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?

Financial Services (Banking Reform) Bill

Viscount Trenchard Excerpts

Tuesday 8th October 2013 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, with the leave of the Committee, I, too, would like to participate in these proceedings although, like my noble friend, I was prevented from participating in the Second Reading debate. I strongly support the amendment put forward by my noble friend for the reasons that he has explained very well. I do not think that I can improve on his excellent explanation, but your Lordships should consider that governance would not be improved if there is a situation where the holding company has a completely different membership from the boards of the ring-fenced subsidiaries, and that applies most strongly in the case where the excluded activities comprise only a small part of the activities of the group as a whole. But even in the case where a relatively greater amount of excluded activities are carried out within the group, if the board of the holding company with responsibility to shareholders comprises completely different people from the board of the principal operating subsidiaries, does that provide for effective governance? I therefore would like to hear from the Minister something more about what “to a specified extent” means in new Section 142H(5)(d).

[The Commercial Secretary to the Treasury (Lord Deighton) (Con)]

My Lords, I will consider both Amendments 1 and 2, and I will talk first about Amendment 1, which has been proposed by my noble friend Lord Blackwell. I have much sympathy with the intention behind this amendment and I hope that I can provide some of the comfort that my noble friend seeks. Independent governance is of course key to the integrity of the ring fence to ensure that ring-fenced banks do not simply operate in the interests of their group’s investment bank, in this example, or indeed other parts of the bank, but it is important that any governance requirements are proportionate to the threat to the ring-fence. Where a ring-fenced bank makes up the great majority of a group’s business and the investment bank is therefore small, so the risk of the ring-fenced bank being dominated by the interests of the investment bank is also small.

The Independent Commission on Banking recommended that where the vast majority of a group’s assets were in the ring-fenced bank, requirements for independent governance should be relaxed. The Government accepted that recommendation, and in our June 2012 White Paper we supported,

“flexibility in governance arrangements where a ring-fenced bank represents the overwhelming majority of a group’s business”.

Under the Bill, the precise details of ring-fenced bank governance arrangements, along with other ring-fencing rules, are for the regulator to determine. The Bill sets the objectives that rules must achieve; the regulator then decides what exact structures or restrictions are needed to achieve those objectives. This is appropriate because of the highly technical nature of the issue, and in order to allow requirements to keep pace with developments in a fast-moving market. Rule-making will, of course, require the regulator to exercise its judgment, and proportionality will be central to how it does so. In particular, the regulator will be obliged to consider the costs and benefits of any rules it proposes to make, including ring-fencing rules.

In the case of ring-fencing and governance rules, the Bill also specifically gives the regulator flexibility to consider the proportionality of different requirements. The Bill requires the regulator to ensure “as far as reasonably practicable” that a ring-fenced bank is able to take decisions independently of the rest of its group.

The formulation “as far as reasonably practicable” specifically anticipates circumstances in which certain governance requirements might be impractical or have costs that are disproportionate to their benefits. The case where a ring-fenced bank constitutes the overwhelming majority of a group’s business may be one such circumstance. I hope the noble Lord can therefore feel reassured that the intention of his amendment is already reflected in the Bill. I therefore call upon the noble Lord to withdraw his amendment.

Government Amendment 2 corrects a minor and technical point in connection with new Section 142H, which imposes an obligation on the appropriate regulator to make certain rules requiring that a ring-fenced bank be independent of other members of its group. The clause as currently drafted defines the appropriate regulator only in relation to ring-fenced bodies. However, as new Section 142H also imposes an obligation on the appropriate regulator to make rules applying to authorised persons who are members of a ring-fenced body’s group, but are not themselves ring-fenced bodies, the appropriate regulator needs to be defined in relation to all authorised persons, not just ring-fenced bodies. This is corrected by this amendment, and I commend it to the House.

Queen’s Speech

Viscount Trenchard Excerpts

Monday 13th May 2013 Lords Chamber

[Viscount Trenchard]

My Lords, it is always a privilege and a pleasure to speak in the debate on the gracious Speech. I, too, pay tribute to the noble Baroness, Lady Lane-Fox of Soho, on her excellent maiden speech. Given how important IT is to all of us, it is very good to have her in your Lordships’ House and I look forward to many contributions from her. Like many noble Lords, I congratulate my noble friend Lord Lang on the entertaining and skilfully constructed speech he made in proposing the Motion for an humble Address.

