Financial Services and Markets Bill

Lord Lilley Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Lord Lilley (Con)]

My Lords, I begin by paying tribute to my noble friend Lord Lawson. As his researcher in my spare time before I entered Parliament, then his PPS for four years, then his Economic Secretary to the Treasury for two more, I learned my politics at his feet. I also learned to admire his immense intellect, his sound judgment, and—what may be less well known to others—his incredible, uncanny insight into human psychology, enabling him to forecast in advance the reactions of individuals and the public to events long before they occurred. When I saw him in the summer, his intellect, judgment and insight were undimmed. They will be sorely missed in this House.

I want to make five simple points. First, the four major global financial centres, London, New York, Hong Kong and Singapore, are all based on common law, as are the three newest players, Dubai, Abu Dhabi and Astana. By contrast, the largest European financial centre, based on civil law code, is Frankfurt, which clocks in at number 18 as the most significant globally. That is not a coincidence; it is because common law is uniquely suited to financial markets. In recent decades, layers of civil law code have been added to Britain’s financial system, so the objective of this Bill, to return rule-making to a more common-law-based approach, is very welcome.

Secondly, it is not clear whether the Bill will achieve that objective. Historically, the common-law approach involves laws and regulations made by Parliament and explicated by the courts by the accumulation of precedents. The Bill at present will effectively hand over rule-making to independent regulators, with minimal accountability to Parliament or involvement of the courts.

Thirdly, the economic analysis of regulation is a comparatively new discipline, but its seminal conclusion is clear: we cannot rely on the beneficence of regulators. Left to their own devices—and I stress this—regulators regulate in the interests of regulators, without accountability. That is why, in practice, they mind their own backs by taking a bureaucratic, box-ticking approach to every decision, rather than focusing their resources on areas of genuine concern. As a result, bona fide businesses face pointless delays to obtain the least contentious decisions; regulators refuse to offer advice on how they will apply specific rules in specific cases, leaving businesses to face uncertainty and risk; and regulators refuse to publish reasons for their decisions, with the result that there is no coherent body of case law for firms to follow. Finally, regulators tend remorselessly to extend their remit, increasing their own importance.

I understand that amendments are likely to be proposed to make regulators more accountable to Parliament, or at least to a powerful Joint Committee of both Houses. Having chaired the Joint Committee scrutinising legislation following the great financial crisis, I can vouch for how much value the Members of this House give to such committees, as well as those of the other House, to which I then belonged. It is also important that there are amendments to require regulators to apply common law disciplines and to enable tribunals to ensure that a body of publicly available case law develops to give practitioners greater legal certainty. I am predisposed to support such amendments, as I hope will the Government.

Fourthly, I understand that the regulators have been arguing that their independence is sacrosanct. To quote Mandy Rice-Davies, “They would say that, wouldn’t they?” Of course politicians should not meddle in how regulators apply rules to specific practitioners, but the Bank of England was given independence to set interest rates for a very specific reason: because the timing of interest rate changes is electorally sensitive. There is no equivalent reason to allow the financial regulators to be immune to influence and oversight from Parliament or the courts.

Fifthly, finally and rather differently, there is no reason to extend the regulators’ competence to include climate change. The sensible path to net zero, which we have adopted in this country, is to reduce demand for fossil fuels, not to reduce their supply. If businesses overinvest in producing fossil fuels ahead of declining demand, they will lose money. That is their problem, not the regulators’. If the UK unilaterally bans investment in fossil fuels, which would be a bizarre thing to do given that we do not ban their import, other people will supply them, both here and abroad. If the world collectively restricts the supply of fossil fuels faster than we phase out demand, there will be shortages, prices will shoot up and fossil-fuel producers will make enormous profits; we will have done to ourselves what Putin has just done to the world. Giving regulators a climate objective would be either pointless or disastrous. In all other respects, I support the Bill.

Financial Services and Markets Bill

Lord Lilley Excerpts

Committee stage
Wednesday 1st February 2023 Grand Committee

Moved by

[Lord Lilley]

46: Clause 24, page 38, line 19, at end insert—
“(4B) When discharging its general functions in the way mentioned in subsection (1) the FCA must, so far as reasonably possible, act in a way which, as a secondary objective, advances the predictability and consistency objective (see section 1EC).”Member’s explanatory statement
This amendment and Lord Lilley's other amendments to Clause 24 require the FCA and PRA to maintain high standards of clarity, predictability and certainty in exercising their general functions and applying their rules and guidance.

