Financial Services Bill

Earl Howe Excerpts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Monday 22nd February 2021 Grand Committee

This is an important group of amendments since most of them challenge the Minister to clarify the Government’s thinking following the UK’s exit from the European Union. I am sure that we all await the Minister’s comprehensive reply with considerable interest.

[Earl Howe (Con)]

My Lords, I am grateful to all noble Lords who spoke in this debate, which has opened up an extremely important set of issues relating to the competitiveness of our financial services sector. I am sure we all recognise that the UK has long been a global leader in financial services; I am the first to agree that, as we adapt to our new position outside the EU and the opportunities that it brings, it is essential that we continue to provide the right environment to support a stable, innovative and world-leading financial services sector. That is why I embrace this opportunity to speak about this vital industry’s place in the world.

First, I remind the Committee of my right honourable friend the Chancellor’s speech last November. He was clear about the Government’s commitment to ensuring that the UK continues to be the most open, competitive and innovative place to conduct financial services anywhere in the world. I say in response to the noble Baroness, Lady Bennett, that the Chancellor could not have been clearer about the huge value of our financial services sector to the entire UK economy, including nearly £76 billion in tax receipts in the last financial year and more than 1 million jobs. At the very heart of this vision are the UK’s world-leading regulators: the Financial Conduct Authority, or FCA, and the Prudential Regulation Authority, or PRA. They are respected across the world for their expertise and thought leadership on the regulation of financial services.

I will now address the proposals that the amendments invite us to consider. Amendments 2 and 6 would introduce a statutory objective for the FCA and PRA to support the standing and competitiveness of the UK as a global financial centre. Amendment 7 would introduce a similar competitiveness objective for the Bank of England relating to financial conduct and prudential regulation. Amendment 87 has a similar purpose and would require the regulators to take international competitiveness issues into account when making rules, as well as reporting to Parliament on this and benchmarking the UK against other international financial hubs. The supplementary Amendment 3 seeks to explore what is meant by “high market standards” and to instigate a formal review of regulator activity every three years.

I listened with interest to the many good arguments from noble Lords in favour of including competitiveness as an element of the regulators’ statutory objectives. I have also listened to other contributions, including those from the noble Baronesses, Lady Kramer, Lady Bowles and Lady Bennett, and the noble Lord, Lord Sharkey, which reminded us of the need to be cautious. They also reminded us of the paramount importance of protecting the safety and soundness of our financial system, the integrity of financial markets, and of protecting consumers, as reflected in the regulators’ existing objectives.

Those two facets of the debate point up the critical balance that needs to be struck and the arguments that are necessary to build a consensus on the right approach for the UK’s financial services sector. This is a delicate calibration that needs a great deal of thought, which is why I say to the Committee that these 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.

The noble Lord, Lord Eatwell, asked me for a few further details on the Government’s approach to an overall policy framework. Their proposed approach will involve putting new policy framework legislation in place for key areas of regulation and moving regulatory requirements from the UK statute book to regulator rulebooks. Parliament will have the final say on the approach adopted and how it is applied through legislation. The Government will bring forward further detail on our approach to implementation, and invite stakeholder views on this, in due course. We expect that applying the FRF approach to the full body of onshored EU legislation will take several years to deliver.

We are committed to full, timely and consistent implementation of the Basel regime. I refer the noble Lord to the Governor of the Bank of England’s recent speech, which I am sure that he has already read, which sets out examples of some departures from the EU approach that we are contemplating, one of which is to exclude the value of software assets in the valuation of bank capital.

In saying that, it is worth recognising that a competitiveness objective for the regulators would not be a silver bullet to maintain and enhance the UK’s competitiveness; it is also not necessary in order to develop it. A range of factors determine the attractiveness of our financial ecosystem and make the UK a leading financial hub. This includes access to highly skilled talent, access to a broad international investor base, and dynamism and innovation to give us a leading position in the markets of the future, including fintech and green finance.

In fact, I reassure the Committee that the Government are already taking action now to ensure that competitiveness is a core consideration in our approach to financial services, and a consideration of the regulators. In the prudential measures in this Bill, for example, the UK’s competitiveness is one of the issues that the regulators must have regard to when making rules in these areas. We really are not standing still in this space.

The Government have also kicked off a wide range of activity seeking to seize the opportunities presented by having left the EU. This includes the review of the noble Lord, Lord Hill, into listings to make the UK a more attractive location for companies to list and trade in, and the UK funds regime review, which is considering tax and regulatory opportunities to make the UK more attractive for funds. The long-term asset fund will encourage investment in long-term investment opportunities. The Solvency II review is seeking views on how to tailor the prudential regulatory regime to support the UK’s insurance sector. Ron Kalifa OBE is leading an independent strategic review to identify opportunities to support further growth in the UK fintech sector. The payments landscape review is seeking to ensure that the UK maintains its status as a country at the cutting edge of payments technology. The consultation on cryptoassets and stablecoins seeks to understand how the UK can harness the benefits of new technology and support innovation while mitigating risks to consumers and stability. The call for evidence on the current overseas framework seeks to ensure that our regime is coherent, fair and easy to navigate. I should also mention the independent ring-fencing review, which will consider the rules separating retail and investment banking activities and any impact that they may have on banking competition and competitiveness. I hope that this long list assures noble Lords that the Government are absolutely committed to protecting and promoting the competitiveness of our financial services sector as we seek to ensure that the UK continues to be the most open, competitive and innovative place to do financial services anywhere in the world.

Amendment 33 looks at this question from the other side of the debate. It seeks to probe the legal effect of the obligation placed on the PRA to “have regard” to the UK’s international competitiveness when making its CRR rules. I have already spoken about the UK’s status as a global financial services hub and the work that we are doing to maintain it. The Government want to ensure that the PRA has specific regard to those ambitions when implementing its Basel rules because, while the Government and the regulators remain committed to the full and timely implementation of Basel, now that we are outside the EU, we have the opportunity to implement these standards in a way that takes account of the specificities of the UK market.

That does not mean a regulatory race to the bottom. This requirement is entirely subordinate to the PRA’s existing primary and secondary objectives of promoting safety and soundness, and effective competition, respectively. Amendment 106 in the name of my noble friend Lord Hodgson would require the PRA and the FCA to consider when developing new rules the nature of a product or service being provided, the level of risk this entails for UK consumers and the level of sophistication of a client. This is a sentiment with which it is hard to disagree, but I do not agree that an amendment to this effect is necessary or would significantly alter our current approach to regulation.

When exercising their functions, both the FCA and the PRA are currently obliged to consider proportionality under their regulatory principles. For instance, one of the core measures in the Bill enables the introduction of a tailored prudential regime for investment firms. This regime—the IFPR—will account for differences in the size and business models of investment firms at its very heart. Only non-systemic investment firms will be put on this new FCA-regulated regime, while those that are of systemic importance will remain regulated by the PRA.

Given the size, complexity and global nature of our financial system, we must of course make sure that customers understand the risks of the financial services products that they use. Having left the EU, the Government believe that there may be opportunities for responsibly applying more proportionate regulation in some areas. For example, Sam Woods, CEO of the PRA, made the case last year for a “strong and simple” approach to the regulation of small banks.

I hope that noble Lords will take from these remarks that the Government are committed to exploring and embracing the opportunities we now have to enhance the UK’s competitiveness while remaining committed to the highest international standards of regulation.

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[Viscount Trenchard (Con) [V]]

My Lords, I am grateful to the Committee for once again permitting me to speak after the Minister. Even though I have my name to two amendments in this group, I had not realised that the procedural change that the House is about to approve at 8 o’clock this evening—which I think is rather strange—now prevents one from doing so unless one takes an additional step, in a narrow window, of specifically putting one’s name down to individual groups as well.

I had wanted to speak in support of Amendment 2 in the name of my noble friend Lord Bridges of Headley, as moved so ably by my noble friend Lord Blackwell, and to Amendment 6, ably moved by my noble friend Lady Neville-Rolfe. I thank my noble friend Lord Holmes of Richmond for his kind words, and most heartily thank my noble friend Lord Hunt of Wirral both for what he said and for quoting from my 2012 speech on this subject.

Your Lordships may wonder why I have added my name to two different amendments which seek to achieve approximately the same result. This is because there are many ways to raise the importance of competition and the competitiveness of markets, and I have in my mind some further variations of the theme. In any case, I strongly believe that we must move quickly to maximise the attractiveness of London’s markets to be sure that the City, including our wider financial services industry, will remain one of the truly leading global financial centres, with all that that means for our prosperity as a nation.

I had wanted to speak properly and fully within this debate but am now hesitant to do so, as I am sure my noble friend the Minister will appreciate. I had wanted to make several points, and wished to explain why I think the noble Lord, Lord Sharkey, the noble Baroness, Lady Bennett of Manor Castle, and, indeed, the noble Baroness, Lady Kramer, are so wrong in believing that the FSA’s having regard to competitiveness was a cause of the financial crisis, or that competitiveness, of itself, heightens inequality. Either Amendment 2 or Amendment 6 would be an improvement to this Bill. I would like to ask my noble friend the Minister which of the two he prefers, because they are not precisely the same. In any case, as my noble friends Lord Mountevans and Lord Hunt have said, there is strong expectation and hope that the Government will do more to secure the City’s future in relation to improving the competitiveness of the markets.

[Earl Howe (Con)]

My Lords, I am grateful to my noble friend Lord Trenchard, and sorry that he was not able to enter the main list of speakers for the reasons that he stated. I hope that we will hear more from him in later debates but I also hope that he will take some encouragement from the actions that the Government are already taking to promote the competitiveness of our financial services independently of any conclusions reached from the FRF review. Those are proof of the Government’s commitment and intent to put actions where our words have been. I very much look forward to debating his ideas further in the course of these Committee proceedings.

[Baroness Neville-Rolfe (Con)]

I thank my noble friend the Deputy Leader for his full and courteous responses, which I shall read very carefully before returning to the issue at Report, as I think that there may be something missing in the Bill and that it would not be wise to defer the whole matter of the next set of financial services reforms. What in my noble friend’s long and helpful list assists smaller financial services businesses, which do not necessarily want to list on the stock exchange yet suffer the full cost and burden of FCA and PRA regulation as they struggle to do a good job for consumers and their clients?

[Earl Howe (Con)]

My Lords, I can probably expand this answer to advantage in writing. The Government fully understand the disproportionate effect of some of our regulation on small firms, which is why we are looking critically at whether a more proportionate approach is available to us. It is probably best if I spell out our thoughts in a letter, which I would be happy to copy to all Peers in this debate.

[The Deputy Chairman of Committees (Lord Russell of Liverpool) (CB)]

I have received one additional request to speak after the Minister, and I call the noble Baroness, Lady Bennett of Manor Castle.

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

My Lords, I thank the noble Lord the Deputy Leader for his full response in our previous discussion, but there was one figure that he raised in that response that I wanted to ask him about the source of and justification for. That was the claim that the financial sector contributed £76 billion in tax receipts. I am basing this question on work done by a fellow Member of your Lordships’ House, the noble Lord, Lord Sikka, who may not be joining us until later—so I wanted to raise this point now. I understand from his work that this figure comes from a report prepared by PricewaterhouseCoopers and includes £42 billion borne by customers in the form of VAT and paid by employees in the form of income tax and national insurance contributions. The remaining £33 billion is an estimate, and the report says that PwC

“has not verified, validated or audited the data and cannot therefore give any undertaking as to the accuracy”.

Could the Minister tell us what further justification the Government have for that figure?

[Earl Howe (Con)]

My Lords, this is clearly a detailed and analytical question, which is probably not appropriate for Grand Committee. I would be happy to write to the noble Baroness, giving her chapter and verse as far as I am able to do.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I thank all who have spoken in this debate, and the Minister for the extensive replies. As he said, we have heard a lot of views, a lot of which I felt coincided with one another, at least in terms of what was said, more perhaps than appears in the amendments. Ultimately, a lot of the things that were complained against could be dealt with through proportionality. Yes, it is not competitive if the actions of the regulator are not proportionate—be that in rules or supervision. Therefore, I think there is less need to give a specific competitiveness mandate, because that confuses whether you are seeking something else on top. I refer to what the noble Lord, Lord Blackwell, said in introducing his amendment, when he said that these things were probably taken into account but not formally, or they would be taken as given in any other industry.

Financial Services Bill

Earl Howe Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 24th February 2021 Grand Committee

On reflection, the amendments as drafted do not take proper account of parliamentary recess, as the noble Lord, Lord Blackwell, noted. They need to be corrected in that respect. That said, I commend the practical procedure advocated in these amendments to Her Majesty’s Government as a constructive way of responding to the strongly expressed wishes on all sides of the House.

[Earl Howe (Con)]

My Lords, parliamentary accountability is a subject that has clearly brought out considerable strength of feeling across the Committee; the Government agree that it is vital.

Parliament, particularly this House, has had a central role in shaping critical financial services legislation over recent decades. In many cases, that legislation has served as a blueprint for global reforms. First and most fundamentally, there was the passage of the Financial Services and Markets Act 2000, or FiSMA, which endures as the framework around which all other financial services legislation is based. Following the financial crisis, Parliament led a number of important reforms to make our regulatory framework stronger and, of course, there is the important work of the Parliamentary Commission on Banking Standards, which spearheaded important reforms such as the creation of the senior managers and certification regime.

I assure noble Lords that this Government recognise the important role that Parliament must continue to have in shaping the financial services regulatory landscape. I say that because I cannot agree with the suggestions I have heard of late that there is simply no parliamentary accountability for the UK regulators and that the Bill somehow seeks to sidestep Parliament.

I listened carefully to what the noble Baroness, Lady Kramer, said about the order-making powers contained in the Bill. I refer her to the report of your Lordships’ Delegated Powers and Regulatory Reform Committee, which, perhaps unusually for the committee, raised no concerns about the inclusion of those powers.

The FCA, as I shall go on to explain, is accountable to the Treasury, to Parliament and to the public, including for the economy, efficiency and effectiveness with which it uses resources. There are a number of features in the legislation which support this accountability, as I shall explain.

The noble Baroness, Lady Kramer, argued that the Bill’s scope is too wide. I say to her that the Bill is designed to resolve immediate outstanding policy issues resulting from our exit from the European Union and to meet the UK’s international obligations in the short term. Its scope is limited to ensuring that we uphold our international commitments.

The noble Baroness, Lady Bowles, asked me whether there will be another financial services Bill before the FRF is complete. The Government have not made decisions about legislation in future Sessions. The FRF review is a high priority and essential for establishing the model for all future legislation.

The noble Lord, Lord Eatwell, asked me where in the Bill is there any focus on macroprudential issues. The Financial Policy Committee of the Bank of England is, as he knows, the UK body responsible for identifying and managing systemic risks to financial stability. Its remit is not affected by the Bill. It publishes a Financial Stability Report twice a year. This work compliments the Basel reforms and neither, clearly, is a replacement for the other.

I will set out where the Government stand on this important issue. I begin by focusing on the prudential measures: the investment firms prudential regime and the Basel framework. Implementing these rules in a timely manner is critical to the UK’s reputation as a responsible and responsive global financial centre. The Basel Committee on Banking Supervision is the primary global standard setter for the prudential regulation of banks. In response to the financial crisis the Basel committee significantly overhauled and strengthened its standards, in a package now known as Basel III. Since that time, the Basel committee has continued to refine that framework to ensure that it is robust and to guard against the serious failures that led to the financial crisis.

Due to the interconnectedness of the global financial system and the fact that large financial institutions operate across the globe, the UK Government remain committed to the development and implementation of a common set of standards on prudential regulation and supervision. With regard to Basel III, the UK is committed to implementing those standards for 1 January 2022, and firms have been planning on this basis.

My noble friend Lord Trenchard asked whether I could confirm the treatment of software assets in the implementation of Basel by the PRA. The PRA is currently consulting on a proposal to disallow software assets from counting as regulatory capital, which is contrary to the approach being taken in the EU.

For the investment firms prudential regime, any delay would put the UK at a significant disadvantage compared to the EU. Investment firms in the EU will be subject to a more proportionate prudential regime from the end of June 2021.

I will set out the accountability arrangements relating to these measures. The first thing to remember is that these measures in the Bill sit within the existing framework of FiSMA. As my noble friend Lord Agnew stated at Second Reading, the FiSMA model as updated after the financial crisis is considered world leading. Through it, Parliament has established the appropriate split of responsibilities between the different regulators and has ensured that those regulators have the appropriate statutory objectives to guide their work. It also ensures that Parliament and other interested parties have the information needed to scrutinise the work of the regulators and hold them to account.

FiSMA confers broad rule-making powers on the regulators to ensure that they are able to fulfil their statutory objectives, recognising that it is appropriate for expert and independent regulators to make the detailed technical judgments about how financial services firms should be regulated in a way that delivers the outcomes that Parliament wants. I appreciate this is different from the European model we have been operating under, but it is a return to the UK model. It is evolutionary, not revolutionary. It brings us more into line with other key international peers whose regulators take the lead in the detailed firm requirements.

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

My Lords, I thank the Minister for his very clear and thoughtful response. I have three brief questions for clarification. First, what plans, if any, are there for a Financial Services (No. 2) Bill? Any information on that would be helpful to the deliberations of the Committee today, and to the approaches noble Lords may choose to take as we move through further stages of the Bill.

Secondly, will he say what the Government’s position is on the timeliness of such scrutiny? Does it err more towards rear-view rather than real-time? Thirdly, in the light of the debate that we have just had, will he consider discussions potentially to lead to government amendments coming forward on Report? I think that noble Lords would agree that, on scrutiny and accountability, if the Bill is passed as currently drafted that would be at least somewhat unfortunate.

[Earl Howe (Con)]

My Lords, I intended the Committee to take some reassurance from the final sentences in my winding up when I said that I was very happy to continue the conversation with noble Lords on this theme between now and Report. I hope that noble Lords will take that as a signal that the door is not closed as regards a potential tweak to this part of the Bill.

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We believe these changes are timely and urgent. I hope the Minister will feel able to reflect on them and we would welcome further discussions about how they can be achieved. Failing any progress, we intend to return to this issue on Report. I hope that the Minister can hear what we say with some sympathy and avoid that scenario. I therefore look forward to his response.

[Earl Howe (Con)]

My Lords, I have indeed listened, and I welcome the opportunity to talk about the crucial role played by the financial services sector in supporting the Government’s climate change objectives. Given the strong levels of interest in this topic and the number of amendments we are considering, I hope noble Lords will forgive me if I speak at some length.

Green finance was one of the cornerstones of my right honourable friend the Chancellor’s vision for financial services, as he set out in November in the other place. The Government want to put the full weight of private sector innovation, expertise and capital towards tackling climate change and protecting the environment. Real change requires embedding our climate change goals across all sectors of the economy, including the financial services sector. As my noble friend Lady Noakes has pointed out, the regulators are able to do this already under their current statutory objectives.

I would like to set out a small amount of detail about how the Government are delivering on this agenda. In 2019, the Government set out our vision in the Green Finance Strategy. This strategy also set out the Government’s commitment to use “remit letters” to set ambitious recommendations relating to climate change for the PRA and FCA. These letters will be issued at the next opportunity.

Late last year, the Chancellor announced our intention to make disclosures aligned with the Taskforce on Climate-related Financial Disclosures, or the TCFD, mandatory in the UK across the economy by 2025, with a significant portion of mandatory requirements to be in place by 2023. The Government also published the UK TCFD’s interim report and road map, which set out a clear pathway to achieving that ambition. As my noble friend Lord Sharpe highlighted, the UK expects to be the first country to make TCFD-aligned disclosures mandatory across the economy. The UK is also planning to issue a green gilt, subject to market conditions, to help fund projects to tackle climate change, finance much-needed infrastructure investment and create green jobs across this country.

I understand noble Lords’ appetite to go further and faster, and this is the motive behind many of the amendments we are debating. We are all in agreement that the financial services sector plays a role in meeting our commitments, but the thinking on how this should be factored into legislation and regulations in specific areas such as capital requirements and other prudential standards is still in its infancy. While we are certainly committed to remaining world leaders in this area, it is important that we act carefully and rationally, consult appropriately with interested parties and therefore make progress in the right way.

