Financial Services Bill

Baroness McIntosh of Hudnall Excerpts

Report stage
Wednesday 24th March 2021 Lords Chamber

[The Deputy Speaker (Baroness McIntosh of Hudnall) (Lab)]

My Lords, I shall call Members to speak in the order listed. Short questions for elucidation after the Minister’s response are discouraged. Any Member wishing to ask such a question must email the clerk. The groups are binding. A participant who might wish to press an amendment other than the lead amendment in a group to a Division must give notice in debate, or by emailing the clerk. Leave should be given to withdraw amendments. When putting the Question, I will collect voices in the Chamber only. If a Member taking part, remotely wants their voice accounted for if the Question is put, they must make this clear when speaking on the group.

Amendment 1

Moved by

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[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, it is a great pleasure to follow the noble Baroness, Lady Altmann, and her powerful plea, which I hope the Government will listen to. I also speak to Amendment 1 in the names of the noble Lords, Lord Stevenson of Balmacara, Lord Sharkey and Lord Eatwell, to which I was pleased to attach my name, as I did to a very similar amendment in Committee.

Any noble Lords who have read the Second Reading debate will note that I majored on a “duty of care” in my speech. I used what you might call an expanded definition of “duty of care” to suggest that it might not be too much to put on the face of the Bill a demand that the financial sector should not engage in reckless, fraudulent, corrupt, obviously damaging systemic behaviour, including shipping off tranches of cash into tax havens, deploying complex financial instruments that they clearly do not understand and handing over control of markets to automated systems without adequate controls—things that threaten the security of all of us. But while I believe that principle remains sound, the lawyers convinced me that, in narrow legal terms, “duty of care” could not be stretched that far.

What the amendment here clearly introduces is a duty of care to individual customers. As proposed new subsection (2)(ea) says, their

“vulnerability, behavioural biases or constrained choices”

should not be exploited. Once, perhaps, such a clause was not necessary. There was a not ideal, but certainly useful, constraining paternalism: your local bank manager would look after you, both in limiting borrowing and in making allowances for unexpected disasters, personal and business. That has long gone—as of course has, almost universally, the local bank manager and, all too often, the local bank branch—so we need the law to step in to protect people to constrain the behaviour of financial institutions. As noble Lord, Lord Sharkey, said, we are in a situation where malfeasance has just continued to grow, with technical developments being one cause of that and, as noble Baroness, Lady Altmann, said, scandals and fraud have plagued consumers.

So that is the institutional side of where we are, but we also have to think about the state that people and our society are in today and make the law fit for our modern times, for these are times of massive insecurity. The idea of saving, or of even making the incoming funds match the essential outgoings each month, was an impossible dream for millions of people even before the arrival of the SARS-CoV-2 virus.

No one can know when sudden illness might strike—this Bill has been championed by Macmillan Cancer Support, to whose work I give credit—or it could be a redundancy or a pandemic that strikes people unexpectedly. That is one side of vulnerability and care that financial institutions should acknowledge. As Macmillan highlights, almost one in three of those severely financially impacted by their cancer diagnosis had to take out a loan or credit card debt. That is a public health issue. What we have are institutions that have been making profit from customers, sometimes for decades, and they have a duty to act compassionately and fairly in such circumstances.

But I think we also need to pay a bit of attention to the elements of the proposed new clause referring to “behavioural biases” and “constrained choices”. The noble Lord, Lord Holmes of Richmond, has been a rather isolated champion in this Bill on issues around the use of artificial intelligence algorithms and issues such as their potential bias, but he has also highlighted the way in which financial companies now have a historically uniquely detailed understanding of customer behaviour and the chance to exploit that through complex, opaque mechanisms.

