Lord Eatwell
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Financial Services Bill
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Lord Eatwell
My Lords, we on this side of the House broadly support the conclusions of the Wheatley report and commend Mr Wheatley and his team for the prompt delivery of such a comprehensive document. I say “broadly” because there are a number of details that we believe are not quite right and which require careful consideration in these—let us call them—quasi-Committee proceedings.
The grouping of all the amendments relating to LIBOR into a single group is exceedingly unwieldy and not conducive to constructive scrutiny. After all, as the noble Lord himself pointed out, there are three distinct elements within this group: first, the amendments designed to bring the setting of benchmarks within the compass of regulated activities under FiSMA; secondly, the rules requiring participation in the process of establishing the benchmark; and, thirdly, the establishment of criminal penalties for abuses of the process of setting a benchmark. Each of these three elements merits separate discussion. Rolling them all into one group just because they carry the label “LIBOR” is, to put the matter politely, extremely unhelpful.
For the purposes of this debate, at least, let us degroup the cumbersome group 1 into group 1A, definition of a benchmark; group 1B, establishing the benchmark; and group 1C, criminal offences. Group 1A encompasses Amendments 70 and 71. Amendment 72 is simply consequential. Amendment 70, which incorporates benchmarks into the order-making process, requires some clarification in that, as far as I can read through the existing FiSMA, an affirmative resolution of both Houses will be required for that order to be made. I think I heard the noble Lord say that in his speech, but he said so many other things as well that I hope he can confirm that incorporating any new benchmark into this process will require an affirmative resolution of both Houses.
Moving on to Amendment 71, which is the definition of a benchmark chosen by the Treasury, I disagree with what the noble Lord said. He asserted that this proposed new subsection would also cover commodity benchmarks and he was probably thinking of the recent scandals in the gas market and the accusations levelled at Barclays by the US authorities over the manipulation of the electricity market in California. These particular benchmarks were not specifically involved with investment, but would really come under the heading of trading. Amendment 71 refers to “relating to investments”. All the qualifications are in proposed new subsection (6)(c). Proposed new subsection (6)(c)(i) refers to,
“the interest payable, or other sums due, under loan agreements or under other contracts relating to investments”.
Proposed new subsection (6)(c)(ii) refers to,
“the price at which investments may be bought or sold”.
Proposed new subsection (6)(c)(iii) measures “the performance of investments”.
The scandal in the gas market was to do with trading, not investment. Similarly, I believe the problems in the Californian electricity market are to do with trading, not investment. Unless the noble Lord is extending the meaning of the word “investment” to include all trading activities, which, I suggest, is an abuse of language, then the commodity benchmarks are not included, as he asserted, in Amendment 71. Moreover, if this were true and what the noble Lord says is correct, why did the Financial Secretary to the Treasury make the following statement? He declared:
“The recommendation to consider the use of benchmarks in other financial and commodities markets will be taken forward through the relevant international bodies”.—[Official Report, Commons, 17/10//12; col. 25WS.]
If commodities markets were already included, why did the Financial Secretary say that there was to be a process to take them forward through international bodies? Given the rather lackadaisical attitude displayed by the Financial Secretary, which was quite out of tune with the repeated arguments for the necessity of speed that peppered the noble Lord’s remarks, why are the Government, with respect to these other benchmarks, taking the long, slow route through the international institutions when the revelations about commodity benchmark manipulation have been made over the past few weeks? After all, commodity market trading manipulation has just the same scale of impact, if not a greater impact, on ordinary households, as does the manipulation of LIBOR. Perhaps I may suggest to the noble Lord that if we look for clarity instead of the abuse of language, it would be worthwhile for the Government at Third Reading to extend the scope of the new subsection put forward in Amendment 71 to include trading as well as investment.
Group 1B, as I call it, comprises Amendment 70 moved by the Government and Amendments 80A to 80C, 80CA and 80D tabled by my noble friend Lady Hayter and me. Amendment 80 is the key to the Government’s approach to setting out the rules requiring participation in the benchmark. That participation involves two distinct types of legal person: first, those providing information for the setting of the benchmark and, secondly, the legal person charged with setting the benchmark. A peculiarity of this legislation is that it has an enormous amount to say about the former and virtually nothing to say about the latter.
