Autumn Statement

Debate between Lord Sassoon and Lord Flight

Wednesday 5th December 2012 Lords Chamber

[Lord Sassoon]

I believe that I can confirm both points. The allocation will be for the Welsh Administration in the normal way. I believe that the noble Lord’s understanding on the second point is correct. If it is not, I will correct that understanding.

[Lord Flight]

My Lords, I add my own appreciation of the Minister’s work and success. He has always shown patience, attention to detail, wit and great courtesy and I, too, wish him success and fulfilment in whatever he does next.

The national plan has identified £200 billion of infrastructure investment in transport and communications and about another £200 billion for the energy sector. The financing of that is fairly readily available. For the sovereign wealth funds of the world, it is an attractive investment. I was amazed to find that even the Agricultural Bank of China is setting up in London and is dead keen to put up loan finance. Indeed, it is putting up the loan finance for the improvements to the main road between Edinburgh and Glasgow.

There are also pension funds—who wants to buy gilts at present yields when you might get 4%, 5% or 6% on an infrastructure project? The funding is there, but when I asked the Financial Secretary to the Treasury how much was likely to happen over the next three years, he could not give an answer. There are still delays caused by the way that the planning system works and because of environmental requirements. Now is just the time when this country needs to make those infrastructure investments and get a move on with them. Will the Government look at further measures that they can take to delay these bureaucratic constraints on the infrastructure investment getting going?

[Lord Sassoon]

I could spend the rest of the three minutes and a lot longer on this but I will be brief. Again, I am grateful to my noble friend for his remarks.

On how the infrastructure is funded, there is still a need for a large debt component in many of the projects, and the debt markets continue to be very difficult. My noble friend is completely right about the appetite of the sovereign wealth funds and I will be going to the Gulf again to visit a number of them next week. But the debt component remains difficult.

As to whether the investment is flowing through, total private and public investment in infrastructure is now running at £33 billion per year compared to an average of £29 billion per year under the previous Government—even with all the investment in social infrastructure that went on. While there is more to be done, that is an important number.

There are other areas, yes, where we need to make more progress. I draw my noble friend’s attention to the policy decisions on energy over the last week, which should now enable the energy markets and investors to invest in a broad sweep of nuclear, renewable and gas assets.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Wednesday 5th December 2012 Lords Chamber

[Lord Eatwell]

My Lords, I am very grateful to the noble Lord for having clarified some obscurities in the Bill that arose from the use of the generic term “the Bank” to refer sometimes to the court and sometimes to the executive. However, the noble Lord has just said something which has disturbed me. He said that, for clarification, when the term “Bank” is used, this does not necessarily mean the executive; it may mean the court. It seemed to me that he was acknowledging that an uncertainty remained. Perhaps I misheard. I should be very happy if I did, because the sort of clarification that he has set out is very welcome.

[Lord Flight]

My Lords, there is one area in this territory on which I would appreciate some clarity. The principle of returning the oversight of banks to the central Bank, which I think has been widely supported, has, to my mind, always been about the concept that the central Bank ought to be in regular contact with banks, that it ought to know what is going on and that it ought to be able to head off practices that are clearly potentially damaging to the banking system. However, I am not clear how the staff of the Bank and the staff of the PRA will interact. One would have thought that quite often it would be the staff of the Bank who were having regular dialogue with banks and learning what was going on and what might be going wrong, but it is the PRA—to some extent a sort of cuckoo plopped into the middle of the Bank of England—that essentially has the legal tasks. Therefore, we have clarification of the definitions of “Bank” and “court” but below what I call the executive level I am still not entirely clear where the staff of the Bank or the staff of the PRA will be carrying out supervisory activities.

[Lord Sassoon]

My Lords, in response to the question raised by the noble Lord, Lord Eatwell, as I said at the beginning of my remarks, the Court of Directors is the governing body of the Bank, so ultimately it is for the court to decide who takes what decisions and which decisions should be for the Bank. In the legislation, “the Bank” certainly does not mean the Bank executive; it means the Bank of England. Therefore, it is always for the Court of Directors, just as it is for the governing body of any corporate institution, to decide who takes what decisions and, if the governing body does not delegate them, it takes them itself. We are making clear through these amendments that there is a certain small category of decisions—one of which was identified by the noble Lord, Lord Eatwell—that is of such importance that it is appropriate to put down for the avoidance of doubt in the legislation that it is the court not the executive that takes those decisions. That is what those amendments do.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Wednesday 28th November 2012 Lords Chamber

[Lord Sassoon]

My Lords, I am very tempted to get a few things off my chest as well about some personal experiences of the sort that we have all had, but the horse may well have long gone if I do. However, I am sure that the banks and the Payment Council are indeed listening. My noble friend has again raised an important point. Let me address two things: first, what we can or cannot do through legislation in this area and, secondly, what to do in practical terms given that I think my noble friend was accepting that it was unlikely that the Government would accept this amendment, which indeed we will not and cannot. I will explain why but let me go on to say how, prompted by his useful thoughts on this subject, I propose to take things further forward.

