Financial Services (Banking Reform) Bill

Lord Eatwell Excerpts

Monday 9th December 2013 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Deighton) (Con)]

My Lords, this amendment brings forward the timetable of the independent review to be held of ring-fencing. As the House will recall, the Government previously amended the Bill to provide for an independent review of ring-fencing, once the ring-fence has come into force. Following the recommendation of the Parliamentary Commission on Banking Standards, our original amendment provided that the review be conducted no later than four years after the ring-fence had come into effect. This was to allow the ring-fence time to bed down before being reviewed.

The Government have, however, listened to arguments from the Opposition that the review should be held sooner. Two years is a long enough period over which to observe the operation of the ring-fence, and assess its effects. The knowledge that ring-fencing will soon be reviewed may also be a further encouragement to banks to comply faithfully with the ring-fence.

This amendment therefore requires that the independent review of the ring-fence be held within two years of the ring-fencing taking effect, rather than four years. This is a sensible change and one that we hope illustrates the Government’s constructive approach to reasonable suggestions from all sides.

[Lord Eatwell (Lab)]

My Lords, everyone in the House has from time to time expressed the view that this is a great experiment. We are not quite sure how the ring-fence will work and therefore it is appropriate that that it be monitored promptly and on a regular basis. I think this is a very sensible amendment—I would do, since I moved a version of it earlier—and I urge the House to support the Government.

[Lord Lawson of Blaby (Con)]

My Lords, I thank my noble friend Lord Deighton for putting forward this amendment. As he said, it is something which the banking commission, of which I had the honour to be a member, has been calling for. It is extremely welcome and it is very good that he has acceded to it. As the noble Lord, Lord Eatwell, said, the whole idea of ring-fencing is something of an experiment. We do not know whether it is going to work and therefore it is necessary that after an appropriate time it should be thoroughly investigated to see whether it is working satisfactorily and, if it is not, to have a move to full separation.

We know for certain that full separation works; indeed, separation was the norm in this country for most of our lifetimes. It is only during the past 25 years that there has not been separation. In the old days, there were the so-called joint stock banks, which were to do with the commercial banks and did retail lending and lending to small businesses, which are now known as SMEs, and there was a completely different group called the merchant banks, which were different people and institutions. For a long time, most of them were partnerships and had a different set-up altogether. They did what is now known as investment banking and it worked extremely well. We know that separation can work but we do not know whether this idea can work, so it is right that there should be a review.

While commending the Government, and in particular my noble friend, for introducing this, I hope that it will not be necessary. That is not because the ring-fence will, as it were, be found to work. I have grave doubts about that if it persists. However, there must be considerable doubt as to whether it will persist. Some noble Lords may have seen the interesting report in today’s Financial Times that the HSBC is thinking seriously of spinning off its UK retail and commercial banking enterprise as a separate company, with outside shareholders taking up to 30% in it. That is according to the Financial Times; we do not know, but there is a good reason for that. If the requirements of the ring-fence are really to be enforced toughly, they will make it so difficult, complicated, burdensome and onerous that many banks should, if they are rational, ask, “Is it actually worth staying together? Might it not be better for us”—the management—“and for our shareholders to separate and release increased shareholder value for that purpose?”. I hope that the institutional shareholders will also keep the banks up to the mark. That would be the happiest conclusion—that we will not even need the review because separation will happen of its own accord. However, just in case it does not we will need the review and I am grateful to my noble friend.

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[Lord Brennan (Lab)]

My Lords, the present amendments fortify Part 4 by creating a comprehensive structure for conduct, standards, licensing and so on. Third Reading is an appropriate time for the Minister to clarify how in this structure directors, including the chairman of a bank, bear responsibility for the fulfilment of Part 4 as regards conduct and standards. Amendment 9 talks about:

“Vetting by relevant authorised persons of candidates for approval”.

The relevant authorised person is the bank. The bank ultimately sets its standards at directorial level, and directors carry a responsibility for it under statute and common law. Therefore I invite the Minister to clarify what, under this system, is the position of the directors and the chairman in terms of the enforcement of this framework for good standards.

[Lord Eatwell]

My Lords, I am glad to see that the introduction of Clause 15 on Report has at last seen the Government take the recommendations of the Parliamentary Commission on Banking Standards seriously in this matter and introduce these amendments that capture most, though not all, of the recommendations. What we have left, as the noble Lord, Lord Turnbull, has pointed out, is something of a tripartite muddle because we now have three different regimes affecting persons working within banks. I am afraid that this is characteristic of so many parts of this Bill and will need to be sorted out in future.