In preparing for this debate today I was struck by the fact that much of the work that your Lordships’ House will undertake in this Session on business, the economy, local government and transport was not mentioned in the gracious Speech. The carrying over of Bills which have substantially completed their progress through another place has resulted in a growing disconnect between the gracious Speech and the agenda set for this House over the coming months.

On transport, the High Speed 2 Bills were announced. However, does it make sense to decide to go ahead with HS2 before deciding on the location of London’s main hub airport? The airport question should surely be determined first. After that it will be clear what enhancements to our railway network will be needed. I am sceptical about the value of shaving a few minutes off the journey from London to Manchester. Certainly I do not believe the figures produced in an attempt to monetise the value of HS2 in terms of enhancement to GDP.

If Heathrow is to remain our principal airport hub and expansion is to take place there, surely HS2 should be routed via Heathrow. If, as I believe should be urgently considered, a new airport in the Thames estuary were to be built, then there might well be a case for a new high-speed railway to be built as a part of the new airport’s links with Birmingham, Manchester and the north.

Among the measures announced in the gracious Speech was the deregulation Bill. We have only just seen Royal Assent given to the Enterprise and Regulatory Reform Act which paved the way for the merger of the Office of Fair Trading and the Competition Commission and some assorted minor tinkering. I fear that the new deregulation Bill, which is not yet published, will bring us more of the same. The Government’s website informs us that the Bill forms part of their agenda to reduce the burden of excessive or unnecessary regulation where primary legislation is required. I ask the Minister to explain exactly what that means. What about reducing the burden of excessive or unnecessary regulation where primary legislation is not required?

The Institute of Directors has commented that the gracious Speech shows a “poverty of ambition” about reducing the regulation of businesses. The Government’s Fifth statement of new regulation states that:

“A substantial proportion of the burden of red tape and bureaucracy emanates from Europe. The Government is working with our allies in Europe to encourage the EU institutions to reduce the EU regulatory burden”.

I fear that the Government’s encouragement of their allies will not achieve a great deal. European regulations in areas where we have lost our national competencies bind directly, without parliamentary ratification, and the transposition of European directives into British law continues to produce a vast volume of cumbersome red tape. I fear that it will be largely a waste of time to debate the deregulation Bill, which will be of such limited effect against the massive tide of new regulation engulfing us.

It is not fashionable to defend our banks and financial institutions, which continue, six years on from the financial crisis, to be bullied and abused by Governments and politicians not only here but in many other countries. Although not mentioned in the gracious Speech, soon the Financial Services (Banking Reform) Bill will come here from another place. Your Lordships’ House will have a duty to ensure that this Bill does not negatively affect the prosperity of our financial services sector and the competitiveness of our financial markets compared with their global competitors. British and foreign banks alike are grappling with the burdens of the new regulatory structure; around 2,000 institutions will be regulated both by the FCA and the PRA. The fastest growing departments in many City institutions are compliance and IT—all power to the noble Baroness—rather than the business departments that promote lending to SMEs. No wonder the executive committees of City institutions spend 90% of their time discussing ICAAP and ILAA rather than talking about how to do more to support and lend to new and growing businesses.

Unlike my noble friend Lord Lawson, with whom I agree on most things, I am not really convinced that the strict ring-fencing of retail banks is either necessary or desirable. I do not think that if ring-fencing had been in place, it would have made any difference to any of the banks which failed. Besides, banks now enjoy greatly improved capital and liquidity ratios, which I believe is more important. However, ring-fencing is going to happen. The Government want it, the banks have accepted it, and your Lordships’ House should concentrate on implementing it with as little collateral damage as possible.

As noble Lords are well aware, our new regulatory system is being introduced at the same time that the three equivalent bodies at the European level have been reorganised as fully fledged regulators. I have heard from some continental bankers that they are surprised that we have undertaken such a far-reaching reform of our national regulatory system because, “Everyone knows that it is intended that eventually the European regulators will do the job for the whole of the EU”. The soaring costs and the continuing uncertainty about the regulation of our financial services markets have undoubtedly already lost us many jobs and business operations to other centres.