The essential reason why this amendment does not work comes back to the money-laundering regulations that implement the EU’s third money-laundering directive. Rightly or wrongly, it is just a fact of life that it is not compatible with the directive to require the new bank to rely on the checks carried out by the old bank in all cases. Neither is it compatible with the directive to provide that the new bank is not legally liable where it relies on checks carried out by the old bank, because under the directive each bank is responsible for ensuring that adequate checks have been carried out on all its customers.

I know my noble friend may say that moving the information across does not necessarily take one all the way down that path, but this is getting pretty close to encouraging the banks to do something that is not compatible with the directive by suggesting pretty strongly, if not requiring it, that they rely on the checks of the old bank. We must remember that switching can be between two accounts that are already open and we should distinguish, as I am sure my noble friend does, between switching and account opening. They are not the same thing because we could be talking about switching between existing accounts that an individual has opened.

Having said that I cannot accept the amendment, I shall talk about what I am trying to push forward. I was very struck by the example of Metro Bank and driving licences, because I was not aware of it. I have asked my officials to conduct an exercise with the banks to find out who is doing what, and I have already discovered that Metro Bank is not unique and one or two others are using driving licences.

I, as the Treasury, cannot tell banks how to do their “know your customer” due diligence, and neither can the FSA. However, I am initiating a dialogue with the banks to encourage them to think constructively that a driving licence is already good enough for a number of banks, and plainly it could make things a lot easier for their banks. Because the majority of banks have done it in different ways for a number of years, at the very least I want to ensure, either directly with the banks or through the BBA, that they revisit the practices of the past few years and consider whether there is something more that they can do.

My noble friend Lord Flight has served a very useful purpose in raising this topic during the passage of the Bill, and I intend to continue to press the banks to think harder about the burdens that they are putting on their new and existing customers in relation to the responsibilities that the banks themselves have under the money-laundering regulations. I hope that with that explanation my noble friend might consider withdrawing his amendment.

[Lord Flight]

My Lords, I thank the Minister for his supportive response and my noble friends Lord Trenchard and Lady Kramer for their support. I am delighted to hear that my noble friend Lady Kramer will be pursuing this aspect as part of the banking review; I make the simple point that it is obvious that it should be easy to move accounts. I also thank the noble Baroness, Lady Hayter, for her support.

I would not say that I was surprised but I am interested to note that the Minister cited yet another example of protectionist practices in the EU. To the extent that what he described is there to stop the transfer of such information or to make it unacceptable, it is clearly a barrier to trade. Anyone in the financial services industry who thinks that the single market means a free and competitive one has another thought coming, because the practical barriers to trade and financial services in the EU are substantial at a retail level. I am not sure if the Minister is right, however, because the law as it stands is that it is up to each bank to do what it wants to or feels is necessary and adequate to comply with its “know your customer” due diligence, and I would have thought that if the new bank got all this information it could make it a decision that it thought was sufficient.

I say to my noble friend Lord Trenchard that my amendment provided 10 working days for the information to be transferred once you had given notice that you were going to move your account.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Monday 26th November 2012 Lords Chamber

[Lord Flight]

My Lords, Amendment 93A to some extent overlaps with Amendments 92B and 92C, tabled by the noble Baroness, Lady Cohen. However, its thrust is slightly different. It has the support of ICE Clear Europe, which I believe has raised its concerns directly with the Minister. The starting point is that, given the systemic importance of clearing houses, it is self-evidently appropriate for the Bank to have powers to direct them in certain circumstances.

The powers granted to the Bank of England by Section 296A of FiSMA are extremely wide and broad—arguably too wide and broad—and could be counterproductive to achieving financial stability. My case is that Section 296A should be subject to specific, transparent and predictable trigger conditions. My amendment seeks to address the issue by setting out the trigger conditions and scope for action and intervention by the Bank of England under Section 296A. Other amendments have been tabled that address the issue in a different way. Amendments 92B and 92C in particular are there to achieve clarity and certainty, with less concern about the absolute extent of the Bank of England’s powers.

