Financial Services Bill
Viscount Trenchard Excerpts(12 years, 8 months ago)
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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(12 years, 9 months ago)
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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.
Financial Services Bill
Viscount Trenchard Excerpts(12 years, 11 months ago)
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Baroness Noakes
My Lords, with the leave of the Committee and at the request of my noble friend Lord Northbrook, I rise to move Amendment 127ZA and also speak to Amendment 128AAA in his name. My noble friend is unable to be with us to speak to these amendments due to other commitments.
The new regulators will have many new powers to add to the formidable armoury of powers already held by the FSA. Consultation with practitioners in the industry about the practical aspects of policy, rules and practice is crucial. Amendment 127ZA concerns consultations carried out by the Bank of England in relation to the clearing and settlement systems that it will regulate in future, together with the role of the FCA in that. In general, the consultation arrangements in the Bill for the market areas covered by the FCA are welcomed by practitioners. In particular, the Bill, which mandates several panels to be used for consultation, includes a specific markets panel. However, there is concern in relation to the clearing and settlements systems, which are to be regulated by the Bank of England rather than the FCA. I understand the reasons that led to that decision, but it results in some fragmentation of regulation. Clearing and settlements systems will now be separate from the rest of markets regulation and practitioners are concerned that, in the absence of provisions in this Bill for consulting practitioners about clearing and settlement aspects, there could be problems.
Amendment 127ZA sets up a consultation requirement in this respect by requiring the Bank of England to consult the markets practitioner panel, which is set up under new Section 1P as part of the FCA’s consultation mechanisms. This amendment also allows the panel to request information from the Bank via the FCA in order that the panel can then advise the FCA on any related issues—for example, regulatory changes made by the Bank in relation to clearing and settlement systems, which may well have an impact on trading infrastructure, which the FCA itself will be regulating.
I thank the Minister’s officials for explaining to me how the Bank’s new powers will work legislatively and how the consultation provisions fit in. As I understand it, there will be a statutory requirement for the Bank to consult generally on the exercise of its new regulatory powers in relation to recognised clearing houses, but the consultation with practitioner panels or the FCA is not mandated. The Bill is silent in relation to settlement systems, and we have to wait to see what the eventual regulations will say.
Will the Minister explain how the Government intend consultation to work for settlement systems? Can he also say how the Government see proper co-ordination between the FCA and the Bank of England in this area? Is there, for example, any intention to involve the markets panel—and if not, why not? In respect of clearing houses, can the Minister explain why the requirements in respect of consultation by the Bank for clearing houses in Schedule 7, which applies the general PRA requirements for consultation on rules, specifically remove the requirement for the PRA to consult the FCA and has no requirement to consult panels?
Amendment 128AAA in this group tackles a rather broader issue. Under new Section 1R, the FCA must consider representations made to it by the panels and must publish responses to representations. The corresponding FiSMA requirements were for the FSA to respond in writing with reasons for disagreeing with a panel’s recommendations but this has been omitted from the Bill. The amendment of my noble friend Lord Northbrook reinstates that requirement.
Everybody understands that the FCA will not accept every single recommendation or view put to it, but it is not acceptable that the FCA can merely ignore any recommendations put to it by the panels and merely publish a response “from time to time”, which is all that new Section 1R requires. The FCA ought to be open to the possibility of dialogue with the panels. It is entirely possible, for example, that the FCA could misinterpret a comment or recommendation made to it. The Bill might make the FCA near-omnipotent, but it should not be predicated on the FCA being near-omniscient.
Both these amendments have been suggested by the existing financial services practitioner panel, which has done good work since the FSA was set up. It knows what it is talking about and if it is concerned, I believe that the Committee should be too. I do not claim that the drafting of my noble friend’s amendments is perfect but they are probing amendments. I beg to move.
Viscount Trenchard
My Lords, I support the amendment in the name of my noble friend Lord Northbrook and moved by my noble friend Lady Noakes. While I understand very well the reasoning behind splitting regulators into a multitude of new regulators, it nevertheless remains very necessary to make sure that regulation is well co-ordinated, not duplicated, and made as understandable as possible to practitioners and consumers alike. It is very sensible indeed that the regulation of trading infrastructure also be brought within the sphere of influence of the FCA. The requirement that,
“The bank must consult with the Markets Practitioner Panel on the regulation of clearing and settlement infrastructure”—
deals with that. I agree with my noble friend that the drafting is not yet perfect. In particular, I find somewhat confusing the second paragraph, which states:
“The Markets Practitioner Panel will be able to request information from the Bank via the FCA to enable them to provide appropriate advice to the FCA”.
However, in principle, this is a move in the right direction and I strongly support it.
One of the problems with regulation is that regulators, even if they have practical experience of banking, insurance or other financial services, very rapidly become out of date because markets change so rapidly. There are many very competent former bankers working for the FSA who are out of date with the way markets actually operate today. Therefore, I think it very necessary to have a practitioner panel for the PRA as well as for the FCA. However, that is the subject of a subsequent amendment.
Amendment 128AAA also deserves support for putting the requirement back on the FCA to give a statement in writing of its reasons if it disagrees with a view expressed by the practitioner panel. That is very sensible.
Lord Flight
My Lords, I support all three of these amendments. I declare an interest as a director and founder-member of Metro Bank.
Part of the total objective for the PRA of a safer banking system and banking stability is a need for more competition in the UK. One of the main sources of our problems has been a cartel. Whenever there are cartels bad habits tend to creep in. There is a history behind the cartel coming in, going back to Walter Bagehot in wanting to consolidate banks for safety, but there needs to be a balance. The PRA cannot achieve its major objectives without staunchly advocating greater competition and helping it to come about.
From my experience, it was agony going through a year and a half with the FSA getting the licence for Metro Bank. The sums of money that we had to spend were not quite as great as the noble Baroness reported but they were very substantial. The FSA kept changing its mind. The proposals for capital were out of all proportion to the risk of the bank. At the time, I wrote to the Minister reporting on the experience. Strangely, I do not think that there was ill intent by the FSA. It was very much about individuals wishing to protect their own position and not wanting to be attacked in some way in the media for having been too lenient on licensing a new operation. Memories go back to the early 1970s, when banking licences were given out too easily, and that was a major cause of the secondary banking crisis in 1974. However, it is absolutely right that a more competitive environment in banking should be a key factor which the PRA supports.
