this section.
(5) In this section “central counterparty clearing services” has the same meaning as in section 155 of the Companies Act 1989 (see subsection (3A) of that section).”
Lord Peston
My Lords, before the Minister moves this amendment, can I ask him one other thing that intrigues me? On the bit of paper that we get every day when we meet on this, it says:
“Target for the day: to complete the group beginning amendment 190ZZA”.
Are we to take that seriously? At the rate we are going, we will be going for a very early supper.
Lord Sassoon
My Lords, as ever, these things are discussed and agreed through the usual channels. I certainly take my side of the usual channels extremely seriously. The noble Lord can discuss it with his side, but I believe that is where we are headed. I thought we might have got through the previous group of amendments rather more quickly, so I do not know what time we will finish, but in only a moment I have been able to move on to Amendment 176D.
Amendments 176D and 182ZA build on the existing powers of direction that the Financial Services Authority has under the Financial Services and Markets Act 2000, or FiSMA. This group of amendments gives the Bank of England additional powers to direct UK clearing houses to address risks to their solvency, or indeed any other matter. Specifically, the direction could require a clearing house to make changes to its rules or introduce emergency rules, or require rules to be activated. The existing powers of direction provided for in FiSMA can be used only to direct a clearing house to ensure that it complies with the recognition requirements or its obligations under FiSMA. Here, in answer to a point that the noble Lord, Lord Peston, raised, we are talking about powers that go with the previous group of amendments, which were all to do with clearing up a mess when we got there. We are now talking about additional powers to make sure, specifically, that we minimise the chances of getting into trouble.
Providing the Bank with additional powers of direction over UK clearing houses is essential to allow the Bank to manage the considerable risks that may be posed by actions of a clearing house that is nevertheless not in breach of its recognition requirements or obligations under FiSMA. Put simply, the powers will enable the Bank to intervene as required to help to ensure that clearing houses act in a way that is consistent with the maintenance of financial stability and wider market confidence. For example, these provisions allow the Bank to issue a direction requiring a UK clearing house to refuse to accept certain investments as collateral, or to require all collateral in relation to specified types of financial transaction to be provided in cash. They also allow the Bank to require a UK clearing house to alter the rules concerning its operation in order to ensure that certain matters do not constitute events on which specified rights become available—for example, early termination rights—or to require a UK clearing house to take action or to refrain from taking action under its default rules.
Although these powers are wide-ranging, building in essential flexibility to manage new and unusual risks, they may be exercised only where the Bank is satisfied that it is desirable to do so, having regard to various clearly defined public interest tests. With one exception, the Bank of England cannot use this power to require shareholders, members or clients to recapitalise or otherwise fund a failing recognised clearing house. The power of direction relates only to the recognised clearing house itself. The exception is where the UK clearing house already has recapitalisation arrangements and agreements in place with its shareholders. In this instance, the Bank of England could use this power to direct the UK clearing house to enforce those arrangements, provided that the necessary conditions and safeguards are met. This is to ensure that the clearing house acts in a way that is consistent with the maintenance of financial stability and wider market confidence. I beg to move.
Baroness Kramer
My Lords, I hope that these amendments will be consistent with EMIR and ESMA rules. It is not as though those are not available to the Treasury, and the last thing the industry needs is continual revision. Can the Minister clarify whether the amendments give the Bank of England a fairly free hand in resolution procedures? As he said earlier, the steps to resolution are, first, to use the collateral margin; and, secondly, to go into, presumably, the clearing house default fund and exhaust that. I am not clear what the next step and fallback is at the end of that process.
To what extent is there the capacity to go back to members or, as implied by EMIR, for the Bank of England to direct or permit clearing houses in effect to tear up their trades where a financial stability issue has been raised? If those are the kinds of powers that are being transferred to the Bank of England as a consequence of this, when will we get some clarity on exactly what the rules are—by whom, how and when those steps might be applied? Will they be comprehensive when we see them, as well as clear? Will they be credible, in the sense that they are the kind of rules that could be implemented in a crisis? There is a lot of concern about all that, because EMIR creates a possibility but has not created the rules. Can the Minister tell us when we will get those rules and be able to look at all this again? I understand that EMIR is to be implemented by the middle of next year. That does not give us much time if we are going to use this legislation, so I remain very confused.
Lord Barnett
My Lords, I would like some clarification. New Clause 296A in Amendment 176D says that the Bank of England “may” direct, not “must”, even though it has regard to the public interest, while new Clause 296A(2) says that the direction “may” specify various things. The direction is then enforceable only on the application by the Bank by an injunction or by other complicated means. Why should it not be “must” if it is in the national public interest? I do not understand why the word “may” is there rather than “must”.
Lord Sassoon
My Lords, I shall try to deal with a number of those points. First, on the general question of “may” and “must”, I have quite a lot of sympathy with the noble Lord, Lord Barnett. I thought that we were going to have a more extensive discussion about “may”s and “must”s in our previous session, but unfortunately and regrettably the noble Lord was not able to be here, so we did not spend as much time discussing it as we could have done. There were some instances last week where I thought that on a first reading he and the noble Lord, Lord Peston, had spotted some rather good examples where those terms should be reversed, although they had spotted one or two others where I did not agree with them. However, it provoked quite a long discussion with the Treasury lawyers and drafting experts. As a general matter, I have asked them to reassure me on all the “may”s and “must”s in the Bill, as I am a bit confused sometimes. However, a general defence of this is that, even though some of us as laymen may think that a “may” should be a “must”, it gives rise to all sorts of difficult potential legal challenges. As noble Lords will know, this is a common feature of a lot of legislation that we discuss. I have asked the draftsmen to reassure me that there are no instances where we could change the language in the Bill. I am grateful to the noble Lord, Lord Barnett, for that.
In answer to my noble friend Lady Kramer, as the Committee will know, EMIR will, in the main, force mandatory clearing of OTC derivatives. That will increase the role of, and risk concentrated in, clearing houses and is part of the driver behind introducing these new powers now. I reassure my noble friend that these provisions are entirely consistent with and complementary to EMIR. The intention is that the EMIR regime will be agreed in full by 1 January 2013, with 12 months thereafter to comply. I believe that that gives enough time to explain to all concerned how these various powers are going to be operated. However, I will take back my noble friend’s specific concern that all relevant guidance, particularly in the area that we are discussing this afternoon, goes out in good time. I will discuss that with the authorities.
On the specific questions that arise from the London Stock Exchange, I confirm to the noble Baroness, Lady Cohen of Pimlico, that I answered the question on the first point directly. On the second point, we need to recognise that there are two rather different sets of trigger conditions. The power of direction is designed to avert situations where resolution is necessary. The special resolution regime itself is to be implemented where there is no realistic prospect of the clearing house continuing to function. While I am happy to debate and take away the noble Baroness’s point—I will read carefully what she said on the record—I believe that there is a fundamental mis-read-across between the appropriate trigger conditions for a power of direction as opposed to a special resolution regime. Of course, if there is anything more I can add on that, I will write to all those on the copy list.
Baroness Kramer
For clarification, I had understood the statement of the noble Baroness, Lady Cohen, to be that she was reassured because, under these rules, there was no expectation that the members of a clearing house could be required to top up a default fund unless there were some pre-agreed arrangement or mechanism in place; they would presumably be able to scope out their liabilities. What are the consequences of that for those who are trading and clearing through for the counterparties on the various transactions where the clearing house then has no resource to margin or to a default fund because it is exhausted and whose trades remain open with the clearing platform as the counterparty that should have fulfilled that side of the trade? What are the implications for people who initiate the various derivatives contracts? As my noble friend knows, these contracts often can be open for quite a few years. Are they at risk or is there some other mechanism that provides them with protection, or will they have to very carefully evaluate what they consider to be the financial safety of the clearing houses? If that is the case, will we have credit-rated clearing houses? What mechanism will be used to have some sort of assurance that this is an appropriate platform for them to use to clear trades?
Lord Sassoon
My Lords, these are professional markets. We are putting in place additional protections and provisions, which does not mean that you could not put in place in a theoretical world all sorts of other protections. We are going further than the current situation. Currently, all sorts of rules and oversights are in place. We are going further but we do not believe it is appropriate—that is the point on which I was able to reassure the noble Baroness—that the Bank of England should be in a position to order shareholders of these businesses any more than it can order shareholders of banks that fail to put more money in, save only in the prescribed circumstances where there is a pre-existing agreement and where the clearing house itself can trigger it.
I am sure we can all think of all sorts of provisions that we could put in place to make the world a lot safer, but rather sterile, place. We are going further than the current protections. Of course, theoretically, various things could be put in place but we do not intend to do that.
Lord Peston
My Lords, I hate to abandon a “may” and “must” debate, because it is my favourite activity. However, in this case, since we are discussing additional powers, I hate to say it but I think that “may” is simply the word that corresponds grammatically to giving the additional powers. Given the circumstances in which the amendment lists when those powers can be used, it is perfectly obvious that “must” is then implicit. Why else would these criteria be taken into account? I do not want the Minister to stop annoying the parliamentary draftsmen but perhaps for once they have got it right.
Lord Sassoon
I am very grateful to the noble Lord, as I am sure the officials will be.
Amendment 176D agreed.
Lord Sassoon
Lord Sassoon
Baroness Hayter of Kentish Town
Perhaps the noble Lords will let me make my case and explain that. As was suggested by the noble Lord, Lord Flight, the purpose of my amendment in the next group is to address this issue and I hope that it will get support from across the House. It is about a different way of dealing with this and bringing to that independence a much higher hurdle for exactly the reasons that noble Lords have been talking about. I hope that when we come to that amendment it will receive wide support because I share the view about a greater degree of independence and separateness being needed. Nevertheless, transparency is a particularly important issue which we, as consumer representatives, feel was very restricted by Section 348 of FiSMA and the FSA’s interpretation of this. I shall in a moment explain why we do not support the amendments of the noble Lord, Lord Flight, in the present group.
Amendment 185B concerns warning notices in respect of procedures and referrals to tribunals and other issues. It would remove the requirement to consult with those about to be named before any warning notice is published. I find it hard to see why this requirement is in the Bill. It does not affect other walks of life. In criminal cases, ordinary people do not get consulted before they are arrested or charged but their names will be released. “Consultation”, I fear, is code for, “Let the lawyers loose”—I apologise to noble Lords who are lawyers—and risks injunctions, stalling and long legal arguments. Why should the person who is to be named be given special rights? If it is right to publish, why should there be a block on publication? I hope the Minister will be able to justify that, given that tremendous consultation goes on already with the firm involved before one is even at the stage of a warning notice.
On the amendments in the name of the noble Lord, Lord Flight, as I say, we have sympathy with bits of them because of the lack of a second eye, independence and separateness, if you like, from the investigators within the regulation. The Bill empowers the regulators to publish the fact that a warning notice has been issued. This is of particular interest to the issue of misleading financial promotions. For consumers, it is a significant increase in transparency to know which ads have not only been looked at by the regulator but have been seen to be sufficiently misleading for consumers to know that an ad—which they may still have; they may have cut it out of a magazine or remember it from the television and it may still influence their purchase of a product—is under review. There could be considerable consumer detriment if the ad is still in their minds and they have not had a signal that the regulator is worried by it. That is one of the most important things to consumers.
At an earlier stage of the Bill, the Government were not motivated to accept our worries about reliance on “buyer beware”—caveat emptor—but how can consumers shop around if the ads on which they are basing their choice of products are perhaps going through what can be quite a lengthy procedure? It can take very many months, and an advertising campaign can be quite short, and all that time consumers do not know that procedures are taking place that might affect their choice of product.
In other areas, we know fairly quickly. If action is taken against a food factory suspected of contaminating food, we as consumers want to know immediately, and the Food Standards Agency lets us know straightaway when it is taking action. Similarly, if a garage had fixed a coach’s brakes and was accused of doing it less than satisfactorily—some of us are grandparents—I would not want my grandchild to be on a coach where the garage was already up before the Health and Safety Executive for not having done repair work properly. Similarly, as a shareholder, I would want to know whether BP did have some liability for pollution in the Gulf of Mexico before I parted with money to invest in that company.
There can be ongoing detriment if serious accusations are made and the people involved in parting with their money, as consumers or investors, do not know about it. I am not sure it was right that we heard nothing about LIBOR and the behaviour of banks until that first case was settled. Was it right that Equitable Life went on selling products even when there was a case pending? Many of the difficulties that arose were consequences of that ongoing sale. The first time these names came out there would be a lot of coverage in the press, but once we got over that hurdle—once we had got used to it and grown up—consumers are quite able to know the difference between an accusation and a finding. Keeping those hearings in the dark is quite against consumer interest.
We hope that the Government will not accept these amendments, but that in the next group they will be rather more sympathetic to a different approach to dealing with how these decisions are taken. For the moment, I hope that they can support my amendment but hold fire on the others.
Lord Sassoon
My Lords, this has been a particularly interesting debate. These are very important matters because we are talking about important new powers that the Bill gives to the regulators.
Of course I have some sympathy with what my noble friends are saying, but we have to recognise that the starting point is that there has been a huge amount of detriment over the years caused by the mis-selling of financial services. To talk in dramatic terms about human rights and people being proved guilty before they had had a chance to go through natural justice and so on is painting the picture from a completely wrong starting point. To be fair to my noble friend Lord Flight, who kicked off this group of amendments, those are not remotely the terms in which he came at this, so I do not bracket him in this. However, we have people who are quite properly setting out their interests but talking as if somehow everything was fine. It was not fine before.
Certainly the regulators equally fell down on the piece, and we may be giving them a power that is difficult for them to handle. I recognise that, and I will deal with that as I go through the argument. However, I think that we must start from a recognition that things need to change and that we have to think whether we can do better than trying to sweep things up after people have lost very significant amounts of money. We need to tilt the balance slightly in these matters, but I completely agree that there need to be safeguards in place and that whenever you create a new power for a regulator, there are dangers if that power is not properly exercised.
Lord Deben
I hope the Minister remarked in my comments that my major criticism of regulators was that they did not intervene in a whole series of areas where they should have. My argument was that if it is in the public arena when they do intervene, the public will be even more convinced, as the history shows, that everything else is going okay. In fact, the regulator has fallen down again and again. Many of the worst examples—the ones that he and I would be most cross about—are those where the regulator has not intervened.
Lord Sassoon
Perhaps my noble friend could listen to the argument. He said that he has asked for examples on a number of occasions but there has not been a single case where the FSA could say, “This would have been a useful power”. I have a long list of examples that the FSA could no doubt have given him. It includes the Winterflood market abuse case, where it tackled an illegal share ramping scheme, with warning notices issued in April 2007 but decision notices not issued until June 2008; the case of Gary Lester, a fraudulent mortgage broker, in 2008 to 2010; the Swift Trade market abuse case; and Atlantic Law and Greystoke. I could go on. I am sorry if my noble friend has been led to believe that there are no examples. The FSA can certainly give me examples. Of course it is important that there should be examples.
I have made one or two remarks about the general situation—which is that the Government believe that a new power is merited and that we need to recognise that we are trying to deal with detriment to the users of financial services here while affording proper protections to market participants. However, before I come back to some broader points, let me address the amendments themselves.
The first two amendments, Amendments 183A and 187A, seek to reverse a very specific change that the Bill makes to FiSMA, namely shortening the period for making representations after a warning notice has been issued from 28 to 14 days. We made this change in close consultation with the regulator, which noted that in many cases the 28-day window is not required at all. This may be because a case is straightforward and does not require such a long time for representations to be put together, because a person admits to the contravention or because that person does not respond at all. In such cases, having a mandatory 28-day period has the effect of unnecessarily slowing down the overall enforcement process, which is not in the interest of credible deterrence and the regulator’s efficient use of its time and resource. That is why we have moved to a starting point of 14 days.
I fully agree that firms should have adequate time to make representations. Although 14 days is the new minimum, it is important to note that it remains at the regulator’s discretion to specify a longer period—for example where it knows a case is particularly complex. The regulator may decide to extend the period from the outset. The decision whether to extend the period will of course be governed by the principles of natural justice and Article 6 of the European Convention on Human Rights concerning the right to a fair trial. I hope that that gives some reassurance to my noble friend on the narrow point; that is, it is not a blanket 14 days.
I am conscious that, in moving to the wider issue, we risk straying into the areas covered by the amendment of the noble Baroness, Lady Hayter of Kentish Town, which we are going to debate next, but I repeat that my starting point is very much the same as that of the noble Baroness; namely, we need to provide the regulators with this new power but to make sure that it operates proportionately.
Amendments 185A, 185B and 186 are all concerned with the new power for the regulators to disclose the fact that they have issued a warning notice in respect of disciplinary action to a firm or individual. Amendment 186 probes an important issue relating to the disclosure of warning notices; namely, whether the new power should apply in respect of individuals or approved persons. There are two reasons why we included warning notices issued under Section 67 in the list in new subsection (1ZB). First, the warning notices concern what are very clearly disciplinary matters, relating as they do to contraventions or knowing involvement in rule breaches or contraventions of EU requirements, so it is consistent that they should be included here. Secondly, it is important to remember that this is a power, not a duty, and that the regulators will be required to consider whether disclosure would be unfair to the person concerned.
Amendment 185B seeks to remove the requirement to consult from the power. I recognise that allowing warning notices to be disclosed is a major step change in regulation. It must be underpinned by proper procedures and safeguards. Consultation with the firm or individual concerned is key, because it is an important way in which the regulator can assess whether disclosure would be unfair and consider the possible impact of its actions. But I want to be clear that a requirement to consult the person affected does not mean that the FCA needs to seek their consent. That is clear and there is no getting away from it.
Amendment 185A seeks to delete the entire new power and revert to the current arrangements in FiSMA. I restate that the power to disclose warning notices is a key part of our vision for the FCA. It enables the FCA to regulate in a more proactive and preventative way. I have given a number of examples where, in its judgment, these powers would have made a difference in the past. They make transparency and disclosure a key pillar of its regulatory approach and enable it to have a credible enforcement function and deterrence strategy.
I do not agree with my noble friend Lord Flight about the read-across from the Standard Chartered case. I certainly agree with him and my noble friend Lord Deben—my noble friend Lord Hodgson of Astley Abbotts also touched on this—that there are real dangers in terms of the knock-on consequences which the FSA and the FCA will have to take into account, but that general proposition, which of course the regulators in the UK will have to take account of, does not make valid a direct comparison with the Standard Chartered case in the US. The power proposed in this Bill is substantially different in scope, safeguards and proposed application from the power used by the New York DFS in respect of Standard Chartered. I think that my noble friend recognises some differences, but our analysis is that the safeguards are materially different. So, yes, the FCA will have to take into consideration the impact of its notices, but I do not agree that we should pray in aid the specific details of the Standard Chartered case. It is important to be reminded and have on the record what my noble friends say—which is correct. For listed companies in particular, the share prices can and will react very negatively in these circumstances. If subsequently it happens with tax announcements that are somehow back-tracked and have been over the years by HMRC or the Treasury, the first effect on a share price is often much more negative than subsequently, when some decision or tax policy announcement is reversed. I take that point and I am sure that the FCA will be very mindful of it as it makes those decisions in the future.
A number of other points have been made by noble Lords. As to the more specific challenge of my noble friend Lord Deben about what would happen if the regulator got it wrong, there is a general danger which the regulator needs to bear in mind before putting out a notice. Where the regulator decides to take no further action after it has made public the fact that it has published a warning notice, it has discretion to publish the fact that it has issued a notice of discontinuance if the person to whom the warning notice relates consents to that issue. Where the regulator has made public the fact that it has issued a warning notice but then decides that a case will not proceed to a decision notice, it will also make public the fact that a notice of discontinuance has been issued.
There are various other questions about delay and injunctions. I do not agree that the power as drafted will cause overall delays to the enforcement process. The Bill does not require publication of the warning notice or of a decision whether or not to be published to be taken, challenged or appealed et cetera in order for the enforcement process to keep going. The only delay will be to the publication rather than to the action itself. That may not have been the point that the noble Baroness, Lady Hayter of Kentish Town, was making, but just to be clear: if it was, the underlying enforcement process keeps on going.
Of course, the FCA might face injunctions to prevent publication and that is part of the protection in the injunction process. We also stress that, without a requirement to consult the firm or individual in question, it is more likely that that firm would seek emergency injunctions preventing publication as a knee-jerk reaction. Therefore, we have the consultation duty and the final decision is taken by the FCA. There could be an injunction process, but we think that the right balance has been struck.
I could go on for a long time on this, but let me conclude. I hope that my noble friends will listen to the next bit, because I hear that, although we believe this is an important power, the question is whether it will be exercised properly and whether any further protection is needed. We are taking a bold new step in an untested direction and it has to be used responsibly. For that reason—and listening to this debate—I can say that we intend to return to this issue on Report in this one very specific way: that is, to make provision for a power for the Government to repeal the new warning notices power if at some point in the future the Treasury considers that the power or use of it by the regulators is, or may be, contrary to the public interest. This does not weaken in any way our commitment to this policy, or our belief that if used responsibly, which we expect it to be, the new power will form a vital part of the FCA’s regulatory toolkit.
I hope that what I have just said provides my noble friend with some reassurance that we will be mindful that the power is used in a responsible way which is in the interests of the greater good. Should that not be the case, we will act under a power which we intend to bring forward on Report.
Lord Peston
I admonish the Minister in a trifling way. It seems to me that the issuing of warning notices is enormously beneficial to those being regulated. That is one bit of a Bill that I do not like which I am totally in favour of. I am surprised that the Minister would even consider any backtracking on that. It is immensely beneficial to people to be told, “We are concerned about what you are doing and would like you to modify your behaviour so that it does not create a loss to the public interest”. That is one of the really good bits of the Bill.
Lord Sassoon
My Lords, let me stress again that we are not backtracking at all. Our commitment to the new policy instrument remains extremely firm. It may be that the industry will come to take the view expressed by the noble Lord, Lord Peston. We will see. I have been struck by not only our debate this afternoon but our conversations in the run-up to it that because we are taking such a bold step, which I believe to be the right one and which I believe that the FCA will exercise properly, we should have the reserve power, which we do not have in the Bill, should things not turn out as I and the noble Lord, Lord Peston, expect.
I hope, on the basis of that explanation of our intention, that my noble friend will feel able to withdraw his amendment.
Baroness Hayter of Kentish Town
My Lords, would that happen by an order that would come back to this House, or would it just be by Treasury decision? That is a big power to take away without parliamentary scrutiny.
Lord Sassoon
My Lords, I said that we intend to come back to the House on Report with a power to reflect the concerns that have been expressed. As to how the power will operate, noble Lords will see a draft of what we are considering in good time before our debate. For a power of this importance, I would expect it to be in secondary legislation subject to the affirmative procedure, so there will be an opportunity to discuss the repeal in this House, but let us see it when it is drafted.
Lord Flight
I am not entirely clear where the Government are. As I understand it, the present situation is very satisfactory. If the FSA thought that the noble Lord, Lord Peston, had been a naughty boy, it would have a word with him and tell him so. It might make that notice public but, first, there would be a fair judicial inquiry into whether what was alleged by the FSA was correct and accurate. That is handled by the Regulatory Decisions Committee.
I cannot understand why the Government want to sideline the RDC, because it seems to me to be the check on accuracy and fairness. The issue about warning notices being public is that, in today’s world, if it is made public that the FSA has warned the noble Lord, Lord Peston, that it thinks he is conducting his business dishonestly, his career and reputation are dead. He is a guilty man: strike his head off, basically. We are living in that sort of world, which is why it is a serious matter.
If the Government are saying that they are very happy to have an independent judicial process before warning notices are published and as I understand the amendment that the noble Baroness, Lady Hayter, has tabled, which we are coming on to debate, then I have no problem, but I am extremely uncomfortable at the officers of the FSA being able to gang up and publish warning notices themselves.
I have experienced indirectly a number of examples where, to be candid, the accuracy and research of the FSA has been questionable. I know one business that was raided and accused of insider dealing. Eventually the alleged insider news was shown to have been in the newspapers three weeks previously. The situation was that someone on the wrong side of a takeover battle wanted to get at somebody because they thought that they would vote their shares the other way, so they phoned the FSA and said, “We think so-and-so has been insider dealing”, and the FSA went roaring ahead without checking at all. I am afraid I have encountered other situations where the FSA has not been professional in putting together its case and checking it before taking action.
Therefore, I am concerned that, if it is just left to an individual and their chums in the FSA to go ahead and publish warning notices without any sort of fair judicial review, there is scope for injustice. It is not helpful to the consumer either because, if the FSA is subsequently proven to have got it wrong and to have been unfair, it damages its own reputation.
I am not quite clear where the Government are coming from because of this unfortunate division of the amendment of the noble Baroness, Lady Hayter, which is yet to come, and this group of amendments. If the Government are to support some form of alternative fair judicial process, I think that everyone in the Committee will be happy. If they are not, I think that quite a lot of people will be less than happy.
I merely ask the Minister whether there is an intent to have some form of judicial review, as we are about to debate. Without some knowledge of that, it is not possible to know how to react to the comments.
Lord Sassoon
All I can say to my noble friend—which I hope he would expect me to say—is that I am not going to pre-empt what I hear in the next debate. I want to listen to the next debate and hear what the Committee has to say. I am not responsible for the groupings here.
