Spring Budget 2024

Baroness Bowles of Berkhamsted Excerpts

Monday 18th March 2024 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I declare my interests as in the register.

The economy is in the doldrums, which gave the Chancellor little room for manoeuvre. I will address two mendable reasons for the doldrums. One issue will come as no surprise; it is the double-counting cost disclosure that is killing the investment trust sector. The Mail’s “This is Money” led yesterday on over 130 investment company directors—representing some £120 billion of assets—writing to the Chancellor about the urgency of changing EU rules that the UK is applying in a draconian, gold-plating form.

I know that it is gold-plating and not law because 10 years ago, while I was chair of the European Parliament’s ECON Committee, I suggested exempting investment trusts from the PRIIPs definition. I was told by EU officials I could not exempt what was not covered. In Ireland, legal opinions were obtained that investment trusts were not covered. Interaction with MiFID requirements—also gold-plated—has created the disaster of a shutdown in fundraising and daily news of investors leaving the sector.

Every day, long-only managers suffer redemptions and net outflows of funds from portfolios which hold investment trusts. Every day, there are weak share prices with deep discounts to NAV across all categories. Every day, there are scarce bids in the market, and those that there are, are mainly arbitrageurs with shorter time horizons than the usual long-term investors such as wealth managers and pension, charity and multi-manager, multi-asset funds. Every day, British assets are snapped up cheaply by overseas purchasers. Every day, independent financial advisers, local authority pensions and charity funds scrub investment trusts from their advice or portfolios because “It’s too complicated to explain that the high costs aren’t true”.

Some £7 billion-plus a year of critical funding into UK infrastructure has been wiped out, with projects being starved, sold and bust, and jobs lost and businesses closing in the real economy. I am sure the Chancellor would have liked to announce £7 billion a year of investment that did not cost the taxpayer anything. Instead, it is being killed.

I know the Minister will say that the Government are working at pace to replace EU legislation, but I really do not understand why UK-specific gold-plating is not just taken away for an instant solution. This has been going on at critical levels now for two years, and damage may be irreversible, with habits changed. How will the Government redress that? It poses the question of what on earth can ever be done, truly at pace, when there is an emergency. Something is badly wrong, and it is not just because it is retained EU law; actually, it is only retained FCA interpretation. Of course, there are other headwinds on trusts, but this is the big one, and the correctable one.

The second topic is that which was raised by the noble Lord, Lord Hague, and Tony Blair in their joint report: initial procurement from young UK businesses and the need to have a buyer of first resort. One of the reasons tech companies go to the US to list—to the detriment of our wider economy—is to obtain sufficient core procurement to establish themselves. Success is not all about investment, or loans; they are more plentiful here than procurement.

Lack of UK procurement is endemic across the private and public sectors both for young innovative companies and for those big enough to be in the public eye. One example is Graphcore. Given the UK’s desire to be a leading nation for AI, why is it missing out on opportunities in favour of more established overseas companies? Can the Minister name any domestic procurement success stories?

Newer, smaller technology firms first have to seek grants, often offering below minimum wage daily rates once the cost of applying is factored in. Then innovation procurement in the public sector is not really available. Instead, they are offered open competitions for crossover support, such as commercialisation grants, which use up time and resources, but do not end in procurement.

Underpinning this malaise is that it is far easier for a department to procure a large consultant than it is to procure a young technology business. Barriers include fear or lack of willingness to trial a new technology, concern about becoming stuck with the new technology provider, and fear that the technology not working will be seen as a failure. The fact that departments already end up stuck with the usual suspects, plus failures, via the usual consultants, seems not to feature. The syndrome of “can’t be blamed for choosing them” seems to dominate, whether the procurer is government, via tier 1 contractors or management consultants, or the private sector.

The economy needs procurement from the ground up: the vital first £1 million contract win, which will then grow with such a business if it shows good product or service quality. This is the route to a broader, more competitive supplier market and a wider knowledge universe. Over time, it will reduce reliance on a procurement process that always gets dominated by incumbents and foreign competitors. It will eventually lead to homegrown talent staying and listing at home.

Alternative Investment Fund Designation Bill [HL]

Baroness Bowles of Berkhamsted Excerpts

2nd reading
Friday 1st March 2024 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I declare my financial services interests as in the register. I congratulate the noble Baroness, Lady Altmann, on her speech and on the great energy that she has put into seeking clarity for the consumer, and fairness for listed investment companies and their investee businesses.

A series of legislative time bombs planted under listed investment companies have culminated over the past two years to force misleading information to consumers and strangle a thriving sector that is over a third of the FTSE 250. The first bomb was the alternative investment fund managers directive, and this Bill starts by excluding listed investment companies from the UK version. Industry representations to the EU Commission in 2009 explained that listed investment companies were already significantly regulated and transparent, but they were never explicitly excluded—and indeed the UK itself then removed wriggle room that other countries use. This was the start of the UK ignoring the fundamental structure and regulation attached to a listed company.

AIF categorisation meant that these listed companies had to have fund managers and reporting requirements that are expensive and duplicative of listing requirements and set aside the proper role of company directors. Then the FCA further railroaded listed investment companies along a track that should never have existed. It was the start of pretending that they are the same as open-ended funds when they are not, and the start of misleading consumers into thinking that they should select by the same criteria, focused on assessed net asset valuations and fund manager costs rather than the real market value of shares, bought and sold using the established indicators of premium or discount that signpost market sentiment about assets, performance and costs or expenses. Explicit details of each of those were always presented anyway.

AIF classification seeded the treatment of a listed security as a financial product, which is remarkable given that the definition of a financial product is that it has a value derived from reference values not set by the market. But ignoring market valuation is a central plank of the FCA’s excuses for levering listed investment companies inside subsequent legislative bombs when the EU legislation itself actually did not.

Bomb number two came along with packaged retail investment and insurance products legislation. The clue is in the name—“products”—and as I have said, a listed security is not a financial product, but the FCA pretends it is. The PRIIPs legislation even contains its own definition of the collective investment undertakings to be included. The definition is:

“an investment ... where the amount repayable is subject to fluctuations because of exposure to reference values or the performance of one or more assets which are not directly purchased by the retail investor”.

But listed company shares do not have an amount repayable; you sell the shares on the stock exchange. This is among the issues I have challenged with the FCA. It reverts to suggesting—albeit in witnessed mumbled verbal comment rather than a written response, but witnessed—that there “can sometimes be amounts repayable, in some circumstances”, by which it means insolvency, hardly a mainstream interpretation. In Ireland, when the then FSA’s interpretation first became known, three counsels’ opinions were commissioned, all of which stated that listed investment companies did not fall within the definition, so Ireland kept them out, as did everybody else.

Listed investment companies can be found on stock exchanges all over the world but only the UK, through the FCA, maintains its own irrational interpretation that differs from common understanding. As a consequence, the tangle of ill-fitting and misleading disclosure requirements started which has destroyed the market. Clause 3 removes listed closed-ended funds from the misapplied cost methodology in PRIIPs.

