Financial Services Bill

Baroness Kramer Excerpts

Committee stage
Monday 1st March 2021 Grand Committee

In closing, will my noble friend the Minister tell the Committee what plans the Government have to look at the issue of capital risk weighting and at how it can align with the UK’s net-zero commitment? Is this something that will be looked at by, for example, the Network for Greening the Financial System? Will the Government think again and have some sympathy with the idea of increasing the risk weighting associated with these assets, at least in line with what is proposed in Amendment 31?

[Baroness Kramer (LD)]

My Lords, I begin by welcoming Amendment 136A from the noble Lord, Lord Holmes, which is the only amendment in the group that does not have my name attached to it. The amendment is useful. In a sense, it belongs with the group of amendments on climate change that we discussed last week, in that it is focused on disclosure and other such issues, which is helpful. The reason why we have this group of amendments is that we require more powerful levers, we need to recognise urgency and we need the financial system to recognise both the risks that it faces as a sector from the implications of climate change and the positive role that it can play.

Mark Carney and Andrew Bailey have both accepted that climate change is the greatest risk that we face to financial stability. That surely should be reflected in the way that the industry is regulated. I was therefore taken aback when Andrew Bailey, in his speech to the Green Horizon Summit in November, laid out a strategy that seemed to depend, essentially, on better data, disclosure and guidance. At the macro level, Mr Bailey confirmed that a climate stress exercise, postponed because of Covid, would launch in June 2021, but then he said:

“We will not use the results to size firms’ capital buffers.”


I found that quite shocking, but, having listened to the noble Baroness, Lady Noakes, and the noble Lord, Lord Sharpe, I realise the kind of pressures that Andrew Bailey must be facing from the industry. Surely capital buffers are a crucial tool of the regulator. If climate change is the most important risk to financial stability, surely the Bank of England must be prepared to reflect that in its capital adequacy requirements.

The noble Lord, Lord Oates, explained the complexity of some of the calculations. I understand that the numbers look really large when they are written down, but of course they are a weighting. The consequence for existing assets is not that a bank will have to hold 150% equivalent to its exposure but rather a percentage of that—around 12% of the exposure, I think. The number is not quite as alarming as it looks. When we look at future exploitation, we see that essentially what is being said is that it is so risky that 100% of capital needs to be held against any loan made—in effect, it is an equity investment because of the nature of its risk and not a risk that can accept the additional risk that is attached to leverage.

When I listened to the noble Baroness, Lady Noakes, a couple of things particularly struck me. One is that I have far less faith than she does in the ability of the banks to assess credit risk. Sometimes they are pretty good at looking at an individual company—though, my goodness, a lot of that was flawed, if we look at the period before 2008. The noble Baroness, Lady Noakes, was on the board of RBS and must have looked back at its credit—not at the time of its troubles being created but afterwards—and probably was in shock at some of the credit practices that were in place. That is similarly true at HBOS, Northern Rock and a wide range of banking institutions.

We should not fool ourselves that banks are all-seeing, even when it comes to looking at an individual company’s credit risk. But where they are really poor is in identifying change and looking at systemic and holistic risk. That is why we ran into that incredible crisis in 2008. The industry struggles to look beyond the small and narrow to understand the broader picture and then apply it to its whole range of credit decisions. I say that as someone who spent most of their banking career in the United States as a commercial banker, looking extensively at credit risk; I very much understand the weakness of the system.

Banking is, almost by definition, a short-term activity, so decisions are made over relatively short horizons. Despite the many changes that we have introduced at governance level to try to inculcate a longer-term culture, it will always be true—partly because of the way that remuneration and promotions are structured, and partly because it is just inherent in the culture of most of these institutions—that the way that banks look is inherently short term. They are particularly bad at assessing long-term risk and understanding how the implications of that should be applied on any given day.

