Financial Services and Markets Bill

Viscount Trenchard Excerpts

Committee stage
Monday 13th March 2023 Grand Committee

[Lord Sharkey (LD)]

My Lords, I declare an interest as co-chair of the APPG on Mortgage Prisoners. I thank the noble Viscount, Lord Trenchard, for adding his name to my Amendment 197, which is a probing amendment to allow debate on the issue of mortgage prisoners. There are getting on for 200,000 mortgage prisoners in the UK, who are trapped with their current lenders. For eight years or so they have paid very high standard variable rates, now of around 7%, 8% or even more.

Mortgage prisoners exist because the Government sold their mortgages to vulture funds, which have been increasing their standard variable interest rates and refusing to offer mortgage prisoners new deals or access to fixed rates. The harm being caused to these mortgage prisoners is the direct responsibility of the Government; when the time came for the mortgages of Northern Rock and Bradford & Bingley customers to be sold back to the private sector, the Government could have pursued an approach that ensured that these customers were protected. They could have sold them to active lenders or secured a cast-iron commitment from purchasers to offer these customers new deals.

The risk to these customers was clearly identified. In January 2016, the noble Lord, Lord McFall, wrote to the Treasury, UK Asset Resolution and the FCA to highlight that many of those affected by the sales were mortgage prisoners who would be unable to switch lender. He warned:

“Given the prospect of rising interest rates it is important that all mortgage customers are given the opportunity to achieve certainty over their payments by accessing a fixed rate. I am concerned that some customers affected by these mortgage sales … will not be offered reasonable fixed mortgage rates.”


UKAR responded that, in returning these mortgages to the private sector,

“the option to be offered new deals, extra lending and fixed rates should become available”.

However, this requirement was not written into the contract when mortgages were sold to the vulture fund Cerberus, with the BBC reporting that UKAR is now claiming to have been misled by it.

Consumer champion Martin Lewis, about whose work I will have more to say in a moment, lays the responsibility for the treatment of mortgage prisoners with the Government. He said that they have

“sold these loans to professional debt buyers that don’t offer mortgages, and left these people with these types of mortgages that have been too expensive and crippled their finances and destroyed their wellbeing.”

The Government are directly responsible; they chose to sell the mortgages to vulture funds.

In 2021, the House of Lords passed an amendment that would have capped standard variable rates for mortgage prisoners. This would have provided immediate, practical help for the 200,000 mortgage prisoners and their families. When the Government rejected this amendment in the Commons in April 2021, the Minister claimed that

“the Government and FCA have undertaken significant work in this area to create additional options that make switching into the active market easier for some borrowers.”—[Official Report, Commons, 26/4/21; col. 85.]

The FCA published an update in November 2021; this review confirmed that its interventions have, so far, had only a tiny impact. Only 2,200 of the almost 200,000 mortgage prisoners have been able to switch, just over 1% of the total. It turned out that lenders had only a limited appetite to offer options to switch using the modified affordability test devised by the FCA.

The FCA and the Government show little understanding of how vulnerable many mortgage prisoners really are or what stress and financial hardship they have endured and continue to endure. They certainly have not done anything practical to help. All this misery and harm could have been prevented, but even now the Government still refuse to acknowledge their responsibility or provide any help. At the moment, they and the FCA propose no further action.

This is deeply unfair and more than slightly ironic. A recent LSE report found evidence that the Treasury has not only made back the cost of managing the sales of these mortgages but has made a £2.4 billion surplus. However, there has been one significant development. Last Wednesday, my co-chair of the APPG on Mortgage Prisoners, Seema Malhotra MP, and Martin Lewis, chaired a meeting in Parliament to examine and explain new research conducted by the LSE, generously funded by Martin Lewis. The Treasury and the FCA were in attendance. This research contains concrete and costed proposals for a solution to this long-standing and continuing injustice.

Martin Lewis told the meeting:

“This report lays out starkly that the state sold these borrowers into poverty, knowing it could cause them harm, and made billions doing it. The result has destroyed lives. People have been left in financial, physical and mental misery, exacerbated by the pandemic and cost of living crisis ripping through their already dire situations. When we put solutions to the Treasury in the past, it said it wanted to look at them, but couldn’t as they weren’t costed. Now, having fought tooth and nail to get some of the data needed from official institutions, it is costed.”


Therefore, there should be no more excuses. He went on:

“The Government has a moral and financial responsibility to mitigate some of the damage done. Mortgage prisoners are the forgotten victims of the financial crash. The banks were bailed out at the expense of these borrowers. I hope the Treasury lives up to its past promise to investigate at speed and uses this report as a springboard to find any and all solutions to free mortgage prisoners.”


The APPG has sent copies of the LSE report to the Treasury, the FCA and other interested parties.

Will the Minister and her Treasury colleagues meet the APPG and its supporters to discuss the solutions proposed in the LSE report? Can she arrange this meeting urgently—certainly well before Report? Thanks to the support, generosity and persistence of Martin Lewis, and the work of the LSE and the APPG, we now have a clear and costed plan finally to bring relief to the nearly 200,000 mortgage prisoners. There can be no excuse for further delay. If we cannot set a course to free these prisoners, we will want to return to the issue on Report. I beg to move.

[Viscount Trenchard (Con)]

My Lords, I am delighted to support Amendment 197, moved by the noble Lord, Lord Sharkey, and to which I have added my name. I served on the former Services Sub-Committee of the former European Union Committee with the noble Lord and have been impressed by his accurate understanding of, and thoughtful approach to, this and other financial issues.

The noble Lord explained the reasons for his amendment with his customary clear logic. I will not take up the Committee’s time by repeating them. I particularly endorse the introduction of a cap of 2% over the standard variable rate for mortgage prisoners. UK Finance has identified 195,000 borrowers from inactive lenders, of whom 47,000 have been identified as mortgage prisoners.

I welcome the FCA’s recent review of this problem and its review of the effectiveness of its regulatory interventions to remove barriers to switching. Recently, only a small number of borrowers have been able to switch from an inactive lender to a new deal with an active lender. I share the FCA’s hope that more mortgage prisoners will be able to switch their mortgage and I hope that the Minister will support this amendment.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I rise briefly to offer Green support for this amendment and to agree entirely with everything that has been said thus far. I feel a sense of déjà vu all over again. I was just looking back at the comments I made in 2021, when, it is worth noting for the record, this issue of mortgage prisoners went to ping-pong: the House of Lords passed an amendment, and it went back and forth between the two Houses. Back then, we were talking about people suffering under high rates of 4% or 5%, and some were suffering with the vulture funds of 9%. As we have heard set out clearly, the situation has not improved but has got much worse, and we also have a cost of living crisis.

The noble Lord, Lord Sharkey, noted that Martin Lewis is now involved in this, with his crucial supporting research. What a state our country is in when everyone can feel a great sense of relief and hope because someone who is, after all, only a private individual has stepped in where Parliament has failed. Surely this is the stage where Parliament—or the Government—can step up and rescue people trapped in often terrible situations through no fault of their own.

--- Later in debate ---

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I was waiting to hear what the noble Baroness, Lady Noakes, said on this amendment. I am afraid I cannot support her this time, although we agree on a lot of things. I accept that this is a hard call. The way I look at it, this goes back to our discussion about whether you follow rigid rules or you want people to think about what they are doing. Ultimately, there has to be a desire for people operating in financial services to think about what they are doing in all circumstances. Therefore, I see that as a proper override.

What has been portrayed as the ultra-right wing libertarian approach of just doing things and then being for the high jump if you get it wrong—that is a caricature, I accept—relies on your having done what is right in principle. Some things will not be fair if you merely follow a rigid set of rules. Therefore, it is right that there is a “fair and reasonable in the circumstances” backstop. It is right that if such things happen, there should be discussions about what it means for the generality.

However, it is not right for the FCA to have an automatic override and say, “We’re right, and our rigid rules derived from principles”—because they abandon principles once we have rules—“can never be wrong”, and that people should not have been thinking actively about these things, particularly while they were dealing with customers and individuals. I understand where the noble Baroness is coming from, but I cannot support this. I plug again that we should expect that extra level of thought. This again goes to the heart of having a duty of care. It is the same argument. A duty of care does not mean, “I just do what I’ve always done and got away with” or “I just do what everybody else appears to have done, turn the handle and don’t think about it.” It is a fundamental principle of caring for the consumer that at least the ombudsman can continue with. I heartily think that we need a dash more of it in the Financial Conduct Authority.

[Viscount Trenchard (Con)]

My Lords, I support my noble friend Lady Noakes in her amendment. As she has explained well, Clause 38 requires the FCA, the FOS and the FSCS to co-operate and to consult with each other in exercising their statutory functions. However, it is important that FOS decisions with wider implications do not diverge from FCA rules, or there may be unintended consequences, and predictability and consistency may be negatively affected.

As my noble friend just said, this does not mean that the FCA or the FOS should act without thinking very carefully about what they are doing. Her amendment takes account of that and would be likely to encourage real thought about the consequences of making a particular decision in any case. Besides, Parliament never intended the FOS to be a quasi-regulator. UK Finance has recommended that the FCA should be given a power to overrule a decision by the FOS where it believes that the decision could have wider and perhaps unforeseen implications. My noble friend’s amendment would deal effectively with this potential problem.

Of course, the granting of additional powers to the FCA strengthens further the case that the FCA must be properly accountable to Parliament, and I regret that I have not yet heard my noble friend the Minister acknowledge that, as drafted, the Bill does not provide adequate arrangements for this. I firmly believe that a properly resourced joint committee is how to achieve that.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the Government agree that, where there are wider implications, it is critical that the bodies within the financial services regulatory framework, including the FCA and the FOS, co-operate effectively.

As my noble friend Lady Noakes noted, that is why Clause 38 of this Bill introduces a statutory duty for the FCA, the FOS and the Financial Services Compensation Scheme to co-operate on issues which have significant implications for each other or for the wider financial services market. Clause 38 also ensures that the FCA, FOS and FSCS put appropriate arrangements in place for stakeholders to provide representations on their compliance with this new duty to co-operate on matters with wider implications.

As my noble friend also noted, these organisations already co-operate on a voluntary basis through the existing wider implications framework. The voluntary framework was launched in January 2022 to promote effective co-operation on wider implication issues. Clause 38 will enhance that co-operation and ensure that these arrangements endure over time while retaining the operational independence of the bodies involved.

--- Later in debate ---

[Lord Kirkhope of Harrogate (Con)]

My Lords, I rise for a moment to support the amendments from my noble friends Lord Moylan and Lady Noakes. I spent much of my political career in Brussels, where I used to complain regularly that various directives and regulations were gold-plated when they came back to this country. We were always very stern in the implementation of just about everything that came from the European Union. I and others in this Room played some part in preparing these things, including the anti-money laundering regulations. In fact, for a long time, when I went places I endured the description, “Here’s the expert on money laundering”. This was not very nice, but it got even worse with the PEP issue.

