Financial Services (Banking Reform) Bill

Debate between Lord Flight and Viscount Trenchard

Wednesday 23rd October 2013 Lords Chamber

[Lord Flight]

My Lords, as the noble Lord, Lord Eatwell, pointed out, this is crucially important territory. However, I am not certain that the amendment gives the right answer.

I recollect that when I was studying economics at Cambridge 40-something years ago, a capital base of 8% and a gearing ratio of 12.5% was viewed as the prudent formula for a bank. Things have changed a great deal since then. Who was it that allowed banking ratios to get to such ludicrously low levels in this country? It was the regulator. Although we have a change of regulator organisation, there are still, to some extent, the same people and I am not sure that I necessarily trust the regulator in its new name as being sound in overseeing such things.

Look what has happened, I repeat, in the past 10 or 15 years. I think it was the noble Lord, Lord Lawson, who made the point that risk-weighted asset formulae are somewhat discredited. Again I agree and, having had some recent experience of it, I have little confidence going forward.

I also note in terms of ratios permitted that the regulator for some extraordinary reason—at least until the recent present—had ridiculous differences between the capital ratios required for large, too-big-to-fail banks and smaller and new banks. The ratio for mortgage lending was something like 20 times as much for a small bank as for a large bank. So, again, how come the regulator allowed crackpot different capital ratio requirements to creep in in a way that was thoroughly anti-competitive?

I am not sure that the Treasury may not be the safer party to ultimately have the power to determine capital ratios. As has been pointed out, the amendment states:

“The direction above may specify the leverage ratio to be used”.

The direction is given by the Treasury and so the amendment ultimately gives the last-call power to the Treasury and not to the PRA.

So where are we? I do not think the issue is resolved. It certainly needs addressing.

[Viscount Trenchard (Con)]

My Lords, I agree with much of what my noble friend Lord Flight has said. I also agree with a great deal or all of what my noble friends Lord Blackwell and Lady Noakes have said. I was also impressed by the way in which the noble Lord, Lord Turnbull, stated that he believed that the straightforward, unweighted leverage ratios should operate in tandem with a risk-weighted ratio.

I noticed that noble Lords opposite smiled when my noble friend Lord Blackwell pointed out that if the absolute ratio bites first and becomes effectively a frontstop rather than a backstop, it will lead banks to concentrate more heavily on risky assets, on lending on assets which they think will give them higher returns. I am convinced that that is correct. It is therefore important that the absolute ratio should be a backstop rather than a frontstop.

I am confused by the difference in responsibility between the FPC and the PRA. The amendment suggests that the Treasury should enable the FPC of the Bank of England to determine what the leverage ratio should be. However, as noble Lords have pointed out, the FSA had already become more involved in interfering with and providing advice, exercising influence over banks’ lending policies and questioning their formula and the basis on which they applied certain leverage to certain categories of asset class.

I am not sure where the writ of the FPC stops and where that of the PRA starts. I know that they are both part of the Bank of England and this is confusing. I would welcome clarification from the Minister.

Financial Services Bill

Debate between Lord Flight and Viscount Trenchard

Wednesday 28th November 2012 Lords Chamber

[Lord Flight]

My Lords, I think that there is broad agreement across the House that an ingredient part of a more stable banking system is that we should have healthy competition and, indeed, that a number of the problems that have developed over the past few years have been the result of a banking system that was not competitive enough, that was described as oligopolistic or cartelised. One important issue in terms of banking competition is the ease with which individuals can move their bank accounts.

I moved an amendment in Committee that largely covered all the practical things about transferring direct debits and standing orders. As many will be aware, the Payments Council has spent a lot of money on sorting that out and next September will implement its proposals to address the mechanistic aspects of changing a bank account.

My amendment in Committee raised the possibility of the Bill being used to enforce that. It is being done on a voluntary basis, and I am aware that most banks have signed up to the Payments Council arrangements. The one aspect that is not covered is the grandfathering of anti-money laundering information. I declare an interest as a senior non-executive director of Metrobank. Metrobank has pioneered removing a lot of the unnecessary—indeed, uncompetitive—measures that banks have typically used, such as requiring you to have your passport signed by a lawyer and to produce an original bill. Metrobank is able to get all the information it needs from your driving licence, so it can open an account pretty quickly. However, that cannot cover all circumstances, and as any existing bank has to have done all the necessary “know your customer” and anti-money laundering checking, it seems only sensible if, when an individual moves an account, the existing bank is obliged to pass on—to grandfather, to hand over—that anti-money laundering information to make it easier for individuals to move their accounts. Amendment 116B provides for banks to do that without charge.