The noble Lord, Lord Sharpe, said that if we do not want to see lending to future fossil fuel exploitation, we should deal with it globally at the COP meeting later in the year. I say to him that we take this same attitude to junk mortgages; I do not remember us saying that we must not do anything to increase the risk of those while we wait for a global agreement. We do the same thing with a wide range of high-risk derivatives and I do not remember us saying we should not act on those until we get a global agreement. When the financial regulator sees risk and recognises it, it has a responsibility to act. I remain, as I said, rather shaken at the idea that we have a financial regulator that will be identifying that risk but then not using it in its power to adapt capital buffers. As I have said, this is almost the last point at which we as parliamentarians will collectively be able to have an impact on the banks’ thinking and it strikes me that we need to seize that opportunity now.

Holding capital is a powerful tool to force a banking institution to face up to the risk that it is undertaking. That is why it is particularly true that the capital adequacy requirements are some of the most powerful leverages to change. In that same conversation, we must also make it clear to banks that they are not too big to fail and that if they undertake high-risk transactions there are consequences—in the past there have not been, as we as a country have bailed them out.

Finally, I will talk to Amendment 42, which deals with credit rating agencies. As the noble Baroness, Lady Noakes, pointed out, an organisation such as Shell has a very high credit rating and who would not lend to an organisation with a credit rating on that scale? We always—I would say this to any individual Minister—have to be somewhat cynical when we look at the product of credit rating agencies. I know that they try to behave with integrity, but the companies pay their fees and their wages and that tends to incline them to think in very narrow terms. None of the credit rating agencies got right the crisis that we saw in 2008-09, even though it developed over quite a period of years leading up to 2008-09. This was not an overnight event; it was a crisis that built over a decade and, in that way, it is very similar to the climate change crisis.

We have an opportunity to put down a particularly important marker to the regulator and say, “You have a tool that matters, a tool that you can use to protect the financial system from risk, which you yourself acknowledge and recognise and which you say you find frankly somewhat frightening. So use those tools.” In these amendments, we have the leverage to make the regulator do so.

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[Lord Naseby (Con) [V]]

I thank the Lord Chairman. As I was just saying, in both the United States and Canada there has been a change in young people’s attitudes to debt. This is one reason why the credit union movement there is seeing better times and beginning to come strongly back to life. However, two other things have happened here. First, during the pandemic, people have had a chance to look in great depth at their own financial situation; many are responding to approaches by building societies, credit unions and the other mutuals by having interactions, on the basis that they know somebody. They do not know anybody in the banks. I do not have a clue who looks after an account that I have at RBS; all I can do is act on the telephone. Secondly, and in addition, what do we see on the ground? Bank after bank are closing branches. Whereas in the old days I could go to the RBS in Biggleswade, and then to Bedford, now they have all gone. There is an opportunity here that should be encouraged.

Secondly, I will look not at cheap credit—I hasten to say—but what is called “home-collected credit”, which I covered to some extent at Second Reading. That is all about consumer choice and a fair price. Home-collected credit has been around for 150 years. It is highly successful: it is the credit of choice for the working classes, if I may use that phrase in today’s world. People who use home-collected credit take out small, short-term loans perhaps three or four times a year, probably around Christmas, Easter, birthdays and days such as that. They know what the terms are; the terms do not change, and if they run over in terms of repayment, there is not some swingeing increase in the rate charged. They get a single credit charge.

On the other side, there are payday loans. Every one of us in politics knows exactly what those loans are about: they compound interest and offer high-frequency, weekly loans that people get hooked on. When they go a bit wrong, the claims management companies—CMCs—leap in with a huge volume of complaints, most of which are manufactured. The problem is that today the FCA appears to be treating all high-cost credit models in the same way. The regulator is taking a singular sector-wide approach to affordability and repeat lending and pays less or no attention to the crucial differences between these two products. Whereas officials once differentiated between the responsible and the harmful models, now they treat them all the same. There is therefore a real danger of the HCCs being driven out of business.

