Financial Services Bill

Baroness Kramer Excerpts

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

[Baroness Kramer (LD)]

My Lords, we have, sadly, become used to skeleton primary legislation, with policy embedded in statutory instruments that cannot be amended and cannot be voted down without threats of a constitutional crisis. But at least statutory instruments can be brought before Parliament, and Ministers must then make the case.

This Bill is a new low—skeleton primary legislation, elimination of secondary legislation and policy set in regulators’ rules with no meaningful accountability to Parliament. The accountability set out in the Bill, which largely mirrors proposals in the future regulatory framework review, provides, in essence, just for a bit more explanation by the regulator, the existing right of a parliamentarian to submit evidence to any consultation, and the existing right for committees such as the Treasury Select Committee and the Economic Affairs Committee to question the regulator from time to time. This will be the policy framework shaping a sector of the economy that will fundamentally impact our national prosperity, jobs and public spending.

The Minister was kind enough to meet us, so I can perhaps anticipate some of the arguments that the Government are likely to make. They will argue that the Bill is just a stopgap while consultation takes place, but the consultation under way has multiple stages and will stretch the whole process out for 18 months or two years. By then the horse will have long bolted and procedures will largely have been set in stone. Perhaps the Minister would spell out the timetable—because the Bill looks to me like a template, not a stopgap.

Secondly, the Minister will say that only part of financial regulation is covered by the Bill. But, since it includes all of Basel III, the Bill actually covers almost everything that matters in prudential regulation. I have also heard from parts of industry that a second financial services Bill is on its way. I do not know that; I have not heard it from the Government—but if so, it will have come and gone before the new framework legislation is finalised. Perhaps the Minister would comment on that. It is absolutely clear that what happens with this Bill genuinely matters.

I value consultation—real consultation—but I am saddened because consultation has become a cynical tool to sideline Parliament. “Just give us a free hand now, because we’re doing a consultation.” Colleagues who cover other areas of policy tell me that this is a pattern, and are now concluding that it is cynically being used with a wide range of legislation, to make sure that Parliament is sidestepped.

I suspect that the Minister will argue that the powers being given to the regulators in this Bill, with minimal accountability, are necessary so that the UK can respond to changing events. After all, we have left the European Union and times are going to change. I regard that as nonsense. We are in changing times, but we have proved in the last year that fast-track procedures exist when they are genuinely needed.

I very much welcome the amendments tabled by the noble Baroness, Lady Noakes, also signed by my noble friend Lady Bowles, and the noble Baroness, Lady Bennett. They are tough: they would prevent Schedules 2 and 3 coming into effect before the accountability deficit is sorted. That, I suggest, is what the circumstance warrants.

This group of amendments was revised from Monday, so it now includes proposals detailing how accountability can be structured. We have heard a whole series of brilliant speeches in this debate, so I want to make only some limited comments.

The noble Lords, Lord Tunnicliffe and Lord Eatwell, have tabled a number of amendments laying out process and timetable. I find that extremely constructive. By contrast, the noble Lord, Lord Blackwell, has tabled an amendment that covers similar territory, but with such a light touch that—I hope he does not take this wrongly—I think it will be read as cosmetic. The industry needs to recognise the importance of proper scrutiny and understand that scrutiny in name only will, in the end, do the industry itself no long-term good.

In addition to the procedural amendments, my noble friend Lady Bowles has tackled an equally crucial but often overlooked element of oversight—one that goes to the heart of the matter. It is the need for the regulator to provide the detailed information to Parliament to fully understand and evaluate the evidence, reasoning and consequences of changes to rules. For years this has been done for us within the oversight process of the European Parliament, which has expert resources in depth. My noble friend, in her role in that Parliament, was able to use the information to improve proposals for rules and make them more effective. We have now lost that capacity, and nothing in the Bill or the framework consultation replaces it.

My noble friend Lady Bowles has also proposed amendments that would put this oversight on a regular basis, not just an ad hoc one, and would bring in an independent expert panel to do some of the heavy lifting. As the noble Lord, Lord Holmes, referred to, recently the All-Party Parliamentary Group on Financial Markets and Services addressed similar concerns. I quote from its February report, The Role of Parliament in the Future Regulatory Framework for Financial Services:

“Regardless of the format, the level of technical support available to Parliamentarians in this policy area will be key.”


