Financial Services Bill

Lord Tunnicliffe Excerpts

Monday 26th November 2012 Lords Chamber

Amendment 89 agreed.

[Lord Tunnicliffe]

Will the Government please consider the timetabling? It is unreasonable to call the next amendment when Members are expecting the House to be in the middle of the second Statement, which should have started immediately after the first one. The only sensible option is to adjourn during pleasure.

Banking: Offshore Accounts

Lord Tunnicliffe Excerpts

Tuesday 20th November 2012 Lords Chamber

[Lord Newby]

This is why we need increased international co-operation and why the G20 initiative is so important. Obviously if people can just shift off all their revenues to a low tax jurisdiction, some companies are going to do so. We are working very hard with our international partners on this because we have a common interest in making sure that these companies pay a fair share of tax.

[Lord Tunnicliffe]

My Lords, the Minister mentioned £19 billion that is tied up in Jersey related to UK citizens—a very precise figure. Does this mean that there is sufficient transparency, and that we have a sufficient viewing, of what is happening in Jersey? Do we have sufficient HMRC resources addressing that? And if the answer to both of those is yes, does he have a feel for the amount of money that the UK Exchequer could expect out of these people if we were better able to get hold of that money through agreement?

[Lord Newby]

My Lords, in terms of resources, the Government have committed an extra £917 million over the current period to combat tax avoidance and evasion. That money is now being redirected with HMRC. It has led already to several convictions involving overseas tax evasion. The fact that £19 billion of funds is held by UK citizens in Jersey does not mean that £19 billion is improperly held in Jersey. A very large proportion of that money is there perfectly properly. We have to understand that simply because you have a bank account in Jersey does not of itself mean that you are a crook.

Financial Services Bill

Lord Tunnicliffe Excerpts

Monday 12th November 2012 Lords Chamber

[Baroness Noakes]

Will the Minister elaborate on what he said about the role of this amendment in relation to the fostering of a successful financial services industry in this country? The UK is a service-led economy, and the largest sector within it is the financial services sector. If we are looking at sustainable growth in the UK economy in the medium term, and probably in the long term as well, we need to look to a successful financial services sector. I thought that I heard the Minister say something along the lines that this is really about the non-financial services sector and about underpinning economic growth outside it. It seems to me that the amendment enables the regulators to take into account the importance of a successful and sustainable financial services sector that is competitive internationally, because it is through that that we will produce growth in the UK economy. I will be interested in the Minister’s views.

[Lord Tunnicliffe]

It is not often that I rise to offer sympathy to the Minister. He was quite right to say that the generality of this amendment, which in my recollection came from all sides of the House, particularly from these Benches, was stressed by us in another place. Every now and then, one has to look at a massive Bill such as this and recognise that the final test of all legislation is that it contributes to the general good. I think that the two lines of this growth amendment produce the right reminder to the regulators that they have to contribute to the general good—I share the emphasis placed by the noble Baroness, Lady Kramer, on the medium and long term—and I warmly welcome it.

[Lord Newby]

I am grateful for the contributions from all noble Lords who have spoken. I do not want to go into a lengthy response at this time of the evening, but not because I do not feel that we know the answers to the questions. I shall deal with a couple of specific points that were made. My noble friend Lord Hodgson asked in particular about crowd sourcing. To a certain extent, my noble friend Lady Kramer dealt with that. Government Amendment 26, which we debated earlier this evening, goes some way to recognise the validity of crowd sourcing. As my noble friend Lord Hodgson will know, there is already one fully authorised, equity-based crowd-funding platform operating here and growing. We will continue to consider how we can help this and other platforms grow. It is all part of increasing diversity of funding, which we strongly support.

My noble friend Lady Noakes asked whether this amendment relates to the financial services sector as it relates to the rest of the economy and whether the Government accept that sustainable growth in the financial services sector is desirable. We agree that it is crucial. The financial services sector plays a major part in the UK economy, not just in helping the rest of the UK economy to grow, but in its own right. It is a very significant source of export earnings. The whole of the Bill is designed to provide regulatory underpinning that will mean that the financial services sector is safe and secure and can grow in the medium and long term. I hope that with those comments the House will feel able to support the amendment.

--- Later in debate ---

[Lord Newby]

The government amendments in this group make a change to the way that with-profits policies will be regulated under the new framework. We had a very useful debate on this subject in Committee. As my noble friend Lord Sassoon stated at the time, with-profits policies give rise to a particular risk of unfairness because the benefits that policyholders receive are largely at the discretion of the firm. The tensions between the firm treating current and future policyholders fairly, and maintaining safety and soundness, are especially acute. It is therefore difficult to separate the prudential and conduct issues in the regulation of “with-profits”, much more so than in any other type of financial services business. The Government’s main objective, therefore, is to ensure that there is clarity in decision-making in this area. The approach that was originally envisaged in the Bill was that this clarity would be delivered by giving the PRA sole responsibility for ensuring an appropriate degree of protection for policyholders in relation to the making of discretionary payments.

The noble Baroness, Lady Drake, raised a number of concerns including the possibility that excluding the FCA from decision-making would lead to consumer detriment, as the prudentially focused culture of the PRA may lead it to pay insufficient attention to the fairness element of policyholder protection. The Government have now given further consideration to this, and on balance we agree that this is an area where the Bill could be improved. We have therefore brought forward amendments that will ensure that both the FCA and the PRA have a responsibility in relation to the regulation of with-profits, rather than giving sole responsibility to the PRA. This will mean that the FCA has a full role in consumer protection, as it does in other firms. The PRA and FCA will have to put in place an MoU setting out their respective responsibilities in this area.

However, to preserve the sense that there should be a final decision-maker, the PRA will be given the power to require the FCA to refrain from actions that conflict with its general or insurance objectives, for example if it considers the FCA action could harm the safety and soundness of a particular with-profits insurer or with-profits insurers generally. To ensure scrutiny and accountability, any such veto must be published unless the PRA considers it is against the public interest to do so. The Government’s view is that this approach strikes the right balance between giving the FCA a much stronger mandate, and preserving clarity of decision-making and responsibility in this exceptionally complicated area. I hope that the amendment meets the noble Baroness’s concerns, and I beg to move.

[Lord Tunnicliffe]

My Lords, I thank the Government for bringing forward this group of amendments, which meets the concerns raised by the noble Baroness, Lady Drake. I particularly thank the Minister for mentioning her in his speech. She regrets that she cannot be here, but I am sure she will feel her efforts were worthwhile by resulting in this group of amendments.

Amendment 47 agreed.

Financial Services Bill

Lord Tunnicliffe Excerpts

Wednesday 17th October 2012 Lords Chamber

[Baroness Noakes]

It might help those Members of the Committee who did not hear my opening remarks if I say that my amendment is designed to ensure that the power of direction can be used for all of the functions of the Bank of England not simply those listed in Clause 57(2). I also said that it probably ought to exclude the functions related to monetary policy.

[Lord Tunnicliffe]

I spent some years sitting on the Benches opposite facing the noble Baroness, Lady Noakes, and it comes as a refreshing new experience to find myself so frequently in agreement with her on this Bill. I am sure that will distress her as much as it is distressing me. Unfortunately, her caveating remarks are every bit as important as the lead remarks recommending the amendment.

We would not be able to support the amendment as drafted because, as she rightly points out, it could involve a direction to the MPC. This part of the Bill is a limiting list. The noble Baroness may want to consider either extending the list—we would look at that with great interest—or reversing it and extending the powers to the whole of the activity as her present amendment does and then caveating it with a number of areas where this power could not be used. This is a very useful amendment to develop the debate. I look forward to the Minister’s reply and thank the noble Baroness for proposing it.

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

My Lords, first let me be clear that I do not believe that it would be appropriate to extend the scope of the power in the way that is suggested by this amendment. It would make the power unusable. I was going to remind my noble friend, but she already made the point, that the Treasury already has a very broad power of direction over the Bank. As my noble friend pointed out, Section 4 of the Bank of England Act 1946, which continues and will continue to be operative, as my noble friend says, allows the Treasury to,

“give such directions to the Bank as ... they”,

the Treasury,

“think necessary in the public interest, except in relation to monetary policy”.

I think we are all agreed that the amendment was not intended to cover monetary policy.

[Lord Tunnicliffe]

Does the noble Lord agree that every Committee that has looked at this and reported and all professional commentators take the view that the power is so wide and so nuclear that no Chancellor would ever use it?

[Lord Sassoon]

My Lords, the noble Lord, Lord Tunnicliffe, is getting ahead of me. That was precisely what I was going on to explain. He is absolutely right that the power has never been used. Even at the height of the recent financial crisis, the then Chancellor felt unable to use this power to direct the Bank. Indeed, Alistair Darling’s book is rather interesting on this point. He explains in it that he was told,

“that it might be legally possible”,

to direct the Bank, but that,

“there would be wider implications of such an action. We had set great store by making the Bank independent and a public row between myself and Mervyn would have been disastrous, particularly at this time”.

The 1946 Act direction power is considered, and was considered by a Chancellor very recently, to be such a nuclear option because it is so broad that it would be very difficult to use. This means that any use of the power would likely be interpreted as the Chancellor overruling decisions and judgments that should rightly be for the Bank. This would be seen as a direct challenge to the Bank’s independence and a judgment on the competence of the Bank’s senior executives, which could cause a crisis in leadership in the Bank and a serious loss of public confidence. That line of thinking has prevented Chancellors from using the 1946 Act power in the past, as the fallout could be more damaging than the situation that they might be trying directly to address.

That risk was recognised by the Treasury Committee. That is why their report recommended that,

“the Chancellor should be granted a power to direct the Bank in a crisis which is free of the problems associated with the power under the 1946 Act”.

