Financial Services Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 24th February 2021 Grand Committee

[Baroness Noakes (Con)]

My Lords, this is my first day in Committee and I place on record my interests as declared in the register, particularly my shareholdings in financial services companies.

I am very grateful to the Committee for going so slowly on Monday and not reaching Amendment 10. As I think noble Lords are aware, I was in the Chamber and could not have moved it myself. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, and my noble friend Lord Holmes of Richmond; not only have they added their names to my amendments in this group but they were standing by to deal with them without me on Monday. Normal service is resumed and I can move my amendment myself. I shall also speak to Amendment 26 in this group.

This is a fairly large group of amendments but its underlying theme is a search for the right balance between letting the specialist regulators get on with the job of regulatory rule-making and the role of Parliament in overseeing those regulators. My Amendment 10 to Clause 2 says that Schedule 2 to the Bill, which amends FiSMA to create rule-making powers for the FCA to undertake prudential regulation of investment firms, will not come into effect until each House of Parliament has approved accountability arrangements for those powers.

Amendment 26 is drafted in identical terms but relates to the rule-making powers conferred on the PRA by Schedule 3, which deals with the capital requirements regulation rules.

I make no attempt in these amendments to say what form of parliamentary accountability arrangements should be put in place, although the second part of my amendment says that accountability arrangements should include a number of things: arrangements for drafting the final rules being laid before Parliament; taking evidence on a draft of final rules and, importantly, Parliament expressing an opinion on them; and the consequences of any expression of opinion. On reflection, the drafting of my amendment is perhaps not clear enough as I was not intending to suggest that Parliament had to, for example, have the laying of draft rules as part of the accountability arrangements. I merely intended to indicate that it could have that as part of the arrangements.

My amendments are predicated on a belief that we should not grant significant new rule-making powers to the regulators without sufficient checks and balances in the system. Had the Government retained the rule-making powers repatriated from the EU, it would have been pretty clear that Parliament would have had an involvement. I am clear that passing these powers to the regulators should not allow the Government to write Parliament out of the picture. I am not, however, of a settled view as to what Parliament should do, which is why my amendment says that these new rule-making powers can go to the FCA and the PRA only when Parliament’s involvement is settled by Parliament itself. I am very conscious that it is not correct—or at least not normal—for legislation to cover the precise arrangements for parliamentary scrutiny. Those arrangements are for Parliament itself to determine, and I have tried to respect that.

Other amendments in this group seek to fill the void of what Parliament should do in practice, and I shall comment briefly on some of them. The noble Lords, Lord Tunnicliffe and Lord Eatwell, in their Amendments 20, 21, 40 and 41, have set out involvement, with time limits, for each House of Parliament reporting on draft rules, with the ability to report on them but no power of veto. I can certainly see the merits of these amendments, as they strike a balance, giving Parliament an opportunity to give its views on new regulations but without allowing it to overrule our independent regulators. They should allow Parliament to take evidence on the impact of proposed new regulations, for example, on different parts of the financial services sector. This could deal well with concerns about, for example, the impact of regulations on both small and large players in parts of the financial services sector, and whether regulations create new barriers to entry. I am not sure, however, that the amendments sit easily with a need to make new regulations rapidly, which I believe is necessary from time to time.

On the other hand, many in the financial services sector are fearful of regulators gold-plating regulations and imposing unnecessary costs on whole sectors. At the end of the day, costs get passed on to consumers, even though there is often no direct correlation between a rule or regulation and any particular increase in consumer costs. That would not necessarily be well dealt with by the amendments in the names of the noble Lords, Lord Tunnicliffe and Lord Eatwell.

Some elements of Amendment 27 in the names of the noble Baronesses, Lady Bowles of Berkhamsted and Lady Kramer, would allow more thematic or cumulative reviews. I particularly like the elevation of the statutory panels of the FCA and the PRA, though I do not believe that those panels should include Members of either House of Parliament. I know that these panels could be more effective voices for industry concerns. I have in mind, in particular, the PRA’s practitioner panel, which the PRA certainly did not want when it was set up by the Financial Services Act 2012, and has had no discernible impact since then. On the other hand, other elements of Amendment 27, for example Parliament’s involvement in the regulators’ meetings with the Basel Committee or IOSCO, seem to me to go beyond what it would be reasonable for Parliament to do.

