Financial Services Bill

Lord Eatwell Excerpts

Committee stage
Wednesday 10th March 2021 Grand Committee

[Baroness Kramer (LD)]

My Lords, in many of the groups of amendments to the Bill we have discussed the issue of accountability, and it has been a very important discussion. However, we have also discussed the necessity to have proper evidence and information to make that accountability worthwhile, valid and effective. These amendments follow exactly that direction.

One of the pleas that I will put in is that an impact assessment should be studied and then reviewed. The noble Lord, Lord Tunnicliffe, is not speaking in this group of amendments but I can think of numerous occasions when he has spoken on a financial services Bill and pointed out that the information in the assessment did not seem to answer any of the obvious questions that a sensible person would ask in order to understand the regulations involved. I would join him in that. We seem to have narrow definitions of what an impact assessment is, and it seems to me that it should do what it says on the tin. It ought actually to assess the impact in a way that is meaningful to the regulation or piece of legislation in front of us.

This push for evidence and information, and quality in both, is an important thrust of the conversations and debates that we have had around the Bill. I very much hope that Ministers take that on board, because this is starting a pressure that will not go away. In fact, for the Government, if they want to produce the highest-quality legislation possible, the discussion created by developing a high-quality impact assessment will lead in the end to far better legislation.

[Lord Eatwell (Lab)]

My Lords, my initial reaction to the amendment of the noble Baroness, Lady Neville-Rolfe, was to puzzle over exactly what sort of impact assessment she had in mind. Was she perhaps thinking of the famous remark by the noble Lord, Lord Turner, that the banking sector in the UK does much that is not socially useful? After all, the ultimate rationale for regulatory activity is the enhancement of the common good—the goal of good government.

However, this debate has clarified the issue before us, which is that an effective impact assessment requires not just thorough analysis but a definition of an objective or, perhaps, objectives. The lack of clear objectives is the key weakness of Amendment 103. Amendment 104, therefore, is much stronger in that it lays out a number of objectives against which an impact assessment might be calibrated. The key to resolving the dilemma—I apologise for sounding a bit like a broken record—is to take the parliamentary role referred to in Amendment 103 and combine it with the sense of Amendment 104. An effective parliamentary process and, dare I say, a parliamentary committee, could define the objectives to be addressed in any impact assessment of the type referred to in Amendment 103—“We want to know the impact of this regulation on problem x, y or z”—and then seek annual reviews focusing on matters that are deemed to be important at any given time, thereby avoiding the template issue referred to by the noble Baroness, Lady Noakes.

That is what is missing from the amendment—a means of making the impact assessment an effective means of acquiring information and an insight into the thinking of regulators, which can then be scrutinised in a coherent and consistent manner.

[Earl Howe (Con)]

My Lords, as my noble friend Lady Neville-Rolfe has explained, these amendments bring us to the question of how we report on the impact that regulation has on firms. Every noble Lord who has spoken today has referred to the value of impact assessments for Parliament and the Government in particular, and I do not dissent from that general proposition. My noble friend Lord Trenchard in particular spoke about the value of measuring the burden imposed by certain EU rules when we were an EU member. I hope that it is of comfort to him if I remind him that the Chancellor has said that decisions about financial services regulation after the end of the transition period—we have of course now passed through it—would be based on what was right for the UK, taking account of what is necessary to ensure financial stability, market integrity and consumer protection.

Amendment 103 would require the Government to lay impact assessments for each of the regulations made under the Bill. It would also require the PRA and the FCA to publish any rules made using the powers in the Bill in draft, alongside an impact assessment. I do not believe that the amendment is necessary, as the Government and the regulators are already committed to identifying and publishing the expected impacts of subsequent rules and regulations made under the Bill.

The Government have of course published an impact assessment alongside the Bill. In line with the guidance set out in the Government’s Better Regulation Framework, the impact assessment sets out HM Treasury’s current understanding of the costs and benefits of the measures. Where appropriate, further details will be set out in the impact assessments that will accompany the secondary legislation made under the Bill. I remind my noble friend Lady Neville-Rolfe that the regulators are required by FSMA 2000, with some very limited exceptions, to undertake a cost-benefit analysis for proposed new rules, and to publish those alongside their draft rules as part of their consultation. The PRA and FCA have already published their first consultations on the draft rules that they intend to make in relation to the prudential measures in the Bill, and they include comprehensive cost-benefit analyses.

Amendment 104 would require the Secretary of State to report on the impact on business that measures taken by the regulators and the Government to regulate financial services may have, and particularly to report on the impact on small businesses, innovation and competitiveness. We have spoken at length in this Committee about competitiveness, and I hope that I have demonstrated how importantly the Government take this issue. Additionally, my noble friend Lady Penn recently wrote to my noble friend Lady Neville-Rolfe about how the Government support smaller financial services firms.

I am sure that my noble friend Lady Neville-Rolfe does not need to hear me say that the Government are committed to ensuring that the financial services sector supports competition and innovation, allowing new firms to compete and grow. Of course, both the FCA and the PRA have a statutory objective to promote effective competition.

In earlier debates, we have talked about the new accountability frameworks that the Bill puts in place for the prudential measures. Those require the PRA and the FCA to have regard to UK competitiveness, among other things, when making rules to implement Basel or the investment firms prudential regime. They are required to report on how having regard to that has affected their proposed rules. The FCA and PRA are of course already required to prepare annual reports, which are laid before Parliament for scrutiny. These reports cover the extent to which the regulators’ objectives, which include promoting effective competition, have been advanced, and how they have considered existing regulatory principles in discharging their objectives.