As the noble Lord, Lord Stevenson of Balmacara, said in introducing an amendment, there has always been asymmetrical access to information between financial sector companies and their clients, but this has been massively magnified by technology—something that is only likely to grow. To create an assumption that this inequality of arms should not be misused should, we hope, constrain the behaviour of the financial sector—or at least, if it does not do that, provide a potential route for redress should it occur. There are already many who have need to seek redress for the behaviour of financial sector companies. I spent time with some of them this morning at a meeting of the Transparency Task Force.

As noble Lord, Lord Stevenson, said, the Government are likely now to say “Wait”—but why? We know that there is already an existing massive problem and a huge risk. If the Government do not acknowledge the need to act now, I offer the Green group’s strong support for the intention of the noble Lord, Lord Stevenson, to test the view of the House.

[The Deputy Speaker (Baroness McIntosh of Hudnall) (Lab)]

The noble Lord, Lord McNicol of West Kilbride, has withdrawn from the debate, so I call the next speaker, the noble Baroness, Lady Tyler of Enfield.

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[Lord Holmes of Richmond (Con) [V]]

My Lords, it is a pleasure to follow my noble friend Lady Noakes. In essence, since we are on Report on a Financial Services Bill, these amendments can, I hope, be rightly summed up as, “What point profit if no planet to spend it on?” But, as the term “global warming” clearly sets out, it is collectively a global issue, not a national one. In this context, I give more than a nod towards our involvement with the whole Basel process and the letter from Mr Sam Woods on this issue.

I support the amendments tabled by my noble friend the Minister. They strike the right balance on the need for transition—not in any sense slow or fast, but a transition—to get to where we need to get to across financial services and the wider economy. As noble Lords commented, there is no benefit—quite the opposite—in taking an approach to a particular industry in a particular region of United Kingdom only to have a more catastrophic climate impact by having to shore up resource from other parts of the globe.

In short, the PRA has a role to play, as do all elements in the financial services sector. More can probably be done on the use of new technologies and the measurement of how funds and various assets are performing in this sense. That is certainly in our grasp; it is not a matter for this group of amendments, but it could well provide much of the solution, and certainly the clarity and accountability that would come through in the course of business.

I fundamentally agree with my noble friend Lady Noakes’s commentary on how large corporates go about their funding—[Connection lost.]

[The Deputy Speaker (Baroness McIntosh of Hudnall) (Lab)]

We appear to have lost contact with the noble Lord, Lord Holmes. Perhaps we should move on to the next contributor, the noble Baroness, Lady Altmann.

[Baroness Altmann (Con) [V]]

My Lords, I have added my name to Amendment 3, moved so excellently by the noble Lord, Lord Oates. I congratulate him on his work on the issues relevant to this group of amendments.

I also commend my noble friend the Minister and his department for listening to the concerns expressed in Committee and for laying his own amendments to the Bill, which previously made no mention of climate change at all. I believe that the Government are committed to making a real difference on climate change and environmental issues, and have recognised the dangers that our precious planet faces due to climate change and biodiversity risks, as the noble Baroness, Lady Bennett, mentioned and as is in her amendment. I welcome the Government’s Amendments 43, 46, 47 and 49, and hope that the issue of climate risk will continue to move up the agenda in financial services.

I have enormous respect for my noble friend Lady Noakes and her experience in banking. She makes relevant distinctions between assets held by insurance companies, regulated by the FCA, which hold investments directly in fossil fuel or environmentally damaging firms and activities, whereas banks’ main assets are loans rather than more direct investments. Their balance sheets, as she noted, have some leasing, but, should the worst predictions of climate catastrophe materialise in a shorter timeframe than currently anticipated, there could be unexpected defaults on a number of the loans on the loan books, which also needs to be considered, I would hope, in terms of risk weightings.

