Financial Services Bill

Lord Davies of Oldham Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Peston]

My Lords, I am a bit puzzled about the wording in the relevant paragraph. Of course, I agree with what my noble friend says about consultation. However, can the Minister explain why the word “would” appears in line 5 rather than “should”? Even if the Treasury thinks the order would have the described effect, it must certainly believe that it should have the effect. What is the point of the order if it does not achieve what it is trying to achieve? I am a bit puzzled about the word “would”. My noble friend’s amendment would make much more sense if “should” were inserted instead of “would”.

That leads me to my attempt to get my mind around what would actually happen in this case. It is immensely difficult because the provision substitutes material in this Bill for material in legislation that we do not have before us, which is always a problem. However, if we ask ourselves, “When would any of this order-making process occur?”, presumably the answer would be that it would occur when various outside bodies say that this matter is not being regulated, but must be regulated. In other words, what precedes the consultation is the fact that it is not certain at all that the Treasury would take the initiative in this. It is the acting body and is therefore the one that has to act when it comes to producing the orders.

Therefore, the built-in logic behind the entire new paragraph is the consultation process. Indeed, it is also part of the spirit of the age. One can go further and say that not merely is consultation part of the spirit of the age, but that interested bodies would undoubtedly be aware of these orders. Even if the Treasury does not consult them, those bodies will ensure that the Treasury knows what they think because they will get in touch with the Treasury and say either, “What you are doing is a good thing and we would like to support you”, or, “You do not know what you are doing and you ought to do it in a different way”. What my noble friend is putting forward helps the Bill to become much more sensible in practical terms, and it would become a fortiori more sensible if we were allowed to amend the language by inserting “should” for “would”. I think that would make infinitely more sense.

[Lord Davies of Oldham]

My Lords, I am grateful to both my noble friends who have spoken on this issue and very much agree with the arguments they presented. Amendment 149AB in my name merely seeks to take this matter one obvious stage further. My noble friends have put the emphasis on effective consultation so that the Treasury presents a position that is the result of informed judgment. However, the other part of informed judgment is that Parliament should reach a decision on what the Treasury has arrived at regarding such an important matter as the powers to amend Schedule 6 of the Financial Services and Markets Act. The Bill significantly changes the architecture, which is a phrase frequently used by the Minister. With our amendment, we are merely seeking assurance that, after effective consultation and deliberation by the Treasury, the orders are put before Parliament, whereby its views can be heard before anything comes into effect.

[Lord Sassoon]

My Lords, I shall try to assure the Committee that none of the amendments is necessary or appropriate. If the noble Lord, Lord Peston, will forgive me, I am not sure that we have a procedure for oral amendments. No doubt we shall have some interesting discussions about “must” and “may” later in this Committee session. Looking at this paragraph, in my opinion, x or y “will” be the case and, when written the other way, the word turns into “would”. If an opinion is that something will be the case, then “would” rather than “should” is entirely appropriate here. However, I have now fallen into the trap of getting into a debate on this non-amendment. Of course, if the noble Lord really insists, what can I do but give way?

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Moved by

[Lord Davies of Oldham]

153A: Clause 10, page 59, line 18, at end insert—
“( ) In seeking to ensure an appropriate degree of protection for consumers, the PRA and FCA shall—
(a) require banks to provide clear and prominent warnings to consumers where deposits are not covered by the Financial Services Compensation Scheme; and(b) make and maintain effective arrangements to consult consumers on the prominence and method of such warnings.”

[Lord Davies of Oldham]

My Lords, Amendment 153A relates to that part of the Bill which refers to passporting, where a UK-authorised firm may be eligible to carry out its permitted activities in any other EEA member state, subject, of course, to its fulfilment of the requirements under the scope of the relevant single market directive. We are concerned about consumer protection for firms operating in other EEA states which originate in this country. The amendment, which is quite clear and self-explanatory, requires either the FCA or the PRA to require banks to provide clear and prominent warnings to customers where deposits will not be covered by the Financial Services Compensation Scheme. Everyone will know the anxieties that have occurred as a result of the proliferation of a vast range of banking activities. This is a question of the basic operation of the bank elsewhere, and we think that the Bill should contain a fundamental identification of the obligation of banks so that customers know exactly where they stand with regard to any resources they may have committed to the banks. I beg to move.

