Financial Services Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Monday 1st March 2021 Grand Committee

Moved by

[Baroness Bowles of Berkhamsted]

29: After Clause 5, insert the following new Clause—
“Further matters for regulators to take into account
When making rules using their powers under the Financial Services and Markets Act 2000, the Prudential Regulation Authority and Financial Conduct Authority must—(a) have regard to competition within the contexts of—(i) the availability of consumer choice and fair pricing;(ii) the development and encouragement of new products and new industry;(iii) the desirability of supporting the international reputation of the United Kingdom for good governance;(b) structure the rules to establish clear categories for different types and sizes of financial service businesses including—(i) in banking, for small co-operative, mutual and community banks;(ii) in insurance, for captives and reinsurance.”Member’s explanatory statement
This is a non-exhaustive example of additional high level policy that could be embedded in the remit for the Regulators.

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

My Lords, I support all the amendments in this group and will speak to my Amendment 29, which suggests further measures for regulators to have regard to. I also remind the Grand Committee of my financial services interests, as in the register.

“Have regard” clauses are the only things that the Government are proposing as additional accountability measures in this Bill, or as the “activity-specific regulatory principles”, in the language of the HMT consultation. Indeed, views were sought in question 2 of the consultation concerning more “have regards”.

The first part of my amendment seeks to give the PRA, as well as the FCA, a set of competition considerations relating to consumer choice and fair pricing, the development and encouragement of new products and new industry, and the desirability of supporting the international reputation of the United Kingdom for good governance. These are self-explanatory, but giving encouragement to new products and new industry is something that is important for both regulators. There is overlap here with issues that were discussed in the competition group on the first day of Committee. This is the kind of measure on which it seemed there was more consensus, but I will not repeat that debate.

The second part of the amendment, also under the umbrella of competition, in proposed new subsection (b), suggests that rules establish clear categories for different types or sizes of business, and two examples are given for banking and insurance. The regulators frequently inform us that they apply proportionality, but it is often within an overall regime that does not allow specific or easy identification of a stand-alone category and may not always take advantage of all legitimate considerations.

In banking, I have highlighted regimes for small co-operative, mutual and community banks. I have the impression that these banks have been at best tolerated by the PRA, rather than encouraged; perhaps it is awkward for the PRA to have more banks to deal with, perhaps there is no promotion from working with the small guys, or perhaps it is like it was with the old FSA and everybody wants the big glamour jobs. It seems to me that, for quite a long time, the public and parliamentarians have been saying that they want banks in the community, understanding the community and with purpose linked to the community, but the atmosphere in the PRA still seems to be one of reticence and suspicion.

For insurance, there has also long been a call to have better-elaborated categories that deal with different types of risk transfer. This is something that other countries have done, notably carving out specific regimes for captives and reinsurance, which has given them a competitive advantage. I should like to be able to see what the UK is doing in this regard and compare it much more easily with Ireland, Luxembourg or the Netherlands—or, indeed, Bermuda. It has always been possible; it is nothing to do with being in the EU or not—it is our regulators.

Recital 21 of Solvency II states:

“This Directive should also take account of the specific nature of captive insurance and reinsurance undertakings. As those undertakings only cover risks associated with the industrial or commercial group to which they belong, appropriate approaches should thus be provided in line with the principle of proportionality to reflect the nature, scale and complexity of their business.”


Of course, the attitude of HMT and UK regulators to recitals in European legislation is that they are not binding and so they are not interested, but other countries have taken notice. It is all very disheartening, as it was British MEPs who worked hard to get those words in there. Therefore, I would quite like to have another go with a “have regard”, where at least the regulators would have to explain why they have disregarded it.