In Committee, I supported the noble Lord, Lord Oates, in seeking to update the existing capital risk weightings to reflect climate change risk. Having listened carefully to the Committee’s arguments, he has taken care to adjust his amendment for Report. As we have all discussed in this group, climate change is now recognised widely as posing a significant risk to the entire global financial system and, in fact, to our expected and hoped-for way of life. Current central bank policy risks reinforcing a carbon lock-in through a systemic bias to fossil fuel investments—indeed, insurance arrangements and pension funds also have significant investments in this area. I believe we need a twin-track approach that both reports on and quantifies climate-related financial risks and, at the same time, amends prudential risk tools to reflect the risk of loss or stranding in relation to fossil fuel investments or, indeed, loan books.

Such an approach would reflect the urgency of the challenge we face and, as Andrew Bailey said in a speech last year:

“Investments that look safe on a backward look may be existentially risky given climate risks.”


The Minister’s response in Committee was that the proposed amendments would require the PRA to set punitively high risk weights against exposure to existing and new fossil fuel production and exploitation, and that these risk weights would, in effect, make it more expensive to finance such activities and thereby make them less attractive. Loans would be more expensive, potentially, to companies involved in this area. Is this not the very point that we should be seeking to achieve—to reflect the risks of carbon-intensive investments quantitatively, through higher risk weightings, and potentially through the issuing of loans to such companies?

Amendment 3 recognises the Government’s concerns and now proposes only that the PRA carry out a review of the current risk weightings applied to existing and new fossil fuel activities. In this regard, such a review may indeed confirm what my noble friend Lady Noakes suggested would be the outcome but, without such a review, I feel that we will not necessarily be taking this sufficiently seriously. I hope my noble friend can agree that this is a reasonable and prudent way to recognise the urgency of the climate change challenges we face, and that it would provide evidence to inform any necessary future changes to existing prudential rules around capital weightings, should that be found to be required.

In addition, two reports have just been published highlighting the systemic nature of climate risks. The LSE’s Grantham Research Institute report—I declare an interest as a visiting professor—Net-Zero Central Banking stated:

“Central banks and supervisors will need to take a systemic perspective, addressing both micro- and macroprudential risks over a much longer time horizon than they do now, and work to ensure that financial flows become aligned with net-zero.”


Policy Exchange’s report Capital Shift recently stated:

“Whereas international banking codes require banks to include emerging risks such as cybersecurity in capital adequacy compliance … climate change barely features.”


It recommended:

“Central banks and supervisors should introduce higher capital charges for assets at greater risk from climate and nature-related financial risks.”


I hope my noble friend the Minister can provide assurances that an urgent review of this vital area is possible and will be considered.

I speak briefly in support of the aims of Amendment 22 in the name of the noble Baroness, Lady Hayman, on climate-related financial risk reporting. I commend her for her work in this area and declare a further interest as a member of the Peers for the Planet group, which she so ably leads. Amendment 22 would require adjustments to reflect the systemic risk in the whole financial system. I hope my noble friend will commit to a future consultation, at least, on the FCA and PRA objectives having regard to net zero targets.

Finally, I have added my name to Amendment 23, also in the name of the noble Baroness, Lady Hayman, whose work on environmental protection has been so powerful. I congratulate the new chief executive of the FCA, Nikhil Rathi, on the latest announcement that he is recruiting a senior role focused specifically on environmental and other ESG matters, so I suspect that this amendment may no longer be required.

[The Deputy Speaker (Baroness McIntosh of Hudnall) (Lab)]

My Lords, we have not as yet been able to restore contact with the noble Lord, Lord Holmes of Richmond. Should he reappear before the Minister speaks, I will try to call him, but for the time being he is not with us, so I call the noble Baroness, Lady Kramer.

[Baroness Kramer (LD)]

My Lords, I will follow my practice of trying to be brief and selective on Report. We have had absolutely brilliant speeches and I do not intend to repeat them.