On international competitiveness, I have understood recently that the Government’s main objective is that they feel that this is somehow related to light-touch regulation that has got into trouble. I do not see that at all. It seems to me just silly for the UK to shoot itself in the foot with regard to an important industry that employs a lot of people, earns a lot of invisible earnings and so on. I would have thought that, in terms of regulating, it would be normal to consider the effect on international competitiveness. What was wrong with light-touch regulation—I remember it well—was the doctrine: “You don't need to regulate large institutions too much because they can look after themselves”. The weakness of that doctrine was that, if they got it wrong, as subsequently transpired, the problems for the whole system were that much greater. I think that was what was wrong and it has little or nothing to do with the competitiveness of the UK’s international banking services.
I do not accept at all the argument that a brief to keep watch on international competitiveness relates to inadequate or inappropriate regulation. Taking the point to absurdity, to ignore a debate about particular measures, which were clearly going to be highly damaging to the UK industry, would just be silly.
Viscount Trenchard
My Lords, my noble friend Lord Flight is, of course, completely correct in his assertion that the proposed new regulatory framework makes far too little mention of the need to preserve competitiveness of the marketplace, not just competitiveness from the point of view of the consumer but the very competitiveness of the marketplace for practitioners to participate in. For that reason, financial services companies from all over the world have come into London and that has helped to provide more consumer choice, and it will continue to do so in the future, as well as providing the Exchequer with a very large proportion of its annual revenue. It is a huge pity, as my noble friend has pointed out, that the Treasury mistakenly believes that preservation of international competitiveness implies approval of inappropriate or inadequate regulation.
All three amendments have some merit but of the three I tend to prefer the amendment proposed by my noble friend Lord Hodgson because it gives a duty to the PRA to have regard to competition. I would have preferred that the PRA had an objective to protect the competitiveness of the marketplace as well but I realise that there are some valid arguments against that. To have a duty—“duty” is a strong word—to have regard to competition is the preferred of the three amendments put forward. The points in my noble friend’s amendment are all to do with minimising adverse effects, or avoiding restrictions or unnecessary regulatory barriers to entry; they are all negatives rather than positives. I would prefer this issue to be expressed in a more positive manner. I have worked for a Japanese-owned financial institution; I am not sure whether this is a UK institution under proposed new paragraph (d) in my noble friend’s amendment. It is, of course, a UK-incorporated plc. Could my noble friend clarify what “UK institutions and companies” means? It is very important for London that the level playing field for all participants is preserved and I hope that the amendment refers to UK incorporated or UK resident financial institutions and companies.
My noble friend’s amendment also makes it very clear how necessary it is to have collaboration and co-operation between the PRA and the FCA. Proposed new paragraphs (b) and (c) impact on matters that are of great concern to the FCA. I hope that these matters will be properly covered in the memorandum of understanding to be drawn up between the PRA and the FCA.
Lord Sassoon
My Lords, the most important issues to be addressed in this group of amendments are those around barriers to entry linked to resolvability. A sea change is needed and is coming. If the Committee bears with me, I will get to this issue, because it is at the heart of the concerns in this area, as identified in particular by my noble friends Lady Kramer and Lord Flight.
Let me start with Amendments 128BF and 128BG in the terms in which they are drafted. My noble friend Lady Noakes says that in some respects they go too far in terms of the duty to promote competition. However, I should do the amendments justice by speaking to them as drafted, although I accept that my noble friend put somewhat of a qualification around her amendment.
There are three reasons why the Government do not agree with the proposition in the amendments. First, all PRA-authorised firms will also be regulated by the FCA according to their objectives, and will therefore fall under the FCA’s objective to promote effective competition in the interests of consumers. To correct one point, it is also the case that authorisation has to be carried out by both the regulators. For those that are seeking a PRA authorisation, the PRA will lead, but others will be led by the FCA.
Secondly, the Government’s view—this goes to the heart of the new structure—is that the FSA simply has an impossible job in trying to balance so many competing objectives, which has led to its lack of institutional focus on prudential matters. In order to avoid repeating this mistake, we have decided that the PRA should have a single, general objective, supplemented by tailored, focused objectives, which are specific to particular regulated activities, such as the insurance objective set out in new Section 2C.
Financial Services Bill
Viscount Trenchard Excerpts(12 years, 11 months ago)
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Lord Barnett
I strongly support the amendment moved by my noble friend Lady Drake. As usual, my noble friend Lord Peston spoke about the average consumer and the complexity of the Bill. I doubt that an average consumer will ever read the Bill. This is not an ordinary Bill. I do not pretend that the FSA was perfect, but we are now to have an FCA. I think it is in Clause 5—although that itself is not easy to find—but then it is in proposed new Section 1E. You and I may find that easy—I do not, because this is the most complex Bill I have read. I apologise, because over five years I introduced many complex Finance Bills—two a year on average—so I know about complex Bills and have dealt with them both in government and in opposition, but I find this one incredible.
The Bill is about the competition objective and helping the consumer. The amendment is modest. If the noble Lord, Lord Sassoon, is in a good mood—I see that he is not; he is shaking his head—he should look at the amendment to see whether it would do any harm to the consumer. I should have thought that it might help them. The consumer will not read it, but the new FCA would have to read it and be responsible for it. First, the noble Lord must be in favour of good value for money—he is nodding. The last phrase of the amendment is that it should be “good value for money”. It deals with,
“the ease with which consumers can identify”.
That cannot do any harm to the Bill and the idea of helping consumers. Even if the noble Lord is in a bad mood today, as he indicated, I hope that he will see the amendment not in principle but in fact. It is a very modest amendment asking for very little.