I would like to ask some questions about Clause 17 which, as was pointed out, brings branches into part of this aspect of regulation. As the House will be aware, in recent months the Prime Minister has significantly weakened Britain’s regulatory protections of its banking system by encouraging the establishment of branches in this country. Previously, the regulatory authorities had strongly discouraged this because they are not then regulated by British regulators but by their home regulator. The Prime Minister has chosen to weaken this protection particularly by encouraging the establishment of Chinese branch banks, which will be regulated by the Chinese authorities.

However, what is particularly interesting about Clause 17 is that it brings some branches possibly within some British regulatory ambit. I say possibly because according to this clause the Treasury may by order provide that authorised persons falling within any of the descriptions are relevant authorised persons. Relevant authorised persons, for those who have not participated in these debates before, are actually banks. The Treasury can choose which branches will be brought into the ambit. It is enormously important that the branches should be. The noble Lord, Lord Newby, was absolutely right in this respect. I hope the Prime Minister will not undermine this legislation by instructing the Treasury to exclude particular branches, perhaps those emanating from Chinese banks, from this regulation.

[Lord Newby]

My Lords, I am very grateful to noble Lords for the general welcome that they have given these provisions. I have some sympathy with the noble Lord, Lord Turnbull, and the tripartite system of regulation which we now find ourselves with but the approved persons regime is still needed, in our view, not least for people responsible for money-laundering. At some point we may want to see whether it is possible to rationalise all these provisions but I do not think at this stage it would be sensible to attempt it.

The noble Lord, Lord Flight, asked about banks in Crown dependencies and referred to the discussions that he had with the Financial Secretary on this. I will take his concerns back to the Financial Secretary and ensure that we bring some clarity to these discussions so that people in the Crown dependencies and banks can be clear of their position.

The noble Lord, Lord Brennan, asked about the role of directors and responsibility for the enforcement of the standard. One of the key things we are trying to achieve here is to put the responsibility on the banks to ensure that their staff on appointment have and continue to follow adequate standards. The alternative is to say to the regulator, “You have a look at all these people and make sure that they are behaving in a responsible way and have the appropriate qualifications”. We believe that the banks should not be able to duck out of that and that it is for directors and the board to ensure that they follow the rules and do not hide behind the regulator.

The noble Lord, Lord Eatwell, asked whether it would be possible for the Treasury to choose certain categories of branches and treat them in a different way from other categories: in other words, whether it would be possible to deal with Chinese banks in a different way. Your Lordships’ House has spent many a happy hour discussing the meaning of “may”. My belief and understanding is that in the situation we are discussing “may” means that the regulators will adopt rules in respect of branches and will treat all branches equally.

[Lord Eatwell]

That is very helpful, but will the noble Lord therefore explain why proposed new Subsection (3B) begins with the word “If” rather than “When”?

[Lord Newby]

I think that is consequential on using “may”.

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[The Lord Bishop of Birmingham]

My Lords, I take a moment to thank the noble Lord, Lord Lawson, for his kind remarks about my friend the most reverend Primate’s speech last Thursday. I shall pass that on to him. He regrets that he is not in his place today. He is presiding over a whole number of bishops—it amounts to about the number of noble Lords in your Lordships’ House tonight—up in York.

I support these amendments, particularly Amendment 22 on the timetable. I am grateful for the Government’s approach and seriousness towards this payday lending crisis. The examples we have heard from noble Lords about the experience of poverty are gruesome. I should like to introduce a new element of competition to the response time for this particular bit of industry in terms of its timetable, because the risk, referred to by the noble Lord, Lord Newby, to the industry itself in not getting it right is paralleled by the risk just mentioned by the noble Lord, Lord Mitchell, of people having yet another Christmas borrowing at too great a cost and risk to their own future and that of their family. The Minister is trying to set a final deadline of January but I ask that he really encourage the industry to bring this forward to 1 October.

We have heard about the industry’s complexities and the credit unions that are needed. We have also heard of the encouragement this would give to those who are working very hard to provide effective money advice to those who are managing unmanageable debt and to help those young people who have been mentioned start handling their money properly. Local charities, churches and the faith groups are responding to the Government’s approach to tackling this global financial crisis. However, the slow timetable—several years before all this is implemented—is a completely different timetable from that of someone who has no resources, who has no back-up and who is looking for food tomorrow. I encourage people to support this amendment.