[Lord Sassoon]

My Lords, I completely agree about the importance of such warnings and clarity about what compensation schemes apply to particular bank accounts, which is precisely why it is already covered in the FSA’s handbook. As the noble Lord, Lord Davies of Oldham, may not be aware, section “Comp 16” of the FSA handbook requires precisely what the noble Lord requires. Firms from the EEA passporting into the UK are required to inform customers that they are covered by their home state’s scheme. Firms from outside the EEA are required to be separately authorised in the UK, so that they are covered by the FSCS. We completely agree on the importance of this and of raising consumer awareness of it. Again, lots of good stuff went on in many areas during the summer and this is another one. If the noble Lord and the Committee generally want to look at the press release, it was put out on 31 August and sets out details of the FSCS awareness campaign. The notes to editors in it make clear the different health warnings that have to be put down for UK branches of EEA banks and the precise form of words. I do not happen to bank with one of those banks; I bank with a British bank which now adds an extra page—it is not great for the environment, but the extra page sets out the details of the coverage of the FSCS and EEA banks are now required to do something similar.

The noble Lord makes a very good point, but I believe that we should leave it to the FSCS and the regulators to do what they are already doing, rather than writing inflexible requirements into legislation. The advantage of the current approach, as I am sure he will acknowledge, is that the regulator and FSCS can adapt their approach over time, but it is a useful matter for us to have spent four minutes on and I hope that the noble Lord is able to withdraw his amendment.

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[Lord Desai]

I do not carry my bank statement with me, but I do carry my debit card.

[Lord Davies of Oldham]

My Lords, I am grateful for the additional contributions from the noble Lord, Lord Marlesford, and my noble friend Lord Desai, who at least emphasised the justification for our concern that we should make this issue as explicit as possible. My amendment would put it in the Bill. I accept what the Minister says on the enhanced flexibility of it being within the framework of the relevant regulators, but at times we need to assure the country that we are addressing ourselves to the very real anxieties that people have in the context of developments in recent years, particularly when considering this Bill. I accept the Minister’s remarks. He may be somewhat relieved that my batting average dropped below 100 as soon as I lost the first amendment this afternoon. It was some relief to me; even Don Bradman, after all, had an average of only 99.94, so I do not mind if it declines a little further, given the assurances that the Minister has given to the House.

Amendment 153A withdrawn.

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Moved by

[Lord Davies of Oldham]

173AAB: Clause 22, page 82, line 10, at end insert—
“( ) provide for a requirement that an employee representative should be a member of the remuneration committee of a relevant body corporate; and( ) provide for a requirement that the remuneration consultants advising on remuneration policy shall be appointed by the shareholders of a relevant body corporate.”

[Lord Davies of Oldham]

My Lords, this amendment raises issues of enormous significance in this Bill and of course with regard to financial services generally. The whole nation is all too aware of the need for effective action on the remuneration of directors of companies.

In 1980, the median pay of the highest paid directors in FTSE 100 companies was £63,000; by 2010 it was £3 million. In 1980, the median wages were £5,400; in 2010, £25,900. In other words, the ratio of directors’ to employees’ median pay rose over the 30-year period from just 11 times to 110 times. That cannot be justified by any concept of performance of the companies. The same thing, of course, happened elsewhere. It is not just the United Kingdom. Almost the same figures are to be seen in the United States over that period.

Of course, it is not as if the crisis that we have gone through in the past five years has enormously changed things. In the past two years we have gone through a double-dip recession. We have seen FTSE share prices stagnating. We have seen significant public sector cuts and rising unemployment. The increase in pay for FTSE 100 chief executives in this period has been 12%, lower than in some years in the past, but how on earth can one justify these increases against an economy that is underperforming and companies that are inevitably reflecting such poor returns?