The noble Lord, Lord Sassoon, does not always answer my questions positively, but this one is simple. This is not my question but that of my noble friend Lady Drake in her excellent introduction to the amendment. Is the amendment going to do any harm to the Bill? Is it going to help the FCA to help the consumer? If the answer is yes, can the Minister say that he will at least examine the Bill, take the amendment away and look at it with a view to including it at Report? That is all I ask, and I am sure that that is what my noble friend Lady Drake asks. I hope that he feels in a better mood when he comes to reply.
Viscount Trenchard
My Lords, I also recognise the good intention of the noble Baroness, Lady Drake, in moving this amendment. However, I think that the FCA is best helped to help the consumer by having clear objectives and principles, or matters to which they must have regard in pursuing the objectives. I worry that this is becoming overcomplicated.
I also suggest that new Section 1E(2)(a), which states that the FCA must have regard to,
“the needs of different consumers who use or may use those services, including their need for information that enables them to make informed choices”,
overlaps substantially with the effect of the amendment. Furthermore, I am not sure whether it is a good idea to put in the Bill,
“services which are appropriate to their needs”,
and,
“represent good value for money”.
Those two concepts are not defined and may be interpreted in very different ways by different consumers. Who is to say what represents good value for money? The important thing, which has been much too lacking in recent years, is that we should have complete transparency. However, I would like to hear the Minister’s view on this.
I would also like to ask him whether the words,
“The matters to which the FCA may have regard in considering the effectiveness of competition”,
mean that the FCA is prohibited from having regard to other matters, or is this intended to restrict—or to broaden—the matters to which the FCA can have regard? If the provision is intended to broaden the matters, surely the best way is to leave it as simple as possible so that the FCA can use its own judgment in deciding to which matters it should have regard.
Baroness Noakes
My Lords, the noble Baroness, Lady Drake, has made a powerful case for her amendment. I think that it is widely acknowledged that the needs of consumers require greater emphasis in the financial services industry as it moves forward, and I believe that that is why the consumer is being placed at the heart of the FCA. However, I am puzzled that the noble Baroness, Lady Drake, has chosen to put her amendment within the competition objective for the FCA. It seems to me that what she was talking about is quintessentially part of the consumer protection objective, which is in new Section 1C. A number of things are already listed within that consumer protection objective, including,
“the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved … and the capabilities of the consumers in question”.
It seems to me that if proper regard was paid to that in the development of the FCA’s policies, that would meet almost all of what the noble Baroness, Lady Drake, seeks to address in her amendment.
Financial Services Bill
Viscount Trenchard Excerpts(13 years ago)
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Viscount Trenchard
My Lords, I also support my noble friend’s amendment. In particular I think that this whole section is unclear and muddled. It is extraordinary to state that a committee of the court, which is the board of directors, may make recommendations within the Bank. The Financial Policy Committee is clearly a committee of the court. That has been stated. It is strange that it is asymmetric and different from the MPC. This is a recipe for muddle because if it is a committee of the board—that is, the court—it has no authority beyond the court. Any authority that it has is the authority of the court. To state that a committee of the board—the court—may make recommendations within the Bank seems weird.
Similarly, in making recommendations to the Treasury, if it is a committee of the court, it should be the court that makes those recommendations. We are getting very confused. The difference between the FPC, dealing with macroprudential regulation as a committee of the Court of the Bank of England, and the PRA not as a committee but a different body, but again within the Bank of England, is strange. I just think it all needs to be clarified a bit more.
Lord Eatwell
My Lords, I first address the amendment moved by the noble Baroness, Lady Noakes. I am now very puzzled by the status of recommendations, given that a recommendation is not necessarily something which needs to be followed. Given that there seems to be no indication, as the noble Baroness, Lady Noakes, pointed out, about the reactions to recommendations, it is difficult to assess the status of this concept within the structure of the Bill. My Amendment 69 simply deals with the offending new Section 9Q and deletes it. It states:
“The Financial Policy Committee may make recommendations to”,
the world. I am sure the world would be very grateful, but we should not expend public money on making recommendations to the world, and especially not on confirming them in writing. It would be interesting to know who these “persons other than those” are defined to be when we are talking about the context of macroprudential regulation; we are not talking about relationships, say, with individual firms or whatever. The noble Baroness, Lady Noakes, has picked up on some important and valuable obscurities in the Bill and it would be helpful if the Minister could elucidate them.
A sort of bran-tub of my amendments has again been grouped together. I am sorry about that but I am not responsible for the groupings. I could ungroup them but that would be tedious for everyone, so let us deal with them. Amendment 48 is included in the group, which again has been tabled in the context of directions. It refers to the point made with respect to the nature of directions. The Bill states in proposed new Section 9G(4) that:
“The direction may relate to all regulated persons or to regulated persons of a specified description, but may not relate to a specified regulated person”.
I understand entirely what the drafting is supposed to do, but given the level of conglomeration and concentration in the financial services industry, I do not think that this will work as it is quite possible to refer to,
“regulated persons of a specified description”,
but for there to be only one firm of that description. It is quite possible for that to happen. If this may not “relate to” in the sense that it may not have a relationship to, that would rule out, say, a reference to,
“regulated persons of a specified description”,
if it just so happened that the set of persons of that description contained but one element—just one firm of that type. We can see that there are various niche firms and highly specialised companies in the City. I can think of very highly specialised money brokers of which only one performs a particular role in the money markets. Perhaps my amendment would have been more helpful if it had changed the word “relate” to “refer”, so that the direction could not refer to an individual specified regulated person. That would be inappropriate and would go beyond what the FPC is designed to do. However, I am nervous that the activities of the FPC may be unreasonably limited by the possibility that there might be just one specific regulated person within a given class of persons to which the FPC wishes to issue a direction.
I turn to Amendment 50, which again refers to new Section 9G. Subsection (6) refers to the fact that a direction,
“may not require its provisions to be implemented by specified means”—
I am not quite sure what that means—but then it goes on to say,
“or within a specified period”.
This is very dangerous in the sense that it may be enormously important that a direction should be operational within a specified period. It may be important for the financial stability of Britain that actions take place within a month or six weeks, or whatever the period might be. Being unable to require that provisions be implemented within a specified period seriously weakens the ability of the FPC to pursue effectively the stability objective. I am also a bit worried about the term “specified means”, but again, I am not sure what it means. Perhaps the Minister could help me on that when he replies. I really think that the business of a specified period should be looked at very carefully indeed for fear of weakening the powers of the FPC.
