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.

--- Later in debate ---

[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.