It would be remiss if this Bill did not quite specifically address the issue of directors’ pay. One important dimension of this is contained in the first part of this amendment; namely that,

“an employee representative should be a member of the remuneration committee”.

I am not holding out any great hopes that one individual on any remuneration committee is going to work wonders, but I am saying that it would force the remuneration committee, and directors, to take recognition of the absurdities of the past three decades and get things back into some proper balance between achievement and remuneration.

The second point of the amendment is also fairly clear. This situation has developed partly because the remuneration committees are not only hopelessly unrepresentative of the company, they are unrepresentative of anything or anyone except those who are benefiting from these high rates of pay. Consequently, there is an inevitable dynamic to build lavishly on the past. I do not excuse the public sector from this. We have seen it in the public sector, with similar increases in the relationship between chief executives of local authorities and the median pay of their workers—not in the same proportions as in industry and finance but nevertheless significant and unjustifiably so. You see the same factors at work; namely, that the remuneration committee is not significantly representative, and that the remuneration committee says, “Of course, in order that the reputation of our organisation should be enhanced or at least match a comparable organisation, we have to show that we pay our chief executive significant sums”.

We have got to get a grip on this situation. This Bill provides for remuneration to be considered. This amendment makes quite explicit two bases on which the Bill could be significantly and precisely amended to improve things. I beg to move.

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[Lord Sassoon]

Again, my noble friend is ahead of me and I shall not make that point—I am addressing some very narrow and specific matters—but he is completely right that we could debate whether the interventions already being made are appropriate. He may say that that they are excessive; I would say, “Well, that is for the FSA and there are important issues”. But, yes, the FSA is very active in this area, specifically on remuneration consultants.

The suggestion that remuneration consultants be appointed by shareholders was looked at in the consultation but it was not widely supported. I am sorry that the noble Lord, Lord Davies of Stamford, did not spot it, but the proposal has been the subject not only of debate in this House in the past but of the recent consultation. It was not widely supported because of the costs associated with the appointment process and issues to be resolved about the remit and the flexibility of the proposal to accommodate new work. The benefits of the requirement would be uncertain.

However, a majority of respondents to the consultation said that more transparency over the use of remuneration consultants would be beneficial. Suggestions of areas for more transparency included appointment processes, advice provided, fees paid and management of conflicts of interests. The Department for Business is looking at ways in which it can improve transparency in the use of remuneration consultants by companies.

I am grateful to the noble Lord for raising these important issues, which are being taken forward in a wider context. The FCA will have all the powers that it needs to act in this area, as it does already—and as my noble friend pointed out—the FSA. I hope that, on the basis of that information, the noble Lord will feel able to withdraw his amendment.

[Lord Davies of Oldham]

Of course I shall withdraw the amendment, but not because the noble Lord, Lord Flight, has persuaded me that the FSA has been so much a busybody, so interfering and so effective that remuneration has never been an issue in the financial services. That argument runs counter to the facts on remuneration on which the nation as a whole has a firm grip.

I of course accept the chiding of the noble Baroness, Lady Noakes, that the Bill concerns only the financial services sector. I also hear from the Minister that it is extremely dangerous to take the first step because you might then stumble into the second step, and I am not sure that the Government are that committed to any significant strides forward on that at the present time. However, if the Minister is able to assure me that the development of ideas in the Department for Business is such that we are going to see legislation which gives some effect to the principles that I have adumbrated this evening and which helps to resolve what for the nation looks an outstanding scandal with regard to the issues of distribution of resources in our society, I go home with a little consolation and withdraw my amendment.

Amendment 173AAB withdrawn.

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Moved by

[Lord Davies of Oldham]

173AEA: Clause 22, page 89, line 27, at end insert—
“137QA Advisory fees in respect of mergers and acquisitions
Either regulator may make rules (“fee structures in respect of mergers and acquisitions”) about the advisory or consultancy fee arrangements where an authorised person contracts a third party to give advice on the possibility of a merger or acquisition of control of any other body corporate.”

