Financial Services Bill

Baroness Noakes Excerpts

Monday 11th June 2012 Lords Chamber

[Baroness Noakes]

My Lords, our rules say that, on behalf of the whole House, the noble Lord, Lord Bilimoria, should welcome the maiden speech of the noble Lord, Lord O’Donnell, but I hope that I may be permitted to add my congratulations on his forthright and interesting speech. I hope in particular that eurozone Ministers heeded his wise words on leadership. I should declare my interests as set out in the register of interests. I am a non-executive director of RBS and a shareholder in a number of financial services companies.

My first point on this Bill is that it misses opportunities to ensure that UK plc is at the heart of financial services legislation. Bodies such as the CBI have pointed out that none of the new regulatory bodies is due to inherit the FSA’s current requirement to,

“have regard to the international character of capital markets and the desirability of maintaining the competitive position of the UK”.

The misguided reason given in another place is that this was associated with light-touch regulation and its disastrous consequences, but that is not good enough. Just as important, as other noble Lords have pointed out, is that the FPC’s remit does not have an explicit requirement to have regard to growth in the UK. When I read the attempt made by my honourable friend the Financial Secretary to the Treasury to justify this in another place, I nearly lost the will to live.

The financial services sector is a crucial part of the UK economy both directly in its contribution to GDP and tax yields and indirectly in its underpinning of the rest of the economy. It would be truly disastrous if the new bodies created by this Bill were merely technocratic and divorced from the needs of the wider economy. I hope that the UK’s economic success will be hard-wired into this Bill and that we will avoid the stability of the graveyard.

I cannot pretend to be enthusiastic about everything in this Bill. In particular, I believe that the twin-peaks approach may well create as many problems as it seeks to solve. That the FSA failed as a part of the tripartite arrangement is beyond doubt, but it is less than clear that the Bank of England would have made a better fist of prudential supervision before the financial crisis or that separating out conduct will be net positive.

The FSA was expensively created in the late 1990s and now we are even more expensively creating new arrangements that will have different gaps and overlaps. I can sense the law of unintended consequences waiting to spring into action. My noble friend will be relieved to hear that I am not going to fight a rearguard action, and shall instead concentrate on other areas of the Bill where I believe improvements are required.

I support the creation of the Financial Policy Committee to give focus to the Bank’s financial stability objective, but the Bank and the Financial Policy Committee must operate in an accountable and transparent way. My noble friend has helpfully confirmed that the Government will make changes in the Bill as it goes through your Lordships’ House, and I hope that this will go beyond the Bank’s own suggestions. I hope that my noble friend will heed the wise words of several noble Lords on this topic, including the noble Lord, Lord Myners, and my noble friend Lord Lamont.

I am sure that creating new macroprudential tools that will be available to the FPC can make a significant contribution to financial stability, but they are much too important to be created and operated in an accountability vacuum. As a minimum, the super-affirmative procedure will be necessary to give parliamentary oversight to their creation.

If we are to have the twin peaks of the PRA and the FCA, they must be made to work together. I am concerned that the solution in Clause 5 rests on a memorandum of understanding, the very mechanism that demonstrably failed the tripartite authorities. My noble friend may already be aware that there is concern about the practical impact on regulated firms of the separation of the FSA into the two arms that will shadow the PRA and the FCA.

There is no requirement in the Bill for the PRA and the FCA to consult on the creation of the memorandum of understanding; nor is there any parliamentary approval of the arrangements or provision for independent review of the effectiveness of co-ordination. This area of the Bill seems decidedly weak, and we need to strengthen it.

The Government have usefully set out in the Bill the regulatory principles to be applied by the PRA and the FCA, including the rather elusive concept of proportionality. This is described in terms of burdens being proportionate to benefits—which sounds okay—but is then qualified by “in general terms”, which of course begs a lot of questions. The London Stock Exchange believes that this needs to be explained in much more detail and that it should be calibrated both internationally and by reference to specific sectors. We need to look at the detail of this in Committee.

The PRA will be charged with operating judgment-based supervision, which of course marks a radical departure from the last decade or so under the FSA. It is important that the PRA gets this right. I do not understand why the FCA will have a practitioner panel that it must consult but the PRA does not. The Joint Committee thought that this might lead to regulatory capture but wanted to see the PRA’s approach to consultation laid out. We have now seen that approach and it has been described as “dismissive” by the British Bankers’ Association and “insufficient” by London First. I am sure that we will need to look again at the way in which the Bill mandates consultation.

I know that the FCA has a number of supporters, who see it as a consumer champion. But we must not forget that the FCA also has responsibility for wholesale markets and as the listing authority. It is the FCA that will have the UK’s seat on the European Securities and Markets Authority. We will need to look carefully at the proposed membership of the FCA and its objectives to ensure that it will be properly focused on its whole range of responsibilities.

The FCA will have many powers and responsibilities in relation to consumer protection, including product banning powers. We will need to scrutinise these carefully to ensure that they are proportionate and balanced and that they do not stifle product innovation, which could very easily happen.

I would like to mention three final areas before concluding. First, I welcome the Treasury’s new powers of direction. However, like the noble Lord, Lord Eatwell, and the chairman of the Treasury Select Committee in another place, I believe that those powers should be very considerably extended.

The consumer credit responsibilities of the OFT are to be transferred to the FCA, which is a good idea in principle, but a number of practical issues have been raised by market participants, in particular the Finance and Leasing Association, and I hope that we will be able to deal with those in Committee.

Finally, important clauses in Part 5 of this Bill lay the ground for independent inquiries. My test for these clauses is whether or not they would have made the Bank of England set up reviews of its own role in the financial crisis earlier and more comprehensively. I suspect that we need to amend Part 5 so that duties rather than powers are created.

In conclusion, I hope that my noble friend will be receptive to the many improvements to this Bill that our debate today is showing to be necessary.