Before I cover the amendments, I hope my noble friend Lady Altmann will allow me to write to her on the Government’s approach to cryptocurrencies. I shall also write to the noble Baroness, Lady Sheehan, on government funding for fossil fuel projects overseas.

Amendment 23 seeks to prevent the Treasury revoking provisions of the retained UK capital requirements regulation, or CRR, where the rules made by the PRA are not aligned with the UK’s target to achieve net-zero emissions by 2050. Lest we forget, the changes the Bill enables serve to implement a number of vital reforms following the financial crisis. These reforms reinforce the safety and soundness of the UK financial system. This amendment would prevent us giving effect to updated prudential rules and thereby undermine our ability to uphold our G20 commitment to the full, timely and consistent implementation of the Basel standards. There is no evidence that “greener” means “prudentially safer”, at least not yet, and therefore it is not clear that a regulator whose primary objective is the safety and soundness of financial institutions could meet such a requirement now.

Amendments 12, 13, 14, 15, 16, 17, 34, 35, 36 and 37 are all similar in nature. Specifically, they would insert an additional consideration into the accountability frameworks of the FCA and the PRA. In essence, their intention is to require the regulators to take climate change, biodiversity and related issues into consideration when implementing the prudential regimes. Amendments 11 and 12 are also similar, but arguably go further and would impose a duty, rather than a “have regard”, on the FCA to make prudential rules for FCA investment firms and their parent undertakings to manage the climate-related financial risk to which they are exposed.

I agree with the principle that the regulators should have regard to our climate change commitments. I believe that the goal—if I am interpreting the amendments correctly—is to make the regulators consider how to channel private financing towards greener investments. I agree with this goal, but there are some very real challenges to note. First, to hold the regulators to account and achieve what we want, we need to be able to define what we mean by “green”. A programme of work is under way domestically and internationally to achieve that through a green taxonomy; that is, agreeing how we classify what is “green” and ensure consistent standards on that. There is also the important matter of understanding the financial risk of such green investments and the extent to which changing prudential requirements according to the greenness of the investment is justified. Again, work is ongoing on how to capture climate change risks in prudential regulation, both within the Bank of England and by the Basel committee task force, which is leading work to understand how climate risk is transmitted, assessed and measured. This is a significant undertaking and the evidence will take some time to examine. I note the excellent points made by my noble friend Lord Sharpe on some of the complexities in this area.

While the UK is committed to being a world leader in this area, given the global nature of the climate change threat and the interconnectedness of financial markets, this means bringing other jurisdictions with us and, while being bold, it also requires careful thought and robust evidence. These are global discussions and global consensus takes time. Any amendment or “have regard” introduced now would therefore naturally be a stopgap until fuller definitions have been established. In the short-to-medium term, there could well be minimal changes to the prudential framework as a result of this have-regard until the appropriate capital treatment is established.

Secondly, there is a time constraint. We are committed to implementing these Basel standards, the first batch of which the Government aim to implement by the end of this year, lest we risk damaging our international reputation. Further, if we do not implement the investment funds prudential regime by the end of the year, we will have a more burdensome regime than the EU.

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

My Lords, I thank the Minister for his comprehensive answer, although I ask again, how can the Government justify having included climate change considerations in the then Pension Schemes Bill last year, but not in this far larger, more significant Bill in 2021?

I want to respond to what the Minister said: that there is no evidence that greener means prudentially safer. I hope I am quoting him accurately. I refer specifically to the fossil fuel companies that the noble Baroness, Lady Sheehan, mentioned earlier, as well as to mining companies with a substantial role in environmental destruction. As the UNEP report to which I referred earlier said, this is unlikely to continue to be tolerated on the international stage. Surely the Government are aware and are taking account of the Carbon Tracker Initiative, which is responsible for popularising the term carbon bubble, if not for inventing it. The excess of carbon beyond climate limits is termed unburnable carbon, some of which is owned by listed companies. This has the financial implication of potentially creating stranded assets and destroying significant shareholder value.

The Carbon Tracker Initiative says that valuations tend to be based on near-term cash flows, which are less likely to be affected by climate-related factors. However, exposure varies, and some companies will be in a far worse position than others, as the demand for fossil fuels and the ability to burn them reduces. Surely, this is a potential concern and a risk that the greening of companies can tackle.

[Earl Howe (Con)]

My Lords, I failed to cover the Pension Schemes Act. I apologise to the noble Baroness. The Act provides a power to bring forward regulations, placing various obligations on pension schemes relating to climate change risks. The provisions in the prudential package of the Financial Services Bill do something slightly different. They place a duty on the regulators to have regard to certain matters and to explain how they have been considered, given that the Bill imposes duties on the regulators to make rules relating to Basel and the IFPR. I reassure the noble Baroness that my officials and I have considered these provisions carefully, as we have the other amendments discussed today.

As regards her main question, my point was simple. As yet, there is no international agreement on what the term “green” means. Therefore, we cannot say with certainty that greener means prudentially safer. I do not say that we will never be able to, but it is not possible at present.

[Lord Oates (LD)]

My Lords, I am grateful to all noble Lords for their thoughtful contributions to the debate. I thank and pay particular tribute to the noble Baroness, Lady Hayman, for her important leadership on these issues through Peers for the Planet which is recognised across the Committee. I also thank all noble Lords who signed or spoke in favour of amendments for their co-operative, cross-party approach.

In quoting the Government’s approach, the noble Baroness, Lady Hayman, paraphrased St Augustine: “Lord, make me greener, but not yet”. I thank the Minister for his comprehensive response and characteristic courtesy, but it felt a little complacent. One could also quote from St Paul—that it was about “the good that I would I do not”. There is no doubt about the Government’s intentions, ambitions and targets. We welcome and are impressed by them, but it is now reaching the point where we have to act.

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[Earl Howe (Con)]

My Lords, perhaps it will be helpful if I take as my starting point Clause 3, which enables the Treasury to revoke provisions in retained EU law to enable the PRA to implement the remaining Basel standards. As I discussed in an earlier debate, the UK Government are committed to the Basel prudential standards as a member of the G20. While a member of the EU, our adoption of the latest Basel standards was achieved through EU legislation. The capital requirements regulation implemented the previous set of Basel reforms in the EU and, therefore, in the UK. However, regulation is not static: it must continually evolve to mitigate emerging threats and respond to developments in the financial markets.

As I set out in earlier remarks, the most recent set of internationally agreed Basel standards now needs to be implemented in the UK. The capital requirements regulation, or CRR, forms part of retained EU law in the UK and therefore continues to form the basis of the UK’s prudential framework for credit institutions. In order to comply with the latest Basel standards, the CRR needs to be updated. The EU is updating its own standards through the second capital requirements regulation, CRR2. Rather than implementing the new provisions through detailed primary legislation to amend the retained CRR, Clause 3 gives the Treasury a power to revoke relevant provisions of the CRR that need to be updated in order to comply with the latest Basel standards. This then allows the PRA to make rules implementing the latest standards.

As I have already set out, the Government stand by the delegation of the responsibility for implementing those standards to the PRA but with an enhanced accountability framework. In that general context, and in response to the noble Lord, Lord Tunnicliffe, and for that matter the noble Baroness, Lady Bennett, I might usefully repeat something that I said in an earlier debate: the rules that will replace the EU legislation being deleted are already available in draft form. The regulators and the Treasury are working to make sure that the final rules are published ahead of the debate on the relevant statutory instruments, which have also been published in draft.

It is the PRA that has the technical expertise to implement these essential post-crisis reforms. This is a novel approach, so the Bill ensures that there are checks and balances in place. First, Clause 3 ensures that we transfer only some elements of the CRR to the PRA. The extent of the Treasury’s powers to delete will be confined to those areas of the CRR that are necessary to ensure that the UK upholds its international commitments. It is for the PRA to write the rules. The Treasury’s involvement is merely to enable the rules to be updated by deleting old rules that no longer meet international standards.

Secondly, the clause ensures that the deletions the Treasury makes take place only when it is clear that adequate provision has been made by the PRA to fill the space. Deletions will be subject to the draft affirmative procedure, providing the proper opportunity for scrutiny. The clause also allows the Treasury to make consequential, supplementary and incidental deletions to parts of the CRR. This is to ensure a coherent regime across the CRR and PRA rules, which are critical to industry.

Furthermore, Clause 3 gives the Treasury power to make transitional and savings provisions to prevent firms facing cliff edges from the deletion of a provision in the UK CRR. This will allow the Treasury to save, for example, permissions to modify capital requirements that have already been granted to firms under the CRR and avoids the need for firms to reapply for those permissions under the new PRA rules.

Amendment 24 would remove the requirement on the Treasury to ensure the PRA’s rules “adequately replace” revoked parts of the CRR. It would replace this requirement with ensuring that the rules “replicate or otherwise reflect” them. I understand that the intention of this amendment is to probe the degree of flexibility allowed by the current drafting. The intention is not for the new PRA rules to completely mirror the CRR provisions that they will replace. The PRA rules will update the CRR provisions they replace to achieve compliance with the revised Basel standards, and the language of “adequately replaced by” is intended to allow for this.

The wording in the Bill— “adequately replaced”—is also phrased to ensure that the rules are written in a language appropriately tailored to the PRA’s rulebook, which is specifically for the UK sector, and that the regime remains coherent. The amendment replaces this with the word “replicated”, which suggests that the language of the EU CRR is copied over exactly into the rulebook. This may not be the most suitable language for the UK’s rulebook and may prevent the PRA making the necessary changes to ensure compliance with the latest Basel standards.

In response to the noble Baroness, Lady Bowles, the EU—as I am sure she will recognise with her immense experience—is an outlier in the extent to which it specifies these matters in the equivalent of primary legislation. The approach taken in the Bill will bring us more into line with other major financial centres. This means that the EU is used to assessing rules set in the equivalent of regulator rules.

Amendment 25 would bind the Treasury into setting out why it thinks it is appropriate for the rules not to be replaced before laying the relevant regulations before Parliament. Clause 5 already provides for the PRA to prepare a document setting out whether its rules correspond to the revoked provision and, if so, how. The Government’s view is that that should be the primary document to explain why a CRR provision is not being replaced to provide a coherent explanation. If that document does not reflect a revocation where the CRR rule is not being replaced, this can be explained by the Treasury in the Explanatory Notes accompanying the statutory instrument revoking the rules. The amendment is therefore unnecessary, and I hope noble Lords will feel able not to press it.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I have received no requests to speak after the Minister, so I call the noble Lord, Lord Tunnicliffe.

Financial Services Bill

Earl Howe Excerpts

Committee stage
Monday 1st March 2021 Grand Committee

[Baroness Jones of Whitchurch (Lab) [V]]

My Lords, I am grateful to the noble Lords, Lord Oates and Lord Holmes, for tabling these amendments and for their helpful contributions. They provided a welcome extra clarity as to how we can deliver the UK’s climate change obligations across the financial services sector.

In an earlier debate, we identified the important principles which should underpin the application of climate change principles by the regulators and how they should be reported. A number of noble Lords then made strong and compelling cases for changes to the regulatory regime in advance of the Government’s consultation and implementation of the Basel standards because of the urgency of the climate change threat that we all acknowledged in that debate.

These amendments go one step further. Amendment 28 would add a specific requirement on the PRA to take the level of exposure to climate-related financial risk into account in setting capital adequacy requirements. We believe this is right, given the increasing evidence that institutions with overexposure to carbon-intensive investments are not acting prudentially.

In the debate last week, the Minister said:

“There is no evidence that ‘greener’ means ‘prudentially safer’, at least not yet”.—[Official Report, 24/2/21; col. GC 224.]


Although we accept that evidence in this field is still being collected, we believe that there is already a sufficiently strong evidence base on which to act. This has been confirmed by the Bank of England, which is already planning to tighten the supervisory expectations on climate-related risk for banks and insurers. As the Governor of the Bank of England said—and we all seem to be quoting the governors or the bank in different guises in this debate, but all roads lead to the same conclusion—in a recent speech:

“Investments that look safe on a backward look may be existentially risky given climate change. And investments that might have looked speculative in the past could look much safer in the context of a transition to net zero.”


Therefore, let us face it: high-level thinking is changing fast, whether it is by the Chancellor or the Governor of the Bank of England or, indeed, in the quotes from BlackRock that we looked at in the previous debate. There are big changes and big thinking going on. We now need to turn that recognition by all those leadership characters into practical policies for the future, and that is what we are attempting to do. We identify the urgent need to revisit investment assumptions and near-term capital requirements, and that is what Amendment 28 is trying to do.

Amendments 31 and 32 focus on the specific risk weight of investment in fossil fuels, which remain a major contributor to carbon emissions and are inevitably high-risk. We welcome the debate on these amendments and the specific risk weights that are proposed. I listened carefully to what the noble Lord, Lord Oates, and other noble Lords, had to say on this. We feel that the noble Lord was making a very valid point. As other noble Lords have said, the wording of these amendments might not be perfect, but they are certainly worthy of further exploration. On that basis, I look forward to the Minister’s response.

[Earl Howe (Con)]

My Lords, I am grateful to the noble Lord, Lord Oates, for his clear and succinct introduction to these amendments, and to other noble Lords who have spoken in his support, as well as to those who have sounded a more critical note.

I have already spoken about some of the broader questions relating to climate change and financial services in a previous debate and, in response to the noble Baroness, Lady Ritchie, in particular, I set out last Wednesday the significant action the Government are taking in this area. I also indicated that I have heard and understand the well-argued concerns of noble Lords about the manifold risks arising from climate change. I stand ready to discuss those concerns in the context of this Bill as constructively as I can between now and Report.

To add one more assurance in reply to the noble Lord, Lord Oates, who spoke about the risk of stranded assets and asked specifically about a transition plan, the Government are committed to a managed transition that puts new jobs in the clean energy sector at the heart of our strategy. My right honourable friend the Prime Minister set out details of this in his 10-point plan; further detail will be included in the forthcoming net zero review.

If I may, I will focus my remarks more narrowly on the specific issues raised by these amendments. Noble Lords reflected in earlier debates on the importance of prudential regulation, which aims to ensure the safety and soundness of the financial system. Much of the UK’s existing prudential regulation was introduced as a result of the 2008 financial crisis, to protect our economy by ensuring that financial services firms are adequately capitalised and properly managed to limit the risk of failure and the impact that would have on the economy. We must therefore be careful when considering the use of prudential tools to deliver other policy objectives; my noble friend Lady Noakes was absolutely right to emphasise this.

Indeed, one of the key advantages of the approach taken in the Bill is that it allows the UK’s prudential regulator, the PRA, to react where necessary to changing market conditions and to developments in international work and research on climate risk, particularly the development of a global consensus on what role the financial sector should play in tackling climate change. I believe this is a better solution than the amendments we are discussing here.

Amendment 28 would require the PRA to set capital adequacy requirements of a credit institution while having regard to its exposure to climate-related financial risk. As I have said, I appreciate all the concerns around climate change—there is no question of the Government being complacent about them—but I cannot see how this amendment would deliver more than the PRA’s existing obligations under the Financial Services and Markets Act, which by definition requires it to consider risks to the safety and soundness of financial institutions. I say to my noble friend Lady Altmann in particular that this includes climate risks in the same way as any other risks. The regulators are very alive to climate-related risks and are already acting to make sure they are understood and addressed in the financial system. To prove the point, the PRA will undertake climate-related stress tests in June to ensure that the financial system remains resilient to climate-related risks.

Amendments 31 and 32 would require the PRA to set punitively high risk weights against exposure to existing and new fossil fuel production and exploitation. These risk weights would, in effect, make it more expensive to finance such activities, and thereby make them less attractive. However, the point of the Bill is to support a flexible regulatory system that can respond to changing circumstances and developments as they arise. This framework puts financial stability at its heart through the PRA’s primary objective of safety and soundness. Other relevant public policy considerations are dealt with through the system of “have regard” set out in the Bill. None of these is prescriptive in the way that these amendments are, and they are, quite importantly, subordinate to the PRA’s primary objective. I maintain that this is the most effective way in which to ensure appropriate prudential treatment for all assets. Putting other public policy issues on a par with safety and soundness could lead to decisions being taken that are not sufficiently focused on the core purpose of prudential regulation.

Amendment 42 would require the Treasury to make regulations requiring credit rating agencies to give due consideration in their ratings to the level of exposure of a credit institution to climate-related financial risk. The credit rating agencies regulation sets out the UK’s regulatory regime for credit rating agencies, which are supervised by the FCA. A key principle of the regulation is that the agencies are independent, and the credit ratings they produce are independent, objective and of adequate quality. In producing these ratings, credit rating agencies are required to use methodologies that are rigorous, systematic, continuous and subject to validation based on historical experience. However, the credit rating agencies regulation does not stipulate factors that must be included within the methodologies used by credit rating agencies. In line with this principle of independence, the regulation prohibits interference of public authorities in the content of credit ratings or methodologies when performing their supervisory functions. This is an important principle designed to ensure that ratings have not been unduly influenced.

However, the regulation places requirements on credit rating agencies clearly to disclose their methodologies and the key elements underlying the credit rating or the rating outlook. That ensures that those using the ratings can make an informed choice as to whether a rating gives due regard to the impact of a type of risk on the creditworthiness of the institution in question, including climate-related financial risk. In addition, EU guidance published in 2019 provides that, when a credit rating agency changes a rating, it must disclose whether environment, social and governance factors played a part in that decision. The FCA has publicly communicated that it considers all guidance published by European authorities before 31 December 2020 to be relevant to UK firms and, therefore, UK agencies are expected to continue to apply this principle. More generally, the Government have committed to implementing the requirements of the Task Force on Climate-Related Financial Disclosures in the UK, with a significant portion of mandatory requirements in place by 2023, and all relevant firms reporting in line with the requirements by 2025.

On the topic of disclosures, Amendment 136A would require the Government to introduce an obligation on fund managers to report to the FCA on how their funds are satisfying environmental, social and governance requirements. I have already spoken about the Government’s commitment to implementing the requirements of the Task Force on Climate-Related Financial Disclosures—TCFD—in the UK. Becoming the first major economy to commit to fully mandatory and public climate disclosures is even more ambitious than the proposed amendment, which requires FCA-regulated fund managers only to make disclosures to the FCA. But fund managers do not yet have sufficient information on environmental factors from the wider economy in which they invest. The mandatory TCFD road map set out by the Government will apply to funds and the wider economy in a co-ordinated timeline.

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[Lord Eatwell (Lab)]

My Lords, one of the most important elements in this amendment is set out in the explanatory statement provided earlier by the noble Baroness, Lady Bowles, which says that the proposed general review is

“not linked to specific fault or failure”.

When we consider the history of the development of both international and domestic financial regulation, it has almost always been reactive: a model of crisis, then response. As a result, regulatory reform has typically been made in an atmosphere of crisis rather than an environment of thorough, calm consideration. So a periodic report by a skilled group might enable our regulatory system to get ahead of change in financial markets rather than persistently lag—and change, as we know, is persistent and indeed accelerating.

Another important factor that favours the proposals by the noble Baroness, Lady Bowles, is the extraordinary complacency evident in the documents issued with the Bill and in those issued so far that are associated with regulatory framework review. Organisations that in the past displayed a total lack of understanding of systemic risk in the markets they were supposed to be regulating should not resist external scrutiny and advice from well-informed parties; indeed, such external scrutiny would be in the national interest.

However—I am afraid I now come to that word—given the assurances of the Minister in summing up the debate we had on parliamentary scrutiny, I wonder whether we are at risk of creating too many committees and too many reviews. A well-resourced parliamentary scrutiny committee, which I trust the Minister has in mind, would recruit expert, experienced advisers to help them in the discharge of their responsibilities and would conduct periodic reviews. I must say that I was struck by the comment by the noble Baroness, Lady Kramer, that the buck stops with Parliament; indeed it does. I therefore suggest that it would be more fruitful for this Committee to concentrate on ensuring that well-resourced parliamentary scrutiny is indeed introduced, rather than taking the path suggested by the noble Baroness.