The APPG goes on to propose secondments from the Treasury to the relevant parliamentary committees to bolster institutional capacity. I personally regard that as the wrong approach—that would be letting foxes into the henhouse—but it makes the point that proper parliamentary oversight requires new expert capability to replace that lost with Brexit. We have expertise within the regulator but we must have it for oversight of the regulator.

Before I finish, I want to refer to Amendment 137, tabled by my noble friend Lord Bruce, which would require the Government to consult on rule changes with the devolved Administrations. It is quite shocking to me that the devolved Administrations are overlooked in the Bill. Scotland is a major player in financial services and that needs to be recognised.

I will listen to the Minister’s response. I hope he will not repeat the airy dismissal that the Economic Secretary in the Commons deigned to give as his response. Voices on all Benches in this House are capable of coalescing around a set of viable amendments on Report that would at least remedy the worst in the Bill. The Government ought to be coming forward with the best.

[Lord Eatwell (Lab)]

My Lords, in due course I will speak to the amendments in the name of my noble friend Lord Tunnicliffe and myself, which, as many noble Lords have commented, would introduce operational proposals that would address the problem of adequate parliamentary scrutiny.

Before I turn to those practicalities, though, I wish to speak to the amendments tabled by the noble Baroness, Lady Noakes, supported by the noble Baroness, Lady Bowles, and the noble Lord, Lord Holmes, which deal with the principles at stake. As we might expect from the noble Baroness, Lady Noakes, her amendments are precise and direct and go to the heart of the matter: the inadequacy of parliamentary scrutiny.

I regret that I was unable to attend the Second Reading debate on the Bill. On reading the report of that debate, it is evident that an overwhelming sentiment in your Lordships’ House was that the procedures suggested by Her Majesty’s Government for the future development of the regulatory powers display a serious lack of appropriate parliamentary scrutiny. The fears expressed at Second Reading can only have been further reinforced by the note entitled “Meeting between the Economic Secretary, Peers, the Financial Conduct Authority and the Prudential Regulatory Authority: Background Briefing for Peers”, and by the document Financial Services Future Regulatory Framework Review Phase II Consultation, published by Her Majesty’s Treasury in October last year. Both documents advocate a degree of parliamentary scrutiny that may at very best be described as minimalist. Seldom can two documents have made the case so eloquently for the adoption of a policy entirely at odds with that which they propose.

The central thrust of government thinking is spelt out in the phase 2 consultation document to which I have just referred. It may help if I quote the relevant passage:

“The Financial Services and Markets Act 2000 (FSMA), and the model of regulation introduced by that Act, continue to sit at the centre of the UK’s regulatory framework. The government believes that this model, which delegates the setting of regulatory standards to expert, independent regulators that work within an overall policy framework set by government and Parliament, continues to be the most effective way of delivering a stable, fair and prosperous financial services sector. The model maximises the use of expertise in the policy-making process by allowing regulators with day-to-day experience of supervising financial services firms to bring that real-world experience into the design of regulatory standards. It also allows regulators to flex and update those standards efficiently in order to respond quickly to changing market conditions and emerging risks. The FSMA model was readily adapted to address the regulatory failings of the 2007-08 financial crisis.”


Commenting further on the manner in which this model was readily adapted to address the regulatory failings of the 2007-08 financial crisis, the authors of this document declare:

“The financial crisis of 2007-08 revealed serious flaws in the UK’s system of regulation, particularly in the allocation and co-ordination of responsibilities across the ‘tripartite’ institutions – HM Treasury, the Bank of England and the FSA … The post-crisis framework reforms were therefore focused primarily on institutional design and allocation of responsibilities.”


So the problem that led to massive regulatory failure and to a regulatory system that failed to protect UK citizens and firms from a near-existential breakdown in the financial system, that heralded a sharp downturn in real income and higher unemployment, and that led inexorably to the disastrous austerity policy was a problem of

“institutional design and allocation of responsibilities”.