--- Later in debate ---

[Lord Lilley (Con)]

My Lords, I rise to address the amendments in this group standing in my name and those of my noble friends Lord Moylan, who is currently speaking on the Online Safety Bill, and Lord Trenchard.

The Bill gives the regulators the responsibility for replacing retained EU law and regulations with more user-friendly common-law rules. That greatly enhances their already considerable power to make as well as to apply regulations. That has led to demands from across your Lordships’ House to increase the accountability of the regulators to Parliament, which I support. However, parliamentary scrutiny is inevitably broad-brush and largely ex post facto so it cannot alone provide effective accountability. Legal accountability is also needed—above all to ensure predictability and consistency in the way that regulators develop and apply their rules.

The amendments standing in my name and those of my noble friends attempt to achieve that. I am not a lawyer, so I am grateful to those distinguished legal practitioners who have drafted these proposals and whose glove puppet I am. The overall aim is to ensure that regulators act predictably and consistently: first, by giving them that explicit objective; and, secondly, by enabling more case law to develop on the meaning of the regulators’ rules through the application of legal reasoning to disputes between financial institutions and SMEs, consumers and others.

We have sought to achieve that aim subject to two constraints: first, the revised system should not generate unnecessary litigation or legal costs; and, secondly, SMEs and consumers should retain all their existing rights. That is most relevant to the amendments in a subsequent group, which mainly concern the Financial Ombudsman Service. Today’s set of amendments deals with the higher-level regulators: the Financial Conduct Authority and Prudential Regulation Authority.

Amendments 54 and 64 would set predictability and consistency objectives for the FCA and PRA, respectively. Amendments 46 and 57 would require them to act in accordance with those objectives. Amendment 82 would require them, when making rules, to ensure that they meet the objectives of predictability and consistency. Amendment 85 would then oblige them to use a common-law approach in interpreting regulatory rules. This is the usual and powerful way that we achieve predictability and consistency in other legal contexts.

Regulators have increasingly taken to laying down general principles; inevitably, the detailed implications of such principles may not be predictable. Amendment 85 would therefore allow regulators to continue to make rules with such a high level of generality, but they would be able to enforce such rules only if either the rule itself or the guidance issued by the regulator made the implications of such general rules clear. Otherwise, general principles may be used to interpret and apply more concrete rules laid down by the regulators.

I hope that the objectives of predictability and consistency are self-evidently desirable, but let me briefly deal with issues that arise from making them a statutory objective. First, concerns have been raised about adding additional objectives in other contexts, such as the growth, competitiveness and net-zero objectives. However, those objectives greatly widen the responsibilities of the regulators and add to their burdens. The predictability and consistency objectives would not expand the regulators’ responsibilities; they merely spell out the way in which those responsibilities should be exercised. Nor would they conflict with other objectives; indeed, predictability and consistency contribute to competitiveness, growth and stability.

The second question that these objectives raise is: why are these objectives so important? Clearly, predictability and consistency are an end in themselves and make life easier for business in the financial markets. That is a feature of our markets that has attracted businesses from across the globe, and reinforcing it will restore and enhance that attractiveness. I recall that, post big bang, London has been able to boast more American banks operating here than in New York and more European banks than in any European centre. But there are further benefits to the economy: the more predictable and consistent the regulatory environment, the less the burden of compliance. Compliance costs have been the fastest increasing cost faced by most firms in recent years. That, in turn, will remove the dampening effect that unpredictable regulation has on enterprise and innovation.

I mentioned at Second Reading that the seminal conclusion of studies of the economics of regulation was that, in the absence of accountability, regulators regulate in the interests of regulators. A number of financial institutions that have contacted me in support of these amendments—and I am glad to say that they do seem to have considerable support in the City—have reinforced that point. They say that the amendments would not only result in better regulation but, equally important, help to change the culture of the regulators. At present, our largely unaccountable regulators tend to be bureaucratic and negative. They prioritise box-ticking and find it easiest to say “No”. Moreover, companies admit that this culture feeds back into their own compliance departments, often staffed by people from the regulators who bring the same bureaucratic negativism with them. That dampens companies’ enterprise and initiative from within.