[Earl Howe (Con)]

My Lords, this amendment would require an independent review of both the FCA and the PRA every five years, and it sets out a number of things that the review would have to cover. The FCA was created to ensure that relevant markets work well. In practice, that means regulating the conduct of firms to make sure that the financial services sector is serving the interests of individuals, businesses and the economy as a whole. It has a broad remit and is responsible for regulating nearly 60,000 firms.

I accept the point made by the noble Baroness, Lady Bowles: the recent investigations by Dame Elizabeth Gloster and Raj Parker have shown that the FCA does not always get this completely right. However, the FCA is wholly committed to learning from past mistakes. It is addressing the recommendations in both these reports and we can see that commitment being translated into action.

The FCA has set out how it will accelerate its ongoing process of reform, including through its transformation programme led by the new CEO, Nikhil Rathi. It has committed to provide public updates on progress every six months, and it is right that the Government and Parliament hold it to account on delivering these important changes. The FCA absolutely knows what it needs to do, and that it needs to do it under a spotlight, both from the Treasury and from Parliament.

That is one part of my answer to my noble friend Lady Noakes, who asked me how the Government assure themselves that the regulators are fit for purpose. But the noble Baroness, Lady Bowles, spoke about the need for assurance and the noble Baroness, Lady Kramer, similarly, on the need for accountability. I reassure all three noble Baronesses that there already exist a number of mechanisms to hold regulators to account, both to Parliament to the Treasury. I believe that these existing mechanisms are sufficient to achieve the outcomes that this amendment is aiming at. I touched on some of these points in my previous remarks to this Committee, but I will attempt to provide a short summary here.

First of all, the regulators are required to produce annual reports and accounts, which are laid before Parliament by the Treasury and certified by the National Audit Office. The regulators are subject to full audit by the National Audit Office, and the NAO has the associated ability to launch value-for-money studies on the FCA and PRA. The FCA is subject to scrutiny via departmental Select Committee hearings, including the Public Accounts Committee and the Treasury Select Committee, which holds regular six-monthly meetings with the FCA CEO and Chair. The Treasury Select Committee scrutinises the appointments of the FCA Chair and CEO posts, and the Treasury has direct control over appointments to the FCA board and powers under the Financial Services Act 2012 to commission reviews and investigations.

The Treasury is also able to launch investigations under Section 77 of the Financial Services Act 2012 where it suspects there may have been regulatory failure. There are a number of informal mechanisms as well: there is nothing to prevent a Select Committee of either House launching inquiries, taking evidence on them, and reporting with recommendations; that is a decision for them. In speaking to Parliament about this Bill, both the PRA and FCA have stressed that they are committed to appropriate parliamentary scrutiny and will always respond to requests for engagement. Combined, these measures ensure that there is sufficient independent scrutiny of our regulators.

I am the first to agree that this is particularly important in light of Dame Elizabeth Gloster’s findings, but I reassure the Committee that, in addition to these measures, the Economic Secretary meets frequently with the FCA CEO to monitor progress on these critical reforms and ensure that the FCA remains focused on effectively delivering against its objectives. Of course, however, as we have discussed, the future regulatory framework review is considering the appropriate accountability mechanisms for the regulators, so this will provide an opportunity to consider these issues further. I hope that these remarks are helpful and sufficiently reassuring to the noble Baroness to enable her to withdraw her amendment.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I thank everybody who has spoken in what has turned out to be quite an interesting debate, the majority of whom have supported the general notion of my probing amendment, if not exactly all the specifics that I put into it, which perhaps tried to do too much. To clarify my intention, it was exactly as my noble friend Lady Kramer summarised: it was for a regular review that gave oversight to the regulator’s activities. As the noble Lord, Lord Sikka, said, the systemic factors also had oversight of that change.

I am sure that it is possible for this to come from other quarters. The Minister has suggested that it comes from the Treasury. Perhaps it could come from a parliamentary committee, although what I had in mind was not so much a body that solely took evidence but a few people who could get inside and examine procedures and find out how the operations worked.

Like others, I would like to clarify my concerns here. I know how difficult it is to be a regulator, especially to be the conduct and markets regulator, where things are less tangible than in some of the prudential regulation work, but it is about giving a helping hand. Although a lot of good thought and planning goes into how to address the problems that are exposed every time there is a review, if it is done from the inside, that is never the same as having eyes that come from outside. The thing about having an independent regulator is that, if you want independence, ultimately, the review should be independent. Having those reviews monitored through the Treasury is not necessarily the sort of independence that is satisfactory if you want to say that it is independent, and I question whether it is possible to do it through a parliamentary committee.

Financial Services Bill

Earl Howe Excerpts

Committee stage
Monday 8th March 2021 Grand Committee

[Lord Eatwell (Lab)]

My Lords, I have sympathy with the concerns behind these amendments. As the noble Baroness, Lady Bowles, and my noble friend Lord Sikka have spelled out so clearly, there is an intimate link between accounting standards and effective prudential regulation. It is probably true that nothing has a greater impact on policy than the manner in which relevant variables are measured.

That relationship between accounting standards and prudential regulation has been exposed just this last week with the collapse of Greensill Capital, a supply chain financing firm. Its business model was based on flaws in UK accounting—that was how it worked. As the Financial Times reports:

“While a company that uses supply-chain finance owes money to a financial institution, accountants do not class these facilities as debt. Instead a company typically books the money owed in the ‘trade payable’ or ‘accounts payable’ line of its balance sheet, mingled in with all the other bills owed to suppliers. While a footnote to the accounts might explain how much of this line is made up of money actually owed to financial institutions, rather than suppliers, there is no requirement to disclose it.”


Lack of disclosure means that the supply chain has proved popular with struggling companies looking to mask their mounting borrowings. When nervous lenders remove these facilities from heavily indebted companies, it can create an effect similar to a bank run on their working capital position, whereby that quasi bank run then escalates into risk to the financial services sector. Who really suffers? Typically, it is the SMEs at the origins of the supply chain. Greensill is not an isolated example. Parliamentary investigations into the collapse of the Carillion group, already mentioned, found that it made heavy use of the Government’s supply chain finance programme. MPs investigating the outsourcer’s demise said that the scheme allowed it to “prop up” its failing business model.

This is a major concern in the prudential management of the financial services sector in the UK. If accounting standards and methods do not accurately represent the fragility or strength of an institution, especially a financial institution, they severely compromise our efforts at prudential regulation.

A quite different prudential and market conduct risk created by accounting standards arises from the fact—again already mentioned—that while the UK’s accounting standards apply IFRS, the US maintains its own GAAP different standard. Are the UK Government pursuing negotiations with the US Administration to encourage the adoption of a common standard, perhaps one that accurately represents the risks present in financial institutions?

The issues raised by the noble Baroness, Lady Bowles, and the noble Lord, Lord Sikka, require urgent consideration, not just by the accounting profession but by Her Majesty’s Treasury and by the prudential regulators.

[Earl Howe (Con)]

My Lords, as we have heard, Amendments 74 and 77 concern accounting standards. I have listened carefully to what the noble Baroness, Lady Bowles, and other Members of the Committee have said. It is perhaps best to begin by making a key distinction: the objective of accounting numbers is to show a true and fair financial position of a company; the objective of regulatory capital numbers is to provide information to the regulators in meeting their supervisory objectives. These are different numbers used for different purposes.

Amendment 74 proposes a kind of conflation of those purposes by requiring UK banks to align their accounts prepared under international accounting standards with their regulatory capital equivalent where the regulatory capital number is lower. My noble friend Lady Noakes rightly made the point that I have just made: these accounting standards are international. It is in the UK’s interests to maintain convergence with international accounting standards—IFRS—set by the International Financial Reporting Standards Foundation. The IFRS bring consistency to financial statements and allow investors easily to compare the financial statements of companies across the world. It is therefore consistent with the Government’s aim of ensuring that the UK retains its reputation as a global hub for business for the UK to continue to adopt these standards.

The amendment would result in financial statements of UK banks not being prepared in accordance with those international accounting standards. UK banks wishing to maintain listings abroad would however still need to prepare a second set of financial statements. The UK prudential regime for banks is supported by detailed regulatory reporting. It is these reports and other data gathered from firms that are the basis for prudential regulation, and not financial statements and annual reports.

A subset of the information contained in the regulatory reporting is published in the form of what is referred to as Pillar 3 reports. These reports include details of the regulatory capital held by banks. Therefore, while Pillar 3 reports are not identical in form to financial statements prepared for accounting purposes, they already provide a significant amount of the information sought by this amendment.

--- Later in debate ---

[Lord Eatwell (Lab)]

My Lords, those of us who were involved in the discussions on the Financial Services Act 2012 will no doubt remember the debate in which the noble Lord, Lord Sassoon, then speaking for the Government, revealed that the principals of the tripartite committee—the noble Lord, Lord King, Gordon Brown and Howard Davies—had never met. He then revealed that the committee had slowly moved down in terms of the seniority of the officials who attended, and it was basically steadily downgraded into complete irrelevance. It was a co-ordinating committee between the Bank of England, the Financial Services Authority and the Treasury, and it did not meet. What this suggests to me is that an effective committee to deal with some of the issues of co-ordination, which have been referred to by the noble Lord, Lord Blackwell, in moving his amendment, must have an organic purpose identified and shared by the participants. There must be, if you like, some enthusiasm about the operations of the committee which encourages everyone to participate fully.

In the discussion we have had on this amendment, I have been struck by the nostalgia for the FSA. I shared with the noble Baroness, Lady Noakes, the feeling that breaking up the FSA was unnecessary. Indeed, I think it was mainly done to show that something was being done rather than having to face up to the intellectual, analytical and groupthink failures to which the noble Baroness, Lady Kramer, referred. However, if there is the problem which the noble Lord, Lord Blackwell, has identified, the noble Baroness, Lady Noakes, has once again come up with the right answer, which is that there would be an organic interest of both to work together if they had to report to a suitably well-resourced and tough parliamentary committee which then ensured not only that the conditions of the MoU were being followed but that other identified overlaps were being dealt with in a productive way. So I think we come back once again to the debate we had concerning parliamentary scrutiny and identify, yet again, a positive role for Parliament in this respect.

[Earl Howe (Con)]

My Lords, this debate has taken us back to a number of the issues that were brought sharply into focus during the passage of the Financial Services Act 2012. It has been useful. I therefore begin by assuring the Committee that the Government agree that we now have an important opportunity, not least in the wake of our exit from the EU, to review our regulatory framework and ensure that it is high-quality, agile and fit for the future. I assure my noble friend Lord Trenchard in particular that we will progress the future regulatory framework review as a priority and take specific action in high-priority areas, as I have set out in previous debates. I hope noble Lords will forgive me if I do not rehearse the remarks that I made in our earlier debate on competitiveness—a subject to which we will return, I am sure.

Amendment 86 seeks to establish a new joint co-ordination committee for the PRA and FCA to ensure that their activities are consistent and proportionate. Of course, the Government agree that it is important that the PRA and FCA work closely together and take a co-ordinated approach to the regulation and supervision of firms. However, I respectfully submit that this amendment is not necessary to ensure that that is the case. As my noble friend Lord Blackwell noted, the PRA and the FCA have different statutory objectives, which will naturally—and, on occasion, rightly—lead to differing priorities as these objectives are pursued.

I note the reservations expressed by my noble friends Lady Noakes and Lord Trenchard. However, this model was agreed by Parliament in the Financial Services Act 2012 as part of the post-crisis reforms, and the Government and regulators have taken a number of actions to support and improve co-ordination between the institutions while they carry out their different objectives. I believe that this addresses in a very real way the issue that my noble friend Lord Blackwell seeks to highlight through his amendment.

As mentioned in the amendment itself, there is already a memorandum of understanding between the FCA and the PRA, as set out in the Financial Services and Markets Act as amended. The MoU sets the framework for co-operation on a number of issues, particularly dual-regulated entities. In April 2020, the regulators introduced the new Regulatory Initiatives Grid, supported by a senior co-ordinating forum. The grid’s purpose is to increase co-ordination across the regulatory landscape. It provides a user-friendly overview of upcoming changes to allow the sector to plan for the future more effectively.

The senior co-ordinating forum is chaired jointly by the chief executive of the FCA and the chief executive of the PRA. It discusses the combined impact of regulatory initiatives across the financial services sector, and seeks to allow the Government and regulators to identify and address any peaks in regulatory demands on firms. The forum also provides a clearer picture of upcoming initiatives so that firms are better placed to plan for them, supporting the regulatory principles of proportionality and transparency.

I hope that those remarks are helpful in providing the background to the co-ordination that we have seen put in place and that, therefore, my noble friend Lord Blackwell will feel sufficiently reassured to be able to withdraw his amendment.

[Lord Blackwell (Con) [V]]

My Lords, I thank all noble Lords who have contributed to what has been a very helpful discussion. In moving this amendment, I was not advocating recreating the FSA; there may be a debate about that at some point in time. My point was that, having split out these separate objectives, there are points at which there are conflicts and that does not remove the need to resolve those conflicts or to have a mechanism to do that.

I listened with great interest to the noble Baroness, Lady Bowles. Her experience with the EU is clearly very relevant. I have, of course, studied the memorandum of understanding between the two regulators, but my reading is that it is much more about setting out the clarity of their individual roles and their rules of engagement, including such things as exchange of information. It does not require them to resolve issues of conflict or set priorities. It is a much lower-level setting out of the boundaries and how they should operate across them. The simple fact is that I think practitioners would say that it has not led to those issues being dealt with.

My noble friend Lady Noakes and the noble Lord, Lord Eatwell, talked about reporting to Parliament. Clearly, that is a major area, which we have discussed and will discuss further, and it may be helpful here. However, I find it difficult to believe that a parliamentary committee—particularly the Treasury Select Committee but maybe we can move to some other form of committee —would get into the level of detail of the regulatory load on institutions and those priorities. It may be able to check whether meetings are happening and the agenda is being followed, but I do not think that it can resolve the issues.

As the noble Lord, Lord Eatwell, says, if there is such a committee, there has to be a purpose. One of my reasons for specifying looking at the load on the major institutions is that it is only when you get down to the granularity of how the different agendas are loading up on specific institutions that you can have a meaningful discussion about where the conflicts arise. I am not wedded to this particular mechanism or this particular committee. I am not even sure that legislation is needed. As the Minister said, it is an issue I have raised with the chief executives of the PRA and the FCA. There is nothing to stop them doing this of their own volition. I would perhaps encourage the Minister to sound out with those chief executives how they view this and what they might consider doing to help ensure that the priorities are properly addressed. There is a consultation he has under way. He may take a view on whether this kind of legislation or some amendment along these lines would be helpful. In the meantime, I beg leave to withdraw my amendment.

--- Later in debate ---

Amendment 100 in my name and that of the noble Lord, Lord Tunnicliffe, provides a mechanism for Parliament to monitor the various equivalence regimes. In particular, it focuses on the protection of UK retail investors in such circumstances—the community that, surely, the FCA and Parliament both have a commitment to protect.

[Earl Howe (Con)]

My Lords, the noble Baroness, Lady Bowles, has taken us into an interesting topic area: regulatory equivalence.

The UK has long been a global leader in financial services. As we adapt to our new position outside the EU, it is essential that we continue to support a stable, innovative and world-leading sector. We have already considered the UK’s international standing in another debate. With these amendments, we are considering equivalence and the UK’s relationship with the EU in relation to financial services. I know that there is a lot of interest in this issue, so I will take this opportunity to provide an update on where we are, to the extent that I am able to do so at this point in time. Perhaps, though, I could begin by saying something about our approach to making these decisions.

Amendment 90 seeks to impose an obligation on the Government to make an equivalence determination only where they have determined that the relevant overseas jurisdiction has legal and supervisory standards equivalent to those of the UK. It also seeks to prohibit the Government granting an equivalence determination based only on an agreement to make determinations on a reciprocal basis.

I am happy to confirm that the Government are already committed to conducting their equivalence assessments of overseas jurisdictions on the basis that the relevant legal and supervisory framework of that jurisdiction provides equivalent outcomes to the UK’s. This is outlined in the guidance document on the UK’s equivalence framework which was published in November 2020.

In addition, an example of the legislative requirement for granting equivalence can be seen on page 35 of the Bill. It amends the money market funds regulation to allow the Treasury to make equivalence determinations and states:

“The Treasury may not make regulations under paragraph 1 unless satisfied that the law and practice of the country or territory imposes requirements on MMFs which have equivalent effect to the requirements imposed by this Regulation.”


There is a key point for me to make here. This is not a so-called “line-by-line approach”, where we require a country to have identical rules. We believe that compliance with internationally agreed standards and equivalent regulatory outcomes in different countries can be achieved in different ways and through different legal frameworks.

In that context, there is a further important point that I invite noble Lords to note: granting equivalence is a decision we make independently with no reciprocity requirement. The UK would not grant equivalence just on the basis of reciprocity but would always carry out an assessment to ensure that the other jurisdiction is equivalent. The Government must lay a statutory instrument in Parliament to make an equivalence decision. This will give all noble Lords the opportunity to consider and scrutinise Her Majesty’s Treasury’s decisions as part of the normal legislative process.

I turn to consider our relationship with the EU. I say to the noble Baroness, Lady Kramer, that there is no question of us dismissing this relationship with a wave of the hand or otherwise. Amendments 100 and 105 seek to impose obligations on the Government to report on the status of the EU’s considerations about UK equivalence and on the status of negotiations on the regulatory co-operation memorandum of understanding between the UK and EU. I have already said that the granting of equivalence is an autonomous matter for the UK, and this is equally true for the EU, so the Government are not in a position to report on what the EU may or may not be thinking at a given point in time, even if we wanted to.

The noble Baroness, Lady Bowles, characterised the UK regulatory system as a squidgy balloon and hence difficult for the EU to grapple with but, as I have previously set out, the EU is well used to assessing regulator rules and practice as part of its equivalence assessments, and we see no reason why it would not be able to assess the UK in the same way if the will is there.

However, I can provide an update on our own actions. In November, the Chancellor announced a package of equivalence decisions for the EU and EEA member states. We did this to provide clarity and stability for industry. My noble friend Lord Hodgson asked me a number of factual questions about the existing equivalence decisions between the UK and the EU. If he will allow, to ensure a full and accurate response, I am happy to write to him on those questions.

We are not ruling out further equivalence decisions for the EU in the future, and we continue to believe that comprehensive mutual findings of equivalence between the UK and EU are in the best interests of both parties. The Government remain ready and willing to work with the EU to achieve this. For their part, the EU has granted only minimal decisions for the UK. As per our joint declaration with the EU on financial services, which was agreed alongside the trade and co-operation agreement, we have agreed to establish structured regulatory co-operation on financial services by the end of this month. My noble friend Lord Trenchard will be glad to note that we believe we are on track to do that.

This co-operation will support engagement on issues of mutual interest, including facilitating transparency and dialogue around the process of adopting, suspending and withdrawing equivalence decisions, but I should be clear that it is not envisaged, in the joint statement or elsewhere, that the agreement of the MoU on regulatory co-operation will directly entail any new equivalence decisions. This MoU will be publicly available to Parliament after the conclusion of negotiations. I reiterate that the Government are committed to operating an open and transparent approach to equivalence with the EU, but I am afraid that the Government cannot provide updates on this discussion in real time.

My noble friend Lady Neville-Rolfe expressed concerns that we may have given EU firms some kind of advantage over UK firms. In the absence of clarity from the EU, the UK has acted to provide clarity and stability to industry, supporting the openness of the sector, and to deliver our goal of open, well-regulated markets, but these decisions should not be seen simply as altruistic. They will allow firms to pool and manage their risks effectively and to support clients on both sides of the channel in accessing our world-leading financial services and highly liquid markets, so there are benefits for the UK as well as for the EU.

Finally, Amendment 100 also seeks to impose a legal obligation on the Government to publish a strategy to provide security to UK retail investors in the event of equivalence being withdrawn. I reassure noble Lords that, as set out in the guidance document on the UK’s equivalence framework, the Treasury will seek to ensure that withdrawal of equivalence is undertaken in line with the principle of transparency. That means that the Treasury will endeavour to engage with interested parties as part of the process and will seek to provide Parliament with appropriate scrutiny. I say to the noble Lord, Lord Eatwell, that I recognise the importance of clarity and stability regarding the potential withdrawal of equivalence. When withdrawing an equivalence determination, it will be undertaken in an orderly and controlled manner to ensure that investors are protected.

