Financial Services Bill

Baroness Kramer Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Thursday 28th January 2021 Lords Chamber

[Baroness Kramer (LD) [V]]

My Lords, I declare my interests as set out in the register. I join in the very warm welcome extended to the noble Lord, Lord Hammond of Runnymede, and the noble Baroness, Lady Shafik, who introduced themselves so powerfully in their maiden speeches.

This Bill may look technical, but it deals with a number of crucial issues, including the stability of our financial institutions. The Bill incorporates Basel III by using skeleton clauses that lay out policy at a very high and general level. It then eliminates secondary legislation and hands to the PRA the power to develop policy through its use of rules. It gives the regulators almost unlimited rein to craft rules that could be at the weak end of international standards, or the strong end, without parliamentary interference. The PRA faces no meaningful accountability, only delayed and minimal transparency, and an occasional review by a Select Committee.

The Financial Conduct Authority expects to follow the same template for the activities it regulates, as it makes clear in the financial regulatory framework review now in consultation. I join others in being shocked that this Bill does not wait for that consultation to be completed, but I think it indicates that the Government have already made up their mind. The PRA will later this year expand the scope of this template to cover its remaining activities. This is not delegated powers; it is the permanent removal of Parliament’s powers in the area of financial regulation. It is not just temporary; it is permanent. Let me quote from the framework review, which states that

“this approach will result in greater policy responsibility and discretion for UK regulators than has existed at any time since the early operation of FSMA following its introduction 20 years ago.”

FSMA 2000 is the regime that underpinned the culture—the noble Lord, Lord Hodgson of Astley Abbotts, reminded us of the importance of culture—and the naive regulation that led to the 2008 collapse, failed us over Libor and failed us for years over PPI. I could go on with other examples, but quite a few noble Lords have already done so very usefully. I hope that the Minister will look back and examine their speeches.

I am shocked on three grounds. The first is the general contempt for Parliament. We so often today see the pattern of skeleton Bills with policy then enacted through statutory instruments. However, this is even more cynical: a skeleton Bill with policy then set by the regulator in its rulebook. There is not even a semblance of accountability. This is not designed for flexibility, because we have plenty of fast-track procedures; it is deliberately designed to ensure that no effective oversight or challenge can be made by Parliament.

Secondly, we are at a critical time following Brexit, as my noble friend Lord Bruce of Bennachie and others reminded us. There is no way that the EU is going to grant anything but limited and temporary equivalence to financial services if they are only governed by rules in a regulator’s rulebook and can be changed without any parliamentary process. Indeed, I suspect the United States—I am thinking particularly of Janet Yellen—will be nervous of any equivalence rulings in the absence of any significant legislative underpinning. My noble friend Lady Bowles and the noble Baroness, Lady Altmann, raised real issues that remain unanswered and I hope that the Minister will address them.

Lastly, I am shocked because although I respect the integrity and intelligence of our regulators and recognise that they have more substantive powers than in 2008, I am still certain that this is not enough to discipline a sector where arrogance and greed have such a history of motivating bad behaviour. I sat on the Parliamentary Commission on Banking Standards for nearly two years. Senior managers who are respected figures, many with gongs and widely recognised, had rushed for short-term, false profits to boost their huge bonuses, and boards of directors were intimidated into silence over reckless behaviour. The regulators failed to speak out, obsessed with regulatory perimeters and constrained by a deep deference to the big institutions. That deference remains, and today the noble Lords, Lord Sikka, Lord Northbrook and Lord Desai, have given us some very powerful examples, which again I hope the Minister will examine.

The regulators also lack the resources to take on the industry, and I think it was the noble Lord, Lord Sharpe of Epsom, who took us through some examples of that. The reports from the Parliamentary Commission on Banking Standards and the legislation that followed changed the landscape, but many of us on the commission feared that the powerful financial institutions would bide patiently and, as memories of the 2008 crash faded, would carefully—we guessed in our conversations that it would take 10 years—persuade the Government to unwind the constraints that prevented the high-risk gambling and the crafting of loopholes to increase both power and bonuses. This Bill tells us that we guessed that timing pretty right, and I would remind the noble Lord, Lord Blackwell, who advised after-the-event oversight but not before-the-event oversight, that that approach pretty nearly destroyed the economy of this country.

It is an irony that the Bill deals with the final end of Libor and the other IBORs, abused in one of the biggest stains on the reputation of the UK’s financial services sector and its regulators. If we want an example of deference in the Treasury and in the regulators, we should listen to these words in the Explanatory Notes to this Bill. The reason that the notes give for ending Libor and similar benchmarks is:

“in response to cases of attempted manipulation of IBORs”.

Attempted? Fake submissions were made by the major banks in London every day for at least a decade, and probably two, in order to get a Libor benchmark that would boost the bonuses of traders and senior managers. Every day for those one or two decades, more than $400 trillion in outstanding loans across the globe were corruptly priced. The knowledge among regulators was evident, partly because the banks in their arrogance made no attempt to hide it, but also because the Bank of England got in on the act, asking banks to manipulate their Libor submissions for the more public-spirited purpose of hiding the depth of the 2008 crash. The scale of the corruption was so large and pervasive that it cannot be unravelled.

I have two other quick comments on the contents of the Bill. Many in the financial services industry have pressed for an international competitiveness requirement for the regulators, and there is in the Bill a “have regard” for both the PRA and the FCA, at least for certain sectors. We heard about that again today from the noble Lords, Lord Hunt of Kings Heath and Lord Bridges of Headley, and others. The industry says constantly that it does not seek a reduction or dilution in regulatory standards, but I—and, I suspect, many others—am going to take some convincing that this competitiveness provision is not doing just that, and driving standards down.

Secondly, the clauses on statutory debt repayment plans and the debt respite scheme are good, but they fail to include a clear implementation timetable. I support those actions, but please may we have the timetable? With Covid, it is now exceedingly urgent.

The Bill is also noteworthy for everything that it does not include. This House will need to remedy that. I have quite a long list, but today the hour is late, and I shall mention only two. The first is a duty of care by financial institutions to all customers. My noble friend Lord Sharkey, the right reverend Prelate the Bishop of St Albans, the noble Baronesses, Lady Bennett of Manor Castle and Lady McIntosh of Pickering, and others, highlighted that need.

The second—although it is not second in terms of priority—is action to motivate and incentivise the financial services sector to support our goals on climate change. My noble friends Lord Oates and Lady Sheehan and the noble Baronesses, Lady Hayman and Lady Bennett of Manor Castle, all spoke about that, and so did many others. It is crucial that those additions be made to the Bill. There are also other priorities, such as financial inclusion, but I will not go through that list now.

If there has been one message in this debate, which the Minister must now address, I can cite what was said by the noble Baroness, Lady Noakes. She and I do not often see eye to eye on an issue, but she talked about the accountability deficit. If regulators are to be given such untrammelled powers as the Bill anticipates, will the Minister tell us now how they are to be held accountable to Parliament? He has heard the words of so many in this House, from all Benches and all political persuasions, who have made it clear that accountability is required.