Amendment 63 has been withdrawn, so I turn now to Amendment 66. It refers to the making of recommendations under new Section 9P(2), and states specifically that:
“The recommendations may relate to all regulated persons or to regulated persons of a specified description, but may not relate to the exercise of the functions of the FCA or the PRA in relation to a specified regulated person”.
Again, this is the problem. It is quite possible that a generic description could apply to just one regulated person. Therefore, this is the same point that I made with respect to Amendment 48. The word “relate”—that is, “have a relationship to”—could result in the FPC not being able to make recommendations because the specified activity was performed by only one particular institution.
Finally, Amendment 69 is where I follow on from the noble Baroness, Lady Noakes, and comments that have been made by the noble Lord, Lord Hodgson, and the noble Viscount, Lord Trenchard, about new Section 9Q being very odd. It states that:
“The Financial Policy Committee may make recommendations to persons other than those”,
namely, the rest of the world. With those comments, I look forward to hearing the Minister’s comments on the amendments in the name of the noble Baroness, Lady Noakes, and the various amendments in my bran-tub in this case.
Lord McFall of Alcluith
On this point, can I remind fellow Peers that I have invited the Governor of the Bank of England along tomorrow morning, so I suggest that they ask him the very important question: “Will he enjoy writing letters to himself in the future?”.
Viscount Trenchard
The Minister just said that the FPC is to be a separate committee with strong statutory powers. I find it very hard to reconcile this with its being a committee of the Court of the Bank of England. This is different from the MPC, which is not a committee of the court but is a committee of the Bank. It would be more logical and comprehensible if at least it were acknowledged—as it clearly is—that the FPC is not a committee of the court but a strong semi-separate body. However, the Bill says that it is a committee of the court, in which case it cannot have any powers beyond the powers of the court.
Lord Sassoon
My Lords, the clear advice on the drafting of the Bill—notwithstanding other constructions that my noble friends are putting on this—is that the FPC should have the clear power to make these recommendations. I remember now that I, almost on a daily basis, am writing letters of perhaps a similar kind when I write to my boss the Chancellor—when, for example, he is wearing his hat as the chair of a Cabinet committee—for clearance or to seek permission for some policy matter. I certainly write letters within the Treasury on a regular basis to deal with formal matters, which is broadly similar territory to what we are talking about.
I have talked about the importance of clarity and transparency. It is perhaps worth underlining that one of the things that this power does is to ensure—because FPC recommendations will be published in the meeting record of the FPC—that the public are informed that, if a recommendation has been made by the FPC to the Bank, it is recorded and is open to public scrutiny.
I think that it was my noble friend’s construction that the FPC cannot have powers beyond those of the court. I correct him on that: if the Bill confers such powers on the Financial Policy Committee, it does indeed have powers that the court does not have.
Viscount Trenchard
In that case, does my noble friend the Minister not think that it would be right to recognise the FPC as a committee of the Bank and as separate from the court, having its own powers as given in the Bill? The position would then be logical. At the moment, it is stated that it is a committee of the court. If I were a member of the court, I would not find it easy to understand any structure where a committee of the court—that is, the board—had powers which were independent of and separate from those of the court itself.
Lord Sassoon
My Lords, that is the situation; my noble friend might find it difficult now. If he or anybody else was appointed—as they have been—to the interim FPC or the formal FPC if and when it becomes established, they will of course receive extensive briefing on all these matters. This is not the right place to discuss how the FPC fits into the architecture of the Bank—that is dealt with in other provisions. Although my noble friend may not like it, the FPC, however it is constituted—I do not think that his construction would alter the point—simply must have these important powers, which are unequivocally the powers of the FPC and not those of the Bank. That is the case however the FPC fits into the architecture. I am glad that we have probed this matter but, without this provision being in the Bill, the FPC would be unable to make recommendations and would not therefore be transparent and open to parliamentary or public challenge.
These are important matters, but I think that I should turn, if the Committee will permit me, to Amendment 69, relating to the FPC’s ability to make recommendations to people other than those whom we have discussed so far. Amendment 69 would remove one of the FPC’s most versatile and useful levers for addressing systemic risks. Perhaps the best way of explaining this is by addressing the challenge given to me by my noble friend Lord Hodgson of Astley Abbotts to provide examples of what we are thinking about and why the power is necessary.
For example, the FPC may wish to make a recommendation to the Financial Reporting Council regarding corporate governance standards, or to the European Banking Authority about a risk to the UK financial system stemming from European banks—that very much links in with our recognising earlier that systemic risks may come from overseas and should not be ruled out. Equally, here is a power taking on board the challenge from the noble Lord, Lord Eatwell, about international linkages. Here is a power that gives an important ability to the FPC to make recommendations to an international authority.
Financial Services Bill
Viscount Trenchard Excerpts(13 years ago)
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Viscount Trenchard
As other noble Lords have said, all three amendments are well intentioned. I also welcome the Government’s intention to introduce a new objective for economic growth and employment. However, it is a pity that we are not contemplating the introduction of a requirement to have regard to international competitiveness. If you have regard to the international competitiveness of the marketplace, that will certainly serve the Government’s declared objective to support economic growth and employment.
I do not understand why it is believed that the maintenance of international competitiveness is synonymous with the discredited system of light-touch regulation. We should not abandon at this stage any attempt to reintroduce into the Bill, in more places than at present, at least a requirement—if not an objective, which is what ideally I would like to see—always to have regard to the maintenance of the competitiveness of the marketplace, because that is what drives growth, creates employment and has made London what it is today.
I understand that the FSA’s report on the failure of RBS suggests that the FSA’s need to have regard to international competitiveness was one reason for regulatory failure, but I humbly submit that I doubt that. I believe that you can always have regard to competitiveness while at the same time protecting the consumer and ensuring the stability of the marketplace.