My noble friend Lady Noakes is right to say that we should not dwell too much on our personal problems with this. I will not, although I have had problems—more particularly, one of my sons, when he tried to open an account with an emerging bank. Everything was going swimmingly until someone contacted him and said, “Are you by any chance related to a Lord Kirkhope?” He said yes, presumably thinking that it would help him get a better deal, “That’s my father—thank you very much”. That was that. He then received a communication some two weeks later telling him that his application for an account had been declined, but they would not give him a reason and apparently could not do so under our regulations in this country. It was obvious why he was declined; that information had been enough to make them use some kind of prescriptive arrangement whereby everybody is looked into not individually but under a general approach, subject to having a PEP in your family.

Again, I will not get into the point from my noble friend Lord Moylan that we can now ignore the anti-money laundering regulations or do something different. That might well be the case but I do not want to revive discussions on Europe in this debate. However, we were very careful when we drew up the regulations. It was very much a British component that insisted on the regulations being employed or deployed proportionately. The word “proportionate”, which has been referred to already, was conveyed with those regulations to us in this country. The problem was that, when we entrusted the implementation of the regulations into the hands of the FCA we failed to oblige it to follow a proportionate approach in the way we should have done, although the word “require” is set out in its instructions. It did not do so, has not done so and appears not to be willing to do so.

I simply want to make it clear that consultations, which I think my noble friend Lady Noakes mentioned a moment ago, seemed to take place, particularly in 2017. It was perfectly clearly stated how these things should be implemented. It was not expected that those holding politically exposed positions in the UK should be regarded as anything other than a low risk, rather than the enhanced risk that we seem to be stuck with. I suggest that it is too late for consultation and that it must be done by way of legislation. Very strict instructions must then follow to the financial institutions, past, present and future, that they must not deploy the draconian measures and inquiries that are totally unnecessary and unjustified.

[Viscount Trenchard (Con)]

My Lords, I apologise that, in the earlier group of amendments, I omitted to declare my interests as a director of two investment companies.

All four amendments in this group seek in different ways to find a solution to the problem that all noble Lords, and members of their families, suffer as a result of being designated as politically exposed persons. Regulation 35 of the 2017 regulations provides that a regulated person must “manage the enhanced risks” arising from having a business relationship or conducting a transaction with a PEP. It assumes that such a business relationship always carries a higher risk than a business relationship with a person who is not a PEP. From my experience, I suggest that the reverse is the case—in other words, entering into a business relationship with a Member of your Lordships’ House carries, in general at least, a lower degree of risk than the average risk posed by a customer of a relevant person.

However, the regulation requires more personal KYC information to be provided in respect of PEPs than for other customers. As noble Lords are well aware, it is currently hard enough for anybody to open a bank account or an account with any financial institution. Long-standing customers with active accounts with banks who fail to answer emailed requests for proof of address or the like find their account summarily closed, without any appeal. It is very difficult and time consuming to speak to anyone with responsibility for such decisions. Quite extraordinarily, when a credit card operator obtains KYC information for a customer with regard to one account, it does not automatically regard that information as being equally relevant to other accounts held with it by the same customer. The situation for PEPs is disproportionately worse.

My son, who was resident in Taiwan, was nominated by his employer as a signatory on his corporate bank accounts but was subjected to entirely disproportionate questioning which caused a considerable degree of irritation. He experienced the same thing when proposed by his employer as a signatory on a Singapore bank account. He has now had to agree with his employer not to be nominated on the corporate bank accounts in Korea, where he now resides, and in several other jurisdictions.

I have put my name to Amendment 227, well introduced by my noble friend Lady Noakes, which sensibly seeks to disapply the application of PEP status for this purpose by the FCA in respect of UK citizens. Amendment 215, in the name of my noble friend Lord Moylan and others, would place an obligation on the Treasury to achieve the same thing. But these amendments do not solve the problem for overseas relevant persons. I hope that the adoption of more proportionate and reasonable guidance, as proposed by my noble friend Lord Kirkhope in his Amendment 234, to which I have also added my name, might eventually be copied by overseas regulators too.

In any event, I ask my noble friend the Minister to respond positively and to commit to take action on these proposals. It really is time that something was done about the expensive waste of time caused by the current regulations.

[Baroness Fox of Buckley (Non-Afl)]

My Lords, I will be brief. The noble Baroness, Lady Noakes, made the point that this should not be just about us and anecdotes about ourselves. That is true, but the fact that family members are caught up in it leads you to think, “Maybe I could cope with it, but why should innocent members of my family be affected in this way?”

However, I am falling into my own trap because I am saying “innocent family members” as though we are not innocent. One of the most disconcerting aspects of this whole discussion is that this is about the law of unintended consequences. We all know who these regulations should be aimed at, and none of us would advocate being soft on money laundering or not having the kind of regulatory framework necessary to deal with money used for terrorism and so on. But can you imagine what it would say to the public were they to find out that the PEPs on that list that the noble Lord, Lord Moylan, read out are considered to be dodgy people who are not to be trusted? We are telling the public that political figures in this country are what some of the more cynical and nihilistic commentariat might have us believe—that everybody is on the brink of money laundering. It sends a terrible message, but I feel as though it is just the law of unintended consequences.

As noble Lords know, if you ask whether this is happening because you are a politically exposed person, the person you are talking to goes through the most extreme example of gaslighting, where they kind of glower at you and, as one noble Lord said, either imply that it is happening to everyone all around the country or that you are making it up. You are made to feel completely paranoid, even though you know that that is probably the cause. Without telling anecdotes, I can say that I am met with a certain amount of aggression.

On lots of aspects of the Bill—certainly the parts that I was involved in the other day—we have talked about the public’s frustration that banks are closing all the time. Barclays has just announced a whole set of closures. We are worried about the consequences of not being able to go into a bank and talk to a manager and about what kind of lives we will have if everything is overly removed from people’s interactions. Here we have the most unnecessary example of risk-averse, bureaucratic time wasting from banks which should be spending their time serving the public and working for society’s financial services as we face an economic crisis. Can you imagine how much time they waste checking on us? I know how much time I have wasted during their completely unnecessarily and spuriously checking on us.

I do not know which of the amendments I prefer but, for once, I just want the law to change. I shall go with whichever is likely to win and pass. We are not doing the public any favours at all by worrying that they might think that we are just talking about ourselves in this instance, because the public are having their financial services wasting time on something that is not due diligence but a complete distraction from attacking the real problem.

Financial Services and Markets Bill

Viscount Trenchard Excerpts

Committee stage
Tuesday 7th March 2023 Grand Committee

[Baroness Noakes (Con)]

My Lords, I have Amendments 179 and 190 in this group. I am not very enthusiastic at all about the provisions for cash access and distribution in the Bill. I am far from clear that a heavy-handed regulatory solution, which is what we have in the Bill, is necessary to preserve cash access and distribution, but, if we have to have it, I believe that the powers in the Bill should be time limited, which is what my Amendments 179 and 190 seek to achieve. Under these, the powers would expire in 10 years, unless the Treasury brought a statutory instrument giving a later date.

This is not a hard-nosed sunset clause, because we genuinely do not know what the future will be like. What we do know is that, before Covid, the use of cash was on a long-term downward trend and the use of debit cards had already overtaken cash. Covid then accelerated those trends so that, by 2019, debit card usage was 50% higher than the use of cash, and the latest data for 2021 shows that debit cards were used three times more often than cash. UK Finance forecasts that, by 2031, cash will account for only 6% of transactions while debit cards will account for more than half.

I do not deny that some people are more comfortable using cash than other payment options, and I accept that digital exclusion exists. It may well be a proportionate response to the current need for cash to protect its availability in the way that the Bill does, but I find it hard to see why we should set cash up on a pedestal as though it is some form of human right.

There is a large cost associated with cash provision. The Access to Cash Review found that it costs around £5 billion per annum. That is ultimately borne by all users of banking services, with the possible exception of holders of basic bank accounts, which do not cover their costs anyway and are already loading costs on to other users. As the use of cash continues to plummet, the cost will become disproportionately high because most of the costs involved are fixed.

I am certain that the future is digital, and the real need in the medium term is not to build shrines around cash points but to incentivise the financial services sector to make digital payment systems more accessible and inclusive. The best fintech brains should be put to work on this, and the banks need to see that it is in their interests to support innovation. This is where the regulators should be putting their efforts, rather than working out where cash points should be.

For this reason, I quite like the idea behind my noble friend Lord Holmes of Richmond’s Amendment 239, which calls for a review of access to digital financial services, although I am not sure that now is quite the right time. I am also not sure that a review should result in decisions made by government. We need to incentivise the providers of financial services to provide answers for this, rather than thinking that government can dictate how things will work in practice as society changes.

Some of the other amendments in this group, in particular those in the name of the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Tyler of Enfield, seek to cling to an idea of high street banking that has already been overtaken by events. Bank branches closed because people stopped going to them; I predict that the new hubs will go the same way. The future is digital—that is what we should be trying to encourage. Making banks shoulder the costs of branches or hubs that are little used will simply increase the costs of the banking sector. This will end up harming consumers because costs will be passed on to them or, in some cases, providers may decide to withdraw from servicing particular sectors. In trying to preserve high street provision, the outcomes for consumers are not good.

I do not believe that it is responsible to legislate to preserve a version of the past unless there is clear evidence that the benefits outweigh the costs. I doubt that the cost-benefit case could, in truth, be made at the moment for maintaining branches or paying for the setting up of hubs, but I am absolutely certain that, when we look back in 10 or 20 years’ time, we will be amazed that we even thought that standing Canute-like against technological and societal change was the right thing to do in this area.

[Viscount Trenchard (Con)]

My Lords, I recognise the good intentions of the noble Baroness, Lady Tyler of Enfield, in introducing her Amendment 176. However, the tide is running out for cash. We are not the most advanced country in this area. It is now almost impossible to use cash in Sweden. What does my noble friend the Minister know about how the authorities in countries such as Sweden, which have largely dispensed with cash in daily life and where retailers are not prohibited from refusing to accept cash, support those who have no bank account, debit card or credit card?

I sympathise with the aim of this amendment. I regret the disappearance of the bank manager, but I doubt that this is an area where the Government should be too prescriptive. Where there really is demand to meet a bank manager, surely the market will respond and one or more banks will locate a manager where he or she is needed.

I support Amendments 179 and 190, to which my noble friend Lady Noakes has already spoken so ably. Her amendments recognise the reality of the disappearing role of cash.

I have sympathy for the aims of Amendments 180 and 181 in the name of the noble Lord, Lord Tunnicliffe, as I think it important that banks continue to provide in- person banking services where there is demand for them.