I do not know whether it will be possible to repatriate significant powers such as financial regulation, but if the European Union is to consist principally of one very large country—the eurozone, one medium-sized country—the United Kingdom, and perhaps one or two small countries, then I think that it will be neither comfortable nor advantageous for us to remain a member, and I congratulate my noble friend Lord Lawson on his decision to articulate his view at this time. As my noble friend Lord Forsyth so eloquently argued, our future lies in developing our global trading relationships with the Commonwealth and the growing economies of Asia, South America and elsewhere. Of course we would need to negotiate a free trade agreement with the EU, but if South Korea can have one, why can we not have the same? Why would the EU not agree? After all, we buy more from the EU than it does from us.

I have spent a third of my working life resident in Japan, which is at last enjoying its day in the sun after a very long economic winter. I was naturally delighted that the Prime Minister and the former Japanese Prime Minister Mr Noda signed two important collaboration agreements in April last year: one on military equipment procurement and one on civil nuclear power. Hitachi’s acquisition of Horizon, rescuing our new nuclear power industry, is an example of the second. I believe that our excellent trading and investment relationship with Japan can make an increasing contribution to our growth and urge the Government to include Japanese alongside Mandarin Chinese as one of the languages that may be offered in primary school at key stage 2. Given the deep economic ties with Japan, and the fact that the Chinese and Japanese economies are nearly the same size, it is strange and upsetting to our Japanese friends that Japanese is excluded from the list.

The Government deserve congratulations for sticking to their pledge progressively to reduce corporation tax. By April 2015, we should enjoy, at 20%, the joint lowest rate in the G20. That should help the Government’s first priority: to strengthen Britain’s economic competitiveness. Although I keenly support the Government’s economic policy, I would ask my noble friend to explain what the Treasury meant by its statement following the gracious Speech that there would be a crackdown on tax avoidance and evasion, with a £4.6 billion package, including a new information exchange agreement between the Isle of Man, Jersey and Guernsey. Can my noble friend confirm that, in spite of the Treasury’s statement, the Government still distinguish between tax avoidance and tax evasion? Can she explain whether the UK is also a party to the information exchange agreement between the three territories? What is meant by a £4.6 billion package: will it yield £4.6 billion and, if so, over what period, or will it cost £4.6 billion to implement? The language is not clear.

In common with some other noble Lords, I confess that I, too, did not really feel inspired by the gracious Speech. I regret that it felt somewhat lacking in enthusiasm and vision. Nevertheless, there are some sensible measures, already referred to by other noble Lords, such as the Local Audit and Accountability Bill, which abolishes the Audit Commission and outsources and delegates its powers to local communities. The National Insurance Contributions Bill will also, in a modest way, encourage small businesses to take on more employees. I look forward to hearing the rest of the debate and the Minister’s reply.

Financial Services Bill

Viscount Trenchard Excerpts

Wednesday 28th November 2012 Lords Chamber

[Lord Flight]

My Lords, I think that there is broad agreement across the House that an ingredient part of a more stable banking system is that we should have healthy competition and, indeed, that a number of the problems that have developed over the past few years have been the result of a banking system that was not competitive enough, that was described as oligopolistic or cartelised. One important issue in terms of banking competition is the ease with which individuals can move their bank accounts.

I moved an amendment in Committee that largely covered all the practical things about transferring direct debits and standing orders. As many will be aware, the Payments Council has spent a lot of money on sorting that out and next September will implement its proposals to address the mechanistic aspects of changing a bank account.

My amendment in Committee raised the possibility of the Bill being used to enforce that. It is being done on a voluntary basis, and I am aware that most banks have signed up to the Payments Council arrangements. The one aspect that is not covered is the grandfathering of anti-money laundering information. I declare an interest as a senior non-executive director of Metrobank. Metrobank has pioneered removing a lot of the unnecessary—indeed, uncompetitive—measures that banks have typically used, such as requiring you to have your passport signed by a lawyer and to produce an original bill. Metrobank is able to get all the information it needs from your driving licence, so it can open an account pretty quickly. However, that cannot cover all circumstances, and as any existing bank has to have done all the necessary “know your customer” and anti-money laundering checking, it seems only sensible if, when an individual moves an account, the existing bank is obliged to pass on—to grandfather, to hand over—that anti-money laundering information to make it easier for individuals to move their accounts. Amendment 116B provides for banks to do that without charge.

