Financial Services Bill

Baroness Neville-Rolfe Excerpts

Committee stage
Monday 8th March 2021 Grand Committee

[Baroness Neville-Rolfe (Con)]

My Lords, it is always a great pleasure to follow my noble friend Lady McIntosh of Pickering, who is sitting today in front of a superb backdrop of the Houses of Parliament—in my opinion, one of the best views in Europe. I await my noble friend the Deputy Leader’s comments with great interest.

I have great respect for my noble friend Lord Blackwell and for all he has achieved. However, I have some doubts about this proposal, not least the amendment’s apparent focus on bigger operators. For me, the second-class treatment of small operators in the financial services sector as a result of regulation by two regulators is the bigger issue. It is there that the pressure on investment funds and on capital, the prioritisation of IT resources and the lack of management capacity—described so well by my noble friend Lord Blackwell—is at its most apparent. Smaller firms also suffer from the overlap and overload mentioned by my very experienced and expert noble friend Lady Noakes. I should say that I speak as a non-executive director of Secure Trust Bank, which is a smaller bank.

I was pleased to see the Chancellor focus on smaller businesses in last week’s Budget—for the first time, I felt—although I am not sure how much that will help in the financial services context.

In conclusion, is this amendment necessary, or can we tackle the issues rightly raised by my noble friend in another way?

[Viscount Trenchard (Con) [V]]

My Lords, my noble friend Lord Blackwell’s amendment is an interesting idea and deserves serious consideration. It requires the establishment of a new joint co-ordination committee, comprising delegates of both regulators under the chairmanship of the Governor of the Bank of England. As long as we retain a “twin peaks” regulatory structure, it is clearly right that both regulators carry out their duties in a co-ordinated manner, ensuring that their activities are consistent and proportionate in meeting their respective general duties and objectives.

At the time of the introduction of the “twin peaks” system, we were told that it was necessary because there was a conflict between the interests of the consumer and those of the Government in maintaining financial stability. However, the FCA is responsible for both consumer protection and the prudential regulation of all regulated companies except very large ones that are considered systemically important. Might not the best way to be sure that the regulators’ actions are consistent and proportionate be to merge them into a single regulator—the FSA—but leave the Bank responsible for macroprudential regulation?

As I failed to add my name to the speakers’ list for the group of amendments beginning with Amendment 2, debated on 22 February, I was able to speak only briefly after the Minister. My noble friend’s amendment deals with much the same ground, which gives me an opportunity, with the Committee’s leave, to make some of the points that I had wanted to make on the first day.

My noble friend’s amendment seeks to ensure consistent priorities between the two regulators. This is hard to do if the objectives confer conflicting priorities on the two regulators. Indeed, it can be argued that being dual regulated at all is time-consuming, expensive and unattractive. However, I strongly believe that we must move quickly to maximise the attractiveness of London’s markets in order to be assured that the City, including our wider financial services industry, will remain one of the two truly leading global financial centres, with all that that means for our prosperity as a nation.

In 1999, I was privileged to serve on the Joint Committee on Financial Services and Markets under the chairmanship of the noble Lord, Lord Burns, during my first incarnation in your Lordships’ House. At that time, we considered arguments that the FSA should be given a competition objective as a fifth objective. This was supported by the BBA and the ABI, but the Government argued, and the committee ultimately decided, to put competition and competitiveness among the principles rather than the statutory objectives. Two arguments that led us so to decide were that ensuring competition was the primary task of the OFT, not the FSA, and that making competitiveness of UK financial services an objective could damage the FSA’s relations with overseas regulators. Our report at that time noted that some members of the committee would have preferred competition and competitiveness to feature among the FSA’s statutory objectives.

Much water has flowed under the bridge since 1999. Following the financial crisis of 2008, the FSA was split into two regulators, and we adopted the “twin peaks” model that had first been introduced by Australia. On 22 February, my noble friend Lord Howe said that discussions about the balance of the regulator’s objectives

“are not arguments for today. The Government’s future regulatory framework review is considering how the UK’s financial services regulatory framework must adapt to reflect our future outside of the EU. That has to be the right place to consider issues such as the regulators’ objectives”.—[Official Report, 22/2/21; col. GC 142.]

The Minister’s response was disappointing. Does he not agree that our departure from the EU and freedom to adopt an entirely different, principles-based, outcomes-oriented regulatory model suggests that the Government should look seriously at this question as soon as possible?

Some encouraging proposals are included in the phase 2 framework consultation, such as the introduction of “activity-specific regulatory principles”, described in section 2.38. However, it seems that the Government do not plan wholesale changes. They conclude in section 2.46 that these regulatory principles could bring about

“enhanced regulator focus on … competitiveness, without needing to change the regulators’ overarching objectives”.