The Central Bank of Ireland took the recital to heart and, taking the definition of a captive from Solvency II, has defined a “direct writing captive insurer” for which there is a specific “differentiated supervisory approach” under which the solvency, capital and governance requirements are less onerous. That approach is justified by the narrower risk referenced in recital 21. Are these the sort of more flexible, tailored kinds of rules that the Minister would like to see put to good use in the UK? If so, then maybe, over a decade on, we can get to where we should have been. Even if we do not, this illustrates a significant example where having the regulator’s justification for not “having regard” would at least be useful. I beg to move.

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[The Deputy Chairman of Committees (Lord Russell of Liverpool) (CB)]

I have received no requests to speak after the Minister so I now call the noble Baroness, Lady Bowles of Berkhamsted.

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

My Lords, I thank all those who have participated in what has turned out to be quite an interesting debate. It seems that most or all noble Lords have managed to put their fingers on one or two points. It would be useful if the regulators could look through this debate, and maybe the Government could also look through it a little bit more when we get offline.

The noble Lords, Lord Holmes, Lord Naseby, Lord Stevenson, and the noble Baroness, Lady Kramer, all linked together the fact that, post-Covid, changes will be going on. Younger people in particular are looking to bank in different ways; they want to use their local services. Although I listened to what the Minister said about this Bill enabling the PRA to act in more proportionate ways, I know for a fact that they can already do that but do not. So there needs to be a little bit more encouragement. To go back to my first amendment, if things were more transparent in terms of having a category and saying, “This is how it is for a bank of small or medium size, or mutual,” we would be able to see how that proportionality works. At the moment, we are told that it is there, or “You can’t do it because of the EU”, and that is simply not true. Let us take the example given by my noble friend Lady Kramer about the MREL. You do not have to have the MREL kicking in at such a level for the medium-sized banks; that was very much introduced as something for the larger and more systemic banks.

My plea is: look at what this is asking. My basic “have regards” provisions were asking for us to have something that shows us the categorisations, layers, tiers and the strata—whatever you want to call them—so that it is clear for everybody. As the Minister herself said, there can be lots of places where things are too complex; it is not just for MREL. That is exactly the point I was trying to address: you have to go across the whole suite of regulations and bring together what is relevant for the different categories, not have the smaller banks having to fight their way through and find out that there is no consistent set of proportionality requirements.

We have started an interesting conversation here; there may well be some point that it is worth us pursuing when we get to Report on categorisation as a “have regard”. I see nothing wrong with that: we are not telling the regulators what to do but asking them to have regard because we think there has not been enough of it already. I am interested in carrying that forward, but, for now, I beg leave to withdraw the amendment.

Amendment 29 withdrawn.

Moved by

[Baroness Bowles of Berkhamsted]

30: After Clause 5, insert the following new Clause—
“Skilled person review of supervisory bodies
(1) At least once every five years, an independent skilled person review must be conducted of—(a) the Financial Conduct Authority and(b) the Prudential Regulation Authority.(2) The body set up to conduct the independent skilled person review must include a person nominated by resolutions of the House of Commons and House of Lords.(3) The independent skilled person review must include a review of— (a) internal operations and controls;(b) systems for responding to whistleblowers, Parliamentary correspondence and reports, and public concerns;(c) regulatory perimeters;(d) the effectiveness of relevant legislation and rules and the regulatory burden;(e) whether all statutory and public policy objectives have been met;(f) the operation and effectiveness of engagement practices before and during rule making;(g) the skills base of the Authority’s staff;(h) any other matter the skilled person considers relevant;(i) any other matter requested by a relevant Committee of the House of Commons or House of Lords.”Member’s explanatory statement
This amendment suggests a generalised review, not linked to specific fault or failure, of a kind that exists in other jurisdictions.

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

My Lords, I have already trailed the notion of regular independent reviews of regulators in an earlier amendment, but this amendment gives an opportunity to investigate it at greater depth.