I sympathise with Amendments 238 and 239 in the name of my noble friend Lord Holmes of Richmond. The way the KYC rules are interpreted by banks and credit card providers is completely absurd and disproportionate. It really is ridiculous to have to prove one’s existence to an institution with which one has had an active business relationship for many decades. Can my noble friend the Minister tell the Committee whether she agrees that a review of the KYC rules is absolutely necessary?

[Lord Naseby (Con)]

My Lords, I shall be brief. I have put my name to Amendments 180, 182 and 189.

I have a couple of points to make on Amendment 180. First, proposed new subsection (2) is on essential in-person banking services. My wife and I were just in a position in which we needed a face-to-face meeting with our joint-stock bank. The nearest one is eight miles away, which is not exactly around the corner. It was extremely difficult to find the right person in that particular bank, despite the requirement being created by that bank. I am sure that others have had that experience. There is a need to have the ability to have reasonably convenient face-to-face meetings with knowledgeable people who are prepared to work on Fridays, when the rest of us are working. In our case, we work only four days a week—they are just long days—but that is by the by.

Secondly, proposed new subsection (4), to be inserted by the amendment, refers to “applicable local authority areas”. We must never forget that we now have a combination of district and single-tier authorities. The difference is that it can be many miles from one town to another in single-tier authorities.

Apart from that, I hope that my noble friend the Minister takes very seriously the points made in the amendments of my noble friend Lord Holmes. They are well worth listening to and analysing.

Financial Services and Markets Bill

Viscount Trenchard Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

Why does all this matter? Because it will make the whole system more transparent, predictable and consistent without detracting from existing consumer rights. I hope that, over time, it would reduce the number of claims for adjudication from the very high present levels. At present it would mainly affect domestic consumers and financial providers, but it is more than likely that the internet will gradually open up consumer finance internationally, in which case Britain will be best placed to be home to the Google or Amazon of domestic finance in the future, just as we are for wholesale financial transactions, if we have a trusted, common-law based system, which these amendments would effectively introduce.

[Viscount Trenchard (Con)]

My Lords, I declare my interest as a director of two investment companies, as stated in the register.

I too congratulate my noble friend Lord Bridges and his supporters on their most interesting proposal to set up an independent office for financial regulatory accountability. The Bill as drafted does not secure sufficient change in the way the regulators carry out their duties and the speed with which they will work to simplify and improve the rulebook. In particular, I welcome the provision in Amendment 162’s proposed new subsection (2): that the office “must prioritise” analysis of regulations that reduce competition, negatively affect competitiveness and add compliance costs. In other words, the office will be bound to identify regulations such as the myriad anti-competitive and cumbersome regulations adopted by the ESAs in recent years.

I support my noble friend’s amendment and believe it would augment but not replace the work of an FSRC, such as my noble friend Lady Noakes and I proposed in Amendment 86. As such, it would mitigate further the regulators’ lack of accountability to government following the transfer of significant rule-making powers. This is most likely to be a good thing, although alone it does not do enough to improve the deficit in accountability to Parliament.

I would like my noble friend Lord Bridges to tell the Committee whether he envisages the office working alongside a Joint Committee such as the FSRC and whether he would consider amending his Amendment 165 to replace the Treasury Committee of another place with a suitable Joint Committee. I agree entirely with what the noble Lords, Lord Hunt and Lord Vaux, said about the need for a new Joint Committee.

Along with my noble friends Lord Sandhurst and Lord Roborough, I have put my name to Amendments 169 to 174, so eloquently proposed by my noble friend Lord Lilley. In common with my noble friend, I am not a lawyer; I am a banker. I was proud to work in the City of London when I joined Kleinwort Benson as a management trainee in 1973 because, by and large, the City was an honest place and its leading firms were well regarded. We knew the importance of the old maxim, “My word is my bond.” The banks did not maintain vast compliance and legal departments. During my banking career, I have seen the relative size of these departments increase massively as a proportion of total staff. This itself has had a negative effect on the culture of our leading firms, reducing the emphasis on innovation and business development and increasing the number and influence of those employed in compliance and legal, and of the interlocutors with the regulators.

We believed that Brexit would enable us to return to our simpler, less cumbersome, common law-based regulatory system. These proposals will enable this and encourage agility and precision in the drafting of rules. The regulators operated in this way after the Financial Services and Markets Act 1986, and this is how the FSA was empowered to act under FSMA 2000. But by then, the EU acquis on financial services was beginning its period of rapid expansion, so most of the rules since then have actually been made at statutory level by the EU. FSMA 2000 already accepts that judicial review is an inadequate safeguard against unduly harsh decisions by the regulators, and it gives the final say on enforcement decisions to the Upper Tribunal. These proposals would ensure that the regulators act predictably and consistently. They would ensure that they are no longer above the law—now even more important, as a result of their greater rule-making powers.

I believe that the opportunity costs of the current regulatory system are too high. Legitimate financial business, such as providing new products for consumers, is not being done because of regulatory uncertainty. These amendments would ensure that the wording of the rules is more thoughtfully drafted than it was under EU regulation and would reduce compliance costs. The rules would be based on common law methodology. The wording would be applied to facts on the basis of their natural and ordinary meaning. The renamed financial adjudication service would reach decisions not only on its own subjective opinion but on the basis of the growing body of case law deriving from decisions of the new first-tier tribunal.

Does my noble friend the Minister understand just how important it is that the Bill be made a lot more radical in changing the way our regulators operate? As drafted, nothing much will change. There was no point in Brexit if we continue to apply a bureaucratic, overly cautious and cumbersome regulatory system. These proposals would take us down the right road as a significant step to ensuring the City’s future and reversing the recent decline of some of our most important institutions, such as the London Stock Exchange.

[Lord Turnbull (CB)]

My Lords, I have not spoken before in this Committee, but as one of the surviving members of the Parliamentary Commission on Banking Standards, I want to address an instance where an amendment directly challenges one of the proposals that was incorporated following the commission’s report. Earlier in proceedings—on day three, I think—the noble Lord, Lord Tyrie, addressed Amendment 46, which introduced the concepts of predictability and consistency. He asked, “Who could possibly object?”, and went so far as to describe them as “motherhood and apple pie”. On examination, these principles, particularly predictability, can be seen to be simply duplicating the existing provisions of administrative law, but also as introducing provisions that could limit the scope of the regulator to address new and previously unforeseen problems.

A similar problem arises with Amendment 174 in this group. How could one possibly object to acting

“reasonably and in good faith”

as a defence against sanction under the senior manager conduct regime, the SMCR—the principal sanction being disqualification from practising? By way of a bit of background, the PCBS spent a great deal of time on structural issues—bank break-up, ring-fencing, capital adequacy, liquidity adequacy and so on—but it also attached a great deal of importance to conduct issues, hence the creation of what was then called the senior person conduct regime and is now the senior manager conduct regime.

Is there evidence that this regime has proved oppressive and needs to be relaxed? Quite the contrary, in my view. There have been very few cases, although it has only been fully in force since 2018. Following the 2008-10 financial crisis, Mr Peter Cummings of HBOS is the only senior person to have been seriously sanctioned. One can debate whether that verdict was fair or unfair, but it is undeniable that it is unfair that he should be the only person sanctioned of the big players in those events. I do not think the case for further easing has been made out; more effective application is needed.

The introduction of a defence of acting

“reasonably and in good faith”

would, in my view, be a serious weakening of the regime. Very few people who made serious errors—which were costly to their customers, their own companies or the economy at large—set out intentionally to do harm. The thinking behind this amendment is that it is unfair to sanction people who claim that they did not intend to do harm, even if their actions were genuinely harmful. The protection of consumers is not achieved if those who mis-sell financial products or take what prove to be excessive risks are immune from regulatory action if they can show that they did not intend to do so.

Once again, these amendments look superficially desirable, but they would weaken the SMCR and could cause a lot of damage. The normal pattern in Committee is that an amendment is proposed and others stand up to support it. I want to do the opposite: I urge the Minister to stand firm in rejecting Amendment 174. In any case, I wonder whether the right way to change the underlying philosophy of regulation and the balance between the regulator, the common law and the courts should be to set out a comprehensive proposal, rather than through the accumulation of a disparate set of amendments in this Bill.

Financial Services and Markets Bill

Viscount Trenchard Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

[Lord Moylan (Con)]

My Lords, I will also speak to Amendment 241, also in my name. I hope this will be the least controversial mini-debate on the Bill, because I do not think anybody in the Committee is other than opposed to financial exclusion. We favour financial inclusion, especially in a modern digital age. What is normally meant by financial inclusion is the opportunity for people of limited means or living in marginalised circumstances to participate in the financial and banking system—something that is all the more necessary now that people are so dependent on access to it, not least for benefits but also for other, ordinary means of getting about in life and so forth. Who can be against that? A number of amendments in this group tend towards strengthening the obligations on the regulators to promote financial inclusion, and I am happy to lend my general support to them.

Amendments 55 and 241 in my name relate to a different sort of financial exclusion that has grown up over the last 25 or 30 years: the general tendency to exclude the retail investor from the opportunities to invest in regulated products. For example, we have gone from a situation 30 years ago where it was possible to buy gilts—UK government bonds—at the Post Office, or to bid for new issues of gilts at an average price through cutting out a coupon in the newspaper, to a situation where it is very difficult for ordinary people to buy government bonds.

In the case of highly rated corporate bonds, an EU regulation incorporated from its prospectus directive has set the minimum denomination of new issues of bonds at €100,000, which we have applied of course. The result is that very few sterling bonds are in denominations small enough for ordinary investors to buy, and even they are long-dated issues that are running off, so soon there will be no more unless we take some action.

The days of Sid are long gone. Nowadays, when companies do new share issues—what have come to be known as IPOs, initial public offerings, or even subsequent offerings—corporate treasurers are simply uninterested in engaging with retail investors, partly because the burden of additional regulation involved deters them from doing so. Shares are generally placed in private placements with institutional investors, because it is easier and quicker—no room for the retail investor.

There have been two reasons for this. The first is overcaution on the part of regulators. They feel responsible for regulated investments, so they do not want anyone to lose any money unless they are a really big player. The easiest way of preventing smaller players such as retail investors from losing money and complaining is to prevent them from investing in the first place. The second is the reluctance of corporate treasurers to engage with the retail market, because they have no incentive to do so, only additional burdens.

This might have been motivated by a good sentiment for protecting investors, but the results have been completely perverse. Nothing prevents retail investors investing in unregulated investments, so we see people out there quite freely putting their money into spread-betting; contracts for difference, which are similar to spread-betting; and even some things misleadingly known as mini-bonds, on which they regularly lose their shirts. Indeed, one issue of mini-bonds, from London Capital & Finance, was unregulated; it was ambivalent whether or not the regulator had actually regulated it. Noble Lords will recall that, last year, we had to pass a special Act of Parliament to allow the Treasury to indemnify those investors, because they had potentially been misled on the legal position. The core point is not that we had to indemnify them; it is that they were perfectly able to invest and to lose their shirts. But we stopped them—regulators and the circumstances prevent them—from investing in much safer, regulated products.