Perhaps I can start by being helpful to the noble Baroness, Lady Noakes, and I speak as a fairly weather-worn commercial banker who dealt extensively with loans and risk. She will understand, therefore, that the PRA, as the regulator, in dealing with capital adequacy issues, looks at the loans that sit as assets on the bank’s books, but of course it does not stop there. It looks through that to the operational activities—to the activities and investment of the company to which the loan is made. That is why the terminology “investment” pins exactly what this amendment is intended to do, which is to make sure that the PRA does that look-through to investment. I do not think that any member of the PRA would have the slightest difficulty in understanding what this amendment is guiding them to carry out. They would see that it has genuine precision in it. I do not have a problem with the wording; the wording says what it should, it says what it means and it says what the PRA would understand and follow through.

Very briefly, I thank the Minister for the two “have regard” amendments that he has embedded in this group. To “have regard” to the climate change target of 2050 is a step forward, but we have to recognise that it is very light-touch and will not scare the horses. The noble Baroness, Lady Noakes, captured that rather well when she said that the two “have regard” amendments will do no harm. I do not think they change the landscape, but they give a little hint of a change in direction and I welcome that change in direction.

Like others, I am very frustrated that we have a PRA that is going to do stress tests to test the sufficiency of banks’ capital buffers to deal with the financial instability caused by climate change, but then seems to have taken almost the equivalent of a vow of passivity and will not then follow through and implement the consequential adjustments to capital adequacy ratios that would come from that exploration and examination of the buffers. I really do not understand going through the process and then saying, “But we will not learn from or implement the consequences of that work”.

I sometimes think, as I listen to the speeches, that there is a sense that this requirement to look at capital adequacy ratios is somehow novel or revolutionary. I sit on the Economic Affairs Committee and last week, we were privileged to hear from the noble Lord, Lord Turner of Ecchinswell. I hope I have pronounced that correctly. We were looking at quantitative easing issues and therefore it was a discussion of central banks, but the issue of climate change came up. I thought what he said was quite helpful in understanding how normalised the approach of challenging this issue through capital adequacy ratios is now becoming. He said that any role of central banks in relation to climate change is very much secondary to the fiscal and regulatory authorities—the same issue that I think was raised with reference to quotes from the noble Lord, Lord King—but that is an important statement. It is secondary to the fiscal and regulatory authorities because, of course, the relevant regulatory authority is the PRA. He went on to give an illustration by referring to coal:

“If banks go on lending to coal companies, they may end up with stranded assets on which they will make a loss. That will be bad for their capital ratio. I think that it is reasonable for the PRA to set higher capital ratios for anybody who is still lending to coal.”


I do not want to suggest that he was willing to go further than coal, but he was using it as an illustration. I think most of this House would very happily accept that that language needs to be extended across the full range of fossil fuels, certainly in requiring the PRA to do a review. So, I wanted to underscore that this is a normalised approach; this is where we will go, and where we will end up. Given that we have described climate change, absolutely correctly, as an emergency, a delay in getting to that appropriate application of capital adequacy is really serious.

I wanted to pick up the point made by the noble Baroness, Lady Noakes—that most loans are short or medium term. They are, but they are supporting longer-term projects. Of course, the duration of financing the project itself—the project they enable, the project they empower, the project they drive—has a much longer-term application. So, the fact that the loan itself is short term does not mean that it can be set aside as though it had no longer-term implications. It is merely the first step in an ongoing process, and once the process is started it is almost impossible to stop. Loans might be short term because people think they might get better terms and conditions or pricing in the future. The short-term issue is not applicable here; the urgency issue is.

We know that we face an emergency and that how we act in the future will have to be more draconian and dramatic, and have far greater collateral damage, than if we act early. It is crucial that the issues raised in Amendment 3—getting in place the plan, pattern and process for using capital adequacy ratios to tackle the financial instability that will come from allowing climate change-related activities to continue and grow—be dealt with now, and rapidly. If the Government do not recognise what we have been describing here and commit to this review of the whole issue of capital adequacy and climate change, I very much hope that my noble friend Lord Oates will press his amendment. The message is absolutely critical.