I would obviously be lucky to get the Government’s agreement to include that in the Bill, but in thinking how it might be dealt with practically, this is an issue where the FCA, if not the PRA, could reasonably direct the banking system. One way or other, anti-money laundering is being used as a deliberate barrier to competition, a deliberate discouragement to people to move from one bank to another if they are unhappy with their existing bank’s service. That needs addressing and I hope that the Minister may have some clever idea as to how the point can be grasped.

[Viscount Trenchard]

My Lords, I support the amendment moved by my noble friend Lord Flight. Since the disappearance of the traditional bank manager from the high street, customers have increased difficulty in communicating with their banks at all, let alone to request a transfer to another bank.

What particularly irks me is that when you seek to engage with the successor to a bank manager by telephone—or when you respond to a text message requiring you to telephone the bank—you first have to go through a long process of answering questions put to you by a machine to establish your identity. If you successfully pass such questions, you may eventually be able to speak to a human being, who will then proceed to put you through an identical process of security checking. I wonder why you cannot be put straight through to a human being, rather than wasting time on your telephone, usually on an 0845 number or something like that, answering questions put to you by a computer, because it does not make any difference. When you speak to the person, the person requires you to do the security again. It is then very often the wrong person and you are transferred to another department and you have to go through the process again, probably in duplicate, first with a computer and then with another human being. Therefore, you have to allow at least 30 minutes if you are going to attempt to engage with a bank to do something that ought to take five minutes.

I welcome my noble friend’s amendment. It should be made much easier to transfer your bank account to another bank. For a long time the mobile telephone companies resisted a similar facility to change supplier; I understand that it is now much easier to change from one company to another. I see no reason why it should not be so in the case of banks.

However, in order to permit the customer to do this, banks should be required to provide forms for this purpose on request—and the request should be able to be given in writing or orally—making clear what information is needed. Otherwise, people writing in may not give the correct address or branch of the bank, and the banks will have reason not to act on the request. So the forms should be standardised and make clear what information should be given.

At the same time, the individual should be required to grant permission to bank A that it may release on behalf of the customer what my noble friend calls the anti-money laundering information—the material that it holds in that connection—because otherwise bank A will surely be prevented from releasing such information to a third party under data protection legislation. It would be necessary to agree a prescribed time limit for the transfer of such information, because in the case of somebody who has banked with a certain bank for 40 or 50 years, material that bank may hold dating many years back may be irrelevant to bank B. Does my noble friend have any comment on that?

--- Later in debate ---

[Lord Flight]

My Lords, I thank the Minister for his supportive response and my noble friends Lord Trenchard and Lady Kramer for their support. I am delighted to hear that my noble friend Lady Kramer will be pursuing this aspect as part of the banking review; I make the simple point that it is obvious that it should be easy to move accounts. I also thank the noble Baroness, Lady Hayter, for her support.

I would not say that I was surprised but I am interested to note that the Minister cited yet another example of protectionist practices in the EU. To the extent that what he described is there to stop the transfer of such information or to make it unacceptable, it is clearly a barrier to trade. Anyone in the financial services industry who thinks that the single market means a free and competitive one has another thought coming, because the practical barriers to trade and financial services in the EU are substantial at a retail level. I am not sure if the Minister is right, however, because the law as it stands is that it is up to each bank to do what it wants to or feels is necessary and adequate to comply with its “know your customer” due diligence, and I would have thought that if the new bank got all this information it could make it a decision that it thought was sufficient.

I say to my noble friend Lord Trenchard that my amendment provided 10 working days for the information to be transferred once you had given notice that you were going to move your account.

[Viscount Trenchard]

I am sorry, I did not explain my question clearly. It was how old the information should be that must be transferred—10, 20, 30 years or what?

[Lord Flight]

The answer is that it is the current information that the existing bank has which satisfies its “know your customer” credentials. Maybe there could be a time period of two years or something, but it is the current information that is relevant.