Amendment 55, in my name—I am grateful for the support of my noble friends, Lord Trenchard and Lord Naseby, and the noble Baroness, Lady Kramer—puts a new objective on the Prudential Regulation Authority to ensure that, as part of its work, it aims to minimise the barriers to retail participation in regulated products in the financial market.

Amendment 241 deals specifically with the narrow point that denominations of corporate bonds are required at the moment to be a minimum of €100,000 and replaces that with what we were used to many years ago, by having £1,000. That would make them accessible to retail investors.

I have had conversations with brokers—and I am grateful for them—who deal with retail investors in the City. I know that they are already in contact with the Treasury and that the Treasury is sympathetic to these arguments. There is nothing in what I say that will come as a surprise to the Minister, and I hope that, when she stands up, she will say many warm words in support of both my amendments, which I would appreciate. But I am concerned that there should be more than simply warm words and unbankable promises about what regulators might be asked to do in the future, so my inclination at the moment is that legislation would be a jolly good way forward. I beg to move.

[Viscount Trenchard (Con)]

My Lords, I declare my interests as a director of two investment companies, as stated in the register. I support my noble friend Lord Moylan in his Amendments 55 and 241, to which I have added my name. My noble friend has explained the purpose of his amendments very well and he spoke persuasively on this subject at Second Reading.

I was involved in much of the privatisation programme of the 1980s, and the Government’s efforts to increase the shareholder base, especially the retail shareholder base, were rather successful. Regulation has increasingly stymied retail investors’ ability to buy equities and bonds since that time, and I strongly support my noble friend’s wish to bring back Sid. New issues of equities used to be widely available to retail investors, but additional regulatory requirements now discourage corporate treasurers from including retail tranches in public offerings.

Amendment 55 requires the PRA, in advancing its general objective, to minimise barriers to wider securities ownership. This will create a better balance of factors, which it must take into account without in any way weakening the stability of the UK financial system.

As my noble friend mentioned, the prospectus directive is a strong candidate for early reform, in particular its requirement for a minimum transaction amount in a corporate bond issue of €100,000, which obviously excludes most retail investors from the market.

I also support Amendment 241, for the reasons that my noble friend has well explained to the Committee.

My noble friend Lord Holmes of Richmond proposes a new financial inclusion objective for the FCA. I welcome the steps that the Treasury and the DWP have taken to support financial inclusion. Could my noble friend the Minister tell the Committee how the welcome decision to release £65 million of dormant assets funding to Fair4All Finance has improved access to fair, affordable and appropriate financial products for those in financial difficulty? How do the Government intend to honour their commitment to protect the long-term viability of the UK’s cash infrastructure as we move inexorably towards a cashless society.

The Money and Pensions Service, in its national well-being strategy published in 2020, set out an agenda for change containing various ways in which to help people manage their money more effectively. I welcome this and other steps that the Government are taking in this area. I am also mindful of the fact that the Government have legislated to create a consumer financial education body, and I ask my noble friend what plans the Treasury has for that body. I welcome what is being done, and I am not sure that it is sensible to give a further objective to the FCA in this area, because it would dilute the attention that the FCA must give to its existing objective and two new ones—both the one already included in the Bill, the competitiveness and growth objective, and that proposed by my noble friend Lord Lilley, the predictability and consistency objective.

I also have sympathy with Amendment 75, in the name of the noble Lord, Lord Tunnicliffe, on financial inclusion, and I look forward to what he has to say. When I look at the matters to which the FCA must have regard in furthering its consumer protection objective, I am surprised that retail investors are allowed to invest at all. I am not sure that Amendment 75 would help reduce the barriers to market participation by ordinary investors.

I have sympathy with Amendment 117, because I think it will help if the FCA has a duty to address the issue. But I cannot support Amendment 228 in the name of the noble Baroness, Lady Kramer, because it may unfairly prescribe a bank’s ability to decide within reason the businesses that it wants to undertake, and its obligations to its shareholders and depositors to invest their money wisely. I am also not sure how the noble Baroness would define low-income communities. Our markets have been adversely affected both by the impediments to new authorisations and by unwarranted restrictions on the businesses of licensed banks. The result of this is often the reverse of what is intended, by dissuading new entrants from seeking authorisation, which negatively affects competitiveness and consumer choice.

[Lord Tunnicliffe (Lab)]

I rise to speak to this group, particularly my Amendments 75 and 117. The group contains the important amendment which would give the FCA a “have regard” duty for financial inclusion within its existing consumer protection objective. The FCA’s and the Government’s argument is that its consumer duty means that it does not need a financial inclusion “have regard”, but there is a fundamental difference between the two. A consumer duty deals with people who are able to access products. I want to know how the FCA—and, incidentally, the Government—will be required to consider those who are not yet consumers.

We are not arguing for a new primary or even secondary objective, and very much want to wait for the outcome of the FCA’s consumer duty work. A “have regard” duty is the proportionate approach to ensure that those who are currently excluded are supported to become consumers and begin to benefit from the new consumer duty that we have heard so much about. We are not being radical or party political in this; we have Lib Dem and Cross-Bench support for Amendment 75. Nor are we alone: the Phoenix Group, a FTSE 100 company, is also arguing for the FCA to have regard to financial inclusion.

I hope that the Minister will consider this amendment favourably and, if she does not, I want to know why not, and what the Government will do to tackle financial inclusion issues, including the poverty premium—the fact that people who can pay for things only monthly rather than in an annual lump sum pay more.

We also have in this group Amendment 117, which

“would require the FCA to report on financial inclusion”

yearly. Perhaps the Minister would value having evidence on how to fix the manifold problems in this area, enabling HMT and stakeholders to feed in too.

Financial Services and Markets Bill

Viscount Trenchard Excerpts

Committee stage
Wednesday 1st February 2023 Grand Committee

[Viscount Trenchard (Con)]

My Lords, I declare my interests as stated in the register. The noble Earl, Lord Kinnoull, is right in his Amendment 45 to bring the Committee’s attention to the need to ensure that the regulators take seriously the new objectives which may be given to them under the Bill. As your Lordships are aware, the Bill strengthens rather than weakens the regulators. My worry is that, if it is not made explicit, the regulators may not give enough importance to the new competitiveness and growth objective. Rightly or wrongly, the regulators are considered by much of the industry to be set on ensuring the stability of the graveyard and the protection of the investor against any possible risks. I entirely support the FCA’s new strategy to become more assertive and agile in detecting and taking action against scammers, but I wonder how, in practice, it can measure its advancement of the new objective in terms of consistency and proportionality and how it will balance that against its strategy to halve by 2025 the number of consumers who invest in higher-risk products.

The noble Earl’s amendment would also place a duty on the FCA to measure the PRA’s responsiveness to regulated entities. Does this not indicate clearly the additional complexity—especially for dual-regulated firms—that the well-intentioned but misguided decision to split the FSA into two regulators has caused? What proportion of the FCA’s time and costs will be spent on monitoring the PRA, and vice versa? Will my noble friend commit that, in the medium term, the Government will conduct a review of the effects on regulatory standards and the City’s competitiveness that have resulted from having two principal financial regulators?

--- Later in debate ---

[Viscount Trenchard (Con)]

My Lords, I support my noble friend Lord Lilley’s Amendment 46, to which my noble friend Lord Moylan and I have added our names. It adds a further objective to ensure that the regulators discharge their duties in a manner which maintains high standards of predictability and consistency. Noble Lords might ask why this is necessary, given that the competitiveness and growth objective obviously requires them to act in a predictable and consistent manner. As I have already remarked, it is hard to be confident that this secondary objective will have enough effect on how the regulators exercise their functions.

I agree with what the noble Baroness, Lady Kramer, said on the previous group: it is necessary to find the right balance between different objectives. However, I fear that defining an objective as secondary and placing it lower in the hierarchy will in reality lead the regulators to apply an anti-competitive balance. These amendments provide a necessary safeguard against the lack of certainty currently worrying many market participants due to the very great transfer of powers to the regulators. As my noble friend has explained so well, this additional objective should make our financial market rules more predictable, increasing the attractiveness of our markets as the best place to introduce new and innovative products.

I also support Amendment 70 from the noble Baroness, Lady Bowles, and my noble friend Lady Noakes and its intention to introduce a principle to require the regulators to exercise their functions in an efficient manner. I also support Amendment 72 from my noble friend to promote proportionality as something that the regulators must apply in exercising their general duties. I am not advocating a race to the bottom, but it is widely believed that much of our current regulatory regime is applied in a less than efficient manner; it is often disproportionate in that the benefit, if any, is often smaller than the cost of achieving it.

Amendment 74 from my noble friend Lord Holmes of Richmond also seeks to strengthen the existing regulatory principle when the regulators are considering a new restriction but, on balance, I prefer the amendment from my noble friend Lady Noakes, which has wider application. In considering all these amendments, we should not lose sight of the need to question what the regulation is for. Amendment 77A in the name of my noble friend Lady Noakes ensures that we constantly ask ourselves this question. If there is no evidence that a regulation is needed or brings any benefit, we should not introduce it, or if it exists, we should abolish it. I hope my noble friend the Minister will accept these amendments and look forward to hearing her response.

[Lord Naseby (Con)]

My Lords, I will speak briefly to Amendments 54 and 64. They are vital to the future planning of existing companies, but they seem even more important to people entering a financial market, whatever it may be. When they are doing their planning, they must recognise—it must be self-evident to them—that there is consistency and objectivity. Most of my commercial life has been in the creative world and bringing it into the ordinary world—for want of a better description.

It may be that there is a difference between what is required for growth, which is the primary objective behind the Bill, and the competitive nature. They are two distinct objectives.

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[Baroness Noakes (Con)]

My Lords, I shall speak also to Amendment 58 in my name. The new competitiveness and growth objective, which I strongly support, is rather curiously drafted, as the FCA and the PRA are mandated to pursue competitiveness and growth

“subject to aligning with relevant international standards”.

My Amendments 47 and 58 remove this from the formulation for both the FCA and the PRA on a probing basis to try to understand what the Government mean by it.

International standards come in all shapes and sizes and it is far from necessary for the UK to adhere to everything which claims to be an international standard. The term is not defined in this Bill nor, I think, in FSMA. Part of what I am seeking is to understand what is a “relevant standard” and what kind of standards can in effect trump the competitiveness and growth objective. I hope that my noble friend will be able to explain this when she winds up.