The coup de grâce came via MiFID II in 2018, when Investment Association guidance—it insists that it follows FCA interpretation—resulted in the UK forcing firms to allocate listed investment companies’ corporate expense numbers into an EU-wide industry reporting data template, which then displays them as ongoing cost forecasts on platforms such as Hargreaves Lansdown, AJ Bell, Fidelity and so on. The displayed information indicates that there are ongoing charges in connection with holding listed investment companies. This is untrue, of course, because the share price has already factored them in: that is what you have bought, and that is why every other country puts “zero” in the template. It also feeds in to wrongly elevate the costs of funds holding investment companies. Everyone in this chain of misinformation, from authorised corporate directors to platforms, is part of an FCA-sponsored failure of consumer duty that has killed off investment by frightening away consumers and causing fake breaching of cost caps.

This coup de grâce would never have happened if the legislation were interpreted as written, but the FCA has, again, its own conniving explanation to wheedle listed investment companies into a slot where they do not belong. It deliberately misinterprets “value”. The annexe of the MiFID Commission delegated regulation is clear that only deductions from the value of the investment should be aggregated as ongoing costs, because that is what the investor loses. But the FCA insists that deductions from assessed net asset value must be included in the cost disclosure and, as a direct consequence, the investor is informed as if they have to pay them again, and annually, when the truth is that the efficiency of the company and its expenses are already taken into account in the actual market share price—share price undeniably being the investment value to the consumer.

Ignoring the harm, the FCA listens to voices urging this fake comparison with open-ended companies. You might as well compare ice cream and toothpaste—they are sometimes both white—even while the FCA’s own consumer panel is warning against simplistic measures such as these. Nowadays, even the superficial similarity with open-ended funds is gone, with most listed investment companies investing directly in real economy assets, not other listed equities. Meanwhile, the FCA takes no action against a few large firms that do not comply, probably knowing it would lose the litigation, showing inconsistency and further distorting competition, knowing that ACDs and smaller firms cannot take the risk.

The FCA also claims that it cannot help, as it has no leverage over an industry-run reporting template, despite the fact that it is based around the FCA’s core misinterpretation and all the actors are regulated by it. It would have to say only, “It is really a zero”, but the leading official has said—witnessed, in the presence of their superiors and more than once—that they do not want zero and “What’s the problem? They can always not list under chapter 15”. That means that they are reading different listing rules than I am. Clause 2(3) clarifies that, for closed-ended listed investment companies, the value is the share price. Other amendments clarify that there is nothing relevant in UCITs.

[Baroness Swinburne (Con)]

My Lords, eight minutes is guidance, but we appreciate it if people try to stick to it. If the noble Baroness will close, I will be very grateful.

[Baroness Bowles of Berkhamsted (LD)]

I will exercise my privilege to continue, if the House is willing. It is necessary for such an important subject.

The FCA alleges that it cannot change the rules to undo the misleading cost allocations, as they are in retained EU law, but as has been said, it has to change only its own interpretation. For the record, the damage that the FCA’s illegal, irrational and inconsistent interpretation is causing includes: some £15 billion and counting of lost investment in real UK assets that has largely gone overseas; depriving SMEs in manufacturing, technology and infrastructure companies in the real economy of investment, affecting jobs, tax revenue and causing cheap asset sales to foreign buyers; depriving consumers and pension funds of investment opportunity in the real economy; and causing reputational damage to UK markets and regulation. And, yes, we are being laughed at for this mess. EU people phoned me up at Christmas to tell me that.

Add to that harming international competitiveness and presiding over a market failure caused by knowingly tricking the consumer, and I ask myself how many jobs should go at the FCA. Do not be fooled into thinking that it cannot do anything. It is “won’t”, not “can’t”, and it is accountable for that. If nothing is done, our system is demonstrably broken. This Bill and Parliament can offer a fix.

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

I will come on to gold-plating. I am not entirely sure that everybody is in alignment on whether or not this regulation is implemented, but consultation is just good government. I do not see us making substantial changes to the regulatory scope on the basis of having not done it before we are not going to do it now. We need to get it right, but we absolutely support the investment company sector and want to get on with this. That is why I am so grateful to my noble friend Lady Altmann for bringing this forward, allowing us to have a conversation in the Treasury and beyond.

I turn to the second element: cost disclosures. My noble friend Lady Altmann has rightly identified that EU-derived legislation is not currently fit for purpose, as many other noble Lords, the Government and the Financial Conduct Authority would agree. The packaged retail and insurance-based investment products regulations, commonly and more easily known as PRIIPs, were originally meant to provide more transparent and standardised disclosure for retail investors across the European Union. Noble Lords are well aware that there are many problems with the EU PRIIPs regulation. It is prescriptive, misleading to retail investors and prioritises comparability over a wide range of financial products at the expense of consumer understanding.

That is why, as part of the Edinburgh reforms, the Chancellor announced that, as a priority, the Government would reform PRIIPs. We have already made significant progress on delivering this commitment. Most recently, at the Autumn Statement last year, the Government published a draft statutory instrument to replace PRIIPs with a new framework tailored to UK markets.

We understand industry’s concerns regarding broader legislation that prescribes firms to calculate their costs as they are required to do so now, and so the Government and the regulator have not stopped there. At the same Autumn Statement, the Government announced that they would bring forward the repeal of relevant cost disclosure provisions in the markets in financial instruments directive, or MiFID, alongside the replacement of PRIIPs.

Many noble Lords have mentioned that the FCA has published the forbearance statement, and some feel that it has not gone far enough. I will ensure that the FCA is made aware of the debates that noble Lords have had today. There has been significant criticism, which it will no doubt be interested in, and some suggestions of how it might be able to go forward.

I hope that this brief summary has provided sufficient reassurance to my noble friend Lady Altmann, and to all noble Lords, that the Government are treating this as a priority. We have a comprehensive plan to alleviate the harms faced by the investment company sector, but are committed to making sure that we get it right for the long term, to ensure that 150 years already gone by becomes another 150 years in the future.

I have mentioned consultation, so I will move on from that to cover some points raised in the debate on timelines. I accept that, for many noble Lords, and indeed Ministers, it is never fast enough. This was mentioned by my noble friend Lord Hannan and the noble Lord, Lord Macpherson. We are delivering a very ambitious programme to build the smarter regulatory framework for financial services. At Mansion House, the Government removed almost 100 pieces of unnecessary EU legislation from the statute book, and now we are looking at wider reforms—those mentioned in the debate today and others, including Solvency II—that will deliver the biggest potential benefits.

I note that my noble friend Lord Hannan would have liked us to go through things in a different way. The Treasury is very much focused on looking at where we can have the biggest and quickest potential benefits to economic growth. We are conducting a phased approach to bringing in this change of regulation because we must also ensure that the system and different financial sectors can cope with this change in legislation.

I note the invitation from the noble Lord, Lord Macpherson, to make commitments from the Dispatch Box on certain matters. I am not able to do so just yet—maybe soon.

There is debate around gold-plating. I hope that that will all be laid to rest as we are able to reform this and ensure that we have the right framework going forward.

My noble friend Lady Altmann mentioned investment companies being removed from platforms. We note and recognise the frustration that some investment companies feel at having been removed from investment platforms. I reassure her that, although this is a commercial decision, the Government and the FCA are well aware of this issue and are carefully considering what options are available. Ditto in the use of the EMT, the MiFID template. This is a voluntary template, but we understand that it may not be providing the best information to retail investors at the current time.

