Financial Services Bill

Lord Eatwell Excerpts

Wednesday 5th December 2012 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, in most cases the legislation places duties, powers and obligations on the Bank as an institution. The Court of Directors is responsible for managing the Bank’s affairs. In practice, the Court of Directors, in a similar way to other governing bodies, delegates the vast majority of the Bank’s day-to-day decisions to the executive, with the court itself taking only the most important strategic decisions. There are, however, some instances in the legislation where the duties, powers and obligations are placed directly on the court. For example, the court is responsible for determining the Bank’s strategy, including its financial stability strategy, and it also has the power to delegate additional functions to the FPC.

On Report, the noble Lord, Lord Eatwell, and I discussed whether the court would take the decision whether or not to withhold from publication a report of the oversight committee. I stated clearly that I would expect a decision of this importance to be taken by the court rather than to be delegated to the executive. However, in the light of that debate, I asked my officials to look right through the Bill again to see whether there were other key decisions for which responsibility should lie unequivocally with the court. This group of amendments is the result.

Amendments 4, 5, 6 and 7 confirm that the court will decide whether oversight committee reviews should be withheld from publication in order to protect the public interest.

Amendments 1, 12 and 26 to 31 make the same change to confer a number of other responsibilities directly on the court. These are the power to delegate additional functions to the oversight committee, responsibility for being consulted on the PRA’s strategy, and the power to appoint non-executive members to the PRA board.

Amendment 25 puts beyond all doubt that the court may not delegate any functions that are explicitly given to it in legislation. I should make it clear that this does not mean that all functions that the legislation confers on the Bank will automatically be undertaken by the executive. The court will of course retain discretion either to delegate these roles to the executive or to reserve those decisions for itself. However, I believe that these amendments provide important clarity by identifying those roles within the legislation that will be the responsibility of the court in all cases. I beg to move.

[Lord Eatwell]

My Lords, I am very grateful to the noble Lord for having clarified some obscurities in the Bill that arose from the use of the generic term “the Bank” to refer sometimes to the court and sometimes to the executive. However, the noble Lord has just said something which has disturbed me. He said that, for clarification, when the term “Bank” is used, this does not necessarily mean the executive; it may mean the court. It seemed to me that he was acknowledging that an uncertainty remained. Perhaps I misheard. I should be very happy if I did, because the sort of clarification that he has set out is very welcome.

[Lord Flight]

My Lords, there is one area in this territory on which I would appreciate some clarity. The principle of returning the oversight of banks to the central Bank, which I think has been widely supported, has, to my mind, always been about the concept that the central Bank ought to be in regular contact with banks, that it ought to know what is going on and that it ought to be able to head off practices that are clearly potentially damaging to the banking system. However, I am not clear how the staff of the Bank and the staff of the PRA will interact. One would have thought that quite often it would be the staff of the Bank who were having regular dialogue with banks and learning what was going on and what might be going wrong, but it is the PRA—to some extent a sort of cuckoo plopped into the middle of the Bank of England—that essentially has the legal tasks. Therefore, we have clarification of the definitions of “Bank” and “court” but below what I call the executive level I am still not entirely clear where the staff of the Bank or the staff of the PRA will be carrying out supervisory activities.

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[Lord Eatwell]

Just for clarity, the noble Lord said that it is the responsibility of the directors—that is, the court—to decide who takes the various decisions. I presume what he has said does not apply to the Monetary Policy Committee?

[Lord Sassoon]

Indeed. I should say that it is subject to what is laid down in statute about the Monetary Policy Committee and the Financial Policy Committee and so on. If they are decisions of the Monetary Policy Committee, then they are the decisions of the Monetary Policy Committee. If they are the decisions of the Bank, the court will decide how they are taken. As for the question from my noble friend Lord Flight, of course it will be the PRA staff who will supervise and lead on the direct relationships with the banks or insurance companies, for example, that are being supervised. Technically, the PRA staff will be seconded from the Bank. There will be a close working relationship, which is part of the benefit of bringing it all together under the one umbrella.

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[Lord Newby]

My Lords, Amendment 11 responds directly to a request made by the noble Lord, Lord Eatwell, on Report. On hearing my noble friend Lord Sassoon’s explanation of the underlying purpose of the FPC’s reviews of its live actions—namely, to consider whether they are still necessary and whether they should be removed or revoked—the noble Lord, Lord Eatwell, responded,

“if that is what the new section meant, why did it not say so?”.—[Official Report, 6/11/12; col. 978.]

I believe that the purpose of the reviews could have been derived implicitly from the clause as it was originally drafted. However, I accept that this could be made more explicit in the clause, and Amendment 11 seeks to do exactly that. This is a straightforward amendment, which responds directly to concerns raised in this House about the clarity of the drafting. I hope that noble Lords can support it. I beg to move.