The noble Lord, Lord Eatwell, made clear a similar concern in relation to the overseas funds regime, given that the provisions of the Bill also create a new equivalence regime there. I assure him that we do not envisage that in the event of equivalence being withdrawn investors would be forced to divest their investments in the fund, but instead that the fund should continue to service them. The Bill also includes a power so that the Treasury may take steps to smooth the transition for funds if equivalence has been withdrawn.

I realise that noble Lords might have wished for a slightly fuller account of our discussions with the EU on the MoU and equivalence issues, but I trust that the reasons for me being constrained on those matters are clear. I hope nevertheless that I have provided the Committee with a sufficient update on this topic and ask that the amendment be withdrawn.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I have received a request to speak after the Minister from the noble Lord, Lord Northbrook.

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[Earl Howe (Con)]

My Lords, I hope that my response to this debate has indicated that, of course, we regard mutual determinations of equivalence as desirable. However, I have also made it clear that there is advantage to both the UK and the EU in our adopting an autonomous position to take decisions for ourselves in this area. Of course, I am hopeful that our discussions with the EU will progress in a helpful way, and I assure my noble friend that, as soon as I have news that I can vouchsafe to him and other noble Lords, I shall certainly do so.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I thank all noble Lords for what has turned out to be a very interesting debate. For once, the crafting of my probing amendment produced exactly the responses that I was hoping to obtain. Here is the thing: in many respects, I can agree with everybody, even though noble Lords were obviously coming from different positions.

The noble Viscount, Lord Trenchard, and the noble Baronesses, Lady Noakes and Lady Neville-Rolfe, think that we just have to get on and plough our own furrow. The Minister has said that that is essentially what we are doing, but we are maintaining the hope or ambition that the EU will, one day, come round and finally realise that there is mutual advantage in equivalence decisions or whatever one wants to call them. In my opening speech, I said that I had sometimes failed to persuade it of that, and, ultimately, we already see the pattern: once it realises it needs it, we will get it, but not before. It will not concede a general mutual benefit, which is one of the big differences between the UK and the EU. I fully support the line that the UK is taking, which is to be open and to show that openness works. There lies the power of London—and common law has a hand in it as well.

The Minister has been clear. On the adoption of the squidgy balloon, as I termed it, I did not mean that in a disrespectful way; I was just trying to say that the EU looks for something concrete, and we have a squidgy balloon, although the outcome might end up being around the same. It has difficulty with that, but we are proceeding with the squidgy balloon, and, therefore, we will have to take in our stride whether we get equivalence or not. I think that that is what the Minister has said, quite fairly and clearly.

However, he has confirmed that standards will be maintained. I knew that I was broadly quoting from guidelines in the first part of my amendment; that was not a happy accident. However, there was confirmation that there will always be this looking at the outcomes and what is supporting that, which applies no matter the route we take to equivalence or whatever else it is called—as the noble Baroness, Lady McIntosh, explained, there are various routes to achieving the mutual recognition, however it comes about.

From my perspective, this has ended up being quite a satisfactory debate—probably nobody is happy, but we are where we are. On that basis, I beg leave to withdraw my amendment.

Financial Services Bill

Earl Howe Excerpts

Committee stage
Wednesday 10th March 2021 Grand Committee

[Lord Eatwell (Lab)]

My Lords, my initial reaction to the amendment of the noble Baroness, Lady Neville-Rolfe, was to puzzle over exactly what sort of impact assessment she had in mind. Was she perhaps thinking of the famous remark by the noble Lord, Lord Turner, that the banking sector in the UK does much that is not socially useful? After all, the ultimate rationale for regulatory activity is the enhancement of the common good—the goal of good government.

However, this debate has clarified the issue before us, which is that an effective impact assessment requires not just thorough analysis but a definition of an objective or, perhaps, objectives. The lack of clear objectives is the key weakness of Amendment 103. Amendment 104, therefore, is much stronger in that it lays out a number of objectives against which an impact assessment might be calibrated. The key to resolving the dilemma—I apologise for sounding a bit like a broken record—is to take the parliamentary role referred to in Amendment 103 and combine it with the sense of Amendment 104. An effective parliamentary process and, dare I say, a parliamentary committee, could define the objectives to be addressed in any impact assessment of the type referred to in Amendment 103—“We want to know the impact of this regulation on problem x, y or z”—and then seek annual reviews focusing on matters that are deemed to be important at any given time, thereby avoiding the template issue referred to by the noble Baroness, Lady Noakes.

That is what is missing from the amendment—a means of making the impact assessment an effective means of acquiring information and an insight into the thinking of regulators, which can then be scrutinised in a coherent and consistent manner.

[Earl Howe (Con)]

My Lords, as my noble friend Lady Neville-Rolfe has explained, these amendments bring us to the question of how we report on the impact that regulation has on firms. Every noble Lord who has spoken today has referred to the value of impact assessments for Parliament and the Government in particular, and I do not dissent from that general proposition. My noble friend Lord Trenchard in particular spoke about the value of measuring the burden imposed by certain EU rules when we were an EU member. I hope that it is of comfort to him if I remind him that the Chancellor has said that decisions about financial services regulation after the end of the transition period—we have of course now passed through it—would be based on what was right for the UK, taking account of what is necessary to ensure financial stability, market integrity and consumer protection.

Amendment 103 would require the Government to lay impact assessments for each of the regulations made under the Bill. It would also require the PRA and the FCA to publish any rules made using the powers in the Bill in draft, alongside an impact assessment. I do not believe that the amendment is necessary, as the Government and the regulators are already committed to identifying and publishing the expected impacts of subsequent rules and regulations made under the Bill.

The Government have of course published an impact assessment alongside the Bill. In line with the guidance set out in the Government’s Better Regulation Framework, the impact assessment sets out HM Treasury’s current understanding of the costs and benefits of the measures. Where appropriate, further details will be set out in the impact assessments that will accompany the secondary legislation made under the Bill. I remind my noble friend Lady Neville-Rolfe that the regulators are required by FSMA 2000, with some very limited exceptions, to undertake a cost-benefit analysis for proposed new rules, and to publish those alongside their draft rules as part of their consultation. The PRA and FCA have already published their first consultations on the draft rules that they intend to make in relation to the prudential measures in the Bill, and they include comprehensive cost-benefit analyses.

Amendment 104 would require the Secretary of State to report on the impact on business that measures taken by the regulators and the Government to regulate financial services may have, and particularly to report on the impact on small businesses, innovation and competitiveness. We have spoken at length in this Committee about competitiveness, and I hope that I have demonstrated how importantly the Government take this issue. Additionally, my noble friend Lady Penn recently wrote to my noble friend Lady Neville-Rolfe about how the Government support smaller financial services firms.

I am sure that my noble friend Lady Neville-Rolfe does not need to hear me say that the Government are committed to ensuring that the financial services sector supports competition and innovation, allowing new firms to compete and grow. Of course, both the FCA and the PRA have a statutory objective to promote effective competition.

In earlier debates, we have talked about the new accountability frameworks that the Bill puts in place for the prudential measures. Those require the PRA and the FCA to have regard to UK competitiveness, among other things, when making rules to implement Basel or the investment firms prudential regime. They are required to report on how having regard to that has affected their proposed rules. The FCA and PRA are of course already required to prepare annual reports, which are laid before Parliament for scrutiny. These reports cover the extent to which the regulators’ objectives, which include promoting effective competition, have been advanced, and how they have considered existing regulatory principles in discharging their objectives.

On this basis, I hope that my noble friend Lady Neville-Rolfe agrees that I have said enough to make her feel comfortable in withdrawing her amendment.

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[Lord Eatwell (Lab)]

My Lords, my noble friend Lord Sikka has made a powerful case for greater transparency in regulatory matters. I think it is clear to everybody that nothing undermines confidence in the regulatory system so much as the sort of cases to which my noble friend referred. What is often evident is that these matters eventually come out, and so the traditional rule that the cover-up is worse than the original transgression exerts itself once again.

The Government have made a virtue of transparency and openness in several aspects of the regulatory system. Not least, for example, we have discussed in this Committee the case of beneficial ownership, and we heard the noble Baroness, Lady Penn, make the argument for transparency of the beneficial ownership record of Companies House as a great virtue at an earlier stage of our considerations. Surely that commitment to transparency should be quite general, covering all regulatory matters, and not limited just to selected parts of the regulatory system.

[Earl Howe (Con)]

My Lords, Amendment 107 would require the FCA to make a public statement on the nature of any intervention a Minister may make into an FCA investigation into an individual firm.

The current legislative framework established the FCA as an independent, non-governmental body responsible for regulating and supervising the financial services industry. I listened with great care to the noble Lord, Lord Sikka but, with respect to him, and without belittling the value of lessons from history, the examples of investigations that he cited are ones that are unrelated to investigations carried out by the Financial Conduct Authority. That is a key point because, although the Treasury sets the legal framework for the regulation of financial services, it has strictly limited powers in relation to the FCA.

The Treasury is the FCA’s sponsor in government but, in view of the regulator’s independence, it is not appropriate for the Treasury or Ministers to seek to intervene in individual cases. In particular, the Treasury has no general power of direction over the FCA. I will write to the noble Baroness, Lady Kramer, on the content of the Ministerial Code, but I am not aware of any loopholes in the code that would permit the kind of conduct that has been talked about.

We are talking here about an independent organisation. The independence of the FCA is vital to its role. Its credibility, authority and value to consumers would be undermined if it were possible for the Government to intervene in its decision-making. I realise that the noble Baroness, Lady Bennett, has some mistrust of Government Ministers, but I hope that that fact is of at least some reassurance to her.

That is not to say that the FCA is not accountable for its actions when investigating potential wrongdoing or malpractice by firms because, equally, the noble Baroness, Lady Bennett, should be reassured that the FCA is governed by the framework of duties set out in legislation by Parliament. It would be unlawful for it to act outside this framework in order to further vested interests. The decisions of the FCA can be subject to judicial review and, under legislation, the FCA must maintain arrangements for the investigation of complaints.

In the event of a significant failure to secure an appropriate degree of protection for consumers, where those events might not have occurred but for a serious failure in the regulatory system, Section 73 of the Financial Services Act 2012 imposes a duty on the FCA to investigate. Situations can arise in which the Government determine that it is appropriate to intervene. In such situations, the relevant legislation—Section 77 of FSMA —provides a mechanism for the Treasury to direct the FCA to conduct an investigation where it suspects that there may have been regulatory failure.

Under Section 77, the Treasury can require the regulators to conduct an investigation into relevant events where the Treasury considers there to be a public interest. In addition, Section 77 investigations can consider aspects outside the regulatory system as established by FSMA, allowing a comprehensive review to be undertaken in the public interest. However, it is important to note that a Minister cannot use a Section 77 direction to do anything else at all, or to stop the FCA doing anything else.

The most recent example of Section 77 in action was in relation to the regulation of London Capital & Finance, when the Economic Secretary to the Treasury laid a direction before Parliament on 23 May 2019, and formally directed the FCA to launch an independent investigation. The direction was public and transparent, as we would always expect to be the case. The report was laid before Parliament on 17 December 2020.

I hope that this has clarified the legal underpinning of the FCA’s independence, and the very limited powers that Ministers and the Treasury have in this area. I hope that what I have said has reassured the noble Lord that appropriate legislation is in place, and that he is content to withdraw his amendment.

[Lord Sikka (Lab) [V]]

I am grateful to all noble Lords for their contributions, but somewhat disappointed by the Minister’s response. The examples I gave—if I had time, I could add another dozen—all inevitably relate to the past, when, despite government efforts, things have come to public attention. At no point have Ministers ever volunteered information or made statements that they have stymied investigations.

In the parliamentary debate on the Banking Act 1987, which formally made the Bank of England the supervisor of banks, Ministers claimed that the Bank would be an independent regulator. Then we discovered that there was a whole process of cover-up—the BCCI case, for example. When the Bank of England ceased to be an independent regulator, the next one, the Financial Services Authority, came in. Again, it was claimed that that was independent. Well, under ministerial pressure, it did not intervene. It did not investigate HSBC’s misdemeanours in the UK, and indeed it was a party to cover-up in the US. The US House of Representatives committee report contains some correspondence showing how the Bank of England, the FSA and the Chancellor were pressuring the officials there to go easy on HSBC. The idea that somehow the FCA is some brand new version of independence which we ought to believe simply neglects what has happened in the past, and that is not really very helpful. Of course, Ministers can allay all public fears by simply saying, “Yes, we will embrace independence.” What is wrong with that?

I have visited the US on many occasions. I have met many academics, regulators and businesspeople, and I always ask them two questions when I deliver a seminar or after a meeting. The first question I ask is, “If you could commit financial crime, where would you like to commit it?” The response is always, “The US, because there is a lot of money to be made.” The next question I ask is, “If you are caught, where would you like to be prosecuted?” At that point, laughter sets in and they all say, “The UK.” Indeed, this country has become kind of a standing joke in regulatory circles. If I were referring to any other country and explaining how Ministers and regulators have colluded to protect organisations which, by their own admission, engage in criminal conduct, many Members of the House would say, “Well, that country is corrupt” or “It is a banana republic”. But I find it surprising that the ministerial response is basically “Well, we are good, and we don’t really need to take account of any of these events.” That is really the tip of a corrosive iceberg, because this corruption goes very deep.

I have asked Ministers a number of times to comment on the public statement of Anthony Stansfeld—the Thames Valley police and crime commissioner—that there is a “cover-up” at Cabinet level of the HBOS and RBS frauds. It is interesting that no Minister has denied it, and no Minister has confirmed it. I have quoted a statement from a very senior law enforcement officer—what could be a greater indictment of the UK’s regulation?

Finally, could the Minister please tell us why the Sandstorm report, which is sitting in 1,300 US libraries, is still a state secret in this country after 30 years? I do not know if it is appropriate for him to reply but I would not be opposed to that.

[The Deputy Chairman of Committees (Lord Duncan of Springbank) (Con)]

Does the Minister wish to respond?

[Earl Howe (Con)]

My Lords, the noble Lord has the advantage over me, because I am not personally privy to the case history that he cited, which is now 30 years or so old. However, I will consult my officials and write to him with an answer to his question.

[The Deputy Chairman of Committees (Lord Duncan of Springbank) (Con)]

Can I confirm with the noble Lord, Lord Sikka, that he does not wish to press his amendment?

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[Earl Howe (Con)]

My Lords, I am grateful to my noble friend Lord Hodgson for directing the Committee’s attention to a set of issues that lie at the heart of the agenda for workers’ rights and social justice in the workplace. Let me begin by saying to him that the Government are committed to making the UK the best place in the world to work, and I found myself in considerable sympathy with a great deal of what he said about the connection between employee well-being, high-quality work and national prosperity.

The Government certainly have a role in furthering those ends, and I hope that my noble friend will agree that we have already made good progress in bringing forward measures that support our flexible labour market, while also ensuring the protection of workers’ rights, such as: banning the use of exclusivity clauses in zero-hours contracts; extending the right to a written statement of core terms of employment to all workers; closing a loophole whereby agency workers are employed on cheaper rates than permanent workers; introducing a right for agency workers to receive a key facts page when signing to a company; and quadrupling the maximum fine for employers who treat their workers badly.

The Government are committed to bringing forward measures to establish an employment framework that is fit for purpose and keeps pace with the needs of modern work practices, in due course. We are also committed to building back better from Covid-19. Alongside the Budget, we published our wider economic plan for significant investment in skills, infrastructure and innovation, in Build Back Better: Our Plan for Growth.

During the pandemic we have taken unprecedented action to protect jobs, most notably through the coronavirus job retention scheme—one of the most generous such schemes in the world. And from April 2021, the national living wage will increase by 2.2%, from £8.72 to £8.91, and will be extended to 23 and 24 year-olds for the first time. Taken together, these increases are likely to benefit around 2 million workers.

I fully appreciate that if we are to build back better, progress should be measured by more than just dry economic trends. However, most people would agree that a large part of human and civic well-being lies in people’s livelihoods, and I remind the Committee that in last week’s Budget the Chancellor set out his plan to protect the jobs and livelihoods of the British people.

Amendments 108, 109, and 110 would essentially require the FCA to have regard to “sustainable good work” when conducting their functions, and to embed this principle in the financial system as a whole. Financial services firms would then be required to apply the principle in all their activities, including investment decisions.

The FCA is responsible for a large number of firms and has been given three operational objectives: to protect consumers; to protect and enhance the integrity of the UK financial system; and to promote competition. So I am afraid I do not believe that the FCA is the right body for this function, given its current role, particularly as the issues go far beyond the subject of financial services.

Amendment 122 would require the FCA and the PRA to consider the impact of employee share schemes on sustainable economic growth. The Government want to support hard-working people to share in the success of the businesses for which they work. To encourage this, we offer several tax-advantaged employee share schemes. These provide a range of tax benefits to participating employees and businesses. We keep all employee share schemes under review, to ensure that they remain effective in these ways.

However, once again I do not believe that the UK’s financial services regulators are best placed to carry any changes forward. It is important that they remain focused on their core objectives. Giving them a diffuse set of objectives could undermine focus on consumer protection, financial stability and the sound functioning of financial markets. The body best placed to keep employee share schemes under review is the Government, and we see no need to impose this additional condition on the FCA and the PRA. So, while I am the first to acknowledge the importance of the matters that my noble friend has raised in this debate, I hope he will understand why I do not think it appropriate to amend the Bill in the way that he proposes.

[Lord Hodgson of Astley Abbotts (Con) [V]]

My Lords, I am exceptionally grateful to everybody who has taken part in this debate, including the noble Lord, Lord Knight of Weymouth, who was the first to raise the concept of building back better, which was later picked up by everybody, including my noble friend the Minister.

I am grateful to the noble Baroness, Lady Bowles, who always brings a degree of detailed and forensic expertise to these areas. Of course, I am well aware of her work with the employee share ownership association, as I am of the work of my noble friend Lord Holmes of Richmond on employee ownership trusts, which are critical. I share the interest of the noble Lord, Lord Tunnicliffe, in finding out the results of the consultation that is under way in this general area. It is not often that I find myself supported by the noble Baroness, Lady Bennett of Manor Castle, but I am glad to have her along for the ride. The noble Baroness, Lady Kramer, was certainly right to remind us all how fast everything is changing and that we need to make sure that we are not trying to tackle yesterday’s problems and failing to tackle tomorrow’s.

I am not surprised that my noble friend the Minister could not accept these amendments. He rightly emphasised the work that the Government have done both in employment generally and as a result of the pandemic. If he had accepted the amendments, I probably would have fainted with surprise and been unable to reply to the debate. However, this issue is not going to go away. The weakness of our present regulatory system is that it merely catches and tries to prosecute the bad. In this part of the century, given all the challenges we face, the system should be doing more than that; it should be encouraging the good. This is an area where good could be encouraged, and that would have a huge trickle- down effect on our society as a whole.

Perhaps I may leave noble Lords with a quote from Robert Kennedy, who said that GDP measures

“everything … except that which makes life worthwhile”.

I beg leave to withdraw the amendment.

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[Lord Tunnicliffe (Lab) [V]]

My Lords, the interesting amendment tabled by my noble friend Lord Sikka is another demonstration of the considerable unease felt on all sides of the Grand Committee about the governance of the FCA and the PRA, and their relationship with one another. The amendments moved on Monday by the noble Lord, Lord Blackwell, addressed similar concerns. The question still to be answered is: what would be the composition and terms of reference of such a supervisory board? Is the Treasury not deemed to be performing that role? How can we be confident that the supervisory board would have the authority and expertise to perform a task that my noble friend Lord Sikka rightly identified as being necessary?

I am sorry to sound like a broken record. Are not my noble friend Lord Sikka’s concerns another example of the lack of an effective mechanism of parliamentary scrutiny? Whether an effective parliamentary mechanism can be created is a question that we do not hear or have the ability to address but it must be addressed. I am sure that the Minister will agree.

