Financial Services and Markets Bill

Lord Altrincham Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Lord Altrincham (Con)]

My Lords, it is an honour to follow my noble friend Lord Ashcombe, to welcome him to this House and to reflect that it really is a blessing for this Bill that there are three maiden speeches. My noble friend has spent his whole career in insurance. We nearly met around the age of 30, when he was working at Lloyd’s of London but he has always otherwise been at Marsh. He brings expertise to us in financial services that is often, as he said, a little overlooked.

In addition to insurance experience, it is worth adding that my noble friend brings us experience in energy. His whole career has been around energy, which we quite often talk about in this House. Energy and energy infrastructure are important, as is understanding how that infrastructure in this country is laid out. My noble friend brings us expertise in that area. Finally, I would mention that three noble Lords have already asked him for insurance advice. At this time of year, we all have to work out endorsements and exclusions in policies, with the small print and all the rest of it. We may have only one Peer—certainly one Peer in the Chamber today—who really understands this stuff. He would be welcoming of any inquiries as well. He is very welcome and I look forward to working with him for many years ahead, and indeed on the Bill.

Turning to the Bill, I declare my interests as a director of South Molton Street Capital, Financial Services Capital and, in Manchester, the Co-Operative Bank. In the Autumn Statement, the Chancellor reminded us of the importance of growth. He specifically referenced energy, broadband, road and rail. The shadow Chancellor has made some very similar comments, so it is particularly important that we reflect on how the Bill, among the other financial Bills that we have seen, can help to support that growth, in particular with reference to infrastructure. We see Bills come through the Chamber and imagine that they will be financed by somebody, but there is going to be a limit to how much the Government can really support infrastructure investment. The OBR has already said that the Government will need to reduce infrastructure spending in two years’ time.

This means that spending on infrastructure will rest on the private sector and unlocking that private sector capital really rests on the Bill, so it is very welcome that Chapter 3 makes reference to growth. As we know and have heard from many Peers, the regulators have been somewhat cautious and prudent, for the reasons well expressed. At this point, we need to find ways to unlock capital to support infrastructure and for the wider economy. We might look carefully at Chapter 3 and reflect on how to address the growth opportunity, but also some of the concerns expressed about adding risk, or the prudential issues, which have been well covered.

The regulatory environment needs to be a little refreshed. Nearly immediately after this Bill was started in the House of Commons, on 7 September, we ran into the extraordinary pension LDI debacle. This was around the time when the Bill was going into Committee. It is worth reflecting on how we got to this extraordinary situation, which in some ways arises from an abundance of caution; that is to say, it goes in several steps.

Step 1 was to require companies to reflect actuarial changes in the valuations of their pension funds in their annual accounts. These are modelled changes of future liabilities and, because rates were very low, those liabilities felt very high at the time. It was a prudent thing to do; at the same time, it was not commercial and did not reflect a broader commercial understanding.

Step 2 was, remarkably, to de-risk these funds—that is to say, de-risk them from the point of view of the company and not, incidentally, necessarily that of the beneficiaries—by moving them into gilts. There not being sufficient long-dated gilts, they were moved into derivatives of gilts. These funds were suddenly hugely invested in derivatives for the purpose of de-risking. Again, this de-risking looked somewhat prudent. It is not, as we know, but it looked somewhat prudent then. At the same time, these enormous funds, which are effectively closed—they are in run-off and are barely supervised, while their beneficiaries have little control of them—were invested in an enormous amount of financial derivatives.

Had this growth chapter been in place, some of this error might have been caught. We had an extraordinary situation whereby very large captive funds were not invested in long-dated investments in this country or in infrastructure; we also had the savings of Canadian public schoolteachers making long-dated investments in UK infrastructure, while the savings of our own teachers were put into financial derivatives. This extraordinary debacle is an illustration of how prudent, cautious, step-by-step regulation can lead you into enormous risks.

I commend and support the Bill, which is extremely well thought through and, as the Minister explained, has been broadly consulted on. But regarding Chapter 3 and growth, I hope we will discuss in Committee the opportunities to invest in infrastructure and perhaps to meet the green agenda, which has been mentioned—again, that is often infrastructure. In Chapter 3 lies an opportunity to direct financial regulation for the benefit of the economy and of this country, and to meet the needs of this Government and indeed the next Government.