I would obviously be lucky to get the Government’s agreement to include that in the Bill, but in thinking how it might be dealt with practically, this is an issue where the FCA, if not the PRA, could reasonably direct the banking system. One way or other, anti-money laundering is being used as a deliberate barrier to competition, a deliberate discouragement to people to move from one bank to another if they are unhappy with their existing bank’s service. That needs addressing and I hope that the Minister may have some clever idea as to how the point can be grasped.

[Viscount Trenchard]

My Lords, I support the amendment moved by my noble friend Lord Flight. Since the disappearance of the traditional bank manager from the high street, customers have increased difficulty in communicating with their banks at all, let alone to request a transfer to another bank.

What particularly irks me is that when you seek to engage with the successor to a bank manager by telephone—or when you respond to a text message requiring you to telephone the bank—you first have to go through a long process of answering questions put to you by a machine to establish your identity. If you successfully pass such questions, you may eventually be able to speak to a human being, who will then proceed to put you through an identical process of security checking. I wonder why you cannot be put straight through to a human being, rather than wasting time on your telephone, usually on an 0845 number or something like that, answering questions put to you by a computer, because it does not make any difference. When you speak to the person, the person requires you to do the security again. It is then very often the wrong person and you are transferred to another department and you have to go through the process again, probably in duplicate, first with a computer and then with another human being. Therefore, you have to allow at least 30 minutes if you are going to attempt to engage with a bank to do something that ought to take five minutes.

I welcome my noble friend’s amendment. It should be made much easier to transfer your bank account to another bank. For a long time the mobile telephone companies resisted a similar facility to change supplier; I understand that it is now much easier to change from one company to another. I see no reason why it should not be so in the case of banks.

However, in order to permit the customer to do this, banks should be required to provide forms for this purpose on request—and the request should be able to be given in writing or orally—making clear what information is needed. Otherwise, people writing in may not give the correct address or branch of the bank, and the banks will have reason not to act on the request. So the forms should be standardised and make clear what information should be given.

At the same time, the individual should be required to grant permission to bank A that it may release on behalf of the customer what my noble friend calls the anti-money laundering information—the material that it holds in that connection—because otherwise bank A will surely be prevented from releasing such information to a third party under data protection legislation. It would be necessary to agree a prescribed time limit for the transfer of such information, because in the case of somebody who has banked with a certain bank for 40 or 50 years, material that bank may hold dating many years back may be irrelevant to bank B. Does my noble friend have any comment on that?

[Baroness Hayter of Kentish Town]

My Lords, my noble friends Lord Mitchell, Lord Peston, Lord Barnett and Lord Davies of Oldham have all had the opportunity to thank the Minister today for hearing their arguments and meeting them. Perhaps it is now time for the Minister to do the same for one of his own side, and accept these arguments from his noble friend Lord Flight. The noble Lord, Lord Flight, is right on this: consumers will only be able to drive competition if they can swiftly, easily and cheaply change bank accounts. Without that, there really will be no way to drive up standards.

It was interesting to hear the noble Viscount, Lord Trenchard, talk about phone calls and automatic voice recognition. It reminds me of a wonderful publication produced by the National Consumer Council called The Stupid Company. This asked a whole lot of consumers, not just in financial services, “What are the things you most hate about companies?” In the top three was automatic voice recognition. It was really interesting that when that was played back to companies, they continued to use it although they knew that it was the thing their consumers most hated. Banks are like that. Until people can change banks easily, I fear that they will continue to do things that none of us likes. I hope very much, therefore, that the Minister can send Lord Flight home happy this evening by having accepted his amendment.

--- Later in debate ---

[Lord Flight]

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

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

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

[Viscount Trenchard]

I am sorry, I did not explain my question clearly. It was how old the information should be that must be transferred—10, 20, 30 years or what?

[Lord Flight]

The answer is that it is the current information that the existing bank has which satisfies its “know your customer” credentials. Maybe there could be a time period of two years or something, but it is the current information that is relevant.

On the basis of the Minister’s reply I am happy to withdraw the amendment, but I would like to think that somehow, through the banking committee, the FSA and the work that the Treasury is doing, a sort of code of practice among banks could be accepted and evolved. Just as the mechanistic aspects of moving bank accounts are being signed up to on a voluntary basis by the banks at the initiation of the Payments Council, I hope that practice in this area to go along with it might be brought into a code of conduct by banks. I beg leave to withdraw the amendment.

