Financial Services Bill

Lord Eatwell Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 24th February 2021 Grand Committee

[Baroness Kramer (LD)]

My Lords, we have, sadly, become used to skeleton primary legislation, with policy embedded in statutory instruments that cannot be amended and cannot be voted down without threats of a constitutional crisis. But at least statutory instruments can be brought before Parliament, and Ministers must then make the case.

This Bill is a new low—skeleton primary legislation, elimination of secondary legislation and policy set in regulators’ rules with no meaningful accountability to Parliament. The accountability set out in the Bill, which largely mirrors proposals in the future regulatory framework review, provides, in essence, just for a bit more explanation by the regulator, the existing right of a parliamentarian to submit evidence to any consultation, and the existing right for committees such as the Treasury Select Committee and the Economic Affairs Committee to question the regulator from time to time. This will be the policy framework shaping a sector of the economy that will fundamentally impact our national prosperity, jobs and public spending.

The Minister was kind enough to meet us, so I can perhaps anticipate some of the arguments that the Government are likely to make. They will argue that the Bill is just a stopgap while consultation takes place, but the consultation under way has multiple stages and will stretch the whole process out for 18 months or two years. By then the horse will have long bolted and procedures will largely have been set in stone. Perhaps the Minister would spell out the timetable—because the Bill looks to me like a template, not a stopgap.

Secondly, the Minister will say that only part of financial regulation is covered by the Bill. But, since it includes all of Basel III, the Bill actually covers almost everything that matters in prudential regulation. I have also heard from parts of industry that a second financial services Bill is on its way. I do not know that; I have not heard it from the Government—but if so, it will have come and gone before the new framework legislation is finalised. Perhaps the Minister would comment on that. It is absolutely clear that what happens with this Bill genuinely matters.

I value consultation—real consultation—but I am saddened because consultation has become a cynical tool to sideline Parliament. “Just give us a free hand now, because we’re doing a consultation.” Colleagues who cover other areas of policy tell me that this is a pattern, and are now concluding that it is cynically being used with a wide range of legislation, to make sure that Parliament is sidestepped.

I suspect that the Minister will argue that the powers being given to the regulators in this Bill, with minimal accountability, are necessary so that the UK can respond to changing events. After all, we have left the European Union and times are going to change. I regard that as nonsense. We are in changing times, but we have proved in the last year that fast-track procedures exist when they are genuinely needed.

I very much welcome the amendments tabled by the noble Baroness, Lady Noakes, also signed by my noble friend Lady Bowles, and the noble Baroness, Lady Bennett. They are tough: they would prevent Schedules 2 and 3 coming into effect before the accountability deficit is sorted. That, I suggest, is what the circumstance warrants.

This group of amendments was revised from Monday, so it now includes proposals detailing how accountability can be structured. We have heard a whole series of brilliant speeches in this debate, so I want to make only some limited comments.

The noble Lords, Lord Tunnicliffe and Lord Eatwell, have tabled a number of amendments laying out process and timetable. I find that extremely constructive. By contrast, the noble Lord, Lord Blackwell, has tabled an amendment that covers similar territory, but with such a light touch that—I hope he does not take this wrongly—I think it will be read as cosmetic. The industry needs to recognise the importance of proper scrutiny and understand that scrutiny in name only will, in the end, do the industry itself no long-term good.

In addition to the procedural amendments, my noble friend Lady Bowles has tackled an equally crucial but often overlooked element of oversight—one that goes to the heart of the matter. It is the need for the regulator to provide the detailed information to Parliament to fully understand and evaluate the evidence, reasoning and consequences of changes to rules. For years this has been done for us within the oversight process of the European Parliament, which has expert resources in depth. My noble friend, in her role in that Parliament, was able to use the information to improve proposals for rules and make them more effective. We have now lost that capacity, and nothing in the Bill or the framework consultation replaces it.

My noble friend Lady Bowles has also proposed amendments that would put this oversight on a regular basis, not just an ad hoc one, and would bring in an independent expert panel to do some of the heavy lifting. As the noble Lord, Lord Holmes, referred to, recently the All-Party Parliamentary Group on Financial Markets and Services addressed similar concerns. I quote from its February report, The Role of Parliament in the Future Regulatory Framework for Financial Services:

“Regardless of the format, the level of technical support available to Parliamentarians in this policy area will be key.”


The APPG goes on to propose secondments from the Treasury to the relevant parliamentary committees to bolster institutional capacity. I personally regard that as the wrong approach—that would be letting foxes into the henhouse—but it makes the point that proper parliamentary oversight requires new expert capability to replace that lost with Brexit. We have expertise within the regulator but we must have it for oversight of the regulator.

Before I finish, I want to refer to Amendment 137, tabled by my noble friend Lord Bruce, which would require the Government to consult on rule changes with the devolved Administrations. It is quite shocking to me that the devolved Administrations are overlooked in the Bill. Scotland is a major player in financial services and that needs to be recognised.

I will listen to the Minister’s response. I hope he will not repeat the airy dismissal that the Economic Secretary in the Commons deigned to give as his response. Voices on all Benches in this House are capable of coalescing around a set of viable amendments on Report that would at least remedy the worst in the Bill. The Government ought to be coming forward with the best.