There is no mention of the failed analysis, no mention of the pernicious groupthink that infected the analysis of the FCA and the Bank of England, no mention of the fact that warnings from distinguished commentators in academia and in the financial services industry were airily dismissed, and no acknowledgement that our regulators participated in the creation of a procyclical regulatory model that actually made the crisis worse than it otherwise might have been.

If anyone has any doubt that allowing regulators to bring that real-world experience into design of regulatory standards was the foundation of that massive failure, they should consider the words of Alan Greenspan, then head of the US Federal Reserve system—essentially, the western world’s senior regulator—speaking to the banking committee of the US House of Representatives in October 2008. He said:

“This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.”


Where in this document is the recognition that the intellectual edifice collapsed? Where is the acknowledgement that those with real-world expertise did not understand the systemic risks in the industry that they were supposed to be regulating?

All this was clearly set out in the Turner review, published by the FSA in 2009 and seemingly unread by the authors of this document. The review advocated a shift from microprudential regulation that focuses attention on the risks facing individual firms to macroprudential regulation focusing on the risks inherent in the operation of the system as a whole. It is entirely true that implementing that change has proved more difficult than the noble Lord, Lord Turner, could have anticipated. Basel III, the regulatory system lauded in this Bill, was supposed to do the job, but as Professor Hyun Shin, chief economist of the Bank for International Settlements, the home of Basel III, has commented:

“Under its current … form, Basel III is almost exclusively micro-prudential in its focus, concerned with the solvency of individual banks, rather than being macro-prudential, concerned with the resilience of the financial system as a whole. The language of Basel III is revealing in this regard, with repeated references to greater ‘loss absorbency’ of bank capital.”


When we turn to the impact assessment published by Her Majesty’s Treasury to accompany the Bill, we again find many references to the virtues of bank capital, its loss absorbency and the resilience of individual firms. There is, however, absolutely nothing about the attempt to deal with systemic risk using liquidity rules, resolution regimes and comprehensive supervisions. The authors of this document have been rewriting history. They have also failed to learn from history.

--- Later in debate ---

[Baroness Noakes (Con)]

My Lords, I will not speak on the substance of most of the amendments in this group. In general terms I do not believe that alterations are required to legislation governing the PRA and the FCA, in view of the enthusiastic work that they have already commenced to embed climate-related financial risks in their work and in the work of the institutions that they regulate. Neither the FCA nor the PRA needed any alteration to their statutory powers and duties to start this process, and I do not believe they need anything in statute to carry on their work.

My noble friend Lord Sharpe of Epsom said that he was worried about the meaning of “climate-related financial risk”. In practical terms, the sectors of the financial services industry have an understanding of what is meant by climate-related financial risk in relation to them, and that will inevitably evolve over time. If you take banks, it is fundamentally a credit risk problem; you can track almost all the issues back to credit risk. If you take an investment company, it is an investment risk problem, as I think the noble Baroness, Lady Sheehan, said in an earlier contribution. With insurance, we are talking about something like the shifting nature and scale of conventionally insured risks in that sector. I am sure that other parts of the financial services sector will have an understanding of climate-related financial risk. So I am not concerned about the definition of that; I am just not sure that it is necessary to find its way into legislation, because it is already being done.

I would also caution people who want change overnight in this area that a huge amount of work is needed to implement, for example, measuring the carbon intensity of a bank’s balance sheet, or indeed an investment company’s balance sheet. These are not simple things to do but require huge amounts of new data and new ways of manipulating it, and the industries need to work out how efficiently to do that. I know a little about insurance companies and I am sure that there are similar challenges to overcome there too. I make a plea to leave it to the regulators to determine the pace of change that is required and not to impose additional duties on them. They must judge themselves how best to achieve the aims which I believe they share with the people who have tabled and moved this amendment.