That is why the new power of direction in Clause 57 is designed to be a targeted and usable power. There will still be the power in the 1946 Act, for the reasons that underlie what my noble friend and the noble Lord, Lord Tunnicliffe, said. It is probably worth maintaining that reserve power somewhere in the system, albeit with the caveat that it is difficult to see the situation in which it might be exercised.

On the other hand, and going to the heart of who is in charge and who is responsible for what is in the new system, it was muddled and confused under the tripartite system but we want to make it much clearer in the new system that the Chancellor and the Treasury are principally there as guardians of public funds. That is why the specific direction in Clause 57 is designed that way. It is targeted. It does not allow the Treasury to overrule the Bank’s decisions and judgments; it allows the Treasury to take the decisions that are rightly for the Government to take. It is designed to allow the Chancellor to intervene to require the Bank to take specific action in a crisis management situation where public funds are at risk. That is why the power covers only the Bank’s crisis management functions, specifically the provision of liquidity and the operation of the special resolution regime. Again, I hope that that helps the noble Lord, Lord Peston, with the intended scope of this.

--- Later in debate ---

Moved by

[Lord Tunnicliffe]

190ZEZA: After Clause 60, insert the following new Clause—
“Duty of coordination: early warning
In furtherance of collaboration under this Part, the Bank of England, FPC, FCA or PRA must provide the Treasury or the Secretary of State with an early warning of the possibility that a notification of a material risk to public funds may be given under any provision of this Part, and must provide full information about circumstances.”

[Lord Tunnicliffe]

My Lords, the intention behind this amendment is twofold. It is to bring more players into the decision about an early notification and to bring in the requirement for early notification. Touching first on bringing new bodies into this, the clause effectively brings the FPC, the FCA and the PRA into the early notification procedure advocated in this clause. The essence of our concern has been rehearsed around the House. It is that the Bill gives enormous power to the Governor of the Bank of England and, in a crisis, he effectively ends up as the gatekeeper of information flowing from the Bank to the Government. We believe that there should be ways of making this gate wider and that where the FCA and the PRA—I shall talk about the FPC in the next amendment—believe that an early warning is required, they should have a duty to consider the circumstances; and where they believe that it makes sense, they should have a duty to communicate that to the Treasury or the Secretary of State. This would clearly require them, as part of their function, to be proactive in their stance when they are horizon-scanning or looking forward at various risks.

The second part of the amendment is about the essence of an early warning. The concept of an early warning is that it is a warning short of a formal notice. The amendment lowers the bar from the form of words in the Bill that implies the “probability” of a material risk or the requirement of the use of public funds to the “possibility”. It echoes the concerns of the Treasury Select Committee in its 21st report which was published on 8 November 2012. Its recommendation at paragraph 166 was:

“We are concerned that the formal notification of a material risk to public funds may still not give the Chancellor enough time to consider other policy options. The Treasury needs to know as early as reasonably possible when it might receive a notification. We therefore recommend that the forthcoming legislation also require the Bank to give the Chancellor an early warning of the possibility that a notification of a material risk to public funds may need to be given, and full information about the circumstances”.

We very much agree with that recommendation and in this amendment we seek to give effect to it.

The process of crisis that we are debating will probably involve protecting the activation of the proactive intervention framework. The noble Baroness, Lady Noakes, knows what I am talking about because she is familiar with the document, The Bank of England, Prudential Regulation Authority: Our Approach to Banking Supervision, published in May 2011. The PIF is described on page 18. It describes five stages of escalation, which presumably are the key stages that lead up to a crisis. There is almost a presumption that there is a clear difference between normal business and a crisis. I hope it never happens, but if it did, it would be an escalating situation. Some of the stages of the proactive intervention framework will be in private. Some will not want to be the subject of a notice, as the final notification as envisaged in the Bill should be. The ability and duty of the Bank to give a notice of possibility would allow those private activities, in the early stages of the PIF, to take place, alerting the Government that they have to start thinking about the possibilities and how they may develop.

The counterargument often revolves around the fact that the Chancellor and the Governor of the Bank of England talk to each other. Of course, at the moment we have two most charming individuals and I am sure that they have useful conversations. However, once again, if you go into the evidence of the Select Committee and its comments, clearly this has not always been true. I am rather sorry that the noble Lord, Lord Lawson, is not in his place so that he could reflect on the events of 1984 when he had to find a great deal of money to save a failing bank and, according to the Select Committee, was advised of that requirement on the morning of the crisis. Equally, one cannot read Alistair Darling’s book without a clear feeling that the day-to-day communication between the Governor of the Bank of England and the Chancellor was less than warm. Certainly, it was not enough to leave one comfortable that the necessary preliminary warning that this amendment envisages would take place at an informal level.

As this crisis gathers, one has to presume a situation that relationships could really be quite bad. They could be in seven years’ time. The new governor might turn out to be less charming than the present one. The Chancellor of the day could well be less charming and communicative than the present one. In fact, there could have been a total breakdown of trust between them. It has happened in the past. This amendment would require a preliminary notice and there would be a dereliction of duty if the Government did not provide this preliminary notice. This mechanism would allow the Government to start their preliminary thinking and consider mitigation measures other than the expenditure of public money—as envisaged in the Bill —and give the lead times necessary. Crucial is a situation of no surprise. We are very uncomfortable about the sense behind some of the remarks, and the extent to which the governor is the gatekeeper of information to the Government. We believe the Government should be equally sensitive and concerned and I commend the amendment to the them.

[Lord Sassoon]

My Lords, I am genuinely puzzled about this amendment. I know that it was put forward in another place by Mr Leslie, the colleague of the noble Lord, Lord Tunnicliffe, and that it is designed to implement a Treasury Select Committee recommendation to create an early-warning mechanism of a risk to public funds. No one would be keener than me to have such a mechanism in place if I believed that it was necessary because I thought that the Treasury would not, under the provisions of this Bill, get sufficient early warning.

However, this provision and the question of an early warning do not rely on what I think we all agree is very important; namely, that there is constant dialogue about a whole range of things between the Treasury and the authorities, including the Bank. The question of an early warning does not rely on that, although we would expect it to carry on because it is working well at the moment.

I believe that the amendment is unnecessary and inappropriate. Therefore, let me carefully go through why. First, as the Government made clear in their response to the Treasury Select Committee, the duty on the Bank to notify the Treasury of risks to public funds already achieves this aim. The existing duty is already designed to give the Treasury an early warning of a potential risk to public funds. That is because Clause 54 sets an extremely low bar for notification; for example, when the Bank or the PRA looks at the position of a firm or a group of firms, if it thinks that a possible future scenario could lead to a situation in which the Treasury might reasonably be expected to decide to use public money to protect stability or the public interest, a notification must be made.

I do not think that the bar could be set much lower than that. For example, in the type of scenario described by the noble Lord, where the Bank is aware that at some point in the future a risk to public funds could arise, the Bank should be making a notification of a risk to public funds under the existing duty in Clause 54. I am happy to put that on the public record again. The Bank completely accepts that and there is no debate about the interpretation of the duty under Clause 54.

With this amendment, the noble Lord also risks undermining the clarity and force of the statutory duty to notify the Chancellor of risks to public funds by broadening the grounds on which it could be triggered to include risks to the FCA’s objectives which do not involve public money. Just as in the previous debate we were talking about issues which related to the line between risk to public money and other matters, again, in relation to this particular early warning, the duty is drafted very deliberately with the line drawn, which is not reflected in the noble Lord’s amendment.

[Lord Tunnicliffe]

I feel that the words used by the Minister are quite a shift. He referred to a “possible future scenario”. As I read Clause 54, it is much closer to a probable future scenario. Will he explain to me—I am sure that he is much more familiar with the Bill than I am, much as I have tried to study it in the past few days—where in statute I can draw the comfort that a possible very low bar to notification is emphasised.

[Lord Sassoon]

My Lords, the fact is that a regulator would have to look at future scenarios when it is thinking of its duty under Clause 54. The clause refers not to a situation that has arisen but to,

“a material risk of circumstances”,

which links it, as I have said, to the provision of financial assistance. It is clear and simple. There is a lot of other stuff in Clause 54(1), but the key things are,

“that there is a material risk of circumstances within any of the following cases”,

which are then explained in detail. As understood by the Government and the Bank, this is a forward-looking statement and requirement, which obliges them to think about possible future scenarios that could lead to the situations that are then developed in Clause 54. Of course, the duty in Clause 55 is to notify any changes to that.

[Lord Tunnicliffe]

I think that some of what the Minister has just said is quite a shift from what Clause 54 says. I would be delighted if he came forward on Report with some amendments that contained a duty to look at scenarios and a duty to bring forward a notification at the point of a possibility. There has been considerable debate in another place and in various committees, as to what “a material risk” means. There is a commitment in Clause 61 that it must be in the MoU, but as I search the MoU I cannot find it coming readily out to me—I shall be asking about that later. I invite the Minister to consider what he has said and see whether he can improve the legislation so that there will be no ambiguity about the test that the Bank has to apply in bringing forward a notification.

[Lord Peston]

My Lords, perhaps I can help the Minister—it is not a question of persuading him to say yes or no at the moment. Looking at Clause 54, I take “material risk” to mean a significant probability; “possible” is much less than that. I think that my noble friend suggests in his amendment that Clause 54 would be strengthened if we went down the “possible” line, the technical point being—and I do not press it—that there is deep philosophical argument, particularly within probability theory, about the difference between possible and probable.