The key principle of the trigger conditions and scope that my amendment proposes is that Section 296A should be used only in the event that without such direction the clearing house would fail or would be likely to fail. Secondly, a particular concern is that the Bank of England could use the broad powers granted by Section 296A to direct a viable clearing house to take on business that could be severely damaging to its interests. Section 296A should not be used in this way. Directions should relate only to the existing business of a clearing house. Finally, Section 296A should be used only in consultation with relevant bodies, including the clearing house itself. The noble Baroness, Lady Cohen, made the same point.

If the principles set out in Amendment 93A were adopted, they would allow the Government’s objective to be achieved. They would tailor the regime to circumstances in which the Bank of England would need to intervene in the market to maintain financial stability, and they would reflect the appropriate interests of the clearing houses.

[Lord Sassoon]

My Lords, the Government note the concerns expressed about the additional powers of direction to be conferred on the Bank of England. Some of these concerns are reflected in Amendments 92B and 92C, tabled by the noble Baroness, Lady Cohen of Pimlico. These amendments seek to impose more stringent conditions on the Bank of England’s ability to exercise the Section 296A power. I will say at the outset that in response, the Government are minded to bring forward amendments at Third Reading to address some of the concerns raised by the industry.

Before bringing forward amendments at Third Reading, I will reflect further on the debate we have had today. However, I am happy to confirm that the Government are considering amendments to raise the threshold of the trigger for the power of direction to a “necessary” rather than a “desirable” test; to more clearly set out how the power is to be used, including specifying procedures with which the Bank should comply prior to issuing a direction, whether on a routine or an expedited basis; and, finally, to set out in statute the assurance that I have already given the House that the additional power of direction cannot be used to compel a clearing house to accept the business of a competitor.

I will now address the amendments in this group. Amendment 92A, tabled by my noble friend Lord Sharkey, seeks to introduce a requirement for clearing houses to draw up and maintain recovery plans. The appropriate place for a requirement for clearing houses to prepare recovery plans would be in Part III of the recognition requirement regulations made under Section 286 of FiSMA, not in primary legislation.

The Government have already outlined their intention to build on the positive developments around loss allocation arrangements that are being introduced by some clearing houses of their own volition, and will also consult on proposals to make changes to the recognition requirement regulations, which are the operating conditions under which clearing houses are licensed to operate in the UK. The changes would have the effect of requiring all UK clearing houses to have in place loss allocation rules. As part of the consultation exercise, the Government will also seek views on proposals to change the recognition requirement regulations to make mandatory the preparation and maintenance of recovery plans by clearing houses. We are on the case and certainly are not waiting for EU legislation. However, we believe that the recognition requirement regulations are the appropriate place for these conditions, and we will take action to that end.

Amendment 93A, tabled by my noble friend Lord Flight, would impose further preconditions on the exercise of the power, would limit the scope of any direction given under the power and would apply various provisions of the special resolution regime provided for in Part 1 of the Banking Act 2009 to any direction given. It would not be appropriate for the Bank of England to wait until the financial position of a clearing house had deteriorated to the extent that it posed a serious threat to financial stability or failed to meet its recognition requirements before exercising the additional power of direction. The additional power of direction is a supervisory power, not a resolution power. It will allow the Bank of England to manage the considerable risks that may be posed by the actions of a clearing house which do not constitute a breach of its recognition requirements or its obligations under FiSMA 2000. If Amendment 93A were agreed, the Bank of England might be unable to give a direction that would safeguard the solvency of a clearing house, forcing the use of resolution powers as a last resort in order to minimise the impact of the failure of the clearing house on wider financial stability.

It would also be inappropriate to limit the scope of any direction that the Bank of England might give in the way suggested by Amendment 93A. The additional power of direction is intentionally wide-ranging. The Government feel that this is essential in order to build in sufficient flexibility to enable the Bank to manage and respond to new and unusual risks that may require regulatory action that goes beyond the purposes specified in Amendment 93A. The Government also believe that requiring a court order to be obtained before any direction could be given by the Bank could undermine successful regulatory intervention in instances where there was a need to act with alacrity in the event of a crisis. The court may not necessarily be well placed to make judgments on whether action is necessary having regard to the relevant public interest criteria.