I also mentioned at Second Reading that it is no coincidence that the four greatest global financial centres are all based on common law, as are the new ones starting up in the Middle East and elsewhere. Part of the reason for the dominance of common law in finance is that it provides the maximum predictability and consistency with the maximum freedom to innovate. These amendments are designed to strengthen those attributes. I hope my noble friend the Minister will give them serious consideration.

--- Later in debate ---

[Baroness Penn (Con)]

I am sure that the regulators have provided some of those views already. For example, they gave evidence during the Commons Committee stage of this Bill. I do not want to speak for them but I absolutely undertake to the Committee to seek that from the regulators, and obviously it will be down to them as to how they wish to deal with the request. With that, I hope that noble Lords will not press their amendments.

[Lord Lilley (Con)]

My Lords, this has been a fascinating and valuable debate, the highlight of which was obviously the agreement between my noble friend Lady Noakes and the noble Baroness, Lady Bowles, on the disproportionality of the PRA. Another common feature of the whole debate was that everyone seemed to express concern about the lack of accountability of the regulators. I was encouraged by the Minister’s remark that she would look positively at the debate.

I am grateful for the support of my noble friends Lord Trenchard, Lord Naseby, Lord Sandhurst, Lord Roborough and Lord Holmes for the amendments that stand in my name. I am also grateful to the noble Lord, Lord Tyrie, and the noble Baroness, Lady Bowles, for applying their critical faculties to the amendments that we tabled. I will consider carefully what they said. It will be easier for me to respond when I can actually read the text rather than doing so immediately now—anyway, I only have time for a few words now—but I think I can assure them that the amendments would not require new rules to be predictable from old, existing rules, nor would they forbid new rules that were inconsistent with existing rules; it would just have to be explicit that they overrode an existing rule—although I may have misunderstood what they said.

The noble Baroness, Lady Bowles, mentioned that she is worried about excessive powers to lawyers and litigation. I am in the unusual position of being in alliance with lawyers. I got into trouble early in my parliamentary career by quoting

“let’s kill all the lawyers”

in a debate in which it turned out that I was the only non-lawyer. I think we have to recognise that the only alternative to the common law approach which we seek to entrench here, which is the purpose of the Bill, is the codified approach, which is very much more rigid and unable to respond quickly to the rapidly varying world to which the noble Baroness rightly referred, or simple discretion which may not lead to being capricious, but does mean that it is very unpredictable for practitioners who do not know how rules are going to be applied. I will, of course, withdraw the amendment, but I hope we will return to these issues on later groups and perhaps on Report.

Amendment 46 withdrawn.

Financial Services and Markets Bill

Lord Lilley Excerpts

Committee stage
Monday 20th February 2023 Grand Committee

[Lord Holmes of Richmond (Con)]

My Lords, it is a pleasure to start this fourth group on day five of Committee. As it is the first time that I have stood up today, I declare my interests in financial services as set out in the register.

I will speak to my Amendments 123, 129, 130, 132, 138 and 139; I thank my noble friend Lady Noakes for co-signing them. In essence, what they try to get at is pretty simple: to enable the CBA panels to be effective in the mission they purport to be set up to achieve.

I present to the Committee a new financial instrument: the ISA. Noble Lords might think that they are familiar with the ISA, but this ISA is “independence, scrutiny and accountability”, which we have heard so much about today and previously in Committee. I gift this particular ISA to my noble friend the Minister. Treat it as a woodworking router or some such device. If we take independence, scrutiny and accountability and apply them throughout the Bill, will she agree that, if current clauses do not stack up, they should be kicked out, improved and changed before Report?

With the CBA panels we currently have a conceptually useful form of ISA approach. However, the difficulty is that, as we have heard with so many other provisions in the Bill, as currently constructed they are the plaything of the regulator, again enabling the regulator to mark its own homework—or, even more so, to simply respond to whatever the CBA panels might say with, to put it in common parlance, “Whatevs”.