Lord Flight
In anticipation thereof, I shall withdraw my amendment but, if it is not dealt with satisfactorily, I intend to put it to a vote at Third Reading.
Lord Sassoon
Lord Sassoon
“( ) In subsection (7A), for “the Authority” substitute “a regulator”.”
Lord Turnbull
Can the noble Baroness clarify for me what right the accused has to make representations to this committee? Does it simply take the presentation of a case from the FCA and examine that for its strengths and weaknesses, or is representation from those accused of the regulatory breach built in? To answer the noble Lord, Lord Peston, it is a criminal offence to leak the existence of a decision notice before its appropriate time.
Lord Sassoon
My Lords, I go back to the overall picture on this and to the previous group of amendments. This is a necessary area of additional powers that must be in the authority’s armoury. We will take a power to look at the whole thing again if it does not operate properly. However, on this specific amendment, we are probably all agreed—this is where I can be sympathetic if not positive in response to the challenge by the noble Lord, Lord Peston—that it is necessary for there to be appropriate checks and balances. The question is whether we can rely on the judgment and good sense of the successor regulators to do appropriate things without having the stick of legislation on them. In this specific area, everyone seems to have plenty of criticisms of the FCA, many of them justified. However, the Regulatory Decisions Committee was established by the FSA, although it is not required in statute.
I understand why people are nervous about what the successor bodies will be putting in place, but it is important to recognise that the RDC structure—which everyone this afternoon seems to love and wants to hard-wire into the legislation in some form—was put in place by a regulatory body that was given a broader remit, used its judgment as to how best to have this independent challenge and scrutiny of decisions, and put that in place. Now we are saying, which I do not agree with, “Well, the FSA did such a good job in putting it in place that we are not going to trust it to exercise appropriate judgment on your successor’s shape, so we need to hard-wire that in”.
My starting point is that the authorities will establish appropriate procedures. This afternoon we are very much talking about the FCA side of it. What is appropriate for one authority is not necessarily appropriate for the other successor authority. While I am of course sympathetic to the end objective here, the question is what it is necessary to put in place that goes beyond the current framework within which the FSA established the RDC, which people like. I believe that it is appropriate to leave the successor authorities to make their own decisions on this point.
Lord Barnett
I suppose that I should not be surprised. The noble Lord has heard a very serious case made from all sides of the House and he cannot even bring himself to say that the Government will at least consider a possible amendment which may not be exactly the same as that which my noble friend suggests. I suppose that the regulators, the new FCA, may be perfect and will never make a mistake. But as regards this modest little amendment, he could at least say, before my noble friend perhaps seeks to withdraw, that the Government would be willing to consider it. Can he not even say that?
Lord Sassoon
With all due respect to the noble Lord, this slightly misses the point. As I have explained, within much the same remit under FiSMA, to which we have added one additional piece of protection, the FSA exercises the judgment and comes up with the structure that this Committee seems broadly happy with. It is entirely fair and proper to allow the successor body the space to come up with a decision which finds approval in decisions that were previously taken about this structure. Therefore, based on our approval of how it has done up to now, we should have confidence that it will do it again. It has heard loudly and clearly the support that your Lordships will give it if it takes that approach.
Lord Peston
I am really lost as to what the Minister is saying. Apart from the fact that he was made a very good offer—I would have thought that the Minister, in his right mind, would never reject a good offer—is he saying that this amendment is not needed because the regulators could set up committees of this sort themselves with no statutory powers behind them and that they can do exactly what is in this amendment already? Can he guarantee that it is right that each regulator can set up a committee so the only difference is that we are saying that they must and he is saying that they can? For the record, is that what he is saying?
Lord Sassoon
I am sorry that I have not been sufficiently clear. Yes, that is exactly what I am saying. In fact, I am saying more than that. Within the very similar provision for FiSMA, that is exactly what the FSA did. Not only can it do it but it has a track record of having done that. I think we should trust it to do whatever is appropriate again.
Baroness Hayter of Kentish Town
My Lords, I am extremely disappointed. We come back to “may” and “must”, which my noble friend mentioned. He has just had a birthday and he is still talking about “may” and “must”. If the FSA had not put on its website that it would not continue with this, perhaps our trust that it would continue with the RDC would be greater.
I confess that I have some form on this. In 1981, I worked on a Royal Commission on criminal procedure which tried to persuade the police that they should take their cases to an independent prosecutor. The Committee will not be surprised to hear that they did not want that to happen. In the Labour Party, it used to be the NEC that took cases against individuals. We were taken to court and told that we could not do that, so I ended up on the disciplinary committee to ensure that that was separate and independent of the National Executive Committee of the Labour Party. The barristers did not get it right and for a time the Bar Council used to use the same body to discipline its members and was taken to court. It had to set up the BSB complaints committee—that is another declaration of interest as my partner was vice chair or something of that—to ensure that there was that independence among the people who were presenting the cases and those hearing them. Whether there are two panels—one to see whether there is a case to answer and one to hold a hearing—is an issue of detail which I did not go into. I think that is for regulator. To trust the regulator, who is, if you like, the prosecutor—I do not like using the word “prosecutor” but perhaps we can bear it for the moment—to decide what sort of committee will challenge its evidence, seems to me not quite the correct way to approach this.
Lord Sassoon
“( ) In subsection (7), omit “board members,”.”
Lord Sassoon
“In section 221 (powers of court), in subsection (2), after “director or” insert “other”.
In section 222 (statutory immunity), in subsection (1), omit “board member,”.”
Economy: Deficit Reduction
Lord Sassoon Excerpts(12 years, 1 month ago)
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Lord Barnett
To ask Her Majesty’s Government what is their latest estimate of the debt to gross domestic product ratio in 2015 under the current deficit reduction plan.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Office for Budget Responsibility produces the official fiscal forecasts. The OBR’s March 2012 forecast shows public sector net debt peaking at 76.3 per cent of gross domestic product in 2014-15 and subsequently falling in 2015-16 consistent with the Government’s supplementary target for debt. The OBR will publish updated forecasts alongside the Autumn Statement on 5 December.
Lord Barnett
My Lords, I thank the noble Lord for his Answer. Is he aware that there has been a later report from a more independent source—namely, the IMF—which states that in 2015 the net debt as a percentage of GDP will be about £50 billion more than the Chancellor previously expected? In those circumstances, does he not accept that the OBR is less independent for the very good reason, as was set out in the beginning, that its forecasts are influenced considerably by the general and regular meetings that it has with the Chancellor and Treasury officials? How many have there been in the past 12 months?
Lord Sassoon
No, my Lords, I do not accept for one minute any questioning of the independence of the OBR. It was set up on a statutory basis through a Bill to which the noble Lord, Lord Barnett, contributed. It is set up totally independently under a respected head, Robert Chote, and his team and I refute absolutely any question that it is not independent. All of its meetings with the Chancellor and the dates on which data are transferred over are transparently set out on the Treasury website.
Baroness Kramer
My Lords, does the Minister agree that lack of access to reasonably priced credit by small businesses is holding back both those businesses and general economic growth? Does he further agree that with funding for lending now in place there is no excuse for the banks not to make that credit available, especially as they no longer have to put capital on their books to support those loans?
Lord Sassoon
My Lords, I certainly agree with my noble friend that the question of funding, particularly for SMEs, continues to be of considerable concern to the Government. That is why we have been able to use the strength of the national government balance sheet which derives from our deficit reduction plans to put in place the funding for lending scheme, to which my noble friend referred, and the UK guarantee scheme of up to £50 billion for infrastructure projects so that we can ensure that credit continues to flow.
Lord Peston
My Lords, I take it that the noble Lord’s answer implies that the Government intend to pursue continuously their ludicrous economic policy, the effect of which is that the Government engage in cuts, those cuts lower aggregate demand, the tax revenue goes down and some benefits go up so that the budget deficit increases, whereupon they engage in more cuts, and this process goes on until the economy implodes. That is the danger before us. What is required is a change in economic policy that leads to some expansion of the real economy.
Lord Sassoon
My Lords, I do not know whether the noble Lord, Lord Peston, and his noble friend Lord Barnett have been comparing notes, but the noble Lord, Lord Barnett, was quoting the IMF approvingly at me only a minute or two ago. On this point, only a week ago, on 9 October, a senior official of the IMF said that at this stage:
“The policy mix in the UK, which consists of adjusting fiscal policy, reducing deficits, at the same time supporting the economy with a very accommodative monetary policy is the right way to go”.
Lord Ryder of Wensum
My Lords, can my noble friend please tell the House about the last time that the IMF forecasts for the British economy were accurate?
Lord Sassoon
My Lords, I am not going to give a commentary on the IMF’s forecasts, or anybody else’s. We should wait until 5 December to see what the Office for Budget Responsibility has to say in its renewed forecasts.
Lord Davies of Oldham
My Lords, are we not experiencing a double-dip recession that is longer than any since the war, and is it not the case that forecasts are belied by the facts? The Government are borrowing £9.3 billion more in the first four months of this year than in the same period last year. How on earth can the Minister pretend that the present policy is working?
Lord Sassoon
My Lords, we have only to wait until 25 October to learn the third-quarter growth number; then we will know the latest state of play in the economy. As to the question about levels of debt, I find it extraordinary that a Front-Bench opposition spokesman should give us a lecture on debt plans. Does the noble Lord, Lord Davies of Oldham, recognise the recent IFS analysis of Labour’s plans, which said that under the so-called Darling plan, total accumulated debt would be £201 billion higher than under the present Government’s plans? That level of debt would see the AAA rating gone for a very long time and would see almost £4,000 of debt per man, woman and child in this country added to the debt load we inherited. Is that what the noble Lord is advocating?
Financial Services Bill
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Lord Eatwell
My Lords, I rise to raise an important issue concerning the conduct of the Committee stage of the Bill. On 3 October—last Wednesday—I wrote to the noble Lord, Lord Sassoon, in these terms:
“The Wheatley study on the future of LIBOR has produced a series of conclusions with which the Labour Party is broadly in agreement. I congratulate both Martin Wheatley and his team for their achievement, and the Government for initiating this investigation.
I note from the statements of Treasury ministers, and from the Treasury website, that it is the Government’s intention to implement the Wheatley proposals by means of amendments to the Financial Services Bill. No such amendments have been tabled as of yesterday”.
That was 2 October, and indeed no amendments have been tabled as of today.
“I presume that such amendments will involve predominantly clauses that have not yet been debated (as suggested by reference to particular FSMA clauses in the Wheatley Report itself)”.
The Wheatley report refers to the first clause that we will debate today.
“However, it is possible that you will also need to introduce amendments to clauses already debated, in which case it would be entirely inappropriate to introduce such amendments at Report. Given the importance of these issues it is imperative that the House have the opportunity to debate these matters in the freedom of Committee, rather than under the constrained rules of the Report Stage.
May I therefore have your assurance that should the Government, as a consequence of the Libor scandal and of the recommendations in the Wheatley Report, plan to introduce amendments to clauses 1 to 5, or at some later stage, amendments to clauses at that time already debated, that you will re-commit the appropriate clauses, hence ensuring that the House of Lords has the scope for full debate”.
It has since become clear that the Government intend to introduce on Report all the entirely new material presaged in the Wheatley report. The noble Lord, Lord Sassoon, wrote to me on 2 October—the day before I wrote to him which was somewhat mysterious. He said:
“I do not believe that it is necessary to recommit the Bill, and see no reason why a substantive debate on the relevant clauses at Report stage would offer insufficient opportunity for scrutiny by the House.
Re-commitment would risk unnecessarily delaying the implementation of both these important reforms to LIBOR setting processes, and of the equally urgent reform of the UK’s financial regulation regime which we have been debating through the Committee sessions to date”.
The noble Lord’s reply does not take into account what I actually asked for. First, I was not asking for total recommitment. I was asking only for the clauses which deal with entirely new material from the Wheatley report to be recommitted. Secondly, I believe very strongly that with respect to financial regulation it is not an issue of quibbling about delay but of getting it right. These enormously complex matters deserve the iterative consideration which is possible only in Committee. I remind noble Lords that on Report they can speak only once. Thirdly, it is quite wrong to deny this House the opportunity to consider entirely new and complex material within a Committee setting. I would therefore ask the noble Lord, Lord Sassoon, to reconsider his rejection of my proposal that the relevant clauses be recommitted.
If he is unwilling to do that, perhaps I may make a constructive proposal. Either he or the Chief Whip, who unfortunately is not in her place, should give an assurance that the rules of Report will be relaxed for consideration of what might be called the “Wheatley” clauses when they are introduced.
Lord Barnett
I warmly agree with my noble friend on the Front Bench, and it gives me an opportunity to refer to the noble Lord, Lord Sassoon, himself. In the Recess I read with regret that he proposes to retire at the end of this year. He and I have had a few exchanges across the Floor and I will miss them, but I look forward to continuing with those exchanges until the end of the year.
Not only do I agree with my noble friend in the points he has made about the Bill, what is even more important is that the whole Bill should be dropped for the moment. There is no hurry for it and much of it will cause great damage to financial services in this country. As the noble Lord, in his new position, is no longer going to be quite so subservient to the Chancellor of the Exchequer, I certainly hope that he can tell us the truth, drop the Bill for the time being and, as my noble friend has suggested, come back to the House with a new one.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I thought we were going to talk about some clauses on LIBOR, but we have now strayed, in the imaginative way that the noble Lord, Lord Barnett, does, into scrapping the Bill. I can assure the House that the Government intend to carry on with this Bill according to the timetable because it is vital that we get the financial regulatory architecture right. It is an architecture that failed us miserably in the financial crisis, so we will of course press on with the Bill.
As noble Lords know, LIBOR is the most significant interest rate benchmark used by the market—not just the UK market, but globally. It underpins contracts worth at least $300 trillion, so it is imperative that market confidence in the rate is restored quickly in order to ensure that, in the future, contributors to this benchmark act with greater integrity, promoting financial stability, legal certainty and business continuity. It is important to be clear about that. It is also important to be clear that the Government have not yet announced our response to the Wheatley review, so what the noble Lord, Lord Eatwell, raises is a somewhat hypothetical question at the moment. He notes correctly that my right honourable friend the Chancellor of the Exchequer has indicated that the Financial Services Bill is the Government’s preferred legislative vehicle to implement new policy arising from the review. Should the Government decide to accept Martin Wheatley’s recommendations in full, we anticipate that the clauses which would implement the review will indeed be debated at the Report stage of this Bill, and the draft clauses will be published in good time in advance of that date.
As noble Lords with longer experience of the House than me will well know, recommitment is an extremely unusual procedure. Notwithstanding what the noble Lord, Lord Eatwell, says, it would risk causing delay not only to these important reforms of the LIBOR setting processes but to the Bill itself. It is quite routinely the case that government amendments setting out new policy are tabled at the Report stage, and in this case, as the noble Lord has confirmed, there is broad cross-party consensus in favour of the policy. There has already been wide debate of the issues during the period when Mr Wheatley was carrying out his work. In the light of that, I believe that substantive debate on the relevant clauses at the Report stage will offer sufficient opportunity for scrutiny by the House, but I am sure that, in the normal way, the usual channels will consider the business of the House, as they always do. That is the appropriate way to carry this sort of thing forward.
This is a significant piece of legislation, which has already benefited from a very constructive approach to scrutiny from your Lordships’ House. We will do all we can to reinforce that debate including on any clauses we bring forward on LIBOR through, among other channels, briefing parliamentarians separately outside the formal debate. However, I suggest that for this afternoon it might be more productive to carry on with the sixth day of our scrutiny of the Bill.
Lord Eatwell
My Lords, although I agree with the noble Lord, Lord Sharkey, that it is enormously important that we improve the flow of funding to small firms, particularly given the complete failure of the Government’s attempts to improve the funding through banks to small firms, I believe that we should approach this proposal with great care. The problem with crowd funding is that crowds can often be subject to hysteria. We have seen hysterical funding levels in what might be deemed to be fashionable or popular companies: lastminute.com comes to mind, as does the recent launch of Facebook. In both cases, excessive hysteria associated with the popularity of the particular company led to investors losing quite a lot of money.
However in the SME sector, the fundamental problem for small investors is the risk to which they are exposed. They will necessarily have significantly less information than they would from a listed company. Given that lack of information, and the high mortality rate of small and medium-sized companies—thankfully they have a high birth-rate as well—it is likely to lead to a lot of not-very-well-off people losing significant sums of money.
Lord Sassoon
My Lords, I will put some things to one side before I deal with the main substance of my noble friend’s argument in this short and interesting debate around crowd funding. First, for the help of the noble Lord, Lord Barnett, there is indeed no Section 417 because crowd funding has been introduced into this Bill by my noble friend Lord Sharkey. I am sure that in due course he will table a Section 417 which will make us all a lot clearer about the definition. However, for the interim benefit of the noble Lord, Lord Peston, and rather than me banging on about what crowd funding is and boring the rest of the House, I draw his attention to the FSA guidance on this topic put out in August this year. It gives a helpful short introduction to what it is all about.
Lord Peston
Perhaps I may interrupt the Minister. As I listened to my noble friend, it suddenly dawned on me what we were talking about. It really does mean crowd funding and, following what my noble friend said, there is a very simple answer to it: do not do it.
Lord Sassoon
That is one way of dealing with it, but it is not the way in which the Government wish to deal with it, which I shall explain in a moment. I say to my noble friend Lord Stewartby that I have a hunch that before we pass this clause we will have a discussion about timetabling. If he will forgive me, I shall come back to the matter then, but if we do not I will make sure that I raise the timetable in question later.
Crowd funding is an innovative new source of funding for start-ups and other small enterprises. I share my noble friend’s hope that it will continue to grow in the coming years, so my answer to his first question is a resounding yes. However, on his second question, which is the subject of the amendment, while I understand my noble friend’s enthusiasm for establishing discrete legislative provision to bring this very new sector into regulation, I do not agree that it is needed at this stage and so cannot accept the amendment.
My noble friend raised the US JOBS Act. In the US, there was a very distinct problem and a pressing need, which led to the introduction of that Act. The situation is different in the UK. Among other things, there has been no clarion call from industry for more regulation. However, we should not be complacent, and the FSA is not waiting until there is a problem before doing things.
Platforms seeking to operate what are in effect collective investment schemes must obtain authorisation from the FSA. The FSA already has powers to take action against firms operating without appropriate authorisation. It is up to the FSA to work with platforms seeking to offer equity returns to their investors to ensure that they obtain relevant permissions before the activity that is most likely to apply here—arranging deals in investments—starts. This is happening already, with one such platform securing authorisation from the FSA prior to its launch.
Of course, the regulator must balance the need to allow innovative models to flourish with ensuring that consumers understand the risks involved with new platforms. In this regard, the FSA’s recent guidance on crowd funding makes clear its concerns, which are evidently shared by the noble Lord, Lord Peston. This is the right sort of regulatory response. It shows that we should not rush to create new regulated activities here.
I am also concerned that amending the Bill in this way could create confusion that stifled the growth of the new sector. There are currently many forms of crowd funding. We do not yet know precisely what definition my noble friend had in mind, but the vast majority of these platforms ask customers to make donations rather than investments. They have been very successful in doing that. The world’s largest crowd-fundng site, Kickstarter, for example, which will launch in the UK very soon, raised more than $100 million for creative projects in the past year. A platform such as that does not pose the same risks to investors, who expect no money in return for their donation, so we have to be mindful of the risk of legislating in a way that does not fully take account of the breadth of the businesses in this new area.
In conclusion, although industry standards and further FSA and FCA guidance may have an important role to play in future, my view is that the regulatory structure proposed in the Bill is suitably flexible to support the growth of the full variety of crowd-funding platforms, with a careful eye on the needs of the consumer throughout. With that, I hope that my noble friend will agree to withdraw his probing amendment.
Lord Sharkey
I thank the noble Lord for his answer. The noble Lord, Lord Peston, invited me to extend his education, but I think I should decline any such attempt. The noble Lord, Lord Barnett, did not believe that there was a definition there, and he was right—there is no definition. I shall not do it again now, but I did try to explain what forms crowd funding currently takes. Perhaps I did not give a clear impression of how important or what size it currently is, and that is my fault, but crowd funding exists and plays quite a large part in the landscape of small companies, both in the United States and already here in the United Kingdom.
I think I noticed an expression of perhaps amazement on the face of the noble Lord, Lord Peston, at the notion that people should donate $100 million to commercial enterprises for no return at all—an aspect of crowd funding that clearly he was not familiar with.
Lord McFall of Alcluith
I support my colleague’s comments on this clause. Only last week I received a text saying that there was £2,200 waiting for me to claim as a result of that; I think, therefore, that something needs to be done. In relation to PPI, only six weeks ago both the banks and the consumer organisations had a meeting to sort out the problem with claims management simply because they said that the Ministry of Justice is not fit to look at it at this time. There are big problems here for the Minister; there needs to be consultation. If he gave us an indication today that the department was engaging in that, it would give some reassurance to those who are plagued by claims management companies at the moment.
Lord Sassoon
My Lords, my comments on Amendments 147L and 147M will be brief, because we discussed both issues in some depth in earlier sessions of the Committee. Amendment 147L seeks to enable the activities of debt adjusting and debt management to be regulated under the Financial Services and Markets Act. I can reassure the Committee on this point. The effect of Amendment 147L is already achieved by Clause 6, which enables all activities currently regulated by the Office of Fair Trading under the Consumer Credit Act to be transferred to the FCA under FSMA. I hope that is a very clear answer and the direct reassurance for which the noble Lord, Lord Stevenson of Balmacara, was asking.
I will not be quite as brief on Amendment 147M; this continues to be an important area even though we have discussed it before. The amendment seeks to add the services provided by claims management companies to the list of matters that can be regulated under FSMA. I set out in some detail in a past session of the Committee why I do not believe that the activities of claims management companies should be regulated by the FCA. The key point is that claims management companies are not financial services firms. Yes, it is correct that a substantial proportion of their activity at the moment relates to financial services, but—as the noble Baroness, Lady Sherlock, has pointed out—they may move their focus of attention back to, or on to, something quite different in the future. However, that does not alter the fact that they focus on financial services at the moment. It does not alter the fact that they have no place in the scope of a regulator concerned with financial services and only financial services, which is what we are talking about here.
I agree, of course, with the noble Lord, Lord Stevenson of Balmacara, that there are a lot of detrimental practices in the sector that need to be tackled. I reiterate that work that is already under way to strengthen the existing regime for the regulation of claims management companies. Before the summer, I flagged that the claims management unit at the Ministry of Justice was doing work to strengthen the conduct of rules governing the sector. That work is proceeding apace and further steps are being taken. I will take back the noble Baroness’s comment about resources but I have no evidence that this work is being hampered by inadequate resources.
Baroness Sherlock
I am very grateful to the Minister. If the barrier is not resources, will he advise the Committee of what he thinks it is? If there is no problem, is he satisfied with the regulation at present?
Lord Sassoon
I am not satisfied with the conduct in the industry, which is why in August, since we last debated these matters, as the noble Baroness I am sure is aware, the Ministry of Justice announced that, from April 2013, claims management companies will be banned from offering financial rewards or similar benefits as an inducement to make a claim. I understand why there are concerns but, since we last discussed these matters, there has been significant progress.
As has already been noted in this debate, proposals have been consulted on to tighten the conduct rules with which all claims management companies must comply as a condition of their licence. The consultation closed on 3 October and the responses are now being considered. Again, the target date for implementation is April 2013. Also from 2013, the Government intend to extend the Legal Ombudsman’s jurisdiction to provide an independent complaints and redress service for clients dissatisfied with the service provided to them by the claims management companies with which they have contracted.
I believe that significant and important work is going on, and that that is the right approach. I hope I have been clear on why I cannot support proposals to make the FCA responsible for claims management regulation, which applies as much now as it will in future. The Government will therefore not be including the activities of claims management companies in the enabling provisions in Clause 6. With reassurance on the first amendment and the explanation of all the work going on more generally, I hope that the noble Lord will feel able to withdraw his amendment.
Lord Stevenson of Balmacara
I thank the Minister for his response. I accept his assurances on Amendment 147L, and I am grateful to him for making it very explicit that the intention and the practice will be that debt management companies will clearly come under the scope of FiSMA and therefore the FCA. Perhaps I may leave with him the thought that there may be a slight divergence of view, unlikely as that may seem, within the Government. As I mentioned in my introductory speech, there is still an ongoing commitment by the Department for Business, Innovation and Skills to produce some sort of protocol which will affect all DMPs. I may write to the Minister about this but it seems to me that where we have an assurance on his behalf that there will be full coverage of DMPs within the scope of the current Bill, as he mentioned, it is not quite clear where BIS and its draft protocol will lie. I should like some assurance on that but I will not contest this on that point.
If I understood the Minister correctly, I think he was making three points on Amendment 147M. The first is that, in a way that is clear to him but not, I am afraid, to me, claims management companies are not financial services companies. If they are dealing with claims, they are dealing in some sense with a form of financial service. The examples we have had, which move away from pure financial services, concerned whiplash injuries. It seems to me that these companies would not be involved if there was no money somewhere in the circuit. Therefore, if that money is available to an individual who wishes to claim for it and is being assisted by a CMC, under a very broad definition, that would be a financial service.