Finally, it would not be feasible to apply the provisions of the special resolution regime provided for in Part 1 of the Banking Act 2009 to this power of direction. The additional supervisory power of direction provided for by Section 296A is separate and distinct from the stabilisation powers, exercisable in respect of UK clearing houses, provided for by Amendment 193G. In contrast to the power of direction, which is a supervisory tool, the stabilisation powers are resolution tools that would be deployed to minimise the impact of the failure of a clearing house on wider financial stability. Given that alternative, specific resolution powers exist, it would be unreasonable for the Bank of England to use the power of direction to effect “partial property transfers”. Such an action would be contrary to the constraints under which the Bank operates as a public authority.

With those explanations and assurances about what we intend to come forward with at Third Reading, I hope that my noble friend will feel able to withdraw his amendment.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Tuesday 20th November 2012 Lords Chamber

[Lord Flight]

My Lords, Amendments 75A to 75G and Amendment 77 relate to Clause 10 and Amendment 77B relates to Clause 13. The amendments to proposed new Section 55 seek to remove the need for the PRA to consult the FCA over authorising a bank or in relation to other regulatory actions, such as variation and cancellation of permission, and imposition of requirements. The effect of the amendment to Clause 13 is that the FCA would have no role in approving an application to act as a bank director.

I raised a similar area of principle at Second Reading. I remain of the view that the double doing of applications for banks and bank directors by the PRA and the FCA is unnecessary and adds to the costs and hassle for new banks trying to emerge and compete. The PRA process for bank applications is more than sufficient. The matters that the FCA deals with, such as good conduct in relation to citizens and consumers, are essentially ongoing rather than being about having a good banking plan and appropriate directors, appropriate capital and appropriate systems in order to be able to start a banking business. I have also recently encountered a situation whereby the new yet-to-be FCA organisation made inquiries of a senior director that related to PRA, not FCA, territory.

The amendments are also in part probing amendments because it is not clearly understood by the industry how the new arrangements are intended to operate. At one level, my understanding is that an application for a banking licence and bank directors will be dealt with by the PRA, which will merely refer to the FCA to see whether it wants to raise any issue. However, in other circumstances, there seem to be two different processes to go through. Therefore, if the Government are not willing to accept my point of principle, which is that it would be much better to leave the approval of banks and bank directors purely to the PRA, it would be helpful for the Minister to set out today exactly how the new dual system is intended to operate in practice. I beg to move.

[Lord Sassoon]

My Lords, Amendments 75A to 75G, tabled by my noble friend Lord Flight, 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. We discussed a similar group of amendments in Committee.

As I previously said, authorisation is a vital tool for the authorities to set and enforce standards for regulated firms efficiently. It is much more costly to address issues within firms following authorisation than it is to do so during the authorisation process. Such costs will fall on regulated firms and, eventually, consumers. Of course, it is far preferable for the FCA to be able to identify and address potential threats to consumer protection or integrity as part of the authorisation process and to prevent consumer detriment or improper behaviour before it happens.

The FCA will have a significant role in the authorisation process—for example, in assessing the range of products being proposed by the applicant, its systems and controls, its processes for treating customers fairly, including dealing with complaints, ensuring the business is not being used for a purpose connected with financial crime, and promoting effective competition in the interests of consumers. It is surely right that all these matters should be carried out up front. To take one clear example, it must be right that the FCA should carry out its anti-money laundering checks as part of the authorisation process. In addition, it is surely right that the FCA should be able to object to an application if it is not satisfied that a firm can comply with its threshold conditions.

Similar points apply in relation to Amendment 77B, which would establish that the FCA should have no role in approval of any person who is to be a director of a deposit-taker. This would mean, for example, that the FCA has no role in approving a director of customer services or a director with responsibility for regulatory compliance.

Let me cut to the chase, because my noble friend made it clear that he is probing around how the system will work. There will be one application, not two. This is the crucial point that people have not fully grasped. I believe that I have said this before in our debates but I say it again clearly. My noble friend is right to say that we want to minimise the inconvenience of the process. There will be a single administrative process for approval of firms and of persons to perform significant-influence functions. It would not be appropriate now for me to go through the detail of how the PRA and FCA will do it, but the key issue for this House and the Government in setting the framework is that there has to be one application. That is what sets the tone of the necessary and appropriate co-operation to make the process as seamless as possible.

On the basis of that further assurance, I ask my noble friend to withdraw the amendment.