[Lord Eatwell (Lab)]

My Lords, in due course I will speak to the amendments in the name of my noble friend Lord Tunnicliffe and myself, which, as many noble Lords have commented, would introduce operational proposals that would address the problem of adequate parliamentary scrutiny.

Before I turn to those practicalities, though, I wish to speak to the amendments tabled by the noble Baroness, Lady Noakes, supported by the noble Baroness, Lady Bowles, and the noble Lord, Lord Holmes, which deal with the principles at stake. As we might expect from the noble Baroness, Lady Noakes, her amendments are precise and direct and go to the heart of the matter: the inadequacy of parliamentary scrutiny.

I regret that I was unable to attend the Second Reading debate on the Bill. On reading the report of that debate, it is evident that an overwhelming sentiment in your Lordships’ House was that the procedures suggested by Her Majesty’s Government for the future development of the regulatory powers display a serious lack of appropriate parliamentary scrutiny. The fears expressed at Second Reading can only have been further reinforced by the note entitled “Meeting between the Economic Secretary, Peers, the Financial Conduct Authority and the Prudential Regulatory Authority: Background Briefing for Peers”, and by the document Financial Services Future Regulatory Framework Review Phase II Consultation, published by Her Majesty’s Treasury in October last year. Both documents advocate a degree of parliamentary scrutiny that may at very best be described as minimalist. Seldom can two documents have made the case so eloquently for the adoption of a policy entirely at odds with that which they propose.

The central thrust of government thinking is spelt out in the phase 2 consultation document to which I have just referred. It may help if I quote the relevant passage:

“The Financial Services and Markets Act 2000 (FSMA), and the model of regulation introduced by that Act, continue to sit at the centre of the UK’s regulatory framework. The government believes that this model, which delegates the setting of regulatory standards to expert, independent regulators that work within an overall policy framework set by government and Parliament, continues to be the most effective way of delivering a stable, fair and prosperous financial services sector. The model maximises the use of expertise in the policy-making process by allowing regulators with day-to-day experience of supervising financial services firms to bring that real-world experience into the design of regulatory standards. It also allows regulators to flex and update those standards efficiently in order to respond quickly to changing market conditions and emerging risks. The FSMA model was readily adapted to address the regulatory failings of the 2007-08 financial crisis.”


Commenting further on the manner in which this model was readily adapted to address the regulatory failings of the 2007-08 financial crisis, the authors of this document declare:

“The financial crisis of 2007-08 revealed serious flaws in the UK’s system of regulation, particularly in the allocation and co-ordination of responsibilities across the ‘tripartite’ institutions – HM Treasury, the Bank of England and the FSA … The post-crisis framework reforms were therefore focused primarily on institutional design and allocation of responsibilities.”


So the problem that led to massive regulatory failure and to a regulatory system that failed to protect UK citizens and firms from a near-existential breakdown in the financial system, that heralded a sharp downturn in real income and higher unemployment, and that led inexorably to the disastrous austerity policy was a problem of

“institutional design and allocation of responsibilities”.

There is no mention of the failed analysis, no mention of the pernicious groupthink that infected the analysis of the FCA and the Bank of England, no mention of the fact that warnings from distinguished commentators in academia and in the financial services industry were airily dismissed, and no acknowledgement that our regulators participated in the creation of a procyclical regulatory model that actually made the crisis worse than it otherwise might have been.

If anyone has any doubt that allowing regulators to bring that real-world experience into design of regulatory standards was the foundation of that massive failure, they should consider the words of Alan Greenspan, then head of the US Federal Reserve system—essentially, the western world’s senior regulator—speaking to the banking committee of the US House of Representatives in October 2008. He said:

“This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.”


Where in this document is the recognition that the intellectual edifice collapsed? Where is the acknowledgement that those with real-world expertise did not understand the systemic risks in the industry that they were supposed to be regulating?

All this was clearly set out in the Turner review, published by the FSA in 2009 and seemingly unread by the authors of this document. The review advocated a shift from microprudential regulation that focuses attention on the risks facing individual firms to macroprudential regulation focusing on the risks inherent in the operation of the system as a whole. It is entirely true that implementing that change has proved more difficult than the noble Lord, Lord Turner, could have anticipated. Basel III, the regulatory system lauded in this Bill, was supposed to do the job, but as Professor Hyun Shin, chief economist of the Bank for International Settlements, the home of Basel III, has commented:

“Under its current … form, Basel III is almost exclusively micro-prudential in its focus, concerned with the solvency of individual banks, rather than being macro-prudential, concerned with the resilience of the financial system as a whole. The language of Basel III is revealing in this regard, with repeated references to greater ‘loss absorbency’ of bank capital.”


When we turn to the impact assessment published by Her Majesty’s Treasury to accompany the Bill, we again find many references to the virtues of bank capital, its loss absorbency and the resilience of individual firms. There is, however, absolutely nothing about the attempt to deal with systemic risk using liquidity rules, resolution regimes and comprehensive supervisions. The authors of this document have been rewriting history. They have also failed to learn from history.