I interpret the amendment to mean that if the relevant body—whether the Bank of England or another regulator—is looking at a specific part of the financial services sector, or even a specific firm within it, it should let the Government know that it is doing so and that one definitely possible outcome is a need for the use of public funds. The amendment, as I understand it, is simply an attempt to be helpful to HMG when it comes to the control of public money. The Minister may say, “We do not want to know about possibles; we only want to know when the real demand for the money is coming”. That may be his argument, but that is the difference—am I not right?—as to what we are talking about here.

--- Later in debate ---

[Lord Sassoon]

My Lords, there are some points where, frankly, I have to take the advice of the legal experts here, which I have done. Frequently Bills, this one included, contain constructions which follow some sort of drafting formula and are sometimes difficult to understand. As I say, my starting point is that if I really thought that the Treasury was not going to get the sort of early warning which the noble Lord, Lord Tunnicliffe, and the Treasury Committee rightly ask for, I would propose a government amendment. I take the point that “possible” appears in a heading and not in Clause 54(1) but it is very clear from the heading that we are talking about the material risk in the context of the possible need for public funds. I assure the Committee that all the advice that I have been given is to the effect that this will achieve the purpose that the noble Lord, Lord Tunnicliffe, desires. Finally, I draw the noble Lord’s attention to paragraph 13 of the draft MoU to find the interaction between the MoU and these issues. On the basis of those explanations, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Tunnicliffe]

My Lords, this has been a useful debate. However, members of the Treasury Committee are concerned that there is confusion about material risk. We will come to the extent to which the MoU does or does not define that. I believe that a Prime Minister once said, “Circumstances, old boy, circumstances”. As I said, I am happy to accept the Minister’s assurance that the legislation will work under the present charming governor and charming Chancellor, but it needs to be future proof. The words that the Minister used in connection with this important point were reassuring but they need to be in the Bill if they are to persist beyond the tenure of the present Government. I hope that he will consider bringing forward an amendment to achieve that. In the mean time, I beg leave to withdraw the amendment.

Amendment 190ZEZA withdrawn.

Moved by

[Lord Tunnicliffe]

190ZEZB: After Clause 60, insert the following new Clause—
“Collaboration under this Part: power to make regulation
(1) The Secretary of State may, by order subject to affirmative resolution in each House of Parliament, add to the list of bodies specified in section 54(4).
(2) The first such order made under this section shall add the FPC to that list.”

[Lord Tunnicliffe]

My Lords, I apologise to the Committee for this extraordinarily clunky amendment. I give a prize to anybody who really understands what we are trying to do. Those who are committed members of the conversation on the Bill will know that at the end of the previous sitting, the Chair, as is typical or traditional, or whatever the right word is, swept through a whole series of clauses which we approved. Unfortunately, that destroyed about five amendments which we had tabled that day.

I am not suggesting malpractice on any part, but it rather ruined the arguments that we wanted to make today, and we have had to find a way around it. The first amendment slipped around it quite comfortably but the second one looks rather difficult to understand.

For the avoidance of doubt, this amendment puts the FPC into the notification process; it is as simple as that. Indeed, if we bring the amendment forward on Report, we will make sure that it is very clear, straightforward and in the right place and that the Committee does not plough it out by accident.

The FPC is at the centre of this Bill. In many ways the FPC is the new activity that will give force to the consideration of stability. I could not find any one place where it is nicely described. The best that I could find is in the Explanatory Notes to the Bill, where paragraph 35 states:

“New section 9C provides that the objective of the FPC is to contribute to the achievement by the Bank of the financial stability objective provided for in section 2A of the BoE Act … Subsection (2) provides that the FPC is to contribute to that objective primarily by identifying, monitoring and taking action to remove or reduce systemic risks (such as those set out in subsection (3)) with a view to protecting and enhancing the resilience of the UK financial system”.

In the FPC, we are seeking to put together the people who are the most able in the country to monitor, consider and mitigate financial instability. We are requiring them to opine on it and to make directions on it. We are requiring them to be the best informed people in the country and the FPC to be the most important body in the country in terms of financial instability. It is therefore strange that the new body is not able to pull what I would call the Clause 54 trigger. The Bill leaves this entirely in the hands of the Governor of the Bank of England. The presumption is that the governor will always provide the best information and the best notification of where a risk is likely to come about.

It is difficult to understand that, because at first sight of the Bill you would expect it to be a narrative about setting up structures and organisations to address the whole issue of financial instability. You would expect it to give those institutions the appropriate powers to understand, to control and to mitigate financial instability. Broadly speaking, the Bill does that; and, broadly speaking, the Bill is not opposed by these Benches in how it seeks to do that.

However, suddenly the narrative stops. The FPC, watching instability occur in the economy, is expected to take actions—quite powerful actions. It is able to instruct the PRA to take certain actions with respect to banks, perhaps to consumer credit, and so on. Yet suddenly, once the deteriorating situation is labelled a crisis, there is no involvement by the FPC. There is the presumption that the Bank of England Governor will be all-knowledgeable, that the FPC will no longer have any role, and that it should not opine on whether the Clause 54 trigger is pulled.

The facts of life are that real organisations have a diversity of opinion, and the FPC, if it is doing its job well, will have interesting and difficult discussions about a gathering storm. We contend that it should be able to decide that, as a result of those discussions, it can advise the Chancellor that a situation is deteriorating and that there may well be a situation in which public funds would be required. If we require this body to have that role, then the FPC will be a safeguard against the possibility that voices that should be heard by the Chancellor are not heard. I beg to move.

[Lord Newby]

My Lords, amendments to probe the role of the FPC in triggering a public funds notification under Clause 54 were also laid in Committee in the other place. They were inaccurate then and they remain inaccurate now, primarily because these amendments would have no legal effect. The FPC does not have any powers under Parts 1 to 3 of the Banking Act 2009. So in referring to the powers of the FPC under those provisions, the amendment refers to powers that simply do not exist.

The thrust of the noble Lord’s amendment is that the FPC should be able to give notification of risks to public funds separately from the Bank itself. As we have explained previously, the new system that the Government are putting in place is based on making the Bank a single point of accountability for financial stability. Consistent with this, we are making the Bank, and the Bank alone, responsible for notifying the Chancellor of risks to public funds. This is because, as we have seen so strikingly with the tripartite system, the risk of splitting responsibilities over various institutions is that each one thinks that one of the others is responsible, or blames another, when things go wrong, thereby allowing serious risks to fall through the gaps. This will require the Bank and its senior management team to identify and evaluate risks emanating from all parts of the financial sector, working closely with the PRA, the FCA and the FPC.

However, the statutory responsibility for formally notifying the Chancellor must be clear and unequivocal. It is not that the FPC is going to be separate somehow from the Bank and, given that the governor in his new enhanced role is going to chair the FPC, if the governor, representing the Bank, goes to speak to the Chancellor under the terms of Clause 54 he, of necessity, will also be representing the views of the FPC.

We therefore think that the amendment is unnecessary and inappropriate, and ask the noble Lord to withdraw it.

[Lord Tunnicliffe]

My Lords, the essence of this situation was caught in the last part of the noble Lord’s response. If the governor goes to see the Chancellor and, say, does not represent the FPC’s view, that would to some extent be unthinkable. However, our concern is if he does not go to see the Chancellor—that he listens to the debate at the FPC and may find himself in a minority, but still concludes that he has no responsibility to share FPC’s doubt with the Chancellor. We are not talking about competing roles where it is not clear who is responsible. We are not in any way challenging the split of responsibilities set out in the Bill. We accept that the Bank has the executive responsibility to take action in a crisis. We accept that there need to be rules about where the Chancellor comes in and has executive responsibility.

This is not about who is responsible, other than the points raised by the noble Baroness, Lady Noakes, earlier in the debate, where we may think the line has to be moved about a bit on direction. We are not, broadly speaking, challenging the thrust of the Bill and the division; we are challenging the idea that only the Governor of the Bank of England can advise the Chancellor that there is a gathering crisis that may involve the use of public funds. We believe that it is safer to have more bodies involved in that situation and we particularly believe the best qualified body in the land should have a duty to consider whether there is a crisis situation developing and should have a right, if it considers that to be true, to advise the Chancellor.

I can see that I am not persuading the noble Lord but nevertheless the point is important and valid. We may come back to it on Report but in the mean time I beg leave to withdraw the amendment.

Amendment 190ZEZB withdrawn.

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Moved by

[Lord Tunnicliffe]

190ZEE: Clause 61, page 138, line 2, at end insert “, and how a temporary Stability Committee would be convened and function in a crisis”

[Lord Tunnicliffe]

My Lords, I shall refer to the memorandum of understanding, particularly paragraph 20. I am mindful that people reading Hansard may wonder which memorandum of understanding it is and where it is. It is Annexe E to A New Approach to Financial Regulation: Securing Stability, Protecting Consumers, Cm 8268, from January 2012.

Paragraph 20 of that document states:

“During a potentially fast-moving crisis, it will become especially important to ensure close and effective coordination so as to maintain coherence in the overall crisis management process. At the heart of institutional coordination during a live crisis will be frequent contact between the Chancellor and the Governor. However, the Chancellor and the Governor may agree to establish ad hoc or standing committees at other levels to support this process”.

That is fine as far as it goes. Our amendment seeks to require in the MoU more detail of how a temporary stability committee—as we have called it but we do not mind what the Government call it—would be convened and how it would function in a crisis. We are essentially saying that we would like a commitment in the Bill to emergency preparedness—to planning how the crisis might be handled.

I have a very strong relationship with the concept of emergency preparedness. It has been part of my whole professional life. My first job was as an airline pilot—third class; I struggled up to second class. We spent our time hurtling down runways with engines on fire and so on and coping with it—not for real, I hasten to add, or there would be piles of burning metal all over the place, but in simulators. It was a crucial part of our role. The public who use those services have every right to expect that people in that critical position spent a great deal of time preparing for emergency.