Lord Sassoon
I do not want to be picky on this point but would the noble Lord, Lord Stevenson of Balmacara, contend that the legal profession, which deals with claims all day every day to recover money for people, should be brought within the regulation of the FCA? I clearly said that at the moment it is dealing with some very important matters which are financial services matters but that is very different from defining a claims management company as a financial service. Is the noble Lord suggesting that lawyers and all sorts of other people who deal with money should be defined as such?
Lord Stevenson of Balmacara
It is not for me to suggest anything. I simply wish to draw out that, simply because of the name or the fact that, on occasion, these companies do not deal strictly with financial services, they are somehow excluded from any regulatory oversight of their activities. Yes, to extend the point as the Minister does makes it seem unlikely, but they deal with financial services at the moment and are unregulated in that sense. I just want to make clear our feeling that this is something to which we may have to return.
My second point is that the Minister said that detrimental practices exist in the sector and that he was not satisfied with the situation, yet he has decided that there is no need for any further action in the Bill. That seems a little unrelated to the facts as we understand them.
Thirdly, he made the point, which we accept, that there are other activities going on here. Indeed, we hear that there will be a report shortly on the result of the consultation done by the Ministry of Justice and we may be able to look forward to action in April 2013. Therefore, I think that we need to keep this under review to see whether the movement is in the direction that we wish it to be to focus more clearly on where claims management companies are operating within the financial sector, and that the detrimental practices get sorted out. With those thoughts in mind, I beg leave to withdraw the amendment.
Lord Sassoon
I am grateful to my noble friend Lady Noakes for raising questions about timetabling. I am very aware that we are putting an enormous burden on industry with many aspects of the implementation of the Bill. Of course, the flood of European regulation does not wait just because we are putting our own house in order in an architectural sense through this Bill. So the Government are very well aware of the issues here.
Before I deal briefly with the specifics on consumer credit, it may be worth confirming, or announcing, the Government’s plans on the cutover date between the FSA and the new authorities. That is something that it is necessary for the industry to have certainty about, even before you get on to consumer credit. To provide the certainty that enables industry and the new authorities to proceed with their planning, we are now sufficiently advanced in the Bill process to announce that our intention is to deliver cutover to the new authorities created by the Bill on 1 April 2013.
When it comes to consumer credit, we are aware of the need to allow both the FCA and the many firms involved to manage the transition smoothly. We will continue to work closely with the FSA, the OFT and all stakeholders to identify the best approach to implementing the new regime and will consider phased introduction of any new requirements. As my noble friend rightly identifies, Clause 91 allows for significant flexibility in the approach to implementation. We will consider the best approach. As my noble friend knows, we are not final in our thinking on this. We are considering options which could involve temporary grandfathering of firms with a licence under the Consumer Credit Act who wish to transfer to the new FiSMA regime. That would deal with some of the concerns by giving both firms and the regulator more time to prepare. We will, of course, consult on the transition arrangements as well as the detailed proposals for the new FCA regime early in 2013.
I hope I have been able to reassure my noble friend that we do indeed take seriously these concerns and the timing of the basic cutover. That is why we have put flexibility into the Bill and we will use it for this purpose.
Lord Davies of Oldham
My Lords, I am grateful to both my noble friends who have spoken on this issue and very much agree with the arguments they presented. Amendment 149AB in my name merely seeks to take this matter one obvious stage further. My noble friends have put the emphasis on effective consultation so that the Treasury presents a position that is the result of informed judgment. However, the other part of informed judgment is that Parliament should reach a decision on what the Treasury has arrived at regarding such an important matter as the powers to amend Schedule 6 of the Financial Services and Markets Act. The Bill significantly changes the architecture, which is a phrase frequently used by the Minister. With our amendment, we are merely seeking assurance that, after effective consultation and deliberation by the Treasury, the orders are put before Parliament, whereby its views can be heard before anything comes into effect.
Lord Sassoon
My Lords, I shall try to assure the Committee that none of the amendments is necessary or appropriate. If the noble Lord, Lord Peston, will forgive me, I am not sure that we have a procedure for oral amendments. No doubt we shall have some interesting discussions about “must” and “may” later in this Committee session. Looking at this paragraph, in my opinion, x or y “will” be the case and, when written the other way, the word turns into “would”. If an opinion is that something will be the case, then “would” rather than “should” is entirely appropriate here. However, I have now fallen into the trap of getting into a debate on this non-amendment. Of course, if the noble Lord really insists, what can I do but give way?
Lord Peston
If the Minister will read a few lines further on in his own Bill, he will see the words,
“by reason of urgency, it is necessary to make the order”.
That can make sense only if the word “should” is used. It cannot possibly be a meaningful part of the Bill if the word “would” is used. The Treasury must believe that there is a reason of urgency for this to take place and so we infer that “should” is the right word. Otherwise, reasons do not apply, and it reads more like something happening by chance, so let it happen. However, that is not what this bit of the Bill is about. I hate to tell the noble Lord, but on this point I think I understand his Bill better than he does.
Lord Sassoon
On this occasion, I am quite confident in my use of the English language, even if the noble Lord understands the Bill better. Outside the Chamber we can debate who understands the Bill better. I am quite clear that “would” is the correct word here because it refers to something which is expected to have the effect of extending regulation. I shall not detain the Committee on what we are not discussing, so let us talk about what we are discussing.
Amendment 148 would require the Treasury to consult on the order made under Section 22 where it would result in an unregulated activity becoming regulated. The Government recognise the best practice established in this area by the Department for Business’s code of practice on consultation. I can assure the Committee that the Government will continue to observe the code wherever possible when conducting formal written consultations. However, I do not think that it would be appropriate to write this requirement into this legislation, as it is not written into many other pieces of legislation. Indeed, the Government generally consult on changes to the regulated activities order. I cannot find any case to date where the Government have introduced substantive changes without consultation. Having said that, it may not be appropriate in all cases: for example, if an urgent change needs to be made to bring an activity into prudential regulation that may cause a financial stability risk. For that additional reason, I think it would be wrong to require consultation.
Amendment 149 would require the Treasury to consult on the first Section 22A order and any subsequent orders which amend the scope of PRA regulation or which amend primary legislation. The Section 22A order sets out the scope of PRA regulation. Here, too, the Government agree—and I am happy to restate it—that it is preferable to consult, and indeed the Treasury will be consulting on a draft of the Section 22A order shortly. I do not think it is necessary to write such requirements into legislation.
It is also worth the Committee noting that both of these types of orders would be subject to the affirmative procedure in all cases. Parliament will always have the chance to consider these amendments, and to consider whether the Government have presented suitable evidence—through a consultation in the normal event—of the need for any change. I think that that backstop is an important point here.
I turn now to Amendment 149AB in the name of the noble Lord, Lord Davies of Oldham. He has tabled, I think, only one amendment out of the many hundreds that this Committee has already considered and because I made a concession on it, his batting order is going down from a 100% to a 50% success rate at a stroke. I agree with the noble Lord that orders made by the Treasury that amend Schedule 6 should be subject to the affirmative procedure as they concern changes to the PRA’s and FCA’s threshold conditions, which are the cornerstones of each authority’s regulatory approach. However, we have already provided for this. Clause 46(2), on page 130, includes orders made under Section 55C in the list of orders that should be subject to the affirmative procedure. Therefore it is a simple matter to understand that Amendment 149AB is not needed.
I move to Amendment 174, tabled by the noble Lord, Lord McFall of Alcluith. I will briefly explain the purpose of new Section 141A of FiSMA. It gives the Treasury and the Secretary of State a narrow and technical order-making power to amend legislation that makes reference to the rules of either regulator or to guidance issued by the FCA where the regulator has altered or revoked its rules. This is a sensible approach to ensuring that references to rules and guidance made by the regulator in legislation remain accurate and up to date.
It would not be appropriate to require the Treasury or the Secretary of State to engage in consultations before making amendments to legislation that are a direct consequence of changes to rules or guidance made by the regulator. This would cause unhelpful delays to the process of updating the affected legislation, causing possible confusion and uncertainty for firms and other persons affected. Of course, except in cases of urgency there will already have been consultation on the substantive changes being made to the rules or guidance, as this is required of the regulators.
I hope that with those explanations the noble Lord, Lord McFall, will feel able to withdraw his amendment.
Lord McFall of Alcluith
My Lords, it was not my primary aim to promote a deeper understanding of the English language but I did enjoy the exchanges. However, I now beg leave to withdraw the amendment.
Lord Flight
My Lords, I have previously raised the issue of the potential costs of the regulatory regime, which will ultimately fall on clients. I have also raised the common sense aspect. I suggest in part a reply to the very fair points raised by the noble Lord, Lord Eatwell: why on earth should both regulators have to be involved with the approval of a bank? Approval of a bank is fundamentally about its capital, the soundness of its shareholders and the propriety of its directors. The approval stage is not really about whether what it intends to do meets all the potential consumer interest elements; it is about its safety and its propriety.
In essence, the amendments in my name would remove the need for the PRA to consult the FCA over the authorising of a bank. The subsequent amendments make corresponding alteration to the regulatory actions, such as variation of permission, cancellation of permission and imposition of requirements.
I think that I may be the only Member of this House present today who has been through a bank application process with the FSA, having had responsibility for steering the Metro Bank application. That is an issue on which I could speak in greater depth. I was surprised to have someone from BIS contact me and ask whether they could come along and talk to me about it. In many ways, the crisis was at its height at that time and one can understand the FSA being extremely cautious and changing its approach, but taking a year and a half was quite excessive. There is already much improvement in the way in which the FSA is looking to deal with banking applications, but involving another organisation that does not have prime responsibility for banking safety is unnecessary from the perspective both of costs and of the delay and complication involved in meeting the key elements required for approval of a banking licence.
Lord Sassoon
As my noble friend Lord Flight has explained, his amendments would remove the requirement for the FCA to consent to authorisation decisions taken by the PRA relating to banks and other deposit-takers, including the decision to grant or remove permission. I should say at the outset that I cannot accept this group of amendments.
My noble friend spoke about his direct personal experience, of which I am aware, of going through an authorisation with the FSA. He will understand from that that, when the FSA approaches the authorisation of a bank or other deposit-taker, it now looks both at matters that will be within the ambit of the PRA and at matters that will be within the ambit of the FCA. As he will understand, if it was to be a matter only for the PRA, it would be an authorisation process that dropped a certain amount of what is done at the moment. I know full well that the FSA’s authorisation processes were becoming very slow. I am glad that my noble friend acknowledged that it has worked hard at improving them because it is important that the barriers to new entry are lowered as far as possible.
However, I should explain why I believe that it would be unsafe to drop the FCA leg of the authorisation process. Yes, the process should be improved in the way that is happening already, but half of it should not be dropped. The PRA will be responsible, as we know, for the prudential regulation of deposit-takers, including banks, but with the FCA being responsible for the conduct regulation of such firms. The authorisation process for a deposit-taker will be led by the PRA, but the FCA’s consent will be required before an approval can be granted and before a firm can acquire permission for any new activities once it has been authorised. It will be a dual authorisation and regulation process, as we know.
It is right that these matters should be looked at before a firm starts to get into business, rather than leaving it, as my noble friend suggests, to afterwards, because it is going to be much more costly to address issues within firms following authorisation if they were to engage in activities that the FCA believed to be inappropriate in any way. This is particularly important for the FCA, which is going to be looking at many more firms than the PRA. It is not only for the safety of the system but it will ultimately lower the cost in terms of the regulatory burden on firms and, as my noble friend says, in the end on the users of financial services if problems can be nipped in the bud or sorted out before they become an issue.
One only has to look at and think about the example of PPI. I know that it is not precisely the point that my noble friend makes, but PPI shows, lest we forget it, that deposit-takers can put consumers as much at risk as any other part of the industry, if their conduct is not appropriate. The FCA will have a significant role in the authorisation process, in assessing the range of products being proposed by the applicant, its systems and controls, and its processes for treating customers fairly, including dealing with complaints, ensuring that the business is not being used for a purpose connected with financial crime and promoting effective competition in the interests of consumers.
The Government believe that these issues need to be addressed up front as an absolute requirement. As a practical matter, if we went down the route that my noble friend suggests, dealing with problems as they came up afterwards, it not only would be to the detriment of consumers but would ultimately be more costly in terms of the regulatory burden. I hope that with those explanations my noble friend will be able to withdraw his amendment.
Lord Flight
My Lords, I suggest that the areas that the Minister referred to are already in the rulebook and in the legislation. Anyone going into business knows that they have to be good boys and behave appropriately. Authorisation of a bank at the beginning is concerned with the essentials: is there enough capital, is the banking plan safe and are the proposed directors proper people? That is what the FSA has now pulled itself back to looking at. I do not think that the FSA—while it still exists—is looking at all these other issues; it is looking at the fundamentals of a bank.
In my view, there is a muddle between the ongoing regulation and what matters up front. I remain of the view that there is a very strong common-sense and functional case for limiting the approval and granting of licences for banks to the PRA. I will add that I have found that a number of heavies, from both the regulatory world and related territories, strongly agree with this point and perceive dualling it up as adding to both costs and complications. However, I am sure that we can return to this matter on Report and hope I may persuade the noble Lord to think again on this point. On that basis, I beg leave to withdraw.
Lord Sassoon
“Notification55Z1 Notification of ESMA
A regulator must notify ESMA of—(a) the giving by it of a Part 4A permission to an investment firm, where the regulated activities to which the permission relates are investment services and activities,(b) the giving by it of a Part 4A permission to a management company (as defined in section 237(2)), where the regulated activities to which the permission relates fall within paragraph 8 of Schedule 2,(c) the cancellation by it of a Part 4A permission of a description falling within paragraph (b), or(d) the cancellation by it of a Part 4A permission under section 55J(6), in reliance on any one or more of the conditions in section 55K(1)(b) to (d).55Z2 Notification of EBA
(1) A regulator must notify EBA of—
(a) the giving by it of a Part 4A permission to a credit institution, where the regulated activity to which the permission relates falls within paragraph 4 of Schedule 2,(b) the cancellation by it of a Part 4A permission of a description falling within paragraph (a).(2) “Credit institution” has the meaning given in section 1H(8).”
Lord Davies of Oldham
My Lords, Amendment 153A relates to that part of the Bill which refers to passporting, where a UK-authorised firm may be eligible to carry out its permitted activities in any other EEA member state, subject, of course, to its fulfilment of the requirements under the scope of the relevant single market directive. We are concerned about consumer protection for firms operating in other EEA states which originate in this country. The amendment, which is quite clear and self-explanatory, requires either the FCA or the PRA to require banks to provide clear and prominent warnings to customers where deposits will not be covered by the Financial Services Compensation Scheme. Everyone will know the anxieties that have occurred as a result of the proliferation of a vast range of banking activities. This is a question of the basic operation of the bank elsewhere, and we think that the Bill should contain a fundamental identification of the obligation of banks so that customers know exactly where they stand with regard to any resources they may have committed to the banks. I beg to move.
Lord Sassoon
My Lords, I completely agree about the importance of such warnings and clarity about what compensation schemes apply to particular bank accounts, which is precisely why it is already covered in the FSA’s handbook. As the noble Lord, Lord Davies of Oldham, may not be aware, section “Comp 16” of the FSA handbook requires precisely what the noble Lord requires. Firms from the EEA passporting into the UK are required to inform customers that they are covered by their home state’s scheme. Firms from outside the EEA are required to be separately authorised in the UK, so that they are covered by the FSCS. We completely agree on the importance of this and of raising consumer awareness of it. Again, lots of good stuff went on in many areas during the summer and this is another one. If the noble Lord and the Committee generally want to look at the press release, it was put out on 31 August and sets out details of the FSCS awareness campaign. The notes to editors in it make clear the different health warnings that have to be put down for UK branches of EEA banks and the precise form of words. I do not happen to bank with one of those banks; I bank with a British bank which now adds an extra page—it is not great for the environment, but the extra page sets out the details of the coverage of the FSCS and EEA banks are now required to do something similar.
The noble Lord makes a very good point, but I believe that we should leave it to the FSCS and the regulators to do what they are already doing, rather than writing inflexible requirements into legislation. The advantage of the current approach, as I am sure he will acknowledge, is that the regulator and FSCS can adapt their approach over time, but it is a useful matter for us to have spent four minutes on and I hope that the noble Lord is able to withdraw his amendment.
Lord Marlesford
May I just make one very small point to my noble friend? I declare an interest straightaway as a modest customer of the national savings bank. Along with many other people, I suspect, I assumed that if one had money in the national savings bank there was no way in which one would not be paid, however much money one had in it, in the event of any sort of default. When it transpired a couple of years ago that the national savings bank had put most of its money into the Bank of Ireland, certain fears were raised. It then became clear that the rules on the limit of compensation applied to money deposited with the national savings bank, just as they did to anything else. There was an implicit guarantee by reputation, as it were, on money put in the national savings bank, and the noble Lord’s point underlines the need for implicit guarantees to be cancelled by explicit denials of obligation.
Lord Desai
I add to what the noble Lord, Lord Marlesford, has said. As a depositor in the US, I had a cheque book and it said on each cheque that I wrote to what extent my deposits were guaranteed by the FDIC. It is all right for the FSA handbook to say something, but it would be much better if on my debit card or cheque book—although people do not use cheque books any more—it said to what extent my deposit was guaranteed. If it said that, it would be very good.
Lord Sassoon
I thought that I had said this, but I shall say it again. The detail of what is covered is a requirement that comes with your bank statement, which is a more appropriate place. It is better to have it attached to the bank statement than on a cheque when you are paying money out. So it is there, and it is completely clear in the rules in the FSA handbook.
Lord Desai
I do not carry my bank statement with me, but I do carry my debit card.
Lord Sassoon
“(2) For “the Authority” or “the Authority’s”, in each place, substitute “the appropriate regulator” or “the appropriate regulator’s”.”
Viscount Trenchard
My Lords, I support my noble friend Lord Flight in his amendment, principally because it reads much better and is much easier to understand than the equivalent part of the Bill, which is confusing to say the least. I further agree that there is a very considerable risk that approved firms, having to apply to two regulators separately, is going to reduce the attractiveness of London and lead foreign firms to consider establishing in other centres businesses that could be established in London. There is already a perception that it is extremely cumbersome to obtain approval for significant-influence persons and that it is more difficult to do that here than in other financial centres around the world, so I definitely believe that my noble friend’s amendment would represent a significant improvement.
It is also important to ask my noble friend the Minister whether, if joint responsibilities are to be agreed between the PRA and the FCA, that would mean a single procedure. If the two regulators are made jointly responsible but operate slightly different procedures that with time become more different, it makes it much more time-consuming and expensive for regulated firms to comply with the requirements.
Has my noble friend also thought about customer-dealing functions? His amendments deal perfectly with the significant-influence functions, but the Bill as drafted also deals with customer-dealing functions, and I see no reason why these should not also be dealt with in an extremely simple and understandable manner using a form of words similar to his.
Where joint responsibilities between the two regulators are agreed, will this lead to the avoidance or elimination of the duplication of staff between them? If you have two regulators doing the same thing, you have double the people and you may have even more people who are responsible for talking to their equivalents at the other regulator. Where joint responsibilities under the memorandum of understanding or elsewhere are agreed and put into force, can that be done in a way that reduces rather than increases the number of persons necessary to carry out the process?
Lord Sassoon
My Lords, I can assure my noble friends that these matters have been carefully thought about. To some extent, the somewhat tortuous drafting is entirely to achieve a simpler and more cost-effective result, even if the drafting of the Bill is more complex than my noble friend has suggested, although I do not think he is doing it to make the drafting more comprehensible.
As with our earlier discussion about the authorisation of firms, we need to recognise that there are already difficulties in this area. My noble friend Lord Trenchard quite rightly points out how aspects of the authorisation processes in London are of concern to firms, particularly from outside Europe. I understand that. As he and I have discussed over a long period, different aspects of this go over many years. Whether it is the FCA or the new regulators, there is an ongoing challenge to make sure that the system is sensitive, appropriate and efficient, quite regardless of the new architecture. He makes an important point, but I suggest that it is a different point from the narrow but equally important one here about where best to do it in a dual-regulation, dual-supervision environment.
Amendment 165A would establish a different system for designating significant-influence functions, or SIFs. For dual-regulated firms, the PRA and the FCA would jointly make rules specifying which functions are SIFs and then put in place joint arrangements for approving individuals to perform them. For FCA-only firms, this would be done by the FCA alone. I can see the attraction of the approach which my noble friend Lord Flight is proposing. The language and the on-the-face-of-it approach perhaps appear simpler than the arrangements in the Bill at present. However, the arrangements in the Bill have been thought about, and we believe that they are preferable because they put one regulator in charge of leading the process for approving those who wish to carry out roles involving significant influence over the conduct of affairs of an authorised person. In most cases, this will be the relevant prudential regulator, although the FCA will be able to designate SIFs in dual-regulated firms where the PRA has not done so. For example, the FCA will have a greater interest than the PRA in the chief anti-money laundering officer, so it may wish to designate this function in the absence of the PRA.
We certainly do not think that the administrative process should be excessively difficult or lead to log-jams. The Government expect the two authorities to run a single administrative process for SIF applications, taking into account the statutory timeline. Indeed, the draft memorandum of understanding, published by the Bank and the FSA, makes clear that that is exactly what they will do: run one administrative process. I cannot answer my noble friend’s question about whether there will be more or fewer people. All I can say is that they have already documented a process to make it as efficient as possible.
With the explanation that this has all been very carefully thought out and that, although there is no perfect way to do it, we believe that the basis in the Bill as drafted will work better in practice for firms and for the regulators, I hope that my noble friend will withdraw his amendment.
Lord Flight
My Lords, I appreciate that this is a tricky issue to solve to the optimum, whichever route you choose to go down. I would just comment that, particularly as the drafting of the legislation is less than clear, I hope the Minister might give an undertaking that the two new regulatory bodies would issue codified statements for people wanting to seek approval as to where they should go as a first port of call, depending on their functions. This would make life easier, particularly for non-UK parties. With that proviso, I beg leave to withdraw the amendment.
Lord Sassoon
I am not the first noble Lord to have jumped up a bit fast this afternoon but will probably not be the last—apologies for that.
On the amendment, we need to go back over a little of the history, which is all to do with the question of who was going to be the listing authority at the time FiSMA came in. My noble friend Lord Flight refers to the past couple of years, but as I understand it—and I remember a little of this—it was unclear at the time FiSMA was enacted whether the FSA would undertake the listing functions on a permanent basis. As a result, Part 6 of FiSMA was prepared as a self-contained part of the Act and included some provisions—for example, those relating to fees and penalties—that are included elsewhere in FiSMA to apply to the FSA in its general capacity.
I suggest, on the point about the listing authority having a special status and being more flexible in order to be moved around in the future, that that would not have been considered at all if it had not related to the circumstances a decade or so ago. Since then, not only was the listing authority with the FSA through that period but, as my noble friend said, the Government considered the question, at a very early stage of the work leading up to this Bill, of the appropriate future home of the listing function. As my noble friend recognises, as a result of that consultation in July 2010, which was essentially about whether the listing function could be merged with the Financial Reporting Council, the clear view among the vast majority of respondents was that listing should be with the FCA, along with other parts of market regulation. FiSMA also includes provision for the possible transfer of the competent authority functions to another organisation.
Clause 14 gives effect to that decision. I say again to my noble friend that if it had not been for the particular circumstances of uncertainty going back a decade and more, there would not have been this anomaly. We are now tidying it up and making the listing function a core part of the FCA, as with all other major parts of its activity. I hope that, on the basis of that explanation, my noble friend will withdraw his amendment.
Lord Flight
My amendment was there to raise the matter for discussion and I am satisfied with the Minister’s response. I beg leave to withdraw the amendment.
Lord Stevenson of Balmacara
My Lords, the purpose of this group of amendments is to demonstrate that government recognises that business has a responsibility to respect human rights and sustainable development, to focus corporate behaviour on its wider social and environmental impact, to provide information to affected individuals and communities, and to inform better the investor community.
The Government have said that in discharging its general functions the FCA must act in a way that is compatible with its strategic objective—ensuring that relevant markets function well—and in a way that advances one or more of its operational objectives. I argue that these amendments would be entirely compatible with both the FCA’s strategic and operational objectives, as it would uphold the integrity of the Stock Exchange and ensure that businesses take into consideration the full impact of their operations. This approach is supported by a wide range of organisations, including Aviva Investors, the Carbon Disclosure Project, Save the Children, the Co-operative and the World Wildlife Fund.
There is of course a legal case for this. In June last year, along with every other member of the UN Human Rights Council, the UK endorsed the UN framework on human rights and transnational corporations, which enshrines the state duty to protect alongside the corporate responsibility to respect human rights. The Government, including the Prime Minister, have been enthusiastic in their support for these principles, but so far they have not spelt out how they intend to fulfil them. Listing requirements specifically relating to human rights and sustainable development would be a strong first step. The UK has a duty to protect human rights under international conventions to which it is a signatory. The human rights obligations of states under international law include the taking of effective measures to prevent human rights abuses by third parties, including companies.