On the basis of the Minister’s reply I am happy to withdraw the amendment, but I would like to think that somehow, through the banking committee, the FSA and the work that the Treasury is doing, a sort of code of practice among banks could be accepted and evolved. Just as the mechanistic aspects of moving bank accounts are being signed up to on a voluntary basis by the banks at the initiation of the Payments Council, I hope that practice in this area to go along with it might be brought into a code of conduct by banks. I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Flight and Viscount Trenchard

Wednesday 24th October 2012 Lords Chamber

[Lord Flight]

My Lords, I wish to speak in support of my noble friend’s amendment. It touches on unfortunate developments. The reaction of regulators to being criticised for what were described as the failures of light-touch regulation have increasingly led to a much more tough-guy, macho approach by them. In turn, I find major, totally responsible financial services businesses saying to me when they are unhappy and think some regulatory proposals are mistaken, “But we don’t want to talk to the regulators in case they punish us”. An unfortunate culture has developed of seeing the regulators as being very likely to use their powers against you, if you fall out with them.

The whole light-touch regulation story is a misinterpretation. What was wrong with FiSMA in that territory was the assumption that large institutions could be left to run their own affairs, which, as I warned at the time, missed out the fact that when large institutions go wrong they risk bringing down the whole system. The amendment may be belt and braces—I agree with my noble friend that to rely on complicated legal processes to get justice is not satisfactory—but I think it is perfectly straightforward, sensible and common sense to have that guideline as regards how investigations are handled. In the present climate, I think that is necessary.

[Viscount Trenchard]

My Lords, I, too, support my noble friend's amendment. I apologise for going back to the regulatory principles, but I continue to believe that it is a huge pity that the regulatory principles, by which both the PRA and the FCA are bound to operate, do not contain, to my mind, the very necessary principle that they should have regard to maintaining the competitiveness of the marketplace on which the United Kingdom depends so much for tax revenues, for prosperity, for employment and for all kinds of things.

I also speak with the experience of having been a member of the executive committee of a regulated firm for several dark years. I can assure the House that at least 90% of the time of an executive committee is spent discussing how to respond to regulators. There is a real fear of increased supervision and a more intrusive approach and, nowadays, many firms spend very little time talking about how to develop and to expand the business in order to provide further employment and earn more money so that the business can be consolidated and maintained in London. In the absence of, to my mind, such necessary principles, which ought to be there and by which the new regulators ought to have to abide, it is more necessary than it otherwise would have been that the regulators should act, as my noble friend’s amendment suggests and requires, “proportionately, reasonably and fairly”. I wholly support the amendment and I look forward to hearing the comments of the Minister.

Financial Services Bill

Debate between Lord Flight and Viscount Trenchard

Monday 8th October 2012 Lords Chamber

[Lord Flight]

My Lords, I think it is self-evident that in gaining the advantage of twin peaks and what I hope will be a much better regulation of the safety of banks comes the cost of the requirement for elements of dual regulation and involvement. Rather contrary to what I had to say earlier about the authorisation of banks, when it comes to the authorisation and approvals of holders of controlled functions my amendment proposes, in essence, joint responsibility on behalf of the PRA and the FCA to approve holders of significant-influence functions for dual-regulated firms. Generally the industry has concerns that the proposed process for approving holders of controlled functions covered in Clause 12, which amends Section 59 of FiSMA, appears unnecessarily complex and might not have been fully thought through. From the drafting, it is unclear which regulator will be responsible for designating and approving some functions. The only straightforward, common-sense approach would be a joint responsibility on the part of the PRA and the FCA for granting approvals. Whatever system is put in place, it is important that it is run jointly in order to be as efficient as possible.

The draft MoU between the PRA and the FCA gives further details of the proposed system, but this makes it clear that there is an assumption that certain roles—for example, the CEO and the chairman—are inherently prudentially focused and so should be approved by the PRA, although with FCA consent. The holders of these senior roles are as much responsible for ensuring that the firm meets conduct standards as prudential standards; in the case of many businesses, the conduct standards may be more fundamental than the prudential standards.

I would like to hear the Minister’s comments on this territory, but one approach that might make life simpler is to have joint responsibility for the more senior dual-registered holders.