The competitiveness and growth objective is already circumscribed by its status as a secondary objective. Using the PRA as an example, this means that it has to act only

“so far as reasonably possible”

in a way which advances its competitiveness and growth objective. Its primary objective—promoting the safety and soundness of PRA-authorised persons—will always trump a secondary objective. In this respect, I am not sure that Amendment 65 from the noble Lord, Lord Tunnicliffe, is necessary. That is certainly the view of the PRA, which has been clear about the primacy of its prime objective.

Although some of us might have preferred competitiveness and growth to be a primary objective, which could then raise different issues, the Bill does not go that far and the secondary objective is therefore secondary to the primary objective. I completely understand if the PRA choses to follow international standards because it believes that this advances its primary objective, and that would trump the secondary objective. On that basis, there is no need to refer to international standards in relation to the competitiveness and growth objective because if the PRA thinks that they are necessary, they are already absorbed within its primary objective. However, if an international standard is not necessary for the primary objective, I do not understand why any such international standard should crowd out the competitiveness and growth objective.

There may well be a presumption that standards promulgated by bodies such as the Financial Stability Board or the BCBS will be followed, but that is accommodated within the primary objective. However, even in that context I think we have to remember that, for example, the Basel capital standards have not always been followed universally, most notably by the USA, which pursued its own course for a considerable period of time. International standards are not matters of international law. Their implementation is always a matter of judgment for the home regulators and therefore needs to be considered in the judgments they make on their primary objective.

I believe that the words

“subject to aligning with … international standards”

give too much weight to policies developed outside the UK and could damage our competitiveness and growth. The regulators should not be allowed to ignore the secondary objective on the grounds that they are following international standards if those standards are not core to their primary objective.

I look forward to hearing the noble Baroness, Lady Bowles of Berkhamsted, on her Amendment 49, but my initial view is that it is right to keep the reference to financial services in the competitiveness and growth objective. Whether we like it or not, the financial services sector contributes around 12% to the UK economy and 7% of all UK jobs, according to the City of London Corporation. The regulators that can have the biggest impact on the financial services sector are clearly the financial services regulators: the PRA and the FCA. It seems to me only right to emphasise that their new secondary objective should specifically refer to the financial services sector. I beg to move.

[Viscount Trenchard (Con)]

My Lords, I support Amendments 47 and 58 in the name of my noble friend Lady Noakes, to which I have added my name. I also appreciate the support of my noble friend Lady Lawlor.

The FCA is influential in the formation and development of standards, and states on its website:

“We contribute to and implement international standards, and supervise and enforce rules based on them in the UK.”


The principal international standard-setting body for the industry is IOSCO. Will the Minister confirm that the UK is already using its enhanced influence in that body resulting from our having a seat at the table in our own right rather than through the EU? IOSCO’s key strategic goal is to be accepted as the recognised standard-setter for securities regulation. The International Association of Insurance Supervisors seeks to play the same role for the insurance industry. Its mission is to promote effective and globally consistent supervision of the insurance industry to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability.

Nevertheless, international standards are a very subjective concept, and the introduction of this concept does not assist the need for clarity and predictability, besides the question of whether international standards will assist or impede the advancement of the competitiveness and growth objective. I am unable to support the proposal of the noble Baroness, Lady Bowles, to include sustainability in addition to relevant international standards because I think that sustainability is an even more subjective concept and that this amendment would reduce clarity and predictability.

I do not understand Amendments 49 and 59 from the noble Baroness; I think the financial regulators’ responsibility for financial services does not extend to different spheres of activity, although I, too, question why this limitation is included in the Bill anyway. The amendments in this group are really important because the Bill provides for rather limited supervision of regulators, and I believe it is necessary to improve parliamentary oversight.

Financial Services and Markets Bill

Viscount Trenchard Excerpts

Committee stage
Wednesday 25th January 2023 Grand Committee

[Baroness Noakes (Con)]

My Lords, as this is the first day of Committee, I declare my interests as recorded in the register, in particular that I hold shares in listed financial services companies. I will not comment on the government amendments in this group; I am taking those on trust.

I share the desire of the noble Lord, Lord Sharkey, for Parliament to be involved in the new rules that will replace retained EU law, but this is part of the larger issue of how there will be parliamentary accountability of the regulators. A number of us have tabled amendments of slightly different varieties on how to achieve that in the Bill. I for one will not contribute to that issue in this debate, because it is better saved until the various mechanisms that some of us have proposed are debated later in Committee.

I have two amendments in this group: Amendments 244 and 245. At Second Reading I acknowledged that the replacement of retained EU law on financial services would take some time, but I felt that the process needed the discipline of a hard stop along the lines of the Retained EU Law (Revocation and Reform) Bill. I have not copied that Bill, with its deadline of the end of this year, but I have instead proposed one three years later: that is, on 31 December 2026.

That will doubtless disappoint some hardliners among my Brexiteer colleagues, but I see that as a pragmatic compromise between getting the issue fixed and letting the regulators do a proper job in turning EU rules into something that works for the UK or indeed, whenever possible, removing the rules entirely.

I am not convinced that, left to themselves, the FCA and the PRA will prioritise the task of dealing with the full corpus of retained EU law, especially once the first batch of relatively easy issues has been dealt with. A deadline is a simple device in order to incentivise them to get on with it or risk losing the related law entirely.

If my noble friend resists the notion of a statutory deadline, even though it is government policy for retained EU law generally, perhaps she will explain what sticks and carrots the Treasury has at its disposal to get the job done within a reasonable timeframe. I do not think it reasonable to have this large body of EU law left in limbo for any considerable period of time.

[Viscount Trenchard (Con)]

My Lords, I share the views of the noble Lord, Lord Sharkey, to a large extent, but I agree with my noble friend Lady Noakes that the question of parliamentary scrutiny is better dealt with when we come to that part of the Bill to which her amendments are tabled.

I declare my interest as a director of two investment companies, as stated in the register. On the whole, I welcome the Government’s amendments in this group and look forward to hearing my noble friend the Minister explain them. Insofar as they increase the powers of the regulators, I welcome the improved clarity and transparency, but we need to improve the method of scrutiny and degree of regulators’ accountability to Parliament, as I have said.

I support my noble friend Lady Noakes in her Amendments 244 and 245. While the task of reviewing, revoking and replacing retained EU financial services law is monumental, it is important that there be a time limit to this process. Ideally, it should be completed this year, because more than four years have passed since the passage of the withdrawal Act and more than two years since the end of the transition period. We have not acted as fast as we should perhaps have done in moving to exploit the opportunities available to make bold moves away from the cumbersome, expensive and anti-competitive regulatory regime that has progressively constrained the competitiveness of the City of London and its innate ability to innovate. There has been some inbuilt resistance to making any changes, and I am glad that this Bill takes some significant steps in that direction.

I would have preferred the Bill to be more radical and to require that certain EU regulations automatically be repealed without replacement, such as the whole regime around the alternative investment fund managers directive and its subordinate legislation. That directive was opposed by the whole City establishment and has served merely to divert new and innovative fund managers wishing to launch new products for professional investors away from the City to other jurisdictions. However, too little work has yet been done, and I think that my noble friend’s suggested latest revocation date of 2026 is a reasonable compromise. I look forward to discussing that later, and I hope the Government will accept my noble friend’s two amendments.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I want to lend some support to the noble Lord, Lord Sharkey, for raising the issue of parliamentary scrutiny in relation to this clause and Schedule 1. Clause 1 and Schedule 1 are an extraordinary exercise in executive powers through regulations and the regulators. In a later debate some days down the line, we are coming on to that issue, but it is appropriate that we start this debate with a reminder to the Minister that the issue of parliamentary scrutiny is very important.

I just want to reflect on what the noble Lord, Lord Sharkey, said about regulations. The Minister will no doubt pray in aid the fact that Parliament has processes for dealing with regulations. In your Lordships’ House, praying against a negative SI leads to an affirmative debate, unlike in the other place, and we debate it in full—but to what end? I have tabled a Motion today in the Chamber relating to an affirmative Motion on a completely different issue, data use in the NHS. I have no doubt that we will have a very good debate, but the Government will just plough on without having to take account of any debate that has taken place.

--- Later in debate ---

Yet the Treasury’s consultation document is clearly looking for reasons to create a full-blown regulatory regime once the EU-derived short selling regulations are withdrawn. In my view, this is the wrong direction of travel. Regulation should be evidence based and not precautionary. Regulation inevitably imposes costs, and costs are ultimately borne by consumers. The message that the Bill sends on short selling is the wrong one. I beg to move.

[Viscount Trenchard (Con)]

My Lords, I support all the amendments in this group introduced by my noble friend Lady Noakes, to many of which I have added my name. I do not need to repeat the arguments so powerfully put by my noble friend. Clause 8 amends FSMA 2000 through new Section 71K to create a designated activities regime, which allows certain activities related to financial markets to be regulated within a framework that is separate to the existing FSMA regime for authorised persons, while still being compatible with a comprehensive FSMA model. The intended purpose of the designated activities regime seems to be to enable the Government to perpetuate the various retained EU law regimes without adequate parliamentary scrutiny, particularly given earlier comments on the inadequate way in which we scrutinise SIs.

New Schedule 6B is an indicative list of designated activities. This regime may at first be used to replace the retained EU law being revoked under the Bill, but there is no apparent limitation to the Treasury extending it in future to new or different activities. The designated activities regime is almost completely unconstrained in scope and effect. As such, it could be used to ban all kinds of products and classes of provider, and/or to establish parallel licensing requirements for particular activities, for both authorised and unregulated firms. The Explanatory Notes to the Bill state:

“Initially, the government expects most designated activities to be activities which are currently regulated through retained EU law”,


suggesting that new designated activities may be introduced.

The market will be keen to ensure a level playing field for regulated activities among FCA-authorised, dual-authorised and unregulated firms. Can my noble friend the Minister confirm that FSMA 2000’s new Section 71N means that rule-making in relation to designated activities will be the sole competency of the FCA? Currently, the PRA and the Bank of England share regulatory responsibility with the FCA for a number of technical standards relating to the entering into of OTC derivatives, for instance. Additionally, if the requirements are set out in the FCA handbook for authorised firms and in separate instruments for unauthorised firms, there may be a risk of divergence and inconsistency.

I have tabled Amendment 35 as a probing amendment, on removing the admission of securities to listing on a stock exchange from the lists of designated activities. First, I would question whether listing should be a regulated activity at all, because many listings happen without an issue of new shares or other securities and may, for example, be undertaken by companies wishing to show that they are good corporate citizens that want their corporate information to be available to the public in the same way it is for other listed companies. This was certainly a major consideration when many major Japanese companies such as Toshiba, Fujitsu and Honda listed their shares on the London Stock Exchange in the 1980s and 1990s. They subsequently undertook capital-raising exercises involving the issuance of securities, but those were separate exercises. I see no reason why unregulated firms may not act as sponsors for stock exchange listings, and therefore would question why the arrangement of listings should be a regulated activity.