[Lord Flight]

My Lords, it is highly important that it should be absolutely clear that there will be one application and, as I understand it, that means that an application to establish a bank will be dealt with by the PRA, which will then have its own arrangements to deal with the FCA for FCA matters. What really matters in establishing a bank is whether there is enough capital, whether the management and the directors are suitable and whether the business plan is sensible. The bits that the FCA is concerned with are much less relevant up-front and more relevant as the business develops, so the PRA really should be in the driving seat for approving banks.

I would also make the point that I made in a slightly different context the other day. A team from the BIS made an appointment to come and see me to ask whether, in my view, the process of applying for licences for new banks and approval of new directors was anti-competitive. I was pleased to find that the BIS was very focused on that aspect, even if the Treasury was not quite as focused. I am pleased to have the assurance of the Minister that effectively it will be one process with the PRA and the FCA liaising and, on that basis, I beg leave to withdraw my amendment.

--- Later in debate ---

[Lord Sassoon]

My Lords, Amendments 77A and 79A would reinstate an existing “have regard” that applies to the FSA in its capacity as UK listing authority as a “have regard” applying to the FCA’s listing work. This “have regard” is a requirement to take account of the international character of capital markets and of UK competitiveness. I can assure my noble friend that these amendments are not needed. As we discussed in Committee, the FCA and the PRA will be bound to have regard to the regulatory principle that any burden they impose should be proportionate to the benefits that flow from it. The proportionality principle will apply where a requirement would have an effect on UK competitiveness that would be a burden, and the same need to ensure that the burden was proportionate to the benefits would apply.

In addition, last week we debated and agreed to make an amendment to the Bill to add a new regulatory principle giving the regulators the duty to have regard to the desirability of sustainable UK economic growth. My noble friend was good enough to welcome that amendment, which I assure him will also encompass international competitiveness in the appropriate way in relation to listing as well as more generally. I think that that answers the direct question he posed to me. My noble friend refers to the London Stock Exchange and my understanding is that, although it was rightly concerned about the removal of the listing authority competitiveness “have regard”, it has welcomed the new regulatory principle. I hope therefore that my noble friend will agree to withdraw his amendment.

[Lord Flight]

My Lords, I thank the Minister for the comfort on this point. I am aware that the London Stock Exchange has raised this issue and I hope that what he has said will also provide comfort to the Listing Authority Advisory Committee. The only grey area for me is that I am still not entirely clear whether the general burden upon the FCA with regard to competitiveness automatically covers its role as the listing authority. The Listing Authority Advisory Committee seems to think it does not. However, I note that the point has been generally picked up and therefore beg leave to withdraw.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Tuesday 6th November 2012 Lords Chamber

[Lord Flight]

Could I ask the Minister whether he feels that the arrangements as they stand, where these posts are advertised and people apply, have actually delivered the sort of Court of the Bank of England that is appropriate to the needs going forward? There has been, I believe, fair criticism of the court for not being a robust enough body, but the court is assembled by the very arrangements that the Minister is talking about.

[Lord Sassoon]

My Lords, the whole substance of the point here is that we are giving the court a very clear and enhanced mandate, particularly through the oversight committee, which we will come on to. In the context of the new role and mandate for the court, it will increasingly attract the very best people who go with the new mandate. The comparison with the past is not necessarily a fair one.

Financial Regulators: Examinations

Debate between Lord Sassoon and Lord Flight

Monday 22nd October 2012 Lords Chamber

[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.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Wednesday 17th October 2012 Lords Chamber

[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.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Monday 15th October 2012 Lords Chamber

[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.

--- Later in debate ---

[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.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Monday 8th October 2012 Lords Chamber

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Wednesday 25th July 2012 Lords Chamber

[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.

--- Later in debate ---

[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.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Wednesday 25th July 2012 Lords Chamber

[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.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Tuesday 10th July 2012 Lords Chamber

[Lord Sassoon]

I completely agree, which is why we only very recently brought forward proposals including mandatory shareholder votes on board pay. There is, and will continue to be, a big agenda here on which this Government have been working very actively but which the European Parliament proposal would, I suggest, work against. That is why we are fighting hard in Europe, as we do on all matters, to get a result that is more desirable for the health of our industry.

I will just say a few words about Amendment 139A, which is another very important one. It would require both the PRA and FCA to consider the impact on the financial sector’s ability to contribute to the UK economy in the medium or long term, having regard to the principle of proportionality. The PRA and FCA must consider whether their actions are proportionate. That will act as a check on the FCA acting in a way that is excessively burdensome, which would prevent a subsequent negative impact on economic growth if there was not a greater benefit from taking the action. Similarly, if the PRA is being proportionate, it would be difficult to envisage a situation where the firms that it supervises could be required to be too safe or too sound.