[Lord Eatwell]

My Lords, my noble friend Lord Mitchell in speaking to his amendment on the proposed date referred to 90 days. One might ask how 90 days can make a difference. Surely when the Government need something to be done they can get it done. The idea that somehow the whole process is so darn elaborate that they cannot do it in a period of time which saves 90 days on their side is, in the true meaning of the word, incredible. On the other hand, for the borrower 90 days includes Christmas Day 2014. That is a big issue, because this is the period when short-term borrowing is at its peak. That is why it is incumbent on this Government to take swift action. They have been dragging their feet on this issue for four years. It is incumbent on them to take swift action and that is why Amendment 22 is so important.

The noble Lord, Lord Sharkey, has raised a crucial and frightening point—that payday lenders within the European Economic Area could lend within the UK. I hope the Minister will be able to tell us that we are not wasting our time completely this evening—because that is what that would mean we would be doing—and that the noble Lord’s fears are unfounded.

Swift action is so important that when this amendment is called I intend to test the opinion of the House.

[Lord Newby]

My Lords, noble Lords have raised a number of issues and questions. I shall do my best to answer. The noble Baroness, Lady Oppenheim-Barnes, discussed the way in which the total cost of the loan, as opposed to the interest rate, is portrayed, and of course many people do not understand interest rates. The Government are discussing with the European Commission the relative prominence of the total cost of the loan. This discussion is taking place in the context of the Commission’s review of the consumer credit directive, so I hope we are well on top of that.

My noble friend Lord Sharkey asked a raft of questions. I hope that I managed to write them all down. He asked whether the FCA understood the particular problems of multiply sourced simultaneous loans. I can assure him that that is within its remit. My noble friend talked about rollovers and asked whether the FCA would look at one or none as part of this review. I can give him that assurance. He asked whether he could see a draft regulation in a timely manner. We will try to do that. Of course, if we are going to consult on draft regulations, things such as the odd 90 days here and there make a lot of difference. Our ability to consult properly at any point in this process requires us to follow something like the timetable that I set out earlier. He asked whether data sharing is being considered as part of the FCA’s remit. I can assure him that the FCA is looking at that.

My noble friend asked for a definition of “excessive” and why it was not in the Bill. The FCA will be looking at existing definitions of excessive, including that in Florida. Different people in different places who cap payday loans have different definitions of excessive. There is no single definition that is uniquely right. It has to be taken in the context of all the other factors and the overall design of the scheme. The FCA will be looking at international definitions as part of that work.

My noble friend asked whether there will be an opportunity and time in Parliament for debate on the publication of the draft rules. That partly goes to the speed with which we do that. If, as I set out, the FCA publishes a consultation paper by the end of May, it will be perfectly possible for Parliament to debate it. There are a number of ways in which that could be done. In your Lordships’ House, it is now very easy for individual Members to get a debate on an issue within a very few weeks, even if no other formal debate was allowed. I would be very happy to raise that issue in the usual channels. Finally, my noble friend asked whether the FCA will consider the limit to cover both the amount and the term of the loan. I can give him that assurance.

The noble Lord, Lord Higgins, asked why we do not refer to interest in the Bill. The provision covers every aspect of the cost of a payday loan, of which interest is only one part. The definition in the Bill subsumes interest.

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Moved by

[Lord Eatwell]

22: After Clause 123, line 19, leave out “2 January 2015” and insert “1 October 2014”

[Lord Eatwell]

My Lords, I was struck by the reply of the noble Lord, Lord Newby, on the issue of companies from other parts of the European Economic Area trading on the internet. He said that the Government are just beginning to look at this. It is extraordinary that the Treasury does not know, now, what are the particular rules that affect financial trading within the European Economic Area. That is another incredible statement. We have been dragging our feet on this area. It is urgent that we deal with it with all due speed and that we ensure that the cap is in place before next Christmas. I therefore wish to seek the opinion of the House on Amendment 22.

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[Lord Newby]

My Lords, I now turn to an amendment which will better position the PRA to take account of consumer interests by drawing on the views of the FCA’s Consumer Panel. This follows the debate at Lords Report stage where the noble Lord, Lord Eatwell, proposed amendments which would have created a role for the Consumer Panel by creating a duty on the PRA to consider representations made to it by the panel and to publish its responses, equivalent to the duty on the FCA.