The next phase of my career in which this was particularly important was when I was managing director of London Underground Ltd. A year before I came into that office we had 31 people at Kings Cross. We got more or less everything wrong that could possibly have been got wrong. Emergency preparedness was part of the series of errors. If we had had good emergency preparedness processes and all other things had gone wrong, in probability nobody would have died. Later in my career I was chairman of the United Kingdom Atomic Energy Authority, which has the potential of course to release radioactivity into the atmosphere and we took the whole issue of emergency preparedness right up to what the role of the non-executive chairman would be in such circumstances.

In the airline business, London Underground and UKAEA, we had the potential to kill tens or hundreds of people—in LU, it was thousands of people. I am happy to reassure anyone reading this debate that we engineered out the scenario that involved thousands of people and London is much more secure for that. Nevertheless, they were grave and important consequences and we took them very seriously. Yet the damage that we could cause through our failure in that mode pales into insignificance compared with the pain the country is suffering in this double-dip recession.

I do not want to go into the causes of where we are today. There is not the slightest chance of the Minister and I having any serious common ground in such a debate. Despite the time we have in front of us this afternoon, it would be rather fruitless to start such a discussion. Yet I do not believe that we would disagree that the banking crisis made a significant contribution. We might argue over what came first or so on, but if the banking system had remained stable through the circumstances as they developed in the last part of the previous decade and the first part of this one, we would be in a much better position. A banking crisis does absolutely enormous damage to an economy—and to the world economy—and needs to be prevented, avoided or handled at all costs.

This amendment invites the Government to set out, at least in terms of duties or some such way, how they do the necessary emergency preparedness for such a crisis. For anybody who has been through a crisis—I have been through some modest ones in my professional career—there is absolutely no question that the extent of emergency preparedness has a significant impact on the ability to handle that crisis. Knowing who to talk to, who to bring together for skills and how to communicate with appropriate external agencies, and the effort put into developing scenarios and looking at the various tools that can be addressed by them, is massively repaid in those scenarios happening.

In my previous professions, very serious scenarios were very improbable. Very serious scenarios in the banking world have proved all too probable. They really happen and cause enormous damage. This amendment seeks to encourage the Government to set out what planning they are doing, how they would convene the committee envisaged in paragraph 20, what functions it would have and how it would involve the main players. In our experience, you have to have the top players involved. I am sure that, for instance, in contemplating a possible unfavourable military situation in the Middle East, the Prime Minister spends part of his time working through how the Government would respond to that and how the process of debate, analysis and so on would take place. I put to the Committee that exactly those sorts of capabilities ought to exist within Government for a possible future banking crisis. I am reasonably confident that they are in place. As a minimum, I hope the Minister can outline what preparedness is envisaged. I ask him to accept the amendment, which would require him to set out that preparedness in a memorandum of understanding. I beg to move.

[Lord Newby]

My Lords, we have stated many times during this debate that the Government place great importance on effective co-ordination between the relevant authorities. We accept that this will be particularly important with regard to crisis management. That is why the Bill places a legal duty on the Treasury, the Bank and the PRA to co-ordinate their functions, and requires that they prepare a memorandum of understanding setting out how they intend to co-ordinate in a crisis management situation.

Obviously in such a situation the Treasury, Bank and PRA will need to be in regular contact. These events are often by their nature fast-moving or take place outside office hours. The protocols in place for ensuring co-ordination need to be flexible to accommodate this uncertainty. A committee is not necessarily the most appropriate way to deal with every crisis. For example, setting up a formal committee for a crisis event that lasts the duration of a weekend would be overly bureaucratic and cumbersome if the event required a particularly swift and flexible response.

These crises require that. They require frequent and immediate contact between Ministers and senior officials at the Treasury and senior executives at the Bank of England. Each financial crisis situation is different, and sometimes the circumstances will mean that a formal committee process would not be appropriate. If you look at three events which have either been, or had the potential to trigger, a financial crisis, without going into the details you can see how greatly they differ. There was for example BCCI, which was referred to earlier. There were the concerns in the immediate aftermath of the 7/7 bombings. There was the RBS crisis. These happened at different times of the day and at different points in the week. Some were put to one side relatively quickly while others have had long-term consequences. In those circumstances, it is difficult to imagine how you could set out in a memorandum of understanding either how a committee might be formed—we do not think that you always need one—or, if one is formed, how it will be convened and would function.

The memorandum of understanding is currently 39 paragraphs long. I do not know whether, when the noble Lord, Lord Tunnicliffe, was doing his training on the plane or when he was at London Underground, they had instruction manuals and crisis manuals. From working in humble PR, I recall that crisis management plans there ran to page after page. An MoU would not be the right place for these plans. This is not to say that the authorities do not plan. I can reassure the noble Lord that the authorities now have regular war games to prepare for a range of financial crises and participate in a range of cross-governmental operational crisis war games. This is to try to make sure that when a crisis explodes its participants have some preparedness for how they can respond.

That is different from saying that you need a committee in every case, even though we have said in the memorandum that in some cases you might. Certainly it is different from saying that in a memorandum of this scope and length you could set out how a committee could be convened and function. I hope that the noble Lord will be reassured that officials are spending quite a lot of time in crisis management planning and that that is the appropriate way of making sure that we are ready to deal with a crisis, rather than having the formal structure that his amendment would require.

[Lord Tunnicliffe]

My Lords, I thank the noble Lord for his response. I am reassured to a degree about the issues. We are not likely to press this further. The Committee might be reassured if he could flesh out some stronger sense of the preparedness and if he could write us a note that sets out the levels at which people are involved. I am not asking him to make a commitment now. He does not have to do anything as dangerous as that.

The thoughtfulness that has gone into the pre-crisis preparation is crucial. So many organisations fail to do it properly. British Petroleum successfully wrote off something like a quarter of its value through not having an adequate level of preparedness. In the defence sphere, for instance, the committee systems within government for national security and so on are documented as part of the strategic defence plan. Anything the Minister can do to add to our understanding of the depth and height of this preparedness and who is involved would be reassuring. With that request, I beg leave to withdraw the amendment.

Amendment 190ZEE withdrawn.

--- Later in debate ---

Moved by

[Lord Tunnicliffe]

190ZEL: Clause 61, page 138, line 24, leave out subsection (7) and insert—
“(7) The memorandum is a measure prescribed by the Treasury by order which shall not be made unless a draft of the order has been laid before and approved by resolution of both Houses of Parliament.”

[Lord Tunnicliffe]

My Lords, the MoU is an important document. We believe that it is incomplete. Earlier, we suggested that it should have some additions relating to what I will call, more generally, emergency preparedness, if only to acknowledge that there should be an acknowledgement that there is a duty to do that. There is a real question mark over whether the commitment to explain material extent is fulfilled in Clause 61(2)(a). I have read the memorandum with care and I do not see in which paragraph that commitment is discharged. I should be grateful if the noble Lord could bring that out in his response. I see curiosity spreading across the faces of the Government.

[Lord Newby]

For clarification, will the noble Lord repeat which duty he is referring to?

[Lord Tunnicliffe]

Clause 61 is entitled “Memorandum of understanding: crisis management”. Clause 61(2) states:

“The memorandum must, in particular, make provision about—

(a) what the Treasury and the Bank regard as a material risk for the purposes of section 54(1)”.

We have had quite a debate about material risk but I cannot see which paragraphs of the memorandum address that duty. I should be grateful if the Government would flesh that out. I do not want to cause the Government undue problems. We would be very happy to see a letter setting that out, although a response now would be delightful. The memorandum is important. It will change because, in my view, it already has question marks over it as it stands, but also because the world will change and, as the world changes, the Government, the Bank and the Treasury will want to change the memorandum. It is crucial that Parliament is involved in such an important document.

This MoU deserves to be a formal document and it deserves to be approved by both Houses. The amendment is a standard amendment such as we find in these situations. It requires an affirmative resolution, first, to register the document and, secondly, to allow for when it might change. I cannot see why it is being resisted. The concept of an MoU is entirely sound but the document, frankly, should be more formal than it is at the moment. Its alteration in the future should be by affirmative resolution of both Houses. I beg to move.

[Lord Newby]

My Lords, I shall start by answering the noble Lord’s question as to where in the memorandum of understanding the question of material risk appears and where it is defined. The principal paragraphs dealing with this matter are paragraphs 8 to 18, but paragraphs 13 to 16 set out the matters that the Bank should take into account in determining the material risk.

The Bill does not actually say that the memorandum of understanding has to define material risk. It says that it must,

“make provision about … what the Treasury and the Bank regard as a material risk”,

which is a slightly different requirement. The paragraphs in the memorandum of understanding to which I have just referred do exactly what the Bill requires the Treasury to do.

[Lord Tunnicliffe]

Forgive me—the noble Lord was going faster than my brain. Will he repeat the paragraph numbers that cover the point?

[Lord Newby]

The whole section is headed “Notification by the Bank of a risk to public funds” and it runs from paragraph 8 to 18. It explains the background and sets out, particularly in paragraphs 13 to 16, the matters that the Bank needs to take into account in determining whether the material risk test is met.

The amendment would transform the MoU into a statutory instrument. In our view, that would severely limit the usefulness of the MoU as secondary legislation is, like primary legislation, extremely prescriptive. It sets out what must and must not be done and confers powers that have legal effect. Although we agree that clear responsibilities are important for effective crisis management, we believe that the Bill sets out the framework for this extremely clearly and the MoU then fleshes that out. That is the role of an MoU. It goes beyond what must, in all cases, be done or not done. It allows the authorities to set out what is likely to happen in given situations and why that is the case and provides an insight into the aims of the authorities involved. We do not believe that it would be possible for the MoU to fulfil this purpose effectively if it were required to be in the form of secondary legislation. That is because it is difficult to impose clear legal constraints on how a crisis is managed because of the wide variety of situations that could be considered as a crisis, each requiring bespoke handling that suits the characteristics of that particular event. Earlier I talked about the different kinds of financial crises we have had in recent years which I think exemplify that point.