Proposed new Section 137DA, as inserted by government Amendment 80, refers to,
“the setting by a specified person of a specified benchmark”.
But as regards who this specified person might be or even what might be the process by which they are specified, who has the responsibility for specifying them and with what characteristics they are endowed, on all these matters the Bill and the government amendments are entirely silent. Mystified, our team asked the Bill team for the answers to those questions. Following a long and what we interpreted to be a somewhat embarrassed silence, the answer was that all this was to be left to later. That is not good enough.
Mr Wheatley’s report suggests that the responsibility for LIBOR be taken from the BBA, which anyway does not want it any more, and given to another body determined by tender. Here we part company with Mr Wheatley. It is not clear that a private organisation that has the experience and the expertise to set a benchmark will not also have serious conflicts of interest. It is especially not clear because the Government have so far failed to publish the criteria which they believe any successful tender should fulfil. All we know is that a committee has been established under the noble Baroness, Lady Hogg, to define the criteria and to establish the tender process. Before examining the tender process, will the Minister tell us why the Government did not consider establishing an independent body to set LIBOR? After all, one of the most important benchmarks in this country was for many years set by such a body, the Retail Prices Index Advisory Committee. Why was that model not followed in this case? Why is there this putting out to tender?
Turning to the route chosen by the Treasury, why, given the continually professed urgency of LIBOR legislation, does the committee to be chaired by the noble Baroness, Lady Hogg, still have no membership other than the noble Baroness herself? What brief is the noble Baroness working to, what criteria is she expected to work to in establishing a tender process and what characteristics is she expected to seek in the specified person? Why is the Bill totally silent on these matters?
The fact that these serious matters are, to quote the email we received, being left for later not only suggests complacency on the part of the Government—they are putting on a show of doing something rather about the LIBOR scandal than actually doing something—but it also places a number of serious question marks over the legislation as drafted.
The amendments in my name and that of my noble friend Lady Hayter in group 1B address some of these deficiencies, though I confess that more time and more careful scrutiny would probably not only allow us to prepare more focused amendments but would also reveal other deficiencies in the current drafting.
Amendment 80A refers to the,
“code or other document published by the person responsible for the setting of the benchmark”.
The responsibility for setting the code, like so much in the LIBOR amendments, is rather amorphous. We suggest that the Financial Reporting Council might be included as a possible institution for setting and regulating the code. The reason is obvious to anyone who has worked with the FRC or studied its activities. The FRC is the only body in the UK that has general oversight over such codes of conduct in the financial services industry. For example, the FRC oversees the codes produced by the professional bodies—the Institute of Actuaries, the Institute of Chartered Accountants and so on—ensuring that their codes are appropriate to the needs of the organisation. It oversees supervision in enforcement.
Of probably even greater importance, though, the FRC includes independent persons in its council. This means that it is not just the actuaries who agree their code or the accountants who agree their code. So we have introduced the FRC into the Bill at this point—remarkably, the only point in the entire Bill at which it might be mentioned—in order to stimulate the Minister to say that, in setting a code to control behaviour of those participating in the setting of the benchmark, the responsibility will not be given to insiders—to the bankers—to establish their own code. There must be the same sort of external oversight as that practised by the FRC to ensure that the code is objective, effective and enforced. How will the Treasury ensure that that is the case?
Amendment 80B, which the Minister has already referred to, tabled by my noble friend Lady Hayter, would clear up a drafting error in the Government’s amendment, establishing consistency in references to the code. I asked my noble friend what would happen if she decided not to move it, and I think the answer is that the Government would be embarrassed—but there we go.
Amendment 80C addresses a serious deficiency in what we believe is the Government’s proposal with respect to the specified person responsible for setting the benchmark. We understand that the committee—as yet not established under the chairmanship of the noble Baroness, Lady Hogg—will devise procedures and rules for a tender process to select the specified person.