The Combined Code on Corporate Governance, issued by the Financial Reporting Council, gives guidance to companies on reporting CSR-related matters. The listing rules of the London Stock Exchange require companies incorporated in the UK and listed on the main market of the exchange to report on how they have applied the combined code in their annual report and accounts. Overseas companies listed on the main market are required to disclose the significant ways in which their corporate governance practices differ from those set out in the code. The reporting obligations in the Companies Act 2006 extend to everything of relevance to the company within the terms of Section 417 of the Act. There are no geographical restrictions on what information is relevant or may be disclosed. Markets are driven by information. If the information they receive is short term and thin, these characteristics will define our markets. These amendments would serve to improve the information available to investors and all external stakeholders.
A recent survey of global stock exchanges conducted by Aviva Investors revealed that 57% of respondents agreed that strong sustainability requirements for listed companies made good business sense for the exchange. Only 14% of respondents disagreed. A lack of regulatory support was highlighted by over half the respondents as a factor that discouraged them from undertaking sustainability initiatives.
Stock exchanges play a vital role in economic development as one of the primary tools for the allocation of capital in both emerging economies and developed ones. Yet at present there is no requirement on applicants to the London Stock Exchange to provide information on their social or environmental impact, which means there are no sanctions available to the UK Listing Authority, even if a company listed on its main market is found guilty of the most grievous human rights abuses.
London is already behind the curve in this area and we suffer reputational risk if we do not act. For instance, the Hong Kong stock exchange mandates that mineral companies must: divulge the likely,
“impact on sustainability of mineral and/or exploration projects”;
reveal the,
“claims that may exist over the land on which exploration or mining activity is being carried out, including ancestral or native claims”;
and state the company’s,
“historical experience of dealing with concerns of local governments and communities on the sites of its mines”
and,
“exploration properties”.
The Shanghai stock exchange requires listed companies to commit to environmental protection and community development while pursuing economic goals and protecting shareholders’ interests. In Luxembourg, listed companies must have “high standards of integrity”, and behave in a “responsible manner”. In Malaysia, listing rules include provisions on CSR reporting, and the stock exchange has also developed a CSR framework with accompanying guidance for directors. Human rights are also referenced throughout guidance materials elaborating on the framework, most recently in a training tool for directors.
The business case for human rights and sustainable development reporting is therefore robust. The current listing requirements are in place to allow investors to make good and informed decisions about the merits of investing. Arguably, this would be impossible without information on the social and environmental impact and responsibility of a company. The UK’s largest institutional investor, Aviva Investors, has called for a,
“listing environment that requires companies to consider how responsible and sustainable their business model is, and also encourages them to put a forward looking sustainability strategy to the vote at their AGM”.
It is widely accepted that environmental and social governance performance can have a significant impact on shareholder value and should therefore be taken into full consideration by companies in their reporting and financial disclosure.
When a similar amendment to the Bill was raised in the other place, the then Minister said that the proposers,
“have raised some very important issues and there is a lot of truth in what they say. The reputation of the UK listing regime depends partly on the behaviour of companies, and we need to think about that quite carefully”.
He also said:
“Matters of stewardship and corporate behaviour are predominantly the responsibility of the Financial Reporting Council, which is responsible for the stewardship code and corporate governance issues”.—[Official Report, Commons, 22/5/12; col. 1028.]
However, as the FRC recently explained to the Treasury Select Committee, its role is about implementation and not about applying sanctions.
A gap is developing between what we would all agree is best practice and what needs to be done to ensure that the rules are followed; effective sanctions must be available. There is currently no single body responsible for all aspects of company behaviour, including the raising of finance. Under the current regime, the listing process provides the funds that companies need to invest and grow, and shareholders have the primary responsibility for holding business to account for its behaviour. However, there is no regulatory body responsible for both sides of that equation with sufficient powers to intervene. I believe that the FCA should take the lead as it has the authority, the expertise, the personnel and the funding to enable it to exercise vigilance over all UK listed companies. I beg to move.
Lord Sassoon
My Lords, Amendment 165DA would require the FCA to have regard to fostering ethical corporate behaviour when exercising its listing functions. While we would all agree on the importance of corporate ethics, the issue here is whether we should make changes to the Bill to give the FCA specific roles or responsibilities in relation to them. The Government consider that the answer to that question is no.
The objective of our reforms is to put in place a new regulatory system with properly focused regulators who have clear responsibilities and objectives. This, of course, replaces a regulatory system which was not sufficiently focused and failed when the point came to protect consumers adequately. However important additional, worthy objectives might be, we need to be mindful at all times of the need for focus on the new bodies which we are creating. In this particular case, there are of course already other bodies or agencies engaged in these important matters. In particular, as the noble Lord, Lord Stevenson of Balmacara, knows, the Financial Reporting Council is responsible for the corporate governance code and the stewardship code to which he referred. That is where I believe we should leave this responsibility, rather than blurring or muddling the lines.
Amendment 167E is more specific. It would require the FCA to make listing rules to require all listed energy and mining companies to carry out human rights due diligence and then require the companies concerned to make annual human rights impact reports to the exchange. Again, I can appreciate what is behind Amendment 167E but do not believe that it is necessary.
First, the FSA currently—and the FCA in future—is already able to make listing rules covering both points made by the amendment if it considers it appropriate to do so. I see that the noble Lord is nodding. We do not need to give new powers in this respect to the FCA, or to include new requirements in FiSMA. However, I know that the noble Lord will come back and say it is one thing that it has the ability to do it, and another thing if we think it to be sufficiently important. I understand that, but it does have that ability.
Secondly, we see the way forward to be encouraging transparency and supporting action in the countries in which mining and other extractive activity takes place. That is why the Government support the EU proposals to improve transparency in the extractive—oil, gas and mining—and forestry sectors. We are already engaged in the EU negotiations on this issue. The Government also support the extractive industries transparency initiative and encourage resource-rich countries to sign up to it. Under that initiative, companies publish the payments they make to Governments of resource-rich countries, and these Governments publish the payments they receive from extractives so that the benefits from extractives can be seen by all. Therefore, while I appreciate that the noble Lord wishes to go harder on this, I believe that the Government are being active on the case. These are important issues and it is better to leave it to the FRC through the code on the one hand, and to push forward with these important international initiatives on the other. On that basis, I ask the noble Lord to withdraw his amendment.
Lord Sassoon
“(a) in subsection (1), for “competent authority”, in the second and third places, substitute “FCA”, and(b) in subsection (3A), for “competent authority” substitute “FCA”.”
Lord Flight
My Lords, it is widely known that there are some concerns within the industry that in a more interventionist and judgment-based regulatory environment, the ability to challenge the regulators’ decisions should be strengthened rather than weakened. My amendments in this group essentially seek to retain the current provisions. I am obviously aware that the Government’s Amendments 184 and 185 go a long way to alleviate the underlying concerns here. Under them, the regulator will be obliged to issue another decision notice, not a final notice, when the tribunal gives a direction to the regulator to reconsider a non-disciplinary case.
However, if I have understood it correctly, the Government’s amendments enable the tribunal to substitute its opinion only in disciplinary cases and not in judgment-led decisions. I am not clear why judgment-led decisions should not be included, because they are the most sensitive and perhaps the most appropriate for further consideration. I look forward to hearing the Government’s case for tabling amendments on this issue. I beg to move.
Lord Sassoon
My Lords, I am happy to speak next. In doing so, I will first need to go through the analysis of my noble friend’s amendments and the effect of the Government’s amendments in the group. I invite the noble Baroness to break in at any stage if it would help her.
The starting point is that the experience of the last few years has shown that we do not want a regulator with broad responsibilities that is too much focused on narrowly policing compliance with rules. We are still dealing with the consequences of that approach. The reforms, in particular those in this clause, are about giving the new regulators the right focus and mandate. They are also about judgment, and empowering the regulators to use their knowledge, experience and expertise to take difficult decisions, often on a proactive and preventive basis. The changes to the arrangements for appealing firm-specific decisions set out in Clause 21 play a key role in making this happen.
I will be clear about what our changes will mean. Clause 21 carries forward the rights of those who are dissatisfied with a firm-specific decision of the FCA or PRA to refer the matter to the tribunal, and preserves the ability of the tribunal to reconsider the matter afresh on a full-merits basis. There have been no changes to the grounds on which the tribunal will consider references. It will continue to consider references on a full-merits basis. In addition, for disciplinary matters or references under Section 393 of FiSMA that relate to third-party rights, the ability of the tribunal to substitute its opinion for that of the regulator remains unchanged.
What has changed is the nature of the directions that the tribunal will be able to give in the case of references that do not fall into the above category. In these cases, where the tribunal decides not to uphold a decision, it will not be able to substitute its decision for that of the regulator. Instead, it will be required to remit the decision back to the regulator, giving directions that it considers appropriate. The directions will be limited to findings relating to matters of fact or law that should or should not be considered by the regulator, and whether or not there were any procedural deficiencies. This is an important part of the move to judgment-led regulation, which recognises that it is the regulator’s job to take regulatory decisions, while providing a mechanism for judicial scrutiny of the fairness of those decisions.
I have already set out why the Government attach significant importance to the new arrangements for appealing non-disciplinary decisions. However, we must also ensure that we provide a fair regime for firms, and give certainty and clarity around procedures. That is what government Amendments 184 and 185 seek to do. Where a non-disciplinary reference is made, the tribunal remits the matter to the regulator. The regulator must then reconsider the matter in accordance with the tribunal’s directions. These amendments seek to provide clarity about what happens next. They require the regulator to issue a second decision notice rather than moving straight to a final notice, as would be the case under the Bill as drafted. Once a final notice has been issued, the firm’s or individual’s options for further challenge are strictly limited. A final notice can be appealed to the High Court only by way of a judicial review, on more limited grounds and at the risk of higher costs and lengthier delay.
Amendments 184 and 185 would require the relevant regulator to issue a second decision notice in all such cases once it has considered the tribunal’s direction and reached a new decision in accordance with the tribunal’s findings. This means that the firm or individual could challenge the second notice, for example if they do not think that the regulator has properly considered the tribunal’s direction in reaching its new decisions. There will be a second hearing before the tribunal, which will be able to consider the full merits of the matter and deal with the case more speedily and, because it will already be familiar with the case, at lesser cost to the firm and the regulator.
The amendments will increase fairness for firms and substantially strengthen the new arrangements. I hope that I have done enough to convince my noble friend. I think he already recognises that the government amendments go a considerable way toward allaying his concerns. Having heard the further explanation of how the process is intended to operate, I hope that he will feel able to withdraw his amendment.
Lord Flight
My Lords, I thank the Minister for his explanation of a rather complicated territory. Certainly I think it is as much as we are likely to get here. There is still a slight question in my mind about whether tribunals should be able to overrule judgment-led decisions. However, it seems that a reasonably fair system has been set out for members of the industry. I beg leave to withdraw the amendment.
Lord Sassoon
Lord Sassoon
My Lords, I shall start with Amendment 173ZAB. We are talking about new Section 137B which provides for FCA rules about the handling of clients’ money and related matters. It will replace existing Section 139 of FiSMA which is entitled, somewhat enigmatically, “Miscellaneous ancillary matters”, which does not really do it justice. However, as my noble friends have identified, it does not exactly reproduce Section 139. Their amendment would ensure that it tracks Section 139 in every respect by reinserting one subsection which, as my noble friend explained, relates to how references to money held on trust are to be construed in Scotland. Following consultation with the Scottish Law Commission, we reached the view that the relevant law in Scotland was sufficiently similar to the rest of the UK that it was neither necessary nor desirable to make different provision for Scotland in this way. I can reassure my noble friend that the recent Supreme Court judgment on Lehman Brothers also supports the view that a firm in Scotland which receives and holds a client’s money is obliged to hold that money in a way which preserves it for the client’s benefit as a trustee. This confirms that the approach taken in England, Wales and Northern Ireland is also correct for Scotland and that it is unnecessary to carry forward Section 139(3). I am happy to confirm that.
I turn now to social enterprise rules and Amendment 173AAZA, which seeks to give the FCA a new power to make social enterprise rules. I was of course delighted that my noble friend reminded us that social enterprises have not gone away over the summer break. I could leave it at that but I should probably do slightly more justice to this, although what I say will be entirely consistent with where I was before the break. We discussed in some detail the role that the FCA should or should not play in relation to social investment and enterprise and I will not repeat the whole of that debate. For the purposes of this amendment, I simply wish to put on record that where those running a social enterprise are carrying out a regulated activity, they will need to be authorised and will therefore be regulated by the FCA and will be subject to the rules that the FCA makes.
The drafting of the FCA’s objectives as well as new Section 137R make clear that the FCA should distinguish between different types of authorised persons and their consumers. There is therefore no need for a bespoke power. Specific rule-making powers in Clause 22 exist only where such rules go beyond the general rule-making power—for example, because they extend to unauthorised persons or affect third party rights. I would suggest that that is plainly not the case here.
On product intervention, I turn first to the group of amendments that seek to amend the FCA’s new product intervention power. This new power provides the FCA with a clear mandate from Parliament and the right tools to support a new and more proactive approach to consumer protection with greater regulatory scrutiny of the products themselves. I am grateful to the noble Baroness for her recognition of and support for the importance of the new rules in this area.
Amendment 173AA would restrict the circumstances in which the FCA may make product intervention rules. I should like to reassure my noble friend that to a large extent the Bill already requires the FCA to exercise the power in the way intended in the amendment. To be clear, however, there is one respect in which I do not sympathise with the amendment; namely, proposed new subsection (11)(a). This seeks to raise the threshold for intervention to where a product or practice,
“gives rise to significant investor protection concerns or poses a serious threat”,
to market integrity or financial stability. The amendment would prevent the FCA intervening to advance its competition objective in relation, for example, to high exit fees which, I am sure my noble friend would agree, have a negative impact on switching. The Government believe that this is an important feature that we want to see in the marketplace. The power would therefore become an exclusively negative rather than a positive tool. That would represent a significant step back in terms of consumer protection and is why I cannot support my noble friend’s amendment.
Amendment 173AF deletes the option for the FCA to make temporary product intervention rules. It is correct that the FCA’s rule-making power is very broad. The new power puts beyond doubt that the FCA has a mandate in this area. It also introduces a safeguard as temporary rules expire after 12 months plus breach of a ban can render a contract unenforceable. The default will be that any product intervention rules are made under the normal rule-making procedure, with prior cost-benefit analysis and public consultation. However, given the speed with which a new product can gain traction in the market, and the fact that the FCA cost-benefit analysis and consultation take a minimum of six months, we think it is important that, specifically for product intervention rules, the FCA has the option to intervene more swiftly albeit with the limitation that I have just outlined.
I turn to Amendments 173AG and 173AH on the FCA’s statements of policy under this power. The purpose of the statement of policy is to provide industry and consumers with clarity around the circumstances in which the FCA will make temporary product intervention rules in the absence of prior consultation. The FSA has published a draft of the statement on its website and noble Lords will see that it sets out the factors that the FCA will take into account before and the process it will go through. Linking the statement to the temporary rule-making power does not, of course, preclude the FCA from publishing information about its general approach to product intervention. Indeed, the FSA has already published a discussion paper and a policy statement on this topic.
However, the link we have here is consistent with the wider approach taken in FiSMA and in the Bill that policy statements are required only where there is a very specific need to provide further guidance on how the regulator will exercise a power or function; for example, the power to impose penalties. Therefore, out of the very many policy statements that the FCA and the FSA have and will have, only 10 policy statements are required by FiSMA, as amended by the Bill, principally relating to enforcement and imposition of penalties. In this instance, the need for guidance does not extend to the general product intervention power as the process for making such rules is set out in the Bill itself so the statement is deliberately limited to the temporary power because of the very particular effect that a temporary power will have through the short cut to making it. Finally, while I can reassure my noble friend that I expect the FCA’s statement of policy to cover the main points in Amendment 173AH, I do not believe it appropriate to specify this much detail in the Bill.
I turn to the group of amendments that start with Amendment 173AAC relating to the issue of a longstop requirement for complaints about financial services. When the FSA last looked at the issue in 2007, it said that to introduce a time bar, it would need to be clear that the potential detriment to consumers was outweighed by the benefits to consumers and firms arising from greater certainly among independent financial advisers about the extent of their liabilities. It is this cost benefit analysis that needs to be addressed. The FSA said in its published response of 5 November 2011 to the Treasury Committee’s retail distribution review report that,
“the FSA believes the FCA should review this issue again at some point in the future”.
I certainly believe it is important that the expert regulator looks at this issue and undertakes the necessary consultation with consumers and firms. I am grateful to my noble friend for this amendment because it has prompted me to look back at the rather unspecific commitment that the FSA gave to the Treasury Committee. As a consequence of my noble friend’s prompting, I followed up on the point with the FSA and it has made a commitment that the FCA will consider whether to investigate the case for a long stop as part of its business planning for 2014-15. The timing of that is linked to the settling down of the RDR. Therefore, I am grateful to him for prompting this and I would encourage industry and consumer groups to continue a dialogue with the FSA on this topic.
I turn to the Amendments starting with 173ACA on the new power to make rules concerning financial promotions. I cannot agree with Amendments 173AC and 173ACA. Financial promotions can have an immediate detrimental impact if consumers act on them. Quick and decisive action is therefore needed on the part of the regulator and we must empower the regulator to use its judgment to make a call on a promotion. It may be too late once the promotion has been made or while the regulator undertakes further investigation. This is why the power applies both where it is clear that rules have been breached, and where in the view of the regulator this is likely to be the case, and enables the regulator to prevent a promotion from being made. To provide the most obvious example of why “likely to” is required, the FCA needs to be able to require a firm not to circulate a promotion where it becomes aware of a promotion before it is actually circulated and the FCA is of the view that it is likely to breach financial promotion rules if circulated.
Finally, I turn to Amendments 173AD and 173AE, which seek to change the disclosure obligations attached to this power. Amendment 173AD seeks to change the duty on the FCA to publish information about a direction it has given to a power to do so. Amendment 173AE seeks to block the FCA from publishing information where a direction has been revoked. The fundamental shortcoming of the current financial promotions regime is that in most cases the FSA is not able to publish the fact that it has asked a firm to withdraw a misleading promotion. The power—which I am grateful to the noble Baroness for giving her support to—is designed to address the deficiency by giving the FCA a broad requirement, including a requirement to publish such information about the matter as it considers appropriate.
The Government believe it is important that the FCA should disclose what it has found for a number of reasons: it will help consumers, as they will be able to see what the regulator did and why; and, importantly, it will also increase the accountability of the regulator, as it will have to outline its thinking and set out where it has or has not taken action. The importance of the regulator both taking effective action and being seen to be taking effective action in this area is vital.
However, I accept that there may be circumstances when it is not necessary or appropriate to publish the information about a direction. Therefore we will look again at subsection (11) and consider carefully whether we should change the provisions relating to disclosure from a duty to a power. We will return to this issue on Report. On the basis of those reassurances and explanations I hope that my noble friend Lord Sharkey will feel able to withdraw his amendment.
Lord Sharkey
I am grateful to the Minister for confirming the Scottish situation. However, I am not entirely sure whether I am correct in understanding him to say that there is now no need to add explicitly cash received to cash held in Amendment 137B. On the assumption that that is the case—I can see that he is nodding to say that it is—I am happy to withdraw the amendment.
Lord Sassoon
Baroness Noakes
I am pleased to see that we are in agreement. Finally, I was concerned whether or not the noble Lord, Lord Davies of Oldham, thought that his amendment meant that all listed companies would be dealt with by the PRA and the FCA, because I do not think they have powers to deal with other than those bodies that are within the regulatory net, so it would only cover a relatively small proportion of his target.
Lord Sassoon
My Lords, my noble friend has made the first point that I would make. The noble Lords, Lord Davies of Oldham and Lord Davies of Stamford, talked as if we were debating provisions that related to all listed companies, but my noble friend is completely right that this section does not apply to great global companies such as Vinci and others. Although it relates to an important group of companies, it is related essentially to authorised persons.
The Bill allows regulators to make rules regarding the role of employees in relation to remuneration committees and, in theory, the requirement that remuneration consultants be appointed by shareholders if they think that such rules would advance their objectives. However, I accept that, in practice, it is uncertain that that test would be met, particularly in the latter instance. In any case, other appropriate processes are already in place to consider these questions in the context of wider corporate governance reform—which, again, is precisely the point that my noble friend makes. This is a wider series of issues.
It is important to be reminded that, in January this year, the Department for Business published its response to its consultation on executive remuneration, which considered among others, the possibility of giving employees a say on remuneration. Although I do not want to be drawn into a wider debate—we should focus on financial services—the consultation responses nevertheless illuminate what would be appropriate or, as I would say, inappropriate for financial services businesses alone.
The Government’s view is that, while there will be qualified and enthusiastic employees willing to take on such a role, there are strong arguments against this proposal, including—on this I agree with the noble Lord, Lord Davies of Stamford—that members of the remuneration committee need to be full board members if they are to understand the overall financial strategy and the wider business and economic context which impact on remuneration policy; that introducing external representatives on a single committee risks obscuring directors’ collective responsibility, as well as potentially creating additional tensions, which might reduce the effectiveness of the UK unitary board model; and that the level of responsibility of employee representatives and the possible conflicts of interest they might face would need to be resolved.
As a result of the BIS consultation on executive pay, the Government have decided to proceed with some key reforms, such as the introduction of a binding shareholder vote on remuneration, but the case for requiring companies to include employees on remuneration committees has not been made, and the Government are certainly not going to make or accept it in the narrower context that we are discussing today.
Lord Flight
When I sat on the remuneration committee of a financial services business, we already received substantial directions from the FSA as to what we were supposed to do, what we should do, how much we could put up pay and all sorts of things. I find it somewhat strange, but the direction is there and functioning already.
Lord Sassoon
Again, my noble friend is ahead of me and I shall not make that point—I am addressing some very narrow and specific matters—but he is completely right that we could debate whether the interventions already being made are appropriate. He may say that that they are excessive; I would say, “Well, that is for the FSA and there are important issues”. But, yes, the FSA is very active in this area, specifically on remuneration consultants.
The suggestion that remuneration consultants be appointed by shareholders was looked at in the consultation but it was not widely supported. I am sorry that the noble Lord, Lord Davies of Stamford, did not spot it, but the proposal has been the subject not only of debate in this House in the past but of the recent consultation. It was not widely supported because of the costs associated with the appointment process and issues to be resolved about the remit and the flexibility of the proposal to accommodate new work. The benefits of the requirement would be uncertain.
However, a majority of respondents to the consultation said that more transparency over the use of remuneration consultants would be beneficial. Suggestions of areas for more transparency included appointment processes, advice provided, fees paid and management of conflicts of interests. The Department for Business is looking at ways in which it can improve transparency in the use of remuneration consultants by companies.
I am grateful to the noble Lord for raising these important issues, which are being taken forward in a wider context. The FCA will have all the powers that it needs to act in this area, as it does already—and as my noble friend pointed out—the FSA. I hope that, on the basis of that information, the noble Lord will feel able to withdraw his amendment.
Lord Davies of Oldham
Of course I shall withdraw the amendment, but not because the noble Lord, Lord Flight, has persuaded me that the FSA has been so much a busybody, so interfering and so effective that remuneration has never been an issue in the financial services. That argument runs counter to the facts on remuneration on which the nation as a whole has a firm grip.
I of course accept the chiding of the noble Baroness, Lady Noakes, that the Bill concerns only the financial services sector. I also hear from the Minister that it is extremely dangerous to take the first step because you might then stumble into the second step, and I am not sure that the Government are that committed to any significant strides forward on that at the present time. However, if the Minister is able to assure me that the development of ideas in the Department for Business is such that we are going to see legislation which gives some effect to the principles that I have adumbrated this evening and which helps to resolve what for the nation looks an outstanding scandal with regard to the issues of distribution of resources in our society, I go home with a little consolation and withdraw my amendment.
Lord Sassoon
My Lords, the Government’s view is that, in general, decisions about advisory arrangements and consultancy fees are commercial decisions for firms themselves. However, the regulators could in fact already make the rules described in this amendment under the general rule-making power if they judged that was an appropriate way to advance their objectives. For example, if the PRA was satisfied that there was a problem with advisers being incentivised to advise in favour of high-risk mergers and acquisitions in a way that threatened the safety and soundness of PRA-authorised persons, it could step in to make rules to regulate the appointment of advisers.
Respecting the brevity with which this amendment was introduced, I should probably leave it at those two key reasons why we believe that it is redundant. I ask the noble Lord, Lord Davies of Oldham, to consider withdrawing it.
Lord Davies of Oldham
My Lords, I will certainly withdraw the amendment, having benefited from the clarity of the Minister’s reply—although I cannot say that I agreed with it.
Lord Davies of Oldham
My Lords, I am once again jettisoning a whole sheaf of notes in deference to the hour that we have reached. Amendment 173E, as part of the competition scrutiny provisions included in this Bill, calls for the Competition Commission, in consultation with the Treasury, to publish a report by the end of 2013 providing advice about the effect of regulating provision or practice,
“with reference to the Independent Commission on Banking recommendations on competition”.
The intention of the amendment is clear. It is to ensure that we make progress with regard to competition in banking, to show that we are in earnest about the necessity for early reforms and to use this Bill and the competition procedures within it to ensure that the maximum pressure is brought to bear on the competition authorities—and of course, behind them, the Government—to take as early action as is possible to remedy what the nation expects to be remedied in the light of the experience of the recent past. I beg to move.
