Financial Services Bill

Lord Stewartby Excerpts

Tuesday 26th June 2012 Lords Chamber

[Baroness Liddell of Coatdyke]

My Lords, I am delighted that cleverer people than me have found this Bill incomprehensible, because I have real fears that we will get very lost in the detail of this Bill, and we will certainly get lost in the alphabet soup of acronyms contained within the Bill. However, I will return to the substantive issue.

The Bank of England is to be the pre-eminent financial services regulator. A regulator has to be transparent, consistent, and readily understood internationally. I would be delighted if, when the Minister replies, he will explain to us why it is necessary to vest such untrammelled power in the Governor of the Bank of England. The governor becomes much more powerful than the Prime Minister, who is, after all, only primus inter pares. The governor becomes completely unchallengeable. That is why the idea of a supervisory board in the amendment proposed by my noble friend is sensible.

I will not get tied up on titles. The court concept is anachronistic, and it is not readily understood by our main competitors. I am much more interested in the substance of supervision. One of the key elements of the work of the Bank of England as financial regulator will be to insist upon the best kind of corporate governance that we can get in our financial institutions. It should, therefore, be an example in itself in how it is governed. I have no confidence that that level of modern, transparent, corporate governance is in the model that is outlined in this Bill, as I understand it.

If people are tied up with the history of the Bank, which is long and distinguished, we can still have chaps running around in pink coats, and we can still have a wonderful collection of silver. However, at the end of the day, if we, as a nation, are to remain a leader in the financial services industry, we have to have a system of governance of our financial regulator that stands up to very tight scrutiny. I therefore urge the Minister, when he replies to this amendment, to give us some explanation as to why the Government have not come up with a model of corporate governance that gives that kind of confidence.

We will come to other elements when we talk about the role of the governor. I am extremely concerned about a repetition of what happened in the run-up to the run on Northern Rock. Some ill advised, perhaps unintentional, comments by the governor contributed to the run on that bank. We cannot allow ourselves to get into a situation where something like that could happen again.

[Lord Stewartby]

My Lords, I do not want at any length to add to what many noble Lords have said, except to record that this is one of the most incomprehensible Bills that I have had business with. Several times I started on what I thought was a trail of decisions, and at the end of it I could not work out who did what and how they knew what they should do.

I have one small technical question for my noble friend that is along those lines. I know that “macro” means “long” in Greek. I do not know what is meant by “micro”—which means small—so far as it is applicable to prudential regulation. Is the micro bit about the size of the body being investigated or about the scale of the activities of the regulator? I am not at all clear about this. Having come across these terms “macro” and “micro” regulation, I found myself unable to work out what quite a lot of these fundamental things mean.

Unfortunately, under the old regime there was a lack of clarity about who did what and who was responsible. However, I am not sure that we are getting away from that, as we ought to. It is a difficulty, and I hope that my noble friend can shed a little light on it. Many who have spoken in this short debate have pointed out that the Bill is not very easy to follow, to put it mildly. I would strongly welcome anything that would make it easier.

[Lord McFall of Alcluith]

My Lords, this is the most important Bill to have come from the coalition. We are expected to right the wrongs of the financial service and have that in place for the next 20, 30 or 40 years. This Bill has been tacked on to the Financial Services and Markets Act, which is why there is such complexity and why it is wrong. The Governor of the Bank of England himself said in June 2011:

“We are losing the simplicity and the ability to have a cleaner debate about the new framework. Certainly the Government rejected our”—

the Bank of England’s—

“request to have a new Bill and the argument that they gave, understandably, was that at the cost of some complexity we could ensure that all the provisions that were appropriate could be put into an amended FSMA and it would be a faster way of doing it”.

He went on, with some understatement:

“I think we have seen the complexity”.

If the comments of noble Lords today are anything to go by, we have not seen anything yet as a result of that. The governor went on:

“I am not quite sure whether we have avoided delay”.

Going back to the crisis of 2007 and 2008, the main issues were complexity, the question of who was in charge and transparency. We are making them worse, rather than better. We are moving from a tripartite system to a quadripartite system. When we ask exactly who is in charge—the deadly question that no one could answer at the time of the financial crisis—it will be equally hard to give a decent answer as a result of this Bill.