In 2018 no less a man than Andrew Bailey said that people viewed home-collected credit differently from rent-to-own and payday ones, and that this was the model he thought about because the difference with home-collected credit is that the borrower knows the lender. The agent is the lender; that is, it is a different, almost social relationship that goes on and creates different attitudes. I ask the Minister to have a close look at this, and perhaps a discussion with the FCA and the Financial Ombudsman Service, to ensure that there is a clear differentiation in any investigations that they might want to undertake between these two very different models.

Thirdly, with the permission of the Committee, I would like to go back to the Mutuals’ Deferred Shares Bill, which I took through your Lordships’ House in 2015. I was motivated to do so by my interest in the mutual movement and by the financial crash of 2008. It seemed to me that there was a need for mutual insurers and friendly societies to have a means of raising capital. That is what I set about doing and it became law in 2015. That was, for me, a high day for the mutual movement. Today, there are not hundreds of mutual insurers and friendly societies: in fact, the active ones are the 52 that are members of the Association of Financial Mutuals.

What that Bill—which is now an Act—did was important, first, because it gave access to new capital, particularly for the friendly societies and mutual insurers. Secondly, without that new capital, many mutuals would have been driven into inappropriate corporate forms through demutualisation. Thirdly, a lack of capital limits mutuals’ growth and their ability to develop new services, which is what this amendment is all about. Fourthly, like all businesses, mutuals need to be able to benefit from economies of scale. Fifthly, it is important to learn lessons from that financial crisis I mentioned; if financial services businesses are to build up stronger capital bases, they require the legislated regulatory agility with which to do so. Sixthly and lastly, there are direct benefits of being able to issue new shares; debt—the alternative—is of lower quality than equity for firms wishing to build their capital base.

One dimension of the then Bill had two elements to it. I am afraid the Government of the day decided they would not accept the second arm that I put in the Bill originally, which was the proposal to have redeemable share instruments for co-operative and community benefit societies. At the time, the Government said they were

“unpersuaded about the merit of a redeemable share instrument as these societies already have a means of issuing redeemable shares. The Government do not see a clear need and demand for such an instrument”.—[Official Report, 24/10/14; col. 923.]

I think the world has not changed. The Government need to have another long, hard look at the second element of that Bill. Obviously, I withdrew that section, because I was happy to have what I could get.

The mutual world is dynamic. If we have learned nothing else from Covid—I was in isolation for my 10 days because I caught it at the beginning of January—it is that people work very hard on a local level. We need to capitalise on that. Society wants it. The wind is in the right direction. I hope very much that the amendments that both the noble Baroness, Lady Bowles, and my very good and noble friend Lord Holmes are putting forward find a following wind—not necessarily in the format they have produced them but certainly in some other format—and come to fruition.

[Baroness Kramer (LD)]

My Lords, I will speak very quickly to Amendments 29 and 126. Like the noble Lord, Lord Naseby, I welcome both. We need to keep putting pressure on the regulator to be far more granular in regulation. There has been significant improvement on predecessor regulators, but there is a lot more work to be done. I will speak in a later group about roles which could encourage the regulator to gap-fill, which is very much related to how it regulates a much more varied set of financial organisations, particularly relatively small ones.

Unlike the noble Baroness, Lady Noakes, I am a very strong fan of the idea of regional banks, so I appreciate the amendment of the noble Lord, Lord Holmes. You have only to look at the Landesbanken in Germany and their capacity to focus on local issues and people; they are there for them during times of crisis when, frankly, big banks tend to flee. Being regional does not guarantee that you are good, but it certainly creates a different dynamic, which we ought to explore—particularly in an era when we are talking much more about the importance of devolution and recognising its significance, and dealing with a levelling-up agenda. I hope all those will generate some thought in the Treasury and Government.

My three amendments—I am sorry there are three and that I have to talk to all of them—are probing amendments into problems that the Government need to get down and fix promptly.