On this basis, I hope that my noble friend Lady Neville-Rolfe agrees that I have said enough to make her feel comfortable in withdrawing her amendment.

--- Later in debate ---

[Baroness Kramer (LD)]

I was in the middle of saying that we need the FCA to be much more aggressive and transparent in its pursuit of wrongdoing within the financial services industry. I gave the example of what I considered to be real weakness in the way that it handled the HBOS Reading fraud and in its treatment of Jes Staley, chief executive of Barclays. As we discussed earlier, he was fined by the PRA and FCA, under the senior managers and certification regime, something in excess of £600,000 for, among other things, hiring private detectives to try to hunt down the identity of an internal whistleblower.

I note that it was the US authorities—one of the New York regulators, I think—that fined Barclays $15 million for the same behaviour, not the UK authorities. Some Members of your Lordships’ House may be aware that the US regulators visit the UK—I have certainly met with the CFTC when they have been doing this—in order to get the message over to bankers here that, if they come across any wrongdoing that potentially has an impact on the United States, as well as informing the UK regulators they should also make immediate contact with US regulators, who start from a position that they will be far more aggressive in hunting down wrongdoing.

I am afraid that the reputation of the UK for hunting down wrongdoers is not good. I wish we did not see ourselves in that position. That is one of the reasons why I am hopeful for an office of the whistle- blower. If there is any suspicion that a Minister had intervened inappropriately, it is through a whistleblower that that information would be exposed. We need an absolute safe haven for such a whistleblower to make contact, in order for that exposure to happen. Again, I look forward to hearing from the Minister how the Ministerial Code impacts on a situation such as this. If it does not, or is ineffective, the answer seems to me to be: strengthen the Ministerial Code.

[Lord Eatwell (Lab)]

My Lords, my noble friend Lord Sikka has made a powerful case for greater transparency in regulatory matters. I think it is clear to everybody that nothing undermines confidence in the regulatory system so much as the sort of cases to which my noble friend referred. What is often evident is that these matters eventually come out, and so the traditional rule that the cover-up is worse than the original transgression exerts itself once again.

The Government have made a virtue of transparency and openness in several aspects of the regulatory system. Not least, for example, we have discussed in this Committee the case of beneficial ownership, and we heard the noble Baroness, Lady Penn, make the argument for transparency of the beneficial ownership record of Companies House as a great virtue at an earlier stage of our considerations. Surely that commitment to transparency should be quite general, covering all regulatory matters, and not limited just to selected parts of the regulatory system.

[Earl Howe (Con)]

My Lords, Amendment 107 would require the FCA to make a public statement on the nature of any intervention a Minister may make into an FCA investigation into an individual firm.

The current legislative framework established the FCA as an independent, non-governmental body responsible for regulating and supervising the financial services industry. I listened with great care to the noble Lord, Lord Sikka but, with respect to him, and without belittling the value of lessons from history, the examples of investigations that he cited are ones that are unrelated to investigations carried out by the Financial Conduct Authority. That is a key point because, although the Treasury sets the legal framework for the regulation of financial services, it has strictly limited powers in relation to the FCA.

The Treasury is the FCA’s sponsor in government but, in view of the regulator’s independence, it is not appropriate for the Treasury or Ministers to seek to intervene in individual cases. In particular, the Treasury has no general power of direction over the FCA. I will write to the noble Baroness, Lady Kramer, on the content of the Ministerial Code, but I am not aware of any loopholes in the code that would permit the kind of conduct that has been talked about.

We are talking here about an independent organisation. The independence of the FCA is vital to its role. Its credibility, authority and value to consumers would be undermined if it were possible for the Government to intervene in its decision-making. I realise that the noble Baroness, Lady Bennett, has some mistrust of Government Ministers, but I hope that that fact is of at least some reassurance to her.

That is not to say that the FCA is not accountable for its actions when investigating potential wrongdoing or malpractice by firms because, equally, the noble Baroness, Lady Bennett, should be reassured that the FCA is governed by the framework of duties set out in legislation by Parliament. It would be unlawful for it to act outside this framework in order to further vested interests. The decisions of the FCA can be subject to judicial review and, under legislation, the FCA must maintain arrangements for the investigation of complaints.

In the event of a significant failure to secure an appropriate degree of protection for consumers, where those events might not have occurred but for a serious failure in the regulatory system, Section 73 of the Financial Services Act 2012 imposes a duty on the FCA to investigate. Situations can arise in which the Government determine that it is appropriate to intervene. In such situations, the relevant legislation—Section 77 of FSMA —provides a mechanism for the Treasury to direct the FCA to conduct an investigation where it suspects that there may have been regulatory failure.

Under Section 77, the Treasury can require the regulators to conduct an investigation into relevant events where the Treasury considers there to be a public interest. In addition, Section 77 investigations can consider aspects outside the regulatory system as established by FSMA, allowing a comprehensive review to be undertaken in the public interest. However, it is important to note that a Minister cannot use a Section 77 direction to do anything else at all, or to stop the FCA doing anything else.

The most recent example of Section 77 in action was in relation to the regulation of London Capital & Finance, when the Economic Secretary to the Treasury laid a direction before Parliament on 23 May 2019, and formally directed the FCA to launch an independent investigation. The direction was public and transparent, as we would always expect to be the case. The report was laid before Parliament on 17 December 2020.

I hope that this has clarified the legal underpinning of the FCA’s independence, and the very limited powers that Ministers and the Treasury have in this area. I hope that what I have said has reassured the noble Lord that appropriate legislation is in place, and that he is content to withdraw his amendment.