Financial Services Bill

Viscount Trenchard Excerpts

Monday 26th November 2012 Lords Chamber

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

My Lords, new Part 12A of FiSMA, as inserted by Clause 26, extends and strengthens the regulatory framework by giving the regulators powers to act in relation to a parent entity, which is itself not regulated, but controls and exerts influence over a regulated entity. As we have heard, Amendments 90 and 91 seek to make significant changes to the scope of the powers over parent undertakings. We have not heard new arguments this afternoon, and regret that I probably will not advance any significantly new ones either—as is often the case. However, let me go through the argument as clearly as I can.

The Government are extending and strengthening the regulatory framework, so it is important that these new powers, which are untried and untested in the UK, have safeguards in place to ensure that they are used in a targeted and proportionate manner. I stress the new powers; they are not powers that previous Governments have sought to put in place, so we will put an important additional series of safeguards in place. However, their untried and untested nature is principally why the Government have proposed limiting the power to financial institutions of a kind prescribed by the Treasury in order to keep it within reasonable bounds.

As has already been identified today and on other occasions, if your main business is owning or managing authorised persons, you are caught, but if your main business is making or selling bread, then you are not. That is what the Government intend at this stage. We do not wish, at this stage, to give the financial services regulators powers of direction in relation to parent undertakings whose main business is not related to financial services. However, the Government are very much alive to the concerns raised by the noble Lord, Lord Whitty, which is why we propose to take a power to remove the limitation to financial institutions. We accept that it may be appropriate to widen the scope of Part 12A powers to catch a wider range of parent undertakings but the Government remain unconvinced that now is the appropriate time for these new powers to apply to parent undertakings which are not themselves financial institutions. It is a developing area of financial services industry practice. We need to watch it closely and the noble Lord, Lord Whitty, is right to remind us of that. The provision future-proofs the powers and ensures that the Treasury has the flexibility to respond if circumstances change and firm structures evolve, such that parent undertakings are no longer captured within the scope of the power.

I know that in both Houses there has been interest in strengthening the application of the powers over unregulated parent undertakings. Government Amendments 91A to 91E seek therefore to improve the usability of the powers. Amendments 91A, 91B and 91C lower the trigger for use of the power against parent undertakings and make the power more usable. Amendments 91A and 91B clarify that the regulators can give a direction if it is considered desirable in order to advance the FCA’s operational objectives or any of the PRA’s objectives, or if the giving of the direction is desirable for the purpose of the effective consolidated supervision of the group. Amendment 91C is a related consequential amendment.

As a result of these amendments, the FCA and PRA, would no longer have to demonstrate that,

“the acts or omissions of the … parent … are having or may have a material adverse effect on the regulation … of one or more … authorised persons … or the effectiveness of consolidated supervision”.

After reviewing the powers in light of statements made in this House about the imperative need for the regulators to have effective powers over the parent undertakings of authorised persons and consulting with the authorities, the Government consider the previous threshold was set too high, which would have made the power difficult to use in practice. The high threshold may also have hindered and sometimes prevented the regulators properly supervising complex financial groups.

These amendments will mean that the powers can be used effectively by the regulators to address difficulties within the group as a whole. That will better fulfil the Government’s objective of ensuring that the regulators have the tools they need to conduct suitably robust supervision of unregulated holding companies.

Amendment 91E would make similar changes to the power of direction that the Bank of England has in relation to the parent undertaking of a recognised clearing house. Amendment 91D would remove the requirement that a direction must specify the period during which each requirement remains in force. This ensures that, in appropriate cases, the regulator can give a direction of an indefinite duration. It better aligns the new Part 12A powers with the provisions in new Sections 55L and 55M to be inserted into FiSMA, which provide for the imposition of requirements on authorised persons by the FCA and PRA of an indefinite duration.

While we think that directions in relation to unregulated parent undertakings should generally be of limited duration, we can conceive of cases—for example, in connection with structural reform of the kind envisaged by the Banking Reform Bill—where it would be appropriate for a direction to have an indefinite duration. Amendment 91D therefore provides the regulator with the flexibility to give a direction of an indefinite duration.

[Viscount Trenchard]

Will my noble friend explain more about government Amendment 91A? I do not understand why the reference to the FCA is different from that to the PRA. As regards the FCA, the amendment refers to,

“one or more of its operational objectives”.