[Viscount Trenchard]

My Lords, I support my noble friend Lord Flight in his amendment, principally because it reads much better and is much easier to understand than the equivalent part of the Bill, which is confusing to say the least. I further agree that there is a very considerable risk that approved firms, having to apply to two regulators separately, is going to reduce the attractiveness of London and lead foreign firms to consider establishing in other centres businesses that could be established in London. There is already a perception that it is extremely cumbersome to obtain approval for significant-influence persons and that it is more difficult to do that here than in other financial centres around the world, so I definitely believe that my noble friend’s amendment would represent a significant improvement.

It is also important to ask my noble friend the Minister whether, if joint responsibilities are to be agreed between the PRA and the FCA, that would mean a single procedure. If the two regulators are made jointly responsible but operate slightly different procedures that with time become more different, it makes it much more time-consuming and expensive for regulated firms to comply with the requirements.

Has my noble friend also thought about customer-dealing functions? His amendments deal perfectly with the significant-influence functions, but the Bill as drafted also deals with customer-dealing functions, and I see no reason why these should not also be dealt with in an extremely simple and understandable manner using a form of words similar to his.

Where joint responsibilities between the two regulators are agreed, will this lead to the avoidance or elimination of the duplication of staff between them? If you have two regulators doing the same thing, you have double the people and you may have even more people who are responsible for talking to their equivalents at the other regulator. Where joint responsibilities under the memorandum of understanding or elsewhere are agreed and put into force, can that be done in a way that reduces rather than increases the number of persons necessary to carry out the process?

[Lord Sassoon]

My Lords, I can assure my noble friends that these matters have been carefully thought about. To some extent, the somewhat tortuous drafting is entirely to achieve a simpler and more cost-effective result, even if the drafting of the Bill is more complex than my noble friend has suggested, although I do not think he is doing it to make the drafting more comprehensible.

As with our earlier discussion about the authorisation of firms, we need to recognise that there are already difficulties in this area. My noble friend Lord Trenchard quite rightly points out how aspects of the authorisation processes in London are of concern to firms, particularly from outside Europe. I understand that. As he and I have discussed over a long period, different aspects of this go over many years. Whether it is the FCA or the new regulators, there is an ongoing challenge to make sure that the system is sensitive, appropriate and efficient, quite regardless of the new architecture. He makes an important point, but I suggest that it is a different point from the narrow but equally important one here about where best to do it in a dual-regulation, dual-supervision environment.

Amendment 165A would establish a different system for designating significant-influence functions, or SIFs. For dual-regulated firms, the PRA and the FCA would jointly make rules specifying which functions are SIFs and then put in place joint arrangements for approving individuals to perform them. For FCA-only firms, this would be done by the FCA alone. I can see the attraction of the approach which my noble friend Lord Flight is proposing. The language and the on-the-face-of-it approach perhaps appear simpler than the arrangements in the Bill at present. However, the arrangements in the Bill have been thought about, and we believe that they are preferable because they put one regulator in charge of leading the process for approving those who wish to carry out roles involving significant influence over the conduct of affairs of an authorised person. In most cases, this will be the relevant prudential regulator, although the FCA will be able to designate SIFs in dual-regulated firms where the PRA has not done so. For example, the FCA will have a greater interest than the PRA in the chief anti-money laundering officer, so it may wish to designate this function in the absence of the PRA.

We certainly do not think that the administrative process should be excessively difficult or lead to log-jams. The Government expect the two authorities to run a single administrative process for SIF applications, taking into account the statutory timeline. Indeed, the draft memorandum of understanding, published by the Bank and the FSA, makes clear that that is exactly what they will do: run one administrative process. I cannot answer my noble friend’s question about whether there will be more or fewer people. All I can say is that they have already documented a process to make it as efficient as possible.

With the explanation that this has all been very carefully thought out and that, although there is no perfect way to do it, we believe that the basis in the Bill as drafted will work better in practice for firms and for the regulators, I hope that my noble friend will withdraw his amendment.

Financial Services Bill

Debate between Lord Flight and Viscount Trenchard

Wednesday 25th July 2012 Lords Chamber

[Lord Flight]

My Lords, I support all three of these amendments. I declare an interest as a director and founder-member of Metro Bank.