[Earl Howe (Con)]

My Lords, the Government agree that effective oversight of the FCA and PRA is a crucial component of our regulatory framework. Indeed, noble Lords will remember that in earlier debates we discussed the existing mechanisms to ensure effective independent oversight of the regulators by a diverse range of stakeholders. For example, both the FCA and PRA are required under the Financial Services and Markets Act 2000 to consult independent panels on the impact of their work.

I should say that in general I do not recognise the picture of regulatory capture that the noble Lord, Lord Sikka, painted in relation to our two financial regulators, although I shall of course read his comments in Hansard and make sure that I understand all that he said.

For the PRA, this involves consulting an independent practitioner panel of industry representatives, while the FCA must consult four different statutory panels, representing consumers as well as the financial services industry. Furthermore, the regulators are already under a statutory obligation to publish the results of their public consultations, including on proposed new rules.

The amendment proposes that the FCA and PRA should attend hearings in front of a supervisory board. I simply observe that both bodies must already attend such hearings before parliamentary committees, and those committees may also hear evidence from stakeholders about the performance of the regulators. The FCA, for example, must attend general accountability hearings before the Treasury Select Committee twice a year, while the PRA must appear before that committee after the publication of its annual report. Parliamentary committees of both Houses are also able to summon the regulators to give evidence whenever they may choose. For example, the CEO and chairman of the FCA appeared before the Treasury Select Committee on 1 March to answer questions on their regulation of London Capital & Finance.

The amendment proposes that a supervisory board should have the power to inquire into the adequacy of resources used and available to the FCA and the PRA. However, as we have discussed in previous debates, the Treasury already has the capacity to order independent reviews into the regulators’ economy, efficiency and effectiveness. Therefore, all told, the amendment would result in a duplication of existing opportunities for scrutiny and oversight of the regulators’ resourcing.

I realise that the noble Lord, Lord Sikka, has a close interest in the issue of supervision, but I hope I have convinced him that the PRA and FCA are already accountable in meaningful and tangible ways, and that a diverse range of stakeholders has opportunities to participate in scrutiny of their actions.

Finally, let me say that the Government are not closing down debate on these issues. As I have set out during other debates, the future regulatory framework review is already exploring how our framework needs to adapt to reflect our new position outside the EU. It would be premature to make changes to these arrangements before we consider stakeholder responses to the ongoing consultation. However, I have noted the contributions from the Committee on what form that may take. Against that background, I ask that the amendment be withdrawn.

[Lord Sikka (Lab) [V]]

I am grateful to all noble Lords for their contributions to the debate, and it would be helpful if I could respond to a few points. First, under my amendment both the FCA and the PRA would need a supervisory board. Indeed, if I were redesigning the entire regulatory architecture in the UK, every regulatory body would have a supervisory board, because that is the only way of putting ordinary people, who are practised upon, inside the organisation, to check the conduct of executive boards and reshape the organisational culture, which has given us such problems.

The amendment does not duplicate in any way whatever what any parliamentary committee or review board might do. The supervisory board would simply be engaged in day-to-day strategic oversight. Those people would be in the organisation on a permanent basis, observing, requiring reports, making recommendations and in many ways hoping to prevent the major scandals that we read about later—often some years later. It has been suggested that such regulatory architecture would be cumbersome and expensive. My response, as always, is, “What do you think the cost of the status quo is?” How many more banking crashes can we afford? How many more London Capital & Finances, how many more Connaughts, and other scandals, can we afford? We simply cannot afford them.

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[Lord Tunnicliffe (Lab) [V]]

My Lords, the provision of country-by-country data by banks and investment firms will be an important step forward both in combating financial crime and in addressing the vexed question of the fair taxation of international entities. These problems will be solved only by international negotiation and agreement. It is important that we are seen as an exemplar, and satisfactory country-by-country reporting is surely part of that.

[Earl Howe (Con)]

My Lords, Amendment 121 aims to ensure that banks and investment firms engage in country-by-country reporting related to the provision of tax information. I am happy to assure the noble Baroness that there is no need for this amendment, because such requirements already exist for these firms in legislation.

Banks and most investment firms are already subject to country-by-country reporting requirements as a result of the fourth capital requirements directive, or CRD IV, which we implemented in the UK while we were an EU member state. This was done through a statutory instrument in 2013, and it requires firms to report relevant information on tax and revenue in each country where they have operations. This statutory instrument remains in place today. In order to implement the investment firms prudential regime, this Bill removes investment firms from the prudential requirements for banks in the capital requirements regulation—in order to allow the FCA to implement the new regime. But Schedule 1 to the Bill ensures that country-by-country reporting requirements will continue to apply to FCA investment firms.

There is an exception for small and non-interconnected investment firms. This is because this new regime aims to ensure proportional requirements for investment firms consistent with their size and activities. These firms are, by definition, small and non-interconnected with the wider financial system, and it would be disproportionate for these requirements to apply to them. This is the same approach that the EU took in the investment firms directive.

Amendment 121 would have the effect of preventing small and non-interconnected firms from being carved out in this way. For the reasons just mentioned, I do not think that this is appropriate. Therefore, when it comes to banks and investment firms, I am confident that the existing country-by-country reporting requirements for these firms are appropriate, and I ask the noble Baroness, Lady Bowles, to withdraw the amendment.

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[Lord Tunnicliffe (Lab) [V]]

My Lords, I think the whole subject of supervision and the presentation of information for decision-making is very important. I do not think that it could be shoehorned into this Bill. I hope that the Government will note the concerns about this and meet it where we can in parts of the Bill, but perhaps there has to be an ongoing debate, which will hopefully come to some consensus about how we improve the supervision and accountability of the financial services sector.

[Earl Howe (Con)]

My Lords, I listened carefully to the noble Baroness, Lady Bennett, in her clear introduction to these amendments, and I thank her for the background briefing papers that she kindly sent me this morning. Having said that, I hope she will forgive me if I do not turn the end of these Committee proceedings into an off-the-cuff economics seminar. Indeed, she will not be surprised if, on behalf of the Government, I adopt an orthodox stance on the role of our financial services sector.

It is the Government’s firm contention that the financial services sector is a vital part of our economy. It employs more than a million people, and two-thirds of the people employed in financial and professional services work outside London. It has been a critical source of tax revenue, whatever the exact figure, especially in these difficult times.

The IMF has described the UK’s financial system as a global public good, so the Treasury is not persuaded by the arguments of the Tax Justice Network around “too much finance” or that finance is inherently a bad thing for the real economy. The financial services sector supports British businesses to expand, manage cash flow, invest in themselves and create jobs. The sector is also one of our leading industries in its own right, driven by a concentration of international, and therefore internationally mobile, firms.

Amendment 123 would require regular reports on the impact of the financial services sector on a range of topics including growth, inequality and risk. Amendment 124 would establish a new oversight body which would consider the impact of this sector on the “real economy”.

I have already set out some of the positive impacts that the sector has in its own right on growth, jobs and tax revenue in the UK. But let us not forget that it is also a sector on which all other parts of our economy rely. This means that the sector is a vital source of funding and services for other sectors of the economy. But, of course, it can also mean that if there are problems in the financial services sector, they can affect other parts of our economy. That is why the sector is so vital, and it is why I am able to assure noble Lords that the Government are absolutely committed to transparency around financial risks and welcome independent scrutiny of risk exposure.

The Bank of England’s Financial Policy Committee also has a responsibility to identify, monitor and take action to remove or reduce systemic risks. The committee was established under the Financial Services Act 2012 and must publish and lay before Parliament a financial stability report twice a year. As part of its assessment of financial stability risks, the Financial Policy Committee already considers and reports on risks arising from shadow banking, also referred to as “non-banks”. Given the rapid growth of non-banks, the Treasury has asked the Financial Policy Committee to publish a detailed assessment of the risk oversight and mitigation systems in place for non-banks. That is expected in the first half of this year.

The Office for Budget Responsibility produces and presents a fiscal risks report to Parliament every two years, and it has previously explored risks posed by and to the financial sector. More generally, the FCA and PRA are required to prepare and lay annual reports before Parliament, assessing how effectively their objectives have been advanced. These objectives are set by Parliament, as noble Lords are well aware.

Of course, as I said, one key role of the financial services sector is to provide funding to the so-called real economy. The Government have recognised that, in this Bill, the provisions on the implementation of Basel require the PRA to have regard to the likely effect of its rules on the ability of the firms affected to continue to provide finance to businesses and consumers in the UK, on a sustainable basis in the medium and long term.

The amendment refers to inequality. On that issue, I can reassure the Committee that the Treasury, the FCA and the PRA are all bound by the public sector equality duty. As part of that duty, all three are required by the Equality Act 2010 to have due regard to the need to eliminate discrimination and to promote equality of opportunity in carrying out their policies, services and functions. The FCA publishes a diversity annual report to set specific measurable equality objectives and publish relevant, proportionate information demonstrating its compliance with the public sector equality duty.

Amendment 124 mentions the impact of the financial services sector on climate change and biodiversity. The Committee will I hope forgive me if I do not repeat what I said in earlier debates on that topic, as I have already set out the actions that the regulators are taking in that space.

I turn briefly to the composition of the oversight network that the noble Baroness proposes. I am completely with her in believing that the regulators should take on board a variety of different views; it is important that they do so. In fact, the FCA already has a statutory requirement to consult independent panels representing consumers and practitioners, and the Bank of England has strong links with many academics. Of course, all the groups mentioned are able to respond to consultations, which the regulators are required to undertake, and where their responses must be considered.

As a general comment, I just say that the topics raised by the noble Baroness are those which the Treasury and the regulators consider every day when making financial services policy. I assure her that the Government are committed to ensuring that the sector has a positive impact for consumers and for the economy as a whole. No Government could do otherwise.

Given all that I have said, which I hope has provided some useful perspectives on this topic, I hope that the noble Baroness will feel comfortable in withdrawing her amendment.

[The Deputy Chairman of Committees (Lord Faulkner of Worcester) (Lab)]

My Lords, I have had a request to speak after the Minister from the noble Lord, Lord Sikka. I point out to him that we are almost out of time for this Committee tonight, and I ask him please to be as brief as possible.

Financial Services Bill

Earl Howe Excerpts

Report stage
Wednesday 24th March 2021 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, I was tempted to start my speech with the famous quotation from Juvenal, “Who guards the guardians?”. But, given the strictures by the Leader of another place against speaking in foreign languages—although he was referring to Welsh—I will instead begin with a different quotation, from the late Lord Keynes. In the introduction to The General Theory of Employment, Interest and Money, he says:

“It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics.”


Well, we have certainly had many examples of regulators believing foolish things. The sorry history of the regulatory response to the role of credit derivatives in the expansion of credit in the run-up to the financial crisis of 2007 to 2009 is a clear example of the folly of thinking alone. Hence, a periodic review of the thinking of regulators—whether the prudential regulator or the conduct of business regulator—would certainly be worthwhile; it would be a useful challenge to groupthink.

However, this particular aspect is not best achieved by three independent persons, because there would be a grave temptation to appoint three expert regulators—just the sort of people who would think in the same way. However, they would, no doubt, come up with recommendations that deal with the operational objectives in this amendment, so I see the review activity as falling into two parts: the operational assessment; and the core policy issues, about which I would have less confidence in the approach of the three independent persons. Peer reviews are all very well, but I assure you that any academic economist will tell you that they not only tend to embody the status quo but often stifle innovation and can perpetuate error.

That is why I and others in the House have argued that the intention of the amendment with respect to policy would be best met by a parliamentary scrutiny committee. It is the nature of parliamentarians to be sceptical, to pose without embarrassment the naive question, to entertain the views of mavericks and free-thinkers, and to relate the performance of any organisation to its statutory objectives—after all, they are responsible for the statutes. So we have two tasks before us: a review, as proposed in the amendment, which would be a valuable check and assessment of operational matters; and the review of policy and thinking, which could be the regular component of the work programme of a scrutiny committee.

But first, of course, we need the acknowledgement from Her Majesty’s Government that they would support the foundation of such a scrutiny committee, giving it appropriate powers to work with the regulators in an effective and constructive manner and to commission regular reviews of policy issues of the sort sought by the noble Baroness, Lady Bowles. We will discuss this matter later; so much hangs on the issue of the general scrutiny of the activities of regulators, voiced by Members on all sides of the House, that we will certainly return to this matter later in consideration of the Bill.

[Earl Howe (Con)]

My Lords, as the noble Baroness, Lady Bowles, has helpfully explained, the amendment seeks to introduce a statutory obligation for the Treasury to launch an independent review of the financial services regulators every two or three years, and sets out the topics that such a review would need to cover.

I will begin by saying that I absolutely understand where the noble Baroness is coming from in tabling the amendment; indeed, having yesterday reread the two very eloquent speeches she made on the subject in Grand Committee, and having listened today to the noble Lord, Lord Davies of Brixton, my mind, like that of the noble Lord, Lord Eatwell, also turned to the Roman poet Juvenal’s famous question. The noble Baroness is concerned about the need for oversight of those who oversee, and I entirely appreciate her reasons for wanting reassurance on that issue. However, where she and I differ is over her contention—express or implicit—that there is currently a deficiency of mechanisms to provide meaningful oversight of the regulators and to ensure that they are working effectively. I set out a number of these mechanisms in Grand Committee; they include tools both for examining detailed operational or policy matters and for scrutinising more general, overarching issues. This I think was part of the distinction made by the noble Lord, Lord Eatwell.

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

My Lords, I shall not detain the House for long at this stage. I fear I got cut off just as I was extolling the virtues of how new technologies could help in this endeavour. I support the amendments in the name of my noble friend the Minister and look forward to his explanation of them.

[Earl Howe (Con)]

My Lords, let me begin by saying that I have listened carefully to the debate today, as well as the important contributions made in earlier debates on this Bill. As a result of those earlier debates and subsequent discussions held with a number of your Lordships, the Government have tabled the four amendments included in this group, which I shall speak to in a moment. Before I do, I want to leave the House in no doubt as to the context in which we are now operating.

In November, my right honourable friend the Chancellor set out a vision for the financial services sector to put the full weight of private sector innovation, expertise and capital behind the critical global effort to tackle climate change and protect the environment. That is why the Government are taking a number of actions, such as making climate-related financial disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023, and issuing our first-ever green gilt later this year. At Budget this month, we augmented the Government’s economic objectives and the remit of the Monetary Policy Committee and Financial Policy Committee to support environmental sustainability and the transition to net zero. We also established the UK infrastructure bank with a mandate that includes tackling climate change. The Government have ambitious plans to ensure that the financial services sector as a whole plays its role in supporting our climate change commitments. However, we heard loud and clear the strong views from members of this House that they wanted to see that ambition reflected in this Bill.

Amendments 43 and 47 in my name will require the PRA and the FCA to consider the 2050 carbon target in relation to the Climate Change Act 2008 when making prudential rules under the accountability framework set out in this Bill. The Government are showing, very publicly, how the financial services sector and our regulators can take a lead role in delivering on our climate commitments. They are also showing the rest of the world that the UK is taking a cross-sector approach. I have greatly welcomed the way in which noble Lords have engaged with me on this issue. We have picked the 2050 carbon target, as it benefits from being both legally defined and substantively focused. This makes it clear to both regulators exactly what they must have regard to in making their rules and how they can be held to account.

As I explained in earlier debates, the Government and the regulators are committed to implementing the first wave of Basel reforms and the initial introduction of the investment firms prudential regime on 1 January 2022. These reforms are important for our international standing as a country that upholds its international commitments, for financial stability, and for our competitiveness relative to the EU. As I said in Committee, there is a great deal of work happening at the moment at the international standard-setting level to determine exactly how climate change should be factored into prudential policy globally. This is why Amendments 46 and 49 delay the application of mandatory climate change considerations to 1 January 2022. This will ensure there is sufficient time for this work to progress, and that there is no unnecessary and impractical delay in implementing these vital regimes. Otherwise, we would be in the unfortunate position where the regulators would have to reopen or restart their consultations.

When and how will the amendments bite, if not on the first wave of Basel and the IFPR? I can assure noble Lords, particularly the noble Baroness, Lady Hayman, that the PRA will still need to make rules to implement substantive reforms contained in Basel 3.1, which will be implemented in 2023. These rules will be within the scope of the amendments in my name. I fully expect the regulators to use the powers again in future to update their rules—for example, to take account of new international standards or developments in the market. I hope the House will agree that these amendments strike the right balance between acting quickly on climate change and taking swift action to reform our prudential regimes which aims to prevent a future crisis. I therefore see this as a significant action which very visibly demonstrates the Government’s commitment to furthering this important agenda.

The Government are also acting to ensure that the regulators take account of our climate commitments more broadly. At Budget, the Treasury published remit letters for the Monetary Policy Committee and the Financial Policy Committee, requiring both these committees to consider the Government’s commitments on climate change. Today, I can confirm that the Chancellor has set new remits for the FCA and the PRA that will also require them to consider these commitments across the whole of their remit. As has been mentioned in this debate, the CEOs of the PRA and the FCA have both written to me to set out the significant amount of work they have under way. I will provide some further details on this in a moment. They have also demonstrated their clear commitment to acting to address climate change. I have placed copies of their letters in the Library and in the Royal Gallery.

Lastly, and importantly, there is the future regulatory framework review. This is the means by which the Government are exploring how the regulators focus more broadly on important public policy issues, such as climate. I hope this meets one of the concerns expressed by the noble Baroness, Lady Hayman. I can add to it because, as part of that review, the Government recently consulted on a proposal to allow Parliament and Ministers to specify new regulatory principles for specific areas of activity—for example, setting out how the regulators must consider sustainability or green issues when making rules. The Government are considering the responses to the consultation ahead of a second consultation later this year, and recognise the need to address this crucial issue across the whole regulatory framework. I hope I have shown that the Government understand the issue, that we are taking the appropriate actions and that the regulators are ready and willing to support such actions.

I now turn to the other amendments in this group, though not in numerical order. I begin with Amendment 44, which would amend one of my own amendments. Amendment 44 would require the FCA also to take into consideration the UK’s commitments under the UN convention on biodiversity when making rules to implement the investment firms prudential regime.

This Government are committed to being the first to leave the natural environment in a better state than they found it, with our long-term agenda laid out in the 25-year environment plan. As the Dasgupta review highlights, and as the noble Baroness recognises, the global financial system will play a critical role in enhancing our stock of natural assets and encourage sustainable consumption and production activities. We will reflect on the conclusions and recommendations of the Dasgupta review and consider the most appropriate way to take them forward. However, unlike the 2050 carbon target in the Climate Change Act 2008, which my own amendment targets, the commitments under the UN convention are extensive, varied and more challenging to deliver through financial services regulation. Work on how the financial sector can support our transition towards net zero is more developed than work on how the sector can support biodiversity goals.

However, work to develop our understanding is under way. For example, just last year we saw the launch of the Task Force on Nature-related Financial Disclosures. This task force will provide a framework for businesses to assess, manage and report on their dependencies and impacts on nature. This will support the appraisal of nature-related risk and will continue to realign incentives which support our biodiversity goals.

The Convention on Biological Diversity—COP 15—will also be an important milestone for international action on biodiversity. We will work with countries to agree long-term, realistic, measurable and fit-for-purpose targets to set nature on the path to recovery. Nature will also feature as one of five policy themes for COP 26, which has been agreed by the Prime Minister. The nature campaign is focused on catalysing action to protect and restore the natural habitats and ecosystems on which our climate, air, water and way of life depend, which includes increasing the volume of finance for nature-based solutions. I listened with interest to the remarks of the noble Lord, Lord Judd, in that context.

Amendment 3 would place a legal obligation on the PRA to review the risk weights applied to certain fossil fuel exposures and thereby the amount of capital held against them. The purpose of risk weighting is to preserve the safety and soundness of our financial system and to prevent banks failing as a result of not covering themselves appropriately against the risks they are taking. I was grateful for the remarks of my noble friend Lady Noakes on these issues.

In its letter to me, the PRA recognises the threat posed by climate change to the UK economy and the financial system and sets out the steps it is taking to mitigate this threat. This includes setting out specific and detailed supervisory expectations for both banks and insurers on their approach to managing financial risks from climate change. The PRA has also written to firms setting out its expectations that firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021.

