Financial Services Bill

Baroness Penn Excerpts

Committee stage
Monday 1st March 2021 Grand Committee

[Lord Tunnicliffe (Lab) [V]]

My Lords, despite various initiatives to encourage the emergence of challenger banks and local and regional institutions, barriers to entry remain high and the UK does not have a very positive story to tell. If they were provided with the right regulatory framework, an expansion in the number of local and regional banks could play an important role in addressing local inequalities, building financial inclusion and increasing the proportion of lending going to the real economy SMEs. It is important not to look at this as a zero-sum game; it is not, or at least should not be, a choice between supporting either big corporates or small banks, but rather about creating a financial services ecosystem that covers everybody’s needs.

These amendments seem benign. Nevertheless, banking is a risky activity. It is a funny business: it goes out of its way to look respectable and sound, but, as we know, it is extremely frail. In the financial crisis of 2008, the country almost came to a position of collapse—much closer than we seem to remember. Only through decisive action by the Government of the time, and by other overseas Governments, were we saved from a serious financial crisis that could have crippled the world.

When looking at a bunch of amendments like this, one might be tempted to say that the PRA’s general objective will look after us, and one should remember that its general objective is promoting the safety and soundness of PRA-authorised persons. However, if these amendments were to become a trade-off between the amendments and the PRA’s general objective, that would be a step too far in the safety of the banking structure. Accordingly, I hope that the Government will have listened to the suite of sensible ideas expressed today but judge it as an overall package of goods and bring forward some proposals that capture the best without endangering the banking system. My noble friend Lord Stevenson brought up the fact that individuals desperately need a safe and orderly form of low-cost credit, and that is equally true of SMEs.

[Baroness Penn (Con)]

My Lords, as has been set out, this grouping considers issues relating to competition and proportionate regulation in support of increased competition. Increasing competition in banking has been a priority for government under successive Prime Ministers; this can be traced back to the immediate period following the financial crisis and, indeed, the work of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards, of which I know noble Lords in this Committee were members.

Amendment 29 seeks to ensure that the FCA and PRA give due consideration to competition in exercising their duties and apply their rules and regulations proportionately to different-sized firms. It is important to note that the FCA and PRA are already required to consider competition as part of their statutory objectives. It was essential to put competition at the heart of the post-2007 financial crisis regulatory reforms. For the FCA, this is one of the three operational objectives and, for the PRA, it is a secondary objective—secondary to its safety and soundness objective. Since being given their competition objectives, both the FCA and PRA have taken significant actions to improve competition in UK financial services.

I shall give some examples. First, the new bank start-up unit was set up in 2016 as a joint initiative of the PRA and FCA to make the process of setting up a new bank in the UK more straightforward. Since it was launched, 20 new banks have been authorised, and the PRA continues to ensure that steps are taken to ensure that it is acting on its competition objective. For example, it consulted in summer 2020 on its approach to new and growing banks and, in November 2020, announced its intention to consider a more proportionate prudential regime for smaller banks, which promotes growth. Secondly, the FCA launched its regulatory sandbox in 2015, the first of its kind globally. This sandbox enables businesses to test innovative propositions with customers, improving the range of services and products available to UK customers. The FCA also recently launched a new digital sandbox to allow early stage firms access to data, which enables them further to develop their innovative ideas.

To give some more examples, the current account switch service, or CASS, was introduced in 2013 to allow customers easily to switch account provider when they see a better deal. As of September 2020, customers have switched over 6.8 million times using the service. The Payment Systems Regulator has been created to ensure fair and competitive access to central payment systems so that payment systems work in the interests of the businesses and customers that use them, and an SME credit data-sharing scheme has been introduced to make it easier for challenger banks and alternative finance providers to check the creditworthiness of businesses, improving their ability to lend to SMEs. I hope that reassures noble Lords that competition is already a key priority for this Government and is being properly considered by regulators.

Amendment 43, in the name of the noble Baroness, Lady Kramer, would remove existing capital requirements for banks with assets below £100 billion. As she has already explained, the intention of this amendment is to ensure that the rules on capital requirements for these smaller banks would be replaced by PRA rules with more proportionate requirements. The Government are committed to supporting more proportionate regulation for small and medium-sized banks and enhancing competition in financial services. The delegation of the relevant prudential requirements in this Bill will allow the PRA to introduce proportionality in its implementation, where appropriate.