Amendment 43 deals with the proportionality issue, which really is urgent. The level of loss-absorbing capital which medium-sized banks must hold in the UK is decided by the Bank of England. The Bank has been clear in declaring that these banks are not systemic, so we are not looking at systemic risk, but it treats them as if they were major banks, systemically risky, for the purposes of setting the requirement for loss-absorbing capital, and sets what is known as MREL—the minimum requirement for own funds and eligible liabilities—at 200% of their minimum capital requirements.

This is not an international norm. In the UK, the threshold at which MREL kicks in is a £15 billion balance sheet, or 40,000 transactional accounts—that really is a medium-sized bank. In the eurozone, the threshold is a €100 billion balance sheet, and in the US it is $250 billion before MREL kicks in. I really think that the Bank of England needs to go back and look at this.

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[Lord Naseby (Con) [V]]

My Lords, I would like to thank the noble Baroness, Lady Bowles, for the second time this afternoon for an interesting new clause. I have in the back of my mind the concluding words of the Minister of State, my noble friend Lord Agnew, when he introduced this Bill. Colleagues will remember that he said the Bill

“will support economic prosperity across the country, ensure financial stability, market integrity and consumer protection. It will ensure that the UK remains a world-class financial centre.”—[Official Report, 28/1/21; col. 1814.]

So we all know that the Bill is absolutely key. This particular amendment is about the enhanced role of the FCA and the PRA and, in particular, those who lead them. It means, frankly, that they are ever more powerful and important.

The amendment calls for a review after five years, although the noble Baroness, Lady Bowles, made it clear that, according to her contacts in Australia, a shorter period would have been better. I am quite clear in my own mind that five years is far too long. A great many changes are happening all the time, and I am quite sure that the market will remain dynamic and there will be many opportunities; personally, I would suggest a period of three years. You could argue for two, and I understand why you might, but I think that three years is about right, because it is quite a challenge for those who are running these two organisations to be reviewed after two years, which in effect means 18 months.

Should it be just one person? No, it is far too big a challenge for just one person. I believe there should be a team of three, and it should be the responsibility of one of them to be the chairman of the review, with a casting vote if necessary. In my experience of 12 years on the Public Accounts Committee, quite often a small working group would be set up of just three of us to look at the spread and success or otherwise of our work, and it seems to me that that was a good test market. Secondly, I had the privilege of being chairman of a quoted investment trust for some 10 years on a fixed-term basis. We had a limited number of non-executives and we decided that there should be a review every two to three years of the strategy that the operational company was following.

I say to the noble Baroness: well done for putting this forward. In principle, it ought to find favour from Her Majesty’s Government, although I am sure that the review period should be shorter than five years.

[Baroness Kramer (LD)]

My Lords, come another Monday, come another financial regulator story—this time in the Times. There are concerns that the FCA is going too slowly in its investigation of the Woodford scandal, to the point that Neil Woodford has felt confident about announcing plans to stage a comeback. It is just one story after another, and it very sadly makes the point. I think it is necessary to say that there are many—plenty—of good people at the FCA and the PRA, but clearly something is not working when we have regulatory scandal after regulatory scandal.

Financial services are notoriously difficult to police. The FCA is knee-deep in reviews that it has carried out after a failure, but the internal remedies that are promised every time perhaps help with the problem but do not seem to really cure it. Any financial services firm with a track record like the FCA would have been required by the regulator to bring in outside expertise to give an objective overview but then also to oversee change.

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[Lord Blackwell (Con) [V]]

My Lords, I too support these amendments and welcome the fact that the Bill addresses these issues. While Libor may have been effective in the past, we all know that it was becoming an unviable way of setting rates and was subject to manipulation, in the way mentioned by the noble Lord, Lord Desai. It is therefore important that the regulators have taken a firm line in moving us on from Libor to other benchmarks. But, as my noble friend Lady Noakes set out, in doing that, there are lots of problems with continuity of contracts. The legislation is necessary to help address those issues and ensure that partners in contracts move together to a new common contract based on a synthetic Libor.