Many noble Lords have noted the competitiveness of the UK capital markets. That is what underpins the smarter regulatory framework. Despite recent challenges, the UK has many vibrant and dynamic capital markets, and they remain some of the deepest and strongest globally. However, we cannot rest on any laurels; we have to keep moving forward in this area. That is why the Government are delivering on my noble friend Lord Hill’s listings review, the wholesale markets review, and the Chancellor’s Edinburgh and Mansion House reforms.

The noble Lord, Lord Davies, mentioned the FCA’s activities and scrutiny of the regulator’s role. My noble friend Lord Reay mentioned the FCA’s D&I work, as did the noble Baroness, Lady Kramer. Parliament does have scrutiny over the FCA and many other regulators. Assimilated law is being replaced, in line with the UK’s domestic model of regulation. This means that the UK’s independent financial services regulators will generally set the detailed provisions in their rulebooks, instead of firms being required to follow EU law. This approach was following two consultations and it received broad support across the sector. Parliament debated this approach during the passage of the Financial Services and Markets Act 2023, and it secured parliamentary support then.

The Government recognise the importance of effective parliamentary scrutiny of the regulators, including their approach to rule-making and other activities that they may choose to undertake. That is why FiSMA 2023 introduced additional mechanisms to strengthen Parliament’s existing ability to scrutinise the regulators’ work, including requirements for the regulators to notify parliamentary committees, such as the new Financial Services Regulation Committee, of their consultations and to explain, when publishing final rules, how representations by parliamentary committees have been considered. I warmly welcome the formation of that committee. It will be hugely helpful, and it is quite right and proper that independent regulators are held to account by Parliament.

I will write with a few further comments on the investment in the UK capital markets by UK pension funds and on a few other issues which have arisen and need a fuller response. For the time being, I am very grateful to my noble friend Lady Altmann and many other noble Lords for their continued championing of the investment company sector.

[Baroness Bowles of Berkhamsted (LD)]

I am sure that my interruption is unwelcome, for which I apologise, but it is quite important. Further consultations have been measured and, as my noble friend Lady Kramer pointed out, the aspects of PRIIPs and MiFID where there has been gold-plating that is causing these problems were never consulted upon. It is within the gift of the FCA to make changes.

These cost disclosure issues have featured massively already in two consultations from the Treasury on PRIIPs and in evidence that was submitted to the Treasury last summer, after my own attempt to amend FiSMA 2023. On these discrete issues, legislation does not need to be amended; what the FCA is doing needs to be amended. Support has been heard from these Benches and the Labour Benches for the Government taking more intrusive action. Has that message been received or are we still bogged down in officialdom and consultations? That is what we want to know.

Alternative Investment Fund Managers Regulations 2013

Baroness Bowles of Berkhamsted Excerpts

Monday 13th November 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, I agree with my noble friend in recognising that investment trusts play a vital role in raising capital for infrastructure projects across the UK. The FCA is of course independent, but I understand that it is taking forward work to look at what can be done in this area while we take forward the wider programme of measures to repeal retained EU law and replace it with UK rules that will help to address the issue that she raises.

[Baroness Bowles of Berkhamsted (LD)]

Does the Minister recognise that the debate around aggregated cost disclosure and associated errors arising from misapplied legislation has highlighted difficulties of amending retained EU law rapidly and the absence of FCA powers to amend legislation or issue useful forbearance notices when needed, given concerns about FiSMA Section 138D on right of action? Can the Minister explain whether His Majesty’s Government are considering how emergency action or forbearance can safely be introduced to avoid being in a tighter static regulatory bind than when we were in the EU, where ESMA had more flexibility and power?

[Baroness Penn (Con)]

I reassure the noble Baroness that the FCA has the appropriate powers to implement regulatory forbearance where it considers it appropriate, but it must operate within the legal framework and it does not have the powers to amend legislation—that is for this House to do. It is right that forbearance can only be a temporary, short-term fix. That is why the Government are committed to repealing and replacing retained EU law, including legislation related to cost disclosure, under our smarter regulatory framework.

UK Economy: Growth, Inflation and Productivity

Baroness Bowles of Berkhamsted Excerpts

Thursday 29th June 2023 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, we have had an interesting and important debate and I thank the noble Lord, Lord Eatwell, for putting it on the agenda. We have had wide-ranging speeches about the macroeconomics of inflation, higher interest rates and the woes of productivity and growth. As a business owner in the 1980s, I remember all too well having a commercial mortgage rate around 17%, and inflation being rampant.

While people are hurting again now in a similar way, the remedy exercising my mind is at the more microeconomic level of getting investment into the real economy—for that is the way to growth, productivity and prosperity. My focus is founded on my experience as a patent attorney working with scientists, engineers and management in start-ups and big business alike, because innovation and how to fund development must march together for growth.

An irritation frequently voiced is that the UK’s capital markets have not served UK innovators all that well. Headlines about tech listings going to the US rather than the London Stock Exchange have featured recently, but my heart was breaking long before I became a non-executive director of the exchange —which, by way of a declaration of interests, is a position I still hold, along with other interests as set out in the register. But in this place, I speak for myself.

I am glad that there is now a focus on how to get more investment into productive parts of the UK economy, including from pension funds. That is the right direction of travel, despite the complexities that exist around trustee fiduciary duties and regulator priorities. Pension contributions and investments are so tax-advantaged that looking for public good in the economy from these investments is justified. However, we need to look at the way in which we manage to shoot ourselves in the foot at the microeconomic level, seemingly at the first opportunity.

On Tuesday, we completed the Financial Services and Markets Bill, which includes a secondary competitiveness objective—albeit this was controversial for some, given the misguided approach of the old FSA to its competitiveness objective. However, now that it is there, it is important that it is used to enhance the competitiveness and soundness of the UK’s economy as a whole, and is not just inwardly focused on financial services.

However, all this will be meaningless if the FCA continues to sit on the obvious and unnecessary regulatory damage to the real economy happening now through the decimation of the listed closed-end investment fund regime, also known as investment trusts. These were once a jewel in the London funding ecosystem and a major route for investment in strategic industries and infrastructure, including by pension funds—a jewel of vital importance in the green sector for renewable energy and battery storage, where over £30 billion has been raised and invested in recent years. That is, until July last year, when the FCA and the Investment Association switched off investment funding through new guidance on cost disclosures.

It boils down to ticks in wrong boxes, as I have previously elaborated in detail and recorded in Hansard for 6 June at column 1348. The new guidance came from the Investment Association, on the request and/or instruction of the FCA, even though the FCA website said in January 2022 that, following the extension of the UCITS exemption in the UK’s PRIIPs regulation to 2026, there would just be end-date changes relating to the supply of investor information documents. There was no mention of other changes, implying that the situation would remain as it was until 2026. But, despite a suggested status quo, other changes were initiated, seemingly by this instruction from the FCA to the IA on new guidance.

The guidance has its inspiration in the PRIIPs directive, which is just about to be revoked as unsuitable for purpose in the UK. I can personally attest that the investment trust structure was not properly understood in Brussels when PRIIPs was negotiated, but it has taken this latest UK initiative for guidelines to bring havoc that PRIIPs never did before, nor has in other countries. This is not just a trivial, irritating matter; it is huge, because of the important place that investment trusts have had in the market as a route to collective investment in less liquid instruments, with the holding being made liquid through the listing.