--- Later in debate ---

[Lord Eatwell (Lab)]

My Lords, the Libor scandal has precipitated a regulatory nightmare. How is the FCA to fulfil its statutory responsibility to ensure that markets function well when one of the foundation stones of those markets, the Libor benchmarks, are to be discontinued and replaced by untried underpinning?

The change in benchmarks is not only a problem for individual contracts, it is a systemic risk that the measures in the Bill do not—the FCA itself admits—entirely mitigate. To quote the FCA:

“Where parties to contracts referencing LIBOR cannot reach agreement on how those contracts would operate in the event of LIBOR’s cessation, discontinuation could cause uncertainty, litigation or loss of value because contracts no longer function as intended. If this problem affects large volumes of contracts it could pose risks to wider market integrity of contracts/financial instruments.”


The section in the Bill dealing with benchmarks attempts to limit the potential damage. The FCA describes one area of potential damage in these terms:

“This is to cater for a scenario where either a benchmark administrator informs the FCA of its intention to cease publication of a critical benchmark, or where contributors to the benchmark have notified the administrator of their intention to withdraw submissions to the benchmark before the relevant provisions in this Bill are commenced.”

Note that this is a plausible scenario in the FCA’s view.

How is it to be met? Among other measures there is the totally unrealistic proposal in Clause 9(3) that the FCA

“compel the administrator to continue publishing the benchmark”.

I cannot think of anything more likely to precipitate the systemic events that the FCA wishes to avoid. Then, remarkably, it amends Article 22(b) so that the FCA must provide

“a written notice stating that it considers that the benchmark is not representative of the market or economic reality that it is intended to measure or that the representativeness of the benchmark is at risk”.

What do we think that would do to the markets?

Despite the attempts in the Bill to deal with the cessation of the publication of a benchmark, there is, as the House of Commons Library notes suggest,

“risk of legal challenge and prolonged market uncertainty”.

That is the core of the problem that the Libor scandal has precipitated. I admit that the clauses in the Bill do their best to mitigate the risk, but even the authors of this section know that there is no entirely satisfactory solution. All they can do is cross their fingers and hope for the best.

The greatest risks are in retail markets: the ordinary family investor or, more pertinently, the ordinary family’s pension fund and, as the noble Baroness, Lady Kramer, said, small companies. They are the ones who are really at risk. There is nothing in this Bill to protect retail customers from that risk. When the Minister replies to this debate, perhaps she could reflect on the protection that should be provided for retail customers should the worst fears of the FCA be realised.

Amendment 44 in the name of the noble Baroness, Lady Noakes, seeks further to strengthen the defences against the plausible scenario by introducing continuity of contract when a benchmark is changed. This is an undoubtedly worthwhile addition to the armoury. It does not prevent adverse market reaction and loss of value—that problem remains—but at least continuity of contract will be there.

As I see it, Amendment 45 removes protection from the retail customer by preventing

“claim or cause … or liability in damages”.

This may well be unfortunate. The noble Baroness referred to claims companies. Pernicious though they may be, they were often the only recourse of the retail customer. As I understand it, the administrators of benchmarks could implement these changes themselves because powers that are given to them under Article 23D, where they are granted discretion, allow them to implement changes themselves, without concern for any consequent damages inflicted on holders of particular financial instruments. While I understand the thinking behind this safe harbour, I fear that it stands in stark contrast to the lack of protection for retail customers. Having read this section of the Bill carefully, I feel that the benchmark consultation is clearly necessary. The problems have not as yet been solved.

[Baroness Penn (Con)]

My Lords, as this debate has illustrated, when you hear about Libor it is hard not to think about the benchmark’s manipulation in the wake of the financial crisis. However, since then there has been substantial reform to the regulation of benchmarks and significant improvements have been made to the governance and controls around the submission and administration of Libor itself.

As a result of declining activity in the wholesale lending market that Libor seeks to measure, in 2015 the Financial Stability Board recommended a transition away from certain interest rate benchmarks including Libor to alternative rates based on active and liquid underlying markets. As Andrew Bailey remarked in his speech on Libor wind-down last summer,

“Public authorities and market participants … have … been working together to transition away from reliance on Libor for a number of years.”


It remains of the utmost importance that firms continue to prioritise the move away from the use of the Libor benchmark where possible. We need to reduce the number of contracts that refer to the Libor benchmark as much as possible before the agreement between the FCA and panel banks to continue submissions to Libor to facilitate this transition ends. For most Libor currencies, that is the end of this year.