We have to recognise that no substitute for Libor will have exactly the same characteristics. There is no perfect substitute. Most contracts will be based on SONIA, the sterling overnight index average rate, but getting SONIA terms that have the same characteristics over time is not perfect, so there will be winners and losers. That is one reason why it is important that, to give certainty, the legislation requires the regulator to ensure that synthetic Libor interest rates are taken in the contracts as substituting for Libor for both parties.

As my noble friend Lady Noakes set out, however, some parties will not accept that. They will take the change in the contract as the basis to believe, argue or litigate that the contract has been abrogated. Some parties will be out of the money in a contract and it will simply serve their convenience to choose this method to abrogate the contract. Safe harbour is therefore an important secondary requirement. If banks are following the requirement of the regulator to stop using Libor, and following its instructions in substituting synthetic Libor, they cannot then be subject to litigation from counterparties claiming that, by following the instructions of the regulator, they have abrogated their contracts. This is an important thing for those contracts, which could, in particularly vulnerable contracts, involve vast sums of money.

The Government have launched a consultation on this, but I do not think that is a reason not to legislate in the timescale of this Bill. The problem has been known about for many months—indeed, years—and has been discussed. I do not believe the Government need a consultation to understand that there is a problem or that it must be dealt with. During the passage of this Bill, if not in these amendments then in the Government’s amendments, it is important for this to be incorporated into the Bill. Otherwise, the uncertainty will go on far too long. Libor will come to an end and these issues will present themselves. This Bill is the opportunity to address them.

In taking this issue seriously, can my noble friend the Minister commit that the Government will bring back amendments, or accept these amendments, during the passage of this Bill through the House?

[Baroness Kramer (LD)]

My Lords, I know we have to accept the safe harbour provisions in Amendment 45, but it would be slightly less galling if we had not had to drag the FCA kicking and screaming to investigate the Libor scandal. As noble Lords know, it was finally revealed after a series of American journalists published an investigation into Libor; it then took parliamentarians months to actually get the FCA to do anything about investigating. It first did so because, by that point, the Bank of England was involved in manipulating Libor as well, although, as I think I said in my Second Reading speech, it intervened to try to provide some element of financial stability for the more honourable purpose of disguising to the world how badly the banks had been hit by the 2008 crisis. However, all of them had been aware for years that Libor was being manipulated.

I say to the noble Lord, Lord Desai, that this was no secret cartel; traders were shouting their required Libor benchmarks—the ones that would assist their bonuses—openly across the trading floors of various banks. There was nothing secret in this. At the time, under the UK approach—which is that anything not forbidden is permitted; since there was nothing to say, you could not lie in contributing to a financial benchmark —it was apparently not a criminal act or fraud. I do not think it ever even invoked the senior managers regime which came in later, but many of the players who were deeply involved in all this were obviously still around. It is a real stain on London.

I accept the safe harbour, but one of the things that saddens me is that some of those who will be hardest hit by the transition are small companies. Loans with spreads over Libor were not restricted to large, sophisticated companies; those companies will manage to work their way through this and make sure, if they are moving to a particular benchmark or negotiating a contract with the financial organisation they are set up with, that they do not come out damaged. However, many small businesses are exceedingly worried and have no idea which way to turn—do they get shifted to a new benchmark or stay with synthetic Libor? I hate to say this, but I think the assumption will turn out to be justified that, whatever happens, the amount they will pay in interest will be ratcheted up compared to the interest they would have paid had Libor remained. I find it very hard to conceive of banks saying, “We will move you to Sonia and you will pay less than you would have”. I am afraid there will be rounding up involved in all this. I am not sure how we provide any kind of fairness and justice, but maybe the Minister can talk about that.

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[Lord Sikka (Lab) [V]]

My Lords, I draw attention to my interests as set out in the register: I am an unpaid adviser to the Tax Justice Network. I strongly support Amendment 46 and congratulate the right reverend Prelate the Bishop of St Albans for providing the moral lead in securing tax justice and transparency.

