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.

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[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.

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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.