Do the Government intend as a matter of urgency to act on the recommendations in the listings review undertaken by my noble friend Lord Hill of Oareford? Does the Treasury intend to undertake a fundamental review of the prospectus regime, as recommended by the review? Does my noble friend agree with the recommendation that prospectus requirements should be changed so that, in future, admission to a regulated market and offers to the public are treated separately? Could she tell the Committee whether she thinks that the empowerment of the FCA through the designated activities regime will make stock exchange listings more expensive and cumbersome than they have become during the past 14 years, or less? In that time, as my noble friend Lord Hill pointed out, the number of companies listed on the London Stock Exchange has declined by 40%. I look forward to hearing the Minister’s comments.

[Lord Stevenson of Balmacara (Lab)]

My Lords, I shall speak to Amendment 32 in name, which is part of this group, although it points in a slightly different direction from the speeches we have just heard. I declare an interest, as I was chair of StepChange, the debt charity, in the period 2010 to 2014, although I have no current connection with it.

This is a probing amendment aimed at ensuring that a particularly egregious form of high-cost credit, log-book loans, issued under the bills of sale legislation dating from Victorian times, is afforded the customer protection measures rightly offered to consumers who use other forms of credit. In that sense, it needs an extension of the power discussed in this clause. To be clear, I would much prefer it if the Bills of Sales Acts of 1878 and 1882, and their related legislation, could be repealed. One way or another, I hope that some speedy action can be taken to resolve this issue. Such efforts appear to have stalled, despite a lot of work nearly a decade ago by the Treasury and the Law Commission.

Over the past few years, the Government and the FCA have been largely successful at clearing up the high-cost credit market. It is true that they had to be pushed to get started, and many noble Lords present may recall this House playing a significant part in focusing attention on payday loans, for example. But there are still issues to be addressed. The consumer duty is also a valuable step forward, and I hope that it will be a great success. At the same time, the introduction of statutory backing for the debt respite—the breathing-space regulations—and the forthcoming statutory debt repayment plan will offer immediate and effective help to the many hundreds of thousands of people who face unmanageable debts each year. The Government have done well in this area, and I commend them.

However, the current credit squeeze and cost of living crisis are going to exacerbate this situation. Indeed, if past history is a guide, logbook loans may well become as prevalent as they were in in 2014, when 52,000 bills of sale were registered in one year at the High Court. As I said, logbook loans are issued under bills of sale, which are governed by two Victorian statutes that I have already mentioned: the Bills of Sale Act 1878 had immediately to be amended, so there is also the Bills of Sale Act (1878) Amendment Act 1882. Basically, they allow individuals to use goods they already own as security for loans while retaining possession of the goods. This legislation is archaic and, in the words of the Law Commission,

“wholly unsuited to the 21st century.”

It went on to say that

“it causes detriment to all those who use it, including logbook lenders, logbook borrowers, business borrowers and third party purchasers.”

Nobody, it seems, has a good word to say for them.

This is all set out in a substantial Law Commission Report commissioned by HM Treasury in 2016. In that report, the Law Commission went on to point out the following. Most people who take out logbook loans are borrowers who already have difficulty in securing other forms of credit. Its research revealed that the term is usually six months to three years, while the interest rates ranged from 60% to 443% APR but were usually in the range of 120% to 187%—high-cost credit indeed.

There are complaints that some lenders use the threat of repossession of the goods to demand unreasonable and unaffordable extra payments, even when the loan is substantially repaid—something which is not permitted in, for example, hire purchase agreements. However, logbook loans lie outwith modern consumer protection legislation. It is true that the Financial Ombudsman Service may provide redress after the event, but the FOS is not able to prevent repossessions. There is no protection afforded to private purchasers who buy goods subject to a bill of sale, even if they act in good faith. Those who buy a second-hand car without knowing it is subject to a car-book loan face an unpalatable choice: pay off somebody else’s loan or lose the car.

The 1882 bills of sale legislation requires all bills of sale to be completed on a complex standard form and registered with the High Court, which uses a paper-based record system. Failure to comply with any of the documentation requirements carries substantial sanctions, not least being that the lender loses any rights over the goods or money owed to them. Those sanctions clearly would be out of scope if current consumer protection standards applied, but—

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[Baroness Kramer (LD)]

My Lords, I fear that if we were to follow the amendment from the noble Viscount, Lord Trenchard, we would indeed permit naked short selling. Like most people, I have no problem with short selling in highly liquid markets.

[Viscount Trenchard (Con)]

I am a little surprised that the noble Baroness is taking my name in vain here. My amendment is not about short selling; it is about listing.

[Baroness Kramer (LD)]

I apologise; it was the noble Baroness, Lady Noakes. I have attacked the wrong conspirator, as it were. I say to her that my concern, from listening to various people argue for changes in the rules that govern short selling, is that that is exactly what they have in mind, the argument being that if we allow short selling then illiquid markets will suddenly become much more liquid because many more players will be attracted into that particular end of the market. There is a great deal of risk at play, so I am quite nervous about making that kind of change. We always assume that the investors who would engage in these products would be highly sophisticated and understand fully the risks they are involved in, but the practical reality that we see in everyday life is that many people get involved who, frankly, have insufficient understanding and find themselves very much at risk.

It is for a similar reason that I say to the noble Viscount —I think accurately this time—on ending regulatory criteria for listing, that the listing issue is quite complex. I was one of the people who agreed with the IoD—I do not agree with the IoD all that often—on the changes that the London Stock Exchange made to enable a secondary listing for Aramco. It did not end up with the business, but the IoD was very concerned that the LSE compromised its approach to corporate governance to get that listing, which would obviously have been a highly profitable activity. That issue made the IoD very irate. It described it as

“an opportunistic attempt at boosting short-term primary issuance which ignores the longer-term implications for the overall UK corporate governance regime.”

This is actually quite a contentious area, so removing it completely from the regulatory sphere strikes me as rather dangerous.

I will bring my comments to a halt, except to say to the noble Lord, Lord Stevenson, and to the Government that the noble Lord should not have to fight such a difficult battle to try to deal with such a potential abuse. I wonder whether the Minister might, on a very personal basis, take up the cudgels here, because Ministers sometimes are in a position to get the relevant action that has been sitting many pages back on the back burner. I remember the battles we had to get rid of payday lenders. In the end, the noble Lord, Lord Sassoon, working very closely with all parts of the House on a very personal basis, was able to bring in the legislation that brought an end to that kind of abuse of consumers. The Minister has a very good precedent in the noble Lord, Lord Sassoon, and his capacity to use financial services legislation to deal with an aberration that puts people at risk.

Financial Services and Markets Bill

Viscount Trenchard Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, it is a pleasure to follow my noble friend Lord Northbrook. I thank my noble friend Lady Penn for her impressive introduction of this Bill and declare my interest as set out in the register as a director of two investment companies. I welcome the Bill. I wish to place on record my strong objection to the imposition of a five-minute so-called advisory speaking time at Second Reading. I add my congratulations to my noble friends Lord Remnant, Lord Ashcombe and Lady Lawlor on their excellent maiden speeches.

I was a member of the Joint Committee on Financial Services and Markets, which reported in 1999 on the need for the Financial Services and Markets Act 2000. At the time, we did not appreciate how much of the responsibility for framing financial services regulation would be transferred to the European Commission, as Union competence steadily increased its reach. We were powerless to prevent the entry into force of AIFMD in 2013. We did not resist the adoption and eventual entry into force in 2018 of MiFID II, which requires fund managers and brokers to set separate charges for trade execution and research, and fund managers to pay for research themselves or agree a separate research contract under which they may recover their costs. These and other legacy EU regulations, such as PRIIPs and its requirement that companies produce consumer-friendly kids, have had the opposite effect on consumers from that which was expected.

A return to the FSMA 2000 model, balancing responsibilities between Parliament, government acting through the Treasury and the regulators, makes a great deal of sense. I was never sure that the decision following the financial crisis of 2008 to create the PRA as a second regulator, which was neither an independent regulator nor fully a department of the Bank of England, was the right one. The creation of the FCA, with its one strategic objective, that markets function well, and three operational objectives, which include a competition objective but one limited to promoting competition in the interest of consumers, has contributed to the emergence of a culture within the institution which is overcautious and generally perceived by the industry as anti-innovation. Participants in London’s insurance markets have explained to me that this is the principal reason why our share of the global insurance markets is stagnant at around 7%, whereas those of other jurisdictions such as Bermuda and Singapore are growing.

From the point of view of your Lordships’ House, Clause 36 of the Bill, governing engagement with parliamentary committees, is very unsatisfactory. It is very far from even-handed between your Lordships’ House and another place. I question whether the Treasury Committee, as it currently operates, can conduct the required level of oversight. Surely a Joint Committee of both Houses should be established for this purpose. We need a committee resourced well enough to replicate the activities of the ECON committee of the European Parliament.

I welcome the Government’s decision to act in accordance with a recommendation of the Listing Review, undertaken by my noble friend Lord Hill of Oareford, to create a competitiveness and growth objective. Clause 24(2) makes clear that this objective is secondary. However, as I mentioned, the FCA has one strategic objective and three operational objectives. Could my noble friend the Minister please inform the House whether the new competitiveness and growth objective is to be a secondary strategic objective or a secondary operational objective? Could she explain why the Government does not recognise that, if the FCA’s new objective is only secondary, it will not be effective in changing the FCA’s culture and behaviour to the extent necessary to achieve the Government’s ambition for the UK to be the world’s most innovative and competitive global financial centre?

The regulators are required to report on how well they are performing their new objectives, but Clause 26 suggests that the FCA sets its own homework and then marks it. Unlike the PRA, it is not required to undertake public consultation. Could my noble friend the Minister tell the House whether she thinks that the empowerment of the FCA to regulate Stock Exchange listings through the designated activities regime will make admissions more, or less, expensive and cumbersome than they have become over the past 14 years—during which, as my noble friend Lord Hill pointed out, the number of companies listed on the London Stock Exchange has declined by 40%?

I welcome the Bill and look forward to working with other noble Lords to make it a better one.

Queen’s Speech

Viscount Trenchard Excerpts

Thursday 4th June 2015 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, I join noble Lords in welcoming to this House and congratulating my noble friend Lord O’Neill of Gatley and the noble Lord, Lord King of Lothbury, on their excellent and interesting maiden speeches.