I have a couple of comments on two of the amendments. Amendment 48 would bring forward the timing of the disclosures from the task force on climate-related disclosure to the end of next year, with the draconian penalty of not allowing companies to continue to operate in the UK if they have not made the disclosures. Are the proposers of this amendment seriously saying that they will stop a FTSE 100 company from doing business in the UK if its disclosures are not quite in line with the recommendations? Are they prepared for UK employees to lose their jobs because of technical disclosures? I do not believe that the amendment does anything to advance substantive climate change measures, only disclosures in annual reports which, at the end of the day, very few people actually read. This is not a real-world amendment, in my view, and it seems to be drafted in a disproportionate way.

My main reason for putting my name down to speak on this group is Amendment 75, which provides for the appointment of a member of the FCA board to have responsibility for climate change. This contains a fundamental misunderstanding of the nature of boards, whether of public bodies such as the FCA or of private sector companies. Boards are there for governance purposes. They set strategy and hold chief executives to account for delivering against that strategy. They should review performance against what is required of them by statute and what they themselves set. They do not make operational decisions and should not get involved in day-to-day activities. That is why the FCA, like most major organisations, has to have a majority of non-executives on its board.

The amendment is silent as to whether this board member is to be an executive or a non-executive but I believe that either would be wrong. A non-executive should not have responsibility for particular activities within an organisation. This distracts from the core function of a non-executive which is around strategy, oversight and accountability. If the amendment is intended to create an executive board member with responsibility for climate change, that is misconceived as it implies that climate change is not the responsibility of the chief executive. The only way for any policy—whether it is climate change, diversity, social purpose or whatever—to gain traction in an organisation is through its leadership and that is sourced in the chief executive. I believe that the amendment is wrong, likely to be counterproductive or both.

I want to pick up on something that the noble Baroness, Lady Hayman, said. She said that this would bring it in line with the requirements of the senior managers and certification regime, which requires—I think she said—a board member to be responsible for climate change. That is not what the SMCR requires. It requires only the identification of a senior manager, as defined within the SMCR, who has to have identified responsibility. It is absolutely not required that it is a member at board level, so that is not an appropriate precedent to cite in aid of this amendment.

[Baroness Kramer (LD)]

My Lords, listening to today’s really outstanding speeches, I think most of us can agree that tackling climate change is not an optional extra. It is necessary to the survival of a liveable and civilised world, and it is urgent. The noble Lord, Lord Sharpe of Epsom, seemed rather the stand-out among the speeches. If I understand him correctly, he shares the general principles but would like them parked in some very long grass for a very long time. That fails to recognise the real urgency that we face. We are past the point where long grass is an appropriate place to put concerns.

This is a substantial group of amendments. It looks to the financial regulators, influencing the financial sector as they do, to become part of the solution. The amendments break roughly into three parts—a cluster of “have regards” and “considerations” that would influence the FCA and the PRA in shaping the rules to support the net-zero target; disclosure and reporting requirements; and the setting of a climate change objective for the FCA, together with appointment to the governing board of an individual responsible for climate change. Here, I disagree with the noble Baroness, Lady Noakes. I think there should be an individual with particular responsibility at the highest level to make sure that things happen in organisations.

I almost wonder that we are having to discuss disclosure, because, in American terminology, it seems to me a slam dunk. Andrew Bailey, in his Mansion House speech last November, called for “data and disclosure”, and repeated that time-honoured but real truism:

“What we cannot measure we cannot manage”.


The other measures proposed are equally straightforward —it is a very straightforward set of amendments. I have my name to many of them, but the range of names on various amendments underscores the cross-party nature of the concern and the determination of this House to use the Bill to leverage change. I join others in saying, that if you cannot tackle the issue of climate change in a financial services Bill, it is going to be hard to tackle it at all.

The hour moves on, so I do not want to repeat the brilliant discussion, except to say that speaker after speaker detailed the urgency of acting on climate change and the necessity that it become a priority for this sector. My message to the Government is carpe diem, because this House will if the Government will not. If the UK is to be a leader—and of all the years in which we wish to show leadership, it must be this one—it must break new ground.