Part of the total objective for the PRA of a safer banking system and banking stability is a need for more competition in the UK. One of the main sources of our problems has been a cartel. Whenever there are cartels bad habits tend to creep in. There is a history behind the cartel coming in, going back to Walter Bagehot in wanting to consolidate banks for safety, but there needs to be a balance. The PRA cannot achieve its major objectives without staunchly advocating greater competition and helping it to come about.

From my experience, it was agony going through a year and a half with the FSA getting the licence for Metro Bank. The sums of money that we had to spend were not quite as great as the noble Baroness reported but they were very substantial. The FSA kept changing its mind. The proposals for capital were out of all proportion to the risk of the bank. At the time, I wrote to the Minister reporting on the experience. Strangely, I do not think that there was ill intent by the FSA. It was very much about individuals wishing to protect their own position and not wanting to be attacked in some way in the media for having been too lenient on licensing a new operation. Memories go back to the early 1970s, when banking licences were given out too easily, and that was a major cause of the secondary banking crisis in 1974. However, it is absolutely right that a more competitive environment in banking should be a key factor which the PRA supports.

On international competitiveness, I have understood recently that the Government’s main objective is that they feel that this is somehow related to light-touch regulation that has got into trouble. I do not see that at all. It seems to me just silly for the UK to shoot itself in the foot with regard to an important industry that employs a lot of people, earns a lot of invisible earnings and so on. I would have thought that, in terms of regulating, it would be normal to consider the effect on international competitiveness. What was wrong with light-touch regulation—I remember it well—was the doctrine: “You don't need to regulate large institutions too much because they can look after themselves”. The weakness of that doctrine was that, if they got it wrong, as subsequently transpired, the problems for the whole system were that much greater. I think that was what was wrong and it has little or nothing to do with the competitiveness of the UK’s international banking services.

I do not accept at all the argument that a brief to keep watch on international competitiveness relates to inadequate or inappropriate regulation. Taking the point to absurdity, to ignore a debate about particular measures, which were clearly going to be highly damaging to the UK industry, would just be silly.

[Viscount Trenchard]

My Lords, my noble friend Lord Flight is, of course, completely correct in his assertion that the proposed new regulatory framework makes far too little mention of the need to preserve competitiveness of the marketplace, not just competitiveness from the point of view of the consumer but the very competitiveness of the marketplace for practitioners to participate in. For that reason, financial services companies from all over the world have come into London and that has helped to provide more consumer choice, and it will continue to do so in the future, as well as providing the Exchequer with a very large proportion of its annual revenue. It is a huge pity, as my noble friend has pointed out, that the Treasury mistakenly believes that preservation of international competitiveness implies approval of inappropriate or inadequate regulation.

All three amendments have some merit but of the three I tend to prefer the amendment proposed by my noble friend Lord Hodgson because it gives a duty to the PRA to have regard to competition. I would have preferred that the PRA had an objective to protect the competitiveness of the marketplace as well but I realise that there are some valid arguments against that. To have a duty—“duty” is a strong word—to have regard to competition is the preferred of the three amendments put forward. The points in my noble friend’s amendment are all to do with minimising adverse effects, or avoiding restrictions or unnecessary regulatory barriers to entry; they are all negatives rather than positives. I would prefer this issue to be expressed in a more positive manner. I have worked for a Japanese-owned financial institution; I am not sure whether this is a UK institution under proposed new paragraph (d) in my noble friend’s amendment. It is, of course, a UK-incorporated plc. Could my noble friend clarify what “UK institutions and companies” means? It is very important for London that the level playing field for all participants is preserved and I hope that the amendment refers to UK incorporated or UK resident financial institutions and companies.

My noble friend’s amendment also makes it very clear how necessary it is to have collaboration and co-operation between the PRA and the FCA. Proposed new paragraphs (b) and (c) impact on matters that are of great concern to the FCA. I hope that these matters will be properly covered in the memorandum of understanding to be drawn up between the PRA and the FCA.