Importantly, rather than, for example, the membership of the panels, their agendas and outputs being down to the regulators, this suite of amendments can, in effect, empower a CBA panel to do its job effectively for all our benefit. Consider the membership: would it not be good if at least some of those members came from the sectors, with clear, recent and relevant expertise to bring to bear on the matters at hand?

If Amendment 123 and other amendments in my name—and others in this group, which all have a similar purpose—were agreed, it would enable these panels to operate far more effectively. The panels could also take a cumulative view on the impact of regulatory change. They could have a power of pre-regulatory scrutiny to consider the impact and force the regulator to think again before such regulations are brought into being. They could look at and opine on the overall economic impact of regulatory change. Having such an approach would make it far clearer and more transparent for all to see, when the costs are out there, whether there is necessarily any benefit from a particular change.

When my noble friend the Minister responds, will she agree that the CBA panels are a good thing, but it would be a great thing to fully enable and empower them to pass the ISA test? I beg to move.

[Lord Lilley (Con)]

My Lords, I did not speak on the previous group of amendments, but I endorse everything that my noble friend Lord Forsyth and the consensus of speakers said on that issue. I also strongly support what my noble friend Lord Holmes has spelled out, in not only proposing his amendment but providing an overview of this whole group.

We all agree that regulators must meet the objectives set by Parliament, but should do so in a cost-effective way, without erring, as regulators can, on the side of overburdensome regulation that makes life simpler for them without consideration of the costs to others. As drafted, the Bill requires both the FCA and the PRA to have two panels that undertake cost-benefit analysis. That is excellent but, as with much else in the Bill, it allows the regulators to mark their own homework or, at least, to appoint most of the panel of examiners who will mark their homework for them.

My Amendments 124 to 128 and 133 to 137 do, in essence, three things. They ensure, first, that all the members, not just the chair, are appointed by the Treasury rather than by the regulators; secondly, that they are independent; and, thirdly, more specifically, that they are not employees of the FCA or the PRA. I hope they find acceptance from the Government and this Committee. They are not contentious and are quite simple. They are within the spirit of the Bill, but simply tighten it up and make sure that what the Government appear to want is achieved without allowing the regulators to take over the process and run it in their own interest.

[Baroness Noakes (Con)]

My Lords, I have added my name to the amendments in this group in the name of my noble friend Lord Holmes of Richmond, and I endorse everything that he said in introducing them. I should also have added my name to my noble friend Lord Lilley’s amendments, because I agree with everything that he said in respect of them.

I congratulate the Government on embedding cost-benefit analysis panels into the architecture of the PRA and FCA. That is a very good thing. These amendments, which focus on transparency and independence, are intended to be helpful and to make the implementation of cost-benefit analysis panels more effective so that we can properly rely on their contribution to regulation. I hope that my noble friend the Minister will welcome these amendments.

Financial Services and Markets Bill

Lord Lilley Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

[Lord Lilley (Con)]

My Lords, until the noble Lord, Lord Hunt, led me to it, I had not realised the similarity between the Arts Council and the financial regulators in the City of London—but he is absolutely right. Both are manifestations of that growing and alarming phenomenon, the administrative state. These are bodies that set their own rules, mark their own homework, are largely unaccountable, often wayward and certainly unpredictable. The one weakness of this Bill, which in other respects is good, is that it creates even more freedom and power for the regulators to operate without accountability or predictability.

There are two ways in which to deal with this problem, which are compatible and probably both necessary. One is that to which the amendments proposed by the noble Lord, Lord Bridges, make a major contribution: bringing parliamentary accountability to bear. His amendments effectively arm Parliament to carry out that accountability. The other is to try to constrain the behaviour of the regulators within the disciplines of the common law, which is what my amendments here and elsewhere seek to do. I speak particularly to Amendments 169, 171, 173, 174 and 200. The changes in those amendments deal with the Upper Tribunal and the regulators; I shall go on to those which deal with the Financial Ombudsman Service.

At present, firms can take a challenge to a regulator’s decision to the Upper Tribunal. If a challenge is about a regulator’s enforcement decision, the UT decides the matter again on its merits. If the challenge is about a supervisory decision, the UT effectively carries out a judicial review. It may hear fresh evidence, but it merely decides whether or not the regulator’s decision was reasonable and, if it was unreasonable, refers it back to the regulator to take the decision afresh. These amendments would not change that role but, I hope, would constrain the way in which it was carried out.