That is what is wrong with the Bill. It needs the utmost scrutiny in this Chamber. The other Chamber debated the Bill for 43 hours and 28 minutes. However, the Financial Services and Markets Act was debated for 89 hours and 59 minutes—more than double the time. As a result, the Treasury Committee says, in its frustration, in the first paragraph of its report, that it is now over to the House of Lords to change the Bill. Why does it say that? It says so because Clauses 80 to 103 and Schedules 17 to 21 were not debated due to a lack of time for the programme Motion. We need time for, and simplicity in, the Bill but we are getting complexity. That is the issue that has brought the noble Baroness, Lady Noakes, and me together. We are very clear: give us that simplicity, not complexity. The audience that is looking at this from outside may then understand that we have the best interests of the financial services and the country at heart, and we may get a decent Bill out of this.

Financial Services Bill

Lord Stewartby Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Stewartby]

My Lords, this has been a remarkable debate, full of interesting and useful comments on the proposed new scheme of regulation. Having read a few pages of the Bill when it first became available, I felt a bit dizzy because it is very difficult and complex. I think that there is more than enough to keep us happy—if that is the right word—in Committee.

Many points at issue have been discussed. I do not want to rehearse all those that have been mentioned by other noble Lords but I have some personal experience of certain areas. First, I was a member of the FSA board in the 1990s and I subsequently became chairman of the audit committees of an international bank and an insurance company. I was able to observe the changes that took place in the functioning of the internal committees within those companies and to draw some rather hesitant conclusions from them. Therefore, I should like to go back to the 1987 Act for a moment. My noble friend Lord Lawson spoke about some of the most important aspects of that at that time and I should like to pick up two of them.

The first is that the Board of Banking Supervision was an innovative and very interesting move which unfortunately was not given the longer life that it deserved. It was an attempt to bring into consideration the practical experience of people who had been in the banking world, so that those with a lot of experience could be more conscious perhaps of the sort of qualities and experience needed to be able to do a thorough job and to spot the problem areas. That, unfortunately, as my noble friend has said, was abolished by the subsequent Chancellor, but it had shown up that a different cast of mind was needed for that role. I hope that the new regulatory system will be able to follow up that idea, and if not actually recreating the BoBS, nevertheless be very conscious of the sort of qualities and experience that are actually needed.

It has been said by a number of noble Lords today that architecture is not the system by which you can get all these things functioning properly together. It is the people who make the difference. If people come in with a lot of practical experience, they are much more likely to spot the things that are either going wrong or which are possible problem areas that will eventually cause difficulties. That is where another point comes in. The dialogue between auditors and supervisors should for years have been a means of spreading knowledge, understanding and experience in the bodies concerned. Until 1987 conversations between the auditors and supervisors were not allowed because of the problems of preserving confidentiality between auditors and others. That restriction was removed in 1987 and it certainly needs to be a legal and obligatory part of any structure of this kind. If something were to go wrong, or if there was some suspicion that it might, auditors could report to their supervisor, which is something that from here onwards should be built into everybody’s processes.

That takes me to another area of difficulty about the valuation of derivatives and how liabilities were assessed for balance sheet purposes. I have asked a lot of people over the years how much sampling they knew about when “dodgy assets” were under consideration. The supervisory process appears to have been somewhat deficient. It did not throw up for a while the scale of misbehaviour—I suppose I could call it that; at the very least it was incompetence. Very little testing took place of these risky asset areas. I do not know why it happened, but there was a collective suspension of the critical faculties of auditors and others who dealt with these strange animals that caused so much concern. The situation is all the more curious because there were so many layers of consideration that one had to go through before one could take a relaxed view of the valuations, involving the management of the company, the company’s internal audit department, the external auditors and the supervisors.

Much also depends on the individuals involved. The role of the audit committee has been enlarged to an enormous degree over the past few years. That is necessary; the people dealing with this must be well informed. However, the audit committee must not try to second guess management. What is needed is a combination of knowledge and experience. The only thing about the Financial Policy Committee that gives me concern is that it may be too big for safety. It is a multifarious body. I am not sure how the interface between the FPC and the PRA will work. That will be critical. Purely on the grounds of the FPC’s size and complexity, this is an area where I feel a degree of discomfort. However, in general I am glad that we are legislating in this way. I have no doubt that we will make many changes as we go through the Bill in detail, and I wish it well.