[Lord Davies of Oldham]

My Lords, I assure the Committee that I shall be brief, being cognisant of the passage of time. The amendment is simply the product of the FSA’s report—a report of great significance in which the noble Lord, Lord Flight, would be interested—into the RBS and its merger with ABN AMRO. We all know the significance of that merger and the disaster which befell RBS as a result of it. All that my amendment does is reflect the fact that the fees for the advice on that merger were extraordinarily high, disastrous though the merger proved to be. I merely suggest an amendment to the Bill which would add to the list of general rules the power for either regulator to make rules about consultancy fee arrangements in respect of mergers and acquisitions, and I think that the time is ripe for that. I beg to move.

[Lord Sassoon]

My Lords, the Government’s view is that, in general, decisions about advisory arrangements and consultancy fees are commercial decisions for firms themselves. However, the regulators could in fact already make the rules described in this amendment under the general rule-making power if they judged that was an appropriate way to advance their objectives. For example, if the PRA was satisfied that there was a problem with advisers being incentivised to advise in favour of high-risk mergers and acquisitions in a way that threatened the safety and soundness of PRA-authorised persons, it could step in to make rules to regulate the appointment of advisers.

Respecting the brevity with which this amendment was introduced, I should probably leave it at those two key reasons why we believe that it is redundant. I ask the noble Lord, Lord Davies of Oldham, to consider withdrawing it.

[Lord Davies of Oldham]

My Lords, I will certainly withdraw the amendment, having benefited from the clarity of the Minister’s reply—although I cannot say that I agreed with it.

Amendment 173AEA withdrawn.

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Moved by

[Lord Davies of Oldham]

173E: Clause 22, page 102, line 10, at end insert—
“( ) Before the end of 2013, a regulator may, in consultation with HM Treasury, ask the Competition Commission to provide a report giving section 140B advice with reference to the Independent Commission on Banking recommendations on competition.”

[Lord Davies of Oldham]

My Lords, I am once again jettisoning a whole sheaf of notes in deference to the hour that we have reached. Amendment 173E, as part of the competition scrutiny provisions included in this Bill, calls for the Competition Commission, in consultation with the Treasury, to publish a report by the end of 2013 providing advice about the effect of regulating provision or practice,

“with reference to the Independent Commission on Banking recommendations on competition”.

The intention of the amendment is clear. It is to ensure that we make progress with regard to competition in banking, to show that we are in earnest about the necessity for early reforms and to use this Bill and the competition procedures within it to ensure that the maximum pressure is brought to bear on the competition authorities—and of course, behind them, the Government—to take as early action as is possible to remedy what the nation expects to be remedied in the light of the experience of the recent past. I beg to move.

[Lord Sassoon]

My Lords, this amendment is identical to one tabled in Committee in another place, where my honourable friend the then Financial Secretary set out the reasons why the amendment is not appropriate. There are three such reasons. First, 2013 is the wrong time for a review of progress against the ICB recommendations. The ICB report itself recommended that the earliest that the market should be reviewed is in 2015, when it will be clearer whether its recommendations have led to improved market conditions. Secondly, there is no convincing reason why this review, if there is to be one, should be limited in scope to the ICB recommendations themselves. There may be new issues that the ICB report had not considered in depth and which it would be expedient to review at that time. Thirdly, we do not need this provision to ensure that the banking sector receives appropriate scrutiny from the competition authorities in the short term. The OFT, for example, launched a review of the personal current account market in July this year, which is likely to consider some of the issues covered by the ICB. The OFT has a power to refer markets to the Competition Commission at any time if it considers that a feature of the market,

“prevents, restricts or distorts competition … in the UK”.

I am very happy to give those reassurances and clarifications to the noble Lord in the hope that he will withdraw his amendment.

[Lord Davies of Oldham]

My Lords, of course I will withdraw my amendment. However, the noble Lord should not anticipate that when a Minister speaks in the Commons, the Opposition automatically assume that he has always produced exactly the accurate response to our amendments, which we then accept, and that we are duly grateful for the greater wisdom of the Administration. Far from it—we often derive some considerable satisfaction from pressing them at some length on another occasion. However, on this occasion I have not got any length. I beg to withdraw the amendment.

Amendment 173E withdrawn.