We have considered the issues carefully, as I said we would on Report, and have proposed alternative arrangements which are more proportionate to the PRA’s prudential remit, but deliver, we believe, the essence of the noble Lord’s amendment. Our amendment will confer a role on the panel by allowing it to raise issues it is considering with the PRA; for example, through meetings or in correspondence. It will also enable the PRA to meet the expenses of the Consumer Panel when the Consumer Panel discharges this function. This will ensure that the PRA can benefit from the expertise of the panel without the undue burden on either the PRA or the Consumer Panel of a binding requirement on the PRA to consult the panel each time the PRA changes its rules or policies.

I have no doubt that this amendment, which has been welcomed and supported by the chair of the Consumer Panel, will strengthen the voice of consumers at the PRA, and I am pleased to add it to the list of improvements we have been able to make as a result of constructive debate and scrutiny in your Lordships’ House. I beg to move.

[Lord Eatwell]

My Lords, I welcome this amendment, which will add important coherence to the consideration of consumer affairs within the regulatory structure.

Amendment 23 agreed.

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[Lord Eatwell]

My Lords, I am delighted to support Amendment 26, which stands in the names of the noble Lord, Lord Deighton, and of my noble friend Lady Hayter of Kentish Town. She is very sorry she cannot be in her place this evening to say this herself, but she is very grateful to the Government not only for accepting the essence of her amendment, moved at Report, but also for turning in some far better drafting than she could have done. This was done under some tight time pressures, for which we are grateful to both of the Ministers concerned and to their staff. My noble friend cannot be here to thank the Government herself because she is at a Labour Party fundraising event to help fund the campaign to expel the Government from office, but in the mean time she does sincerely want her appreciation for the help to be recorded.

The impact of the amendment is that, in future, consumers with complaints against claims management companies will be able to take these to the Legal Services Ombudsman to be resolved. They will therefore get redress when there is judgment in their favour. This will also help to drive up standards. By reporting repeat offenders to the regulator, it will help to get some of the CMC sharks out of the business. So congratulations to both to the noble Baroness, Lady Hayter, and to the Government for accepting the essence of her amendment.

[Lord Deighton]

My Lords, I know it is getting late, but as this group of amendments draws to a close, I hope you will permit me to spend a few moments reflecting on the changes that this Bill has undergone since it first arrived in this House, and to thank all those who have contributed to it in that time. On Second Reading in July, my noble friend Lord Newby remarked that the great strength of this legislation was due in no small part to the intense degree of scrutiny that it had undergone on its journey to this House, and the constructive spirit in which those of all political colours had contributed to it. This is surely even more true of the Bill that leaves this House today.

My first thanks must go to the members of the Parliamentary Commission on Banking Standards, represented in this House by the noble Lords, Lord Turnbull, Lord McFall and Lord Lawson, the noble Baroness, Lady Kramer, and the most reverend Primate the Archbishop of Canterbury. The central role that they have played in shaping this legislation is one of the things that has made this Bill so unique; indeed, the great majority of the amendments that it has undergone in this House directly implement the recommendations of the Commission’s final report on professional standards and culture in the banking industry. These measures are not only the crowning achievements of this piece of legislation, but the final piece in this Government’s ambitious four-stage programme of reform for the banking sector.

Many of the noble Lords in this Chamber today will have contributed to the first stage of that reform, the Financial Services Act 2012, which recast the regulatory architecture for financial services. This Bill, as it was introduced in another place, made provision for the second stage of that reform, the implementation of Sir John Vickers’s recommendations on structural reform of the banking sector, and the Bill that leaves this House today puts in place the two final pillars of that legislative programme, overhauling the culture of the banking industry, and driving out competition to improve outcomes for consumers. Of course, the Government’s commitment to implement the recommendations of the Commission’s final report through this Bill has meant that the task of scrutinising these incredibly important measures has fallen largely to this House.

I shall respond to the noble Lord, Lord Brennan. As I understand it the explanatory notes have already been written for the amendments, and they will be published tomorrow. As always, my officials are a little bit ahead of the game, but we absolutely take on board the need to communicate this effectively, both to the other place and more broadly to the City.