The noble Lord, Lord Oates, questioned why a lower risk rating should be applied to fossil fuel funding than some other asset classes. As I am sure he is aware, the risk weighting of assets is decided internationally through a set of agreed standards set by the Basel Committee on Banking Supervision, and this is based on analysis of how risk is transmitted and how it can be quantified. These post-crisis reforms have also been endorsed by the G20 and ensure that risk weights are applied consistently across the globe. The flexible approach taken in the Bill ensures that, where considerations around the risk weighting of assets change, the PRA can respond to developing circumstances as they arise.

--- Later in debate ---

Moved by

[Earl Howe]

8: Clause 34, page 40, line 14, leave out subsection (2)
Member’s explanatory statement
This amendment and the Minister’s amendments at page 40, lines 16 and 31 make drafting changes in connection with the Minister’s first amendment at page 47, line 34.

[Earl Howe (Con)]

My Lords, I will speak also to the other amendments in this group. The Sewel convention states that normally, the UK Parliament will legislate in areas that are devolved only with the permission of the relevant legislature, obtained through the legislative consent Motion process.

In recent weeks, despite the best efforts of Ministers and officials from HM Treasury and the Northern Ireland Executive, it has become clear that the legislative consent Motions for relevant parts of the Bill would not be completed before Report in this House. It is therefore necessary to ensure that certain elements of the Bill do not apply in Northern Ireland, in line with the Sewel convention.

I assure the House that the great majority of the Bill will have effect in Northern Ireland, as financial services is a reserved matter. However, it is necessary for Northern Ireland to be removed from the relevant parts of the Statutory Debt Repayment Plan and account freezing and forfeiture measures in Clause 34 and Schedule 12, with connected changes to Clause 44 on extent and Clause 45 on commencement in addition.

These are technical amendments which the Government have tabled to avoid legislating without consent. Our understanding is that the absence of a consent Motion is due to current timing constraints rather than any concern about the substance of the measures. Legislative consent was not denied—the process was simply not completed.

Amendments 50 and 51 will amend Schedule 12 so that certain provisions in that schedule will have different effects in Northern Ireland from those in England and Wales and Scotland. Amendments 38, 40, 41 and 42 amend Clauses 44 and 45 to help give effect to the changes to Schedule 12. The amendments retain the status quo in Northern Ireland regarding the Proceeds of Crime Act 2002, and the changes which Schedule 12 makes to that Act will have effect only in England, Wales and Scotland. It is important to be clear that these amendments will not affect Schedule 12 as it relates to the Anti-terrorism, Crime and Security Act 2001. Anti-terrorism is an excepted matter and the changes which Schedule 12 makes to that Act will have effect across the UK.

Amendments 8, 9, 10, 13 and 39 prevent most of the changes made in Clause 34 extending to Northern Ireland. These are the provisions relating to the Statutory Debt Repayment Plan measure.

Clause 34(4), which provides an express power to bind the Crown, will continue to apply to Northern Ireland. This is done so as not to disturb the position on Crown application that the Government consider originally applied in the Financial Guidance and Claims Act 2018 in relation to Northern Ireland.

I would like to reassure noble Lords that Northern Ireland will still be able to make its own legislation providing for a debt respite scheme of its own design, including similar provisions to those in Clause 34, if these are desired. UK Government officials will of course continue to work closely with and support their opposite numbers on the design and implementation of a debt respite scheme for Northern Ireland if this is pursued.

I urge the House to accept these amendments, which are necessary to avoid legislating for Northern Ireland without the appropriate consent. I beg to move.

[The Deputy Speaker (Lord Lexden) (Con)]

The name of the noble Lord, Lord Stevenson of Balmacara, does not appear on the list, but he should have been included, so I call him next.

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[Lord Tunnicliffe (Lab) [V]]

My Lords, I thank the Minister for introducing these amendments and for the explanation that was shared ahead of this debate. We will not oppose them today, as it is right that changes should not be made without legislative consent. It is, however, very troubling that these provisions will go forward without Northern Ireland’s inclusion. and that time has not been offered to allow the Northern Ireland Executive to pass a consent Motion. It is my understanding that there were also difficulties on timing for a legislative consent Motion during the passage of the Medicines and Medical Devices Bill. It cannot become a habit for this Government to carve Northern Ireland out of legislation at the last minute or treat legislative consent as an afterthought. What conversations were had with the Northern Ireland Executive on the problem of timing? Were any measures considered to allow them extra time as needed?

Have the Government identified ways to prevent this happening again? On the substantive issues, the result is that the Bill will be passed without offering the same powers and protections for communities and law enforcement in Northern Ireland as in other areas of the UK. This is of particular concern for the statutory debt repayment plans at a time when the impact of the Covid pandemic has placed extreme stress on people’s personal finances.

Finally, what options are the Government considering, with the Northern Ireland Executive, to ensure that Northern Ireland is given an opportunity to enact these provisions and that communities in Northern Ireland are able to benefit from the planned support on debt and personal finance?

[Earl Howe (Con)]

My Lords, I thank noble Lords for their remarks, and I stress again that UK government officials will of course continue to work closely with and support their opposite numbers in Northern Ireland. I hope that the noble Lord, Lord Tunnicliffe, will accept that that is as far as I can go as regards our support for our Northern Ireland colleagues, because the ball is very much in their court as to how they wish to proceed and when. As and when they decide to proceed, they will of course get full co-operation from the UK Government.

I would like to touch on a question that the noble Lord, Lord Tunnicliffe, asked me relating to the Medicines and Medical Devices Bill. That also gave rise to an issue over a legislative consent Motion from Northern Ireland. The context for securing legislative consent for the Medicines and Medical Devices Act 2021—as it now is—was quite distinct from that for this Bill. Northern Ireland Executive Ministers were asked to consider promoting a supplementary legislative consent Motion on a second occasion as a result of amendments added to the Medicines and Medical Devices Bill during its House of Lords Committee stage. The Northern Ireland Assembly had sufficient time to consider and pass a supplementary LCM before the Bill’s Report stage in the second House—in this case, the Lords. Report is considered to be the last substantive amending stage of a Bill in the House of Lords and, consequently, the last opportunity for the Government to avoid legislating for Northern Ireland had consent been denied or not achieved in time.

Unfortunately for this Bill, it has not been possible to secure legislative consent in time, in spite of the efforts of our officials and those in the Northern Ireland Executive. The noble Lord, Lord Tunnicliffe, asked whether we can prevent this situation happening again. I respectfully say to him that it really is not within the control of the Government here to influence the order of business and the work conducted by the Northern Ireland Executive. It is largely in their domain, but I hope my earlier reassurances will have been helpful on this topic.

The background to this, to come to his earlier point and the issues raised by the noble Lord, Lord Stevenson, is that breathing space regulations, which are the second half of the SDRP measures, that come into force on 4 May this year, do not apply in Northern Ireland, largely due to there being no sitting Assembly during the policy formulation and drafting of regulations. As I have said, we have been advised by officials in Northern Ireland that it will not be possible to pass the LCM agreeing that Parliament should legislate on their behalf until mid- to late April, which is too late for the Lords’ Report stage. The amendment carves out Northern Ireland from Clause 34 as I have described, with the exception of Clause 34(4). The Government understand that the relevant departments in Northern Ireland intend to take forward their own legislation for a debt respite scheme in due course.

I am afraid that the noble Lord, Lord Stevenson, has the better of me in his detailed questions. I will need to write to him, if he will forgive my not answering him now, on where the precise authority vests in relation to a Northern Ireland debt respite scheme, and indeed how the Government’s plan for the debt respite scheme will pan out prior to the end of 2024.

Amendment 8 agreed.

Financial Services Bill

Earl Howe Excerpts

Report stage
Wednesday 14th April 2021 Lords Chamber

Amendments 45 and 48 strike just the right balance between Parliament and regulators within the evolving structure of the new scrutiny. Once again, I must say that I am pleased to find versions of those recipes in the Economic Secretary’s letter and very pleased that he has endorsed my amendments. I look forward to the Minister’s reply containing, as it surely will, further suggestions as to how this legislation can be made yet more useful.

[Earl Howe (Con)]

My Lords, it is a pleasure to turn once again to the issue of parliamentary accountability of the financial services regulators, and I thank all noble Lords who have contributed to this good debate. This is an issue of considerable importance to many in this House and, indeed, has been a central topic of debate during the passage of the Bill.

Each amendment in the group proposes different things but I know that at the heart of them all is a desire for reassurance from me, as Minister, that the Government agree with the regulators that Parliament has a unique and special role in relation to the scrutiny and oversight of the financial services regulators. I therefore take this opportunity to give the House that assurance. It is Parliament that ultimately sets the regulators’ objectives and, of course, right that it has the appropriate opportunity to scrutinise the work of the regulators and their effectiveness in delivering the objectives that Parliament has set them. This most certainly includes the way in which the regulators exercise their rule-making powers but also encompasses their wider work on supervision and enforcement across the financial services sector.

Noble Lords will, I hope, have had a chance to read the letters of 19 March from Nikhil Rathi, the CEO of the FCA, and Sam Woods, the CEO of the PRA, that I have deposited in the House Library and the Royal Gallery. Those letters can properly be interpreted as a commitment to the openness and sincere co-operation which the noble Baroness, Lady Bowles, said she sought. I do not in the least detect the complacency that the noble Baroness, Lady Kramer, said she detected in the letter from Nikhil Rathi. Perhaps I may quote the sentence that she cited. He said:

“We are committed to ensuring that Parliamentarians have the information they need to scrutinise our policy and rule proposals, particularly during consultation”.


I do not detect any shadow of qualification to that commitment. Sam Woods, chief executive of the PRA, wrote:

“When we publish consultations, we always stand ready to engage with Parliament.”


So the regulators have clearly demonstrated that they have heard the views expressed by noble Lords during the passage of the Bill. Despite the reservations of my noble friend Lady Noakes, I hope noble Lords accept that these letters take us forward in a meaningful and material way.

--- Later in debate ---

[Lord Eatwell (Lab)]

My Lords, Amendments 24 and 25 develop the notion of an information system—the information that will be provided by the FCA, PRA and the Government to feed into an assessment of the performance and impact of the financial services sector and the regulators. Amendment 37 goes much wider, as one might have gathered from its presentation, seeking to make, or ask for, a general economic assessment of the role of financial services generally within the UK, particularly the impact of the various regulators and the Treasury.

One of the themes particularly around the discussion of Amendment 37 was that this is not done. There are shelves of academic books that do this, and there are libraries of this material, but what has not happened is that it has not been brought together and assessed in a decision-making environment on a regular basis. The problem with Amendment 37 is that it asks the FCA and the PRA to—to use a phrase that has become popular today—mark their own homework. They are not really the right people to assess themselves; there are plenty of research institutes around this country that do a first-class job of assessing exactly these issues. However, we have not brought them together very well. What is so valuable about Amendments 24 and 25 is that they are targeted on that bringing together—bringing information into what I have called the “New Scrutiny”.

I would be interested to hear the Minister reflect, when he sums up, on the information role that is represented by the amendment of the noble Baroness, Lady Neville-Rolfe, and the role that that sort of information system will play in our regulatory future.

[Earl Howe (Con)]

My Lords, Amendments 24, 25 and 37 return to an issue that I know is of keen interest to many in this House. They seek to introduce requirements to publish reports on the impact of financial services regulation and to undertake assessments of the impact of the financial services sector on the UK more broadly.

The noble Baroness, Lady Bennett of Manor Castle, many not feel able to assent to what I am about to say, but, as we consider this topic, we should remind ourselves of the vital role that the financial services sector plays in our economy, employing more than 1 million people nationwide. It is also a critical source of tax revenue, which has proved especially important during these difficult times. We can argue about how we should calculate the precise amount of such revenue, but, by any measure, it is very substantial. We also should not forget the role that the sector plays in enhancing the nation’s standing abroad. The UK exported over £50 billion-worth of financial and insurance activities in 2019, a trade surplus of £41 billion.

Amendment 24 would require the Government to publish a report on the “impact of measures” taken by the FCA, PRA and the Government to regulate this most important financial services sector. In particular, it seeks understanding of the impact of measures on small businesses, innovation and competitiveness. Amendment 25 would add “consumer protection” to the list of things that the Government would be required to report on.

Lest there be any doubt, the Government are wholly committed to ensuring that the financial services sector supports competition, innovation and competitiveness. I hope that this is evidenced by the last set of remit letters issued to the FCA and the PRA by the Chancellor, which requested that the regulators have regard to these three priorities when advancing their objectives and discharging their duties.

In respect of reporting, the FCA and the PRA both have a statutory objective to promote effective competition. What does that involve? It involves promoting a financial services framework that supports new firms to enter the market and grow, promotes innovation and allows successful, innovative firms to grow and thrive. Those, surely, are the key aims for the sector when we talk about effective competition.

I remind my noble friend Lady Neville-Rolfe that both regulators are obliged to prepare annual reports that analyse the extent to which their objectives, including this competition objective, have been advanced that year. Those reports are in turn laid before Parliament for scrutiny. Moreover, I should say to her that, under the Financial Services and Markets Act, the FCA and the PRA are required to publish cost-benefit analyses when proposing new rules. The regulatory initiatives grid, a relatively recent innovation, sets out the regulatory pipeline that allows the financial services industry and other interested parties to understand and plan for the timings of initiatives that may have a significant operational impact. The grid is published at least twice a year, so Parliament has a forward look at upcoming proposals in a material and transparent way.

Turning to my noble friend Lady Neville-Rolfe’s point about small firms, in my letter to her of 2 March, I set out the Government’s actions to support smaller innovative firms to grow to their full potential, including through the FCA’s regulatory sandbox and our support for the fintech sector. The amendment would therefore duplicate reporting obligations and arrangements that already exist.

I should also note the new accountability frameworks that the Bill puts in place for prudential measures. These require the FCA and PRA to have regard to UK competitiveness, among other things, when making rules to implement Basel or the investment firms prudential regime. Furthermore, the regulators will then be required to report on how having regard to competitiveness has affected their proposed rules.

On consumer protection, which is the subject of the amendment, let me first reassure noble Lords that the protection of consumers is at the heart of our existing regulatory framework. The FCA has an operational objective to secure an appropriate degree of protection for consumers and is required under the Financial Services and Markets Act 2000 to consult a consumer panel on the impact of its work. The panel ensures that consumers play an integral role in the regulator’s rule-making and policy development.

The FCA has repeatedly demonstrated its commitment to consumer protection. One of the key areas of focus in the FCA’s Business Plan 2020/21 is,

“ensuring…that the most vulnerable are protected”.

The FCA has also recently published guidance on how firms can treat vulnerable customers fairly. As consumer protection is one of the FCA’s statutory objectives, as set out in FSMA 2000, the FCA must already report on how consumer protection has been advanced in its annual report, as outlined earlier. Therefore, as with a previous amendment, the amendment would duplicate reporting that already exists. As regards the PRA, it is important to remember that it already has an important role in protecting consumers indirectly by promoting the safety and soundness of PRA-authorised firms. This means that consumers are protected from the significant distress and suffering caused by disorderly bank failures.

I now turn to Amendment 37, which would require regular reports on the impact of the financial services sector on a range of topics, including economic development and regional inequality. I have already set out some examples of the overwhelmingly positive impact that the sector has on jobs, productivity and tax revenues across the whole UK.

Financial Services Bill

Earl Howe Excerpts

3rd reading & Report stage
Monday 19th April 2021 Lords Chamber

In his final remarks on 10 March, my noble friend Lord Sikka recalled the wishes of many would-be criminals to be prosecuted in the UK on the basis that our enforcement machine is seen as less effective than that of others. My noble friend Lord Eatwell raised that issue in several of his earlier contributions on the Bill. Ultimately, and irrespective of the wording of different amendments, we need to achieve a widespread perception of both independence and effectiveness. This is true not only of the FCA but also of our other financial services regulators and the various enforcement agencies that they work with. If he were here, my noble friend Lord Eatwell would say that there remains some way to go. However, the responses that we received to other amendments in Committee satisfied us that the Treasury understands the challenge and is grappling with it. I hope that my noble friend finds some comfort in the wider discussions we have had and that the Minister can shed more light on the issues of the constraints on ministerial power.

[Earl Howe (Con)]

My Lords, before I respond to this amendment, I would like to express my sadness on behalf of us all at the news of the death of the noble Lord, Lord Judd. Lord Judd took part in our debates on the Bill only just before Easter. He was a Member of this House for some 30 years, a man of great wisdom and wide experience, but above all a man of great kindness, who had an abiding concern for those less fortunate than himself both in this country and across the world. We shall miss him.

Amendment 33 seeks to require the FCA to make a public statement on the nature of any intervention a Minister may make concerning an FCA investigation into an individual firm. The noble Lord, Lord Sikka, made a number of allegations against Ministers, past and present, and the Treasury. I do not have the facts or the briefing to enable me to respond to him today on so many detailed issues. Indeed, I have to say that, for the most part, I did not recognise the picture that he painted. I hope, therefore, that he will allow me to write to him on what he has said, copying in noble Lords speaking in this debate, and in doing so I shall attempt also to address the points made by the noble Baroness, Lady Bennett of Manor Castle. However, I can respond to the issue of principle raised by this amendment, which is what we are here to focus on for the purposes of the Bill.

The House may recall that, in Committee, I outlined the current legislative framework which establishes the FCA as an independent, non-governmental body. In my remarks today, I hope to build on that discussion and reassure noble Lords that this amendment is not necessary. Ministerial intervention in the activities of the FCA, were it to occur, would be one of two things: either legally permitted under existing statute, or illegal. What actions are legally permitted within the legislative framework? Under the framework established by Parliament, the Treasury and hence Ministers have strictly limited powers in relation to the FCA. Indeed, the Treasury’s ability to direct or influence the regulators is set out in statute. Most crucially, the Treasury has no general power of direction over the FCA.

The Financial Services Act 2012 sets out the legislative mechanisms through which the Treasury can launch investigations, provided under Section 77 of that Act, which provides a mechanism for the Treasury to direct the FCA to conduct an investigation into events related to a person carrying on a regulated activity. Section 77 was made use of recently, as noble Lords will know, in relation to the regulation of London Capital & Finance, or LCF. Under Section 78, the Treasury can provide direction as to the scope of an investigation, the timeline that it should cover and how it is conducted. So the scope of the powers available to the Treasury is tightly circumscribed by statute. That has to be right, because the ultimate independence of the FCA is vital to its role. Its credibility, authority and value to consumers would be undermined if it were possible for the Government to intervene in its decision-making or ongoing supervision of authorised firms.

As the FCA has acknowledged in its mission statement, Parliament has given the FCA a range of tools in order to deliver its objectives. These tools range from guidance, to censure, to its Section 166 FSMA powers, which allow the FCA to seek the view of an independent third party or “skilled person” on aspects of a regulated firm’s activities if it is concerned or wants further analysis. These accompany independent powers for the FCA to make decisions on how to use these tools most effectively. In my remarks in Committee, I did not intend to suggest that the FCA cannot investigate events that occurred before it was created. I merely pointed out that the events being discussed were historical. The FCA can and does look at historical behaviour of the firms that it supervises.

In the context of this amendment, it is necessary to appreciate that the FCA is an independent body and that there are laws which govern and strictly limit the directions that the Treasury can and cannot give it. However, were such directions to be given under Section 77 and 78 of the 2012 Act, I cannot conceive of a situation where Ministers and the Treasury would not make that fact public.

That covers the intervention that is legally permitted; what about nefarious interference? In Committee, the noble Baroness, Lady Kramer, raised the Ministerial Code, as indeed she has today, and asked whether the provisions of the code were applicable in this instance and strong enough in relation to engagement with regulators. I have since written to the noble Baroness on this topic and a copy has indeed been placed in the Library. However, for the benefit of the House I will expand on that now.

The Ministerial Code requires Government Ministers to

“maintain high standards of behaviour and to behave in a way that upholds the highest standards of propriety.”