It is our view that the MoU should be a living, responsive document, able to change as is needed. Requiring that it should be a piece of secondary legislation would severely curtail the authorities’ ability to change the MoU as circumstances change. As things stand, the MoU can be changed within a matter of days. That requires no huge amount of legal input because it is a working document about how to handle a crisis. That is very different from dealing with a statutory instrument which goes through a different formal process. It would be difficult to deal with a statutory instrument when the House is not sitting and that would be inappropriate.

The Bill already provides for the MoU to be laid before Parliament. It will then be open to scrutiny. The Treasury Select Committee will be able to scrutinise it, as will the Economic Affairs Committee in this House if it decides to do so. In my view, that is the best way to get parliamentary input rather than through an overprescriptive and inappropriate statutory instrument. In view of those arguments, I hope that the noble Lord will withdraw his amendment.

[Lord Tunnicliffe]

My Lords, my experience is that statutory instruments do not have to be that inflexible. Statutory instruments that have to have early effect can be laid and come into effect immediately, if that is appropriate. However, they do require formal scrutiny by Parliament. I have not won many points today and I am not going to win this one. I beg leave to withdraw the amendment.

Amendment 190ZEL withdrawn.

Financial Services Bill

Lord Tunnicliffe Excerpts

Monday 15th October 2012 Lords Chamber

Moved by

[Lord Tunnicliffe]

187TE: Schedule 12, page 247, line 24, at end insert—
“(c) after subsection (10) insert—“(11) The PRA should require the submission of reports from any PRA-authorised person for the purpose of assessing the extent to which a financial activity or financial market in which the PRA-authorised person participates may pose a threat to financial stability in accordance with the PRA’s general objective. (12) The PRA shall collect, in a manner determined by the PRA and in consultation with the FPC, financial transaction data and position data from the PRA-authorised person companies.(13) For the purposes of subsection (12)—(a) “financial transaction data” shall mean data pertaining to the structure and legal description of a financial contract, with sufficient detail to describe the rights and obligations between counterparties and make possible an independent valuation; and(b) “position data” shall mean data pertaining to data on financial assets or liabilities held on the balance sheet of a financial company, where positions are created or changed by the execution of a financial transaction and which includes information that identifies counterparties, the valuation by the financial company of the position, and information that makes possible an independent valuation of the position.(14) The FCA shall assist the PRA in accordance with section 3D to ensure that the PRA is able to exercise its function as described in subsections (11) and (12).(15) To facilitate the effective collection of data, the PRA should prepare and publish, in a manner that is easily accessible to the public and in the form of a summary or collection of information so framed that it is not possible to ascertain from it information relating to any particular person—(a) a database detailing relevant counterparties;(b) a financial instrument reference database; and(c) formats and standards for PRA data, including standards for reporting financial transaction and position data to the PRA.(16) Where possible, the PRA shall co-operate with foreign regulators to the extent required to collect relevant information on PRA-authorised persons already collected by those foreign regulators.(17) The PRA shall develop and maintain sufficient resources to review the collection of data referred to in subsections (11) and (12) in order to—(a) develop and maintain metrics and reporting systems for risks to the financial stability of the United Kingdom;(b) evaluate stress tests or other stability-related evaluations of financial entities overseen;(c) investigate disruptions and failures in the financial markets;(d) conduct studies on the impact of policies relating to systemic risk;(e) promote best practices for financial risk management to PRA-authorised persons.(18) The PRA shall publish a report which compiles the data collected in accordance with subsections (11) and (12) on a periodic basis as determined by the PRA, which shall be—(a) made available to the public in an easily accessible medium; and(b) in the form of a summary or collection of information so framed that it is not possible to ascertain from it information relating to any particular person.””

[Lord Tunnicliffe]

My Lords, Amendment 187TE, in the name of my noble friend Lady Hayter of Kentish Town, is essentially about the quality of information and its provision. To put it in context, I should like to go back to the purpose of the Bill. I put to the House that its purpose is to prevent or mitigate a crisis in the financial services industry. The crisis from 2007 to 2009 came from the selling of subprime mortgages principally in the US. As we know, these mortgages were repackaged and moved down the line. Eventually, they ended up on the balance sheet of what one would have thought at the time were highly sensible banks of great stature and stability.

How did that happen? It happened because of the malicious intent of the original designers of these products and the people who designed the various packages to disguise the essential weakness that they contained. But when you read the various reports about the crisis, there is no question that a fundamental part of this crisis was caused by the poor knowledge and information that passed through the system. In a sense, the poor knowledge was in two places. It was within the firms, and between the firm and the regulator. In particular, the FSA’s report on the RBS brings this out well. Essentially, parts of RBS simply were not effectively communicating with each other.

[Lord Flight]

Perhaps I may add that in my estimate the US also wiped off about $1,000 billion of its overseas debt as a result of the failure of subprime mortgages.

[Lord Tunnicliffe]

As a great admirer of the US, I would never underestimate its ingenuity but I did not realise that that had been a principal objective. I thank the noble Lord for my improved education. Returning to my speech, the failure in RBS in particular was once again an internal management problem. The refreshingly honest report of the FSA brings that out but it goes on to criticise its own performance as a regulator. It criticises various ways in which it behaved and its allocation of resources but it also criticises the information that it was able to get during the crisis. That was because firms were unable to provide information that was sufficiently accurate, comprehensible and timely.

The Joint Committee on this Bill took a considerable interest in the whole matter of information and pointed out that in the US the,

“Dodd-Frank Act created the Office for Financial Research which was given responsibility for monitoring of systemic financial risks and, in order to undertake this task, has been given powers for the setting of data standards for the industry. In order to allow effective monitoring of systemic financial risk, the Dodd-Frank Act also requires that OTC derivative contracts are recorded in trade repositories, a step that requires standardisation of reporting across the industry”.

The recommendation from the Joint Committee, which the Government effectively rejected, was:

“The Bill should be amended to place a duty on the Bank of England (or its subsidiary the PRA) to develop information standards for the UK financial services industry and to report regularly on progress in improving these information standards in order to support financial stability”.

This amendment does its best to give effect to that recommendation.

In researching the background to this amendment, I looked over a number of areas but perhaps the most inspirational thing I came across was a speech by Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Securities Industry and Financial Markets Association, “Building a Global Legal Entity Identifier Framework” symposium in New York on 14 March. That is a long introduction but it was called simply “Towards a common financial language”. He contended that a common financial language would improve risk management in firms because of better flows and understanding of information; improve risk management across firms; map the network of financial transactions; and, shock-horror, lower barriers to entry. He pointed out that the information standards and information systems within the industry are probably 10 or 20 years behind those in other industries, and particularly the major distribution industries.

We put forward this amendment and it will no doubt be countered by the noble Lord saying, “Well, they can do this anyway”. We are trying to say something different. We are trying to say that this is not just an enabler but a doer. It is a requirement not just that the PRA has the ability to take a positive role in the matter of information and information standards, but requires it to take a role. It is quite long so I will not go through it in any detail but it requires the PRA to require firms to report; it requires them to set standards in the manner in which they report; it requires that they should have sufficient resources to be able to use that information; and it requires them to publish reports.

The Bill has a purpose. It is about institutions, it is about governance and it is about enabling. The amendment is designed to give it some teeth. It is designed to make a requirement in the Bill. This is a “must” amendment, not a “may” amendment. I beg to move.

[Lord Newby]

My Lords, as the noble Lord has explained, Amendment 187TE would require the PRA to collect and publish financial transaction data, and require it to maintain the necessary resources to collect and review data from firms. In doing so, it mirrors exactly the provisions of the Dodd-Frank Act and in particular the provision in that Act for the powers within the Office of Financial Research.

We do not think that such a power is necessary because the regulators here have their own powers to gather information, including all the information referred to in the amendment. Indeed in some cases the FSA already requires firms to hold information in particular ways; for example, through rules requiring firms to be able to present a single customer view. The fact that there is now the concept and the practice of a single customer view shows how the system has been able to develop in the light of the stresses and strains that it has found itself under in recent years. Firms already report transaction data and will continue to do so. Specifically mandating the regulator to develop data standards and to publish collected data, as the noble Lord suggests, is not in our view the answer. The legislation will set the regulators clear and deliverable objectives and the regulators already have powers that could be used to require them to hold their data in specific formats if they judge that to be an appropriate and proportionate way of meeting their objectives.

If the FPC requires particular information in a particular format, whether about counterparty exposures or about anything else, this will be provided by the PRA. If for some reason the PRA is not providing the necessary information, the bank has a backstop power to direct the PRA to gather it and provide it. There is a belt-and-braces provision in the Bill.

The regulators will require a whole range of information from firms. It would not be possible or desirable to specify them all in legislation. The legislation gives clear and deliverable objectives and it is up to the regulators to maintain sufficient resources and to gather sufficient information to meet those objectives. They will be held to account for doing so. With that explanation, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Tunnicliffe]

My Lords, I have received an unsurprising response. The essence of it is that those powers exist anyway. Perhaps the noble Lord can help me—I am not asking him to do so now—by writing to me setting out where these powers are in the new Bill. I have followed up the invitation of the Treasury and downloaded its very helpful Bill as amended. When you download it, you are told that it is 624 pages long and, therefore, it is not entirely easy to find things. I would be very grateful if I could be told where in FiSMA, as revised, these powers are and which of those powers is new because of the Bill. If there are not new powers because of the Bill, we have had regulators with these powers for a considerable time and as far as I can see we do not have the level of standardisation of data, the matching priority or the counterparty exposure. We do not have anything like the ability to see into the systems that the new American provisions envisage. It is incumbent on us in this country, with our dependence on this important industry and the fact that the real economy depends on it as well, to have provisions which are not only wide in theoretical terms but provide actual knowledge of what is being done to make this industry safer, particularly as regards what this Bill does about making the industry safer. If the noble Lord leaps up now and reads his piece of paper I would not mind.