There are various consultations around, to which industry associations and industry participants have made submissions that the new guidance should be revoked. The IA itself has responded to a Treasury consultation, asking if it can revoke the guidance, and letters have been written to the FCA by industry participants. Yet, somewhere in the FCA this is being sat on, instead of rapid corrective action being taken, with the IA saying that it needs amended guidance from the FCA for it to be able to make any changes.

So, while the IA and the FCA each point to the other for updates, new money has been all but shut off since last July because ticks have been put in the wrong boxes. These are multibillion-pound levels of lost investment if you consider the more than £30 billion raised in well under a decade just for the renewable energy and battery storage sector. If we wait much longer, still more enterprises will be starved of funds or, as is already happening, investment will go to Dublin, which, of course, has all the same PRIIPs and MiFID legislation but just has not put ticks in the wrong boxes.

My challenge to the FCA is this: show that you are up to the job and fix this before the end of the summer holidays so that IPOs and fundraising can start again in September. It takes but a word—“stop”—to flick the switch to where it was, doing nobody any harm over a great number of years, and to where the public pronouncements of the FCA seem to indicate it should have remained. We had investment trusts that worked and were lauded for years. We need them back. Every day of delay equates to around £12 million of lost investment to the strategically important clean energy sector. Twelve months, already gone, means over £4 billion and counting since the switch was flicked.

This is not competitive and it is not consumer protection. It is destroying markets, not protecting them, and it is damaging existing funds, blocking both investor opportunity and economic growth. It is setting us behind in meeting environmental targets and it is wrecking the closest thing we have in this country to a sovereign wealth fund.

What is expected of the regulator is continuous monitoring of the impact and outcomes of any guidance or rule, a keen interest in feedback of the market participants, and swift intervention where necessary. The industry body should be equally swift in delivering the decision-useful inputs to the regulator. Heads must be knocked together now for a quick solution, or heads should roll for the billions in lost investment.

I cannot understand why the Government stand by helpless when this disaster is contributing to missed growth and productivity targets, and slipped aspirations to be a global leader in clean energy, as just reported by the Climate Change Committee. The FCA stands in the way of capital queueing to invest in net-zero commitments, and for which the new FiSMA gives an obligation to contribute. Let us do something real for the economy and just get this done. This is a big dent in green finance, for which the Minister has responsibility. I am happy to meet her, or anyone, to help progress this matter. I am again grateful for the opportunity to make this important issue of public and ongoing record.

Financial Services and Markets Bill

Baroness Bowles of Berkhamsted Excerpts

Consideration of Commons amendments
Tuesday 27th June 2023 Lords Chamber

[Lord Randall of Uxbridge (Con)]

My Lords, it is a great privilege to follow the noble Baronesses, Lady Boycott and Lady Hayman. I congratulate my noble friend the Minister on her diligence in trying to come to some solution to our demands. As we have just heard, it is not quite what we wanted but it is getting there, pretty much. Personally, I am sure that the Minister shares our concerns, but sometimes the Treasury is a bit like one’s parents in saying, “You can’t have it all at once; you have to wait and be ready for it”.

I reiterate the questions asked by the noble Baroness, Lady Boycott, regarding regulating all forest risk commodities under the secondary regulations, and ask also for a firm date. I am delighted that we have got as far as we have but I would say, not just to my noble friend the Minister but to all other noble friends and Ministers, that we will not rest here. As we have heard, deforestation is one of the biggest crimes going on in the world and a threat to us all. We shall continue with this.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I first pass on the apologies of my colleague and noble friend Lady Kramer, who is unable to be in her place; hence, you have me instead. I identify with the comments made by the noble Baronesses, Lady Hayman and Lady Boycott, and will not repeat them. Although the Government have given some territory, I do not feel that it is substantial enough.

Two points in particular worry me. The first is with regard to the climate change targets and the wording that

“each regulator considers the exercise of its functions to be relevant to the making of such a contribution”.

The Minister emphasised in her introduction that the regulators have to consider that it fits in squarely with their major objectives. That is quite a discouragement to them to pursue these matters. The regulators do not have to follow every objective and principle anyway; so they do not have an objective or principle and this has now been further diluted by that wording. So, while it is good that there is something on the face of the Bill, a lot of following up will be needed to make sure that something happens.

When it comes to the forestry issues, yes, there will be another consultation—another delay—but why do we have to be in lockstep with our partners? I thought we wanted to be leaders. That means you have to be prepared to go out there and, if you are a leading financial centre, show that it can be done. To always tie ourselves down, to be in lockstep, means that there is a fear to move, there is trepidation, and that does not mark us out or distinguish us as a financial centre. I therefore hope for better, and I hope that comes out of the Treasury’s review.

Overall, the Bill has seen issues raised on all sides of the House and a lot of common thinking. Yes, there has been some yielding by the Government as a consequence—though in general I would say not enough —but this shows that the mood and understanding of this House and of the industry are that the size and momentum of what we are doing in delegating everything to regulators need to have a little more beefing up when it comes to accountability and how matters can be pursued if the regulators do not do things, if they do not do them quickly enough, and so on. In quite a lot of our amendments we have tried to pursue those issues but we have got nowhere. I think that means we will be coming back.

Financial Services and Markets Bill

Baroness Bowles of Berkhamsted Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Lord Vaux of Harrowden (CB)]

My Lords, I introduced a number of amendments on the subject of authorised push payments fraud in Committee. At the time I said I was broadly happy with the Minister’s responses but would look to return to the reporting question again, which is what Amendment 94 does. I should say at the outset that I support what the Bill is trying to do in respect of APP fraud to make it easier, and in particular fairer, for victims of APP fraud to get their money back. Before I go any further, I remind the House of my interest as a shareholder of Fidelity National Information Services, Inc., which owns Worldpay.

My new Amendment 94 has two elements to it. First, it would introduce requirements on the PSR to report annually on the impact that the reimbursement requirement had had on consumer protection and on the behaviour of payment service providers. Secondly, it would effectively create a league table to enable consumers to see how each bank is actually performing both in preventing fraud and in reimbursing victims.

On the first point, the annual impact report is necessary because the mandatory reimbursement requirement could have unintended consequences that might damage consumer protection. I shall give a couple of possible examples of that. First, there is the possibility of moral hazard. If the mandatory requirement means that consumers start to take less care about protecting themselves because they will be repaid anyway, that could have the undesirable consequence of actually making it easier for the fraudsters to commit fraud and so actually increase levels of fraud. While, as we discussed in Committee, we must not put the blame on the victims, there is a balance to find in this area to avoid making it easier for the fraudsters while improving consumer protection and outcomes. We will know whether we have found the right balance only when we start to see the results.

A second example might be that the banks change their behaviour in an undesirable way. Rather than improving their fraud detection and prevention processes, they might simply decide that the easiest thing to do would be to stop providing services to people whom they see as being at the highest risks of fraud in order to reduce their potential reimbursement liability. I think many Members of this House have seen similar behaviour in respect of PEPs—politically exposed persons—where, rather than undertaking sensible risk-based steps, banks have on occasion just decided that it is too difficult or expensive to deal with PEPs and have refused to open accounts or have even closed accounts. We will come to that later today, but it is a good example of a well- intentioned risk measure having undesirable consequences. In the case of APP fraud, if the banks see it as too great a financial risk to provide banking services to those deemed to be at a higher risk of fraud, then we might see a whole swathe of more vulnerable people unable to obtain banking services.

