Financial Services and Markets Bill

Lord Eatwell Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

[Baroness Bennett of Manor Castle (GP)]

My Lords, I rise to speak to Amendments 10 and 112 in my name; I gratefully acknowledge the support of the noble Lord, Lord Sikka. This is a bit of a diverse group, but Amendment 10 in particular heads in a similar direction to Amendment 9 in the name of the noble Baroness, Lady Bowles of Berkhamsted—a direction that seeks to lead towards a financial sector that meets the needs of the real economy rather than swallowing up the scarce human and capital resources that could be used to far better effect than creating complex financial instruments that, when they go down, threaten to take the rest of us with them.

Had it not been for events between Committee and Report, I might have chosen to sign the noble Baroness’s amendment instead of tabling my Amendment 10, which states that Clause 24—the growth and competitiveness clause to which the noble Viscount, Lord Trenchard, referred—should not be deleted from the Bill. It mirrors exactly the amendment tabled in Committee by the noble Lord, Lord Sikka, signed then by myself. However, in the light of events, I thought it really important that we tackle the “growth at any cost” foundation that underlies Clause 24: “Growth is infinite; let’s chase as much growth as we can”—which is, of course, the ideology of the cancer cell.

In Committee, the noble Lord, Lord Sikka, said:

“The secondary objectives of growth and competitiveness cannot be reconciled with the main role of ensuring financial stability and consumer protection”.—[Official Report, 1/2/23; col. GC 242.]


This is a position that we both hold. However, it was clear in Committee that there was no support from the Front Benches, and the issue might have been allowed to lapse. But then there were events that highlighted the many dangers of chasing growth in the financial sector. After several weekends of financial panic, emergency meetings and sudden bank rescues, parts of the real economy—in particular, the digital sector—were left highly uncertain of their financing. I am referring, of course, to the collapse and rescue of Silicon Valley Bank, Credit Suisse and Signature Bank, the first and last of those being mid-sized US banks and the middle one being a former European banking colossus.

These US events came after President Trump watered down the Wall Street Reform and Consumer Protection Act, better known as the Dodd-Frank Act, in 2018, reducing the supervisory oversight of banks with assets between $50 billion and $250 billion; the noble Viscount, Lord Trenchard, referred to this watering down in his introduction to this group. However, just because someone else is doing the wrong thing and reducing controls and protections, it does not mean that we should chase after and try to compete with them. As David Enrich from the New York Times put it, this was a

“crisis that has revealed the extent to which the banking industry and other opponents of government oversight have chipped away at the robust regulatory protections that were erected after the 2008 financial meltdown”.

What happened is that competitiveness had been advanced while security was lost and risk increased. A great many people had sleepless weekends as a result of that.

What has also become clear since Committee is how Credit Suisse clients withdrew nearly $69 billion from the bank in the first quarter of this year before its fire sale rescue by UBS in March. Of course, Credit Suisse had been hit by the insolvency of Greensill Capital—something that is rather close to home in your Lordships’ House—and the collapse of family office of Archegos Capital Management, which caused huge trading losses. However, the end came very quickly.

Clearly, in the digital age which SVB helped to fund, financial events can occur at a speed that was unimaginable even in 2007-08. I wonder whether, when wrapping up, any of the Front Benches are prepared to say that they believe that regulators today are truly prepared for the world in which they operate, a world that also faces the risks of other substantial shocks, as we have seen highlighted today with the Russian attack on the Kakhovka dam, geopolitical risks and, of course, environmental risks, since as we speak, Canada is essentially ablaze. That will undoubtably have enormous impacts on the insurance sector.

The IMF’s Global Financial Stability Report from April reflects on the challenges posed by the interaction between tighter monetary and financial conditions, and the build-up of vulnerabilities since the global financial crash. It says that:

“The emergence of stress in financial markets complicates the task of central banks at a time when inflationary pressures are proving to be more persistent than anticipated”—


a statement which is particularly true within the UK. There are stresses from the shadow banking sector, the effect of geopolitical tensions on financial fragmentation, the risk of potential capital flow reversals, disruption of cross-border payments, impacts on bank funding costs, profitability and credit provision, and more limited opportunities for international risk diversification. The IMF concludes that there is a need to “Strengthen financial oversight”. This is all referring to events since we were in Committee. That is my case for Amendment 10.