In the Government’s consultation and in the context of the Bill, we are told that we are returning to basic FiSMA, getting rid of the statutory instrument layer containing EU-made legislation and going back to what was devised by the UK for the UK. However, it is worth noting that FiSMA never really stood alone, because the EU’s financial services action plan, laid out in 1999 and broadly completed by 2004, meant that the extensive consultation, public transparency and policy co-ordination of the EU was there and growing from the start of FiSMA and, by the time of the 2012 reforms, the EU’s rigorous regulatory and supervisory architecture was in place. Although those things were viewed as annoying by some—perhaps by many—in the UK, changes are now happening by going standalone, including loss of peer-reviewed rules and loss of peer-reviewed supervisory practices. That is especially problematic for the conduct and markets side, given the less developed international co-ordination.

After the financial crisis, the missing element of supervisory quality control was a primary driver behind the EU regulatory architecture reform, its absence being considered part of the reason for the financial crisis—a view much reinforced by the admissions of the FSA in the Turner report. Unwillingness of regulators to see the writing on the wall had certainly been a flaw in the UK. The fundamental gap of supervisory quality control has not been routinely addressed domestically; we just get reviews after failure happens. This gap will be more critically exposed in a standalone system where the regulators make all the detailed policy and all the rules as well as supervising.

Our immediate history, especially with regard to the FCA, is of repeated supervisory failures, already elaborated last week by the noble Lord, Lord Sikka—the latest being the Gloster report showing operational failures. In the news last week was the FCA being too slow on buy-to-let cars, and many more cases are bubbling on. In every case, warnings have been ignored. Private Eye often gives a good summary of what is going on, as do the broadsheets.

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[Earl Howe (Con)]

My Lords, this amendment would require an independent review of both the FCA and the PRA every five years, and it sets out a number of things that the review would have to cover. The FCA was created to ensure that relevant markets work well. In practice, that means regulating the conduct of firms to make sure that the financial services sector is serving the interests of individuals, businesses and the economy as a whole. It has a broad remit and is responsible for regulating nearly 60,000 firms.

I accept the point made by the noble Baroness, Lady Bowles: the recent investigations by Dame Elizabeth Gloster and Raj Parker have shown that the FCA does not always get this completely right. However, the FCA is wholly committed to learning from past mistakes. It is addressing the recommendations in both these reports and we can see that commitment being translated into action.

The FCA has set out how it will accelerate its ongoing process of reform, including through its transformation programme led by the new CEO, Nikhil Rathi. It has committed to provide public updates on progress every six months, and it is right that the Government and Parliament hold it to account on delivering these important changes. The FCA absolutely knows what it needs to do, and that it needs to do it under a spotlight, both from the Treasury and from Parliament.

That is one part of my answer to my noble friend Lady Noakes, who asked me how the Government assure themselves that the regulators are fit for purpose. But the noble Baroness, Lady Bowles, spoke about the need for assurance and the noble Baroness, Lady Kramer, similarly, on the need for accountability. I reassure all three noble Baronesses that there already exist a number of mechanisms to hold regulators to account, both to Parliament to the Treasury. I believe that these existing mechanisms are sufficient to achieve the outcomes that this amendment is aiming at. I touched on some of these points in my previous remarks to this Committee, but I will attempt to provide a short summary here.

First of all, the regulators are required to produce annual reports and accounts, which are laid before Parliament by the Treasury and certified by the National Audit Office. The regulators are subject to full audit by the National Audit Office, and the NAO has the associated ability to launch value-for-money studies on the FCA and PRA. The FCA is subject to scrutiny via departmental Select Committee hearings, including the Public Accounts Committee and the Treasury Select Committee, which holds regular six-monthly meetings with the FCA CEO and Chair. The Treasury Select Committee scrutinises the appointments of the FCA Chair and CEO posts, and the Treasury has direct control over appointments to the FCA board and powers under the Financial Services Act 2012 to commission reviews and investigations.