These are just two examples, but I hope that they demonstrate the importance of the PSR keeping the impact of the requirement for mandatory reimbursement under regular review and amending it if it turns out to have unintended negative consequences. Reporting on this regularly and publicly will ensure that the impact assessment is robust.

Turning now to the second element of the amendment, the requirement to report annually on the performance of the banks, a major criticism of the current voluntary reimbursement code is that it is completely non-transparent. While numbers are published, they are anonymous. Consumers cannot see which banks are behaving best, and which are behaving worst, unless, as TSB does, they tell us voluntarily. The TSB example is encouraging—it is using its 100% reimbursement policy as a selling point. Introducing competitive good behaviour is highly desirable, and this amendment would help achieve that.

The amendment would effectively create an annual league table that would enable consumers to see which banks have the lowest levels of fraud—which will give an indication of how good they are at detecting and preventing fraud—which banks are better and quicker at reimbursing victims when fraud occurs, and, by including the appeal information, which banks make it more difficult for victims. That would allow consumers to take this information into consideration when deciding whether to stay with their existing bank or when considering opening a new account—something that would otherwise not be possible. That would, I hope, provide a real competitive incentive for banks to change their behaviour both in detecting and preventing fraud and in treating victims promptly and fairly.

This would not introduce a significant additional burden; the PSR will have all this information anyway, so reporting it is not a significant job. However, the benefits to consumers of making this information public are potentially significant.

When we discussed this in Committee on 13 March, the Minister stated in relation to the impact assessment that the PSR

“has committed … to a post-implementation review”

and that the Government would also

“monitor the impacts of the PSR’s action and consider the case for further action where necessary”.

That does not go far enough. Fraudsters keep changing their business models in reaction to actions by industry and the authorities, so it is essential that this is kept under continual review rather than only a one-off, post-implementation review. It is also important that the impact assessments are published. Can the noble Baroness provide any greater comfort in those respects?

On the league table, the noble Baroness said on 13 March that the PSR

“is currently consulting on a measure to require payment service providers to report and publish fraud and reimbursement data”.—[Official Report, 13/3/23; col. GC 166.]

It is now nearly three months later, so can the noble Baroness provide an update on whether this consultation has progressed and whether the data will in fact be published? It would be better if such data was published by a single source such as the PSR rather than piecemeal by payment service providers. I beg to move.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I support this amendment and I can be relatively brief. It is important not only to collect the statistics but also at times to dig underneath to see how they might be being gamed. From personal experience, I know of instances where banks are treating microbusinesses more strictly than they are treating consumers, saying that a business should know and therefore rejecting them out of hand at the first time of asking, if I can put it that way. I have heard, in a similar case, stories of someone making contact by telephone repeatedly, their inquiry getting lost and the person having to go through the whole story with a case handler multiple times, the strategy obviously being, “Let’s try and make them give up”. That was with a very large bank; I will not name it because I do not have absolutely all the detail. Therefore it is quite important that different criteria are not being used between sole traders and individuals when it has already been determined via the ombudsman that both have a route.

--- Later in debate ---

[Baroness Hayman (CB)]

My Lords, I support this amendment, which fits very well alongside the discussions we had on the fiduciary duty of pension fund trustees. I will not push those amendments to a vote, but the work being done, as the Minister described, on having a clear and close look at the fiduciary duty for pension fund trustees would complement this amendment. I do not think it is threatening in any way to pension fund trustees; it is very carefully framed and asks the Treasury to publish a review on incentivisation. It is perfectly possible, in the words of the noble Lord, Lord Naseby, to fine-tune it after the review—that is the purpose of the consultation.

This amendment is worth while. The noble Baroness, Lady Chapman, referred to the UK Infrastructure Bank and its recognition of nature-based projects and types of infrastructure as assets that could be invested in. I was involved in that amendment, on which the Minister, in her usual helpful style, listened and took action. I hope that she will similarly recognise the virtues of this proposed new clause and I support the amendment.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I added my name to this amendment and suggested the inclusion of the Pension Protection Fund, partly because there is already quite a big conversation around how we will incentivise investment and be prepared to take a bit more risk, because the UK seems to have become very risk-averse. There has been regulatory encouragement, if you like, for pension funds to be somewhat risk-averse; I am not sure it is actually risk- averse to end up in a situation where you invest everything in sovereign bonds and have a systemic risk but, setting that conversation aside, gilts have always been regarded as a very steady investment. It has perhaps been forgotten how to invest for reward.

The fiduciary duty is important and we need to look at it, because there are implications if you suggest in any way to trustees what they ought to do. Of course, that does not mean that you have to take zero risk as a trustee—you must understand the risk and reward dynamic—but, if we move through legislative steps, we would have to add to the list of consultees a whole load of lawyers to help sort out how we deal with the common-law fiduciary duty. Overall, this is a good amendment, making the Government part of this conversation and drawing in more consultation so that more people can input with common purpose, instead of there being lots of consultations all over the place.

Of course, there is work being done by parliamentary committees and I hope notice will be taken of those, and maybe care taken, looking at proposed new subsection (4)(b) and

“adjusting the terms of reference for DB Local Government Pension Schemes (LGPS) funds to consider regional development as an investment factor”.

To some extent they can do that already, especially in the amounts that are retained where the local authorities are investing directly rather than through the pooled funds—and I have to declare an interest here in potentially listing a fund.

Financial Services and Markets Bill

Baroness Bowles of Berkhamsted Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

[Baroness Hayter of Kentish Town (Lab)]

My Lords, I will briefly speak to Amendment 39, to which I have added my name, and government Amendment 50. I declare that I am on the board of the ABI. More relevantly, as the amendments are about the Consumer Panel, I speak as a former vice-chair of one of the statutory panels, the Financial Services Consumer Panel. It was some time ago and our focus then was on the FSA rather than the present FCA, but our role was essentially the same.

I was on the panel before the events of 2007 and 2008. As a panel, we were warning about the risk to consumers of interest-only mortgages, high loan to value mortgages—which were really unacceptable to us—and high mortgages relevant to income. It was just before the crash, but I am not pretending that we foresaw what would happen, even though we were worried about those things. We did not anticipate what was happening in the financial sector, starting with Fannie Mae and Freddie Mac and Northern Rock. Our concern was about how consumers would fare should house prices tumble and their incomes not rise—or, indeed, if interest rates should increase. We saw them as a very vulnerable group of consumers.

What is interesting and relevant to Amendments 39 and 50 is that our role was only to advise the then FSA. Sadly, it did not pay enough attention to what we were saying. It might have given it a little bit more on its dashboard had it done so. Had our report been to Parliament and the Treasury perhaps someone might have noticed and taken an interest. That lives in the “What if?” category of history, but it explains my support of any report made by people who represent consumers being brought to public attention.

Amendment 39, to which I have added my name, was so brilliantly written and argued for in the Commons by my honourable friend Nick Smith. I should say that a long time ago we worked together when he was the Labour Party agent in Holborn and St Pancras and I was the CLP chair. Quite a bit seems to have happened since then to both of us. I knew at the time that he was able to take an issue with which he was dealing and see the broader context, which is how we come to the amendment he has essentially developed and which is in front of the House today.