Lord Sassoon
My Lords, this amendment is identical to one tabled in Committee in another place, where my honourable friend the then Financial Secretary set out the reasons why the amendment is not appropriate. There are three such reasons. First, 2013 is the wrong time for a review of progress against the ICB recommendations. The ICB report itself recommended that the earliest that the market should be reviewed is in 2015, when it will be clearer whether its recommendations have led to improved market conditions. Secondly, there is no convincing reason why this review, if there is to be one, should be limited in scope to the ICB recommendations themselves. There may be new issues that the ICB report had not considered in depth and which it would be expedient to review at that time. Thirdly, we do not need this provision to ensure that the banking sector receives appropriate scrutiny from the competition authorities in the short term. The OFT, for example, launched a review of the personal current account market in July this year, which is likely to consider some of the issues covered by the ICB. The OFT has a power to refer markets to the Competition Commission at any time if it considers that a feature of the market,
“prevents, restricts or distorts competition … in the UK”.
I am very happy to give those reassurances and clarifications to the noble Lord in the hope that he will withdraw his amendment.
Lord Davies of Oldham
My Lords, of course I will withdraw my amendment. However, the noble Lord should not anticipate that when a Minister speaks in the Commons, the Opposition automatically assume that he has always produced exactly the accurate response to our amendments, which we then accept, and that we are duly grateful for the greater wisdom of the Administration. Far from it—we often derive some considerable satisfaction from pressing them at some length on another occasion. However, on this occasion I have not got any length. I beg to withdraw the amendment.
Lord Sassoon
Lord Sassoon
There are of course other amendments in the group but for the moment I will just speak to the two government amendments. New Part 12A of FiSMA, as inserted by Clause 25, confers on the regulators for the first time substantive powers in relation to unregulated parent undertakings of authorised persons. These new powers strengthen the regulatory framework by ensuring that the regulator can take appropriate action in relation to a parent undertaking that itself is not regulated but which controls and exerts influence over an authorised person.
Amendment 174ZA extends the meaning of “qualifying parent undertaking” so that the new Part 12A powers can also be applied to body corporates which have a place of business in the United Kingdom. At present, the powers are restricted to a parent undertaking that is a body corporate incorporated in the United Kingdom. There is a risk under the new Section 192B(2), as currently drafted, that some financial groups may be beyond the scope of new Part 12A powers or indeed may engage in regulatory arbitrage and restructure their operations to remove themselves from scope. Left unchanged, it would be possible for a firm to evade the powers by incorporating their parent undertaking overseas while retaining a place of business in the UK. It is important that the powers can be deployed for the purpose for which they were designed.
Amendment 174ZB is a bit of small tidying up of the drafting. As there is only one system of company law in the UK, it is not possible for a body corporate to be incorporated only in “part of” the UK. That is why we are making that second amendment. I beg to move.
Lord Whitty
My Lords, I am perfectly happy to accept and support the Minister’s proposals. My two amendments, and I think those of my noble friend Lord Tunnicliffe, attempt at this point to reflect the reality of the changing structure of banking and the potential changing structure of financial services, and their interrelationship with retail. It could go wider than this, but it specifically relates to the phenomenon of supermarkets obtaining banking licences, establishing banking subsidiaries and operating in the banking and financial services area.
This presents significant issues of consumer information and consumer privacy. My first amendment is a simple one. We have, in this Bill, a number of safeguards in relation to financial companies’ relations with their parent company. However, among other things, subsection (4) of the previous Act’s proposed new Section 192B defines a parent undertaking that is susceptible to these protections:
“Condition C is that the parent undertaking is a financial institution of a kind prescribed by the Treasury by order”.
It then goes on to say that those conditions can be changed by the Treasury. However, the reality is that Tesco—I am not particularly having a go at Tesco—would not fall within that definition. Yet Tesco will have a banking operation and has every intention of building on that. My first amendment would therefore delete that restriction, so that a parent undertaking of a financial company could, in fact, be a company of any kind and not simply one which falls within the Treasury’s—from time to time altered—definition of a financial institution.
My second amendment relates directly to the area of potential consumer detriment. Again, I take the example of Tesco. There have been examples in the United States already, so it is not necessarily directed at Tesco; I have a Tesco card myself, as I am sure many other Members of the House do. I would not presume that Tesco would be in a position, deriving data from my Saturday afternoon purchases, to offer to their banking subsidiary indications of my current or potential credit-worthiness. Noble Lords may feel that I do not need that protection, but there will be many who do. The pattern of purchases, particularly for the more vulnerable consumers, can vary dramatically from time to time as circumstances change. Their credit-worthiness can alter if the interpretation of that data is such that the banking subsidiary thinks that they are no longer as credit-worthy as they were last month or last year.
This is an issue of privacy. This is an issue of clarity. It is an issue of confidence that consumers who have quite happily allowed the retail parent company to acquire very detailed information on their purchasing patterns should not have that information used for the entirely different purpose of establishing credit-worthiness and the ability to seek loans, overdrafts or banking facilities from a banking subsidiary. I emphasise this because the change in the structure and interface between banking and large-scale retail and other conglomerates is likely to get larger. In broad terms, the consumer interest benefits from this wider competition and the expertise that it may bring. However, Tesco itself has recognised that one of the synergies arising from its move into the banking sector would be using the club card for credit assessments, and one which, alongside a loyalty scheme, could benefit the banking as well as the retail side of its business. I do not think that that is right. I do not think that the ordinary consumer who goes to Tesco every week would think that it is right. It is, of course, also a facility available to a banking subsidiary of a supermarket which is not available to its competitors, who are part of a purely banking or financial institution.
I hope that the Minister will recognise this problem, and will at least agree that the first deletion is appropriate and to take away the issue raised by my second amendment and come back to us at a later stage, indicating his way of dealing with it. It is an issue which, as I say, is likely to grow in importance and makes hundreds of thousands of consumers vulnerable. I do not beg to move, as the Minister has done so, but I hope that he will take my words into account.
Lord Tunnicliffe
My Lords, I agree with all the points that my noble friend Lord Whitty has made and I will not rehearse them. Coming at the whole thing from a slightly different direction, it seems to me that Clause 25 is highly admirable. It seems to say that if you have an authorised person and that authorised person is owned by someone else, the regulator must be able to get at the someone else. It is a sensible clause in that it uses terms such as,
“may have a material adverse effect on the regulation by the regulator”.
It uses that twice, in both of the conditions in which it can happen. It is a very narrow clause. It is what we who like regulation find very good at setting out what the regulator may do.
Clause 25 also says that a regulator must adhere,
“to the principle that a burden or restriction which is imposed on a person should be proportionate to the benefits, considered in general terms, which are expected to result from its imposition”.
So the whole idea that the owner of a regulated person should come under regulation seems entirely a sign of good principle, and has proper safeguards set against it.
However, for the life of me I cannot understand what new Section 192B(4) is doing there. It states:
“Condition C is that the parent undertaking is a financial institution of a kind prescribed by the Treasury by order”.
Any owner of an authorised person should be susceptible to regulation within the limitations set out in Clause 25. This was debated in the Commons, but we make no apology for bringing it back here. In the Commons, Mr Hoban said:
“This is a proportionate expansion. We want to avoid the sense that the FCA or the PRA could intervene in the price of bread at Tesco or Sainsbury’s”.—[Official Report, Commons, Financial Services Bill Committee, 8/3/12; col. 466.]
That is an absolutely ridiculous reason to deny it. Clearly, the body of this clause says that it shall be used for serious material things in a proportionate way, which could have nothing to do with the price of bread at Sainsbury’s. I hope that the Minister will give a really full explanation of why this clause should not apply universally to all owners of authorised persons, not just to those as set out in condition C in subsection (4) of new Section 192B.
Lord Sassoon
My Lords, the noble Lords, Lord Whitty and Lord Tunnicliffe, have been very clear about the purpose of these three amendments: that they seek to extend the power to capture all parent undertakings, including non-financial parents. The starting point here has to be the recognition, which was partly given by the noble Lord, Lord Tunnicliffe, that we are talking about some new and important powers that go significantly beyond anything that the previous Government put in place in their architecture.
I know that the noble Lord, Lord Tunnicliffe, said that he approved of a lot of this. The fact is that we are moving the boundary forward very significantly, but to an appropriate place for the time being, while nevertheless taking the power—the noble Lord, Lord Whitty, recognised this—to move the boundary further if appropriate. I would have been rather happier if there had been more of a tone of approving of and recognising a significant shift, and gently encouraging us onwards, rather than a tone of outraged incomprehension that we have not moved very much further.
Lord Tunnicliffe
If I can help the Minister, I am entirely happy to welcome this clause—my opening remarks welcomed it—but I cannot understand why it has this serious limitation. The rest of the clause is beautifully balanced and seems entirely appropriate. Why does it not apply to more owners?
Lord Sassoon
My Lords, we are getting into significant new territory here. These are untried and untested powers in the United Kingdom. We want to make sure that they are targeted and used in a proportionate manner. That is why the Government have proposed limiting the powers to parent undertakings that are financial institutions of the kind described by the Treasury, which helps to keep this new and very significant power within acceptable bounds—and bounds within which Parliament can be clear about the movement of the regulatory boundary. I take the case of the supermarkets because they are an important area and the clearest case of where the boundary should be under focus. It is important and helpful for noble Lords to raise this matter in debate now, because it is quite proper that as experience of these new powers is gained and the evolution in the structures of holding companies for financial services institutions moves forward, these matters are kept under some form of scrutiny.
Let me deal first of all with the specific matter of data sharing, because this is a granular thing that affects customers in these groups now. The Data Protection Act 1998 already provides robust safeguards around the disclosure of customers’ personal information, including disclosure to another group company. Therefore, in the case which the noble Lord, Lord Whitty, postulates, the movement of data from one part of a group—the non-financial part—to the financial part will require consent from the consumer.
The Act also requires that the personal data have been obtained fairly from the customer in the first place, which would involve identifying any third parties to which the information would be disclosed. We believe that the current provisions in the Bill—in that specific respect and more broadly—strike the right balance between giving the regulator more intrusive powers over unregulated parent undertakings, protecting the personal data of consumers and ensuring that the net regulatory burden imposed on industry is proportionate.
However—and I restate this—the Government are very much alive to the concerns raised by noble Lords, and it is precisely for that reason that they have taken a power to remove the requirement that the parent undertaking be a financial institution. We have not put that in there unthinkingly; we have put it in there because we recognise the concerns that noble Lords have raised. I am sorry if the noble Lord, Lord Tunnicliffe, does not think that I have recognised the positivity with which he has come at this clause, but he does not perhaps recognise or give enough weight to the fact that we really are making a significant step forward and need to pause and think carefully before going further. The power, however, is there and the Government will use that power as and when it becomes clear that the balance needs to be struck differently. I am happy to restate that, so I hope that what I have said will reassure noble Lords that the Government take this matter very seriously.
Lord Sassoon
(a) is incorporated in the United Kingdom, or(b) has a place of business in the United Kingdom.”
Financial Services Bill
Lord Sassoon Excerpts(12 years, 4 months ago)
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Baroness Hayter of Kentish Town
My Lords, I support the amendment with, predictably, an interest in ensuring that Wales is well represented on panels. Too often these westerly people are forgotten, especially as they have rather less of a financial sector. The needs of Welsh citizens are perhaps greater, given how poorly served they are in rural areas. The financially excluded, many of whom are found in Wales, are also poorly served by financial services. I thank my Scottish friend, my noble friend Lord McFall, for his concern for my country and, I am sure, for Northern Ireland.
I turn to Amendment 128 in this group, which provides that the panel should represent households using products. That seems to be key, if only to emphasise the importance of the financial services sector to the whole community. In effect, it is a public utility with some of the same obligations on the industry to provide a universal service even in non-profitable areas. It is equally important to ensure that users of the less profitable services are part of the system of regulation or its scrutiny. It is individuals and families who often rely most heavily on the financial services, even if they do not feature on a CEO’s radar.
Perhaps I should fess up at this point that I was vice-chair of the Financial Services Consumer Panel, so I am acutely aware of the absolute necessity of a broad range of experienced views and backgrounds on the panel. The new panel would deal with a range of issues that impact on a wide variety of consumers. That is part of the reason we so need a panel, because consumers are not a homogeneous group. Their needs, capabilities, life experience and expectation, as well as their interaction with the sector, cannot easily be slotted into a “consumers” box and ticked off by the regulator. The panel would need to draw on the policy, research, intelligence and expertise of those people long embedded in the consumer world, who bring with them in-depth knowledge and understanding of consumer behaviour, consumer detriment and—equally important—consumer law, debt management, credit, insolvency, complaint handling, redress, retail sales, the financial world and possibly even Europe. I am particularly pleased that the noble Baroness, Lady Wilcox, who is very experienced in consumer matters, particularly when speaking on redress, is in the Chamber at the moment. However, aside from that expertise, the panel will also need some streetwise input, perhaps from people less exposed to the intricacies of regulatory regimes, Europe, consumer law and research, but who know what the world feels like from less exalted heights than the portals of Canary Wharf.
I now turn to the major issue, which is Amendment 136ZA standing in the names of my noble friend Lord Eatwell and myself. It is about the need to balance the caveat emptor principle—buyer beware—with an equal responsibility on those advising or providing services to consumers to act in the “best interests of clients”. We have heard of the challenge facing consumers in judging whether a company is prudentially secure, or whether the product they are buying is fit for purpose, presents value for money or even covers the risk they assume it will. Added to that, as mentioned earlier today, the very pricing of products, their complexity and people’s lack of understanding of their own risks, let alone the risks inherent in products, makes it very hard for consumers to have the knowledge to take responsibility for the choices they make. The level of risk left with consumers is often unclear. The meaning of “guaranteed” or “tracker” may differ quite substantially from their common-use meaning. Consumers often bear a level of risk unknown to them and seldom explained; they are effectively making choices blindfold.
In an ideal world, of course, we support the responsibility principle. Markets are made to work by consumers shopping around and driving up standards. However, in this market, with those long-term “credence” goods, opaque structures and the asymmetry of information, we need to reintroduce some trust and transparency by balancing consumer duties with provider duties. It is an industry beset with low levels of compliance and high levels of complaints; there are no agreed standards for complex long-term products, so it is hard to expect consumers to adopt a higher degree of responsibility than is already legally acknowledged.
I have concerns, therefore, that by writing consumer responsibility into the Bill, new section 3B(1)(c) appears to “up” the existing situation. In law there are no obligations placed on consumers other than to act honestly. It is not clear what a greater emphasis on consumer responsibility might achieve. Why impose this possibly new principle of consumer responsibility without any countervailing responsibility on the service provider? Amendment 136ZA expresses the need for that balance, at the point where the industry might otherwise grab hold of this wording and say, “See—it was their responsibility and their choice”. The noble Lord, Lord Turner, whose chances of becoming Governor of the Bank of England I might now damage by quoting him approvingly, said yesterday that people,
“doubt banks’ values; and they doubt whether banks have their interests at heart”.
He went on to say that the boards of directors and managers must introduce,
“effective controls against dishonest behaviour”,
in order to change the perception of bankers. This amendment seeks to ensure that providers act in the best interests of clients, which would be just one way of guaranteeing the good behaviour for which the FSA chair awaits. Why should only consumers accept responsibility for their own decisions? Why not regulated firms, and authorised firms? It is as if the Bill’s draftsmen are at pains to ensure that consumers should have only themselves to blame. If this phrase “consumer responsibility” is to mean more than the current legal position, then the Minister needs to explain that to us. If it is only common law, then why include it?
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I will take Amendments 122 to 127 and 128 first of all. As the noble Lord, Lord McFall of Alcluith, has explained, these would require the FCA to appoint persons representing the constituent parts of the United Kingdom to each of its consultative panels. The role of the panels is to provide a forum for focused consultation. I believe that the current provisions, which require the persons appointed to be representative of consumers and practitioners in particular sectors, provide the right focus here. To do this requires the FSA now, and the FCA in the future, to seek a diverse range of panel members. I am satisfied that the FSA already takes account of these matters in making appointments. For example, as a matter of practice in making appointments to the consumer panel, which is done through a fair and open process, the FSA aims to make sure that the panel as a whole not only encompasses a broad range of relevant expertise and experience but also represents the constituent parts of the UK. That is as it already is.
The FSA also looks for some geographical spread in the smaller business practitioner panel membership, where that is possible. The large retail firms that sit on the other practitioner panel, by definition, tend to have a large geographical spread that they bring to the table as national firms. Diversity in terms of geographical spread of representation can, therefore, be achieved in the existing model where members are appointed to represent the interests of consumers and practitioners rather than to represent parts of the UK.
For these reasons, although it is important to have on the record how this operates now and how I would expect the FCA to operate in the future, I would be concerned that these amendments could reduce the effectiveness of the panels as forums for focused consultation on the issues which matter most to those most affected by the FCA regulations. I would not want in any way to either dilute or change the focus of the panels on what they are ultimately there to represent.
Baroness Hayter of Kentish Town
My Lords, I shall speak in support of Amendment 128AB in the name of myself and my noble friend Lord Eatwell. I shall also speak to Amendments 128AAA and 130ZB. Accountability means not just listening, but a dialogue: a conversation which hears and responds, and gives written reasons for disagreements. As the noble Baroness, Lady Noakes, said, they will not always agree, but that is quite healthy: we just want to know why. It has really worked very well with the FSA panels under the old Section 11. The proposal would just take that forward and continue it in the new Bill. This encourages transparency and forces the panels to think very hard about what they say and to do their homework well. It also makes the regulator consider submissions carefully and set out where and why they have problems, either with the analysis or with the conclusions. This adds to the openness of the regulator’s thinking, but also to that of the panels, so that consumers and practitioners can also track the record and impact of those who purport to represent their interests, and know how well they are impacting on the regulator’s work. I hope this is one of the areas where the Minister is able to “say yes”.
Lord Sassoon
My Lords, to manage expectations before the break I attempted to say that I was not going to be as accommodating all through the day. In qualitative terms I will be as accommodating, but I can only work with the material that is in front of us. In this case, it is possibly a matter of explanation and reassurance. I hope that some, if not all, of the matters here are going to be covered satisfactorily.
Amendment 127ZA to which my noble friend Lady Noakes spoke would mandate some quite complicated arrangements for the Bank of England to consult the markets practitioner panel of the FCA, in certain cases. I do not make a comment about the drafting, but the general arrangements here would be quite complicated. In addition, the markets practitioner panel would also have the ability to request information from the Bank, but only via the FCA and only for the purpose of assisting the FCA. I had not been quite sure what the amendment was trying to achieve, but I now understand from my noble friend that it is a matter of strengthening the co-ordination between the Bank and the FCA in relation to market infrastructure, as well as strengthening the consultation arrangements in relation to infrastructure matters. I understand why this is important, but will attempt to explain why I believe it to be unnecessary.
There is of course nothing to stop the Bank of England consulting the markets practitioner panel or any other panel, or their members or anyone else. It is worth remembering that. It is also important to bear in mind—it may be more important in this case—that the Bank of England will be regulating only a very small number of institutions in this highly specialist area. That really is the key point. I suggest that there is not a lot to be gained by trying to institutionalise consultation arrangements in this way because of the small number of specialist players.
The Bank will indeed be able to consult each of the entities that it regulates individually, should it wish to do so. That is of course an inconceivable position for most of the other subsectors of financial services, where a panel arrangement is therefore necessary to corral views efficiently. I am not sure what a requirement to consult the markets practitioner panel would necessarily add here. More generally, the Bill already introduces a requirement for the Bank and the FCA to have a memorandum of understanding relating to infrastructure regulation, while there is of course nothing to stop the Bank and the FCA working together in any way that they want, subject to the framework of the Bill.
I think that panels are not required in this area. I hesitate a bit because my noble friend Lady Noakes may come back at me on the settlement question. I accept that on that aspect I should possibly take a bit more time to reflect on my noble friend’s views, just to make sure that all angles have been covered in what I have said and in what has been indicated by the Bank and the FCA, so far as it is relevant to them. However, specifically on settlements, I appreciate that I might reflect a little further.
I turn to Amendments 128AAA, 128AB and 130ZB, the first two of which require the FCA to provide a statement in writing to any panels it establishes where it disagrees with any of the representations. Amendment 130ZB would make a similar provision for the PRA. I note that these amendments replicate the existing provisions in FiSMA. It may help if I explain the thinking behind why the Government consider it right to depart from the existing approach in FiSMA. It is because the Bill imposes a general duty on the regulators to publish responses to the representations they have received, which is wider than the current requirement in FiSMA. The regulators must respond to all representations, rather than simply those with which they may disagree. That was a conscious change because it did not seem right that the only responses the regulators should have to give to the panels are where they disagree with them.
We do not want to promote an antagonistic relationship between the regulators and any of the panels that they may establish. We have also required the regulators to publish their responses to help inform public understanding and enhance accountability. I reassure the Committee that this duty will, in practice, require the regulators to give their reasons for rejecting or departing in any significant way from a recommendation of one of their panels. With those explanations, I hope that my noble friend will feel able to withdraw her amendment.
Baroness Noakes
My Lords, I thank my noble friend Lord Trenchard and the noble Baroness, Lady Hayter, for their contributions to the short debate and I thank my noble friend the Minister for his response. I note that he will look again at the settlement system, which raises slightly different issues because of the different way that it is dealt with legislatively. I doubtless await a letter from him during the summer, which I shall look forward to.
The Minister said that there was nothing to stop the Bank of England from consulting anybody—it may be that he was playing that for laughs. The real purpose of tabling this amendment was because there is no specific mention of panels, and there is a concern that the Bank of England will not use its general obligation to consult the right people. The right people are not necessarily just the people they are regulating but also those who are impacted by regulation, such as the people you would find on something like the markets panel. That is also why I tried to press my noble friend the Minister on why the Bank did not have to consult the FCA when dealing with regulatory matters in this area. I put it to my noble friend that he has not quite addressed those issues. I hope that he will think further on this before we get to Report, and I will certainly reflect on what he has said.
In respect of the second amendment in this group relating to explanations in writing, the Bill states:
“The FCA must from time to time publish in such manner as it thinks fit responses to the representations”.
This does not convey the sense of what the noble Baroness, Lady Hayter, referred to, which is dialogue. At the moment the panels operate in a much more collaborative mode, feeding through ideas as well as making formal representations, and they are being seen here, I think, as just another consultee to be dealt with along with responses from any other consultee. The sense that the practitioners have is that the quality of relationships will deteriorate going forward, and that is a matter of concern.
These amendments were tabled by my noble friend, as I said, following the comments made by the financial services. I know that my noble friend will want to talk to them before we return to this Bill at Report. I thank my noble friend the Minister for his reply today but I do not think that I can regard the issues as settled. However, I am prepared to withdraw the amendment today.
Lord Eatwell
My Lords, I support the noble Baroness, Lady Noakes, in the amendment that she proposes. I have added my name, as has my noble friend Lady Hayter. It is clear that there must be a satisfactory set of amendments for reviewing the effectiveness of this new regulatory structure and whether it provides value for money as conceived, particularly given the added complexity of what the noble Viscount, Lord Trenchard, referred to as the multiplicity of regulators now created out of this single structure.
I speak, too, to Amendments 128BB and 130AA in the name of myself and my noble friend Lady Hayter. Amendment 128BB adds to a definition of an independent person that a person appointed to review the FCA must be independent of the FCA but also of the Bank of England. We should have somebody standing outside this regulatory complexity who should be deemed to be independent. I suggest that if the person appointed is a staff member of the Bank of England, the notion of independence will be compromised, even though the FCA stands outwith the Bank of England. I hope that none the less there will be continuous regulatory dialogue between all the elements in the regulatory apparatus that we are designing here and that it will therefore be necessary, if somebody is independent, that they should stand outside that regulatory community, of which the Bank of England will be a leading part.
The point with Amendment 130AA is that the Treasury in appointing an independent person to conduct a review should inform the Treasury Select Committee of the nature and arrangements of the review, the idea being that that committee itself conducts reviews of the operations of regulatory institutions and will greatly economise on and facilitate the overall operation of a review procedure if there is no duplication and if there is clear communication and understanding between what the Treasury Select Committee and the independent person are doing. These two scrutiny agents should be co-ordinated and we should not have further segmentation; we have too much in this Bill already, and we should not have further segmentation in the procedures that we are designing.
Lord Sassoon
My Lords, first, I will make some comments on Amendments 128B and 130A, and explain who can initiate reviews. One of the main points made by my noble friend was essentially about how things are different from the way they have been up until now, and who can initiate reviews. I am sure we all agree that the Treasury’s power to appoint a person to carry out a value-for-money review is important to support accountability to the Government, to Parliament and to the public, not least because those reports of reviews must be published and laid before Parliament.