First, what if that person does not perform satisfactorily? What if there is another scandal with LIBOR or some other specified benchmark? Who then steps in to clean up the mess? At the moment it has been the Treasury and the FSA/FCA, but this is in circumstances in which the BBA wishes to give up its role. What if the specified person is underperforming but does not wish to give up the role? Moreover, it is not clear at the moment whether the award of a tender is to be time-limited or whether it might be subject to some sort of review. We need to be clear. Who is responsible on an ongoing basis for awarding and revoking the tender?
Secondly, what happens if there is an interregnum? There might be a delay in awarding the contract, or it may be that the specified person runs into difficulties—goes bankrupt, for example, or simply wishes to resign. Who picks up the reins then?
The purpose of Amendment 80C is to ensure that the credibility of the benchmark is sustained by its continuity. The FCA, in our amendment, has that fallback responsibility. The amendment is suitably general so that the FCA may decide to deal with the difficulties in the way “it deems necessary”, but at least the amendment ensures that someone is ultimately responsible, not simply for regulating the setting of the benchmark but for ensuring that one is actually in place.
Lord Sassoon
I tried to make that clear in my opening remarks, but let me have another go. We have a serious LIBOR problem which needs dealing with. These clauses put in place a framework within which the Wheatley recommendations for dealing with the LIBOR problem can be dealt with. Many of the issues I have set out and will come back to will be dealt with in secondary legislation, which I can confirm will be by draft affirmative order. The consultation on the secondary legislation will start very shortly, as I said, with a view to that secondary legislation being laid as early in the new year as the parliamentary timetable permits. So, on LIBOR, we will have a framework and secondary legislation to bolt down much of the detail in the normal way.
There are a considerable number of other benchmarks out there. It is entirely possible that, because of the way in which the framework within these amendments has been constructed, other benchmarks, through affirmative orders and secondary legislation, could at some point in the future be included. My noble friend Lady Kramer asked for clarification in this area but I crave her indulgence for a couple of weeks or so until the consultation document comes out so that, rather than receiving a half-hearted letter from me, the consultation document will deal with the issue. The LIBOR problem needs to be addressed immediately. There are other benchmarks that people may, now or in the future, wish to be covered and the framework is sufficiently flexible and future-proof in this respect. If and when a case is made for other benchmarks to be treated in the same way as LIBOR, this framework will allow for that. However, it will have to come through the appropriate secondary legislation.
Lord Eatwell
My Lords, I was waiting to deal with the scope of Amendment 71. I entirely understand that the particular benchmarks to be included will be determined by subsequent order—and that is fine—but Amendment 71 confines the category of benchmarks to an index, rate or price that has something to do with investments. Can the Minister explain?
Lord Sassoon
The noble Lord, Lord Eatwell, asked the question very clearly earlier. If he would give me another minute or two I will get to his important point. He asked a lot of questions, as did other noble Lords, but it is the next point that I shall come to.
The noble Lord identified something that is consciously in the drafting: it sets a line between purely physical commodity markets where there are other provisions in place which cover price setting. In energy markets, if we are talking about a purely physical commodity price setting, Ofgem is the regulator and has the investigative and enforcement powers for the manipulation of physical markets under the so-called remit legislation. I appreciate that the line drawn raises the questions that the noble Lord has quite rightly asked. With pure commodities that are consciously dealt with in other legislation, Ofgem would be the principal regulator. However, gas, oil and other commodity benchmarks may well be referenced by derivatives or other financial instruments, in which case they are included in this definition. So, pure commodities are not included, but if they are referenced by derivatives or other financial instruments, that is covered in this definition of investment.
Lord Eatwell
That is very helpful. But I still think that the language is not clear. A derivative instrument may essentially be a traded instrument and there is no reason to define it as an investment. An investment is something on which one expects to receive a return either in terms of capital gain or a coupon. But you could easily conceive of a derivative instrument that is simply used as a hedge in a trading operation, which is not then an investment. This is a misuse of the word. I think that it is entirely appropriate that such instruments should be included under the broad definition that could be incorporated into subsequent law by order, but the Government should achieve clarity on this matter by specifying with greater precision exactly what they are doing.