All these changes are a challenge to which this House has ably risen, but I must thank all noble Lords for their patience in giving such careful consideration to this wide-ranging and important set of provisions, particularly with the number of amendments that have been introduced, the speed with which drafts have been turned around, and the speed with which noble Lords have been asked to absorb so much information. In particular I must thank the opposition Front Bench, led by the noble Lord, Lord Eatwell, for its thoughtful and constructive contributions to the debate. I thank my noble friend Lord Newby for his support, without which it would not have been possible to provide the House with the level of response that it deserves, and my officials for their consistent hard work. Special thanks must go to parliamentary counsel for their heroic efforts in drafting amendments with such speed and precision.

The Bill that leaves this House today is completely transformed from the one that arrived here five months ago, and it is hard to imagine how it could have reached its present state without the contribution of those that I have but briefly mentioned. It is a vital addition to the statute book, whose importance is hard to overstate. I beg to move.

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[Lord Lawson of Blaby]

My Lords, it is incumbent on us to respond to the very kind words of my noble friend Lord Deighton. As he said, the Bill has been completely transformed. I have been a Member of this House for a very long time now but I cannot recall a Bill—let alone a Bill as important as this one—to have been so totally transformed for the better. It is not only a great deal bigger but also a great deal better as a result of its passage through your Lordships’ House. I am extremely grateful and the nation will be extremely grateful.

There has been a lot of nonsense talked about the excessive size of the banking sector in this country. Some people have been even as foolish as to talk about a monocrop economy. The fact of the matter is that banking accounts for a little over 5% of this country’s GDP; it is nothing like a monocrop economy. However, it is a supremely important sector and one in which we are world class.

There is a size problem—I have not got time to go into it now and it would not be proper to do so—with individual institutions. As the former Governor of the Bank of England said, if an institution is too big to fail, it is too big. The size of the sector is a great strength of this country. As the present governor, Mr Carney, said recently, it is a great strength of the United Kingdom that we are prominent and world class in this growing and supremely important industry. We want it to grow further, which I hope it will. It is our great strength. It is what economists call the law of comparative advantage—you should do what you are best at—and this is a sector in which we are very good. However, if it is going to get bigger and bigger, which I think it will and should, it has to be both clean and robust. The purpose of the Parliamentary Commission on Banking Standards was to try to ensure that it would be both clean and robust. That is what the Bill is about.

I say again how grateful I am to the Government, and particularly to my noble friend Lord Deighton, for having implemented so many of the recommendations of the parliamentary commission to ensure that the Bill leaves this House in an infinitely better state than when it arrived here.

[Lord Eatwell]

My Lords, the noble Lord, Lord Deighton, expressed the view that this was the final piece of the jigsaw in financial regulatory reform. He is going to be disappointed in that respect. What we have achieved is but a step on the road. Many issues have still not been addressed and many parts of the financial services industry have not been incorporated into the overall consideration of what is necessary as we move into the future with a successful and resilient banking system, to which the noble Lord, Lord Lawson, referred. More will need to be done.

I add my thanks to those of the noble Lord, Lord Deighton, to the Parliamentary Commission on Banking Standards, and particularly the Members of this House—the noble Lords, Lord Lawson, Lord Turnbull and Lord McFall, the noble Baroness, Lady Kramer, and the most reverend Primate the Archbishop of Canterbury. They have done a fantastic job, as was discussed in the debate last Thursday, and they deserve the thanks of the whole House.

I also thank those on this side of the House who have contributed so constructively to the discussion of the Bill—my noble friends Lord Watson, Lord Brennan, Lord Mitchell and Lady Hayter. I would particularly like to thank my noble friend Lord Tunnicliffe for keeping me in order, as he has done throughout this entire process. I would also like to thank our researcher, Miss Jessica Levy, who has worked alone, as opposed to having a team of officials. She has done the most remarkable job. She is a very talented person and we would not have been able to achieve what we have achieved and contributed from this side without her help.

The noble Lord, Lord Higgins, who regrettably is not in his place at the moment, referred to the somewhat unfortunate process by which the Bill has got to this stage. The Treasury has made a bit of a shambles of it, really, and we have just been catching up through these various stages. I hope that when we next have a financial services Bill that, instead of having this elaborate and confusing process of continuously amending parts of FSMA, we have a proper coherent rewritten Bill to consider at the very beginning and that it is considered properly by both Houses in its passage.

That critical comment about the Treasury has not diminished at all my pleasure in discussing the Bill with the noble Lord, Lord Deighton. Ageing professors typically take rather excessive proprietorial pride in the achievement of their pupils; all I can say at this stage is that I am delighted that my teaching of the noble Lord does not seem to have done him any permanent harm.

Bill passed and returned to the Commons with amendments.