I have listened to the valid points made by my noble friends Lady Noakes and Lady Kramer, and the noble Baroness, Lady Cohen of Pimlico, and I understand their concerns. It is essential that the UK financial services sector is not excessively constrained in its ability to contribute to economic growth. As I said at the beginning, in advance of Report, I will consider whether a more explicit consideration of the wider economic impact of the actions of the regulators should be included in the Bill. I should stress that in making changes there must be nothing that would seriously encroach on the regulators’ ability to take the action that may be necessary in furtherance of their objectives. Particularly in the light of that assurance I ask my noble friend to withdraw his amendment.

[Lord Flight]

For the sake of clarity I thought the point that I was making regarding the FCA was that domestic competition is what matters for the consumer. The international institutional aspects which the FCA regulates are quite substantial.

The area that has been the real problem in the PRA and which has brought disgrace on the UK has been the banking sector, which has been largely the result of a cartel. That cartel was the result of regulation. Following Barings, it was made clear that the lender of last resort facilities were available only for banks judged otherwise too big to fail. Lots of lesser banks, such as Hambros, found that they were uncompetitive, so they closed and went away. We were left with a cartel, and when you have a cartel bad things always happen. In terms of the PRA’s ability to regulate and oversee the banking system satisfactorily, it is blindingly obvious that the UK needs a great deal more competition. It is not the sole cure of everything but it is very necessary.

The Government have taken the point and there is no point in putting the amendment to a vote. I hope that they will take note particularly of the need for greater competition in the banking industry as part of the vehicle by which the PRA can regulate better. I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Tuesday 10th July 2012 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I will see if I can help a bit here. Amendment 47A seeks to prohibit the modification or exclusion of procedural requirements—that is, the requirement to consult—except for reasons of urgency. The reasons for the exclusion or the modification would also need to be included in the order. I should briefly explain why the Treasury has the ability to switch off or modify procedural requirements—the requirement to consult—which apply to action taken by the PRA and FCA on a tool-by-tool basis.

As the Government made clear in their February 2011 consultation document, in the case of some macroprudential tools, directions from the FPC will be very specific, requiring no discretion at all on the part of the regulator to implement them. Noble Lords asked for examples. In these cases—for instance, where the FPC is simply changing the level of a particular lever—consultation or cost-benefit analysis undertaken by the regulator would have little value and would introduce unnecessary delay into the process.

The Government believe that in these cases the FPC’s policy statement for the tool and its explanation of how the action is compatible with its objectives will provide much more valuable information about the action and its impact than any consultation by the regulators. However, I reassure the Committee that the Government do not expect to modify or exclude procedural requirements for most tools.

The Government will in due course publish a consultation document with proposals for the composition of the FPC’s initial toolkit, which will set out whether procedural requirements will be amended for any tools. In that case, there will be complete transparency regarding whether there has been any proposal by the Government to cut out the normal full consultation processes, and, if so, the reason will be clear. On the other hand, taking the question of urgent cases, if a delay in implementing an FPC direction could pose a risk to financial stability, both the PRA and the FCA already have, under their existing powers, the ability to waive consultation requirements in order to take action urgently.

Therefore, I hope I can assure my noble friend that on the one hand it will not be, in his words, at all common for consultation not to take place and it will be transparently set out; on the other hand, the power in new Section 9H(2) will not be needed in cases of urgency because that is already covered. On the basis of that explanation, I ask my noble friend to withdraw his amendment.

[Lord Flight]

My Lords, I think I am happy that the fundamental point is covered, and what the Minister has just stated effectively puts that on the record. I beg leave to withdraw the amendment.

Eurozone

Debate between Lord Sassoon and Lord Flight

Monday 9th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, I thought I might have been asked a question about a UK referendum, instead of which I get a question about whether the German people will be consulted. I think I will leave that to German politicians to answer.

[Lord Flight]

My Lords, does the Minister agree that a crucial ingredient in a successful fiscal and monetary union is transfer payments between the more prosperous to the less prosperous, as occurs within the US and even within the UK?

[Lord Sassoon]

Indeed, that is part of the remorseless logic of what an economic and fiscal union normally brings with it.

Royal Bank of Scotland: LIBOR

Debate between Lord Sassoon and Lord Flight

Wednesday 4th July 2012 Lords Chamber

[Lord Davies of Stamford]

My Lords—

[Lord Flight]

My Lords, will the Minister advise the House how many banks from how many countries provide regular LIBOR information in order to produce the average LIBOR rate?