Such an approach is dangerously complacent. Can the Minister confirm that the Government agree with Andrew Bailey that it would be unrealistic and dangerous to stick to EU banking rules in the future? Surely, in financial services, where we enjoy the advantages of scale and can influence the emergence of global consensus around principles-based regulations that support innovation, we should move quickly to establish the right regulatory framework to do that.

Co-ordination between our two regulators has served us fairly well to date, but it is likely that the regulators will continue to face difficulties inherent in a multi-agency regulatory structure where the performance of one regulator is often dependent on that of the other. There is also a challenge in establishing the borders of financial regulation for allocating functions between the FCA and the PRA. In particular, the increased focus on systemic stability and macroprudential regulations has resulted in overlap between the two regulators. The FCA has responsibility for the prudential regulation of more than 24,000 firms in the UK, whereas the PRA is responsible only for the prudential regulation of some 1,500 systemically important banks and investment firms. Further, the “twin peaks” system is inherently anti-competitive for dual-regulated banks and investment companies, which have to report a large amount of monthly data in two different formats to two different regulators.

The PRA’s secondary competition objective is, by definition, subordinate to its other two objectives. In effect, it is simply a principle to which the PRA should have regard. Many countries have financial regulators that incorporate some kind of competition objective among their statutory objectives, and I do not think that there is any evidence that this has damaged their relationships with either the PRA or the FCA.

Furthermore, in his recent report on competition and markets, John Penrose found that

“our independent competition and consumer regulation regime currently has a good reputation, but not a great one. International rankings put our major competition institutions behind USA, France, Germany, EU and Australia. We have stopped making progress on cutting the costs of red tape and, in recent years, have gone backwards”.

This is largely as a result of a constantly increasing number of sectors, including many in financial services, being caught by the tentacles of the very cumbersome, expensive and complicated system of regulation that has been increasingly pushed by the Commission in the interests of harmonisation.

We have prospered and succeeded as a global financial centre not because of our EU regulatory framework but in spite of it. We may have devised much of the financial regulation ourselves and may even have gold-plated some of it, but we did not choose to work within the codified structures on which European law is based. Besides, our regulators are not that different from anyone else’s: they like to make rules, and gold-plating has been the only way that they could do that in recent years.

As Barnabas Reynolds explains well in his recent paper, published by Politeia and entitled Restoring UK Law: Freeing the UK’s Global Financial Market, common law is

“pivotal to the success of a global financial centre … A key element of London's attractiveness to investors is its legal framework, which underpins a flourishing commercial environment with the rule of law”.

I worry that the Government do not yet recognise that we have to replace the entire directives-based, cumbersome, EU-derived financial services rulebook and go back to something more like how we used to regulate: based on common law principles and outcomes. There is huge resistance to change among trade associations and larger financial services groups because the present system helps the strong incumbent against the innovator and the challenger—and is, in fact, a form of protectionism.

I look forward to hearing what my noble friend the Minister intends to do to move in the direction in which we need to go. I believe that my noble friend’s amendment may provide a first step on that journey.

--- Later in debate ---

[Baroness Noakes (Con)]

As I was saying, my Lords, of much greater importance are the plans that the Government have to support and promote the future growth of our financial services sector. The amendments on international competitiveness debated on our first day in Committee are far more important than EU equivalence.

[Baroness Neville-Rolfe (Con)]

My Lords, I am delighted to follow my noble friend Lady Noakes. Like her, I was struck by the comments of the Governor of the Bank of England, and I feel she has given us a welcome dose of reality this evening.

I speak as a member of the EU Committee and its Services Sub-Committee. We have wrestled long and hard on the vexed question of the granting of equivalence by the EU, including the important issue of reciprocity, highlighted by the noble Baroness, Lady Bowles. I want to make three points and ask one question.

First, once one has decided to leave the EU, it makes little sense to be tied to its rules and regulations—in effect, as the Governor of the Bank of England has said recently, thereby becoming a rule taker without being able to make any input to the new rules. So we will have to plough our own furrow on financial services. But that does not stop us agreeing equivalence arrangements in areas where there is strong mutual interest such as central counterparties, known as CCPs, already temporarily approved, and perhaps insurance. We have granted equivalence to European banks and other bodies, as has been said, and the prospect of maintaining that equivalence gives us some leverage.

Secondly, I do not see why we should necessarily refuse equivalence to third countries which do not have similar legal and supervisory standards. Flexibility is important if we are to welcome investors here, and they may have different yet adequate regimes, bringing in innovation and diversity of offer, which could be valuable in the UK. Trade in services is absolutely vital to the future of this country.

