Financial Services and Markets Bill

Baroness Bowles of Berkhamsted Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I declare my financial services interests in the register and my membership of the international Systemic Risk Council.

This Bill falls short on accountability. During the passage of the 2021 FSA, I suggested regular independent reviews akin to the Australian system—a more advanced vision than the sporadic reviews in this Bill, which are reliant on government initiation. Why not have rolling and thematic reviews and regulators reporting to Parliament under independent assessment criteria, such as from the NAO?

The framework consultation touted parliamentary scrutiny as a safeguard, but that is deceptive when the Government have blocked adequate parliamentary influence. Committees have modest power through public interrogation, and Ministers now regularly avoid attending Lords committees. Should parliamentary reports not get specific attention in review processes, not least to reflect public interest, which is left faint among the numerous industry hotlines to Downing Street? The Government cannot hide behind regulatory independence when they fix the regulatory perimeter and key policies, appoint regulators and control reviews. Failure is on the tab of government—maybe a different one further down the track, but the collective reputation of the UK in financial services is on the line.

We have just had an example of that with the market turmoil from DB pension schemes. At its root is the setting aside since 2005 of EU rules requiring pension scheme investment to be vanilla because pension schemes have only light-touch supervision and trustees are mainly ordinary folk and not financial experts. Trustees were thus left at the mercy of unregulated, liability-shirking advisers and the hapless Pensions Regulator.

I have been involved in investigations through the Industry and Regulators Committee, giving evidence to the Work and Pensions Committee and participating in conferences, where polling on the biggest loser in the debacle put the reputation of the UK top. Gilt turmoil is a named issue in papers for international organisations looking at systemic risk.

The timid excuse is that we are waiting for international agreement relating to non-bank systemic risk—that is outrageous, given that this is a UK-created and UK-specific issue of financial stability, with a regulators’ muddle, gaps and an issue that the Financial Policy Committee should have been all over. In evidence to the Economic Affairs Committee, Sir Paul Tucker questioned the point of the Financial Policy Committee if all it does is report. Now, there is some pulling up of socks, again after the event. Systemic risk exists in many funds, but the corralling and correlation of risky investment strategies in pension schemes with emphasis and concentration in gilts is uniquely ours, uniquely crafted and well-known where it should have mattered. It is not black swans and larger buffers; Bank of England yield tables show turmoil well under way at under 40 basis points’ change, and the transposition dirty secret has long been protected by the Treasury and its alumni.

The Bill also touches on issues of cryptocurrency and critical third parties, a reminder that financial services are not really penned in to entity and activity-based perimeters. As the IMF said, we are already into the era of reimagining regulation, otherwise it is not possible to cope with fintech or big tech which blur and exploit the boundaries of regulation. Online brokerage mimics the addictive features of social media, targeting the vulnerable. We regulate gambling but we do not even have robust age verification for online investing. Fraud is at epidemic levels and respects no regulatory boundaries. Far from having agile principles and simple regulation, we have a rigid perimeter and rule dinosaur, which is fostering fraud and revelling in the abuse of position and asymmetry of information. Regulators are operationally inefficient, underfunded, late and thwarted on enforcement.

Financial services are the food of the economy. Where there is harm, there should be justice—and not just where it is regulated. I will be offering amendments.