There will be more to say on the next group of climate change amendments, which I consider more powerful and radical. They deal with risk and capital requirements. I very much hope that we receive a strong response from the Minister. I can understand that someone looking at the Bill and a template of previous financial services Bills may not have thought that climate change had a place. By now, Ministers surely must. Included among this group of amendments are so many that are exceedingly reasonable and, frankly, quite uncontroversial. I hope that the Government will begin to shape some amendments of their own, drawing on the content so very firmly placed before them.

[Baroness Jones of Whitchurch (Lab) [V]]

My Lords, I am pleased to respond to this substantial group of amendments, several of which are in my name and all of which address the need for better regulation to ensure financial services meet their climate change obligations and the associated financial risk. These amendments correct a fundamental failure of the Bill to address those obligations.

As was pointed out at Second Reading, we find ourselves entangled in an argument from the Minister that these issues are not covered in the Bill, and therefore amendments inserting climate change obligations are inappropriate for it. We reject that argument; it makes nonsense of the scrutiny and revising process that we are here to enact. If we find an omission, it is perfectly proper that we seek to correct it by tabling amendments to the Bill.

That is why we regret that the Government did not bring forward their own amendments, following the excellent arguments put forward by my shadow Minister colleague, Pat McFadden, and others in the Commons. As he pointed out there, and as others have pointed out today, the Chancellor set out green goals for the UK financial services industry back in November. Therefore, the Bill was an ideal vehicle to set out an accountability framework to underpin those goals. Every sector of our economy will have to play its part in delivering the climate change net-zero target—whether it is in energy, transport, housing or agriculture—and all these changes will require large-scale financial investment. Financial institutions will thus have to play a central role in delivering it, and it is right that we use this opportunity to spell out how it should be done in practice.

During the Commons debate, the Minister, John Glen, also argued that this issue would be dealt with elsewhere as part of a separate review—again, reference was made to this today. This cannot wait for another review or consultation. We are already falling dangerously behind, and as the climate change committee has made clear, we are not on track to meet the net-zero 2050 target. We need action now to galvanise both public and private finance to step up to the mark and to be accountable for the promises made. The noble Lord, Lord Sharpe, said that we were in danger of complicating regulation, but I do not think our asks do anything like that. Our asks are simple: they set out core principles that we expect the regulators to embrace, but we leave them to sort out the detail of how to follow that through and enact it. That is the right way to go about it.

--- Later in debate ---

[Viscount Trenchard (Con)]

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

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

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

[Baroness Kramer (LD)]

My Lords, I do not have a great deal to say but there are a couple of points that I would like to make. First, the two probing amendments from the noble Lords, Lord Tunnicliffe and Lord Eatwell, make a great deal of sense to me, so I hope that the Government will pay attention to them and provide some substantial answers.

However, what struck me more than anything else was that this was an opportunity to comment on Clause 3. That suddenly dawned on me as I looked at the language both in the Bill and in two amendments which appear in later groups. One I have added my name to and the other is in my name only at this point in time. The first, in the name of my noble friend Lord Oates, looks at capital adequacy ratios for investments in fossil fuel relating to exploitation and exploration. The other amendment, which stands in my name and is in what could loosely be called a regulatory group, deals with MREL thresholds for medium-sized banks.

It occurred to me that this is the last time that we will be able to raise issues such as these in government time in this House if the Bill passes with Clause 3 in it. All the rules issues detailed in Clause 3, which are in effect fundamental to policy, will be transferred to the book of the regulator. Were I to look for an opportunity to raise these issues, which I shall follow up on in later debates on the Bill, the Government would say to me either, “You’re out of scope”, or, “Those are dealt with by the regulator, so wait a year or two and the regulator might do a consultation on one of these issues, then you can make your opinions heard.” They might say to me, “Write a letter to the Treasury Select Committee and see whether it considers the issue important enough to take up its very precious time, in dealing with its very heavy workload, by picking up your issue as part of one of its broader consultations.”

If ever we needed a graphic illustration of the loss of authority of Parliament and the loss of accountability to it, this is the time to illustrate and say it. I am really curious to hear from the Minister how he feels that that is justified and why he will explain to me that the amendments we have tabled are such an irritant to him that he is quite determined that never again will they fall into the scope of a debate on government time.