Financial Services Bill

Debate between Lord Flight and Viscount Trenchard

Tuesday 26th June 2012 Lords Chamber

[Lord Flight]

My Lords, I am unclear as to what are the Government’s proposals, the Opposition’s proposals and even the Treasury Select Committee’s proposals. It strikes me that a great deal of complexity is made out of a situation which should be extremely straightforward. The Bank of England should have a board of directors—you can call it the court, if you like—composed of proper individuals independent of the Bank of England who have substantial experience in the financial services industry and who have all the powers of a board.

I am a commissioner of a minor regulator, the Guernsey Financial Services Commission, and we operate as a board controlled by non-executives to which the executive regulator is accountable and where the board has the power to fire the chief executive and the requirement to understand and be on top of every regulatory issue that is in the course of being addressed. I cannot see why the Bank of England should not have a board of that nature. Indeed, the court has a lot of the powers required to exercise that role. It is just that it has not done so for many years and has been an ornament.

We then have the question of what the FPC should do. Some have said that it will take over as the board that runs the Bank of England. However, it seems to me that the FPC should be a specialist body which focuses on the fundamental issue of what is going on in the banking industry and advises the board on financial stability; it should not be a substitute for or take over from a proper board of the Bank of England which covers all the issues. However, if there is a specialist body and a proper board in this structure, I cannot see what is wrong with it.

I also have to agree that, certainly between 2007 and 2008, the Bank of England did not exactly do very well. Much to my chagrin, it was really the ECB that managed to keep the banks and the City of London afloat, since the Bank of England, extraordinarily, did not recognise a major run on the banking system that was far greater than the one in 1974, which I also lived through. My reply on that point is that these bodies need to contain a majority of independent people. If the board or the FPC is not controlled by independents, then they will be in the control of the governor. Both bodies need independent people who can stand up to the establishment of the Bank of England.

I look forward to learning from the Minister precisely what the amendments mean. Solving the situation should not be particularly difficult but is actually a matter of common sense.

[Viscount Trenchard]

My Lords, I, too, share the nervousness of the noble Lord, Lord Eatwell, about the governance of the Bank of England, and I agree that the Bill is extremely complicated. I take my hat off to those who have worked hard on the Joint Committee. Their task was very much harder than the one that the noble Lord and I had—under the chairmanship of the noble Lord, Lord Burns, who is in his place—when we scrutinised the then Financial Services and Markets Bill some 12 or 13 years ago. This task is clearly much more difficult given that it does not attempt a total rewrite of that legislation. Although I am not sure whether the PRA or the FCA will be the continuing entity of the FSA, as I understand that two-thirds of the FSA personnel will be moving to the FCA, I believe that for most purposes the PRA will nevertheless be the continuing entity.

Although I understand why the noble Lord, Lord Eatwell, has moved his amendment, I am afraid that I am unable to support it. Like my noble friend Lord Flight, I believe that the situation is quite simple: the Bank of England has a perfectly good Court of Directors—a term which I think sounds rather good. Some of your Lordships may think that it sounds arcane and fusty but, on the other hand, it has a certain amount of gravitas. To change it to “supervisory board” would be very un-British. In my business life, I have come across many supervisory boards, in Holland and in Germany. In many cases, I find them semi-detached, rather remote and rather nervous to exercise their powers. If we were to adopt the term “supervisory board” it would give a weak impression—much weaker than the rather heavy-sounding Court of Directors gives. I do not think that there is no problem with the court’s name. However, I agree that its accountability needs to be strengthened, given the additional powers that the Bank will receive. Certainly, some changes need to be made to the governance of the Court of the Bank of England.

The noble Lord also referred to the asymmetry between the Monetary Policy Committee and the proposed Financial Stability Committee, in that the first is independent of the court, whereas the new Financial Stability Committee would be subordinate to the court. I do not think it necessary, in this connection, to strive for total symmetry, because the Monetary Policy Committee has a very specific responsibility, to set interest rates, which is a technical matter. It is essential that it continues to conduct its business in a transparent and independent way and to be composed of persons who are able to provide technical expertise in determining interest rates. The Financial Stability Committee will have a much broader remit. Regarding the oversight of our prudential regulation, both macro and micro, I do not quite understand why it is necessary that the two be so separated; it makes the structure more complicated than it need be. So I have sympathy with the noble Lord’s purpose, but I cannot agree that to replace the court with a supervisory board would be the right way to go.