Amendment 169 would simply give the Upper Tribunal the obligation to give consideration to the predictability and consistency in any case before it and to comply with those objectives when deciding a fresh enforcement decision, and it would empower the Upper Tribunal when making findings on a supervisory decision to help the regulator meet the predictability and consistency objective when reconsidering a case. It would also require the regulator to prove in each case that it had acted predictably and consistently on any issue referred to the Upper Tribunal.

Amendment 169 would also give firms that believed they had acted in good faith within what they knew of the meaning of the regulations laid down by the regulator the right to apply to the Upper Tribunal, if they were found to be in conflict with the regulator, within three days for a declaration of reasonableness. If the Upper Tribunal granted a declaration of reasonableness, the FCA or PRA could not pursue enforcement action against the firm.

There are comparatively few references to the Upper Tribunal. If the Upper Tribunal and the regulators achieve greater predictability and consistency, there are likely to be fewer still in future, which is a good thing. Moreover, those that do take place will themselves create case law, making the meaning of the regulations clearer and more predictable. However, because the volume of cases will be small, the amount of case law that will arise at the level of the Upper Tribunal will be small.

By contrast, a huge number of customers—SMEs and individuals—claim losses that they attribute to breaches of regulatory rules by firms providing financial services, and they do so to the Financial Ombudsman Service. In the most recent quarter, over 43,000 complaints were made to the FOS. At present, consumers, largely small businesses, can take a complaint free of charge to the ombudsman, which can decide whether a financial services company has treated them fairly and reasonably and require the finance company to pay compensation. The costs of the ombudsman service, whose budget for 2023-24 is £240 million, are met by a compulsory levy and some fees payable by financial institutions.

The advantages of this arrangement to the consumer are that there is no fee, there is no risk of having to pay the finance company’s costs if the complaint is not upheld, and the process is generally faster than a court case would be. However, there are disadvantages too: the Financial Ombudsman Service has the power to decide what is fair and reasonable without any obligation to be predictable and consistent before or afterwards, or to explain its reasoning, and it is

“free to make an award different from that which a court applying the law would make”.

Financial institutions that object to the ombudsman’s ruling can in theory appeal to the Upper Tribunal or seek judicial review, but if they did so they would have to prove that the Financial Ombudsman Service’s decision was so unfair or unreasonable that no right-minded person would ever have made a similar decision, so they stand little chance of success and few cases have been brought.

The ensemble of my amendments would respond to those weaknesses in a number of ways. First, earlier amendments would introduce the explicit objective of predictability and consistency, and any challenges to the regulators on those grounds would primarily be considered by the Upper Tribunal. The other amendments in this group would ensure that the internal review bodies within the FCA and PRA that consider enforcement decisions before they are finalised, known as the RDC and the EMDC, were fully independent, and would require them to apply similar tests. That should ensure that most cases would not need to be taken to the Upper Tribunal since concerns would have been addressed before the regulator made a final decision.

Secondly, the amendments would change the role of the ombudsman system into an adjudication system, and that is perhaps the most important element of this group. Instead of being empowered to reach decisions simply on its own subjective view of what was fair and reasonable, the financial adjudication service would be tasked with adjudicating on the basis of the law, including case law as it built up. That is modelled on the adjudication system in the scheme for the construction industry in the Housing Grants, Construction and Regeneration Act 1996. The idea of transferring the lessons there to the financial sector was suggested by Lord Dyson, a former Supreme Court Justice and Master of the Rolls, in a report by the APPG on Fair Business Banking in 2018, which also recommended the formation of the First-tier Tribunal. The adjudication system would remain free to consumer complainants, who would still have the benefits of the obligations on financial businesses to treat them fairly as in the FCA rules and legislation, such as the Consumer Rights Act 2015.

Financial Services and Markets Bill

Lord Lilley Excerpts

Committee stage
Tuesday 7th March 2023 Grand Committee

[Baroness Drake (Lab)]

My Lords, I rise to speak to Amendments 168 and 201. I refer to my interests as a trustee of defined benefit and master trust pension schemes.