On the three amendments, I am afraid that I am unable to support Amendment 35 in the name of my noble friend Lady Kramer because it sounds very much like the command economy. It would give too much of a planning role to the Financial Policy Committee, and I suggest that it would be very difficult to give that committee on the one hand an objective to achieve a stable and sustainable supply of finance, and on the other a duty to remove or reduce systemic risks that include unsustainable levels of leveraged debt or credit growth. To give that body responsibility both to maintain sustainable credit and to prevent unsustainable credit at the same time would mean that it had to decide exactly how much was going to be lent to every business up and down the land. I submit that this command economy-type interventionist role would be inappropriate, and certainly would not lead to maintaining the competitiveness of the marketplace.
As for the other two amendments, I have great sympathy with the amendment of the noble Lord, Lord Eatwell, who treats the growth objective as being equal with the stability objective. Although I am happy to support my noble friend’s objective, which subordinates the growth objective to the stability objective, I ask the Minister to explain in what circumstances he thinks the growth objective would have to be ignored.
Financial Services Bill
Viscount Trenchard Excerpts(13 years ago)
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Lord Flight
My Lords, I am unclear as to what are the Government’s proposals, the Opposition’s proposals and even the Treasury Select Committee’s proposals. It strikes me that a great deal of complexity is made out of a situation which should be extremely straightforward. The Bank of England should have a board of directors—you can call it the court, if you like—composed of proper individuals independent of the Bank of England who have substantial experience in the financial services industry and who have all the powers of a board.
I am a commissioner of a minor regulator, the Guernsey Financial Services Commission, and we operate as a board controlled by non-executives to which the executive regulator is accountable and where the board has the power to fire the chief executive and the requirement to understand and be on top of every regulatory issue that is in the course of being addressed. I cannot see why the Bank of England should not have a board of that nature. Indeed, the court has a lot of the powers required to exercise that role. It is just that it has not done so for many years and has been an ornament.
We then have the question of what the FPC should do. Some have said that it will take over as the board that runs the Bank of England. However, it seems to me that the FPC should be a specialist body which focuses on the fundamental issue of what is going on in the banking industry and advises the board on financial stability; it should not be a substitute for or take over from a proper board of the Bank of England which covers all the issues. However, if there is a specialist body and a proper board in this structure, I cannot see what is wrong with it.
I also have to agree that, certainly between 2007 and 2008, the Bank of England did not exactly do very well. Much to my chagrin, it was really the ECB that managed to keep the banks and the City of London afloat, since the Bank of England, extraordinarily, did not recognise a major run on the banking system that was far greater than the one in 1974, which I also lived through. My reply on that point is that these bodies need to contain a majority of independent people. If the board or the FPC is not controlled by independents, then they will be in the control of the governor. Both bodies need independent people who can stand up to the establishment of the Bank of England.
I look forward to learning from the Minister precisely what the amendments mean. Solving the situation should not be particularly difficult but is actually a matter of common sense.
Viscount Trenchard
My Lords, I, too, share the nervousness of the noble Lord, Lord Eatwell, about the governance of the Bank of England, and I agree that the Bill is extremely complicated. I take my hat off to those who have worked hard on the Joint Committee. Their task was very much harder than the one that the noble Lord and I had—under the chairmanship of the noble Lord, Lord Burns, who is in his place—when we scrutinised the then Financial Services and Markets Bill some 12 or 13 years ago. This task is clearly much more difficult given that it does not attempt a total rewrite of that legislation. Although I am not sure whether the PRA or the FCA will be the continuing entity of the FSA, as I understand that two-thirds of the FSA personnel will be moving to the FCA, I believe that for most purposes the PRA will nevertheless be the continuing entity.
Although I understand why the noble Lord, Lord Eatwell, has moved his amendment, I am afraid that I am unable to support it. Like my noble friend Lord Flight, I believe that the situation is quite simple: the Bank of England has a perfectly good Court of Directors—a term which I think sounds rather good. Some of your Lordships may think that it sounds arcane and fusty but, on the other hand, it has a certain amount of gravitas. To change it to “supervisory board” would be very un-British. In my business life, I have come across many supervisory boards, in Holland and in Germany. In many cases, I find them semi-detached, rather remote and rather nervous to exercise their powers. If we were to adopt the term “supervisory board” it would give a weak impression—much weaker than the rather heavy-sounding Court of Directors gives. I do not think that there is no problem with the court’s name. However, I agree that its accountability needs to be strengthened, given the additional powers that the Bank will receive. Certainly, some changes need to be made to the governance of the Court of the Bank of England.
The noble Lord also referred to the asymmetry between the Monetary Policy Committee and the proposed Financial Stability Committee, in that the first is independent of the court, whereas the new Financial Stability Committee would be subordinate to the court. I do not think it necessary, in this connection, to strive for total symmetry, because the Monetary Policy Committee has a very specific responsibility, to set interest rates, which is a technical matter. It is essential that it continues to conduct its business in a transparent and independent way and to be composed of persons who are able to provide technical expertise in determining interest rates. The Financial Stability Committee will have a much broader remit. Regarding the oversight of our prudential regulation, both macro and micro, I do not quite understand why it is necessary that the two be so separated; it makes the structure more complicated than it need be. So I have sympathy with the noble Lord’s purpose, but I cannot agree that to replace the court with a supervisory board would be the right way to go.
Lord Barnett
My Lords, what we have heard so far exposes to me why, as I have said before, this is a non-party political Bill. I agree with everything that has been said so far. The noble Lord, Lord Flight, was very good. The way that this Bill is being managed is not the Minister’s fault—we should not have had a Bill in the first place. What an amount of paperwork; we are supposed to be becoming a world without paper, but I have left huge volumes of advisory papers behind in the office. I also have with me the Bill itself, of course, and various other documents. The management of this, as my noble friend said, has been outrageous. A few days ago we had four pages—as if the Bill and the amendments were not enough to read—of government amendments. Those were, I think, on page 3 of the paper. We have to read those as well as find out what all the committees, sub-committees, courts and directors, and God knows what else, are going to do. They are all going to be responsible for matters which, at the end of the day, the Chancellor will never give up. Indeed, we are told that the Treasury will be very involved with the various committees. We will come to that later.