I understand that precision can be a trap—you risk leaving so many things out when you are trying to be too precise. I understand that. But there is a bit of special pleading here, particularly because the Financial Secretary to the Treasury said that financial and other commodities markets were going to be referred to other international bodies and were not in the Government’s acceptance of the Wheatley report. So what did the Financial Secretary mean about referring this on to discussions with international organisations?
I want to press the Minister for clarity here. Take the manipulation of the gas market revealed last week. Would that benchmark be included in consideration under Amendment 71? Would it be accessible to an order made under Amendment 71 or not? Would the benchmark of the manipulation of the California electricity market also be susceptible to being included under an order expressed under Amendment 71?
Lord Sassoon
Again, to an extent the noble Lord, Lord Eatwell, pre-empts what I was going to say. First, let me deal with this question about the international situation, which I believe I addressed in my opening remarks. We have identified a clear problem with a critical benchmark, LIBOR. We intend to fix it. Work is going on in the international arena to look at questions of benchmarks more generally. As and when there is a conclusion, that will then be factored in as to whether within this framework there is more to be done to regulate other benchmarks. Of course, if through applicable international rules there were some change to the framework required, which we do not anticipate, we could also change the framework through primary legislation.
In the mean time, having identified LIBOR, we will have a consultation. That will be an opportunity to people to give their views about what other benchmarks, if any, should be regulated. I do not see any contradiction in my remarks with my right honourable friend the Financial Secretary’s remarks at all. We will see what the international community comes up with as IOSCO and the FSB look at these matters.
The noble Lord, Lord Eatwell, is of course right that the definition here is one of the more difficult ones. I will have a look again to see whether anything of the sort that he suggests might be missed out is not covered. Although clear understanding is that the word “investment” as taken sometimes in a common- sense way does not necessarily fit with some of the examples that he gave, I will take it away and have a look at it again to make sure that it does cover everything.
On the series of petroleum-related examples that the noble Lord gave, I am not going to say whether the manipulation of the Californian electricity market would fit within the regulations because that is beyond the scope of what we are talking about, but let me talk about the gas market. I do not want to pre-empt the specifics of the gas market review, but I am quite clear that, between the provisions that we are putting in place in this Bill, and those to which I have already drawn attention and the powers of Ofgem, we will be covered.
Also in this definitional area, one or two questions were asked about GDP and RPI. In particular, the noble Lord, Lord Peston, asked about references to the GDP deflator. Since the GDP deflator is not set by reference to the state of a market but is wholly different, I do not see that coming within the scope of what we are looking at here. GDP is clearly a matter for the ONS; it is not derived from the markets in the sense that we are talking about here.
Lord Sassoon
As I said in response to the noble Lord, Lord Eatwell, I will look again. I believe that, as I have set it out, everything that is intended to be covered is covered. I am grateful to my noble friend for pointing out that,
“‘Investment’ includes any asset, right or interest”,
for this purpose. That points to the wide scope of the definition. I will take away these points and make sure that it all knits together in the way intended. If it does not, I will write and seek to put matters right at Third Reading.
Let me move on to some other questions that have been asked. I can assure the noble Lord, Lord Peston, that this group of amendments does what Mr Wheatley intended and that he and, on his behalf, his FSA team have rightly crawled all over it. I just want to be clear that it does not go beyond Wheatley except in the sense that we are future-proofing it for other possible benchmarks, which is entirely consistent with what Mr Wheatley wanted. While I am dealing with one or two of these questions, I can also confirm to my noble friend Lady Noakes that the definition of financial crime catches the new offences. The definition in proposed new Section 1H(3) provides that,
“‘Financial crime’ includes any offence”,
and the list of offences is not exhaustive, so the answer to my noble friend is yes.