However, regarding my noble friend’s particular point, in future the NAO will also be able to initiate its own VFM reviews. As she identifies, that flows as a result of the Bill making the regulators subject to the NAO audit. I hope that provides reassurance to her on that important point. Clearly our expectations should be in the right place. The NAO can only conduct a certain number of VFM reviews each year across the whole of the public accounts which they audit, but I think my noble friend explicitly said—and I agree with her—that it would not be a question of an annual review. At the same time, the Government need to be able to order a review of the FCA at any time, with the option to focus on areas of the FCA’s activities they see as a priority, and be accountable for the way they exercise this power. In practice, the Treasury is likely to choose to appoint the NAO to carry out such a review. As such I do not see what would be added by placing an obligation on the Treasury to order reviews under new Section 1S, particularly as the amendment does not specify the time period or any of the other circumstances in which a review should be held; I think my noble friend recognises that. Particularly in the light of the fact that the NAO itself will be able to initiate VFM reviews, it would be too early to say how frequently the Treasury will use its power, because it will clearly dovetail to some extent with what flows from the audit. However, in response to my noble friend’s key point—she quoted my honourable friend the Financial Secretary—I am confident that the arrangements we have proposed will deliver a step change in the FCA’s accountability to Parliament, as compared to the way it has been with the FSA, for the way in which the FCA uses its resources to achieve value for money.
Amendment 128BB seeks to amend the requirement that a person appointed by the Treasury to conduct a review must be “independent of the FCA”, by adding the requirement that they must also be independent of the Bank of England. I absolutely agree that it is important that VFM studies of the FCA are carried out by someone independent of the FCA itself. That is what is proposed in the draft of the Bill itself, not least to provide assurance that they are objective and impartial. As I have said, in practice the Treasury is likely to choose the National Audit Office to carry out such a review. However, the Treasury will have the discretion to appoint an independent expert or a commercial firm with relevant specialist expertise to conduct a review. In that context the amendment is too wide, in that it could prevent any firm or expert which had done any significant amount of work for the Bank of England from carrying out such a role. From what the noble Lord said I appreciate that that was not the intention, but ruling out that population of firms or experts would be the effect of requiring the FCA reviewer to be independent of the Bank.
Lord Eatwell
If I may say so, that is absolute nonsense. Are we actually suggesting that any independent firm or individual who has done work for a government department is thereby compromised and no longer an independent person? Are we saying that an independent person who has happened to write a few papers for the research department of the Bank of England is now no longer an independent person and is thereby compromised because he is not independent of the Bank of England? That is a misuse of language.
Lord Sassoon
First, I am not sure why the noble Lord, Lord Eatwell, talks about advisers to government departments. Here, we are talking about finding firms to carry out value-for-money reviews of the FCA, and independence from the FCA would seem to be the overriding concern. We are not talking about the Bank of England itself or some part of the Bank of England’s wider group doing the review. As I am sure the noble Lord knows, with all the increasingly tough professional codes that exist, the definition of independence is becoming ever tougher. Therefore, although the noble Lord and all of us might like to go back to a sort of common-sense, gentlemanly world that once existed, I absolutely stand by what I said. The amendment—whose effect incidentally goes wider than the noble Lord indicated in speaking to it—would capture a range of firms just because of the way that professional independence has come to be defined these days. Therefore, I stand by my analysis of the amendment.
Amendment 130AA would require that when the Treasury orders a review of the economy and efficiency of the PRA, it informs the Treasury Select Committee of the nature of, and arrangements for, the review. I understand that the amendment is driving at the importance of accountability to Parliament. The Government agree that that is important, which is why there is already a large amount on this subject in the Bill, including the provision for NAO audit, which we have discussed.
Requiring the Treasury to inform the Treasury Select Committee of the nature of, and arrangements for, the review at such an early stage might have some benefits of the sort that the noble Lord identified but I fear that it is more likely to be seen as an invitation for the Treasury Select Committee to comment on or even attempt to change the remit of these important reviews. I suggest to this Committee—I would not suggest anything to the Treasury Select Committee—that adding another political hurdle could slow up the process of producing these reviews. It may even make it less likely that they will be commissioned in the first place if there has to be a negotiation of the sort that I fear.
I hope that those explanations are sufficient for my noble friend to be able to withdraw her amendment.
Baroness Noakes
My Lords, I am grateful for the contribution of the noble Lord, Lord Eatwell, to this debate and for my noble friend’s reply. Perhaps I may comment on Amendment 128BB in the name of the noble Lord, Lord Eatwell, concerning independence. I think that my noble friend has stretched even the most stringent modern interpretation of independence way too far. On his interpretation, the NAO might not be independent of the FCA and therefore might not be able to carry out any further reviews of the FCA. I hope that my noble friend will reflect on the need for independence. We have to remember that when the Bank of England, rather belatedly, appointed people to carry out reviews of itself recently, independence was not exactly plain in the appointments that were made.
I thank my noble friend for his responses on value for money. It is slightly odd that the Government intend to use the NAO to carry out value-for-money studies, but they have set up the NAO to be appointed the auditors, so it might carry out value-for-money studies. I am still left with the feeling that the carryover of the ability to appoint somebody to do a review is just repeated legislation which might lay fallow, as the FiSMA legislation largely lay fallow. However, I thank my noble friend for his response and beg leave to withdraw the amendment.
Lord Sassoon
Viscount Trenchard
My Lords, my noble friend Lord Flight is, of course, completely correct in his assertion that the proposed new regulatory framework makes far too little mention of the need to preserve competitiveness of the marketplace, not just competitiveness from the point of view of the consumer but the very competitiveness of the marketplace for practitioners to participate in. For that reason, financial services companies from all over the world have come into London and that has helped to provide more consumer choice, and it will continue to do so in the future, as well as providing the Exchequer with a very large proportion of its annual revenue. It is a huge pity, as my noble friend has pointed out, that the Treasury mistakenly believes that preservation of international competitiveness implies approval of inappropriate or inadequate regulation.
All three amendments have some merit but of the three I tend to prefer the amendment proposed by my noble friend Lord Hodgson because it gives a duty to the PRA to have regard to competition. I would have preferred that the PRA had an objective to protect the competitiveness of the marketplace as well but I realise that there are some valid arguments against that. To have a duty—“duty” is a strong word—to have regard to competition is the preferred of the three amendments put forward. The points in my noble friend’s amendment are all to do with minimising adverse effects, or avoiding restrictions or unnecessary regulatory barriers to entry; they are all negatives rather than positives. I would prefer this issue to be expressed in a more positive manner. I have worked for a Japanese-owned financial institution; I am not sure whether this is a UK institution under proposed new paragraph (d) in my noble friend’s amendment. It is, of course, a UK-incorporated plc. Could my noble friend clarify what “UK institutions and companies” means? It is very important for London that the level playing field for all participants is preserved and I hope that the amendment refers to UK incorporated or UK resident financial institutions and companies.
My noble friend’s amendment also makes it very clear how necessary it is to have collaboration and co-operation between the PRA and the FCA. Proposed new paragraphs (b) and (c) impact on matters that are of great concern to the FCA. I hope that these matters will be properly covered in the memorandum of understanding to be drawn up between the PRA and the FCA.
Lord Sassoon
My Lords, the most important issues to be addressed in this group of amendments are those around barriers to entry linked to resolvability. A sea change is needed and is coming. If the Committee bears with me, I will get to this issue, because it is at the heart of the concerns in this area, as identified in particular by my noble friends Lady Kramer and Lord Flight.
Let me start with Amendments 128BF and 128BG in the terms in which they are drafted. My noble friend Lady Noakes says that in some respects they go too far in terms of the duty to promote competition. However, I should do the amendments justice by speaking to them as drafted, although I accept that my noble friend put somewhat of a qualification around her amendment.
There are three reasons why the Government do not agree with the proposition in the amendments. First, all PRA-authorised firms will also be regulated by the FCA according to their objectives, and will therefore fall under the FCA’s objective to promote effective competition in the interests of consumers. To correct one point, it is also the case that authorisation has to be carried out by both the regulators. For those that are seeking a PRA authorisation, the PRA will lead, but others will be led by the FCA.
Secondly, the Government’s view—this goes to the heart of the new structure—is that the FSA simply has an impossible job in trying to balance so many competing objectives, which has led to its lack of institutional focus on prudential matters. In order to avoid repeating this mistake, we have decided that the PRA should have a single, general objective, supplemented by tailored, focused objectives, which are specific to particular regulated activities, such as the insurance objective set out in new Section 2C.
Lord Hodgson of Astley Abbotts
I ask my noble friend one practical question. I entirely understand what he says about the competition objective of the FCA on page 17. In his argument, that is a reason why it should not be on the PRA. There is no way that the PRA, without its competition objective, can overrule the FCA: that is, there must always be a competition objective in all cases where the PRA cannot outgun the FCA. If there are any occasions where the PRA can outplay the FCA, then of course the competition objective falls away, if there is not one for the PRA. Reading this, it looks to me as though there is a danger that the PRA will be the established centre—the capital centre and so on—and the FCA will be, in some senses, implementing what has been decided as a strategic framework by the PRA. If I have got that wrong, I am delighted to be put right.
Lord Sassoon
I do not think that my noble friend has got it quite right. However, I cannot hide from him the fact that we believe that, because it is right and goes to the heart of the flaws in the present tripartite arrangements, the PRA should have as its single objective the one that I have described. Therefore, the nub of his concern remains, and I cannot pretend that it is not there. All I can say is that we consciously want to have the architecture as I have described it. However, the mitigation—and I think it is an important one—is that the PRA must consult the FCA before taking any steps that could in any way harm the FCA’s objectives, including, in this case, the competition objective. I think it is a reasonable check on the PRA’s action, given the basic architecture which we think is important.
Baroness Kramer
One issue that I have raised to which I have never had an answer, no matter whom I have asked, is where the PRA is expected to move in terms of the cost of getting regulatory approval. The Minister made mention of the capital requirements—and there is a whole set of issues around that—but one does not even get to the capital requirements if one cannot get through an approval process without a phalanx of lawyers, accountants and submissions which frankly act as a complete barrier to any potential small and local banking institution. I do not understand where there is any commitment from the PRA to tackle that set of problems.
Lord Sassoon
The fact that it has already started on the work which will lead to the document in the autumn and which goes to the most expensive element of getting authorised—namely, the amount of capital required—is a fundamentally important and good start. I do not pretend that that completes the business, but it tackles first the most expensive element: the cost of putting that capital aside. This is a start. It is not before time, but it is happening as we speak.
Baroness Noakes
My Lords, I start by apologising to the noble Baroness, Lady Kramer, for having appropriated her amendment incorrectly in my opening remarks. I do not quite know when I made the mistake, but I made it quite early and perpetuated it. I latterly discovered that I did not quite like the drafting, and so was slightly disobliging about the amendment of the noble Baroness, which I thought was my own. With apologies to the whole Committee and particularly to the noble Baroness, Lady Kramer, I did not intend to add my name to her amendment. I would not have signed up to the precise wording but, as has come out in this debate, I think we are all speaking from the same territory.
That apart, I believe that there has been quite a lot of agreement among those who have spoken that the Government have not quite got this right. I am concerned that the Government keep saying that they will not repeat the mistake of giving conflicting objectives, which is alleged to have been one of the causes of the problems of the FSA, so this body has to have a single focus. However, I cannot see that a single focus is going to be good for the financial services industry or for the consumer, particularly where competition is just not in its lexicon. If it is not good for them I cannot see how it is good for the UK, so it seems to me to be bad policy.
The amendments that we have put forward today, in varying ways, have been trying to make it a slightly better policy by giving the PRA a broader remit. My noble friend the Minister said that he had undertaken to come back at Report to give a wider economic context, as he had already undertaken to do on the FCA. With respect, that does not meet the points that have come out from the debate today. I believe that there was quite a lot of agreement between my noble friends Lord Flight, Lord Trenchard and Lord Hodgson and I on the amendment tabled by my noble friend Lord Hodgson. When my noble friend the Minister thinks carefully about what to come back on Report with, I hope that he will look again at this issue. Expecting the FCA’s objectives to bear all the burden of reflecting competition in the way that the PRA operates is just bonkers. With that, I beg leave to withdraw the amendment.
Lord Eatwell
My Lords, this amendment and Amendment 128BFB seek to ask the Government to clarify their definitions of the scope of the markets in which UK financial institutions operate. We have already seen some very peculiar UK-centric views in proposed new Section 9C of the Bank of England Act 1998, which I hope we will see extensively modified on Report. In this clause, however, the Bill currently refers to having,
“any adverse effect on the stability of the UK financial system”.
This fails to recognise the global nature of UK banking, and that risks may arise anywhere in the world where UK financial institutions operate.
We want to ensure that the actions of UK financial institutions are such as to sustain the stability of the entire financial system in which they operate. Why? It is because destabilising actions in foreign markets may destabilise subsidiaries of UK financial institutions and, ultimately, the home institution. However, this could not be said to refer to the UK financial system. I will put it again: if in a foreign market a subsidiary is destabilised by actions here, that subsidiary ultimately destabilises an institution here—not the system but an institution. Can the noble Lord please explain how the current wording of the Bill deals with the fact that the balance sheets of UK financial institutions are typically written on a global scale?
Lord Sassoon
My Lords, these amendments seek to give the PRA a global financial stability remit. Instead of the PRA looking at UK financial stability, the amendment would have it looking at the financial stability of every market around the world in which any PRA-authorised person operates. The PRA would have a new responsibility for the financial stability of many markets where it has no powers, no jurisdiction and no tools. I suggest that this is plainly an absurd position. Although cross-border co-operation is vital to ensure the effective supervision of international firms, it is ultimately for each country and its regulators to ensure its own financial stability, or a single currency bloc may decide that financial stability needs to be supervised ultimately on a currency bloc basis.
Lord Eatwell
My Lords, I think that the noble Lord has misunderstood the amendment. If he inserts the amendment and looks at subsection (3)(a), it would refer to,
“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect”,
on markets in which PRA institutions operate. The noble Lord is suggesting that the PRA would not have jurisdiction, whereas the PRA does have jurisdiction over PRA-authorised persons.
Lord Sassoon
I have read and reread these amendments and discussed them with officials on a number of occasions because I cannot believe that this was the effect that the noble Lord, Lord Eatwell, wanted. Actually, it is entirely the effect of his amendments to require that the PRA’s general objective is to be advanced by,
“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect on the stability of the”—
if amended—
“financial markets in which UK financial institutions operate”.
They would have to regulate in a way that had regard to the financial stability of all these markets around the world, which does very directly get the PRA into the protection of financial markets way beyond its own control in the UK.
I will explain why I think the Bill adequately covers the noble Lord’s justifiable concern. What I have said so far in no way means that the PRA will ignore the stability of any financial market outside the UK that is relevant to PRA-authorised firms. The PRA will take an interest in the stability of any market that has a significant impact on the safety and soundness of one or more PRA-authorised persons. It will do this not in order to improve the stability of this market but to understand the potential or actual impact on regulated firms and to take steps so that this impact is minimised using all the powers available to it. I cannot identify anything in the Bill that limits the PRA or prevents it from taking account of all those factors. It is quite a different thing to put in wording, as suggested in these amendments, that would make the PRA in some way responsible for the effects on the stability of financial systems outside the UK. With that explanation and reassurance, I hope that the noble Lord will feel able to withdraw his amendment.
Lord Eatwell
My Lords, it is very difficult to be reassured by a statement that the PRA would sit back quite happily and watch PRA firms take actions that would destabilise foreign markets. However, given that the Treasury seems to have no concern about PRA firms destabilising markets outside the UK, I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, this amendment reflects a recommendation from the Joint Committee that a secondary general microprudential objective be given to the PRA. It seeks to specify a further means by which the PRA’s general objective should be achieved, by minimising the costs to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry. A similar amendment to this was tabled and debated in another place.
The Government acknowledge that there are some attractions to reframing the objective in terms of the prudential outcomes that the PRA will seek to achieve, as the Joint Committee suggested. However, specifying particular desired outcomes creates difficulties. For example, whether the failure of a firm results in a call on public funds will depend to an extent on the actions of the Government of the day—for example, in taking a decision to nationalise or recapitalise a failing institution. In some circumstances, the orderly failure of a firm followed by an FSCS payout may be the best way of protecting depositors and taxpayers while maintaining market discipline. The effect of specifying such outcomes could be to encourage the PRA to take a highly aggressive and expensive approach to supervision with an end goal of ensuring that, if a firm failed, its potential costs of failure to the FSCS and public funds would be zero or negligible. To ensure this outcome, the PRA would need to intervene extensively in a firm’s day-to-day affairs, undermining the responsibility of firms’ management for running their firm. Ultimately, in an extreme case, it could turn PRA supervisors into shadow directors.
To place such a duty on the regulator would be against the Government’s intention, endorsed by the Joint Committee and confirmed in new Section 2F inserted by the Bill, that the new regulatory regime should not be a zero-failure regime. The amendment would bias the PRA towards a zero-failure regime. On balance, the Government believe that it is better to frame the objective more broadly, requiring the PRA to focus on the safety and soundness of individual firms, so as to improve financial stability. This objective gives the PRA a clear mandate to intervene to address risk-taking by firms.
I hope I have been able to make clear to the Committee why I cannot accept this amendment, and why I ask the noble Lord to withdraw it.
Lord Eatwell
The Minister has exposed some very interesting arguments here in the relationship between the degree of protection which should be provided to consumers and the public purse, balancing that against the degree of supervision of firms. The Government seem to want to err on the side of jeopardising the public purse a little rather than providing supervision that would protect the public purse. However, in the context I can see that a balance is being discussed here, and the Minister has made clear where the Government’s view of that balance lies. In that light, I beg leave to withdraw the amendment.
Baroness Hayter of Kentish Town
My Lords, I trust that the first amendment in this group, moved by the noble Lord, Lord Flight, will not find favour in the Committee as it would substantially weaken the thinking, role and responsibility of the PRA.
First, it would exclude consideration of those currently excluded altogether from financial products, especially in insurance but also in banking. Unless the regulators take exclusion from financial products seriously, we will be failing in our duty to a large section of our community. Our regulators should act in the interests of the whole community, not just those who are already within the charmed circle.
Secondly, there may be issues of promotion and advertising of financial services or products—indeed, to the sophisticated as well as to the earlier group—which must be taken into consideration by the regulators.
Thirdly, it is now acknowledged, including by your Lordships’ House, that regulation should cover future as well as present consumers so that it can take account of changes in consumer needs, the environment and product development. This is the case with, for example, legal services. The Legal Services Act 2007 specifically adds in,
“those who are using (or are or may be contemplating using)”,
legal services.
Amendment 141 in the name of my noble friend Lady Drake is clearly an essential addition to the Bill if those who have bought with-profits policies are to have any confidence in their outcome. The funds must be husbanded in their interests, the profits must be shared according to the policy’s rules, profits must be justly distributed and any discretion must be used fairly and equitably.
There is surely not a word about this amendment with which the Minister could argue. As John Kay wrote in his report this week:
“Financial intermediation depends on trust and confidence: the trust and confidence that savers who invest funds have in those they choose to manage these funds”.
Amendment 141 is part of recreating that trust and confidence, and we are happy to support it.
Lord Sassoon
My Lords, let me first speak to government Amendment 140E. When considering the regulation of discretionary payments in with-profits business there is no easy split between prudential and conduct issues. The Bill deals with this by giving the PRA sole responsibility for issues relating to discretionary payments. The FCA remains responsible for all other conduct regulation. However, under the Bill as drafted, use of “includes” in new Section 3F(1) could be interpreted to suggest that the PRA is responsible for other elements of conduct regulation as well. This amendment simply clarifies the drafting, by removing the implication that the PRA could be responsible for other conduct issues.
I turn to the non-government amendments in this group. Amendment 128BH would remove the reference to those “who may become policyholders” from the PRA’s insurance objectives. However, I can assure my noble friend that the inclusion of this reference to future policyholders is both deliberate and important. It is there for completely different reasons from those advanced by the noble Baroness, Lady Hayter, with whom I agree in rejecting the amendment but for much narrower and more technical reasons related to the nature of a with-profits fund.
Let me give an example of what we are thinking about here. If one considers the scenario where the PRA is considering whether a with-profits insurer should be permitted to make a very large distribution to its policyholders, and if the PRA is only required to consider the interests of current policyholders, it might be inclined to allow the distribution. However, that might leave insufficient assets in the fund to ensure that policyholders coming into the fund—if it is operating on a going-concern basis—obtain fair and adequate payments from the fund.
I should reassure my noble friend that the reference to those becoming policyholders does not require the PRA to go out in some proactive way to protect those who have no current plan to take out a contract of insurance, but who might at some point decide to do so. The PRA is only obliged to provide an appropriate degree of protection and what is appropriate will depend on the facts of the case. In this case, it is the needs of a person who is about to sign on the dotted line for a with-profits policy who needs to be assured by the regulator that the fund to which they are about to subscribe is appropriately strong according to the rules. This provision allows for that.
Amendment 141 would require the PRA to regulate with-profits funds on the basis that the fund should be managed for the purpose of distributing profits to policyholders, as opposed to any other purpose. This is an important issue and I welcome the opportunity to set out broadly how with-profits will be regulated under the new system. It might be worth just pointing out to the noble Baroness, Lady Drake, that new Section 3F—the “With-profits insurance policies” section on page 31 of the Bill—makes it quite clear that the PRA must secure an appropriate degree of protection for policyholders. That is very clear. It is different from the looser wording, to which she referred, about the insurance objective “contributing” to securing protection. It is clear that the language in new Section 3F for with-profits is stronger than in new Section 2C on the insurance objective. That is an important background to the consideration of this amendment, and a point to which the noble Baroness drew attention.
When regulating a with-profits firm, the regulator is concerned with ensuring that the firm recognises a proper balance between the different interests in the fund. These interests include one that is highlighted in this amendment—the interests of with-profits policyholders to the distribution of profits made by the fund. However, there are other legitimate interests in a with-profits fund. They include the interests of the members of the insurer in the case, for example, of a mutual. In a proprietary firm, the shareholders also have an interest in the profits to be distributed. There are also considerations to be balanced between different types of policyholder. I do not suggest for a minute that the noble Baroness seeks to disapply all these other interests in the with-profits fund. Maybe she does—no, I see that she does not. I am glad about that as we would be fundamentally rewriting the law. That would be the effect of the amendment.
I am grateful to the noble Baroness for bringing up this issue. I must say that a balance needs to be struck between the interests of current policyholders, who will be keen to see all available funds distributed, if they are distributed to them, and the interests of future policyholders, which we have discussed, who will pay the price of excessive generosity to previous generations of policyholders. There is also the overriding concern to ensure that the fund remains solvent and able to make distributions.
As I said, under the Bill, the PRA is required to secure an appropriate degree of protection for with-profits policyholders in new Section 3F, and it will have to take all of these factors into account. Although the factors to be taken into consideration are complex, in essence the objective of regulation remains the same for with-profits as for any other type of business. The objective fundamentally is to ensure the firm’s safety and soundness, while ensuring its proper conduct, including the fair treatment of consumers. In asking the Committee in due course to support the Government’s amendment, I ask my noble friend Lord Flight to withdraw his amendment.
Baroness Drake
There is an issue that I am not sure the Minister has addressed. The PRA will be focused on prudential regulation, so its approach on how discretion should be applied on with-profits policies could be influenced by a preoccupation with the prudential responsibility, and through that focus may become unfair in how it has balanced the consumer’s interests.
Lord Sassoon
My Lords, I do not believe that to be the case but it might be helpful if I write to the noble Baroness, copying in the Committee, with a fuller explanation of how that will be taken care of.
Lord Flight
I thank the Minister for answering what in essence was a question. In my view, with-profits policies have been and continue to be useful instruments for the man in the street, and I now understand the reason for the phrasing as it is. I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, the noble Lord, Lord Eatwell, raises an important point here that we want to on one hand future-proof the Bill, and on the other hand make sure that the future ring-fence around regulated activities—the regulatory perimeter—is not widened on a whim. It is not an easy line to draw. If it required primary legislation—not that the noble Lord was suggesting that—to extend the PRA’s objectives to bring other activities within the regulatory perimeter, that would be a complicated 12-to-18 month process that would not allow for a timely response.
The situation that I generally envisage is one where the FPC would ask for the regulatory perimeter to be widened. That, I suggest, is sensible and necessary future-proofing that enables the authorities to react to changes in financial markets and financial risks in a pragmatic way, whether it is to allow for innovation, or for any other reason. To give a couple of examples which could come up where the FPC could recommend such an extension of the perimeter, it might relate to some or all shadow banking activities or to peer-to-peer platforms or activities, which we have discussed fairly regularly.
I am looking to see whether my noble friend Lord Lucas is here, or some of my other noble friends—the noble Baroness, Lady Kramer, and the noble Lord, Lord Sharkey, among them—because at some point activities like this could well be recommended by the FPC to the Treasury to be brought within the regulatory perimeter. The Treasury would then make an order to make these activities PRA-regulated ones, and if necessary apply additional objectives to these activities.
I assure the noble Lord that in this context, in accordance with convention and Cabinet Office guidance, the Treasury, as the relevant department, would of course conduct the consultation in the normal form at that point. I hope that explains why this part of the Bill is drafted in the way that it is, and that there are protections in there.
Lord Eatwell
My Lords, that was very interesting because the FPC has not been mentioned at all and it is suddenly being prayed in aid in support of this section. I remain puzzled as to why the Government are willing to risk the Bill appearing to be so restrictive by not including some notion of general consultation. Of course, if the FPC were involved there would be consultation issues around which the FPC itself is hedged. But changes could appear on a whim, as the noble Lord himself put it. I would not expect the Treasury to behave on a whim, but it might appear that way to the industry.