The loss of financial stability can occur quickly. History shows us that risks that crystallised and caused that instability were often insufficiently captured by regulators and that actions to mitigate their impact were not taken in good time. It would be extraordinary for any Government to believe that financial regulators could deliver the objectives of competitiveness and sustainable growth without embedding in that delivery the finance sector’s response to climate risk.

Climate change brings immense risk, but it is not specifically factored into either the regulatory capital risk requirement for banks or the solvency requirements for insurers. We already see the weaknesses: banks and insurers still retain exposure to fossil fuel investments and a significant number of the largest UK banks do not have interim targets to cut funded emissions. I could quote many other statistics to confirm that weakness.

As the Bank of England stated in the executive summary of the Results of the 2021 Climate Biennial Exploratory Scenario, its assessment is that UK banks and insurers still need to do much more to understand and manage their exposure to climate risks. The Bank admits that there is a lack not only of managing that exposure but of understanding it. That makes Amendment 168 important in calling for a PRA review of capital adequacy and solvency capital requirements, having regard to the full implications of climate change physical, transitional and liability risks and for financial stability.

Failing effectively to factor climate risks into regulatory requirements tolerates the failure of firms that make unwise bets on the continuation of “business as usual”. Inevitably, it necessitates government intervention, socialising of losses and consequences for taxpayers. When a similar amendment was sought previously, the Government argued that the CBES work that I have just referred to would assess the implications of climate change risks for investment, stranded assets and financial stability. However, we have heard from speakers in this debate, including my noble friend Lady Worthington, and read from informed commentators worrying concerns with the work, reinforcing the need for the PRA to review its risk assessment approach and modelling. In a Policy Exchange publication, the former chief economist of ING Group put those concerns succinctly when he concluded that

“central bank scenarios have been based on assumptions and models which ignore or downplay crucial elements of climate risk and critical triggers, tipping points and interdependencies between climate, economy, politics, finance and technology”.

As has just been referred to, the Prime Minister, Rishi Sunak, promised that the UK would create the world’s first net-zero financial centre. However, London recently lost its position as Europe’s most valuable stock market to Paris. The London market is more heavily exposed to unpredictable sectors such as mining and oils and we now see the issue of listings emerging as a problem.

Achieving a net-zero financial sector requires regulators having the necessary mandate and accountability. The finance sector’s practices, as a major investor in companies and as an insurance underwriter, have a vital role to play in the transition towards zero carbon. In an area with which I am familiar, the closure of private defined benefit pension schemes has been followed by an accelerating trend for trustees to enter buy-out financial agreements with insurance companies, paying premiums in return for individual annuity policies covering members, with assets and liabilities transferring to insurers.

Buy-in is also occurring, such as the record-breaking £6.5 billion buy-in recently by the RSA pension scheme. That market saw a £30 billion transfer in 2022 of pension liability to insurers. It could exceed £40 billion in 2023. There were many billions that preceded 2022 and the trend means that there will be many more in 2024. Auto-enrolment means that billions of pounds of defined contributions are being invested each year. The market is consolidating into fewer master trusts, some set up by vertically integrated finance companies that also manage the assets in those trusts, and individual pensioners. Tomorrow’s pensioners will be much more dependent on insurer stability. That clearly reinforces the need for the PRA review and for raising the bar on the investment duties of asset managers, as Amendment 201 seeks, by requiring the FCA to publish guidance on the consideration by investment managers of the long-term consequences of decisions, the societal and environmental impact of investments, standards of conduct in governance and transparency of reporting.

The UK Sustainable Investment and Finance Association reports that it continues to see a common lack of understanding within financial services on the extent to which ESG factors form a core component of investors’ fiduciary duties. The Principles for Responsible Investment Association similarly identified that lack of understanding and recommended further regulator guidance. As a jobbing trustee, for want of a better phrase, there is a part of me that wonders to what extent there is such a lack of understanding, rather than a reluctance to understand, but there is a problem. The investment association found that only 14% of members incorporated ESG across their entire portfolio in 2019, while 44% said that it accounted for less than 25% of their portfolio.