I am not quite sure which of its objectives is non-operational. As regards the PRA, the amendment refers to, “any of its objectives”. I think that “any” means one only. Why is the drafting different between the two?

[Lord Sassoon]

I do not think that there is any material significance, other than that it tracks the wording of the different form of objectives which relate to the two bodies. It now escapes me because it is a few hours since we discussed the form of the objectives but I do not believe that there is any substantive point that relates to what we are doing here to change the power over holding companies. If it is all right with my noble friend, I will write to him to confirm why this links into the slight different wording used.

Financial Services Bill

Viscount Trenchard Excerpts

Monday 26th November 2012 Lords Chamber

[Baroness Hayter of Kentish Town]

My Lords, in moving this amendment standing in my name and that of my noble friend Lord Eatwell, I can hardly do better than quote directly from the Association of British Insurers. The association supports the new rule for the financial services regulator to promote competition in financial services because it believes that properly functioning, competitive markets can deliver good outcomes for consumers. However, the ABI urges further consideration of the practical implications of the FCA’s enhanced role in ensuring such competition. Given that the OFT, and later the CMA, will retain general competition law powers and the right to conduct market studies in financial services, there is, says the ABI, a risk of duplication and/or a lack of co-ordination between the two bodies. Uncertainty about the expected role of the two organisations is unlikely to lead to good regulation either for the industry or consumers. The ABI therefore thinks that the FCA and the OFT should be subject to a statutory duty to co-operate and to produce a memorandum of understanding. While the FSA and the OFT have voluntarily published an MoU, this will become a “must have” when the FCA receives its enhanced competition remit. The MoU should be a statutory requirement and should make clear that the FCA would normally take the lead on competition matters in financial services, with the OFT undertaking market studies only in exceptional circumstances. While the OFT and the Competition Commission and, later, the CMA would lead on enforcing the Competition Act—for example, over cartels—it would be the FCA, as the specialist regulator, that would be best placed to conduct analysis of financial services markets and pursue any necessary regulatory changes. It is for these reasons that the ABI has supported Amendment 86A.

Those in this House who are also following the Enterprise and Regulatory Reform Bill, which will bring about the merger of the OFT and the Competition Commission into the CMA, will have been struck by the comments in government briefings on financial services. The BIS papers on the ERR Bill stress the FCA’s stronger role in promoting competition compared to the FSA at the moment. It notes that both the CMA—the Competition Markets Authority—and the FCA will regulate financial services, with the FCA being the lead regulator and the roles of the two bodies therefore complementary. BIS goes on to state that the FCA will have a mechanism to make sure that the CMA’s powers and expertise are brought to bear in financial services. The CMA will have a mechanism to review competition in financial services and to recommend that the FCA takes action. Indeed, the FCA will have a power of referral to the OFT which will not prevent the FCA taking the lead in addressing competition issues where it is better placed to do so. I hope that noble Lords are all following this.

The FCA will also be required to respond to any recommendation given by the competition authorities. Furthermore, under the Enterprise and Regulatory Reform Bill, the CMA will be able to appoint a third party to monitor the implementation and compliance of remedies. Within financial services, we assume that the FCA could be one such third party where this is deemed appropriate by it and the CMA.

As must be clear from the briefings from BIS, which I assume noble Lords from HMT have also read, there are major competition issues within the financial sector, yet the ERR Bill regrettably makes no mention of the uncompetitive nature of the banking sector, which is highly damaging to our economy. We are all aware of the denial of access to finance being experienced by SMEs. We need a more diverse and competitive banking system, and the PRA, FCA and CMA simply must address this if the financial sector is to serve the wider economy. Neither the Bill before us today nor the ERR Bill indicates how this issue will be tackled, but tackled it must be. It must be crystal clear, as BIS says in its note, that the FCA and CMA will need a memorandum of understanding.

It is not enough for such a vital document to exist on a voluntary basis. It should be a requirement. Equally important, it should be visible to all with an interest and should therefore be published by both parties. In due course, I will seek to lay this responsibility on the CMA under the ERR Bill. Today, we seek to lay it on the FCA in this amendment. Similarly, I will in due course propose that the CMA has an obligation to co-ordinate its work with the FCA. Today, we ask the equivalent of the FCA. I beg to move.