[Lord Newby]

Section 165 of FiSMA enables the regulators to require information or documents which may reasonably be required in connection with the discharge of their functions. Section 165A enables the regulators to gather information from certain categories of unregulated firms for financial stability purposes. Section 166 enables the regulators to appoint a skilled person to provide a report into any relevant matter that the authority may specify. The regulators can also make rules requiring firms to hold their data in specific formats, if the regulators judge that to be an appropriate and proportionate way of meeting their objectives. As I have already said, the FSA did so when it introduced the single customer view requirements.

In terms of the system as a whole and what is new about the Bill as regards ensuring that the regulators get the information that they require in order to prevent some of the problems that we have seen in recent years, the whole purpose of the Bill is to put in place an architecture that enables a clearer focus by splitting the regulators into two halves so that they will concentrate on those parts of the industry for which they have now been given specific responsibility. I am sure that having those powers in the legislation, coupled with a new, more laser-like focus on ensuring that the system is safe and secure, will ensure that the concerns of the noble Lord about the information that is collected are not realised.

[Lord Tunnicliffe]

My Lords, I do not want this to go on, but there is a world of difference between having powers and knowing what people are doing with them. It is absolutely clear where the Americans are coming from; they want something done and they want something changed. I can now try to find these quotes in FiSMA and see how they impact but really I want to know what the regulators are doing. We are not opposing the Bill in general, certainly not in this House, and we wish the Government luck in its implementation, but at the end of the day it only moves people about and has a lot of interconnecting clauses. It does not specifically mandate a requirement to improve the quality of information. Any reasonable observer of the recent crisis has to say that one of the key issues in that crisis was the quality of information moving around within firms, between firms, and between firms and the regulator. The Government have to make a persuasive case that they are doing something about this deficit. Having said all that, I beg leave to withdraw the amendment.

Amendment 187TE withdrawn.

--- Later in debate ---

[Lord Marlesford]

My Lords, I will add my voice to support very strongly the amendment of my noble friend Lady Wheatcroft. I will do it in a short and simple way, by giving a reason and an example. The reason is that a very important function of auditors concerns hazards, and it falls into three parts. First, they must identify hazards; secondly, assess them; and thirdly, expose them.

My example comes from something that I have agitated about for a long while: namely, the level of credit card debt in this country. This is not the credit card debt that noble Lords may have, and which they pay off monthly, but that part of the debt that overruns and is therefore subject to very high interest rates, which very often the people with the debt have no hope of paying back. That level of credit card debt for the British banks is currently still more than £50 billion. The figures are from the British Bankers’ Association and the Bank of England, which both publish a series of monthly figures.

I have mentioned this over a long while in your Lordships’ House. When the previous Government were in power, at my instigation the noble Lord, Lord Myners, who as Treasury Minister fulfilled the role that my noble friend Lord Sassoon now fulfils, wrote to the chief executives or chairmen of the major banks, asking them for details of their credit card debt. The crucial question is: at what value do the banks hold this credit card debt on their balance sheets? Unless they have written it down hugely, the debt is unlikely to be paid and could be a serious hazard to the sustainability, liquidity and indeed continuing existence of those banks. This is the sort of thing that a narrative account by auditors would identify and reveal. I ask the Minister to refer to this example when he replies to my noble friend’s amendment.

[Lord Tunnicliffe]

My Lords, I will not take up the time of the House with detailed comments on the amendment. We have listened to the debate, and all noble Lords who spoke were most persuasive. I hope that the Minister will give careful consideration to their points. We will certainly listen with great care as we decide on the extent to which we may support the noble Baroness, Lady Wheatcroft, if she plans to take the matter further.

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

My Lords, the question of the audit of banks is indeed an important one, and one which has recurred in policy debates over the past 20 years. I looked back to see what the Banking Act 1987 had to say on the topic and what Lord Justice Bingham had to say when he looked into the BCCI collapse. Various changes were made at that time and since in FiSMA but it is important that we learn lessons from the recent banking disasters, and I address the particularities of this amendment from a position of agreeing with the considerable concern around this issue. However, I do not believe that the amendment before us completely achieves what we are trying to do.

Clearly auditors are uniquely placed to identify and flag to the PRA current and potential risks in a firm. We would also expect the PRA to share relevant information with auditors, for example where it views a firm’s approach to asset valuation or provisioning to be significantly out of line with its peers. It is worth pointing out that there are areas in which the present regulator, the FSA, believes that auditors should be looking at particular issues and reporting on them and it can require that to be done in rules under Part 22 of FiSMA. So, for example, under the client asset rules, auditors are required to report on whether investment firms have properly segregated their client assets.

I do however have some difficulty with this particular amendment. My noble friend Lady Wheatcroft says that if only provision like this had been in place before or at the time of the crisis the auditors might have given a lot more help which might have prevented some of the disasters. On the other hand my noble friend Lord Lawson of Blaby quotes from your Lordships’ committee’s report which talks of the complacency of bank auditors at the time. Taking as read for the moment that the complacency thesis is the right one, I wonder if that complacency would have run through what was required to be done under a particular provision like this one in the amendment. I think that we are on to something important here but I am not convinced that this quite hits the sweet spot that the Committee is aiming for and that requiring auditors to provide this general narrative report will achieve what we want. Risk assessment is a highly-specialised process and it goes to the heart of the job of the prudential regulator. What I think we want of auditors is to see if there is something more that they can do which supports the prudential judgment rather than cuts across it.

Financial Services Bill

Lord Tunnicliffe Excerpts

Monday 15th October 2012 Lords Chamber

[Lord Tunnicliffe]

My Lords, I thank the Minister for his introduction to the total package of measures to which the amendments relate and for his explanation of specific amendments. The way in which the amendments have been grouped means that a substantial part of the detail of the overall package will be debated in two working days. Accordingly, we will look at the detail during that period and respond then. The results of the consultation are being published today. Only when we have carefully looked at those will we make a detailed response. At a general level, we welcome the bringing of these financial institutions into the resolution regime.

[Lord Peston]

My Lords, will the Minister clarify one or two aspects of what he said? Am I right in thinking that the amendments, in so far as one can follow them at all, are relevant when something has already gone wrong; that is, when the institution in question is in trouble and something has to be done to cope with that?

Financial Services Bill

Lord Tunnicliffe Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Tunnicliffe]

My Lords, we are very happy, in a sense, to accept the blanket assurance that these amendments are minor and technical and we will not probe them in any detail. However, we are going to have a host of government amendments to the Bill, as was discussed earlier. We did, on this first day back, request a written explanation of this group of amendments so that we could study them at our leisure before the Committee met. Unfortunately, there has been no response to that request. It is important that the Government get into the habit of extremely comprehensive supporting documentation for their amendments. Therefore, I will study with care what the noble Lord has said and make sure that I can be comfortable that they are minor and technical, but it would have been much better if we had had a response to our request. I would value an assurance from the noble Lord that, as these amendments come along over the rest of the Bill—we will all try to work together to ensure the success of debates about new government amendments—the Government will facilitate those debates by providing proper documentary support.

[Lord Newby]

I hope I can give the noble Lord two assurances. First, I can assure him that the amendments are indeed technical and have no policy substance attached to them. I also assure him that, wherever possible, we will make available adequate written information about government amendments in good time so that people can look at them and ensure they are what they say on the tin.

--- Later in debate ---

[Lord Tunnicliffe]

My Lords, I agree with all the points that my noble friend Lord Whitty has made and I will not rehearse them. Coming at the whole thing from a slightly different direction, it seems to me that Clause 25 is highly admirable. It seems to say that if you have an authorised person and that authorised person is owned by someone else, the regulator must be able to get at the someone else. It is a sensible clause in that it uses terms such as,

“may have a material adverse effect on the regulation by the regulator”.

It uses that twice, in both of the conditions in which it can happen. It is a very narrow clause. It is what we who like regulation find very good at setting out what the regulator may do.

Clause 25 also says that a regulator must adhere,

“to the principle that a burden or restriction which is imposed on a person should be proportionate to the benefits, considered in general terms, which are expected to result from its imposition”.

So the whole idea that the owner of a regulated person should come under regulation seems entirely a sign of good principle, and has proper safeguards set against it.

However, for the life of me I cannot understand what new Section 192B(4) is doing there. It states:

“Condition C is that the parent undertaking is a financial institution of a kind prescribed by the Treasury by order”.

Any owner of an authorised person should be susceptible to regulation within the limitations set out in Clause 25. This was debated in the Commons, but we make no apology for bringing it back here. In the Commons, Mr Hoban said:

“This is a proportionate expansion. We want to avoid the sense that the FCA or the PRA could intervene in the price of bread at Tesco or Sainsbury’s”.—[Official Report, Commons, Financial Services Bill Committee, 8/3/12; col. 466.]

That is an absolutely ridiculous reason to deny it. Clearly, the body of this clause says that it shall be used for serious material things in a proportionate way, which could have nothing to do with the price of bread at Sainsbury’s. I hope that the Minister will give a really full explanation of why this clause should not apply universally to all owners of authorised persons, not just to those as set out in condition C in subsection (4) of new Section 192B.