The Government want to see more productive investment by the financial sector. For government to direct how citizens’ private assets are invested would displace fiduciary duties which rest with trustees, providers and asset managers and raise issues of state liability, political expediency trumping best interest and litigation. Amendment 201 could assist regulators, providers and asset managers in considering decisions on productive investment consistent with fiduciary duties and identifying the barriers to aligning these. We can perhaps address some of those barriers on another amendment later in the Bill.

However, the ability of trustees to discharge their ESG and climate risk duties to greatest effect has a clear dependency on how regulators expect asset managers to discharge their duties. We cannot do ours well unless asset managers do theirs well, too. It also depends on central bank scenarios and the regulation of the finance sector’s response to climate risk, because it will influence attitudes and the value of different assets. The whole eco- system needs improvement in both transparency and due diligence. The two amendments that I speak to, on the PRA reviewing its whole approach to modelling, regulating and embedding climate risk, and the contribution that asset managers are required to make to mitigating climate risk, both have merit and are badly needed.

[Lord Lilley (Con)]

My Lords, I will address the amendments just addressed by the noble Baroness, Lady Drake, and others, which are intended to discourage investment in fossil fuels. There are two routes to net zero: one is to phase out demand, which is the route that we have adopted in this country. My noble friend Lord Deben, who is not here today, provides guidance and forecasts to the Government on how to phase out that demand to meet net zero by 2050. That is the sensible way of doing it. The alternative is to try to phase out supply. If fossil fuel producers invest in more production capacity for those fuels than is needed for declining demand, they will lose money. They may even be left with oilfields that have not been fully depleted —it could not happen to a nicer bunch of people.

I am really touched that so many green noble Lords and noble Baronesses are determined to protect the oil industry from losing money. That is not their real intent, of course; that is to discourage investment and reduce it as fast as possible, if need be by reducing the supply of fossil fuels faster than we reduce demand for them. If they achieve that, we will have a shortage of fossil fuels. We will have rising prices with those shortages and will have done to ourselves exactly what Putin has done at the moment. Is that what they want?

Noble Lords pretend on the first argument that they want to save the banks and the industry from being left with stranded assets. As I say, it is touching that they should be so concerned about them, but why do they think they are better at forecasting the future demand and supply balance for fossil fuels than the oil companies and others whose business it is, or others in the City whose business it is to try to work out whether it is worth investing? I used to be an energy analyst in the City; it was my job to try to forecast these things. In some years, I was the most highly rated analyst in the City on these matters, presumably because I was making long-term forecasts and no one could tell that they would prove wrong. But the idea that the PRC knows better than people in the City—

[Baroness Sheehan (LD)]

I find the noble Lord’s contributions really very valuable. But on supply and demand, for him to label us people who just do not want fossil fuels is so incorrect. We need more energy, but it does not have to come from fossil fuels. The fossil fuel industry is supported to an extent.

[Lord Lilley (Con)]

By whom?

[Baroness Sheehan (LD)]

It has been supported by Governments, through subsidies, through tax breaks, through decommissioning tax reliefs—any number of routes for support exist. So I say to the noble Lord: please do not try to categorise the noble Baronesses who have spoken on this issue as people who do not like fossil fuels. What we do not want is for fossil fuels to be needlessly supported in the future when they are patently no longer able to support themselves.

[Lord Lilley (Con)]

I agree with the noble Baroness. I do not want to support fossil fuels. If she looked at the tax revenue levied on the production and consumption of fossil fuels, she would see that it is enormous. To describe that as a subsidy or support is very strange. But to the extent that there is anything that is a subsidy, I am with her: let us remove it, but that is not what these amendments do. They simply aim to make it more expensive to invest in fossil fuels. I do not know whether the noble Baroness, Lady Castle—whatever it is; bouncy castle—is upset at being described as being against fossil fuels. I would have thought that she would be positively flattered. I do not know whether the noble Baroness, Lady Drake, is offended at being told that she is trying to discourage the production of fossil fuels; I thought she was. I am simply saying let us stick to the CCC’s recommendations of phasing out demand and we can leave the supply side to look after itself. We should not pretend that we know better than the industry what is likely to prove excessive or insufficient.

[Baroness Sheehan (LD)]

Before the noble Lord sits down, perhaps I could say a little about stranded assets; I think we have had this exchange before. If stranded assets transpire—from where I am sitting, I think that is inevitable—what assurance can he give that the cost of those stranded assets will not be socialised?