My honourable friend’s interest was sparked when he was campaigning on behalf of members of the British Steel pension scheme—a scandal which led the NAO and the PAC to conclude that the FCA fell drastically short of its proper role in protecting consumers of financial services. His interest in that brings me to where we are today.

In my time, we have witnessed nearly £40 billion being paid in compensation to consumers who were mis-sold PPI, although the full costs were paid much later. Again, as consumer reps, we flagged up that this was not an appropriate product for most of those it was being sold to. Just occasionally, listening to consumers is good not just for them but for the industry and the whole economy. The voice of consumers is worth listening to.

The Government’s Amendment 50 is very welcome. It requires the statutory panels—I am particularly interested in the Consumer Panel—to report to the Treasury and for their reports to be laid before Parliament. This will bring consumer interest to the heart of our public discourse, which will be good for all concerned. I thank the Government for their amendment on this. I am happy that this trumps, or at least meets, Amendment 39.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, in general I support all the amendments in this group. I am particularly pleased to see government Amendment 50 on the panel reports, assuming that they are implemented, and government Amendment 63 and its companions in the next group to require the regulators to state how they have taken account of parliamentary committee reports in rulemaking. I thank the Minister and the Bill team for covering some of the amendments that I tabled in Committee and similar ones from other noble Lords.

In this group, I have added my name to the amendments tabled by the noble Lord, Lord Bridges, which concern the setting up of an office for financial regulatory accountability, as I did in Committee. The noble Lord is unable to be here today and has asked me to give his apologies and to introduce his amendments.

There is no need to go through the debate that we had in Committee, except to say that since FSMA 2022 there has been a growth in voices calling for an independent oversight body, including the main industry bodies. Those bodies were somewhat disappointed by the Minister’s suggestion in Committee that there was no industry support or suggestion along those lines, because they have made their views clear. I have received emails assuring me that they put points in the consultation responses as well as in published industry papers, although I acknowledge that those were early days and they may not have got as far as formulating ideas in the same way that I had in my consultation response.

There has also been a growth in support in this House. As has been said, if we had campaigned during the Brexit referendum that there would be this massive amount of power going to government, which would then be pressed onwards to unelected regulators, maybe some people would have had different thoughts, but that is water under the bridge. Going back to the amendments tabled by the noble Lord, Lord Bridges, the suite of amendments that cover the office for financial regulatory accountability—Amendments 64 to 72—includes some useful amendments from the noble Lord, Lord Eatwell, with which the noble Lord, Lord Bridges, agrees.

Financial Services and Markets Bill

Baroness Bowles of Berkhamsted Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

I ask my noble friend whether she can at least bring back a definition for Third Reading if she does not consider that my amendment offers a reasonable solution, for “having regard to” is a lot less onerous than requiring “alignment with”. I beg to move.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I have two amendments in this group. Amendment 9 is similar to one I tabled in Committee and is intended to focus the secondary objective on the advancement of the UK economy through fair and efficient operation of financial markets.

It still concerns me that the Government’s wording can be interpreted as more about general profitability of financial services, rather than the positive nature of their operation on the economy. We got into a bit of a tangle about this in Committee when the Minister focused on how financial services made money out of clients. I hope the Minister can now appreciate the nuance and at least confirm that the primary intention of the secondary objective is benefit to the economy that is served by financial services, and not maximum income generation from financial services to the extent that it is of detriment to the economy.

A great deal of attention has gone into asking what regulatory issues have risked competitiveness. A key example is how the London market lost out in new insurance products when the regulator was too slow. Criticism has been levied about delays in SMCR approval of new staff. My Amendment 115 concerns an alarming example of harm to the economy and proposes a solution through a specific legislative amendment. It aims to fix a competitiveness and investment issue with listed closed-ended investment funds. As such, I declare my interests as both a director of the London Stock Exchange plc and a director of Valloop Holdings Ltd, which has potential interest in such listings.

For the last 14 months, a dire situation has been seriously affecting the UK economy and should have been resolved but has not. It has its origins in a face-value interpretation of an EU regulation that is part of the MiFID family, relating to how ongoing charges should be presented in collective investment schemes that invest in other funds and a desire to create a consistent cost disclosure framework in a somewhat inconsistent EU framework.

As part of reviewing what should be included in cost redisclosures, the FCA asked the Investment Association —the principal trade body for the asset management industry in the UK—to provide new guidance. That guidance now requires that when a fund holds shares in listed closed-ended investment funds—also known as investment trusts—it should aggregate with the investing fund’s own charges all the underlying running costs that are incurred within the investment trust, including the listing and corporate costs, in the same way as it would were it to hold units in an unlisted open-ended fund. The IA took this line because the investment trust is regarded as a collective investment undertaking, and the EU regulation refers to collective investment undertakings.

At first sight, the cost disclosure might look reasonable, but it ignores the nature of investment trusts, which have publicly traded shares with a price set by the market: an investment trust is essentially like any other publicly traded company from an investment perspective. If a fund invests in the ordinary shares of a listed commercial company, the internal costs of that commercial company do not have to be shown in aggregated charges. For both listed commercial companies and listed investment trust companies, everyday running costs are disclosed in accounts, reflected in profit and ultimately in the share price, which embodies investors’ assessment of the company, including its underlying costs. However, the IA guidance instead equates investment trusts with open-ended funds, requiring internal running costs incurred at the investee investment trust level to be aggregated as a cost, setting aside the fact that, unlike with units of open-ended funds, investors have already factored such changes into the price that they are prepared to pay for the shares of the investment. Thus, for example, directors’ fees of an investment trust aggregate as an ongoing charge of the investing fund; the directors’ fees of a commercial company that is similarly invested in do not have to be aggregated. Likewise, various other corporate costs receive dissimilar treatment.

Therefore, that is an unfairness, but why does it matter beyond being anti-competitive, as if that is not enough? It matters because those corporate costs being in effect almost duplicated and put under the headline of “ongoing charges” suddenly elevated the ongoing charges of the fund investing into the investment trust, sometimes to levels where they hit cost ceilings put in place by various pension funds and other collective investment funds, or simply made fund managers cringe when the headline of accumulated charges suddenly looked more expensive and people started to think that they were doing something wrong. Hence, there became a disincentive to invest in investment trusts to avoid these unexpected changes, questions about them or hitting cost ceilings. A great deal of investment choice follows the headline and not deeper analysis, which separates and explains the varying nature of costs.

To make the point again, an ordinary listed commercial company, such as SEGRO plc, which invests in property, might now be deemed investable while the exact same property investments with the exact same costs, held for example by the investment trust Tritax Big Box fund, might be deemed not investable because one does not have to have its corporate costs regarded as ongoing charges and the other does.

I do not think it is a coincidence that, since the new guidance, there has been no real asset IPO and just a couple of small equity IPOs of investment trusts. At a stroke, something that has at times been regarded as a jewel in the London funding ecosystem—an expanding sector of listed funds investing into long term illiquid alternative assets such as renewable energy and other infrastructure—has been abandoned.

I just gave an example of two companies investing in property, with no intention to impugn either, but there are some sectors of the economy where using an investment trust to raise funds is the only route to capital—notably for new and innovative business in the environmental and social sectors: businesses such as HydrogenOne, which is leading investment into UK’s alternative energy, directly linked with our net-zero commitments.