My noble friend Lord Blackwell has an amendment with yet another variant with scrutiny of rules by parliamentary committees, but with any results being passed to the Secretary of State for action. My concern with that is that the only action that could in practice be taken, once the power to make rules has been passed to the FCA and the PRA, would be more primary legislation. That seems a sledgehammer to crack a nut and would, in practice, not really act as a restraint, a check or a balance on the undesirable use by the regulators of their powers.

The issue of the nature of parliamentary involvement is discussed in the Treasury’s future regulatory framework review. The consultation on part 2 of that process, started last October, has just closed—my noble friend the Minister may want to say something about where we are with that process. I thought the section on accountability in that consultation was not strong and that reliance on the existing committee structures of both Houses was the wrong direction of travel. Whatever our views on that, a longer-term overhaul of accountability structures will not help us; we will have to find a solution that works for this Bill and until any changes emerge from the framework review. That is the challenge before us. I beg to move.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, my name is on eight amendments in this enlarged group. They cover different aspects of parliamentary accountability, although a common thread is Parliament’s right to information. Whether Parliament chooses a regime that scrutinises everything in detail or one which picks points of contention, and however it may develop over time, timely access to background and information is relevant.

My Amendment 18 and its counterpart, Amendment 38, relate to keeping Parliament informed about the discussions between the Treasury and the regulator concerning equivalence. In Schedules 2 and 3 this Bill establishes that, when making rules, the FCA or PRA may consult the Treasury about the likely effect of the rules on relevant equivalence decisions.

Parliament should be sighted of these considerations because they may affect the content and strength of rules and, as explained in the Government’s consultation, equivalence decisions may result in requirements being embedded in statutory instruments. Just as we used to have EU requirements in regulations, we may end up having equivalence requirements. There is nothing complicated about my amendment; it just says, “keep Parliament informed”. Unless Parliament establishes that right now, it will not exist.

To illustrate this, I quote from the recent FCA consultation on investment firms which, like this Bill, front-runs the Treasury consultation. Paragraph 9.68 states:

“we have discussed with HM Treasury the rules’ likely effect on relevant equivalence decisions. We are not expected under our new public accountability requirements to provide further detail on this.”

I think we need to know something, and I hope the Minister will appreciate that too.

I turn to my Amendments 19 and 39, which specify the level of detail that regulators’ explanations concerning compliance with statutory requirements should contain. I was provoked into tabling these amendments on reading the FCA’s explanations in its consultation. Although they gave a reasonable but qualitative explanation of its general approach to the Financial Services Bill, the statutory accountability statements were poor, containing nothing quantitative or illustrative. They consisted of “trust and believe me” statements littered with phrases such as “proportionality”, “business specific”, “bespoke” and “flexible”; no attempt was made to identify or quantify how that was done. Information would have to be extracted from the rest of the consultation and rules, if it were there at all; or—and this is the nub—we have to swallow that, as paragraph 9.71 states, it is left up to the

“investment firms and supervisors to focus on the core business model indicators of financial resilience relevant to each firm”.

There are no examples given.

The statutory explanations are an important part of accountability. They should be elaborated on as a stand-alone justification, perhaps to spoon-feed the non-skilled reader, but not just through assertions. We need more than assertions that supervisors cosying up with firms can decide how to get it right. That is not accountability. These statements should be written more like justifying a case in court and less like how to pander to industry. They should inform on the toughness of the regime and capital calculations.

My amendment proposes that the explanations

“must include specific, detailed and quantitative elaboration, with worked examples”,

and that Parliament may reject rules that are accompanied by inadequate explanation. By way of comparison, when I checked the PRA’s front-running consultation which came out on 12 February, it seems to have done a rather better job and included examples.

--- Later in debate ---

[Baroness Neville-Rolfe (Con)]

My Lords, as the noble Lord, Lord Tunnicliffe, intimated when he introduced his amendments, Clause 3 is very important to prudential regulation and the banks and financial institutions concerned. However, we must make progress with this Bill, so I will speak briefly. I look forward to the Minister’s explanation of what is intended here and why, and what the safeguards will be for those entities regulated by the PRA in terms of purpose, consultation, impact, cost benefit and so on. I do not read it in the same way as the noble Baroness, Lady Bennett of Manor Castle.

I would like to understand the competitive position. My son works in London for a French investment bank regulated primarily in Paris rather than London, under the equivalence arrangements that we have granted. I suspect that the local branch here may be part of a legal entity based in Paris. How would such an EU bank be affected by the proposed changes in Clause 3 and whatever replaces the revoked regulations? Is there a level playing field?