The Treasury is also able to launch investigations under Section 77 of the Financial Services Act 2012 where it suspects there may have been regulatory failure. There are a number of informal mechanisms as well: there is nothing to prevent a Select Committee of either House launching inquiries, taking evidence on them, and reporting with recommendations; that is a decision for them. In speaking to Parliament about this Bill, both the PRA and FCA have stressed that they are committed to appropriate parliamentary scrutiny and will always respond to requests for engagement. Combined, these measures ensure that there is sufficient independent scrutiny of our regulators.

I am the first to agree that this is particularly important in light of Dame Elizabeth Gloster’s findings, but I reassure the Committee that, in addition to these measures, the Economic Secretary meets frequently with the FCA CEO to monitor progress on these critical reforms and ensure that the FCA remains focused on effectively delivering against its objectives. Of course, however, as we have discussed, the future regulatory framework review is considering the appropriate accountability mechanisms for the regulators, so this will provide an opportunity to consider these issues further. I hope that these remarks are helpful and sufficiently reassuring to the noble Baroness to enable her to withdraw her amendment.

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

My Lords, I thank everybody who has spoken in what has turned out to be quite an interesting debate, the majority of whom have supported the general notion of my probing amendment, if not exactly all the specifics that I put into it, which perhaps tried to do too much. To clarify my intention, it was exactly as my noble friend Lady Kramer summarised: it was for a regular review that gave oversight to the regulator’s activities. As the noble Lord, Lord Sikka, said, the systemic factors also had oversight of that change.

I am sure that it is possible for this to come from other quarters. The Minister has suggested that it comes from the Treasury. Perhaps it could come from a parliamentary committee, although what I had in mind was not so much a body that solely took evidence but a few people who could get inside and examine procedures and find out how the operations worked.

Like others, I would like to clarify my concerns here. I know how difficult it is to be a regulator, especially to be the conduct and markets regulator, where things are less tangible than in some of the prudential regulation work, but it is about giving a helping hand. Although a lot of good thought and planning goes into how to address the problems that are exposed every time there is a review, if it is done from the inside, that is never the same as having eyes that come from outside. The thing about having an independent regulator is that, if you want independence, ultimately, the review should be independent. Having those reviews monitored through the Treasury is not necessarily the sort of independence that is satisfactory if you want to say that it is independent, and I question whether it is possible to do it through a parliamentary committee.

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

My Lords, I am pleased to support the amendment from the noble Baroness, Lady Noakes, which, as she explained, was tabled before the benchmarks consultation was launched. I share her thoughts that something nevertheless has to be done quite quickly if there is to be an opportunity to ensure that one can look forward to stability of contracts, knowing that something will be done before the end of the year. Maybe we are again in the territory of Parliament giving a consultation response through the debate.

Switching from Libor reminds me just a little—it is complicated—of the problem that we had with gilts being indexed to RPI rather than CPI, when RPI was both wrong and not being maintained by the ONS. The Economic Affairs Committee covered this in a report; indeed, we were tempted by Mark Carney to try to get it sorted out. Though I paraphrase, I think the report’s message was to grasp the nettle. That is certainly where I stood. That is really what the noble Baroness, Lady Noakes, is saying with the amendments: there needs to be continuity of contract. We do not want lots of litigation, so there needs to be a safe harbour. It makes one reflect on how wise some of the fallback positions possibly were, but we are where we are; in many instances, nobody really expected them to be activated. They are sometimes maybe not fair between the parties.

The explanations given already are very good. It would be useful to have something in the Bill. It might even be crafted in such a way that it could apply as the general precedent if one came across such circumstances again, heaven forbid. Benchmarks do change from time to time: one discovers that something is flawed, therefore one has to correct it. That should not disturb what could be made into something that can operate with continuity, certainty and without disadvantaging either side. I would therefore like the Government to take something up, if that is possible in the timeframe they have given themselves now that they have launched a consultation.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

The next speaker is the noble Viscount, Lord Trenchard.

I believe the noble Viscount is muted. Would he be kind enough to unmute?