Scotland Bill

Lord Stewartby Excerpts

Thursday 15th March 2012 Lords Chamber

[Lord Stewartby]

For information, is the no-detriment principle embodied anywhere in statute within the devolution area?

[Lord Sassoon]

I will correct this if I am wrong, but I believe that it is set out not in statute but, along with a lot of other critical issues relating to the financial arrangements, in the financial accords with lots of other things that support the way in which money flows through to Scotland.

Independent Commission on Banking

Lord Stewartby Excerpts

Monday 19th December 2011 Lords Chamber

[Lord Sassoon]

My Lords, the report today is a response to the Vickers commission’s work on the structure of banking. I fully accept the noble Lord’s reference to other matters, particularly accounting standards. The committee of this House did some extremely important work in that area. I do not pretend that we are solving everything today and accounting is another issue that I am sure Members of this House will not forget as we go forward.

[Lord Stewartby]

My Lords, will my noble friend say something about supervision and where it fits into this very complicated arrangement of new committees and authorities? The report of the Joint Committee, which was published only today, states that it is planned that microprudential regulation will be done through a new subsidiary body called the prudential regulatory authority. However, regulation is not a micro-activity. Supervision is a micro-activity, but regulation is not. If microprudential regulation is meant to refer to supervision, it would be better to say so and not to put it in that form of verbiage.

[Lord Sassoon]

My Lords, I am sure that there will be other occasions and places in which to discuss the Joint Committee’s important report on the Bill, so I do not want to get dragged too far into doing that. I recognise that, even for those of us who have been involved in the banking industry, confusing “regulation” and “supervision” can sometimes be a trap into which it is easy to fall. Supervision will be the responsibility of the Bank of England in the new structure, if the Bill is passed by Parliament.

Regulatory and Banking Reform

Lord Stewartby Excerpts

Thursday 16th June 2011 Lords Chamber

[Lord Sassoon]

My Lords, there are many questions wrapped up in all that. I am conscious that we have four minutes to go. I repeat myself, but we have set up the independent commission with a suitable group of experts and resourced with a secretariat that is now grappling with precisely these questions. Legal separation has, in the history of the US and Glass-Steagall, proved itself to be an incomplete answer to this. We have to find the best answer. We have set out the Government’s perspective, which is to endorse the principle, and set down the standards by which we shall judge the solution that the commission comes up with. I am sure it will listen to the ideas that are put forward here this afternoon, as well as to all the other submissions that it receives. It is not an easy challenge for the commission, but it is made up of the best people to carry it out.

On the international side, one of the standards by which the Government will judge the solution and decide whether to endorse it is compatibility with the international rules. That is the minimum. That is not what the noble Lord went on to say. As to whether other people will come with us, all I can say is that there has been a high degree of interest in what the commission has come up with in its interim report. People around the world are studying it. We shall see in time whether they will follow it. All I know is that the eyes of the world are very much on the continuing work of the commission.

[Lord Stewartby]

My Lords, I draw attention to a confusing passage in the Statement, which makes the text about micro and macro more difficult to understand. It says:

“The Prudential Regulatory Authority will focus on microprudential regulation. It will bring judgment to the vital task of regulating the soundness of individual firms”.

However, that is not a task for regulation; it is a task for supervision, which is not mentioned in the Statement and caused some confusion in earlier business on these matters. I shall not say this at any length but supervision is a separate process, which got slightly lost under the old system. We need to be careful that these are two separate things, which are complementary and sometimes overlap, but nevertheless are not the same. The text on that needs another look.

[Lord Sassoon]

I am grateful to my noble friend because this is a technical but very important area. He is completely right that there is a fundamental distinction between supervision and regulation and often texts can be loose on this. I hope that when he has a chance to read the White Paper he will see that there is extensive discussion of these areas. I refer him to the interesting remarks of the governor last night about the approach to supervision which he intends the Bank and the PRA under it to adopt in the new world, and that that should be a very different approach to supervision from what we have seen recently with the FSA. I take my noble friend’s points to heart, but the short text of the announcement does not give the full flavour that lies behind it.

