Financial Services and Markets Bill

Lord Davies of Brixton Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Lord Blackwell (Con)]

My Lords, I am concerned that, while seemingly innocuous, this amendment might turn out to be the thin end of the wedge of government intervention in pension investment. Clearly, the obligation on pension trustees should be to do their best to get the right returns for their investors. Once we start incentivising trustees to take decisions based on incentives offered to them, that raises the question of who then bears the consequences and the responsibility if those investments turn out in the long term not to be the right thing for their pensioners to be invested in.

I do not dispute the point that pension fund investments have not been optimal in the past, but to my mind that is to do with regulatory restrictions that have been placed on pension funds and the requirements to meet those restrictions. I think there is a case to look at the regulations around pension funds that restrict their investment choices and to enable them to invest in a wider set of assets, but I do not think the right way to do that is to start proposing incentives that would turn into the Government mandating the way that pension funds should be invested.

[Lord Davies of Brixton (Lab)]

My Lords, I support the amendment. I still think of myself as a relatively new Member of the House, so it is useful to remind the House of my lifetime spent working in the pensions industry, broadly in support of scheme members. I have been a scheme trustee, I have chaired the Greater London Council investment panel and I have advised trustees of pension schemes as the scheme actuary. I am just stating my expertise here.

I support the amendment because I think a review is required. I take on board the remarks about the thin end of the wedge, but unless we have the review those concerns cannot be addressed. As the noble Baroness, Lady Bowles, said, there is now a big conversation about using pension scheme money to promote the British economy. There is actually a long history of that sort of proposal going back over many years, but it seems to have reached a crescendo over the last year or so.

It is essential that we have a review. What is also essential, of course, is that the review is undertaken by those who know what they are talking about, but that has not necessarily been true about all the comments made so far. For example, I draw the attention of the House to the recent useful report produced by the Pensions and Lifetime Savings Association—not a body that I consistently agree with—on supporting pension investment in UK growth and thinking up quicker and simpler ways to promote pension fund investment in our economy.

I was going to raise two issues. One has already been explained clearly by my noble friend Lord Eatwell: the funding standards that have been established work against the principles that I am sure we all support. Another problem that we have is the Conservative Government’s introduction of freedom and choice. It is difficult to oppose freedom and choice but, when you come to pensions, which are long-term arrangements depending on long-term investment, giving people freedom of choice weakens the very basis upon which they are being organised. It is all very well saying to pension funds, “You’ve got to invest in infrastructure”, but if the members of that scheme have the right to pull their money out at any time, it is very difficult to take the long-term view. That is a fundamental incoherence behind the so-called policy of freedom and choice. Those issues need to be addressed in the review.

I also hope that the list of consultees for the review is not a complete list; to the extent that it is possible to consult the scheme members, they should be consulted as well. I also hope that the issues can go somewhat broader than those listed in the amendment.

In general terms, a review is needed, and I hope it will lead to the objective being clearly set out of promoting the UK economy.

[Baroness Altmann (Con)]

My Lords, I fully support and have added my name to this amendment. It is a pleasure to follow the noble Lord, Lord Davies. We both go back a long way in the pensions industry. My entire career has been in pensions—examining occupational pension schemes as an academic, then managing occupational pension investments in the City, then advising schemes and Governments. I have also been a trustee on investment committees for pension schemes.

I have to say that the current position that members of pension schemes find themselves in—both members of defined benefit schemes and members of too-often-forgotten defined contribution schemes—has not been positive in terms of the experience of the 2022 markets. As we have heard, trustees and managers of pension schemes have been encouraged to believe that the right way in which to invest a pension fund is in supposedly low-risk—which actually also means relatively low-return —investments, rather than in the traditional and older-fashioned way of managing schemes that persisted until the noughties, which was to try and maximise returns.

We have now moved to a position whereby we were supposed to be minimising risk, but I argue that that entire movement away from supporting the British economy and away from supporting UK equities and UK growth assets has been underpinned and misled somewhat by quantitative easing. The Bank of England’s policy, which effectively offered a natural large buyer that underwrote and underpinned the government bond market, perhaps led people to believe that that was the best or safest way in which to invest pension funds. That was partly because the long-term value of the liabilities, as well as their present value, is discounted and measured as of today by using the gilt yield or bond yield measure. In corporate reporting it is double-A corporates; in actuarial valuations it is typically gilt yields.

In 2022, conventional gilts lost 20% and index-linked gilts 30% of their value. The FTSE 100 rose a little. Yes, smaller companies did not do so well, but the idea that pension schemes were investing in a low-risk manner was actually confounded last year, and I would argue that, as we move into a post-QE world and as we have recognised and I have been warning since 2011, or even earlier than that, the policy of quantitative easing is a significant danger for pension scheme investments and members.

We must recognise that we do not fully understand what investment risk means any more. The capital asset pricing model is based fundamentally on the idea that gilt yields are the lowest-risk assets and all assets are more risky—even if they offer more returns, potentially they are more risky—and may need to be considered with a little more circumspection.

That leads on to the idea that, if we do not quite know whether gilts and fixed income are indeed low risk in the way that we thought they were and they have been in the past—because central banks are going to need to offload at some point and are certainly no longer underpinning the markets—diversifying investments and supporting the domestic economy in the way that this review would be investigating must come into the public debate.