[Lord Sassoon]

My Lords, I was looking at the setting of one of the rates the other day, and there is a panel of 18 banks. I think that is typical of the number of currencies and the different time horizons, so it is of the order of 18 or so banks on each one. Of course, they are typically the complete spread of global banks. It is by no means an activity of UK banks, notwithstanding the name of the rate.

Financial Services Bill

Debate between Lord Sassoon and Lord Flight

Tuesday 26th June 2012 Lords Chamber

[Lord Sassoon]

I need every cheer I can get at this hour of the evening—I am very grateful to my noble friend. Let me press on. This group deals with various aspects of FPC membership, and I will address in turn each of the amendments that have been moved.

Amendments 21 and 21A would fundamentally alter the balance of membership of the FPC by adding either two or four additional external members. Following the advice of my noble friend Lord Hodgson, I disagree with these amendments for three reasons. First, the ratio of the FPC between Bank executives and non-Bank members is six to five, which closely mirrors the MPC, where the ratio is five to four. In answer to the noble Lord, Lord Burns, I can confirm that as with the MPC, the FPC members will act as individuals, and that no change to the membership of the MPC is proposed in this. The MPC model has worked well, and is much admired around the world, and we should not fix something that is not broken.

[Lord Flight]

I thank the Minister for giving way. Is it six or seven members? By my account there are the governor and the two deputy governors, the chief executive and the two members appointed. That makes seven. The whole point of my private amendment, which suggested that there should be eight members, was to give a majority. Are all three deputy governors to be members?

[Lord Sassoon]

The three deputy governors are to be members—I count that up as a six to five ratio. It is not correct that the Bank has seven insiders. The Financial Conduct Authority is an independent regulator, which is emphatically not one of the Bank members. I doubted whether I could count to six at this hour, but it is six. However, I am grateful to my noble friend for getting that clarification.

Tobacco: Smuggling

Debate between Lord Sassoon and Lord Flight

Thursday 26th April 2012 Lords Chamber

[Lord Sassoon]

My Lords, we are in an open consultation period. At the end of that period, it will be for the Government to assess all the evidence. But I am grateful to the noble Lord for drawing our attention to another important piece of topical evidence.

[Lord Flight]

My Lords, many noble Lords may remember reading Parson Woodforde’s diaries in the 18th century when duty on brandy and coffee was very high and Parson Woodforde, along with everyone else, bought smuggled goods. Have the Government dispassionately looked at what might be a level of taxation that would deliver optimum tax revenues?

[Lord Sassoon]

My Lords, I remember vaguely reading Parson Woodforde’s diaries. I did not read them in the 18th century, as my noble friend suggested, but in the 20th century. It is a difficult balancing act. As noble Lords know, the policy of the Government has been to raise duty above inflation in order to deal with health issues but that has implications, of course, for smuggling and other illegal sales. Therefore, this is a more difficult balancing act where we have a health priority as well as a revenue maximisation one.

Banking: Accounting Standards

Debate between Lord Sassoon and Lord Flight

Monday 19th March 2012 Lords Chamber

[Lord Flight]

To ask Her Majesty’s Government whether they have any plans to review the application of international financial reporting standards accounting standards to the banking sector.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, following the financial crisis, the International Accounting Standards Board has taken steps to revise international valuation standards for complex financial instruments. The question of whether there should be a distinct accounting regime for banks was raised in the preliminary report of the Financial Reporting Council inquiry into going concern, chaired by my noble friend Lord Sharman. The panel is considering the response to this report at present. We await its final report with interest.

[Lord Flight]

My Lords, in reply to a question on 19 December the Chancellor of the Exchequer advised that there needed to be a debate about the role of IFRS in the banking crisis. On 19 January, the head of financial stability at the Bank of England commented in a speech that banks needed accounting standards other than IFRS. Does the Minister agree that IFRS contributed to the banking crisis, as it served both to exaggerate profits and capital in good times and vice versa in bad times, and is in need of review?

[Lord Sassoon]

My Lords, having a look at accounting standards in relation to banks is certainly significant. I would not go as far as saying that IFRS had a fundamental role in relation to the financial crisis. There is not significant evidence of that although, as I have had it rather neatly described, you could perhaps describe accounting standards as an accomplice after the fact rather than as being responsible. There are issues that very much need to be looked at. The review that the IASB is doing, very much with the encouragement of the G20, of the financial instruments standard known as IFRS 9, the work that the Financial Reporting Council is doing, which I have referred to, the inquiries coming out of your Lordships’ committee and the most recent hearing last week will all contribute to an important ongoing debate.