In addition, Ministers must act in accordance with the highest standards as set out in the seven principles of public life: selflessness, integrity, objectivity, accountability, openness, honesty and leadership. I particularly point to the requirements under the openness principle for Ministers to

“act and take decisions in an open and transparent manner.”

I hope that this assures noble Lords that, even if Ministers were tempted to interfere improperly, the Ministerial Code provides the proper protections against this. In short, if a Minister were to attempt it, he or she would simply not get away with it. The right reverend Prelate the Bishop of St Albans in a real sense made my point for me. If anyone has evidence of improper behaviour by Ministers, the regulators or firms, they should of course raise that through the proper channels.

It is not a case of my arguing along the lines of “Trust me—I’m a Minister.” I hope that I have demonstrated that the appropriate legislation and the appropriate code and principles of ministerial behaviour are already in place in this space to safeguard against any undue interference as envisaged by this amendment. I hope that this reassures noble Lords that this amendment is simply not necessary, and that the noble Lord is thereby content to withdraw it.

[Lord Sikka (Lab) [V]]

My Lords, I join the noble Earl, Lord Howe, in expressing sadness at the death of Lord Judd, and send my condolences to all his loved ones.

In her response, the noble Baroness, Lady Neville-Rolfe, raised the interesting point that some matters were confidential and that Ministers or the Government cannot therefore talk about them. There is also a broader issue of parliamentary accountability and public interest, and of being open and accountable, which should always triumph over the pursuit of private interests. I do not think that any of the issues I have spoken about touch upon the position of spy satellites or troop movements and are not, therefore, a real threat to national security. They may be a threat to private arrangements which some elites have negotiated with Governments, but that is another matter.

I am grateful to the noble Earl, Lord Howe, for his detailed explanation. He said that if there is any evidence about ministerial interventions it should be brought to the attention of the proper authorities, but the difficulty is that there is no mechanism by which this intervention is placed on public record. We only become aware of it because of revelations in other cases. In the case of BCCI, which I cited, it was after five and a half years of litigation against the Treasury that I managed to secure a copy of the Sandstorm report. The Government did their utmost to prevent the disclosure of that document, so there simply are no formal channels for any evidence. That means that we can only investigate past events, try to put the bits and pieces together and build up a picture about ministerial interventions.

This issue will remain with us, but one thing we cannot deny is that, even under the FCA’s rules and the Ministerial Code, which the Minister cited, the unredacted version of Lord Justice Bingham’s report on the Bank of England’s supervision of BCCI still remains a secret document. That is really bizarre. The Sandstorm report is on the internet, because I put it there, but as far as the state is concerned it is somehow a secret document.

As I said, this issue is not going to go away. In the post-Covid world there may well be more scandals and more issues. There will, therefore, be more questions about government accountability and interventions. For the time being, I withdraw the amendment, but hope to return to it in the future. I thank noble Lords for their indulgence.

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[Earl Howe (Con)]

My Lords, the Government agree that effective oversight of the FCA and PRA is a crucial component of our regulatory framework. The Government also agree that having a diverse range of independent views in such an oversight regime is key to its success. However, as I have touched on previously, a number of mechanisms already exist to ensure effective independent oversight of the regulators by a diverse range of stakeholders. I believe these are sufficient and I do not propose to go into them in detail here, given our other debates on Report. However, I know from our previous debate in Committee, and from what he has said today, that the noble Lord, Lord Sikka, is seeking particularly to address potential issues arising from so-called regulatory capture and groupthink with his amendment.

Regulatory capture becomes a risk in situations where regulators do not have the views of others—particularly stakeholders—to influence their work. I assure the noble Lord that there are already extensive arrangements in place to allow a wide range of stakeholders to contribute their views to influence the regulators’ work. There are also arrangements in place to provide effective scrutiny of the regulators and to require them to explain their actions; for example, both the FCA and PRA are required under the Financial Services and Markets Act 2000 to consult independent panels on the impact of their work, as the noble Lord, Lord Tunnicliffe, has just mentioned. For the PRA, this involves consulting an independent practitioner panel of industry representatives, while the FCA must consult four different statutory panels. These four panels are: the consumer panel, the practitioner panel, the smaller business practitioner panel and the markets practitioner panel. The FCA considers the views of each of these panels, as appropriate, when developing policies and making regulatory interventions.

I point to the work of the FCA’s consumer panel in particular. This panel meets twice a month to advise and challenge the FCA from the earliest stage of policy development, and to bring to the FCA’s attention broader issues for consumers. This ensures that different perspectives on how the FCA should take forward its consumer protection objective can be taken into account. The FCA board receives a report on the panel’s work each month, which helps to inform the FCA’s rule-making and policy development. Through the panel’s annual report, press releases and public statements, the consumer panel can publicly hold the FCA to account, enhancing transparency and reducing the risk of regulatory silence or capture. Furthermore, the regulators are already under a statutory obligation to organise and publish the results of their public consultations. These consultations allow interested parties—including financial services firms, but also consumer organisations and members of the public—to make representations on issues such as proposed new rules.

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[Lord Tunnicliffe (Lab) [V]]

My Lords, the noble Baroness, Lady Bennett, gave us fair warning that she was likely to bring an amendment back on Report for further debate, which is reasonable given the time constraint we faced in Grand Committee. As with the amendment of the noble Lord, Lord Sikka, we agree that implementing the right forms of oversight is of utmost importance. In Committee, several speakers mentioned the potentially valuable contributions to policy debates that could come from academics, think tanks and others, if they only had access to the data they needed. We agree that more must be done to facilitate such research, and I hope the Minister will say something on this.

The noble Baroness’s redrafting of her amendment addresses some of the points raised in the previous debate. However, her original pitch was for

“a network, not reinventing the wheel, not creating a whole new institution.”—[Official Report, 10/3/21; col. GC 735.]

Yet Amendment 124 from Committee and today’s Amendment 36 would create a whole new institution. I believe that the comments from the noble Baroness, Lady Kramer, bear consideration. Surely the first thing we should do is to make sure that this role is fully taken up by Parliament. We have already established, informally at least, that much more scrutiny of how the FCA and the PRA work will be necessary, and I look forward to how well Parliament reacts to this challenge. It is also important to recognise that resources may be needed to give parliamentary scrutiny the expertise necessary in this complex area.

One area that interests me is the impact of the financial services sector on the real economy. We are all familiar with the arguments advanced by the Minister last time on jobs, tax take and so on, and colleagues will remember that I reflected on the successes of the sector at Second Reading. However, as the UK comes out of the pandemic and as government support schemes begin to disappear, we will need to monitor the extent to which lenders continue to support business expansion and other aspects of the economy. This brings us back to the point about ensuring the availability of data.

[Earl Howe (Con)]

My Lords, as I set out in our earlier debate, the Government agree that effective oversight of the regulation of our financial services sector and consultation with a diverse range of stakeholders are crucial to the sector’s ongoing success. As we have discussed previously, Parliament has a unique role to play in that oversight function.

In that context, I will set out the existing mechanisms that ensure effective independent oversight of the sector and its regulation by a diverse range of stakeholders. I will not repeat my previous remarks on the regulators’ arrangements for publishing consultations and the manifold ways in which they are already held to account by various panels and Select Committees.

I understand that this amendment is partly inspired by Finance Watch in the EU, an organisation which conducts research, monitors financial services legislation inside the EU and advocates on financial services issues. As the noble Baroness indicates in her amendment, we do not have a body in this country that performs an equivalent role; were we to have one, I imagine it would be made up of industry stakeholders of various kinds. As noble Lords will know, parliamentary committees can and do seek input from a wide variety of experts. In doing so, they can bring together the existing expertise of academics, think tanks and industry stakeholders.

Nothing prevents the creation of such a body in this country without a legislative basis; indeed, the EU organisation was not created by EU law but was simply set up as a non-profit organisation under Belgian law. It is funded by a combination of contributions from its members and philanthropic foundations and grant funding from the EU, for which the group has to bid.

The Government and the regulators regularly consult on their plans and proposals, and interested parties, including those from the backgrounds set out in this amendment, are free to respond. The Government and regulators consider all responses to such consultations carefully and consider how the views expressed should influence final policies and rules. I am concerned that this amendment would therefore duplicate existing practices in a very real sense.

In addition, it would appear to duplicate the work carried out by the Financial Policy Committee of the Bank of England. The FPC acts as the UK’s macroprudential authority; it identifies, monitors and acts to remove or reduce systemic risks to the UK financial system. It may make recommendations to the Treasury, the FCA and the PRA, and is required to publish a financial stability report twice a year setting out its view of the outlook for UK financial stability, including its assessment of the resilience of the UK financial system and the main risks to UK financial stability.

Given this, and the existing processes that I have set out in previous debates today that offer ample means for achieving the outcomes sought by this amendment, I hope the noble Baroness will feel able to withdraw it.

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

My Lords, I thank the Minister for his response and all noble Lords who have taken part in this debate.

The noble Baroness, Lady Noakes, suggested that what this amendment covers is actually a core function of the Treasury. That is very much not the case. The Treasury is the definition of the establishment, part of the Government; this is an outside, independent oversight body. She also said that Parliament takes a keen interest in financial regulation. That conclusion can be questioned by looking down the lists of speakers through the progress of this Bill and contrasting them to the lists of speakers for, for example, the Domestic Abuse Bill.

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[Lord Tunnicliffe (Lab) [V]]

My Lords, we had a fruitful debate on the issue of parliamentary scrutiny and the regulator’s rule-making powers last Wednesday. Since this amendment was tabled, I have viewed it as an opportunity to tie up any loose ends, rather than being likely to result in a Division.

It is fair to say that nobody is particularly happy with the current arrangements, particularly given the loss of European Parliament scrutiny of new prudential rules, and the glut that will come once the Bill becomes an Act. However, there is little sense in repeating the arguments made in previous debates. I recognise that the Minister was able to make some important additional commitments in his response to last week’s group of amendments. Since this amendment was tabled, we have seen correspondence from the Economic Secretary to the heads of the FCA and PRA, asserting that Parliament, as we have all said in recent months, has and must enjoy a special role in overseeing the regulators’ output. The letter provided what my noble friend Lord Eatwell has long referred to as the final component of a three-legged stool.

Having reached agreement that Parliament should be treated as a significant stakeholder, the key is to now put in place a mechanism for meaningful scrutiny to take place. Our Amendments 45 and 48 envisage the establishment of a dedicated committee of each House, or a Joint Committee of both, and that remains an attractive prospect to us. Therefore, as we move into a new Session, I hope the Minister can assure me that the Treasury and business managers in both Houses will look at making it a reality. We await the outcomes of the future regulatory framework review, which I hope will represent a significant step forward for all strands of oversight. Once we have digested the findings, our task will be to scrutinise a successor to FiSMA, and I repeat our call for legislation to receive the detailed pre-legislative scrutiny it deserves.

Scrutiny has been the central theme of the Bill. The noble Baroness, Lady Kramer, said that we must look forward, and she commented that, in many ways, the theme of scrutiny has crossed parties as an apolitical discussion. I hope it will not be a matter of conflict between regulators and Parliament, and that the opposite will be true, as they must work together to make this scrutiny work. I also hope it will mean that we can have real confidence in the work of the regulators, and a real sense that their actions are fully understood by responsible politicians.

[Earl Howe (Con)]

My Lords, I am grateful to the noble Baroness, Lady Kramer, for her helpful and constructive introduction to this amendment. I begin by stating my agreement with her on what I am confident is common ground between us in two respects: Parliament has a unique and special role in scrutinising the regulators and shaping the financial services regulatory landscape, and scrutiny and accountability of regulators has emerged as the foremost issue throughout our debates on the Bill. The noble Baroness, Lady Hayman, will forgive me for not putting the issue alongside that of climate change.

I appreciated the noble Baroness’s remarks on the way in which our cross-party discussions have enabled us to make progress on this issue, which we debated in some detail last week. I will not repeat all my remarks from that occasion, but I will summarise them. I confirmed to the House that the Economic Secretary to the Treasury has written to the chief executives of the PRA and the FCA, to endorse the commitments that they made in their recent letters, and emphasised the importance that the Government place on them. I assured noble Lords that the Government agree that the regulators should provide a comprehensive response to parliamentary committees on any issues they raise in the course of their scrutiny. I also confirmed that the Government remain committed to further considering this issue as part of the ongoing future regulatory framework review, and to engaging with Members of this House and the other place, as we continue that review.

As I said then, delivering the reforms that the Government have proposed in this area could be done only through further primary legislation. Therefore, Parliament will have the opportunity to return to this issue where it can be considered fully. The noble Baroness, Lady Kramer, noted that consultations are not the only relevant issue here, and I agree with her. I am happy to confirm again that the Government view parliamentary scrutiny much more broadly, also to encompass the regulators’ wider work.

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Moved by

[Earl Howe]

38: Clause 44, page 47, line 33, leave out “subsection (2)” and insert “subsections (2) and (2A)”
Member’s explanatory statement
See the explanatory statement for the Minister’s second amendment at page 47, line 34.

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Moved by

[Earl Howe]

41: Clause 45, page 48, line 21, leave out from “appoint” to end of line 22
Member’s explanatory statement
This amendment is consequential on the Minister’s amendment at page 182, line 26.

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Moved by

[Earl Howe]

43: Schedule 2, page 65, line 27, at end insert—
“(ba) the target in section 1 of the Climate Change Act 2008 (carbon target for 2050), and”Member’s explanatory statement
This amendment requires the FCA to have regard to the carbon target for 2050 when making Part 9C rules (defined in section 143F of the Financial Services and Markets Act 2000, inserted by Schedule 2 to the Bill).

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Moved by

[Earl Howe]

46: Schedule 2, page 80, line 22, at end insert—
“Carbon target
21A_ In relation to the making of Part 9C rules that are made on or before 1 January 2022—(a) paragraph (ba) of section 143G(1) of the Financial Services and Markets Act 2000 (duty to have regard to carbon target for 2050) does not apply, and(b) section 143H(1)(b) of that Act does not require an explanation in respect of matters specified in that paragraph.”Member’s explanatory statement
This amendment disapplies the FCA’s duty to have regard to the carbon target for 2050 (see the Minister’s amendment at page 65, line 27) in relation to Part 9C rules made on or before 1 January 2022.

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Moved by

[Earl Howe]

47: Schedule 3, page 82, line 14, at end insert—
“(ca) the target in section 1 of the Climate Change Act 2008 (carbon target for 2050), and”Member’s explanatory statement
This amendment requires the PRA to have regard to the carbon target for 2050 when making CRR rules (defined in section 144A of the Financial Services and Markets Act 2000, inserted by Part 1 of Schedule 3 to the Bill) and also when making section 192XA rules (see sections 192XA and 192XB, inserted by Part 2 of Schedule 3 to the Bill).

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Moved by

[Earl Howe]

49: Schedule 3, page 90, line 20, at end insert—
“Carbon target
24A_ In relation to the making of CRR rules or section 192XA rules that are made on or before 1 January 2022—(a) paragraph (ca) of section 144C(1) of the Financial Services and Markets Act 2000 (duty to have regard to carbon target for 2050) does not apply, and(b) section 144D(1) of that Act does not require an explanation in respect of matters specified in that paragraph.”Member’s explanatory statement
This amendment disapplies the PRA’s duty to have regard to the carbon target for 2050 (see the Minister’s amendment at page 82, line 14) in relation to CRR rules and section 192XA rules made on or before 1 January 2022.

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Moved by

[Earl Howe]

50: Schedule 12, page 182, line 26, leave out sub-paragraph (3) and insert—
“(3) After subsection (5) insert—“(5A) In this Chapter as it extends to England and Wales and Scotland, “relevant financial institution” means—(a) a bank,(b) a building society,(c) an electronic money institution, or(d) a payment institution.”(3A) After subsection (5A) insert—“(5B) In this Chapter as it extends to Northern Ireland, “relevant financial institution” means—(a) a bank, or(b) a building society.””Member’s explanatory statement
This amendment provides that it is only Chapter 3B of Part 5 of the Proceeds of Crime Act 2002 as it extends to England and Wales and Scotland that is amended to provide for forfeiture of money in accounts maintained with electronic money institutions and payment institutions.

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Moved by

[Earl Howe]

That the Bill do now pass.

[Earl Howe (Con)]

My Lords, it is right that we take a brief time to offer some concluding remarks. I begin by thanking all noble Lords who have taken part in our debates for their thorough consideration of this Bill. The Bill is a very important step towards the Chancellor’s vision for the future of the UK’s financial services sector. As the first major piece of financial services legislation since our leaving the EU, it will enhance the UK’s world-leading prudential standards, promote financial stability, promote openness between the UK and international markets, and maintain an effective financial services regulatory framework and sound capital markets.

It has been a great privilege to guide this legislation through the House alongside my noble friends Lord True and Lady Penn; I thank them both. I am especially grateful to both opposition Front Benches for their constructive engagement on the Bill. All those involved have brought to bear huge experience as well as great enthusiasm and insight. There are too many other noble Lords for me to thank individually, but I do so collectively. I for one have appreciated the very thoughtful and expert contributions from all quarters of the House, not least from my noble friends on these Benches.

As my right honourable friend the Chancellor has set out, the financial services sector will be crucial to our economic recovery from the pandemic, offering job creation and economic growth in all corners of the economy. In these debates, noble Lords across the House have demonstrated their appreciation of the important role that this sector will continue to have, and this legislation is undoubtedly better for their consideration.

We have discussed some extremely technical issues as well as broad issues that reach far beyond the specifics of the Bill. We have looked at the role that the financial services sector will play in our efforts to tackle climate change. We have discussed at length the special role that Parliament must continue to have in relation to the scrutiny of the financial services regulators and their activities. As the Government move forward in delivering their vision for the financial services sector, the debates that we have had during the passage of this Bill will continue to be of vital relevance.

I conclude these brief remarks by acknowledging the hard work undertaken by the Treasury Bill team, the numerous Treasury officials and the clerks in the Public Bill Office, who have worked incredibly hard to support the passage of the Bill. I express my warmest appreciation to them for the unstinting support that they have provided. I beg to move.

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[Baroness Coussins (CB)]

From these Benches, I too am grateful for the opportunity to express my thanks to all noble Lords who participated at all stages of the Bill. The noble Earl, Lord Howe, the noble Baroness, Lady Penn, and, from the point of view of my own particular interest in the Bill, especially the noble Lord, Lord True, have steered the Bill skilfully through your Lordships’ House. Although he is not in the Chamber at the moment, I place on record my grateful thanks to the noble Lord, Lord True, for his constructive engagement and for meeting me and the noble Baroness, Lady Morgan of Cotes, on two occasions to discuss amendments concerning the statutory debt repayment plans.

Together with the Bill team and the wider group of Treasury officials, the noble Lord, Lord True, has given me and the network of debt advice charities a great deal of confidence that these plans will be brought into effect in 2024. We are all grateful for this positive attitude. I thank all other noble Lords who spoke on this issue and on a variety of other matters of concern to consumers. As well as SDRPs, I welcome the fact that the Bill paves the way towards regulating buy now, pay later products, for example. Indeed, it has been very pleasing to see the level of consensus across the House on the need to improve support for people in financial difficulty and to tackle financial exclusion.

Finally, the passage of the Bill has been an important opportunity to look at what more needs doing on the financial services regulatory framework to ensure that it is as effective as possible at protecting consumers; for example, one area that was raised but ultimately found to be beyond the ambit of the Bill was oversight of bailiffs, but the commitment from the Government to work with stakeholders to develop this is very welcome.

I thank all concerned, including the excellent Lord Judd, whom we will all miss very much indeed.

[Earl Howe (Con)]

My Lords, I am grateful to all noble Lords for their remarks in bringing our proceedings to a conclusion. I beg to move.

Bill passed and returned to the Commons with amendments.

Financial Services Bill

Earl Howe Excerpts

Consideration of Commons amendments
Wednesday 28th April 2021 Lords Chamber

Moved by

[Earl Howe]

That this House do not insist on its Amendment 1 and do agree with the Commons in their Amendment 1A in lieu.