[Lord Sassoon]

My Lords, the noble Lords, Lord Whitty and Lord Tunnicliffe, have been very clear about the purpose of these three amendments: that they seek to extend the power to capture all parent undertakings, including non-financial parents. The starting point here has to be the recognition, which was partly given by the noble Lord, Lord Tunnicliffe, that we are talking about some new and important powers that go significantly beyond anything that the previous Government put in place in their architecture.

I know that the noble Lord, Lord Tunnicliffe, said that he approved of a lot of this. The fact is that we are moving the boundary forward very significantly, but to an appropriate place for the time being, while nevertheless taking the power—the noble Lord, Lord Whitty, recognised this—to move the boundary further if appropriate. I would have been rather happier if there had been more of a tone of approving of and recognising a significant shift, and gently encouraging us onwards, rather than a tone of outraged incomprehension that we have not moved very much further.

[Lord Tunnicliffe]

If I can help the Minister, I am entirely happy to welcome this clause—my opening remarks welcomed it—but I cannot understand why it has this serious limitation. The rest of the clause is beautifully balanced and seems entirely appropriate. Why does it not apply to more owners?

[Lord Sassoon]

My Lords, we are getting into significant new territory here. These are untried and untested powers in the United Kingdom. We want to make sure that they are targeted and used in a proportionate manner. That is why the Government have proposed limiting the powers to parent undertakings that are financial institutions of the kind described by the Treasury, which helps to keep this new and very significant power within acceptable bounds—and bounds within which Parliament can be clear about the movement of the regulatory boundary. I take the case of the supermarkets because they are an important area and the clearest case of where the boundary should be under focus. It is important and helpful for noble Lords to raise this matter in debate now, because it is quite proper that as experience of these new powers is gained and the evolution in the structures of holding companies for financial services institutions moves forward, these matters are kept under some form of scrutiny.

Let me deal first of all with the specific matter of data sharing, because this is a granular thing that affects customers in these groups now. The Data Protection Act 1998 already provides robust safeguards around the disclosure of customers’ personal information, including disclosure to another group company. Therefore, in the case which the noble Lord, Lord Whitty, postulates, the movement of data from one part of a group—the non-financial part—to the financial part will require consent from the consumer.

The Act also requires that the personal data have been obtained fairly from the customer in the first place, which would involve identifying any third parties to which the information would be disclosed. We believe that the current provisions in the Bill—in that specific respect and more broadly—strike the right balance between giving the regulator more intrusive powers over unregulated parent undertakings, protecting the personal data of consumers and ensuring that the net regulatory burden imposed on industry is proportionate.

However—and I restate this—the Government are very much alive to the concerns raised by noble Lords, and it is precisely for that reason that they have taken a power to remove the requirement that the parent undertaking be a financial institution. We have not put that in there unthinkingly; we have put it in there because we recognise the concerns that noble Lords have raised. I am sorry if the noble Lord, Lord Tunnicliffe, does not think that I have recognised the positivity with which he has come at this clause, but he does not perhaps recognise or give enough weight to the fact that we really are making a significant step forward and need to pause and think carefully before going further. The power, however, is there and the Government will use that power as and when it becomes clear that the balance needs to be struck differently. I am happy to restate that, so I hope that what I have said will reassure noble Lords that the Government take this matter very seriously.

Financial Services Bill

Lord Tunnicliffe Excerpts

Wednesday 25th July 2012 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, Amendment 138C proposes a new paragraph (g) to the regulatory principles referred to in new Section 3B. It would ensure that,

“each regulator employs staff with the necessary knowledge, experience and expertise of the sectors that they regulate, and of policy making at the European level”.

The FSA has had issues in retaining quality staff in recent years, and recruitment will remain one of the biggest challenges facing the new regulatory bodies. A failure to address the issue of experience and expertise will undermine the introduction of the new regulatory framework—in particular, the proposed move towards a more judgment-based supervisory approach. The amendment is intended to probe the Government on how they and the regulators plan to address those staffing challenges.

I argue that there should be a commitment that the regulators will ensure that they recruit and retain staff with the necessary knowledge, experience and expertise to apply the regulatory regime in an appropriate and proportionate manner. It will be particularly important that the staff have a balance of sector expertise reflecting the range of industries that they cover, and that appropriate expertise is present at all levels and in all functions. Without proper staffing the regulators will be unable to make sound judgments about the strategies, plans and actions taken by individual firms. They will also struggle to understand the potential impact that regulations and supervisory actions taken against individual firms might have on the financial system as a whole.

Staff employed by the new regulatory bodies will also need to acquire skills and expertise to aid their interaction with the new European supervisory authorities. The ESAs will drive more of the regulatory agenda in future and it is essential that the new authorities play an increasingly influential role in the early stages of development and throughout the process governing the agreement of new regulation. To succeed in this area staff will need the necessary negotiating and influencing skills and require a high level of awareness of the political processes at a European level. We touched on this point during our debate on Amendment 96A, moved by the noble Baroness, Lady Hayter of Kentish Town, at our meeting on 10 July.

I have already referred in slightly unflattering terms to the significant influence of the function committee that authorises individuals on a case-by-case basis before they can take up their roles. A major part of the interview with the SIF committee is taken up with questions designed to discover if the interviewee has the necessary knowledge, expertise and experience. If this test is to be applied to those who run the financial services industry, it should surely also be applied to those who regulate it. I beg to move.

[Lord Tunnicliffe]

My Lords, I am somewhat surprised to find myself agreeing with the noble Lord, Lord Hodgson of Astley Abbotts. I have been involved in a lot of reorganisations and all too often people do not think about the human content of the organisation, the size of the jobs that they are creating and the extent to which a reasonable human being can do them—whether even an unreasonable human being can be found to fill those roles.

At first sight it is a matter of motherhood and apple pie. To try to get a feel for this Bill and speaking particularly about the PRA, I searched the internet and came across a splendid document by the Bank of England and the FSA, published in May 2011. It is called The Bank of England, Prudential Regulation Authority: Our Approach to Banking Supervision. It is written as a narrative and really it is a gripping one. All that the Minister says about the PRA is that it is going to be focused. It is going to be much more than focused. It is going to be based on a judgment-based supervision, and I quote from paragraph 15 of this document:

“The PRA’s proposed approach has, at its centre, supervisors making judgements, when needed, about current and future risks to an institution’s safety and soundness and about the action it should take to address these risks. It is recognised that this will mean that, at times, the supervisor’s judgement will be at variance with that of the institution. Furthermore, there will be occasions when events will show that the supervisor’s judgement, in hindsight, was wrong. This is inherent in a forward-looking system”.

This is a very significant intervention. Later the document describes the proactive intervention and at stage 3 points out where,

“significant threats to a firm’s financial safety or soundness may have been identified”.

It continues:

“The PRA may require any of the following actions: a change to management and/or composition of the board; limits on capital distribution; restrictions on existing or planned business activities; a limit on balance sheet growth and/or stricter leverage limits; and setting tighter liquidity guidelines and/or capital requirements”.

I am sorry that the noble Lord, Lord Sassoon, is not with us at the moment, but he said that the PRA will not become a shadow director. It is pretty clear that I do not understand what a shadow director is, but this is a significant level of intervention. Then you look at the role. A lot of the time, the people in this role will be doing base-level supervision. Let us hope that we have some financial tranquillity. We are now looking for people who will be capable of taking that level of intervention at pretty short notice, interfering in major institutions’ affairs, and having effects which, it is admitted, could be wrong decisions. That will have to be done with enormous care by people of very high quality.

I am pleased that the amendment brings Europe into play. In front of us we have a very complex set of organisational changes. It is not clear how it will fit with Europe. There will almost certainly be a number of jarring edges. We need people in this organisation who are capable of overcoming the ambiguities and smoothing the path of the relationship with Europe.

I am sure that the Minister will say that this is not the sort of thing that should be on the face of the Bill. If I were in his place, I know that my brief would say that. Nevertheless, it is for the Minister to assure us that processes will be in place, particularly in the PRA, given the intention to use these powers, which already exist, in such a significant way to meet these very serious challenges.

Financial Services Bill

Lord Tunnicliffe Excerpts

Wednesday 25th July 2012 Lords Chamber

[Lord Phillips of Sudbury]

My Lords, I support totally the tenor of the amendments in this group, which have been so well spoken to. I add some practical examples of where I believe that these amendments or amendments like them would be of immense social utility. It is generally accepted that community life in our dear land is breaking down everywhere. At the same time, there is a general perception and I think agreement that anything that can be done by a community or a group within a community to shore up its social assets is doubly valuable against the background. For example, a local scouts organisation might want to build a new hut; a local sports club may want to build a pavilion or buy some boats or a bus to take teams away; or a local amenities society may want to improve a local building or acquire one. A local church might want to do something. One can go on and on. Local organisations every day of every week in every part of the land want funds to do something that they all agree would be of great benefit to that community. At present, the regime that my noble friend Lady Kramer so vividly described is a complete road block against having a general appeal to the community to chip in perhaps £10, £20 or £100—it need not be £500 or £1,000.

What is needed is for my Government to be imaginative enough, although I realise that the Treasury is not the homeland of social imagination, to see that if we could amend the arrangements provided for by this Bill, realising that one size does not fit all, we could unleash an unpredictable but extraordinary outpouring of funds. Many will be reluctant to give but much readier to lend, even though they appreciate that the basis on which they lend is somewhat uncertain. As my noble friend Lady Kramer said, the upfront costs of having to comply with the present regime are simply prohibitive. She mentioned social impact bonds of £1 million to £5 million, but I am talking about appeals of £50,000.