My noble friend Lord Horam said that the BRICs were made famous by my noble friend Lord O’Neill, although surely it was the other way around and my noble friend became famous for coining the acronym BRICs. The noble Baroness, Lady Liddell, asked him to invent a new acronym for productivity. I am not sure that is a good idea, because there are already too many acronyms, and in fact they are divisive. Acronyms are used more and more in public life and put off the majority of the population, who do not understand what they mean and feel that they appear to be ignorant if they ask. Rather than inventing new acronyms, I hope my noble friend the Minister will concentrate on the commitments that he made to enhancing productivity and to removing a lot of the strangling regulation that we have today.

While it is good for business and the economy that we have the first Conservative Government in 19 years, it is disconcerting for us on these Benches that there are so many fewer noble Lords that we may call our noble friends.

I welcome the introduction of the enterprise Bill, which is intended to cut red tape. This Bill should help to accelerate the encouraging increase in registrations of new companies, from some 480,000 in 2012 to more than 580,000 in 2014, a 20% increase in two years. It is also welcome that the Government have pledged to discourage EU bodies from imposing burdensome rules and have promised that any new regulations that come through from Brussels will be implemented as benignly as possible in the UK.

In order to succeed in a global market, businesses have a strong incentive to meet the standards required in their principal export markets. That in itself will encourage the harmonisation of standards applied across developed-world markets. Beyond that, I hope that the Government will insist in their negotiations with the EU that the principle of subsidiarity be given a great deal more weight than it appears to have been given in recent years.

My right honourable friend the Secretary of State for Business has said that the enterprise Bill will contain deregulatory measures to cut £10 billion of red tape. I ask the Minister, the noble Baroness, Lady Neville-Rolfe, how this figure is calculated. BIS has also announced that the Government’s ambitious target for cutting red tape will look beyond Whitehall and extend to independent regulators for the first time. I wonder whether that includes the European regulators.

I would like to mention the City, including the wider financial services industry, which also has a significant presence in Edinburgh and some other northern cities. I believe that it is time to stop punishing the City. It is arguably the jewel in our crown; it is certainly one of the most sparkling of them. It has come to be by far the most significant and successful financial centre in the European time zone and arguably in the world, not as a result of our membership of the EU, any other group or a politically created market but simply because of the City’s history, stability and highly respected and effective legal and accountancy regimes, the talents of its practitioners and the infrastructure and everything else that our great City of London has to offer.

The City has reacted well to the financial crisis and continues to learn from its mistakes. Several banks have had to pay extremely large fines as a result of LIBOR and foreign exchange-rate fixing. I consider that the balance of punishment has been tilted too much towards the banks and too little towards individuals who may have broken the law. If they have, it is they who should be punished, not the shareholders of the banks. Does the Minister agree?

Given the importance of the City to this nation’s prosperity and productivity, it is important continually to assess what kind of regulation will best protect the consumer against exploitation and at the same time enable our financial services companies to thrive in what is a global rather than a European market. In particular, given that banks now have to comply with greatly increased capital requirements, effective resolution regimes and strengthened deposit insurance arrangements, I would question whether the ring-fencing of retail banking will be necessary or appropriate. The time has come for us to look forward and consider how best we can maximise growth in the economy, in jobs and in tax revenues.

Ring-fenced retail banking would not have saved Northern Rock, and neither would RBS have been protected from the difficulties it encountered if ring-fencing were in force. Neither bank got into trouble because of its investment-banking activities, but the implementation of ring-fencing will be a significant burden for Barclays, HSBC and RBS, and if any one of these banks is considering whether to maintain its global headquarters in the UK, ring-fencing is certainly one of the factors supporting relocation. Other major countries have not introduced ring-fencing and have no intention of so doing.

I would also argue that the City should not be burdened with cumbersome and unnecessary regulation introduced by the European regulators EBA, ESMA and EIOPA, together with the ESRB. On its own, the UK would never have chosen to introduce much of the growing body of EU financial services and insurance regulation to which it is now subject.

As my noble friend the Minister has mentioned, the Government are committed to improving productivity and increasing living standards. That will not be achieved by an artificial rebalancing of the economy in favour of manufacturing. However, the more our financial services sector can thrive and prosper, the better will be the background and conditions necessary for a continued manufacturing revival. There is no statistical evidence that EU regulation has liberalised trade in financial services between the UK and the rest of the EU. Most of the UK’s financial services and insurance exports to the rest of the EU are wholesale in nature and not dependent on the UK’s EU membership. There are no obvious grounds for arguing that EU regulation enables the UK to manage the financial services and insurance sector better than it could do on its own. The European supervisory authorities should be the regulators for the eurozone, and the UK’s PRA and FCA should be restored to their deserved status as global-level regulators equivalent to the SEC of the United States and Japan’s FSA. I ask my noble friend to confirm that powers to regulate the City will be among those which the Government will ensure are returned to our own national regulators.

Like the noble Baroness, Lady Kramer, and other noble Lords, I do not understand the reason for the Government legislating to stop themselves from legislating to increase taxes. We can trust the Government to honour their commitment not to increase taxes, but they do not need to tie their own hands and restrict their ability to react prudently and promptly to any unforeseen economic disaster. I look forward to the remaining contributions, and especially to my noble friend the Minister’s winding-up speech.

Financial Services (Banking Reform) Bill

Viscount Trenchard Excerpts

Wednesday 23rd October 2013 Lords Chamber

[Lord Flight]

My Lords, as the noble Lord, Lord Eatwell, pointed out, this is crucially important territory. However, I am not certain that the amendment gives the right answer.

I recollect that when I was studying economics at Cambridge 40-something years ago, a capital base of 8% and a gearing ratio of 12.5% was viewed as the prudent formula for a bank. Things have changed a great deal since then. Who was it that allowed banking ratios to get to such ludicrously low levels in this country? It was the regulator. Although we have a change of regulator organisation, there are still, to some extent, the same people and I am not sure that I necessarily trust the regulator in its new name as being sound in overseeing such things.

Look what has happened, I repeat, in the past 10 or 15 years. I think it was the noble Lord, Lord Lawson, who made the point that risk-weighted asset formulae are somewhat discredited. Again I agree and, having had some recent experience of it, I have little confidence going forward.

I also note in terms of ratios permitted that the regulator for some extraordinary reason—at least until the recent present—had ridiculous differences between the capital ratios required for large, too-big-to-fail banks and smaller and new banks. The ratio for mortgage lending was something like 20 times as much for a small bank as for a large bank. So, again, how come the regulator allowed crackpot different capital ratio requirements to creep in in a way that was thoroughly anti-competitive?

I am not sure that the Treasury may not be the safer party to ultimately have the power to determine capital ratios. As has been pointed out, the amendment states:

“The direction above may specify the leverage ratio to be used”.

The direction is given by the Treasury and so the amendment ultimately gives the last-call power to the Treasury and not to the PRA.

So where are we? I do not think the issue is resolved. It certainly needs addressing.

[Viscount Trenchard (Con)]

My Lords, I agree with much of what my noble friend Lord Flight has said. I also agree with a great deal or all of what my noble friends Lord Blackwell and Lady Noakes have said. I was also impressed by the way in which the noble Lord, Lord Turnbull, stated that he believed that the straightforward, unweighted leverage ratios should operate in tandem with a risk-weighted ratio.

I noticed that noble Lords opposite smiled when my noble friend Lord Blackwell pointed out that if the absolute ratio bites first and becomes effectively a frontstop rather than a backstop, it will lead banks to concentrate more heavily on risky assets, on lending on assets which they think will give them higher returns. I am convinced that that is correct. It is therefore important that the absolute ratio should be a backstop rather than a frontstop.

I am confused by the difference in responsibility between the FPC and the PRA. The amendment suggests that the Treasury should enable the FPC of the Bank of England to determine what the leverage ratio should be. However, as noble Lords have pointed out, the FSA had already become more involved in interfering with and providing advice, exercising influence over banks’ lending policies and questioning their formula and the basis on which they applied certain leverage to certain categories of asset class.

I am not sure where the writ of the FPC stops and where that of the PRA starts. I know that they are both part of the Bank of England and this is confusing. I would welcome clarification from the Minister.

[Lord Brennan (Lab)]

My Lords, Mr Andrew Tyrie, the chairman of the Parliamentary Commission on Banking Standards, described leverage ratio as,

“the single most important tool to deliver a safer and more secure banking system”.

In their reply last July, the Government accepted this importance. Indeed at paragraph 5.50, they plainly stated that in the future the FPC should determine the ratio, provided that it was not allowed to fall below the international standards reflected in Basel III. However, at paragraph 5.51, that commitment having been repeated, it is then said that it is,

“subject to a review in 2017”.

The question therefore arises, if the Government are committed in principle to the FPC determining the ratio, what in this review in 2017 might affect that principle? Questions of amount or the approach to ratio in the light of Basel III go to the process rather than the principle of who determines the ratio. I presume that over the next four years, the Treasury will determine the leverage ratio and will place such requirements about it as it thinks fit on the banking industry.

At page 68 of the response, the Minister will recall that under the heading “leverage ratio”, it is stated that the Treasury is presently reviewing with the FPC the balance between backstop and frontstop considerations. The intention is to publish the results before the end of the year. Given the six weeks or so of parliamentary time that we have left until Christmas and assuming that Report is, for example, in December, will the Minister undertake to ensure that that review is published before Report? It will affect the debate, should it recur on Report, on the question of who makes the decision. The key point, however, is: why 2017, if the principle is accepted now?

--- Later in debate ---

[Viscount Trenchard]

My Lords, I am not sure that I agree entirely with what my noble friend Lord Phillips of Sudbury said about what happened 25 years ago in that the senior management of investment banks—merchant banks, as we called them then—did not enjoy variable remuneration. I worked for Kleinwort Benson for 23 years, and then for Fleming for four years, and more recently for the Japanese bank Mizuho for five years. To me, the culture of Kleinwort Benson was absolutely excellent, honourable and upright, even though it was doing investment banking.

There was a considerable cultural difference between the banking department and the bond trading department, but that reflected the environments in which the various people were carrying out their activities. We should also remember that even the asset management business was not separated at all at that time, and there were obviously enormous conflicts between underwriting securities and buying those same securities for clients’ managed portfolios. Those conflicts were dealt with internally, because of the overall culture, which was excellent. That was one of the reasons why the City of London earned respect around the world, and other places have attempted to model their own financial centres on what they perceived to have been London’s strengths.

Notwithstanding the disasters that have befallen us, quite a lot of that regard and respect still obtains today around the world. I worry that we are going too far down the road of state interference in remuneration, which is properly the responsibility of management, who are accountable to shareholders. In a command economy that may be the normal thing to do, but I do not believe that if we go too far down that road it will lead to the establishment of the kind of culture that existed in the City of London for decades. That is tarnished and damaged—we all agree—but I believe that it should be restored.