For the moment, however, I would like the noble Lord, Lord Sassoon, to tell us why we removed the FSA. My understanding at the time of the Bank of England Bill was that Gordon Brown took away the FSA from the Bank of England precisely because he did not want to make the Bank as powerful as this legislation now proposes making it. Those powers are now much wider—the court of the Bank is being given much greater powers as well as various committees and sub-committees. The Bill proposes all sorts of things that we are supposed to understand. Frankly, I do not understand them. Will the noble Lord, Lord Sassoon, be able to explain the Bill rather than just read out his briefs? Perhaps he should send his briefs to us; that might be easier than listening to what they say. The whole thing is so complex. The powers of the Bank of England are now so huge that I assume that the Treasury and the Chancellor will never allow them to be used. Members of the Treasury itself are on various committees of the Bank. I do not know who is going to be responsible anywhere.
Viscount Trenchard
My Lords, I had considerable sympathy with the amendment of the right reverend Prelate, which I found rather clearer and easier to understand than I did the explanation of the noble Lord, Lord Barnett. I am not convinced that appointing an additional two deputy governors is necessary because I believe these three sub-divisions of the Bank could be rationalised. However, appointing deputy governors will tend to make the governance of the Bank of England more rather than less level in that if you have a governor and one deputy, only one person comes close to challenging the governor’s authority. As proposed in the Bill, there will be three deputy governors, which will mean that the perception of the balance of power will be more level than before.
It is completely unnecessary for the governor to chair the Financial Stability Committee, because the governor chairs the court and the Financial Stability Committee is a sub-committee of the court. It is not right that the chairman of the court—that is, the governor—should also chair one of its own committees. That is highly illogical.
Lord Turnbull
I do not think that the governor chairs the court any longer.
Viscount Trenchard
I apologise to the noble Lord and I stand corrected. Perhaps the governor should chair the court. However, where possible, the deputy governors rather than the governor should chair the sub-committees.
Lord Turnbull
My Lords, I am not in favour of the amendments. First, there is the post of the deputy governor for prudential regulation. This is the old head of the FSA, in so far as it deals with macroprudential regulation, who is given the status of deputy governor in order to bring him into the councils of the bank. No extra posts or salaries are being created here. One might have been created by the creation of the FSA, but that is not here.
Secondly, as to the checks and balances on the governor, I do not think that a committee as important as either the NPC or the FPC being chaired by his deputy is a good way of exerting supervision of the governor. You cannot work for someone and supervise them at the same time.
At the moment, the governor chairs these committees and brings their thinking together; and, as we discussed earlier, there are other mechanisms around the court or the oversight committee—whatever it is called—that check the over-mighty power of the governor. Using one of his deputies to do this does not make sense.
Financial Services Bill
Viscount Trenchard Excerpts(13 years, 1 month ago)
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Viscount Trenchard
My Lords, I am grateful to my noble friend the Minister for introducing this important debate. I must first declare my interests in that I am employed by Mizuho International plc and am a non-executive director of two other financial services companies. I also wish to pay tribute to the excellent maiden speech of the noble Lord, Lord O’Donnell. If he becomes the next Governor of the Bank of England, I believe that we can easily dispense with all three deputy governor positions. In common with other noble Lords, I thank all those who served on the Joint Committee for their hard work and great contributions.
I believe that the financial regulatory arrangements that existed during the initial stages of the financial crisis were deficient in three principal ways. However, the crisis was not caused principally because the tripartite system in itself was deficient. As other noble Lords have commented, a regulator’s culture and judgment are more important than its architecture. First, there was no bank resolution mechanism in place. If the Banking Act 2009, which enabled the swift resolution of the Dunfermline Building Society insolvency, had been in place, it is likely that the Northern Rock situation would have been quickly and relatively painlessly resolved.
Secondly, the deposit protection scheme that applied was inadequate, because it was not a 100% scheme. If today’s scheme had been in place, there would not have been a bank run of such severity. Thirdly, although the Bank of England was charged with responsibility for financial stability, nobody was looking at the system as a whole. The Bank should have been given a power of direction over the FSA. Although I wholly accept my noble friend Lord Tugendhat’s observations on the Bank’s record as a regulator, I nevertheless believe that the body charged with financial stability should also have ultimate responsibility for regulating financial markets and their major participants.
In 2006, I was working in Brussels as the director-general of the European Fund and Asset Management Association. It is my recollection that at that time the FSA did not consider itself an activist, firm-specific regulator, even though most of its 300 bank supervision staff had come from the Bank of England. I felt that the FSA was more interested in attending conferences and engaging with other European regulators to discuss harmonisation of regulation than actively supervising the banks. It is also clear now that the levels of capital and liquidity required under the Basel I accord were completely inadequate.
I was privileged to serve on the Joint Committee on Financial Services and Markets under the inspired chairmanship of the noble Lord, Lord Burns, which scrutinised this Bill’s predecessor before its introduction to Parliament in 1999. Some of us believed that competition and the competitiveness of our financial markets should have been made an objective of the FSA rather than merely one of the principles to which it had to have regard. I welcome the fact that the FCA is given a competition objective in the Bill, but it is inadequate in that it falls short of a responsibility to maintain or enhance the competitiveness of the UK’s financial markets.
I am not persuaded that it was necessary to dismember the FSA in order to make our regulatory system fit for purpose. Besides, the Government are trying to reduce the number of public sector bodies with all their associated costs, boards of directors, et cetera. Some 2,000 firms will now have to report to two financial regulators, the PRA and the FCA, which will demand the provision of information—in part common to both, in part different—which will require an increase for all dual-regulated companies in compliance staff and commensurate costs.
It is interesting that we consider it appropriate to redesign our regulatory framework in this country at a time when the EU has just established a different regulatory framework based not on the twin-peaks system that we have adopted but divided between banks, securities markets and insurers, including pension providers. The matrix of reporting lines between the UK and the European regulators certainly raises the question of whether the Bank, the FCA or the PRA will have the necessary influence on any of the European regulators commensurate with the UK’s status as the world’s pre-eminent financial market.