--- Later in debate ---

[Baroness Bennett of Manor Castle (GP)]

I will speak very briefly to offer Green support for the amendment in the name of the noble Baroness, Lady Kramer, and the most reverend Primate. The amendment, in a way, is a smaller and lighter version of my attempt to strike out the competition clause, on setting a competitiveness objective, which has sadly remained in the Bill.

In November last year, City Minister Andrew Griffith told the Financial Times:

“The overall thrust of things is to allow more risk … you shouldn’t be risk”


averse;

“we just need to manage that in an appropriate way”.

He went on to say that the aim of reducing ring-fencing was

“to release some of that trapped capital over time”.

I acknowledge that the Minister said that before the collapse of SVB and Credit Suisse, and the other crunches in the American banking system.

In an April piece in the Financial Times, Martin Wolf said:

“A shock like this should make mindless deregulation less appealing to politicians”.


As has been clearly outlined already, the amendment does not actually make anything happen; it just ensures parliamentary oversight. When we get to the dinner break business, my noble friend will seek to ensure that parliamentary oversight is included there. Surely, this is what democracy is supposed to be about.

[Lord Davies of Brixton (Lab)]

My Lords, I support the amendment. We will return to these issues on Thursday, when we discuss the regulations in Grand Committee. However, it is worth mentioning to the House the clash today between this Bill and a meeting of the Economic Affairs Committee, of which the noble Baroness, Lady Kramer, and I are members. By chance, the committee was interviewing the Governor of the Bank of England. The issue of this arrangement arose, and the governor was quizzed on these very issues. It will be useful on Thursday to explore further why and how this action was taken. The governor provided a justification, but, in the light of his remarks, it will be worth while exploring these issues in more detail when we get the regulations.

[Viscount Trenchard (Con)]

My Lords, the noble Baroness, Lady Kramer, and the most reverend Primate have retabled as a single amendment—Amendment 106 —the two amendments that were debated in Grand Committee: Amendment 241C on ring-fencing, and Amendment 241D on the senior managers and certification regime.

As my noble friend Lady Noakes said during that debate, these amendments are trying to set in stone for all time the conclusions of the report of the Parliamentary Commission on Banking Standards. Times change, and I cannot support this amendment because it introduces an inappropriate degree of rigidity.

As my noble friend also pointed out, the lesson of the HSBC and Silicon Valley Bank episode was that the ring-fencing rules were not, after all, considered inviolable. It was necessary to provide HSBC with special statutory exemptions from the ring-fencing rules to enable it to acquire Silicon Valley Bank. That exemption has brought permanent changes to the ring-fencing regime for HSBC which affect it alone. Can my noble friend say whether that means it has a permanent competitive advantage over rival ring-fenced banks in the UK?

In any case, I rather doubt whether the introduction of ring-fencing has reduced the risks to which bank customers’ deposits are exposed. I disagree that it is therefore important to make it very difficult to weaken the ring-fencing regulations in any way. As I said in Committee, I worked for Kleinwort Benson for 23 years, for a further 12 years for Robert Fleming and then for Mizuho. All three banks operated both commercial and investment banking businesses. Internal Chinese walls between departments made it quite impossible for customers’ commercial banking deposits to be diverted to risky investment banking activities. As I said in Grand Committee, there is no positive correlation between the two cash flows of retail and investment banking. It follows that universal banks are in fact gaining diversification benefits. There is little global evidence that splitting up the banks has made them less likely to get into trouble.

Following the Lehman shock, is it not interesting that the US Government did not go for the reintroduction of a kind of Glass-Steagall Act? I am not convinced that ring-fencing is a good thing, and in general I am opposed to market distortions of this kind, which actually make the consumer less safe rather than safer. Ring-fencing also makes it harder for smaller banks to grow, because they must compete for a small pool of permitted assets against the capital of the larger banks. Will the Government conduct a review of the effectiveness of ring-fencing?

As for the senior managers and certification regime, I am sceptical as to whether it has been effective, because there is no hard evidence that it has been used as the stick that was originally intended. Most well-run banks operate in a collegiate manner, and I think it rather odd to attempt to attribute personal responsibility to managers and directors of banks for the decisions and actions of those banks, beyond the responsibilities that the directors carry in any event.

The SMCR has especially inconvenienced foreign banks operating in London. As an example, I refer to the Japanese megabanks. It used to be their practice to assign a very senior executive to London to take responsibility for all the bank’s activities in the UK and in most cases the whole EMIR region. Often, this might be the executive’s last major management position before retirement, and would typically be for two to three years leading up to his retirement date. Such executives have typically worked for 40 years or more for that bank and have managed regulated financial businesses in Japan for many years. However, the FCA has consistently been extraordinarily slow in approving those executives under the SMCR.

Therefore, the Japanese banks have given up on this strategy and feel compelled to appoint as head of their UK and EMIR operations not the person most appropriate for the job, but the most senior person who has already been working in London for three years or so, merely in order to meet the criteria of the SMCR regime. This has caused considerable inconvenience, because it is unreasonable to send a trusted senior executive overseas for five or six years in the last years of his active career, rather than a more reasonable stretch of two to three years. I know that the SMCR is much resented by Japanese and other foreign banks and I ask my noble friend if she will agree to conduct a review of how it is being implemented by the FCA.