I do not believe that the case is made that the state should interfere too much in the salaries of bankers, any more than it does in those of the senior management of utility companies, for example. I fear that if the state interferes too much in this area it will definitely lead to the best bankers in the generation now coming up going to work in other centres. Many noble Lords may say, “Good riddance. If they are so greedy, we don’t want them here”, but I do not believe that that is so. We must have a regime that can attract the very best bankers—and I mean the very best in terms of the most capable, but also those with excellent moral standards because that is absolutely necessary.

Over the past few years, the interference in setting the variable remuneration of controlled persons or senior managers in banks has led to a massive increase in fixed salaries in all banks, including small banks and Japanese banks which do not pay multimillion pound bonuses. The senior directors in Tokyo do not receive the kind of figures that shock ordinary hardworking people in this country. That is understandable because they do not accept that a banker is worth thousands of times more than a comparable engineer or anyone else. Inflation in salaries has occurred over the past three or four years because of the limited interference in variable remuneration that has already happened, and I am certain that if we go as far as this amendment would take us, that will lead to a great deal more inflation in the fixed salary element.

That is my advice, based on my experience of being a banker in a merchant bank. Fleming was an investment house that became a merchant bank, but it was not one of the original accepting houses. The Bank of England had an influence on the accepting houses, but they were rightly highly regarded. Of course there were slip-ups from time to time, and there always will be, but if we set up a framework that creates an environment where everything is tightly prescribed by the state, that will not encourage innovation or lead to the development of the right kind of responsible culture.

[Lord Lawson of Blaby]

My Lords, I strongly support the amendment moved by the noble Lord, Lord Turnbull. I know that my noble friend Lord Higgins wants to give us the benefit of his wisdom, but perhaps I may intervene now because I would like to explain to the noble Viscount, Lord Trenchard, why he has got completely the wrong end of the stick in terms of what this amendment is about. I must say that I was puzzled when he said that one of the reasons we got into difficulties with banking was because of interference with bankers’ remuneration. There has been no interference with bankers’ remuneration at all. It is true that there is a proposal from the European Union to cap bonuses, but that is not something we have in this country and the commission was explicit in saying that we do not want to see it. This amendment has nothing to do with that.

This amendment is about the structure of remuneration, not the quantum. We are not making a statement about the quantum, but about the structure. I shall explain why that is so. I am sure that the right reverend Prelate the Bishop of Birmingham will accept that nothing in this world is without flaws. I yield to no one in my conviction that, for all its flaws, the market system is the best system for conducting an economy and securing economic prosperity for the benefit of the people of a country. One of the essential elements of the market system, without which it cannot work, is the fear of failure. However innovative, adventurous and enterprising industrialists may be, they always know that if they get it wrong, they will fail. The fear of failure is vital because it is an essential market discipline. The problem in banking is that when you have banks that are too big to fail, that fundamental discipline does not work. That is the difficulty. If it is the case, as it was in the management of the banks up to the crisis, of “Let’s gamble, because heads I win, and tails the taxpayer loses”, you are encouraging gambling. You are bound to see more recklessness, which is exactly the reverse of what banks should be doing.

The noble Viscount referred to the good old days of the merchant banks. I knew them very well. While I did not have the privilege of working in a merchant bank, for a time I wrote the Lex column in the Financial Times, so I got to know them. One of the reasons for their great success was that although they were extremely innovative and they were staffed by very clever people, on the whole they were partnerships, and the partners had their own fortunes at stake. That was the vitally important discipline, but that is not the case with the banks. Incidentally, however, it is the case for hedge funds. I can recall, as will many noble Lords, that some years back there were a few people who thought there were dangers in the City and that some things might go wrong. What did they point to? They pointed to the so-called shadow banking system—the hedge funds. They thought that the big banks were fine, but that those dodgy hedge funds might cause problems. In fact, there were very few problems with them. Why was that? First, the hedge funds knew that they were not too big to fail. They knew that they would not be bailed out by the taxpayer. Secondly, on the whole, the proprietors’ own money was invested in the hedge fund.

This remuneration code set out in the amendment is not the whole solution to this problem. We have to make it possible for banks to fail, and that is part of what the Government have been doing with the resolution procedures and the bail-ins; we have read page after page on that. We have to enable banks to fail because that is the only way we will get the right kind of system; not that we want them to fail, but it has to be possible for them to do so. But unfortunately, at the present time, I do not think that they will be allowed to fail. They believe that they will always be bailed out by the taxpayer, so we have to buttress this in another way.

One of the most important aims of the amendment is to replicate after a fashion the discipline of the partnership. It provides that the PRA will be able to insist that bonuses—saying nothing about how much they are—would have to be deferred for a number of years in order to ensure that top management is more careful. It will know that it cannot grab the all bonus money in one year in the knowledge that the institution will be bailed out later on. Management will have to think a bit longer term. In a sense, it is like top managers’ own capital being invested in the company because their bonuses will be deferred for a number of years. The amendment provides a remuneration code to act as a sort of buttress. On its own it will not do much, but it could serve as an important buttress to other measures that the Government are introducing—there are a few more that I would like to see introduced. That will give us a banking system which is not a casino.

[Viscount Trenchard]

My Lords, I have listened carefully to my noble friend Lord Lawson and I apologise if, as he said, I got the wrong end of the stick. I would like to make just two points. With regard to my noble friend’s assertion that there has been no interference in variable remuneration by the state until now, unfortunately I believe that that is not correct. I have served on the executive committee of a bank since 2009 and the regulator has definitely interfered with the variable remuneration in terms of its ratio to fixed remuneration. Over the past three years, that has led the firm to increase fixed salaries considerably, and that has been going on in many banks all over the City. I am just saying that that has already happened and that the attempt to apply restrictions on the proportion of variable to fixed remuneration has led to inflation in fixed salaries.

The second point is that Kleinwort Benson was a listed company when I joined it and that the other merchant banks were mostly companies by that stage. I agree entirely with my noble friend that the partnership ethos was still there, but the listed nature of the businesses enabled even relatively junior people to be awarded modest amounts of shares as part of their variable remuneration from an early stage.

Financial Services (Banking Reform) Bill

Viscount Trenchard Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Turnbull]

My Lords, an important finding of the commission was that the existing approved persons regime was flawed. After a debacle wiping billions of pounds off the value of shareholdings, requiring the state to inject billions of pounds into the industry and take huge financial exposures, and after several serious lapses of conduct, according to my researches one person has been fined and another person has negotiated an agreement not to practise.

Our conclusion was that the APR operates mostly as an initial gateway to taking up a post, rather than serving as a system through which regulators can ensure the continuing exercise of responsibility at the most senior levels within banks. A major cause of this flaw was that responsibilities were ill defined and were not joined up, so that those at the top could claim they “didn’t know” or, “It wasn’t me”.

We proposed a two-tier system: a senior persons regime, now called a senior managers regime, covering a meaningful chain of accountabilities, which we wanted to apply to all banks and holding companies operating in the UK; and, below that, a licensing regime, where no prior approval from the regulator would be required to employ anyone but banks would have to take responsibility for ensuring that those they did employ were properly qualified and trained and that they observed a code of conduct. This would apply to those who could seriously damage the bank or the bank’s reputation or harm a customer’s reputation.

The commission welcomes many of the Government’s proposals: defining the functions of senior management; requiring senior managers to have a statement of responsibilities; extending the limitation period for regulators to take enforcement action from three years to six; recording information on a person’s regulatory history so that a new employer can find out important details about whom they are recruiting; and the reversal of the burden of proof on whether a person is fit and proper.

However, serious issues are left unresolved. Amendment 55 provides a definition of a bank to which the regime applies. I found it impossible to discover what the definition means. Does it meet the commission’s objective of covering all banks and holding companies operating in the UK? Would the Minister clarify what he means by “bank”? Could it be a ring-fenced bank, a non-ring-fenced entity conducting investment activities within a group, a whole group or a freestanding investment bank? In our view, the new senior managers regime should apply to all such entities. It would make a mockery of the scheme if, as I suspect may be the case, it applied only to banks taking deposits from the general public—that is, ring-fenced banks. It would be completely unacceptable if the regime did not apply, for example, to the senior managers overseeing the LIBOR traders, to those overseeing rogue traders such as the “London Whale”, to those overseeing the marketing of highly dubious packages of sliced and diced mortgages or to those engaged in the mis-selling of interest rate swaps. I very much hope that the Minister will be able to give us an answer today or address this between now and Report.

There is no mention of the licensing regime, which the commission recommended. The Government said that they would ensure that regulators had the ability to take regulatory action against persons who were not senior persons—senior managers—or who were not subject to prior regulatory approval. There is no mention of the licensing regime in the government amendment. They have come up with something rather different in Amendment 53 on the rules of conduct. It states:

“If it appears … necessary or expedient for … advancing one or more of its operational objectives, the FCA may make rules about the conduct of the following persons”,

and those persons could be any employee of the bank.

I question whether that is the right answer. It is “may” rather than “must”, but I should have thought it essential that the FCA made rules. Is it right that it should apply to all employees from purely backroom or administrative staff? In some ways, the government scheme goes wider but it is possibly too permissive.

The final omission to highlight is that we propose that as well as an initial statement of responsibilities for each manager, there should be a handover note when people change jobs. We think that that is crucial because without it the chain of accountability breaks down, and when someone changes jobs we are back to, “I didn’t know”, or, “It wasn’t me”.

[Viscount Trenchard (Con)]

I intervene to ask the Minister to comment on some concerns that I have about this new “approved persons” or senior managers’ regime. First, I am worried that it will place British banks at a considerable disadvantage when they try to recruit the most talented managers available, not just from the United Kingdom but from around the world. Everybody agrees that bank management failed, so it is clear that the supervision of senior mangers needs to be enhanced and improved. For example, someone may be offered a job to work in Hong Kong, where he would probably pay less tax anyway, and he is unlikely to run the risk of being individually liable or culpable in that jurisdiction. I am not sure which other jurisdictions intend to introduce some kind of senior managers’ regime such as this.

My second concern is that it seems to me that it is up to the manager to prove that he was not negligent in the exercise of his responsibilities. It is wrong that a senior manager should be deemed to be guilty unless he can prove his innocence. My third concern is that to increase the individual responsibilities of senior managers will have the unintended consequence of diminishing the responsibility of the board of directors as a whole, or the executive committee, risk committee, or whichever committee it may be. I have sat on an executive committee of a bank and often the business being discussed was not my responsibility, but I felt that I should understand what was going on and what the discussion was about because I was collectively responsible as a member of that committee. What worries me is that if it is very clear that the individual manager is going to be responsible, that effectively diminishes the responsibilities of the other members of the committee. It also diminishes the ability of the chief executive to change the responsibilities of his senior team based on his judgment, because it would be too complicated as each department or division would effectively be under the supervision of people outside the chief executive’s control. Can the Minister comment on these points as well?