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.

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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.