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, the noble Lord, Lord Tunnicliffe, has reminded us that this is the clause where the legislation on the CRR gets waived away into rules without any legislative replacement. This follows the pattern that the Government proposed in their consultation: once there are rules from the regulators, the statutory instruments are revoked.

Paragraph 2.25 of the Financial Services Future Regulatory Framework Review states:

“The default approach would be for any retained EU law provision that is in scope of the regulators’ FSMA rule-making powers to be taken off the statute book to become the responsibility of the appropriate regulator.”


Therefore, although there may be consultations on replacement rules at the point of revoking the SIs, there are no checks further down the track, so at some time further on all the rules could be revoked too. As a practical matter, that will not happen, but it is possible that for some things big changes could happen. It is probably more of a worry when it is happening to the wider generality of financial services legislation than with standards that are underpinned by Basel provisions, but I make this point because the Minister said on Monday at the start of Committee that everything is being listened to in the context of the consultation, although I must say that his replies so far do not inspire too much confidence.

It may seem convenient to have a more flexible arrangement of having regulators doing everything and not bothering Parliament with statutory instruments, and the view being pushed by the Government seems to be that Parliament should not become too bothered by rules because they contain frightening Greek letters such as Σ that really just indicate some very simple sums that could easily be explained in a sentence. Underlying that is that there should not really be challenge, only fig leaves and what the noble Lord, Lord Holmes, called the rear-view mirror.

Even though I have no great love of statutory instruments as a measure for showing parliamentary consent, there is a qualitative difference compared with rules, and I want to flag up that this clause is where the notion that we will no longer have any firm policy against which to hold the regulator accountable is endorsed. From here on, the regulator makes the policy, and there is no policy guidance between the regulator’s rules and the simple objectives, have-regards clauses and perhaps a few generalised statements, such as supporting UK economic growth. I do not like this sparseness, and it is ridiculous to suggest that rules are constantly, rapidly needing change. That is not true and not internationally sustainable.

To some extent the Government acknowledge this, otherwise there would not be the statement in the consultation that some things may have to be put into SIs as a consequence of equivalence decisions. So other countries can measure our standards, but not Parliament. How embarrassing. I heard what the Minister said in reply to my equivalence information point in the first group today. He said that such things may have to stay out of the public domain—at least until they become a statutory instrument—but I never suggested that they be public, just that there should be some sharing with Parliament about the policy direction. I am pretty sure that the EU will take the view that regulator rules alone are not enough and are potentially too transient when it comes to such a large financial centre as London, not least when it comes to looking at the lavish use of “bespoke”, which was always one of Brussel’s most hated words because it thought, and I tend to agree, that it was tailoring cut to flatter and trick the eye. That is fine for clothes, but not so good for financial services rules.

As I want to mark resistance to this passing of all policy to the regulators so they end up held accountable only to their own rules, I support the noble Baroness, Lady Bennett, in the suggestion that Clause 3 does not stand part.

[Viscount Trenchard (Con)]

My Lords, I understand the purpose of Amendments 24 and 25, in the name of the noble Lord, Lord Tunnicliffe, but do they suggest that he would like to stick with the enormously detailed and prescriptive provisions of the CRR as they are in retained EU law? The Government’s intention to transfer most of the provisions of the CRR into more flexible rules is right. The PRA will be able to react more quickly if it needs to change particular rules, and this should reduce the risk of failure of banks in the future.

The Government have been clear that the UK’s regulators are the right people to set the detailed, firm-level rules to implement the remaining Basel standards. Of course, as discussed in previous debates, and supported by noble Lords on all sides of the Committee, we need proper parliamentary oversight of the PRA before it starts to use its new powers. The wording in the noble Lord’s amendments suggests that he wishes to reduce the degree of flexibility that the Treasury will grant the PRA, but I think that that might be counterproductive. Does he not accept that, as we move to a simpler, more flexible, outcomes-based regulatory framework, there should be less detailed prescriptive rules?

The noble Baroness, Lady Bennett of Manor Castle, wants to retain all the CRR rules in legislation. I cannot agree with her approach, which might damage the attractiveness of the City as a financial centre. She referred to Singapore-on-Thames, which is becoming a fashionable way to describe a light-touch regulatory regime, but is she not aware that Singapore is one of the best and most strictly regulated centres in the world? It is strict, yes, but much simpler and less cumbersome and bureaucratic. Does the Minister agree that we need to return to a simpler, different, more flexible and agile regulatory style?