Lord Sassoon
I am sorry, but I am pretty sure that I did not say that the Treasury would do anything on a whim: far from it. I would not like the record to say that. Of course the Treasury would not do something on a whim. I would expect recommendations to come from the FPC, which, as the noble Lord said, has its consultation procedures. It does not need a reference in the Bill to say that if the Treasury makes recommendations or an order under this clause nothing else needs to be said. Of course the Treasury will follow the normal consultation processes applicable to this form of order.
Lord Eatwell
One should hope so too. One would have hoped that new Section 22A and other relevant sections, perhaps to be added, would recognise that fact. However, having had an interesting discussion of responsibilities and whims, I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, this is a big group to do justice to, but I will make a start with Amendments 129ZB and 129ZC, which would require the PRA to make and maintain arrangements for consulting consumers as well as practitioners. I agree that consumers have a key interest in the outcome of the PRA’s decisions. In particular, consumers will be one of the beneficiaries of a safer and more stable financial system. However, the PRA will not focus on consumer protection as an end in itself—that will be the job of the FCA. In its regulation of insurance outside the special arrangements for regulation of with-profits business, the PRA will deliver its policyholder protection mandate through effective prudential regulation. Of course, consumers will be able to respond to public consultations on rules and to the PRA’s annual consultation following publication of its annual report. However, the main way in which the consumer interest is represented will be through the FCA. The FCA will provide the PRA with advice and expertise wherever consumer interests need to be taken into account. The draft MOU that has been published by the Bank and the FSA makes clear that such consultation will take place at an early stage.
Amendments 130ZC and 130ZZC would require the PRA to make and maintain arrangements for consulting consumers, and to consider representations made to it by the FCA consumer panel and practitioner panels. On the first element of this, as I have explained, where the PRA needs input on an issue of consumer protection, this will be provided by the FCA. I therefore do not think it necessary to require the PRA to consult consumers or their representatives directly. However, just because the FCA will advise the PRA on consumer issues, that does not mean that the FCA panels should be tasked with a formal role to advise both authorities.
Under the Bill, the FCA panels rightly focus on issues of concern to the FCA and will not have the expertise or mandate to examine the PRA’s approach. The PRA and the FCA will develop different approaches to regulation, consistent with their different objectives and the fact that the PRA will be regulating a much smaller number of firms. The panels are free to make representations when the PRA consults on rules, or indeed at any other time. However, I do not think that it would be right to require the PRA to give special attention to representations made by bodies designed and maintained for the purpose of advising the FCA on its work.
Amendment 130ZA would require the PRA to consider representations from the FCA’s consumer panel. The Government value the work of the panel and its important contribution to the development of consumer protection policy. However, as I have explained, the Government’s view is that it should continue to play this role through engagement with the FCA rather than the PRA.
Amendment 141A would require the PRA to make and maintain effective arrangements for consulting the consumer panel, consumers, or their representatives in relation to the PRA’s responsibility for with-profits insurance policies. The Government acknowledge that there are particular issues around with-profits regulation, balancing questions around the fairness of with-profits policies with the effect of making payments from with-profits funds on the safety and soundness of the firm. The PRA will have to consider these carefully and put in place appropriate arrangements for consulting others with relevant expertise, and is specifically required to seek the FCA’s advice in discharging its sole responsibility for with-profits regulation to ensure that it is taking account of the FCA’s consumer protection expertise. In giving its advice, the FCA is of course at liberty to consult consumer protection experts and panels as it sees fit. Taking all this into account, the Government do not think that a separate consumer panel for with-profits regulation is either needed or proportionate.
I now turn to the amendments in the group that would require the PRA to maintain consultative panels. Amendment 129A would require that the PRA’s arrangements for consulting practitioners under new Section 2K must include the establishment and maintenance of one or more panels. The Government agree that in order to carry out effective regulation, the PRA will have to consult industry in order to gather information, expertise, and outside perspectives on its work. That is why new Section 2K puts the PRA under a high level requirement to consult. However, the Government remain of the view that the PRA should have discretion as to how it goes about this consultation.
Given the PRA’s greater focus on firm-specific prudential decisions, a standing panel might not be the most effective way of ensuring a productive dialogue with industry. I should be clear that the future management team of the PRA have made clear that it does not envisage that maintaining a panel would be the most effective way of gaining the information that it needs to deliver judgment-led prudential regulation. The PRA will also have a much smaller community of regulated firms than the FSA, or indeed the FCA, and so may wish to tailor consultation exercises on individual rules or measures more precisely to the firms most affected by them. A single, industry-wide panel is not ideally suited to this kind of consultation.
Baroness Noakes
My Lords, can the Minister explain in a little more detail why the FCA is not allowed any discretion about whether it has panels but the PRA does have discretion? Is it just because it is the Bank of England, and the Bank is saying that it has to have discretion?
Lord Sassoon
No, my Lords, of course it is not because it is the Bank of England and it says that it has to have discretion. This is government legislation and the Government are presenting a Bill that we believe is appropriate to the new financial architecture. Of course we consult the Bank of England, the FSA and all sorts of other people. We have also had the input of the Joint Committee. My noble friend is quite right to challenge me on this but I am quite clear on it. As I have tried to explain, it is understandable but simplistic of people to read across that there are panels now that would like to continue to be engaged with both new regulators. I can understand where the panels come from and why, as I have explained, since consumers have a considerable interest in the decisions taken by both bodies, consumers superficially may say, “Actually, we would like to be engaged directly with both”.
Lord Sassoon
If the noble Baroness will allow me a moment, the PRA is a very different animal. We risk, in some of this discussion, slipping into a frame of mind of thinking that the FCA and the PRA are somehow going to be two peas popping out of the same sort of pod. They will be very different regulatory and supervisory bodies with very different mandates and very different numbers of firms that they are regulating. It would be quite wrong to have a one-size-fits-all approach to consultation in these circumstances.
Baroness Hayter of Kentish Town
But consumers are not asking for this superficially. It is their money that is being looked after and overseen by bits of the PRA, and they make a very serious request. As I said, we are relaxed about it not being a specific panel, but the existing panels should have a right to be heard. It is simply not enough to depend on the FCA, whose chief executive comes from the industry—as does its new chair, with 27 years in banking and enormous experience. However, they do not represent the consumer interest.
Finally, my fear is that if there is no right to be heard, consumers, and maybe practitioners as well, will retreat to the other way of getting a hearing: to go to the press. One of the great things about the consumer panels is that you very rarely hear about them because they have a back-door entrance. They can go in and have early dialogue. Deny them that and I am afraid that we will revert to the other way, which is an open dialogue through the press.
Lord Sassoon
I understand all that and I know very well that the consumer panel in which the noble Baroness played an important part has had and continues to have an extremely important role. It is not as if the PRA will not be consulting consumers and the public; it must consult publicly on draft rules, for example, and that would involve consulting not just practitioners. Generally, however, the FCA will be the expert on consumer issues and it is right that it should be the primary channel to focus the PRA’s approach.
I repeat that the PRA will be a supervisor with a much more firm-specific, prudential decision-making focus—as opposed to the FSA and the FCA, which will have a much broader rules-based approach. We are talking about very different animals. Indeed, it is worth recognising that, if we are talking on the practitioner side, the FSA tends not to consult the current practitioner panel on firm-specific prudential decisions any more than I would expect the PRA would or should. The dynamic is very different. Therefore, for the reasons that I have given and will continue to give in going through the rest of these amendments, and for the reasons that my noble friend Lord Flight put very clearly in relation to consumers, I believe that what we have put in the Bill is right.
I believe that we are at Amendment 129A. There is no more that I can usefully say on that amendment, so I will move on to Amendment 129B, which would require that the PRA’s consultation arrangements should include industry panels and, where appropriate, a panel representing insurance policyholders. I should start by being clear that where the PRA consults on issues with particular impact on insurers, the Government agree that it should ensure that it engages with insurers in order to understand their views. Such consultation might be done as part of its general consultation under new Section 2K or through consultation on specific rules. Regarding consultation with insurance policyholders, as I have said, where consumer interests are engaged, the PRA will be provided with advice and expertise by the FCA. The Government do not expect it to be necessary for the PRA to make specific arrangements for consulting policyholders any more than other consumers.
Amendment 130ZZZA would require the PRA, as part of its consultation arrangements under new Section 2K, to establish a panel for policy debate with senior representatives of firms and to consider the cumulative impact of regulation by the PRA and the FCA. Policy debates about regulation take place in many forums—for example, between regulatory authorities at the European level, in the FSB and at the IMF, and of course in your Lordships’ House. However, I do not think that it would be right for the PRA to be engaged in policy debate with those that it regulates. Regulated persons are free to make representations to the regulator. There are mechanisms for this is in the Bill. However, to enshrine in legislation the idea that firms should enter into a policy debate with the regulator is contrary to the concept of judgment-led regulation. The PRA will listen to firms but it will form a view based on its own regulatory objectives and priorities, not on the commercial objectives and priorities of firms.
On the second element of the amendment, I agree that the PRA should consider cumulative regulatory burden. It will do this as a matter of course when it considers proportionality under the general duty to co-ordinate. There are already numerous opportunities for industry to comment on the effectiveness of co-ordination. In particular, the PRA and the FCA are required to include in their annual reports an account of how they have complied with the general duty to co-ordinate. Industry and the general public will be able to make representations, for example, at the annual general meeting of the FCA, and as part of the PRA’s annual consultation on the effectiveness of its strategy.
Amendment 129ZD would amend new Section 2K to require that:
“When carrying out a consultation, the PRA”,
should,
“have regard to the desirability of ensuring a broad representation of practitioners and consumers”.
I have some sympathy with the sentiment. I agree that, in order for the PRA to regulate effectively, it will need to consult widely. For example, if it is considering putting in place a new framework for the purposes of supervising credit unions, I would expect it to form a comprehensive view of the sector by talking to credit unions, large and small, based in different parts of the United Kingdom. Where appropriate, I would also expect it to talk to academic experts and other interested parties. However, I do not think that this needs to be underpinned with a specific provision in legislation. The PRA will need to consult effectively if it is to deliver its statutory objectives, and it will be held to account by Parliament for doing so. New Section 2K already requires the PRA to consult the full range of PRA-authorised persons and not just those who are practitioners.
Amendment 130ZZA would provide that the arrangements for consulting PRA-authorised persons may include consultation with persons with specialist knowledge of PRA-regulated activities. Again, I agree entirely with the sentiment. As the Government have made clear, the PRA will consult expert individuals when developing policy. It need not rely solely on industry experts, but also those in academia and other experts. At present, new Section 2K makes express reference to consultation with industry because industry will be directly affected by regulation. It is appropriate to recognise that fact in the Bill, while making it clear that the PRA may decide how to engage with them. But consulting industry is different from consulting “persons with specialist knowledge”. The PRA may of course consult such individuals, whether as part of a public consultation or for a specific purpose, if it will help it to better deliver its objectives. It might also wish to consult all sorts of other categories of person—for example, international organisations such as the FSB and Basel committee. It seems unnecessary to include that level of prescription in the Bill.
Amendment 130ZAA would clarify that the PRA is not to be deemed to be accountable to those firms that it regulates. I am glad that my noble friend has raised this point, as it is an important one. The Government and the Bank of England have been absolutely clear that the PRA should not be seen as accountable to those it regulates. We agree. Firms are accountable to the regulator, and the regulator is accountable to Parliament. However, the lines of accountability are clear in the Bill, and it is not clear what such a declarative statement would add.
Finally, Amendment 130ZZB would require the PRA to report annually on its consultation activities. The Government fully agree with this intention, and indeed the PRA is already required to so do as part of its annual report by new Schedule 1ZB, in paragraph 18(1)(c) on page 186.
I come back to the fundamental point. We have considered carefully the separate consultation requirements for the two regulatory authorities. I understand all the concerns, some of which I hope I have been able satisfactorily to address. But others have consciously been left on the table, reflecting the very different nature of the beast, which the PRA will be as a focused regulator with its small community and one very clear objective. On the basis of that rather long canter through the group of amendments, I ask my noble friend to withdraw his amendment.
Lord Sassoon
Of course, I note what my noble friend says. She is always very clear and direct. I absolutely refute that the PRA has anything approaching a free-for-all. I have explained the many general and specific requirements it has to consult on, whether they are individual rules or setting things out on an annual basis and so on. Earlier on, I think she promised to send me a letter setting out some of the concerns, which she has just summarised, on the recent consultation. I will be very happy to receive that, and the Treasury will of course look at it as well.
Lord Sharkey
My experience in commercial life has left me with a deep respect for the wisdom of consumers, and a deep conviction that consumer groups, properly constituted and properly consulted, are a source of sound guidance, and a vital way of making sure that decisions are properly grounded in current experience, views and expectations. Critically, this wisdom and this learning is always best delivered directly and not through an intermediary. I continue to think that the Government are mistaken in excluding consumers from direct consultation with the PRA, and I think it is unwise to rely on second-hand unmediated input. I suspect, given the comments around the Chamber this evening, that this is an area we might well return to on Report. In the mean time, I beg leave to withdraw.
Lord Davies of Oldham
My Lords, I have little to add to this debate. I will keep my remarks very brief, but they are remarks of some cheer. I never thought that I would from this Dispatch Box congratulate the noble Lord, Lord Flight, on an amendment, but I very much approve of his Amendment 130B, and the precision with which he spoke, as well as the noble Baroness, Lady Noakes, who has made such a contribution to our proceedings today.
Lord Sassoon
My Lords, I fear that again this is going to be relatively long one in which I will not be able to satisfy all my noble friends. I hope that my arguments will speak for themselves, but I have a suspicion that I might not quite be able to do it. Let me give it a go, because this is a series of important amendments.
Amendment 130B would add to the efficiency principle to which both regulators will be required to have regard when carrying out their general functions. The efficiency principle ensures that the regulators should have regard to using their resources in the most efficient and economic way. This is the principle in FiSMA at the moment, but we are going further. We have made the accounts of the FCA and the PRA subject to audit by the National Audit Office and provided that the NAO will be able to carry out value-for-money studies into the new regulators, as we discussed earlier today. This ensures an important line of accountability for the regulators to Parliament, through the Public Accounts Committee, in how they use public money.
If the regulators are required to consider minimising burdens on firms without any counterbalancing provision, they may be distracted from pursuing their focused objectives, particularly if one considers that minimising burdens on firms could be used as a rationale for inappropriate regulatory forbearance. Instead, the proportionality principle ensures that costs of individual regulation are balanced against the pursuit of regulatory objectives that will benefit the whole financial system and its consumers, by requiring the regulators to consider whether the burdens imposed on firms will be proportionate to the benefits brought about by that imposition.
Amendments 131 to 135, in the name of my noble friend Lord Hodgson of Astley Abbotts, look to amend the proportionality principle to which both regulators will be required to have regard when carrying out their general functions.
Given the importance of the proportionality principle to the new structure, I am very glad to have the opportunity to discuss it further via this series of amendments. Amendments 131 and 135 would add to the proportionality principle a requirement on the regulators to consider whether an operational rule or operational requirement is proportionate to the benefits which result from that rule.
I can assure my noble friend that the existing reference to a burden or restriction already includes burdens or restrictions which relate to operational matters. So when the regulators make rules or impose requirements which require firms to alter the manner in which they operate their business, they will be required to have regard to the proportionality principle.
In fact, my honourable friend, the Financial Secretary to the Treasury, tabled amendments to the Bill on Report in another place to ensure that the regulators will have to demonstrate how they have considered such matters when making rules.
Specifically, they will have to set out in the compatibility statements that they are required to publish when consulting on new rules, how they consider the proposals to be consistent with the principles of regulation in new Section 3B, including the proportionality principle. Amendments 131 and 135 pick up the important point that much of it comes in the operational matters but that it is picked up, and specifically that the requirements of the Bill were extended in another place, which makes Amendments 131 and 135—and Amendment 132, which is consequential—unnecessary.
Similarly, Amendment 133 seeks to add “firm” to the proportionality principle, so that the regulators will have to consider the burdens and restrictions placed on firms, adding to the current wording which uses the term “persons”. We may have touched on that before, but again, for the avoidance of doubt, if we have not mentioned that in Committee, I would like assure my noble friend that “person” is defined in the Interpretation Act 1978 as including,
“a body of persons corporate or unincorporate”.
Thus “person” includes individuals and other forms of legal person such as companies, partnerships and unincorporated association. So Amendment 133 is unnecessary.
Finally, Amendment 134 would add the words “reasonable and fair” to the proportionality principle. I agree that the regulators should be both reasonable and fair in the way that they pursue their objectives. I understand my noble friend’s concerns. He has taken us through a number of examples where he feels that the current regime is operating unfairly. I will certainly not detain the Committee by giving the other side of the case in each of those examples, but there is one. Part of what we are doing will work right through the structure only if there are changes of attitudes in lots of ways in which people go about their business.
I appreciate the argument that the best way of making people change their attitudes is to include certain things in the Bill. However, I know that the FSA and the PRA are reading these debates carefully and understand the spotlight that they are under. All these exhortations to them to do what, in this case, is my noble friend’s direction of travel, which I fully appreciate, are being listened to carefully. But the provision itself in Amendment 134 is unnecessary. The regulators have a duty under public law to act reasonably and can be challenged in the Upper Tribunal or by way of judicial review if they fail to discharge that duty, which would be broadly the case if the requirement were on the face of the Bill. The regulators are already under a duty to comply with the rules of natural justice—in other words to follow procedures and processes which are fair.
Amendments 144A and 147C would require the regulators to set out the costs and benefits of the regulation for which they are responsible in their annual reports. The regulators are already required to include in their annual reports a significant amount of information about how they have adopted a proportionate approach to delivering their objectives for the FCA, in new Schedule 1ZA(10) and for the PRA Schedule 1ZB(18). They must set out how they have complied with the regulatory principles, including the proportionality principle.
The financial services regulators are being brought within the statutory remit of the NAO, which I have said before, which will be able to carry out its own value-for-money studies. It would be excessive to add to this an annual requirement for the regulators to conduct their own cost-benefit analysis of the entirety of their regulatory activity.
Amendments 147D and 147E would require the PRA to hold an annual general meeting, as is required for the FCA. Amendments 144C to 144E would require the FCA to put in place arrangements to consult on its annual report, as is required for the PRA.
The Bill provides for the PRA and FCA to take different approaches to annual consultation on the effectiveness of their regulatory approach, and I welcome this opportunity to explain why that is the case. The provisions for an annual meeting under FiSMA provide a useful opportunity for stakeholders to make high-level comments on the FSA’s strategy and approach. Like the FSA, the FCA will supervise the conduct of all financial services firms. Given the wide range of issues under consideration, and the large number of firms, it is useful to have a single annual forum where stakeholders can voice their views. But as I said in discussing the last group, the PRA will be looking in much greater detail at a much smaller number of firms, and will be focused on complex issues of prudential risk. Given the PRA’s narrow focus and the complexity of the prudential issues it will tackle, a written consultation will be a more effective way of obtaining input from industry about how it has performed against its objectives. This will enable firms, consumer groups and others to put in detailed submissions addressing the PRA’s prudential approach in a level of detail that they would not be able to do in an annual meeting.
These are alternative, rather than complementary, mechanisms—horses for courses—and it does not seem necessary to subject both regulators to both mechanisms, and in doing so create additional cost.
Lord Teverson
My Lords, I understand that argument about the PRA and a public meeting, but it seems to me that all of us that are in public bodies, in politics or whatever, know that there is nothing that makes you feel more accountable than knowing that you have to face an audience face to face once a year and people can turn up and ask you live questions. That is why corporate annual general meetings are not perfect, but at least they can be effective in that way and be quite focusing for the board of that company, or, in this case the members of the prudential regulation authority. It seems to me that since prudential regulation is so important to the financial health of the country, it would be a good thing for that reason.
Lord Sassoon
I well understand my noble friend’s argument. It is, of course, far from the case that the PRA and the Bank of England will be able to hide from direct questioning of what they do because I am sure that they will be in front of the Treasury Committee much more frequently than annually, under the full spotlight of television cameras and so on. It is not like a normal corporate situation in which the board may be able to hide away from that sort of scrutiny except annually. There will be very regular public challenge, principally through the Treasury Committee, and I can only repeat that it would have been the simple, easy answer to just put both requirements on both the successor bodies, but I come back to the underlying point: we must remember that we are creating two bodies that have to be, in very many respects, different from what we have with the FSA at the moment. If it is merely shifting the chairs around, we need not be spending the many hours that we are spending over the Bill.
Lord Sassoon
Well, that is why we are not merely shifting the chairs around; there will be a very fundamentally better structure in place for all sorts of reasons that we have debated, but as a consequence of that, some of the easy solutions of “one size fits both regulators” is not the right way to go and in this case it is essentially a disproportionate imposition of the public meeting on the PRA, for the reasons I have given.
Amendment 144B seeks to require the FCA to account in its annual report for how often the FCA used the product intervention power in Section 137C and financial promotions power in Section 137P, what the outcome of each intervention was, and how the FCA complied with the statement of policy concerning the temporary product intervention rules in Section 137N. Both powers are very important, but they are also a departure from the current regime and therefore it is important that the regulator accounts for how it uses them. As such, I fully agree with the sentiment behind this amendment, but I reassure my noble friend that it is not necessary. Paragraph 10 (1)(a) of Schedule 3 requires the FCA to report on the discharge of its functions and the FCA’s general functions include making and policing of the rules. The Government therefore fully expect the regulator to account, in this area, for how it has used these powers.
I think that I have dealt with all the amendments in the group.
Lord Hodgson of Astley Abbotts
I return momentarily to Amendments 131 to 135. I am extremely grateful for the Minister’s comments and the comfort that he gave on operational rules and the exchangability of “person” or “firm” under the Interpretation Act 1978, of which I was not aware. On the point about “reasonable and fair”, I think that he said the firm could always take the regulator to the Upper Tribunal. That is not an answer at all. No firm, particularly not a small one, will want to take the regulator to the Upper Tribunal. That is only in theory an answer. There is no way that any firm will want to go through the risks—in publicity, time and reputational damage—to ensure that the regulator has been reasonable and fair. I am not asking my noble friend to come back on this; I understand his point; but his officials should not think that that is an answer, because it is not a practical answer in the real world.
Lord Sassoon
My Lords, I appreciate that the processes of challenge, whether it is by the Upper Tribunal or under the rules of natural justice, are very much back stops and expensive and difficult for firms. That does not mean that large firms have not challenged the FSA and in some cases been successful over the years. I am not sure that it would be any cheaper and easier if such requirements were written into the Bill.
It just remains for me to ask my noble friend Lord Flight to withdraw his amendment.
Lord Flight
I thank my noble friend for his response. With regard to my Amendment 130B, I hope that, by the time we get to the end of the process, he may have some more effective thoughts as to how to ensure that costs are managed economically. I observe that, since the FiSMA, a great deal of forest wood has been cut down, a great deal has been added and little achieved for the consumer as a result. It is a difficult nut to crack, but, in the mean time, I beg leave to withdraw the amendment.
Lord Sassoon
Lord Sassoon
“Publication of record of meetings of governing body9A (1) The FCA must publish a record of each meeting of its governing body—
(a) before the end of the period of 6 weeks beginning with the day of the meeting, or(b) if no meeting of the governing body is subsequently held during that period, before the end of the period of 2 weeks beginning with the day of the next meeting.(2) The record must specify any decision taken at the meeting (including decisions to take no action) and must set out, in relation to each decision, a summary of the deliberations of the governing body.
(3) Sub-paragraphs (1) and (2) do not require the publication of information whose publication within the time required by sub-paragraph (1) would in the opinion of the governing body be against the public interest.
(4) Publication under this section is to be in such manner as the FCA thinks fit.”
Lord Sassoon
Lord Sassoon
Lord Sassoon
Lord Sassoon
Financial Services Bill
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Lord Phillips of Sudbury
My Lords, I support the purport of the amendment moved very effectively by the noble Baroness, Lady Drake, and supported entirely fairly by the noble Lord, Lord Peston. I confess that for 26 years I tried to deal with the British public’s legal problems as the legal eagle on the “Jimmy Young Show”. I suppose that I take a particular interest in the effect of legislation such as this on the ordinary consumer. There are a number of practices at large these days in what I call big business that leave the individual consumer way behind in terms of any fairness of dealing. The big battalions will call in aid lawyers, often paid on a conditional fee basis, and it is frankly terrifying if you are a small bloke and have a dispute with a large company. You will quickly be given the clear indication by the large company that if you do not buckle and pay up you will be crushed. I put that a little dramatically, but not much.
As it happens, I have been dealing with one of the large energy companies lately over a disputed electricity Bill. I have been astonished at the general tenor of the dealings and the way in which it so organises its affairs that if I were not an old fart of a lawyer I would easily have been overborne by its tactics and approach.
Lord Phillips of Sudbury
I am glad to see that my noble friend doubts that I am an old fart of a lawyer, but I am—55 years in the saddle and still riding.
I appreciate that the Minister has, at all stages along the way, tried to protect the Treasury, the FCA and so forth against all these vague and difficult notions of fairness. Indeed, he might like to clarify in summing up whether he thinks that the ill to which the amendment addresses itself could be healed by the integrity objective. The amendment is to the competition objective, but the integrity objective could enable the FCA to take account of the matters raised by the noble Baroness, Lady Drake, in order to improve things. But I seem to recollect from one of the amendments in my name and that of my colleagues that the Government think that the integrity objective is not about fairness: it is about the mechanics of the system, if I can put it that way. I have the same general misgiving as the noble Lord, Lord Peston, and many others in the House, that the Bill does not address issues of fundamental fairness that affect ordinary citizens. I shall be very interested if there is any consolation that my noble friend can give.