I see the noble Baroness, Lady Hogg, in her place. It is good to see her here. There were various questions about the process for appointing the administrator. I can assure noble Lords that the noble Baroness, to whom I am very grateful for taking on this responsibility, will be taking this forward in a measured way, as your Lordships would expect. That process will take place over the next few months. My understanding is that considerable interest has already been shown in the opportunity to be the administrator. It would have been inappropriate to have an independent body setting LIBOR. As we know, it has been set by the BBA. That has presented all sorts of difficulties and conflicts of interest. Independence was weak. The BBA is handing over to the new administrator but, critically, the oversight of that new administrator will be the responsibility of the FCA. The behaviour of the new administrator will be regulated, not just the behaviour of the banks supplying the information.
Lord Eatwell
As we are in Committee, it might be helpful to take questions as we go along. It would be enormously helpful to the House to understand how the specified person who will be the administrator will act and what sort of person they might be. Given that there has been considerable interest in the position, perhaps the noble Lord could give us a flavour of the sort of organisations that might be interested—not by naming any names, which I am not suggesting at all. That would help us understand how the system might work.
The Minister said that an independent body is not appropriate. Why not? I referred to the previous advisory committee on the retail prices index, which was entirely independent. It included a number of users of the index, a number of professional statisticians and academics, and representatives of the CBI and the TUC. It was an independent committee which looked at the whole structure of the index. That was a crucial benchmark in British public life. After all, it affects uprating of benefits and all sorts of things, although it is now being superseded by CPI. There was an independent body which did the job and was highly respected. Why, in the Minister’s words, would such a body be inappropriate?
Lord Sassoon
My Lords, we risk comparing two totally different sorts of animal here. The measurement of prices, which of course now comes under the Office for National Statistics and is clearly wholly independent of government or anybody else, is an index that is currently under significant review. It relates wholly to UK activity, whereas, as we have seen, the LIBOR index does not. The LIBOR index relates to daily movements in markets, whereas RPI is a different sort of exercise that measures the monthly movement in prices. In comparing a market index such as LIBOR, however important, with the key measurement of retail prices which, under the framework that all countries buy into, should be independently set by a national statistics agency, we are talking about two different animals.
The draft criteria for the administrator of LIBOR were outlined in the Wheatley review. When the committee moves to the next stage of tendering for the role of administrator, it will be for it to set out the detailed criteria. If the noble Lord wants to see the outline criteria, they are set out in the Wheatley review. He can draw his own conclusions as to whether it would be accountants or others who might be interested in doing it. I am not privy to the specific names, nor do I need to be aware of who the people are. However, I have made inquiries, because it is relevant to one of the amendments that I will come to that there has been considerable interest, even at this early stage, before the full rules of the competition have been set out. There will be details of all that to follow.
Lord Eatwell
That is very helpful and I am grateful to the Minister. What would happen then when the administrator is not performing adequately and the FCA decides that it will take it away? Let me give another example so that I do not have to ask two questions; we can roll these in together. The second example is that the administrator goes bankrupt and is therefore unable to continue the activity. What happens then?
Lord Sassoon
If I ever get to the amendments in the name of the noble Lord, Lord Eatwell, we will get to that point because it is raised by one of them. It is completely clear that the FCA will have the power to act as the administrator of the benchmark in question, if necessary. That is in the FCA’s general powers. It does not need to be written into these amendments, but I will address that when I talk about the noble Lord’s amendments. Within the FCA’s general powers it is absolutely clear that it has the vires to step in and act as the administrator, if that is necessary in a market context.
I should address the scope of the offences. The first question was whether LIBOR should be limited to the UK. What is proposed in these amendments reflects the current approach in Section 397 of FiSMA. It surely must be right that UK authorities can act only where misconduct has some connection with the UK. We have a very clear approach to extraterritoriality in our legislative framework. The amendments take a broad approach within the UK’s normal approach to these matters. There has to be a connection, which may be any of a statement made in or from the UK, a person at whom the statement was targeted being in the UK or a relevant agreement being entered into in the UK. Within the normal constraints about extraterritoriality, in which we would expect certain offences of the sort that the noble Lord postulates to be prosecuted by the US authorities, we have nevertheless drawn the connection with the UK widely as it is currently drawn in Section 397.