I appreciate that a lead regulator system will be adopted and that a memorandum of understanding to be drawn up by the PRA and FCA will establish arrangements for co-ordination with each other and with the three European regulators. However, I worry that the complicated matrix of communication channels that will be established as a result not only increases the risk that some vital piece of information will not be passed correctly but also makes it more likely that there will be a great deal of duplication, which is expensive for the taxpayer and for the regulated firms, which will have to satisfy the myriad of regulators’ increasing hunger for ever more detailed and overlapping information on their businesses.
The draft MoU states that the FCA and the PRA will co-ordinate with each other on rule and policy-making, although my understanding is that very little scope remains for national regulators to make rules following the establishment of the three European sectoral regulators. As far as the 2,000 firms that will be dual-regulated are concerned, the draft MoU clearly anticipates a considerable amount of duplication. It provides for the establishment of supervisory colleges for individual firms and groups comprising members of both regulatory bodies. It is important that the Treasury should monitor the escalating costs and complexity of the regulatory system, having due regard to proportionality. The fastest growing departments in many financial institutions are compliance and IT, which certainly does not help the London markets maintain their international competitiveness. RSA Insurance has incurred a dramatic increase in regulatory fees, from less than £500,000 in 2007 to more than £9 million in 2011. As the CBI has urged, the new regulatory authorities should have as a specific objective the supporting of economic growth. There must be a joined-up approach between the FPC, PRA and FCA, and between them and the three European-level regulators.
However, as my noble friend the Minister has said, there is no best or perfect structure. If I recall correctly, he also said that the structure of the industry is at least as important as the regulatory structure. Today is not the day to debate the implementation of Sir John Vickers’ recommendations, but I should like to say that the current extremely difficult economic environment should lead the Government to do what they can to provide a stable and benevolent framework for our financial services industry, which directly employs more than 2 million people and accounts for some 20% of national income. The financial sector contributes more than £60 billion in tax revenue and its markets support more than 7 million jobs in UK-incorporated companies.
It is true that the existing single-regulator structure was not perfect either, so I do not advocate going back to it. There were difficulties in focusing clearly on prudential regulation, and pressure from consumer organisations inevitably tended to push consumer protection to the fore. Even if those difficulties could have been resolved without dismembering the FSA, we have moved on. What will be interesting is the extent to which the consumer agenda dominates the policies and strategy of the new European regulators which, as I mentioned, have not adopted the twin-peaks structure.
The European regulators and many in Europe believe that there will eventually be no need for national regulators except as local enforcement agencies and branch supervisors. In that case, all this complicated legislation may seem redundant in 10 years’ time. However, if the rapid fiscal integration now sought by the eurozone is realised, the European regulators may eventually become the regulators purely for the eurozone and our own regulators will be restored to an independent and equal status among the world's leading financial regulators.
The new architecture is fiendishly complicated. It will no doubt be reformed again before many years have passed, as national and global markets are evolving at an accelerating pace. However, some parts of the Bill need to be improved. In certain areas, the powers of the FCA are too restricted for it to live up to the expectations placed on it. For example, the provision that it must consult before issuing warning notices should perhaps be limited. Otherwise it may effectively be prevented from doing so. The measures on greater regulatory transparency and misleading promotions are to be welcomed. The FCA should be given a power to prevent hidden charges. The objective to promote competition should be extended to maintain the competitiveness of the United Kingdom’s markets, because this is surely as much in the interests of consumers as of taxpayers. The BBA has correctly stated that such a commitment would not conflict with the objective of ensuring that UK regulation is suitably robust and that it would send a strong signal that Britain was open for business if we were to commit to a competitive regulatory regime.
Why does the Minister consider it inappropriate to give the PRA a competition objective? At least the competition principle which exists in FSMA should be retained. After all, the FSA has recently stated that the regulation of capital markets has worked well. How will the FCA, the FPC and the PRA relate to the newly created Competition and Markets Authority?
I do not really like the name Prudential Regulation Authority because it does not make it clear that it is a regulator of financial institutions. It is surely sensible when something is reformed to give it a new name, but surely every regulator in the land is bound to exercise its functions in a prudential manner. However, I suspect that, increasingly, the PRA will be referred to as the Bank of England, of which it is indeed to be a part.
The FCA, in fulfilling its important consumer protection role, should also have regard to its impact on the real economy, as the FPC is required to do. As my noble friend Lady Wheatcroft has already commented on that, I ask the Minister to clarify the meaning of the regulatory principle to be applied by both regulators,
“that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction”.
That principle is very subjective and can be interpreted in many different ways: proportionate to the benefits—for whom? Considered in general terms, which are expected to result—by whom?
Another question identified by my noble friend Lady Noakes which needs to be closely considered is the diminished importance of the practitioner panel established under the FSMA, in particular the absence of any requirement on the PRA to establish a regular consultation mechanism such as the practitioner panel currently provides. I agree with the CBI that the FPC needs a more proactive focus on supporting economic growth. Clause 3(1) explains the financial stability strategy to be adopted by the Bank and the role of the FPC. Section 9C of the amended Bank of England Act 1998 lists the objectives of the FPC in subsections (1) to (7), but actually only subsections (1) and (2) are objectives. Subsections (3) to (7) contain parameters and principles to be followed by the committee in carrying out its two objectives. If a third objective, to promote growth, was included, the rather negative subsection (4) could be dispensed with.
The Bank of England’s new structure with three deputy governors is certainly rather complicated and the Treasury Select Committee has correctly identified the need to strengthen the Bank’s governance and accountability. I hope that your Lordships’ House will be able to improve the Bill to mitigate the difficulties in putting this complicated structure into practice and ensuring that the United Kingdom has a financial regulatory system which is fit for purpose and a degree of security through the unseen storms that lie ahead.
Economy: Government Policies
Viscount Trenchard Excerpts(14 years, 3 months ago)
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Viscount Trenchard
My Lords, I am grateful to my noble friend Lord Lawson of Blaby for introducing the debate. Your Lordships' House is indeed fortunate to have this debate on the day following the Budget. In recent weeks and months your Lordships have spent an inordinate amount of time discussing tinkering with the constitution rather than concentrating on important, urgent matters such as the subject of my noble friend's Motion. It is good that we have an opportunity to redress the balance today.