1A: Page 36, line 13, at end insert the following new Clause—
“FCA rules about level of care provided to consumers by authorised persons
(1) The Financial Conduct Authority must carry out a public consultation about whether it should make general rules providing that authorised persons owe a duty of care to consumers.
(2) The consultation must include consultation about—
(a) whether the Financial Conduct Authority should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care,
(b) whether a duty of care should be owed, or other provision should apply, to all consumers or to particular classes of consumer, and
(c) the extent to which a duty of care, or other provision, would advance the Financial Conduct Authority’s consumer protection objective (see section 1C of the Financial Services and Markets Act 2000).
(3) The Financial Conduct Authority—
(a) must carry out the consultation, and publish its analysis of the responses, before 1 January 2022, and
(b) must, before 1 August 2022, make such general rules about the level of care that must be provided to consumers, or particular classes of consumer, by authorised persons as it considers appropriate, having regard to that analysis.
(4) The duties to consult under this section may be satisfied by consultation carried out after 1 January 2021 but before this section comes into force (as well as by consultation carried out after this section comes into force).
(5) In this section—
“authorised person” has the same meaning as in the Financial Services and Markets Act 2000 (see section 31 of that Act);
“consumer” has the meaning given in section 1G of that Act; “general rules” means rules made under section 137A of that Act.”

[Earl Howe (Con)]

My Lords, this Financial Services Bill will enhance the UK’s world-leading prudential standards, promote financial stability, promote openness between the UK and international markets, and maintain an effective financial services regulatory framework and sound capital markets. I acknowledge the work of your Lordships in scrutinising this important Bill. The issue of parliamentary scrutiny has been prominent in our debates and noble Lords have more than demonstrated the positive role that they can play in this regard.

During the passage of the Bill, Members of both Houses debated how best to address issues of consumer harm in the financial sector. Amendment 1, which this House approved on Report, proposes that this should be addressed through a requirement for the FCA to bring forward rules on a duty of care. Let me underline that the Government are committed to ensuring that financial services consumers are protected and that steps are taken quickly to address issues, when they are identified. However, as the Economic Secretary set out in the other place, the Government believe that the FCA already has the necessary powers and is acting to ensure that sufficient protections are in place for consumers, so I cannot accept this amendment.

It is important to remember that financial services firms’ treatment of their customers is already governed by the FCA’s Principles for Businesses and specific requirements in its handbook. These fundamental principles set out specific requirements for firms, including that

“A firm must pay due regard to the interests of its customers and treat them fairly.”


The FCA’s enforcement powers allow it to ensure that these standards are met, but it recognises that the level of harm in markets is still too high. It is committed to taking further actions.

The Government accept, as the noble Lord, Lord Tunnicliffe, has rightly suggested, that this harm may stem from asymmetry of information between financial services firms and their customers. The risk is that some firms may seek to exploit this asymmetry. The FCA is well aware of how informational asymmetries and behavioural biases can influence consumer behaviour, and it works every day to address these issues where it considers that they may result in harm. The Government therefore support the FCA’s ongoing programme of work in this area and believe that it will deliver meaningful change for the benefit of consumers.

The FCA has considered its existing framework of principles and whether the way in which firms has responded to them is sufficient to ensure that consumers have the right protections and get the right outcomes. Building on this, in May, the FCA will consult on clear proposals to raise and clarify its expectations of firms’ actions and behaviours and on any necessary changes to its principles to deliver them. These proposals will consider how to raise the level of care that firms must provide to consumers, through a duty of care or other provisions. Ultimately, the proposals in this consultation seek to ensure that consumers benefit from a better level of care from financial services firms.

Amendment 1A puts this work on a statutory footing. It requires the FCA to consult on whether it should make rules providing that authorised persons owe a duty of care to consumers. It ensures that the FCA will publish its analysis of the responses to this consultation by the end of the year. It also ensures that the FCA will make final rules, following that consultation, before 1 August 2022. I hope that this provides reassurance of both the FCA’s and the Government’s commitment to this important agenda. I urge the House to accept this proportionate and, I believe, well-judged amendment.

The FCA will bring its consultation to the attention of the relevant parliamentary committees. This will give them an opportunity to consider the proposals and, if they choose, to express a view or raise any issues. The FCA will respond to any issues raised by parliamentary committees, in line with commitments made during the passage of this Bill.

Let me end there. I hope that noble Lords will accept Motion A and this amendment in lieu.

[Baroness Kramer (LD)]

My Lords, we will not challenge this Motion. I cannot say that it goes as far as reassurance, but I think we are in a much better place to have the consultation and its characteristics in statute on the face of the Bill. I particularly thank the Minister and his team. I suspect they have been instrumental in making sure that the concerns, from all sides of the House, were communicated back to the Treasury and the Treasury team.

The Minister today repeated a number of the statements that the Economic Secretary made in the other place when he addressed this issue. I will highlight a few that were of particular importance to me. The FCA recognises that,

“the level of harm in markets is still too high and is committed to—”—[Official Report, 24/4/21; col. 867]

taking further actions. That is an important statement to have on the record. I am slightly concerned, however, that the focus of the FCA should not exclusively be on asymmetry of information. Asymmetry of information is fundamental and important, but it is far from everything. The Economic Secretary said that

“the FCA will consult in May on clear proposals to raise and clarify its expectations of firms’ actions and behaviours, and on any necessary changes to its principles to deliver this.”—[Official Report, Commons, 26/4/21; col. 84]

I hope that will not be confined simply to asymmetry of information, but as the Economic Secretary said, and the Minister today said, Parliament wants to be assured that the FCA’s ongoing work will lead to meaningful change. I think that reflects some of the frustrations expressed in this House of having had eight consultations to date and relatively little action. I hope this will lead to a great change.

In the amendment in lieu—this is perhaps something the noble Lord, Lord Eatwell will address more extensively than I—the fact that all consumers are part of the consideration is an important one. I want to use this opportunity to underscore to the Minister how urgent and significant this issue is.

When the Government’s amendment in lieu was passed, I got an email from one of the leading financial services lawyers in the country, and two things are pertinent. It said that it looks like this one is headed for the long grass again. I think that is partly because we are looking at action in 2022 and not immediately. The reason for that level of concern was, apparently, that audit firms are now saying that any credit risk between the client and the authorised firm should be counted as client money within the meaning of CASS—the protection of client assets and money. This is storing up some big problems when one of these babies—we are talking about firms that collectively have well over £10 trillion in assets under management—goes down and a judge finds that the trust is bust because they comingled client money with money that is not. Lehman Brothers, here we go again. I went immediately to the FCA site, and it is an excellent but sad example of the very limited powers that the FCA has to deal with such situations, because of the regulatory perimeter that limits a great deal of their potential for action to their definition of consumers. The issue has always been that that is a very narrow definition of consumer.

Every day we wait for a duty of care to become embedded in the system, we run significant risk. It is a risk that none of us wants—it has the potential to be limited to a small pool of clients, but also to knock the economy off its paces once again. It is important that there is an element of urgency built into all of this, that the issue is taken seriously and that there is not an attempt to narrow examination by and the focus of the FCA to simply something like asymmetry of information, but to consider the much wider picture before we end up with another crisis none of us wants.

--- Later in debate ---

A most welcome element in the Government’s amendment is the timetable for action—not the immediate legislative action that we on these Benches sought, but a timetable none the less. I assure the Minister that we will be ticking off the dates by which the FCA is required to act, and of course we will scrutinise the new general rules with great care. In doing so, I look forward to working with the noble Earl, Lord Howe, to achieve what is now a clearly shared objective: a well-defined regulatory principle of duty of care.

[Earl Howe (Con)]

My Lords, I express my thanks to the noble Baroness, Lady Kramer, and the noble Lord, Lord Eatwell, for what they have said. I am pleased that they have both taken the trouble to read the words of my right honourable friend the Economic Secretary when responding to the debate in the other place on Monday. I was careful to frame my remarks in a way intended to ensure that there is not a hair’s breadth of difference between his words and mine.

The noble Lord made some very well-observed remarks on the risks arising from asymmetric information. However, I am happy to confirm to the noble Baroness that the FCA’s consultation will not be solely focused on asymmetry of information, important though that is; it will look more broadly at raising the level of care that firms provide to consumers—not particular classes of consumers, but all consumers.

Some hesitation—I think that is the best word—was expressed as to why there is yet another consultation. In response to that, I say that it is important that consumer groups and firms have the opportunity to comment on clear proposals and subsequent draft rule changes before final rules are set in stone. So I argue that it is a necessary step, even though I fully understand the noble Baroness’s wish for action this day. I remind her that we are talking about a consultation to be launched very shortly, and I hope that indicates that the sense of urgency which both noble Lords have indicated is right is shared by the FCA.

The FCA will and must act in accordance with its statutory objectives, which include the consumer protection objective. I come back to that point: this is not an issue that is ever lost on the FCA. With those comments, I am grateful to both noble Lords for their acceptance of the amendment in lieu, and I beg to move.

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

My Lords, we have a request to speak after the Minister from the noble Baroness, Lady Neville-Rolfe.

[Baroness Neville-Rolfe (Con)]

My Lords, I join others in congratulating my noble friend the Deputy Leader of the House and other Members of the Front Bench on the way they have dealt with the Bill and got us to this final stage. I just have a question about the consultation on the duty of care, and it stems from my experience in other areas of regulation—that is, health and safety and food safety. I have found that, where a duty of care is introduced, it is sometimes possible to change adjacent rules and regulations in a regulatory area and reduce the bureaucracy that can be a problem for both consumers and operators in the field. I would be interested to know whether that sort of work is likely to be envisaged by the Economic Secretary.

[Earl Howe (Con)]

My Lords, I do not have an answer for my noble friend, but her point is extremely helpful and I shall ensure that it is fed into the thinking that will be wrapped around the consultation process as it goes forward.

Motion A agreed.

Moved by

[Earl Howe]

That this House do not insist on its Amendment 8, to which the Commons have disagreed for their Reason 8A.

8A: Because the Commons consider that it is not a proportionate or practical means of tackling the issues around consumers who have mortgages with inactive firms.

[Earl Howe (Con)]

My Lords, Amendment 8 concerns mortgage prisoners, an issue that the Government take extremely seriously. We are committed to finding practical and proportionate solutions to help this group but, as Motion B in my name makes clear, the amendment is not one that the Government can accept. As explained in Reason 8A, the amendment is neither a proportionate nor a practical response to this complex issue, and this is why the Government cannot support Motion B1, tabled by the noble Lord, Lord Sharkey.

In our previous debates, my noble friend Lord True set out the FCA’s analysis of this complex issue. To recap briefly, according to FCA data, there are 250,000 borrowers with inactive lenders. Of these, analysis suggests that 125,000 borrowers could switch mortgage providers if they chose to, even prior to the introduction of the FCA’s new rules. Of the 125,000 who cannot switch, the FCA estimates that 70,000 are in arrears and so would struggle to access a new deal even in the active market. The FCA therefore estimates that there are 55,000 borrowers who may struggle to switch but are up to date with their payments. Its data show that, on average, the 55,000 borrowers with inactive firms who have characteristics that would make it difficult for them to switch but are up to date with payments are paying around 0.4 percentage points more than similar borrowers with active firms who are now on a reversion rate.

As the Economic Secretary set out on Monday, the reason these borrowers are unable to switch is not that their mortgage is with an inactive firm; it is that they do not meet the risk appetite of lenders. For example, they may have a combination of high loan-to-value, be on interest-only mortgages with no plan for repayment, or have higher levels of unsecured debts, non-standard sources of income or a poor credit history. Similar borrowers in the active market are also very unlikely to be offered deals with new lenders.

My noble friend Lord True has previously set out the significant work undertaken by the Government and the FCA in this area, which has created additional options to make it easier for some of these borrowers to switch into the active market. If we look at Amendment 8, we see that what it proposes would be a very significant intervention in the private mortgage markets and in private contracts. It would bring with it a risk to financial stability as it would restrict the ability of lenders to vary rates in line with market conditions. The ability to vary standard variable rates allows lenders to reprice products to reflect changes to the cost of doing business and could therefore create risks with significant implications for financial stability. On top of that, the amendment is not fair to borrowers with active lenders in similar circumstances as it targets only borrowers with inactive lenders. Indeed, this cap would be deeply unfair to borrowers in the active market who are in arrears or unable to secure a new fixed-rate deal because it would not include them.

So, at the most basic level, I just do not think it is right to introduce such a significant intervention for those with inactive lenders which could cut their mortgage payments far below the level of someone in a similar financial situation who happens to be with an active lender. Nevertheless, while the Government are opposing this amendment today, I want to reiterate our commitment to finding any further practical and proportionate options for affected borrowers, supported by facts and evidence.

On Monday, the Economic Secretary set out what further steps the Government and the FCA are taking and I want to repeat those commitments today: namely, that

“the Treasury will work with the FCA … on a review to its existing data on mortgage prisoners”.

This will ensure that we have the right data

“on the characteristics of those borrowers who have mortgages with inactive firms and are unable to switch despite being up to date with their mortgage payments. The FCA will also review the effect of its recent interventions to remove regulatory barriers to switching for mortgage prisoners and will report on this by the end of November, and … a copy of that review”

will be laid before Parliament.

“The Treasury will use the results of the review … to establish whether further solutions can be found for such borrowers that are practical and proportionate.”—[Official Report, Commons, 26/4/21; col. 87.]


Within the significant constraints that I have noted, I want to reassure the House that the Economic Secretary, as the Minister responsible for this area, will continue to search for any further solutions that may provide support for borrowers with inactive lenders who are unable to switch. But, again, they must be practical and proportionate. The Economic Secretary has also confirmed that he will write to active lenders and encourage them and the wider industry to go even further and look at what more they can do to ensure that as many borrowers as possible benefit from these options.

I hope I have convinced the House that the Government are taking the appropriate next steps and have demonstrated our commitment to continuing to work tirelessly on this. Therefore, I ask the House not to insist on this amendment and I beg to move.

Motion B1 (as an amendment to Motion B)

[Lord Sharkey]

Moved by

Leave out “not”.

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[Lord Tunnicliffe (Lab) [V]]

My Lords, we have not made as much progress on this issue as many people, including thousands across the country, would have hoped. That is not through any lack of effort. The noble Lord, Lord Sharkey, and my noble friend Lord Stevenson have been tenacious in their pursuit of change. However, for that to be possible, both sides must want to work towards a favourable outcome.

I said on Report that we were not convinced that this amendment provided the answer to the long-running problems experienced by mortgage prisoners. It certainly provides an answer, but I accept the argument that there would be consequences for the mortgage market as a whole. With this in mind, colleagues offered an alternative option in what was then Amendment 37B. Your Lordships’ House has a reputation for being constructive and, in that spirit, the noble Lord, Lord Sharkey, and my noble friend made further offers to look at any text that the Treasury would be prepared to bring forward. Unfortunately, Ministers chose not to put an amendment on the table.

The Economic Secretary has, to his credit, demonstrated knowledge of the challenges in this area. Every time he has spoken, I have believed his wish to identify workable solutions. The noble Earl, Lord Howe, and the noble Lord, Lord True, have said similar things in our meetings; again, I have viewed their comments as earnest. The problem is that warm words do not pay bills—nor do they generally lead to lenders taking the kind of steps that are required. The initiatives launched to date have helped only a tiny fraction of mortgage prisoners, so one would have thought that the case for further action was overwhelming.

We wanted—and continue to need—the Government to take proper ownership of this issue. We welcome the fact that the FCA will conduct a further review of the options available to mortgage prisoners and that the Treasury will revisit its data on the different cohorts of affected customers. As well as following these processes closely, we will of course continue to press the Economic Secretary to do what is needed.

It is regrettable that we have not been able to achieve a satisfactory outcome on this legislation, which should have been more than another false dawn. However, Conservative MPs have rejected the case for action, and it is hard to imagine meaningful progress being made unless Ministers revise their red lines. Accordingly, we do not believe we should press this matter any further today and look to the noble Lord, Lord Sharkey, to withdraw his amendment. However, I can assure the Minister that we will return to this issue at the next legislative opportunity.

[Earl Howe (Con)]

My Lords, I am grateful to noble Lords who have spoken in this short debate, both for their constructive comments and for re-emphasising the genuine concerns they clearly have for this unfortunate group of people who find themselves trapped in mortgages that cause them great difficulty. I do not doubt for a second the distress that many such people are experiencing, but my noble friend Lady Noakes brought us back to some very important realities on this vexed subject. I agree with the noble Lord, Lord Tunnicliffe, that it is regrettable that we have not been able to reach full agreement on the way forward. Nevertheless, I hope my earlier remarks indicated that we take this subject extremely seriously. I am confident that noble Lords who have listened to my honourable friend the Economic Secretary speak on the subject will be in no doubt whatever of his intention to keep on top of it in the weeks ahead.

Part of the problem we face relates to the data that underpin the case that the noble Baroness, Lady Kramer, and the noble Lord, Lord Sharkey, have made. The report of the UK Mortgage Prisoners group makes accusations about the data held by the FCA, essentially saying that the data analysis is wrong. However, I put it on record that the FCA data analysis was conducted using information on the 250,000 borrowers with inactive lenders alongside a credit referencing agency dataset which includes data on 23,000 borrowers with inactive lenders. The FCA data has shown that, on average, the 55,000 borrowers with inactive firms who have characteristics that would make it difficult for them to switch but are up to date with payments are paying around 0.4 percentage points more than similar borrowers with active lenders who are now on a reversion rate. Its analysis also shows that the majority of borrowers with inactive firms are on relatively low interest rates of 3.5% or less.

It is important that, as part of the review that the Government have announced, the existing data is analysed to provide further details on the characteristics of the borrowers of most concern. That is definitely a core part of getting to grips with what more can be done in this area.

It was suggested that in the first instance the Government failed these consumers. I repudiate that suggestion very strongly. The customer protections that we set were best practice for transactions of this type—or went beyond best practice: the Government strengthened the consumer protections for the last two sales of new car loans in response to concerns raised by parliamentary colleagues.

I do not accept the points made by the noble Baroness, Lady Kramer, about the difference between those whose mortgages were refinanced with active lenders and those who found themselves with inactive lenders. The sales of those mortgages did not impact customers’ ability to remortgage elsewhere: customers with inactive lenders can remortgage with another provider as long as they meet the lender’s risk appetite. The customer protections that we insisted on for new car sales also included prohibitions on placing barriers in the way of customers remortgaging with another provider; for example, all early repayment charges are waived. These lenders are charging interest rates in line with SVRs set by active lenders.

The noble Lord, Lord Sharkey, asked about Cerberus. The customer protections in these sales were best practice in the market at the time. For the last two sales, restrictions on setting the SVR last for the lifetime of the mortgage. I add that Cerberus indicated that it was offering new products to customers but this was not part of its bid, so UKAR did not seek a binding commitment on this point. Cerberus was selected because it agreed to the consumer protections that were sought and provided the best value for money for taxpayers. I underline, therefore, that inactive lenders can, and often do, allow borrowers in arrears to make use of a variety of tools to get themselves back on track. Such tools include capitalisation of arrears, term extensions and payment holidays.

It is simply not true that the FCA has done nothing for this group of people. For example, to reflect the current Covid-19 situation, the FCA has brought forward guidance to allow borrowers who are up to date with their payments on a recently matured or soon-to-mature interest-only, or part-and-part, mortgage to delay repaying the capital on their mortgage while continuing to make interest payments. This guidance has enabled borrowers to stay in their own homes for a significant period. The FCA also confirmed that it was making intra-group switching easier for borrowers with an inactive firm that is in the same lending group as an active lender. On 14 September, the Money and Pensions Service launched online information and a dedicated phone service as a key source of information and advice for borrowers with inactive firms.

The point was made that the modified affordability assessment has helped only 40 households. The modified affordability assessment, I contend, provides an additional and important option for some borrowers who may not otherwise have been able to switch. We must just give it time to take effect. It will not be a silver bullet for all borrowers with inactive firms, many of whom have other characteristics that affect their ability to remortgage.

I will leave it there. I say again that I regret there has been no meeting of minds on this, but I also say that the Government place a great deal of emphasis on the work that is now in train. We will do our utmost to see what more can be done for mortgage prisoners as a result of the further analysis I have referred to. I hope noble Lords will see fit to agree with the Government’s Motion.