[Lord Eatwell]

My Lords, I am grateful to the Government for having taken on board the fact that there was some infelicity in the drafting at this point. I am delighted to support the amendment.

Amendment 11 agreed.

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[Lord Fraser of Carmyllie]

My Lords, I declare an interest as a director of ICE Clear Europe, and I warmly welcome this extremely valuable amendment. It seems to go wider; noble Lords may think that it is a narrow amendment, but they have no idea what a sense of confidence it has given to the City at this time. I regard that as very important.

During the 1970s, we generally regarded the Foreign and Commonwealth Office as having the function of managing orderly retreat. Now we have absolute confidence that within the Treasury there is a very clear understanding that it will look after the best interests of the City of London and the pre-eminence of the City. It is a difficult task and I do not underestimate how important that is. The amendment is to be warmly welcomed. Noble Lords may think that it is minor, but it does a great deal more than simply to change the position of the clearing house and the direction.

I have one simple question, and I will not be worried in the least if the Minister slaps me down. Amendment 20 says,

“to accept a transfer of property, rights or liabilities of another clearing house”.

Does that refer only to a clearing house that still operates as a going concern? Frankly, I would regard that as unlikely. It is much more likely that the Bank of England would want to intervene at a point when it was in administration or in the process of liquidation. If I am told that that line encompasses all those particular circumstances, I will be more than happy to be told to shut up.

[Lord Eatwell]

My Lords, perhaps I may simply elaborate a little on the question posed by the noble Baroness, Lady Kramer. Given that there is not to be a transfer of obligations between platforms, and given that the collapse of a platform could impose significant systemic risk on the economy with a large number of unclear positions, are we to understand that the lender of last resort will be required to stand behind a collapsed platform?

[Lord Myners]

Perhaps I may also ask a question following that of the noble Baroness, Lady Kramer. The concept of interoperability is very important in the clearing of derivatives, so that corporates in particular can offset a position with one platform where they have a credit with another platform where they have a deficit. Will the Minister clarify that that involves a degree of mutualisation in the event of a failure of a platform because the failure of that platform will transfer to other platforms?

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[Lord Sassoon]

My Lords, Amendments 33 and 34 concern the new power provided for by this Bill for the regulators to disclose the fact that a disciplinary warning notice has been issued. We have of course already discussed this new power and the safeguards to which it should be subject in quite some detail. I am speaking to these two amendments again only because, as a result of being erroneously assigned on the day’s Order Paper, they were not moved on Report on 26 November. I am grateful to the noble Baroness, Lady Hayter of Kentish Town, for being the first to spot this. So to be absolutely clear, these are simply Amendments 97ZA and 97ZB—as they were—retabled from the Report stage.

To remind your Lordships briefly, Amendment 33 brings the decision to disclose the fact that a disciplinary warning notice has been issued into the list of matters subject to the procedures set out in Section 395 of FiSMA. Amendment 34 sets out the criteria with which the process for deciding to disclose a warning notice must comply, noting that the decision must be taken either by a person other than the person by whom the decision was first proposed, or by two or more persons not including the person by whom the decision was first proposed.

The amendments secure the involvement of the Regulatory Decisions Committee, or an equivalent body for decisions, to disclose the fact that warning notices have been issued. It is a proposal that the House supported and endorsed when we debated it last week.

This group of amendments may be the penultimate time that I will speak on the Bill during its passage through this House. With this in mind, perhaps noble Lords will permit me to conclude this debate by reflecting a little on the past months since our lively Second Reading debate on 11 June. It was so long ago that the England football team was still in the European Championship and preparing to play France as we were kicking off our consideration of the Bill. Of one thing we can be certain: the performance of this House on this Bill was rather better, I regret to say, than the performance of the England football team.

I believe that the Bill that we are sending back to another place is greatly improved from the Bill that we debated at Second Reading in June. That is due to the very constructive contributions and engagement from noble Lords right across the House, not least from the Bishops’ Benches, and I pay tribute to all who have contributed to those debates. No other legislative house in the world could have brought to bear such expertise in financial services and their regulation as this House has on this Financial Services Bill.

As I need to keep my closing remarks brief, I can only apologise for not naming individually the many noble Lords who have made important contributions to our debates. However, I would like to thank the opposition Front Bench—too many of them to name—led so ably by the noble Lord, Lord Eatwell, and the noble Baroness, Lady Hayter of Kentish Town. They have shown real tenacity and skill in their contributions. We have not always agreed with the points that they have made, but I have always valued those points and would like to thank them for their constructive and thoughtful approach throughout.

I thank, too, my noble friends Lord Newby and Lord De Mauley for the support they have given me, not least in calming down the House when it seems to have got rather excited by some of my contributions. This has been a long Bill, and it would not have been possible to provide the level of response that the House has rightly demanded without the able assistance of my noble friends.