However, it has been clear for some time that there will be certain tough legacy contracts that will not be able to transition away from Libor in time. In May 2020, the Working Group on Sterling Risk-Free Reference Rates highlighted the need for legislation to support these contracts. Without government intervention, parties to these contracts would be left without a means of determining contractual obligations when panel bank submissions cease, resulting in significant disruption.

Shortly after that, the Government announced their plans to give the FCA the powers to manage an orderly Libor wind-down through this Bill in a manner that protects consumers and market integrity. This includes legislation to deal with these tough legacy contracts. The UK was the first country to set out an appropriate regulatory framework to manage the wind-down of critical benchmarks, and this legislation has been very well received by industry.

My noble friend Lord Holmes and the noble Viscount, Lord Trenchard, asked about synthetic Libor. The proposed legislation does not prescribe what a synthetic benchmark might look like but allows the FCA flexibility and discretion as to what methodology change it might choose to impose. For example, the FCA could use this power to direct a change to Libor’s methodology so it is no longer reliant on panel bank submissions. The FCA has recently consulted the market on its proposed policy approach to using this power.

Turning to the amendments, Amendment 44 would require that where the FCA has used the powers given to it in this Bill to impose a change in the methodology of the benchmark, that new benchmark must be interpreted as the same benchmark in any contracts which reference the original benchmark. Amendment 45 seeks to reduce the scope for litigation where the FCA has exercised this power.

Since the introduction of this Bill, the Government have received representations from some key industry participants, highlighting a residual risk of disruption and potential litigation that they are concerned would remain even once the FCA has exercised its powers under this Bill. This risk is separate from the wider risks and impacts on markets that would materialise if the Government had not introduced legislation under this Bill, and it is this potential residual risk that these amendments seek to address. I appreciate noble Lords’ interest in this important issue and I reassure them that the Government are committed to looking at it and, if necessary, providing industry with any reassurance it needs. But I will now turn to the two fundamental reasons why we are unable to accept these amendments.

First, critical benchmarks such as Libor are widely used in a diverse range of products and contracts across the economy, so any action of the kind proposed in this amendment would affect a wide range of individuals and businesses. This must be taken into account before determining whether and how to act. As the noble Baroness, Lady Kramer, and the noble Lord, Lord Eatwell, have described, this would impact people outside the financial services industry.

Secondly, these amendments would intervene directly in private contracts, restricting the ability of contractual parties to seek legal redress were they to disagree with the imposition of synthetic Libor. I am sure that noble Lords agree that any such interference would need to be carefully considered and designed to be as narrow and targeted as possible while achieving the intended effect. It is therefore critical that the Government consider to the greatest extent reasonably possible the full range of Libor-referencing contracts and the impact any legal provisions, such as the ones proposed in these amendments, would have on parties to these contracts before deciding how to proceed on this issue.

For example, I am concerned that Amendment 45 would provide wide legal protection to parties using the revised benchmark against all forms of claim or causes of legal action associated with the exercise of the FCA’s Article 23D(2) power, as opposed to a more targeted form of legal protection. I have not yet been convinced that such a wide-ranging legal protection is appropriate, and it could have serious and significant unintended consequences.

For these reasons, the Treasury published a consultation specifically on this matter on 15 February, which is currently open for responses. This will allow us to properly consider these issues with the benefit of feedback from a broad range of Libor users. As the consultation is still open, I cannot say at this stage whether the responses provide evidence that a provision of this nature is necessary, or how such a provision should be structured, but I reassure noble Lords that the Government take this matter very seriously. Guided by the evidence gathered through this consultation, the Government will be well placed to decide if an intervention along the lines that these amendments intend is appropriate. I therefore ask that these amendments be withdrawn.

[Baroness Noakes (Con)]

My Lords, I start by thanking all noble Lords for taking part in this debate; I think all have supported my Amendment 44 on continuity of contract, and I think the noble Lord, Lord Eatwell, expressed some concerns in relation to Amendment 45, which dealt with safe harbour.

It is worth re-emphasising a point made by my noble friend the Minister: we should not confuse what happened with the Libor manipulation scandal—which was dreadful and affected not just the London market but the New York and other markets—with the reasons for withdrawal of Libor. As my noble friend has said, these were much more technical reasons regarding the suitability, durability and stability of Libor as a benchmark going forward. It is a more technical issue than harking back to the fact that it had been manipulated prior to the very significant improvements in benchmark administration that came about as a result of the benchmarks regulation.