I declare an interest in that I am employed by Mizuho International, the investment banking arm of the Mizuho Financial Group of Japan, but I speak in your Lordships' House in my personal capacity. Nevertheless, my employment circumstances—the fact that I also serve as a director of an investment company whose manager’s ultimate holding company is Prudential Financial of the United States and as a director of a chemical manufacturing company on Teesside, whose ultimate holding company is the Lotte Group of Korea, provide me with a basis to judge how attractive the United Kingdom is seen as a centre for investment by major foreign, financial and industrial groups. They will certainly welcome the Chancellor's decision to reduce the tax burden on controlled foreign companies.
My noble friend's Motion calls attention to,
“Government policies to promote enterprise, growth and the fundamental rebalancing of the economy”.
I believe that, in referring to rebalancing the economy, my noble friend means to rein in the bloated public sector in order to create the resurgence that we need in the private sector. The policies pursued by the previous Government produced more than 1 million new mainly unproductive jobs in the public sector but saw the loss of 1.7 million jobs in our already depleted manufacturing sector.
There are those who talk about rebalancing the economy between the financial and manufacturing sectors. They believe that the economy is a zero-sum game and that a withdrawal of resources from our flagship financial sector will assist the creation of a larger and more profitable manufacturing and industrial sector. I think that the reverse is the case. In order to nurture and build on our manufacturing base, it is essential to protect and preserve London's position as the leading global financial centre to ensure that innovative companies can obtain the funds that they need to grow; and that personal and corporate tax rates are low enough not to counterbalance the United Kingdom's other natural advantages over rival investment centres.
During the 11 years for which I worked for Kleinwort Benson in Japan, I was able to encourage Japanese companies to invest in the United Kingdom because of our relatively low tax rates, our sound and stable political system, a reliable accounting system, a respected legal system based on common law and our relatively benign regulatory regime. All those relative advantages have now been compromised to a greater or lesser extent.
The Chancellor's announcement that he will ask HMRC to find out the truth as to whether the application for the 50 per cent tax band is revenue-positive is welcome. The top rate will actually be 52 per cent from next month, and it is probably already counterproductive. It makes it too expensive for international companies to base their most talented employees in this country and adversely affects the competitiveness of our markets. However, I cannot help wondering whether HMRC’s study will be entirely objective. Far too much time and resources are now being wasted on the interplay between market participants and regulators. More importance is now placed on that than on the interaction between lenders and their clients. Senior executives of banks cancel meetings with their clients in order to be available at all times for the FSA, which is now overstepping the mark through its unwarranted incursions into matters such as the composition of subsidiary boards of directors and its unreasonably tough interpretation of capital adequacy rules.
I have some sympathy for the FSA, because besides its dismemberment it has been subjugated to the three new European level regulatory bodies: the EPA, the ESMA and the EOPA. I deeply regret that the previous Government acquiesced in the subordination of our regulatory regime to Brussels. The consequences, including the unnecessary and inappropriate regulation of hedge funds and, indeed, all alternative investment companies, are already having a negative effect on the promotion of enterprise and innovation in the financial sector, limiting the dispersal of risk among multiple players small enough to fail.
Financial markets are global, not European, and the new regulatory regime definitely hinders the City in playing the role that it should have in the promotion of cracks and enterprise in the wider economy. Do the Government fully understand just how serious the problem is, and what steps does my noble friend intend to take to mitigate its damaging consequences?
It is also crucial to ensure that the other formerly attractive features of United Kingdom markets are preserved and protected during a period when higher than optimum taxes need to be applied. I do not argue that lessons did not need to be learnt from the financial crisis, but bankers have been forced unfairly to take a disproportionate part of the blame. There is no evidence that we need more intrusive and more specific regulation. Rather, too much regulation lulls market participants into a false sense of security and tends to absolve them from responsibility for their actions. Will my noble friend bring his influence to bear on the Chancellor and persuade him to reverse the unfair attempt to exclude the banks from the welcome reduction in corporation tax through a further increase in the bank levy? That will do nothing to enable the banks to increase lending to SMEs, and it will have a negative effect on the competitiveness of British banks and of London as a financial centre.
Time does not permit me to comment on many of the other positive measures in the Budget. However, I ask the Minister two further questions. First, will he tell the House whether and when the Government will restore the personal allowance to all taxpayers, thus removing the disincentive caused by the 64 per cent effective band, which is of course widened by £1,200 by the new £600 increase in the personal allowance? Secondly, welcome though the 2 per cent reduction in corporation tax certainly is, will he set out a timetable for its further reduction to 20 per cent—or even the 15 per cent advocated by the Institute of Directors?
All in all, I congratulate the Chancellor on his pragmatic and courageous response to the critically high public sector deficit produced by the profligate and uncontrolled public spending policies pursued by the previous Government. The Chancellor is right to stick to his guns.
Finance (No. 2) Bill
Viscount Trenchard Excerpts(14 years, 7 months ago)
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Viscount Trenchard
My Lords, with your Lordships’ leave, I will speak briefly in the gap. I congratulate my noble friend the Minister on introducing the Bill today. As he said, the Bill is entirely technical and enabling in nature. It is also, I fear, somewhat dull. That may be one reason why not many of your Lordships have chosen to add your names to the speakers list. However, my noble friend did not mention one point. A substantial part of the Bill is intended to replace technical aspects of our law with European law.
As my honourable friend Jacob Rees-Mogg pointed out in another place, Clauses 5, 6, 14, 18, 19, 20, 21, 22 and 23 are, in whole or in part, requirements of the European Union. Furthermore, related to what my noble friend Lord Newby said, the Explanatory Notes to the Bill provided by the Treasury offer in certain instances, as a reason for changing the law, merely the fact that it is necessary for United Kingdom law to conform to European law. It is disappointing that it seems irrelevant to consider in each case which has more merit. Other than that, I will not detain your Lordships; I just wanted to make that point, which my noble friend the Minister omitted to mention.