The noble Lord, Lord Barnett, is perhaps suggesting that he does not want the offences to be retrospective. I think that raises slightly wider questions, even in the case of LIBOR. We do not need to go into the human rights basics. I am glad if, on reflection, the noble Lord, Lord Barnett, accepts that.
Lord Sassoon
I would never accuse any noble Lord, least of all my noble friend, of ever getting muddled, other than accusing myself. The basic construct is that we do not as a general principle take the same approach to extraterritoriality as the US does. The US takes a unique approach to extraterritoriality and that has raised a number of extremely difficult cases in recent years where Members of Parliament in both Houses have raised questions about whether the UK should acquiesce to the US approach. I certainly do not think that we should be using this discussion as a way of opening up the question of whether the UK should take a different approach to extraterritoriality. The fact is that the US takes a different approach, and that is how it is.
What we are doing for this benchmark issue is to draw the offence and the connection to the UK in precisely the way in which it is done for the generality of offences under FiSMA, which by UK standards is a pretty broad definition. I shall not read them out again, but I read out the three different conditions that could apply and that is on the record. I suggest that the House would not want to put some special definition of territoriality and extraterritoriality into this offence as opposed to all the other criminal offences within the financial services arena. I hope my noble friend will accept that general principle. For the moment, I think she does.
Lord Eatwell
Before the Minister leaves the issue of offences, I asked a question about the exemptions around price stabilisation rules.
Lord Sassoon
I have some understanding, but I am a non-lawyer and it was a long time ago so it is only slight. Price stabilisation rules go back to pre-1991. They are very specific rules that allow things to be done in markets in very prescribed circumstances that would run against what might be perceived to be the free flow of markets. As the noble Lord knows, they were introduced in the context of ensuring a safe and stable aftermarket following a large share issue. I think they were first used in this country by the Government in the second sale of British Telecom shares, and they relate to that regime. If there is something else going on there, I will write to the noble Lord, but they are not intended to be some carve-out that could be used to get people off a charge of manipulating LIBOR.
Lord Eatwell
I thank the Minister; that is very clear and helpful. My only question arising from that is whether the noble Lord is confident that the FCA would have the appropriate range of skills, the intellectual property, to perform the task of administration. Is there going to be a shadow specified person within the FCA, ready to take over? As he pointed out, this may be very unlikely, but if it occurred it would be catastrophic. If there is a collapse or other form of demise of the specified person through inappropriate behaviour, inadequacy or some other reason, is he confident that the FCA would have the appropriate skills to do the job straight away?
Lord Sassoon
Yes, my Lords, I am confident that the FCA, on the risk approach that it takes to preparing itself for a huge range of potential eventualities, will prepare appropriately to step in. I have said, however, that those are a very low-probability set of circumstances.
The last thing that I was going to do, because I think that noble Lords are probably sick of hearing my voice for the moment—
Lord Sassoon
They will have another opportunity very shortly because I am afraid I will be introducing the next group as well, so I am encouraged by that reaction. I was going to go on to Amendment 80D, which is all about the Treasury Select Committee being involved, but I am not sure that the noble Lord said very much about that, so—
Lord Sassoon
It has suddenly come back to me; it was just a momentary lapse. The noble Lord spoke about the merits of the Treasury Select Committee being involved in the process of selecting the person responsible for setting the benchmark. There may be a slight misinterpretation of the process for selecting a successor to the BBA and administrating LIBOR, which was outlined in a government Statement on 17 October. As I have already mentioned, the successor to the BBA will be nominated by an independently chaired committee, convened by Martin Wheatley and the Treasury and at the commission of the British Bankers’ Association, which has publicly relinquished the nomination of a successor to the committee.