Independent Commission on Banking

Debate between Lord Sassoon and Lord Flight

Monday 12th September 2011 Lords Chamber

[Lord Sassoon]

I am grateful to my noble friend Lady Kramer for bringing us back to one of the constituencies most affected by the state of our banking system. That is why I welcome the discussion in the report about issues concerning the ability of individuals to switch accounts. There are important recommendations about the Lloyds Bank disposals, which make the point that this is not just a numbers game, of counting the branches that must be disposed of, but about creating another competitor out there. Therefore the report addresses critical aspects of the challenges that she poses, but in addition—whether it is looking at mutual models, credit unions or all the other aspects of a rich and varied banking system—there are significant other channels which the Government continue to address.

[Lord Flight]

My Lords, I draw attention to my entry in the register indicating that I am a director of Metro Bank, one of the new banks.

I would like to make three points while generally welcoming the recommendations. First, I remember over 10 years ago, following what I believed then to be the mistaken collapse of Barings, talking to the then Governor of the Bank of England about changes to the lender-of-last-resort doctrine, which had stood this country’s banking system in very good order for nearly 100 years. It changed by it being said that it was available only to larger banks, walking straight into the moral hazard problem whereby very large banks were of the belief that they could not be allowed to fail, which was the case, and smaller banks were not able—if there were a banking run—to get lender-of-last-resort support. That is why a whole lot of them wound up. It is very important in achieving competition that, broadly, the lender-of-last-resort doctrine is restored to what it was.

Secondly, I am slightly worried that increasing banks’ capital may be brought forward too quickly. I draw noble Lords’ attention to the very convincing writings of Professor Tim Congdon to the effect that if we increase capital requirements very speedily, we will end up shrinking the money supply, which is the last thing we want to do when the country is trying to struggle its way out of recession.

Finally, one banking system, Lebanon’s, escaped all the problems because the governor of the central bank of Lebanon had the wisdom to spot what was coming, to warn the banks and to keep them out of it. There is nothing more important than having a really good central bank governor who actually knows what is going on and blows the whistle in good time.

[Lord Sassoon]

All I can say is that my noble friend Lord Flight makes three important and interesting observations which we need to dwell on as we take all this work forward.

Greece: Default Contingency

Debate between Lord Sassoon and Lord Flight

Monday 20th June 2011 Lords Chamber

[Lord Sassoon]

I am happy to confirm that Greece is a relatively small part of the euro area but, as we have already identified this afternoon, Greece is interconnected, as are all the European and global financial markets. Therefore, one should not in any way trivialise the Greek situation and the capacity for difficulties in the markets.

That said, it is also important to be clear about the lines around whether the UK should or should not be involved in these matters. We are not a member of the eurozone; we are not going into the eurozone; and we are not going to make any preparations to enter the eurozone in the lifetime of this Government, this Parliament. We must make sure that, on the one hand, we are not part of any ongoing and permanent support mechanism for the eurozone; at the same time, we have to play a full part to ensure that the eurozone economic governance is fit for purpose.

[Lord Flight]

Does my noble friend agree that if relatively less or more successful countries or economic areas are to share a currency, there is a requirement for substantial ongoing transfer payments, as is the case within the US and even within the UK? Secondly, does he by any chance know roughly what proportion of Britain's exports to the eurozone are to what I would call hard northern Europe, compared to softer southern Europe?

[Lord Sassoon]

I am not able off the top of my head to break down the analysis of our exports, and I am not quite sure where my noble friend would draw the line between hard and soft. The critical point here is that more than 40 per cent of our exports go into the eurozone. Of course, they are generally distributed in relation to the size of economies, with Ireland, as we discussed in relation to the Irish package, having for historical reasons a disproportionately large share. My noble friend makes the point that it is absolutely in the UK's interest to ensure that the eurozone economies are successful, because that is where the largest part of our exports go.

Taxation: Healthcare Insurance

Debate between Lord Sassoon and Lord Flight

Thursday 9th June 2011 Lords Chamber

[Lord Flight]

To ask Her Majesty’s Government whether they will exclude the provision of healthcare insurance by an employer for an employee as a taxable benefit in kind.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, the Government have no plans to introduce a new tax exemption for private healthcare insurance where it is provided as a benefit in kind.