It is also the case that investment trust exposures are typically more diversified and real than exposures via commercial corporates, which investors appreciate but now cannot access as they have been dropped from portfolios. This is a real loss to the UK economy that has been going on for 14 months. We have all read the news about companies switching listing from London for valuation reasons—and that is another story—but here it is not switching, it is simply regulatory asphyxiation.

Both the FCA and the Investment Association know and understand the problem. The IA thinks it should be fixed and has publicly written about it to the FCA. On the face of it, given that inherited EU legislation is the mix, I think it is more up to government and the FCA to fix it than the IA, even though it came up with the guidance. In any event, you go up the power chain to fix a disaster. It is also worth noting that there is no actual legislative EU definition of collective investment undertaking, only ESMA guidance, from which the FCA could distance itself, if only for this specific purpose.

The Government have been informed of this issue and, while dreaming up ways to help more investment in the productive economy is important for the Chancellor, all he has to do here is stop this extinction event. It is not about undermining transparency; it is about understanding what is and is not like-for-like. There are those who have been getting around it in some EU countries by saying that for cost disclosure purposes, an investment trust is a company not a fund, but investment trusts are not mainstream in EU countries; they use other channels for investment, so the issue is not really pursued.

The UK situation now is that we have essentially just clarified our law using definitions originating in soon-to-be-discarded PRHPs and non-legislative EU guidance, front-running a wider-reaching FCA review and achieving nothing but harm. My amendment shows one way to fix it by amending the regulation so that all listed companies are treated the same for the assessment of accumulated ongoing charges. Investment trusts would then not be discriminated against by being improperly lumped together with open-ended funds whose value is not set through share price, nor by having a cost label attached, compared with competing commercial companies or funds in other countries, and the UK businesses reliant on the investment trust route could again raise the capital they need.

--- Later in debate ---

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the new secondary growth and competitiveness objectives in the Bill will ensure that the regulators can act to facilitate medium to long-term growth and competitiveness for the first time, but a focus on competitiveness and long-term growth is not new. When the UK was part of the European Union and financial services legislation was negotiated in Brussels, UK Ministers went to great efforts to ensure that EU regulations appropriately considered the impact that regulation could have on economic growth and on the competitiveness of our financial services sector.

Now that we have left the EU, and as the regulators take on responsibility for setting new rules as we repeal retained EU law, it is right that their objectives reflect the financial services sector’s critical role in supporting the wider economy. We must ensure that growth and competitiveness can continue to be properly considered within a robust regulatory framework. As the noble Lord opposite said, a secondary competitiveness objective strikes the right balance. It ensures that the regulators have due regard to growth and competitiveness while maintaining their primary focus on their existing objectives. That is why the Government strongly reject Amendment 10, tabled by the noble Baroness, Lady Bennett of Manor Castle, which seeks to remove the secondary objectives from the Bill.

Turning to Amendment 9 from the noble Baroness, Lady Bowles of Berkhamsted, the Government agree that the UK financial services sector is not just an industry in its own right but an engine of growth for the wider economy. The current drafting of the Bill seeks to reflect that but also recognises that the scope of the regulators’ responsibilities relates to the markets they regulate—the financial services sector—so it is growth of the wider economy and of the financial services sector, but not at the expense of the wider economy. I hope I can reassure her on that point.

On Amendment 115, also from the noble Baroness, Lady Bowles, as noble Lords know, the Bill repeals retained EU law in financial services, including the MiFID framework. Detailed firm-facing requirements, such as those that this amendment seeks to amend, are likely to become the responsibility of the FCA. As such, it will be for the FCA to determine whether such rules are appropriate. When doing so, the FCA will have to consider whether rules are in line with its statutory objectives, including the new secondary growth and competitiveness objective.

Parliament will be able to scrutinise any rules that the regulators make, including pressing them on the effectiveness of their rules, and how they deliver against their objectives. Industry will also be able to make representations to the regulators where they feel that their rules are not having their intended effect or are placing disproportionate burdens on firms. I hope the noble Baroness is therefore reassured that the appropriate mechanisms are in place for considering the issues that she has raised via that amendment.

[Baroness Bowles of Berkhamsted (LD)]

I understand that there are and will be mechanisms in place, but the point that I was trying to make—and the reason that I expounded at length on how we got into this mess—is that it is urgent action that is necessary. This is not something that waits for this great wheel of change that we are bringing in through this Bill to come along. This is something that should be on people’s desks tomorrow; it should have been on people’s desks a year ago. There will not be ongoing investments trusts if it is not fixed now.

[Baroness Penn (Con)]

I understand the case that the noble Baroness makes, but it is not for an amendment to this Bill but for regulator rules to address the issue that she raises.

I turn to Amendments 8A and 9A from my noble friend Lord Trenchard, which seek to remove the requirement for the FCA and the PRA to align with relevant international standards when facilitating the new secondary objectives and instead have regard to these standards. As we have heard, international standards are set by standard setting bodies, such as the Basel Committee on Banking Supervision. These standards are typically endorsed at political level through international fora such as the G7 and G20 but, given the need to enable implementation across multiple jurisdictions, they may not be specifically calibrated to the law or market of individual members. It is then for national Governments and regulators to decide how best to implement these standards in their jurisdictions. This includes considering which international standards are pertinent to the regulatory activity being undertaken and are therefore relevant.

Since we left the EU, the regulators have been generally responsible for making the judgment on how best to align with relevant standards when making detailed rules that apply to firms. This approach was taken in the Financial Services Act 2021, in relation to the UK’s approach to the implementation of Basel standards for bank regulation and the FCA’s implementation of the UK’s investment firms prudential regime. It was also reflected in the overarching approach set out in the two consultations as part of the future regulatory framework review.

Part of the regulators’ judgment involves considering how best to advance their statutory objectives. Following this Bill, this will include the new secondary competitiveness and growth objectives. The current drafting therefore provides sufficient flexibility for the regulators to tailor international standards appropriately to UK markets to facilitate growth and international competitiveness, while demonstrating the Government’s ongoing commitment for the UK to remain a global leader in promoting high international standards—which, as we have heard, the UK has often played a key part in developing. The Government consider that this drafting helps maintain the UK’s reputation as a global financial centre.

I turn finally to Amendment 112 from the noble Baroness, Lady Bennett. The Government consider the financial services sector to be of vital importance to the UK economy. The latest figures from industry reveal that financial and related professional services employ approximately 2.5 million people across the UK, with around two-thirds of those jobs being outside London. Together, these jobs account for an estimated 12% of the UK’s economy.

The financial services sector also makes a significant tax contribution, which amounted to more than £75 billion in 2019-20—more than a tenth of total UK tax receipts—and helps fund vital public services. It is not for the Government to determine the optimum size of the UK financial services sector, but in many of the areas that the noble Baroness calls for reporting on, the information would be largely duplicative of work already published by the Government, public sector bodies or other industry groups.

For example, the State of the Sector report, which was co-authored by the City of London Corporation and first published last year, covers talent, innovation, the wider financial services ecosystem, and international developments and comparisons. The Government will publish a second iteration of the report later this year. The Financial Stability Report—

Financial Services and Markets Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

[Baroness Bennett of Manor Castle (GP)]

My Lords, in rising to follow the noble Viscount, Lord Trenchard, I have to comment on a couple of the points that he made. When he referred to Amendment 216 and suggested that we could rely on the discretion of the regulators, I regretted that the noble Lord, Lord Sikka, was not here, because I am sure that he could have given some extensive account on that basis. We have cause for concern about the actions of the regulators. The noble Viscount also suggested that the relaxation of the ring-fence in the case of SVB, allowing its purchase by HSBC, was not important or significant. Of course, relaxation of rules under emergency weekend conditions is reminiscent of stopping contagion—rather like the kind of emergency steps we took in the face of the Covid-19 pandemic, where lots of things were done that would not be seen as viable under normal conditions.

