Financial Services and Markets Bill

Lord Sikka Excerpts

Committee stage
Wednesday 1st February 2023 Grand Committee

[Lord Sikka (Lab)]

My Lords, I and the noble Baroness, Lady Bennett of Manor Castle, oppose the Question that Clause 24 stand part of the Bill.

As I read the Bill, I wondered why growth and competitiveness as a regulatory objective appear at all. A friend in the City reminded me that the Government have been unable to deliver any Brexit benefit and have to show that they are doing something; therefore this had to be tagged into the Bill—although I understand that this clause was written at the behest of TheCityUK and UK Finance, which wanted to sponsor it.

The secondary objectives of growth and competitiveness cannot be reconciled with the main role of ensuring financial stability and consumer protection. If there is growth because of financial stability and consumer confidence, that is fine, but to go out of your way and say that the regulators must somehow grow the finance industry and promote international competitiveness is something else. Unless the Minister points me to it, I could not find anything in the Bill which indicates exactly what kind of weight is to be attached to each of those four conflicting objectives.

How much growth are the Government trying to secure in the finance industry? Are there any limits, and what are the economic and social costs? What would be the opportunity cost of more graduates going into the finance industry and shunning other careers, whether in manufacturing, chemicals or any other industry? How will the regulators ensure that somehow the UK has a greater supply of graduates? How will they ensure that there is adequate infrastructure? I could not see that any of these issues were answered in the long and hefty impact assessment.

The promotion of competition is an existing aim of the financial regulators. Here we can see that the FCA has persuaded some challenger banks to enter the market, although it has been utterly unable to tame the major banks that dominate the market; they have not been broken up and have reduced people’s access to the market—for example, by closing bank branches. Is taming the banks and breaking them up a matter for the FCA or for the CMA? The regulatory architecture continues to become more and more complex. Each regulator already passes the buck to somebody else, saying, “It’s your job to secure competition”, and that is domestically. When we move on to the bigger picture, it becomes even more complicated.

The common understanding is that the notion of competition relates to the state of the market and access to it. That is very different from the notion of competitiveness, which as a discourse does not have any permanent meaning in any sense; its meaning is always constructed and needs to be given. Essentially, however, it relates to the industry as a whole. That is a task for the Government, not for the regulators at all.

International competitiveness, as many noble Lords have already said, is about the ability to attract business from other financial centres. In the words of the former Business Secretary, Vince Cable,

“chasing ‘competitiveness’ really means … a race to the bottom—watering down standards in the hope of attracting more dubious sources of money to an industry.”

That is quite an indictment of the government objectives by a former Minister. Similar principles—that is, the principle of competitiveness—and approaches were behind the 2007-08 crash that hammered the whole economy. We are yet to recover from that folly, but they are being brought back. The Governor of the Bank of England, Andrew Bailey, said that before the last crash the regulator

“was required to consider the UK’s competitiveness, and it didn’t end well, for anyone”,

yet we are embarked on exactly the same course again.

There was an unprecedented bailout of the finance industry. No other industry in British history has needed that kind of state support, and we continue to be plagued by all kinds of scandals, even in an environment where regulators are not pursuing international competitiveness. We have had nearly £1 trillion of quantitative easing to the finance industry. The result is that there is asset price inflation and real wages are still down, yet it is hard to see any reflection of that in the Government’s impact assessment.

Competitiveness, as we all know, was specifically removed from financial regulation in 2012, but it is being unceremoniously smuggled back in. The Government are clearly opting for a race to the bottom for a sector that has been a serial offender and has actually eroded growth. The finance industry has mis-sold numerous financial products over the years, including pensions, endowment mortgages, precipice bonds, split capital investment trusts, payment protection insurance, mini-bonds and much more. It has led the field in international tax abuse, money laundering and sanctions busting. Is that what the Government really want to grow? Is that what the regulators are supposed to be growing?

Rather than cleaning up the industry, this Bill should have been preceded by a public inquiry into the finance industry to see what exactly needs to be cleaned up, but that never happened. Rather than cleaning up the industry, the Government, the Bank of England and other regulators have actually colluded with the UK banks over the consequences of their own criminal conduct. I have given examples, and I will repeat one here. HSBC was fined $1.9 billion in the US for facilitating money laundering. It admitted in writing that it had been engaged in “criminal conduct”. The then Chancellor, George Osborne, in collusion with the Bank of England and the head of the FSA, secretly wrote to the US regulators to say that they should go easy as HSBC was too big to jail and too big to fail. The result is that HSBC continues to commit financial misdemeanours.