[Viscount Trenchard]

My Lords, I support the amendment because I believe that there is too little in the Bill about the maintenance of competition. It is too confused. I personally regret that the PRA has no need to have regard to the maintenance of the competitiveness of the market place. The co-ordination between the FCA and the CMA, as the amendment would require, would help to concentrate minds on exactly how important competitiveness is and to increase awareness among consumers as well as firms and participants. That competition is extremely important and must be maintained and, where possible, enhanced. The amendment would help in that regard and I am inclined to support it.

Financial Services Bill

Viscount Trenchard Excerpts

Wednesday 24th October 2012 Lords Chamber

[Lord Flight]

My Lords, I wish to speak in support of my noble friend’s amendment. It touches on unfortunate developments. The reaction of regulators to being criticised for what were described as the failures of light-touch regulation have increasingly led to a much more tough-guy, macho approach by them. In turn, I find major, totally responsible financial services businesses saying to me when they are unhappy and think some regulatory proposals are mistaken, “But we don’t want to talk to the regulators in case they punish us”. An unfortunate culture has developed of seeing the regulators as being very likely to use their powers against you, if you fall out with them.

The whole light-touch regulation story is a misinterpretation. What was wrong with FiSMA in that territory was the assumption that large institutions could be left to run their own affairs, which, as I warned at the time, missed out the fact that when large institutions go wrong they risk bringing down the whole system. The amendment may be belt and braces—I agree with my noble friend that to rely on complicated legal processes to get justice is not satisfactory—but I think it is perfectly straightforward, sensible and common sense to have that guideline as regards how investigations are handled. In the present climate, I think that is necessary.

[Viscount Trenchard]

My Lords, I, too, support my noble friend's amendment. I apologise for going back to the regulatory principles, but I continue to believe that it is a huge pity that the regulatory principles, by which both the PRA and the FCA are bound to operate, do not contain, to my mind, the very necessary principle that they should have regard to maintaining the competitiveness of the marketplace on which the United Kingdom depends so much for tax revenues, for prosperity, for employment and for all kinds of things.

I also speak with the experience of having been a member of the executive committee of a regulated firm for several dark years. I can assure the House that at least 90% of the time of an executive committee is spent discussing how to respond to regulators. There is a real fear of increased supervision and a more intrusive approach and, nowadays, many firms spend very little time talking about how to develop and to expand the business in order to provide further employment and earn more money so that the business can be consolidated and maintained in London. In the absence of, to my mind, such necessary principles, which ought to be there and by which the new regulators ought to have to abide, it is more necessary than it otherwise would have been that the regulators should act, as my noble friend’s amendment suggests and requires, “proportionately, reasonably and fairly”. I wholly support the amendment and I look forward to hearing the comments of the Minister.

[Lord Peston]

We are indebted to the noble Lord, Lord Hodgson of Astley Abbotts, for raising these matters, although we discussed similar matters last week under the guidance of the noble Lord, Lord Flight, and my noble friend Lady Hayter. The central question here is our fear—fear in the relevant sector as well—that the regulators damage our financial services sector rather than improve its performance. I think that is the theme that lies behind these matters. I have two questions, but I am bad at reading amendments, so I want to be certain about them. Presumably the new subsection proposed in Amendment 192A would come before subsections (1) to (7) in Clause 74. Am I right that it would be the lead-in?

Financial Services Bill

Viscount Trenchard Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Flight]

My Lords, I think it is self-evident that in gaining the advantage of twin peaks and what I hope will be a much better regulation of the safety of banks comes the cost of the requirement for elements of dual regulation and involvement. Rather contrary to what I had to say earlier about the authorisation of banks, when it comes to the authorisation and approvals of holders of controlled functions my amendment proposes, in essence, joint responsibility on behalf of the PRA and the FCA to approve holders of significant-influence functions for dual-regulated firms. Generally the industry has concerns that the proposed process for approving holders of controlled functions covered in Clause 12, which amends Section 59 of FiSMA, appears unnecessarily complex and might not have been fully thought through. From the drafting, it is unclear which regulator will be responsible for designating and approving some functions. The only straightforward, common-sense approach would be a joint responsibility on the part of the PRA and the FCA for granting approvals. Whatever system is put in place, it is important that it is run jointly in order to be as efficient as possible.