On Amendment 216, I confess that I can see the arguments for why this should be considered too technical. However, the points made by the noble Lord, Lord Eatwell, about the fact that we do not have sufficient controls otherwise make the case for it.

On the points made by the noble Baroness, Lady Kramer, we have a problem where the primary purpose of insurance companies and pension managers has been chasing after massive profits, not looking to long-term security. While we are in that situation, we need find rules to manage it.

Responding to the comments of the noble Baroness, Lady Noakes, again suggesting that what has happened in recent weeks suggests that the ring-fence is not working, I think that a military analogy might be quite useful here. If you are in a city under attack and your walls are very nearly overtopped by the enemy, you do not at that point pull the walls down and start reconstructing them. You reinforce those walls. The events of the past couple of weeks have demonstrated that what we have now is not enough of a security system—that is patently obvious—but the answer is reinforcement rather than pulling everything down and starting again, because we saw fit to take actions after 2007-08 which we are hoping will make those defensive walls hold this time.

I would have attached my name to Amendments 241C and 241D had I been able to keep up with the flood of legislation we have before us. In reflecting on them, I want to quote an economist on the New York Times, Ezra Klein:

“Banking is a critical form of public infrastructure that we pretend is a private act of risk management.”


That is the context in which I hope the Minister can today reassure us that, as we come towards the end of Committee and in the new environment in which we find ourselves, the Government will seriously rethink this Bill, particularly key elements of it such as competition and ring-fencing, before we get to Report. I have to borrow from a letter in the Financial Times this weekend —I am relying on this as a source—the fact that apparently the correct name for a group of black swans gathered on the ground is a bank.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I did not prepare a speech on this, but recent events and the speeches have moved round to what a fundamental issue we are approaching here. One important issue, which underlines the Government’s changes on Solvency II, is how to get investment into our economy. That is a fundamental need that we have. It is possibly intertwined with how much national risk we are prepared to take. I do not intend to try to solve that now.

If we look at recent events and the responses to them, we see that we have different risk appetites in different countries, in how they will accept failure and what, in essence, they are prepared to bail out. As my noble friend Lady Kramer said, it appears to be the assumption that the Canadians would bail out the pension fund. Maybe they think that is a decent quid pro quo for getting a large amount of infrastructure investment and other investments. That is a balance that it is legitimate for a country to make, but I do not think it is one that we have made here in the UK. We have said “No more bailouts”. That may be something that can never be absolutely held to, as we know, but we do not operate on a principle that it is going to be the case.

Let us look at what happened with Silicon Valley Bank in the UK, where there was not really a great deal wrong other than it suffering the repercussions of what happened in the US and a bank run through co-ordination and a loss of confidence. What does that say about our challenger banks, if people are not prepared to rely on the amount of the deposit guarantees that we have? For industry, we have next to nothing. The Americans are talking about raising their amounts of guaranteed deposits because they realise that businesses will not trust smaller banks with large deposits if there are not higher guarantees. That worries people in the United States, because they do not want to lose their regional banks and to have everything go into large systemic banks. It should worry us that we have lost a challenger bank and that it has gone into a large systemic bank.

We may have to re-examine what our risk appetite is around things such as deposit guarantees. It is not pertinent to these amendments, but we have the same kind of risk issues when we expand and try to get insurance money into more risky investments. The same can be applied to what we want to do with pension funds. I suppose I had better declare my financial services interests as in the register again, just for the record. The recent history is that our institutions are not very good at investing in UK assets. Of the fallout from LDI, one of the things that is already under way is that pension funds will invest less in gilts. They will want to invest in something else—something that they can repo. They will therefore invest in corporate bonds but, to get the liquidity to be able to repo, they will be US corporate bonds. We will have yet another shift from investing in something in the UK. Even if that was the systemic risk concentrations of gilts, nevertheless it is a shift away from investment in UK assets, or not taking an opportunity for a switch in assets to be able to invest in those in the UK. Some of this is to do with our size. Maybe the Canadians have thought about that; I do not know. I am just sort of tossing these thoughts in. They are not hugely relevant to these amendments, but they are hugely relevant to the big issue that underlies the change on the matching adjustment —that is, how do we get investment into the UK economy? I should think absolutely every person in this Room wants that. It is hard to do it in a piecemeal way by changing the eligibility to the matching adjustment.

I do not fully trust the consultation process that we have in this country, because the pre-consultation process is dominated by an industrial lobby which knows what it wants. The consultation responses are weighed, and they are inevitably heavy with what the industry wants and why, and there is much less that comes in to counteract that. Therefore, we go down the track of accepting the proposals of the Government and getting what the industry says—but where is the backstop? This is where we come to the backstop that my noble friend has put in. The backstop is that it is for Parliament, through primary legislation. She does not say in her amendment, “Thou shalt never amend ring-fencing” or, “Thou shalt never amend the things that the Parliamentary Commission on Banking Standards did”. It says that it requires primary legislation. It says that this should go back to the body—albeit different people at a different time—and that there should be that analysis. This is the same sort of thing that the noble Lord, Lord Eatwell, was saying. Maybe you could get legitimacy from Parliament through a better accountability mechanism but, absent that, the only one we have is that it has to come back to primary legislation. With a Whip system and a government majority, that does not necessarily guarantee anything, but it will get at least a thorough airing and, in normal circumstances, you would get some toing and froing and some reasonable amendments if necessary.

British Banking Sector

Baroness Bowles of Berkhamsted Excerpts

Tuesday 21st March 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, as with any major event, the Treasury will reflect on the lessons to be learned and how improvements can be made. I assure noble Lords that, each year, the Bank of England carries out a stress test of the major UK banks that incorporates a severe but plausible adverse economic scenario. The 2022 stress test scenario includes a rapid rise in interest rates, with the UK bank rate assumed to rise to 6% in early 2023. The results of that test are taken forward by the PRA in its supervision of the banks. The results will also be published this summer.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, an FT piece yesterday, headlined “How ‘competitive’ would you like your bank regulation now?”, says:

“The UK regulatory pendulum has been halted in mid-swing.”


Is that true? Credit Suisse had G-SIFI levels of capital and liquidity but was undone through bad culture. Are not the twin bastions of culture in the UK banks ring-fencing and the senior managers regime? Is it not also of massive cultural significance that it came from the Parliamentary Commission on Banking Standards? If the Government mess with those, where is the break on culture-based runs? What do they say when these practices come under lobbying pressures?

[Baroness Penn (Con)]

My Lords, I think the noble Baroness was asking about the Government’s proposed Edinburgh reforms package, which represents a move towards proportionate, simple regulation that works for the UK and will help to drive growth in the broader economy, supporting families and businesses across the country. In that approach, we recognise that the UK’s success as a financial services hub is built on agility, consistently high regulatory standards and openness. We will continue to take those principles forward in our reforms.