Those involved in the process can be called to account by the Treasury Committee. However, the transfer of responsibility for administering LIBOR from the BBA to a successor body is not a legislative matter. I do not think it would be appropriate for Parliament or the Treasury Committee to be directly involved in what is ultimately a process between private sector commercial bodies. For that rather technical reason—but nevertheless constitutionally rather important —I am unable to accept the noble Lord’s proposed amendment. I stress that those involved in the process can and may be called to account—I do not know—by the Treasury Committee.
Lord Eatwell
The noble Lord has completely misinterpreted what I said and apparently has not read Amendment 80D. One of the main points I made was that currently we have this particular conjuncture where the BBA has said that it does not want to continue doing the job. Quite rightly, the Treasury and the FCA have stepped in and set up an entirely appropriate procedure, as far as we can tell. I am sure that it will be appropriate, given that it will be under the chairmanship of the noble Baroness, Lady Hogg.
However, this is not the only potential benchmark covered by this legislation. There may be other specified persons to be appointed with respect to other benchmarks. To achieve the transparency to which the noble Lord said the Government aspire, the rules for determining the identification of a specified person—the objectives and the characteristics that the specified person might have—should be agreed in broad terms with the consent of the Treasury Select Committee. We then would have a procedure which everyone has looked at and has agreed upon. It can be used not as a reactive measure after a crisis but would be in place, ready to be used, at any time the Government deem it appropriate that, by order, a new benchmark is specified, and that there is a need to search for a new specified person to manage and to be responsible for setting that specified benchmark. I hope that the amendment is now clear.
Lord Sassoon
I may not have expressed myself clearly but I was entirely clear that that is the purpose of the amendment. I illustrate the situation by reference to LIBOR but the same considerations would apply in relation to any other benchmark where the process of the transfer would be very dependent on the private sector current administrator of the benchmark. It would be very specific to the nature of the market and the benchmark about which we were talking. I just do not see this as a class of activity that normally ever would be set down in some sort of framework of rules that would be agreed with the consent of the Treasury Select Committee. It is not territory into which that committee gets in terms of setting rules.
However, the noble Lord does not say that: Amendment 80D states:
“The rules determining the identification of the specified person responsible for setting a specified benchmark must be agreed with the consent of the Treasury Select Committee”.
It gets the Treasury Select Committee into vetting rules of a sort which I am not aware that the committee gets anywhere near, particularly because there will be secondary legislation, which case by case needs to deal with what benchmarks come in. The Treasury Select Committee at all stages can call people in to discuss the process. I entirely stand by my remarks on the amendment. This does not work with the nature of the transfers about which we are talking, with the flexibility we need to have, or with the way in which the Treasury Select Committee operates. However, what works very effectively is the committee calling people to account, which it may well do in this area.
The final amendment I wish to cover is Amendment 80CA, which requires that 12 months after Royal Assent,
“the Treasury shall report to Parliament on the progress of the extension of”,
the regulatory regime to cover benchmark activities. Given that the extension of the regulatory perimeter into a new type of activity may well have significant consequences, I agree that there is merit in making an assessment of the efficiency and operation of this new area of regulation.
I can confirm that it is the intention of the Financial Conduct Authority to conduct a thematic review into the system and control procedures of LIBOR-submitting firms and the LIBOR administrator in the first year of the implementation of the LIBOR supervisory regime. The FCA will be accountable to Parliament through the usual procedures, which we have debated at length.
I believe that the suggestion of a review is good but a review by the regulator itself is likely to be far more fruitful than a review by the Treasury. It is the regulator rather than the Treasury which will be best placed to modify and fine tune the regulatory regime to accommodate lessons learnt from the review. Of course, should the review suggest that there are difficulties with matters for which the Treasury is responsible, such as the scope of regulation, the Treasury stands ready to consider and, where appropriate, implement the recommendations made by the review. The underlying point is very good and the FCA will take it on board but I cannot accept the amendment.
I hope that, at some length, I have dealt with as many of the points raised as I could.
Lord Eatwell
“( ) The regulators must co-ordinate their procedures for, and provide clear and detailed guidance on, the processes for applying for, varying and cancelling permission that are applicable to authorised persons regulated by both PRA and the FCA.”