As the noble Baroness, Lady Bennett, just pointed out, Gibraltar is one of the most secretive jurisdictions on this planet; indeed, it is among the top 30 most secretive, and inflicts tax losses on many nations including the UK. We all know that secrecy is an essential ingredient for tax avoidance and illicit financial flows. Over the years, Transparency International has reported that Gibraltar-based companies have been used to purchase properties in the UK, possibly with dirty money. Gibraltar has a population of around 33,000 but it has over 60,000 registered companies: that is, nearly two for every person living on the Rock. Many of these are just shell companies and little is really known about their authentic beneficial owners.

Gibraltar-based companies pop up in smuggling and bribery scandals all over the world. Unsurprisingly, a headline in the Guardian on 9 April 2017 said:

“Defend Gibraltar? Better Condemn it as a Dodgy Tax Haven”.


Little has changed. In February 2020, a report by the Council of Europe’s anti-money laundering body, MONEYVAL, called on Gibraltar to improve its efforts to combat, money-laundering and financing for terrorism.

The right reverend Prelate the Bishop of St Albans has already drawn attention to the tax haven aspects of Gibraltar. Unsurprisingly, many UK insurance and gambling companies are headquartered there because it is considerably more profitable to run UK operations from there by dodging UK taxes and increasing profit-related executive pay.

Research by TaxWatch shows that Gibraltar is indeed a hub for tax-avoidance: some 55% of the remote gambling services provided to UK-based customers are provided by companies based in Gibraltar. Most of the big companies, including William Hill, Ladbrokes and Bet365, have links to the Rock. Unibet’s website states that its servers are based in Malta, Alderney and Gibraltar and that it is registered and licensed in Gibraltar. The company is also listed on the New York Stock Exchange. This organisational maze provides opacity and tax avoidance and obfuscates accountability and the regulators’ ability to investigate.

William Hill has six subsidiaries in Gibraltar and is expected to pay around 12% in corporation tax for 2020, compared with the headline rate of just 19%. One of Ladbrokes Coral’s two licences to operate in the UK is registered in Gibraltar. On 9 August 2019, the Daily Mail reported that 32Red, which is based in Gibraltar,

“paid just £812,000 in corporation tax over ten years—an effective tax rate of just three per cent.”

The company is obviously not in Gibraltar just for the sunshine and the good climate. On 7 August 2020, the Daily Mail reported:

“Over the past two years, Bet 365 paid an effective tax rate of 12.7 percent on profits of £1.4 billion.”


Bet365’s accounts for the period 2015-19 show that the company’s corporation tax bill was £176 million lower because it has various operations in tax havens, including Gibraltar. Adjusting for inflation, Bet365 avoided around £182 million of UK corporation tax for the period 2015-19.

Ministers continue to tell us that companies should be taxed where sales and profits are made, but then we have this Bill, which will enable companies to book their profits in Gibraltar, even though they will have their sales and profits in the UK. The Government’s briefings on the Bill have not stated how much of the profits made in the UK are booked in Gibraltar and what the effect the Financial Services Bill will have on that.

The Government have a legal and moral duty for the good governance of Gibraltar and other jurisdictions to ensure that they do not continue to be what I call the world’s fiddle factories. Through this Bill, the Government are showering more gifts upon Gibraltar but without any quid pro quo; what exactly is it that we are getting in return? Can the Minister explain how these gifts aid tax justice in the UK? I strongly support Amendment 46 because it provides the basis for tax justice and transparency.

[Baroness Kramer (LD)]

My Lords, I will be very brief—this is not my area of expertise. I do not know if this is a required declaration, but my family have a small apartment in Andalusia; we do not rent it out, so there is no income involved—but it means that we have many neighbours who seem to run their financial affairs through Gibraltar, much to their general advantage.

Gibraltar suffers from a perception that it is something of a tax haven, and, indeed, most of the normal taxes that are levied in the UK or Spain are not levied there. However, I think we all feel great sympathy for Gibraltar; it has absolutely been caught in the Brexit conundrum and has seen many of its sources of income from the Navy and the military disappear over a number of years.