Comprehensive Spending Review

Lord Stewartby Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Stewartby]

My Lords, I nearly forgot to get up, I was so interested in what the noble Lord, Lord Clark, had to say. It has been a very vigorous but extremely interesting debate. I have not prepared a speech of any length, which is a good thing, because much of it has already been said by my noble friends Lord Lamont, Lord Tugendhat and Lord Newby, so I just want to pick out some of the main themes of my rather attenuated speech.

There can be no doubt that the figures of deficit and interest charges have been at a dreadfully dangerous level. Interest is now at over £40 billion a year, which is much larger than the whole of the schools budget and the whole of the Ministry of Defence’s expenditure. One cannot run the economics of a country on the basis that it can hold those levels of debt. The same is true of the scale of the structural deficit, which is over £100 billion, according to the Budget and CSR papers, so clearly tough measures were going to be necessary. There is no doubt that in a situation like this, making changes early is always going to be the right course, because if you leave problems to fester, they normally get worse in the process. I think the Chancellor has done right to see that immediate action was taken, and the CSR now sets out a way ahead after a very bruising period. I am afraid I cannot follow the noble Lords, Lord Myners and Lord Peston, in their defence of the state of the British economy that they bequeathed to their successors, but I thought it was a very bold attempt.

I cast my mind back to nearly 30 years ago and the 1981 Budget, because I think it contains some interesting matters that are relevant in any period of tight budgetary squeeze. I used to carry the then Chancellor’s bags at that time, so I had to field a lot of representations from individual Back-Benchers who were not happy about the composition of the 1981 Budget, to put it mildly. Because the Chancellor was always so busy, I got fielded to talk to these people and it has made an indelible impression on me because that was a classic case of tax increases in a recession. It is a lesson which we would do well to remember today. One of the great moments in that period was a letter written to the Times by 364 academic economists, who said:

“Present policies will deepen the depression, erode the industrial base of our economy, and threaten its social and political stability”.

Well, what happened? From the very moment they signed the letter, the economy turned and began a course of recovery. It made me feel that, although sometimes latent, there was a sort of energy in the British economy if it was left to get on with its work and not hindered by too many regulations or unattractive fiscal situations.

I have been concerned in recent weeks about the supposed “double-dip” recession that may be around the corner. I would be the first to say that there are many uncertainties in the economic world at the moment, not only in this country but abroad. The situation in many countries, particularly in Asia and the Far East, is much more serious, but you do not see much comment about it in this country. When I ask people what the case for the supposed double dip is, I do not get an answer. There has been much talk, but no explanation. People just toss in the double dip as if it was some shadowy possible event hanging over us.

This brings me back to my original point; there is a tendency to be pessimistic about our economic performance and potential. Just as the 364 economists gave an extremely pessimistic assessment of what the 1981 Budget would do to people, so there has been a pessimistic slant in the response to the CSR and the public reaction to it. Of course, two or three quarters of better GDP do not guarantee a strong recovery, but they are more likely to point to an improvement than a deterioration, so I was not surprised that the figures were a bit better than people had expected.

When we are asked where growth is coming from, I would give greater emphasis to something that has hardly been mentioned: investment by the corporate sector. The banks may not be lending very much because they cannot find decent borrowers. One of the reasons for that is that many of the people who were borrowers have strength in their own balance sheets to the point where the corporate sector has far more resources than are needed for the level of activity that is taking place. It could afford to do a lot more.

It is important in a recovery that companies should have confidence that there is stability and that there are further improvements to look forward to. There has been a reduction in corporate taxes and other measures to help businesses. The latest output figures are encouraging. There are other straws in the wind. Those in business whom I talk to or meet say that there are far more examples of companies looking for opportunities to do things, having sat on their hands for quite a long time. The noble Lord, Lord Knight, spoke about investment. That could be one of the stronger elements of recovery.

However, there is still a long way to go. The Government must hold their nerve in implementing the plans set out in the CSR in the face of the criticism and challenges that will certainly follow. I believe that they have the commitment and determination to do so and that the double-dippers may be disappointed. I have moved in the past few months from being moderately pessimistic to being moderately optimistic. I just hope that it will work out that way.