Lord Eatwell
My Lords, Amendment 73B reflects a concern that we have expressed at numerous stages in the discussion of the Bill about the process by which entry is possible within the financial services industry and the processes by which permissions are varied and are cancelled.
Our prime objective is to stimulate greater competition within the financial services industry. Entry is notoriously difficult, particularly in the banking sector, and it has been made more difficult since the financial crisis as the stable door has been banged firmly shut. The shutting of the stable door, of course, has not implied any extra sanction on those banks or other institutions which already exist but has made it much more complicated for new banks to be established or new firms to enter other major parts of the financial services industry.
From an examination of the provisions of the Bill on the issue of permissions, it seems clear that there will be firms that are regulated by both the PRA and the FCA and, indeed, that there will be firms that are regulated by one of these organisations but the process of granting permissions, variations and so on will require reference to the other organisation. Given the way in which permissions are dealt with at the moment, it seems likely that this will introduce further bureaucratic steps inhibiting entry. Those bureaucratic steps will be entirely unnecessary if the regulators have a statutory requirement to co-ordinate their procedures. If, on the other hand, as we suspect, the PRA and the FCA develop different procedures relative to their differing objectives, the possibility that processes will become excessively complex, slow and expensive increases significantly.
The objective of the amendment is simply to require the PRA and the FCA to,
“co-ordinate their procedures for, and provide clear and detailed guidance on, the processes for applying for, varying and cancelling permission”,
in order to facilitate competition and ease of entry into, particularly, the banking sector and into financial services in general. I beg to move.
Lord Newby
My Lords, as I said in Committee when we debated this issue, we are extremely sympathetic to what the noble Lord is seeking to achieve. However, as I also pointed out, the PRA and the FCA are already required by proposed new Section 3D in Clause 6 to co-ordinate their regulatory processes, including the authorisation process, so this element of the amendment would have no effect.
On the publication of detailed guidance, I point out that in order for the regulators to carry out authorisation, they will need to give instructions to firms about how to engage with the process. That is what the FSA does now, and what the PRA and the FCA will have to do in the future. Firms need to be authorised before they can enter the market and the Government agree that it is extremely important to encourage new entrants. The noble Lord talked about the shutting of the stable door in respect of new banks. The truth is that the stable door has been shut for many decades and there have been no new banks. We have to try to change the culture, in terms both of the regulators and of the regulated, that has been in place for many decades, and we are very keen to do it. That is why we had brought forward an amendment requiring the PRA to have regard to the need to minimise the adverse effect on competition that arises from its actions. One of the effects will be to ensure that the PRA works to remove unnecessary obstacles to new entrants; for example, by ensuring that the authorisation process runs as smoothly as possible.
The Government agree that it is important that the regulators explain how they will co-ordinate their regulatory activities. That is why there is a statutory duty to co-ordinate and to set out in an MoU how that co-ordination will operate in practice. The process for applying for permission is one of the things that proposed new Section 3E specifically envisages being in the MoU.
The Government entirely agree with the thinking behind the amendment but we do not believe that anything further is needed to implement what it seeks to achieve.
Lord Eatwell
That is rather complacent. If the noble Lord thinks that the FSA provides clear guidance at the moment, he has not tried to establish a bank. I can assure him that it does not. There is a reason for that. Given that most business plans are rather different and the guidance has to be specific, the FSA has expressed a reluctance to get involved in specific cases.
General guidance is of general use but is seldom useful in the establishment of a given institution. That is why the amendment calls for the provision of,
“clear and detailed guidance”.
That is not available elsewhere in the Bill. The Government are being seriously remiss by discouraging the competitive process as regards this aspect. I know that they want to increase competition but it is a mistake to do it in this way. It is not an intentional discouragement and so it would be enormously helpful if the amendment were to be accepted or some version of it were to be considered at Third Reading. I admit that it may well be belt and braces, but the amendment derives from experience of dealing with the FSA on these matters. It is in this area that the Government do not live up to the picture of assistance and guidance that the noble Lord has painted. However, at this stage, I beg leave to withdraw the amendment.