My Amendment 112 is much more modest and addresses in a different way a point that I raised in Committee. I discussed the growing body of literature around too much finance, but in this amendment I am not asking the Government to agree with me on that; I am asking for them to prepare a report to consider the ideal size of the financial sector. What is the Goldilocks range for a financial sector, where we can afford the risks and supply the human resources and it serves the needs of the real economy?

As the House has heard before, I approach this question in the light of the Sheffield Political Economy Research Institute’s study from 2018, which found that the UK had lost £4.5 trillion over two decades because of its oversized financial sector—£67,500 per person. To bring this right up to the present day, in a study published last week, the global hiring website Climatebase has posted more than 46,000 jobs from over 1,500 organisations in the past two years. Of these, data science and analytics were the hardest to fill, taking an average of nearly four months to fill posts compared with three months for engineering roles.

This brings me back to Amendment 10, which would delete Clause 24. I did not have a chance to speak in Committee, but I suggest that Clause 24 as it stands is internally contradictory. It gives the FCA the duty of facilitating the international competitiveness and medium to long-term growth of the economy of the UK,

“including in particular the financial services sector”.

This clause talks of growing the economy of the UK and growing the financial sector. I posit that those two objectives are mutually contradictory. I refer to a Bank for International Settlements working paper from 2018, Why Does Financial Sector Growth Crowd Out Real Economic Growth? It is actually impossible to promote growth both in the real economy and in the financial sector. It comes back to—probably the easiest part of this to understand—the need to think about human resources. We all know the labour shortages and skills shortages that so many sectors of the UK economy are suffering, and we know that many skills are going into the financial sector when they could be going into other areas.

Tomorrow, your Lordships’ House will debate the report of our Science and Technology Committee titled “Science and Technology Superpower”: More Than a Slogan? I am not asking any Front-Benchers or the Government to agree with the claims that I am making here; what Amendment 112 asks for is a report to look at the evidence, so that the Government and the country can make considered judgments about what size financial sector we both need and can afford.

[Lord Eatwell (Lab)]

My Lords, I will address the amendments proposed by the noble Viscount, Lord Trenchard. In some way, they are part of the whole privileging of the competitiveness objective, but I do not want to talk about that. I will talk specifically about his concern about aligning with international standards.

I suggest that the success of the development of international financial markets since the 1970s has been predicated entirely on the development of an international regulatory system. It was first stimulated by the Herstatt Bank crisis in the summer of 1974, which led to the establishment of the Basel committee on settlement risk. Since then, we have developed a whole international financial infrastructure of regulation—the Basel committees, IOSCO and, most importantly today, the Financial Stability Board. That, by the way, was a British idea that has greatly aided the stabilising of international financial markets.

These committees, as the noble Viscount, Lord Trenchard, pointed out, are not part of any form of international law or treaty. They are what is known in the trade as “soft law”. They are laws that countries agree it is in their mutual benefit to align with, and failing to align is against the benefit of individual countries as well as of the system as a whole. It has been the judgment of His Majesty’s Government that it is in the best interests of the United Kingdom to align with international standards.

But there are other international standards with which we align. Take the Paris-based Financial Action Task Force. Would the noble Viscount, Lord Trenchard, suggest that we do not align with the international anti-money laundering police? It is essential that we agree to align with this framework of international financial regulation, which we have been such an important element in creating.

[Viscount Trenchard (Con)]

My Lords, I am grateful to the noble Lord for giving way, but I want to correct him for criticising me for opposing all international standards. The ones he has chosen to mention are not ones that I objected to specifically. I was just saying that in general international standards are not defined.

[Lord Eatwell (Lab)]

I suggest to the noble Viscount that, in fact, the whole corpus of international soft law on finance is generally known in the trade as the international standards, and those who work in the regulatory community would immediately relate to the proposals of those particular institutions. As the noble Lord pointed out, occasionally Basel standards have not been followed. This is true in the United States, where only international competitive banks follow Basel committee standards. The US has learned painful lessons over the last year or so with the collapse of Silicon Valley Bank and others that did not follow Basel standards. The relaxation of standards was one of the elements that led to that particular collapse. Alignment with international standards and the institutions which—I say again—Britain has done so much to help develop is an important part of the maintenance of financial stability in this country.

[Lord Davies of Brixton (Lab)]

My Lords, I will make an argument that the idea that greater competition is a public benefit is simply wrong, if you think it is inevitable. Now, I spoke about this at length in Grand Committee a couple of weeks ago, and the Minister had the benefit of my views on the matter at the time, so I am not going to repeat them at length; one or two other Members present did as well.