Baroness Hayter of Kentish Town
My Lords, along with most other speakers, I support the amendment moved by my noble friend Lady Drake. As I have argued in Committee before, it is no good having a competitive market for banking and insurance—not that we have one—if consumers effectively cannot enter the market, if they cannot identify what they need and if they cannot get value for money. As we have heard, all sorts of people find it challenging to know what services are suitable for them. How else could HSBC have sold bonds designed to be held for five and more years to 2,500 with an average age of 83? It is a little like people trying to sell PPI to my noble friend Lord McFall, or Barclay, HSBC, Lloyds and RBS mis-selling interest rate swaps to 28,000 businesses.
My hope is that Amendment 117 will give the FCA an explicit mandate to put a stop to unfair overdraft charges, excessive fees and complicated price structures, all of which hinder competition, which is probably why I think the amendment belongs within this area. The FCA has to be able to tackle hidden charges if it is to promote effective competition, given that, as we have heard, individual consumers simply cannot do this for themselves. If we, as consumers, buy a theatre or an airline ticket, there is a pernicious little booking fee—at least we can see it. I have just had to pay £2 on a £10 ticket to go to the Noel Coward Theatre, which seems a bit high. At least we can see such a charge and we can choose whether to pay it or not to go to the theatre, but that is not the case with bank charges.
A recent Which? survey found that 60% of those polled said that they paid what they felt to be an unfair bank charge and half paid a charge which they thought was disproportionate to whatever benefit they received. It is not clear, from the current language in the Bill, that the FCA will have the necessary mandate to tackle hidden charges. I know—and my noble friend Lady Drake quoted it earlier—that the Financial Secretary in the other place said that the FCA had,
“the powers and the mandate to intervene on matters of price and value for money”.—[Official Report, Commons Financial Services Bill Committee, 1/3/12; col. 261.]
The Financial Secretary argued that the FCA does not need these bespoke powers, given that it can take action under the competition and consumer protection objective. However, a Queen’s Counsel advised Which? that the current wording of the objective could allow the industry to challenge the FCA’s mandate to tackle hidden charges, which could lead to a repeat of those failed and expensive test cases to which my noble friend referred. Any such uncertainty would make the FCA very risk-averse; it would be reluctant to take action for fear of being challenged. Unless the FCA has a really clear, unambiguous mandate to tackle hidden charges, I can share its reluctance to be at risk of legal challenge from the industry. Therefore the Bill must give this power to the FCA; it is absolutely key to promoting competition. At present there is insufficient responsibility on firms to ensure that products are appropriate for the consumer in terms of meeting their needs, accessibility and reasonable value for money, as Consumer Focus argued to the Joint Committee. The Council of Mortgage Lenders said that the regulator,
“should have an appropriate degree of protection for consumers and should reflect a differential approach not only between market and retail consumers, but within the retail market itself”.
The amendment is simple; and can only promote confidence in the industry. Who, after all, could argue with appropriate services and value for money? Not even, I think, the Minister. We need to get back to trusting the banks and the pension providers, as the noble Lord, Lord Lucas, said. Therefore we trust that the Minister will accept Amendment 117. In the words of my noble friend Lord Barnett, it can do no harm; it can do good.
Lord Sassoon
My Lords, this has been an interesting and wide-ranging debate to kick off today’s Committee session. I will deal first with the amendment on its own terms and then pick up some of the wider important points, although perhaps they may not be directly relevant to the key reason why I cannot accept it.
As we have heard, this amendment seeks to add a new have-regard to the FCA’s competition objective. I know that it has been promoted by the consumer group Which?. As we have heard, it drives at the same issues as a number of amendments discussed in another place—namely, that the FCA should have, in the words of Which?—which were quoted by the noble Baroness, Lady Hayter of Kentish Town—an explicit mandate to,
“put a stop to unfair overdraft charges, excessive fees and complicated pricing structures where they hinder competition”.
I agree, of course, with what lies behind this amendment. Consumers should have access to the right financial services and products; they should be able to buy in the confidence that they know what they are getting and what they are paying for. That must be clear and transparent; there ought to be no place in financial services for a culture where consumers are kept in the dark.
However, let me put on the record what the Government have said a number of times before—both in publications and during discussions in another place—which is that if the FCA finds problems in pricing, charging or in the ability of the consumer to obtain value for money that cause it concern, it will have the mandate and the powers to act. It has the mandate both under the effective competition and the consumer protection objectives, a point that has been made by a number of my noble friends and other noble Lords in this debate. It can apply its extensive regulatory toolkit in pursuit of price intervention, should it think it appropriate to do so. The FCA does not need new powers nor do its objectives need expanding. We simply do not agree with Which?’s legal analysis. Fundamentally, it is a narrow legal point.
Having said that, a range of important issues have been raised which I will spend a minute or two addressing. The noble Baroness, Lady Drake, in introducing this amendment, talked among other things about the OFT bank charges case. It is important that the Committee understands that the powers available to the FCA are far broader than those available to the OFT at the time of the bank charges case. The OFT was in fact relying on the Unfair Terms in Consumer Contract Regulations. I suggest it is incorrect to draw a line somehow between what the OFT was or was not able to do and what the FCA will be able to do, because the FCA has much wider powers.
In terms of what the FSA can do now and what the FCA might do in future, first, as we discussed in Committee on previous occasions, the FCA will have additional product intervention powers. The noble Baroness I think gave an example of a low headline price to attract new customers that is then offset by high ancillary charges. That is a very good example—and one that I might have given if challenged—of precisely the sort of situation where the FCA might well intervene and where the FSA has already begun to take a similar approach, as set out for example in its consultation paper on the mortgage market review. I do not think there should be anything between us there.
Looking more widely, I think the noble Baroness said at one point that the FCA “must” be required to have regard to ease of access to value for money. However, the amendment does not achieve this—it simply adds to the list of matters to which the FCA may have regard. Linked to that, I can assure my noble friend Lord Trenchard that the have-regards listed in this new Section 1E are of course not exhaustive. The FCA is not precluded from taking other matters into account in assessing the effectiveness of competition. That takes me to the point made by the noble Lord, Lord Barnett, where we would get into difficulties. The easiest thing would be to say, “I agree with the sentiment behind this, let’s put it in”. One of the arguments in favour of putting it in is that the FCA would be vulnerable to legal challenge if it is left out. However, as I have clearly stated, our legal analysis is simply different—I have not seen what lies behind Which?’s legal analysis but we disagree on that. If we were to go down the line of putting in a longer list of have-regards, we get more and more into the difficulty of suggesting somehow that the list is exhaustive and that the FCA cannot do things that are left off the list. Potentially, the more we add to the list, we risk getting into legal difficulties that we are not in at the moment, because the FCA will have all the legal powers it needs. The noble Lord, Lord Barnett, put it as a reasonable challenge, as he always does to me, but I think there is a danger in going down the route of this amendment.
Lord Phillips of Sudbury
I seek to help my noble friend. Regarding the language of new Section 1E(2), where it states:
“The matters to which the FCA may have regard”—
there is no danger of the kind he suggested in the amendment of the noble Lord, Lord Barnett. This is because there is the crucial word “include” at the end of the preamble to the new section, which states:
“The matters to which the FCA may have regard … include”,
paragraphs (a), (b), (c) and (d). That is a clear indication that this is non-exhaustive. One could therefore add a number of further provisions without endangering the ability to think more widely.
Lord Sassoon
My Lords, my clear legal advice is that the FCA does not require this additional “have regard” and that there is, notwithstanding the wording to which my noble friend draws attention, a danger that if the list becomes longer and suggestive that it is intended to be exhaustive, that may give rise to legal challenge. That is the advice that I have received from the best legal advisers that the Government have to hand and it is all that I can say on the matter.
I want to wrap up this discussion by going back to some of the things that noble Lords have drawn attention to in new Section 1C on the consumer protection objective. The noble Lord, Lord Peston, for example, is of course quite right to say that some or the majority of consumers of financial services are not “rationally well informed,” to use his term. This is precisely why, among other things, new Section 1C(2)(b) refers to,
“the differing degrees of experience and expertise that different consumers may have”.
This is also why, among other things, we have discussed the important work of the Money Advice Service in improving the ability of consumers to make informed choices, which we will come back to. I therefore agree with the noble Lord’s starting position, but I suggest that the way to deal with it is not through this amendment. I could point to a number of the other provisions in the consumer protection objective which go to the heart of many of the concerns raised in this debate. Coming back to my fundamental analysis that the legal analysis on which this is based is, in the view of the Government, flawed, I ask the noble Baroness to withdraw her amendment.
Lord Peston
I am full of despair because the noble Lord seems to have missed the whole point of what we are discussing. He keeps going back to technicalities, which is exactly the wrong way to view this matter. I think it was the noble Lord, Lord Lucas, who focused on why this Bill is a wasted opportunity, particularly in the way that it is being handled by Ministers. The real disaster that has hit this country is the destruction of the reputation of the financial intermediary sector. We in your Lordships’ House have a chance to do something about that. The way to do this is not to talk about technicalities and to say, “My lawyers say this, and your lawyers say that”. The way to do it is to place in the Bill a particular amendment—I do not really care where it is put. I will not object if the Minister does not like the wording as long as he makes the wording better. We have a chance to save the reputation of an industry which matters enormously to this country.
I find it very upsetting that in the last opinion poll I saw, the financial intermediaries had fallen nearly as low as politicians in terms of their public reputation—we can live with that because in some sense we do not matter. This is enormously important and I implore the Minister to listen to what his noble friend Lord Lucas said. We have a chance here to make a contribution to improve and, indeed, eventually save the reputation of a vitally important industry. This Bill simply does not do that, but it could. That is why I call it a wasted opportunity.
Lord Sassoon
My Lords, we are in Committee and discussing a very specific amendment. I therefore make absolutely no apology to the noble Lord, Lord Peston, who raises extremely important Second Reading-type debating points.
Lord Sassoon
I will not give away again to the noble Lord for a minute, if he will forgive me. We are discussing a very specific amendment. I have explained why I believe it is defective. The sentiment underlying that is completely shared by the Government: we do not believe it is necessary. The noble Lord raised matters which, although somewhat different, are also related to the capabilities of consumers. I have attempted to address a very serious point by pointing out that his concern will be at the heart, right at the centre, of the new regulatory body’s objective and thinking.
When it comes to his new point, which is not the one I was addressing before, about the standing of the industry, again, I completely agree with him. However, we are now talking about a regulatory structure. The Joint Committee of both Houses has been set up and will look very quickly at some of the wider questions of integrity and standards in the industry. This morning, I am trying to focus on the specific matter of this amendment.
Lord Peston
My Lords, I find it almost impossible to cope with the way in which the Committee stage of this Bill has been handled. It is completely different to any other Bill which I have taken part in. My point was not a Second Reading point. It was germane to this specific amendment, to what lies behind it, and to the philosophy of it. The Minister’s absolute refusal to even say, “Some good points have been made and I would like to go away and think about them some more”, is what annoys me about this Committee. My experience with the Ministers that I have usually dealt is that when a good point has been made, they always say, “I will go away and think about it some more”, without making any promises. However, the noble Lord, Lord Sassoon, never says anything like that. I have not heard him once in five days suggest that there is anything wrong with this Bill, or that he would like to think again. There comes a point when one has to say that, in order that people know that their Lordships have rather high standards.
Lord Sassoon
Does the noble Lord, Lord Peston, agree that the Government came forward with a package of very substantial amendments that have already been discussed in Committee? I refer the noble Lord to the number of government amendments that have already been laid and debated, and to the number of times in Committee when I have indeed said that I will look at things or have made concessions. I do not accept for one minute his statement about the attitude with which I have come to the Committee.
Lord McFall of Alcluith
Can I suggest that the noble Lord does not get so het up? There are issues and principles here, and we want to tie them down. Looking at Amendment 117, if I am correct, it is for the FCA to include,
“the ease with which consumers can identify and obtain services which are appropriate to their needs and represent good value for money”.
This goes to the heart of consumer interest. Given the Minister’s position—and let us get rid of the legalese jargon—does he think that this Bill, in this area or elsewhere, ensures that the type of scandals which we have seen going on for years and years without being addressed will be nipped in the bud by the new powers? Will we see the FCA step in straightaway, without prolonged pain for both the industry and consumers? That is what is behind the amendment and the points put by Members.
Lord Sassoon
My Lords, all I can usefully say is that while I believe that this amendment is well meant, it is based on a legal construction that the Government do not accept. The FCA has all the powers that it needs and there are some dangers in putting this amendment in. That is what we are discussing.
Baroness Drake
My Lords, perhaps I might respond to some of the issues that have arisen in the debate and in the reply from the noble Lord, Lord Sassoon. The Minister is arguing that the FCA has a sufficient mandate through the competition and consumer objectives, as drafted, to tackle these matters. My problem is that I do not share that confidence in the absence of the amendment to the competition objective that I seek. I accept his point that the FCA’s powers are much broader than those of the OFT, but with the bank charges case I was trying to illustrate the disposition of the industry to mobilise quite effectively if there is ambiguity in the statutory or regulated provisions. Rather than arguing whose legal advice is better, I was seeking simply to nail this issue by saying clearly that effective competition means that consumers have to be able to identify whether services are appropriate to their needs and represent good value for money. The lawyers could then argue as much as they like, but that provision of what effective competition embraces would be laid out in the Bill.
The Minister made too much of my use of “must” in my speech, rather than “may” as it is in the Bill. I am seeking not to challenge the word “may” but to establish with clarity that competition cannot be effective without it being value for money for the consumer. My amendment does not seek to establish a long list but it seeks to give clarity on a very important issue, which goes to the heart of what effective competition is. I think that 20 million people out there are with me, based on their personal experiences of the financial services sector in recent times.
In response to the noble Baroness, Lady Noakes, in my own defence I have tabled amendments to both the consumer and competition objectives. My noble friend Lord Whitty very ably answered the question in part. However, I am seeking an amendment to the competition objective because on this occasion, at the risk of repetition, I am trying to give clarity to the definition of effective competition in terms of the matters that the FCA has to have regard to which, I reiterate, is the ability of consumers to identify what is appropriate to their needs and represents good value. At the heart of my argument is that the FCA cannot judge effective competition unless it has regard to those matters. I feel they are so fundamental to a judgment of effective competition that they are worthy of being spelt out in the Bill as a matter to which the FCA may have regard.
On the market integrity point, there is consistency in my amendment in terms of what I am arguing in respect of both market integrity and the competition objective. My argument would be that a key characteristic of well functioning markets is that they can provide consumers with products and services having value for money. The wording of the market integrity clause does not address or mitigate my concern, hence the amendment I have tabled.
Lord Lucas
Before the noble Baroness withdraws her amendment, I wonder if I might take the opportunity to make a couple of points to my noble friend on the Front Bench. He has been saying that his lawyers are better than theirs, which I of course accept, but it really is not a matter for either set of lawyers. It is for the lawyers that the FCA will have when it comes into existence to interpret this Bill. One problem with the FSA is that the limitations it imposed on itself as to the speed and determination with which it has pursued some of these other problems have resulted in them ending up much worse than they might have been.
It would help if my noble friend was prepared either to say now or to consider allowing me to give him an opportunity to say on Report that the sentiments expressed by this amendment—indeed, the particular courses of action envisaged by it—are ones that he would expect the FCA to undertake on the basis of the powers that it already has in the Bill and that he would expect it to act quickly, as the noble Lord, Lord Peston said, to nip things in the bud rather than waiting until it is absolutely sure that it has identified the exact nature of the problem. In other words, it should be able to take swift and pre-emptive action. If nothing else, under Pepper v Hart this would give the FCA’s lawyers some comfort when they come to interpret the Bill in future.
Lord Sassoon
My Lords, I briefly draw my noble friend’s attention to a couple of things that I have already highlighted this morning. First, there are the additional product intervention powers that the FCA will have, as opposed to those which the FSA has had. Those go to the heart of his concerns, because we are certainly not giving those powers to the FCA, and it is not receiving them, without an intention to use them. Secondly, I drew attention to the consultation on the mortgage review, which indicates a developing line of thinking that goes precisely to his points. The evidence points in the direction that my noble friend is looking for.
Baroness Drake
My Lords, I had come to the point where I was reserving this for Report and begging leave to withdraw the amendment.
Lord Flight
My Lords, I support the common sense of these amendments. However, charities are regulated by the Charity Commission. Although one hopes that all these social endeavours are extremely honest and properly run, it is important to be clear about what charges are involved, and that the people organising them are fit and proper people. There is a very real issue to address here. It would be fine to say, “Here is a green light. Be an investor like a sophisticated investor”, but behind this territory lie quite big issues concerning good conduct.
Lord Sassoon
My Lords, we have already, quite reasonably, spent considerable amounts of time discussing issues of social finance and social investment. I want to reiterate, at the start of my response, that I do share the aims of those who wish to nurture the social investment sector and see it grow. I am pleased that there are plans for some of the noble Lords who are interested in these matters to have a discussion with the Bill team over the recess. I am happy to encourage that to happen. There are a couple of other ways to address this issue, which I will refer to as I proceed. So I hope that the Committee will bear with me for a moment or two. I will explain why I think that Amendment 118AZA and Amendment 121A are not appropriate; but there is another channel as well as further discussions between me and the Bill team where it might be possible to make some progress during the summer on practical steps. So I ask noble Lords to bear with me for a couple of minutes.
I am, of course, aware that my noble friend Lady Kramer had a meeting with the FSA on this matter two weeks ago, which she was good enough to tell me about. Those discussions informed Amendment 118AZA. I completely agree that if we are to help social investment grow we must make it possible for social investment vehicles, and in particular smaller schemes, to market themselves. I take her point about costs. In parenthesis, when my noble friend Lord Hodgson of Astley Abbotts talks about the costs being high, they are high. I do not challenge the numbers of my noble friend Lady Kramer but when my noble friend Lord Hodgson of Astley Abbotts talks about the prospectus directive and half a million pounds, we are in the territory of listed investments, which are rather beyond the sorts of investment fund we want to target. I am sure he wants to target them initially, but I accept the costs are high.
The effect of this amendment and why I cannot support it is that it would have the effect of making all financial promotions that relate to social investment exempt from all the requirements placed on firms and investment schemes, about how they can market their products and investments. I agree with my noble friend Lord Flight that we need to be careful. An essential component of a successful financial services sector, as came up in the discussion of the previous group, is that of trust. We already know what a huge job there is for the sector to rebuild trust. We do not want to undermine trust in the social investment space, because an advertisement or a financial promotion might well be the first point at which matters go wrong if a consumer buys a product or service on false or misleading information. So we do have to make sure that the marketing of financial services is regulated; that financial promotions are clear, fair, and not misleading, whether they are related to social investment or to any other product. In particular, we want to make sure that unscrupulous providers do not see some wide exemption in this area as a loophole—my noble friend is nodding in agreement. We must ensure that there is not a loophole to exploit consumers by offering products around claims of social purpose and getting around the rules. We need to be careful about that, because that will undermine the sector.
Lord Hodgson of Astley Abbotts
I am extremely grateful to the Minister for suggesting that we might be able to make some progress over the summer. His example of an industrial and provident society underlines exactly the point we are making. That is one of the areas that falls between the stools. At the moment it is neither a charity nor a proper regulated body, and this is exactly what we are trying to get at. We are trying to get our arms around this space in a way for which the present regulations do not provide coverage as regards the IPSs.
Lord Sassoon
I entirely accept that. However, the effect of these particular amendments would be to take away all regulation and protection. We certainly do not want to go from the current situation, which it appears people are already seeking to exploit, to one where merely because the apparent purposes of the investment were perfectly worthy and the overwhelming majority of promoters would obviously be people of the highest standing, others would be allowed to fly under their banner.
Lord Sassoon
Perhaps I may make one other point and then I will let my noble friend in. My noble friend Lord Hodgson mentioned the exceptions to the financial promotions order for sophisticated persons. Although I should not discuss the advice I gave Ministers in my previous life as an official, all I would say is that I am extremely familiar with the construction of that order in that particular respect. In my view, Ministers at the time made a very wise decision about that particular provision. I do have form, as it were, in this space. I encourage practical ideas for amending, which will be seriously considered, and although it is not easy to amend the financial promotions orders as regards the Red Tape Challenge, Ministers will look at them. Specifically, Amendment 121A is not needed in order to make that happen.
Lord Phillips of Sudbury
In his final remarks, my noble friend pre-empted what I was going to ask him, which was to confirm that it is not beyond the wit of this House to take account of the very proper points he raises and, at the same time, to take account of this big, potentially vital sector of social investment. However, I think that he has already impliedly agreed with that.
Lord Sassoon
I have drawn the Committee’s attention to the opportunity that exists at the moment, and of course the Red Tape Challenge is a cross-government initiative. No. 10 and others take it very seriously; it is not simply a Treasury matter; and it goes with the wider drive in this area. I shall leave it at that.
I should say just a little about Amendment 128AA. I do not believe that the FCA needs to have a dedicated panel for representatives of social investors. As the FSA’s panels already do, the FCA’s panels will advise on a wide range of policies and regulations from a broad range of perspectives, and I do not believe that it is necessary or proportionate to establish another panel, at additional cost, purely to represent the interests of social investors and social sector firms. Social sector organisations will be able to feed in their views through public consultations. The interests of socially oriented financial services firms can be adequately represented by the Practitioner Panel and Smaller Businesses Practitioner Panel, and many of the FSA’s Practitioner Panel members belong to firms which are involved in social investment.
However, again in the spirit of wanting to be helpful in response to the amendment, and accepting that the interests of smaller specialist firms also need to be appropriately represented, I have sought and gained assurance from the FSA that from now on it will approach trade associations which represent social investors, such as the UK Sustainable Investment and Finance Association, asking them to put forward nominations to the Smaller Businesses Practitioner Panel. I hope that that will give additional reassurance to the noble Lord, Lord Tunnicliffe, about the approach in this area. Given all that, I ask my noble friend to withdraw her amendment.
Lord Lucas
My Lords, all of us in this House wish for that sort of reply from my noble friend, although some of us are not so lucky. I am sorry that the noble Lord, Lord Peston, was not present to hear that so that his scepticism on this matter might have been calmed. It was indeed an excellent reply from my noble friend and I very much hope that my colleagues will be able to take advantage of it.
Perhaps I may draw my noble friend’s attention to an organisation called lendwithcare.org, which is an excellent example of how to do things right in this area. It is concentrating on micro-lending in the third world but the pattern it follows would fit very well the sort of projects that my noble friend Lady Kramer and others have outlined. It takes proper steps to make it absolutely clear to those who lend that there is a serious chance that they will never get back any money. That is crucial. There is far too much opportunity here to induce in those who sell something as a loan the idea that they have a reasonable chance of getting their money back, and that can be very dangerous in unregulated investment.
Lord Sassoon
My Lords, I can be brief on this. As the noble Lord, Lord Davies of Oldham, has explained, the amendment seeks to add money-laundering and the financing of terrorism to the list of matters that are considered to constitute financial crime. First, I should make it clear that the FSA is already able to take action in both these areas because the definition here is broad and the list of matters is indicative and not exhaustive.
On the issue of money laundering specifically, financial crime is defined as including the offence of,
“handling the proceeds of crime”.
Money laundering is plainly part of that—it is one way in which a person can handle the proceeds of crime—so there is no need to list it separately in the Bill.
Turning to the next part of the amendment, it struck me as somewhat odd that the definition of financial crime did not list as major an element as terrorist financing. It seemed a strange omission. I did a bit of research and actually the definition, which is picked up in the draft Bill, stems from FiSMA, the previous Government’s Bill drafted in the late 1990s. I do not intend to be critical of the drafting of the previous Bill but it was drafted when terrorist financing was not as significant a concern as it has since become. I think it would be a good thing to include terrorist financing in the non-exhaustive list in this Bill. The world has moved on. I can confirm that we will consider whether and how to amend the Bill on Report to include terrorist finance in Section 1H.
I am sorry that the noble Lord, Lord Davies of Oldham, seemed to think that I would not pick up his excellent suggestion that we have a look at this again. I am very receptive to all good ideas from the Committee, big and small. I am very sorry that the noble Lord, Lord Peston, is not in his seat because this is one of many concessions and willingnesses to listen to arguments. I should make it clear that I cannot promise that I will continue in this end-of-term spirit for the rest of the day. Even though this will make no substantive changes to the duties and objectives of the FCA, I am grateful to the noble Lord for drawing it to the attention of the Committee and I would ask him to withdraw his amendment on the basis of the assurance I have given him.
Lord Davies of Oldham
My Lords, there is a character in “Cabaret” who expresses herself with “I am overwhelmed,” and that is the only phrase I can think of that is apposite at this moment. I am very glad that I am able to catch the Minister in his wonderfully benign mood. If he can just sustain it to the end of the day we can probably deliver this part of the Committee stage by 7 pm. He has given warning that not all amendments will commend themselves to this extent but I am glad that this one has. I am grateful for his response and I beg leave to withdraw the amendment.