Thirdly, I can see the value of some form of reporting to Parliament, as proposed by the noble Lord, Lord Tunnicliffe, in Amendment 100 and my noble friend Lord Hodgson in Amendment 105—although in different ways. Even on the EU Committee, we have had the greatest difficulty extracting information on the progress of negotiations on financial services, partly because this is in the hands of the Treasury and its officials, while the main spokesman has been my noble friend Lord Frost, who has led our negotiations across the board with such tenacity.

My question is this. How does my noble friend the Deputy Leader feel about the balance between UK-owned banks and financial service operators and their EU competitors now that we have granted equivalence and the EU, in the main, has not? Am I right in thinking that a German bank such as Deutsche Bank, a Dutch bank such as Rabobank or a French asset management firm such as Amundi is regulated in its own country and less subject to UK regulator bureaucracy and aggressive enforcement of something like MiFID than its UK counterparts? Is there any sense in which it is privileged, and is this true also of smaller operators? Does this matter to UK plc?

[Baroness Kramer (LD)]

My Lords, I shall begin by addressing Amendments 100 and 105, which would require reports that would be both useful and interesting. However, I want to pick up the point that was made by the noble Baroness, Lady Noakes, who essentially took the position—I understand its logic—“Why bother to seek equivalence from the EU?” I think she said, “They wish us ill and see a competitive advantage in not offering equivalence.” However, I do not think she listened carefully to my noble friend Lady Bowles, who comes with a great deal of experience from the EU. The point my noble friend made is that in the EU, which is a rules-based organisation —that is its absolutely core fundamental structure—it is quite hard to offer equivalence to a financial centre where those who are regulating it make it very clear that they want great flexibility to be able to make change very easily and with very little process. That is what we are doing with this Bill.

Essentially, we are removing the normal parliamentary processes that would have been engaged in the process of changing regulation and leaving it in the hands of the regulator, with, as we have all discussed, virtually no accountability to Parliament. It seems from what we read that a 12-week consultation would be about all that is required for a regulator to change the rules, compared with the process in the EU, which people may regard as cumbersome but which has with it extensive consultation, engagement and oversight, and which flushes out exactly what is associated with, what is involved with and what the consequences are of that rule change. We will now have light-touch rule change—that would be an accurate way to describe it. In an atmosphere where there is very little trust—the language certainly has not been that which would develop and promote trust—I can certainly see why the EU would be uncomfortable with the idea of offering equivalence in those circumstances. Therefore, it is not a determination to do us ill but, to a significant degree, some shock that change will happen so often that it will have very little idea of the rule base that applies in the UK and certainly will not understand its various ramifications.

However, in a sense it really does not matter. I find it quite shattering that we have a Government—the noble Baroness, Lady Noakes, seems to be aligned with them—who say, “We are really not interested in being able to sell our services into the second-largest economy on the globe”—whether measured by population or in terms of GDP. That is a huge and significant market. We have never been successful at selling financial services into the United States, partly because it has its own, very stalwart financial services sector. I suggest that selling financial services into China will be exceedingly difficult over many years. China will wish to develop its own financial centre; it has Hong Kong. We begin then to look at countries across Asia and in South America. However, I think we will find very shortly that they intend to develop their own financial centres. When I have talked to people in India, they would be willing to do some work here with people in the UK but they want to develop Mumbai. We are seeing a regionalisation of economic blocs, which will lead to a rise of significant financial centres in other locations across the globe. There is a real danger in dismissing with a wave of the hand the customers who sit on our doorstep, who have traditionally been our core customers, and saying, in essence, “It really doesn’t matter whether we are able to sell them services. Let’s look elsewhere.” I am not sure that “elsewhere” looks quite so promising.

What I found most interesting in this whole debate was a very different set of questions raised by my noble friend Lady Bowles. To me they were, if you like, the financial services equivalent of the chlorinated chicken question. As we go out and seek to sell our financial services more broadly, presumably, many of those locations will turn to us and say, “You can sell to us provided we can sell to you. We’re developing our financial sector and we would like to have access to your markets.” My noble friend was asking: what standards will we be using to determine that reciprocity? As I say, it is the chlorinated chicken question. We have not heard much—or anything, frankly—from the Government about what standards we will apply under those circumstances.

It seems to me that, when we assert that we can find markets all over the globe that will take the place of the EU—and that this can be done rapidly and very easily—we have to answer that question. Are we going to have to pay the price of providing reciprocity to financial centres whose standards do not meet our own? What are the consequences of that if those entities are then freely able to enter the UK market? We have a long history of concern about money laundering and market abuse. There are very serious questions associated with that; I would like to begin to hear some answers.