The value of those small local appeals, which can be met by people lending in small amounts but large numbers, is double. They provide badly needed social facilities and, in the process, bring the community together and give them the sense of achievement. They shore up community and are of inestimable public benefit. My noble friend the Minister has had a horrendous job steering this Bill through its stages and has dealt with it in an exemplary fashion. I hope that the Government will think again over the two next months and come back in the autumn realising that they have to make major concessions on this part of the Bill for the good of us all.

[Lord Tunnicliffe]

My Lords, I hope to set a precedent whereby the commitment of our Benches is not necessarily proportionate to the length of the speech. I support the amendment in the names of the noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer. Social enterprises are businesses that trade to tackle social problems and improve communities, people’s life chances or the environment. They make their money from selling goods and services on the open market and reinvest their profits back into the business of the local community. When they profit, society profits. We believe that Amendment 118AZA would contribute to their formation and therefore we support it.

On our Amendment 128AA, in the names of the noble Lord, Lord Eatwell, and the noble Baroness, Lady Hayter, we believe that given the consensus in at least part of this Chamber that social investment is a good thing, it would be appropriate for the FCA to have a social investment panel that would sit alongside the small business and market practitioners and consumer panels. The FCA would have a duty to consult. The panel would represent the interests of organisations that specialise wholly or mainly in social finance or investment. Today’s debate has shown that if we can persuade government to go into this area it will be complex and will need an appropriate panel to help to develop the regulations around it.

[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.

Financial Services Bill

Lord Tunnicliffe Excerpts

Wednesday 18th July 2012 Lords Chamber

Moved by

[Lord Tunnicliffe]

111A: Clause 5, page 17, line 23, after “exchange” insert “or market maker”

[Lord Tunnicliffe]

My Lords, Amendment 111A is in the names of my noble friends Lord Eatwell and Lady Hayter, and I shall also speak to Amendments 112, 115 and 116; I shall do so briefly.

Competition has an important role to play in the financial services industry. Indeed, as the party leader, my right honourable friend Ed Miliband, has been arguing since his conference speech in the autumn of 2011, if we are to rebuild our economy so that it works in the interests of the many and not the few, we need root and branch reform of our banks. Having greater competition and more players in the market is an important element of the process. Competition, along with choice, transparency, integrity and access, is an integral part of the market working well. On this side of the House we welcome, therefore, the inclusion of a competition objective in the remit of the Financial Conduct Authority.

However, we must continue to emphasise the question “What is competition for?”. It is for the consumer. In a sense, I am disappointed that the noble and learned Lord, Lord Fraser of Carmyllie, did not move his amendment. First, it would have been an opportunity for me to say just how much I disagreed with it. Secondly, it would have been an opportunity for the Minister to say how much he agreed with me. I hope, therefore, that he will emphasise the importance of this clause to the interests of the consumer. The competition objective in the Bill is built around the consumer, so I support the amendment in the name of my noble friend Lord McFall, which requires the FCA to have regard to the factors contained in new Section 1A.

I shall turn to Amendment 111A, and I am very pleased that the noble Lord, Lord Lucas, asked a probing amendment, proving that it is respectable to do so. This is but a probing amendment, in order to understand new Section 1E(1), which states that:

“The competition objective is: promoting effective competition in the interests of consumers in the markets”.

Perhaps it is trying to say “all financial markets”; if the Minister said that was what it meant, that would be great. Clearly it covers a great chunk of financial markets with new subsection (1)(a), “regulated financial services”. However, it needs to add new paragraph (b), because—and I did not know this, until I looked it up this morning—certain recognised investment exchanges are not, apparently, regulated financial markets, because they get an exemption under Section 285(2).

We have added “or market maker” because market makers seem to be taking in the role of investment exchange in some areas. There is a move-over. If those market makers are already covered by new paragraph (a) —“regulated financial services”—I would be content with that assurance. If they are not, I would be grateful if the Minister could sketch out what exemptions there are from this new paragraph. I beg to move.

[Lord McFall of Alcluith]

My Lords, I would like to address briefly a number of the points in Amendments 112, 115 and 116. It is just a simple change: rather than have “may have regard”, put “must have regard”—to, for example,

“the needs of different consumers who use or may use those services, including their need for information that enables them to make informed choices”.

It is this concept of informed choice that is very important. I well remember when we had the scandal of endowment mortgages; we looked at that issue in the other place. The consumers would be presented with two types of mortgages, one which the salesperson said had a small pile of cash at the end of the day, and the other a repayment mortgage. Believe it or not, the one which had a small pile of cash was cheaper than the repayment mortgage. It defied logic, but everybody piled into it, not least because the salespersons were getting 80% of the first year’s contributions from individuals. When we looked at this, the industry said, “This was way in the past”. It was depending on a high level of inflation for its returns. If inflation is 8% then you are going to get your cash pile, but if it is only 2% or 3% then you are in trouble. We are still living with the consequences of those endowment mortgages, with people making claims for them. That was not an informed choice, and it is why it is important to be more definitive in the Bill and insist that the FSA must look at that issue, as well as at,

“the ease with which consumers who obtain those services can change the person from whom they obtain them”.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am infinitely flexible; it depends how long we go on this evening but I can see one or two amendments coming up on which I can be more accommodating than I will be on this one.

I shall start with perhaps the easiest part: the questions from the noble Lord, Lord Tunnicliffe, around Amendment 111A. I am delighted to see the noble Lord joining the fray. We have now had four players on the Front Bench from the Opposition; I wish that we had such depth of reserves on our side. However, I will battle on.

Amendment 111A seeks to bring the activities of market makers into the scope of the FCA’s competition objective. I reassure the noble Lord and the Committee that the activities of market makers are already very much covered by the objective. Put very simply, to operate as a market maker firms will have to obtain permission to deal in investments as principal, and that is a regulated activity. That means that such firms are performing a regulated activity or a regulated service, and noble Lords will see that new Section 1A(1)(e) clearly states that markets for regulated financial services fall within the scope of the FCA’s objective, so the FCA can indeed shine its regulatory light on market makers as on any other part of the sector. For completeness and to clarify, as far as recognised investment exchanges or RIEs are concerned, they can be exempt from the general prohibition under Section 285(2) of FiSMA, but even their activities are brought within the scope of the competition objective by virtue of subsection (1)(b) of new Section 1E in the Bill. I hope that that deals with that.

Turning to Amendment 112, competition can mean many things to many people. To indicate what the Government might want the FCA to look at in deciding how to advance its competition objective, subsection (2) of new Section 1E sets out a number of matters to which the FCA may have regard in assessing the effectiveness of competition in a given market. It is an indicative and, importantly, a non-exhaustive list. The FCA cannot dodge or duck out of its overall competition objective. Had we not put the non-exhaustive list of examples down there we might not be expressing the concern that we have. There would be the simple competition objective and that would be that.

Given the list, let me explain a bit more why there is danger in changing “may” to “must”. That would mean that the FCA would always have to consider all the issues set out in new subsection (2). The FCA should not necessarily have regard to all of that list when looking at particular competition questions. There could be unintended consequences.

If the FCA wishes to take action to promote switching, the consideration of barriers to entry will not be as important as the ease with which consumers can transition between providers and how that is affected by the structures of the market or behaviours of incumbents. To enable the FCA to generate the outcomes that we want under the competition objective it is important that the list is expressed in the terms that it is. This does not make the basic objective of the FCA weaker in this area. It just means that we need to give it a degree of discretion to be able to target the particular issues that they are looking at at any one time.

That addresses the amendments that are being spoken to and I hope that the noble Lord, Lord McFall of Alcluith, will consider not pressing his amendment.

[Lord Tunnicliffe]

My Lords, I am sorry that the Minister did not rise to my invitation to wax a little lyrical over his commitment to consumer interest, but at this late hour I do not now invite him to. I am sorry too that he was not able to see the attraction of “must”. I have laboured on such ventures and I know the ferocity with which one’s brief has said that one must never move from “may” to “must”. Many of us would have been more satisfied if the Minister had accepted “must”, and we will have to see whether my noble friend Lord McFall brings this back later for further consideration.

I thank the Minister for his straightforward assurances on Amendment 111A and I beg leave to withdraw.

Amendment 111A withdrawn.

--- Later in debate ---

[The Lord Bishop of Durham]

My Lords, my name is on this amendment and the noble Lords, Lord Lucas and Lord Sharkey, have said virtually everything I want to say. I will simply add that in the areas where the access to finance is most wanting, the creation of safe space—through regulation of the kind that the noble Lords described—is what will enable competition to start to break the stranglehold of some of our larger lenders, who neither lend in these areas themselves nor are willing to make space for others to lend in them. That is a fundamental reason why there is still a shortage of finance.

The Bank of England’s north-east agent in her report, which was published this morning, talked about inadequate supplies of finance to the SME sector in the north-east of England despite the valiant and determined efforts of the Government, through guarantee schemes, to make that possible—and those schemes are not providing finance at anything under 10%. The banks are simply layering charge upon charge upon charge. We need regulation to permit competition. It will not stop competition. I hope the Minister will see the advantage of this as it has been so eloquently put by previous speakers.

[Lord Tunnicliffe]

My Lords, these Benches do not have a particular view on Amendment 114. If the noble Lord, Lord Sharkey, is to press this further at a later stage in light of the response from the Minister, we will have to think through whether we will support it. It clearly has consensus support in the Chamber tonight so we will look at it very carefully. In his response, can the Minister give a view on how wide or narrow he sees his amendments, particularly the extent to which they might have a general utility in, for want of a better term, future-proofing the legislation?

Turning to Amendment 117B, we all want to support innovation. Once again we do not have a view on this amendment, but if it is pressed at a further stage, what we always have to look at with innovation and competition is proportionality. Yes, innovation creates competition, new ideas and opportunities, but it may put the customer at risk. Proportionality has to be there to balance new opportunities with proper protection.