The draft MoU between the PRA and the FCA gives further details of the proposed system, but this makes it clear that there is an assumption that certain roles—for example, the CEO and the chairman—are inherently prudentially focused and so should be approved by the PRA, although with FCA consent. The holders of these senior roles are as much responsible for ensuring that the firm meets conduct standards as prudential standards; in the case of many businesses, the conduct standards may be more fundamental than the prudential standards.

I would like to hear the Minister’s comments on this territory, but one approach that might make life simpler is to have joint responsibility for the more senior dual-registered holders.

[Viscount Trenchard]

My Lords, I support my noble friend Lord Flight in his amendment, principally because it reads much better and is much easier to understand than the equivalent part of the Bill, which is confusing to say the least. I further agree that there is a very considerable risk that approved firms, having to apply to two regulators separately, is going to reduce the attractiveness of London and lead foreign firms to consider establishing in other centres businesses that could be established in London. There is already a perception that it is extremely cumbersome to obtain approval for significant-influence persons and that it is more difficult to do that here than in other financial centres around the world, so I definitely believe that my noble friend’s amendment would represent a significant improvement.

It is also important to ask my noble friend the Minister whether, if joint responsibilities are to be agreed between the PRA and the FCA, that would mean a single procedure. If the two regulators are made jointly responsible but operate slightly different procedures that with time become more different, it makes it much more time-consuming and expensive for regulated firms to comply with the requirements.

Has my noble friend also thought about customer-dealing functions? His amendments deal perfectly with the significant-influence functions, but the Bill as drafted also deals with customer-dealing functions, and I see no reason why these should not also be dealt with in an extremely simple and understandable manner using a form of words similar to his.

Where joint responsibilities between the two regulators are agreed, will this lead to the avoidance or elimination of the duplication of staff between them? If you have two regulators doing the same thing, you have double the people and you may have even more people who are responsible for talking to their equivalents at the other regulator. Where joint responsibilities under the memorandum of understanding or elsewhere are agreed and put into force, can that be done in a way that reduces rather than increases the number of persons necessary to carry out the process?

[Lord Sassoon]

My Lords, I can assure my noble friends that these matters have been carefully thought about. To some extent, the somewhat tortuous drafting is entirely to achieve a simpler and more cost-effective result, even if the drafting of the Bill is more complex than my noble friend has suggested, although I do not think he is doing it to make the drafting more comprehensible.

As with our earlier discussion about the authorisation of firms, we need to recognise that there are already difficulties in this area. My noble friend Lord Trenchard quite rightly points out how aspects of the authorisation processes in London are of concern to firms, particularly from outside Europe. I understand that. As he and I have discussed over a long period, different aspects of this go over many years. Whether it is the FCA or the new regulators, there is an ongoing challenge to make sure that the system is sensitive, appropriate and efficient, quite regardless of the new architecture. He makes an important point, but I suggest that it is a different point from the narrow but equally important one here about where best to do it in a dual-regulation, dual-supervision environment.

Amendment 165A would establish a different system for designating significant-influence functions, or SIFs. For dual-regulated firms, the PRA and the FCA would jointly make rules specifying which functions are SIFs and then put in place joint arrangements for approving individuals to perform them. For FCA-only firms, this would be done by the FCA alone. I can see the attraction of the approach which my noble friend Lord Flight is proposing. The language and the on-the-face-of-it approach perhaps appear simpler than the arrangements in the Bill at present. However, the arrangements in the Bill have been thought about, and we believe that they are preferable because they put one regulator in charge of leading the process for approving those who wish to carry out roles involving significant influence over the conduct of affairs of an authorised person. In most cases, this will be the relevant prudential regulator, although the FCA will be able to designate SIFs in dual-regulated firms where the PRA has not done so. For example, the FCA will have a greater interest than the PRA in the chief anti-money laundering officer, so it may wish to designate this function in the absence of the PRA.

We certainly do not think that the administrative process should be excessively difficult or lead to log-jams. The Government expect the two authorities to run a single administrative process for SIF applications, taking into account the statutory timeline. Indeed, the draft memorandum of understanding, published by the Bank and the FSA, makes clear that that is exactly what they will do: run one administrative process. I cannot answer my noble friend’s question about whether there will be more or fewer people. All I can say is that they have already documented a process to make it as efficient as possible.

With the explanation that this has all been very carefully thought out and that, although there is no perfect way to do it, we believe that the basis in the Bill as drafted will work better in practice for firms and for the regulators, I hope that my noble friend will withdraw his amendment.