I should also mention and thank the Bill team, which has worked continuously to provide support to the House throughout the stages of this Bill. It has done an outstanding job, which has been widely and rightly acknowledged. The excellent work of the parliamentary counsel in drafting the Bill and the subsequent many amendments to it deserves special praise.

I believe that we have significantly improved this important Bill in key areas. We have enhanced the governance of the Bank of England; given economic growth a higher priority in the new regime, for the FPC, FCA and PRA; significantly improved the robustness of the UK financial system by bringing investment firms, recognised clearing houses and holding companies within the special resolution regime; responded to industry concerns, in particular over the new warning notice power; offered consumers better protection, particularly in relation to payday loans; and, in the LIBOR clauses, moved swiftly to tackle the shameful behaviour of some in the industry.

The Government have listened carefully to the views of noble Lords and the amended Bill reflects many of the concerns of this House. The Bill will be an important addition to the statute book, and one that has been greatly improved thanks to your Lordships’ expertise. I beg to move.

[Lord Eatwell]

My Lords, I rise not with respect to the amendment but to reflect on the latter comments of the noble Lord, Lord Sassoon. As he said, the Bill began its somewhat laborious journey with its First Reading back in May. The process has been extraordinarily laborious considering that it was a politically non-contentious Bill. We should perhaps learn some lessons from this. The main lesson is that, if there is pre-legislative scrutiny, a valuable process that we introduced, more notice should be taken of the conclusions of that scrutiny than is evident in the Bill before us. I refer particularly to the advice from the Treasury Select Committee that a new Bill be drafted rather than that we rely on the complex structure of amendments to prior legislation that we have had to wade through over the past several months.

Given the weighty nature of the work that we have had to deal with, it is appropriate to thank those who have been involved with the Bill. I add my thanks to those of the noble Lord, Lord Sassoon, to my noble friends Lady Hayter, Lord Davies, Lord Stevenson and Lord Tunnicliffe. I also thank Mr Whiting and the Bill team, who have been helpful and courteous throughout, and the noble Lord, Lord Sassoon, for dealing with often complex matters and, occasionally, defending the indefensible with his usual good humour. Finally, in thanking individuals, I must thank Miss Jessica Levy, our talented and all-knowing researcher.

Effective regulation at the macro and micro level of systemic risks and the risks associated with individual firms is in the interests of households and industry and is essential for the success of the UK financial services industry. Therefore, we on this side wish this Bill well. I hope that the measures over which we have laboured will prove a success.

[Lord Barnett]

My Lords, I cannot let the Bill pass without saying a few words. I described the Bill as “shambolic” and was told by an old friend—a normally good friend who happens to be a former Conservative Cabinet Minister—that he was surprised that I was so political in using that unusual expression. I apologise to the noble Lord, Lord Sassoon, and the House. I could not think of a better word to describe what was in the Bill and what had happened.

My main concern with the Bill is the very principle of giving such huge powers to the Bank of England—and they remain. It is the principle that worries me. We have given huge powers to the Bank of England. We have added to the Bank of England Act, as I mentioned earlier today. We have given the Bank powers over the OFT, FCA, FSA and PRA, and over changes in FiSMA—so many different initials that one forgets precisely what we did do. We amended a lot because there was a lot to amend, because unfortunately these days, under both Governments, the House of Commons guillotines so much that very little gets done properly. Legislation comes to this House for amendment and we amend it well, I am happy to say, as we did on this occasion.

My worry is that we started off with an unusually large Bill: two volumes of clauses and schedules. It was so big and it has become even bigger because we put in provisions dealing with the LIBOR scandal. This should have been a Bill on its own. We on this side of the House rightly agreed with the changes resulting from the Government’s acceptance of the Wheatley report. These provisions dealt with it properly and the Opposition accepted them, but they did not just come forward in a Bill; they came forward scattered in amendments throughout the Bill. I hope that it deals with the LIBOR scandal but it is difficult to tell if it really did, because on top of all this we are now told that there will be secondary legislation as well. I regret to say that we do not understand what we have passed here, because we still do not know what is going to happen.

I hope that we have done the right thing and that everything is going to work out, but the plain fact is that, with the LIBOR scandal, there were some in the Bank of England, the FSA and many other bodies whose main concern was primarily with interest rates. They knew nothing whatever about what the noble Lord, Lord Sassoon—I nearly said “my noble friend Lord Sassoon”; I feel he is that—was talking about. He described this LIBOR scandal as a global one, affecting some $300 trillion. It affected all that, but nobody in the Bank of England or the FSA or anybody else knew the slightest thing that was going on in the LIBOR scandal. Therefore, I would like to finish by asking the noble Lord, Lord Sassoon, a question.