Is that an example of the regulators somehow managing to balance growth and competitiveness? There is certainly growth in dirty money; that has continued. As for competitiveness, all the banks are still charging us roughly the same fees for overdrafts, and they are engaged in other nefarious practices as well. I provided that example regarding HSBC in the previous debates on the Bill.

Scholarly research carried out at the University of Sheffield, where I am emeritus professor, shows that between 1995 and 2015 the finance industry made a negative contribution of £4,500 billion pounds to the UK economy, yet the Government are weakening what modest regulation there is under the guise of the pursuit of growth and competitiveness. Just how bloated does the finance industry have to be before anyone recognises the danger signs flashing all over it? What evidence is there to show that the financialisation of everything is a positive development?

At the next crash, which will come if these objectives are implemented, not just banks but the whole high street will be in trouble, because organisations such as Morrisons, Asda and many others are under the control of private equity, which is utterly unregulated but meshes into the sector that we are trying to regulate. I hope the Minister provides us with some evidence to show that the financialisation of everything, which is inevitable if we grow this sector, will somehow be positive. I look forward to that reply.

The Government have provided no evidence to show that the finance industry has turned a new leaf. Since the 2007-08 crash, there have been scandals galore, whether London Capital & Finance, Blackmore Bond, the Woodford fund, banks forging customers’ signatures or numerous others. What are regulators going to do when faced with multiple objectives?

Do the Government and the regulators even know what the finance industry does? Mini-bonds came as a shock to the FCA; when people told it about them, it did not pay much attention. After the Kwarteng Budget, the gilt market declined because neither the Government nor the regulators knew anything about the impact of market yields on liability-driven investments and pension funds. Just yesterday, the Work and Pensions Committee was told that that Budget resulted in a £4 billion loss to pension funds. The Bank of England earmarked £65 billion of expenditure to bail out that market. As a result, some people made fortunes, but many innocent people made huge losses. There were huge wealth transfers from City speculators to pension funds.

How is the regulator going to adjudicate which kind of wealth transfer is good and which is bad? Regulators have no mandate to do that; only Parliament has that mandate and only the Government can act on behalf of Parliament to do that. Financial stability, growth and competitiveness cannot be reconciled, because there are too many contradictions and the Government are not willing to deal with them.

These kinds of losses are part of the reason why our economy is in the doldrums. The IMF is telling us that we are a basket case in terms of economic growth, yet we are piling on more and more of exactly the same. Ministers have not explained what the competitiveness and growth objective will do to regulators’ duties. We have about 41 regulators in the finance industry; will they all be required to promote competitiveness? How will their efforts be measured? There are 25 anti-money laundering regulators; how will they promote growth? Will they encourage more money laundering and bring in more hot money? Will they object? What will they actually be doing? Perhaps the Minister can spell that out.

We have a real patchwork of enforcement. We have the FCA, the Serious Fraud Office, the Crown Prosecution Service, HMRC, the Bank of England and others. How will they be promoting competitiveness and growth? Will they be lax? Will they copy Chancellor George Osborne, secretly intervene and say to somebody, “Please do not prosecute HSBC, even though it has been caught laundering money and admitted to it”? The Government have provided no answers to these questions and there is nothing about in in the Explanatory Notes. The Government are, in effect, laying the foundations of the next crash, just as the Conservative Government’s light-touch regulation laid the foundations of the 2007-08 crash.

Experienced voices are telling us to change course and not to go down the line that the Government are pushing. For example, Howard Davies, who served as chair of the Financial Services Authority between 1997 and 2003, said that

“he was ‘not keen on’ the competition clause, which went further than the guidance laid out prior to the financial crisis. At that time, he said the FSA only had to prove that issues such as competitiveness were ‘taken into account’ and were not something ‘you were trying to achieve directly’.”

So that is a warning. He added:

“In my view, to give the regulator the objective of promoting competitiveness, could be the thin end of a rather peculiar wedge. I mean, why would … the regulators not come in and tell us to cut our cost-income ratio? That would improve our competitiveness. And if they had a competitiveness objective, it seems that would give them an ‘in’ to the way we run our business, which I think would be a bit tricky, really, and that is one reason why the regulators aren’t really keen on it either.”