[Lord Lilley (Con)]

Clearly, the Government ought to deal with that problem. These amendments do not deal with that problem. If there is a problem, if the noble Baroness thinks that BP or Shell will go bankrupt and be unable to pay for the liabilities it incurred, we should take steps to deal with that situation. I do not think it is likely but if she thinks it is that serious, she should table amendments that would deal with that, but these amendments do not. They simply make it more expensive to invest in things which we are going to continue consuming, according to the Government’s own plans and the CCC’s own projects and recommendations, in considerable quantities until 2050.

[Baroness Worthington (CB)]

I will interject on behalf on the amendment I drafted, as the noble Lord has completely mischaracterised what we are attempting to do here and has narrowed the debate into a very narrow conversation about oil and gas assets. We are talking here about climatic risk across the whole economy. It is not just oil and gas operators; it is anybody who has any money wound up in any of the sectors that will be affected by the physical risk, the risk of transition and the societal risk when we finally realise that science does not negotiate with oil and gas companies, financial regulators or anybody who pretends to be able to predict the future. We have poor modelling, we have terrible risk assessments, and the PRA and the Government need to issue better guidance so that we can understand the risks we are facing. Let us not reduce this to a narrow discussion about oil and gas interests.

[Lord Lilley (Con)]

I read the amendment in the name of the noble Baroness. Proposed new subsection (1) refers to

“group undertakings engaged in existing fossil fuel exploitation and production … group undertakings carrying out new fossil fuel exploration, exploitation and production”.

If this is not about fossil fuel exploration, that is not very clear from her amendment. I am dealing specifically—

[Baroness Worthington (CB)]

My Lords—

[Lord Lilley (Con)]

Hang on, I must have the right to reply to the previous intervention before I take the next. I am not dealing with things other than fossil fuels. I am talking just about fossil fuels. It seems to me that the noble Baroness’s amendment is about fossil fuels, in large measure. My arguments have not been responded to because they are fundamentally logical. They are the whole basis of government and CCC policy. But I give way to the noble Baroness now.

[Baroness Worthington (CB)]

The amendment lists certain sectors which are likely to be most affected. It does not in any way say it is limited to those sectors, and I think it is egregious to assume that this is a narrow amendment when it is, in fact, a very broad amendment.

[Lord Lilley (Con)]

My remarks are narrow. The noble Baroness’s amendment may be broad. Can we agree on that and deal with the aspect of fossil fuel investment?

[Baroness Worthington (CB)]

Yes.

[Lord Lilley (Con)]

We ought to allow the industry to invest as long as we are phasing out demand. If it invests too much, it is its problem. If it invests too little, it is our problem.

[Baroness Altmann (Con)]

My Lords, I declare my interests as set out in the register. I support many of the amendments in this group. My Amendment 241A is in this group. I have added my name to Amendments 201 and 237, which require FCA guidance about long-term returns for occupational pension investors. I think that is very important when considering climate change and is very relevant to the remarks of my noble friend Lord Lilley. I have also added my name to Amendment 235 as I think it is equally important for institutional investors in the UK to be equipped with some green taxonomy so that we have some standards by which we can measure the impact of climate investment.

As regards the issues raised by my noble friend, particularly, perhaps, in relation to Amendment 168, when I read that amendment it seems to me to be calling for a review. It calls for the FCA to review and perhaps guide pension schemes and insurance companies, which have very long-term liabilities, on assessing the long-term risks of investing in assets such as fossil fuels. There is a widespread opinion suggesting that over the long term, whether that is 20 years or 30 years —those timescales are relevant for Solvency II and the annuity books of insurers, for example—there is a significant danger in relying on the continued thriving of those large energy companies.

It makes sense. We have been taken by surprise too many times in the financial world by supposedly very small long-term risks which materialise in a cliff-edge event that people had not been prepared for. Whether or not the review concludes that there should be any change, it is appropriate that this review should be carried out, so I support the amendment, but I understand the points made by my noble friend. Perhaps, on a shorter-term timescale, given the need for fossil fuels and the work that is being done by those large companies to try to transition to more green energy, that is an issue that needs to be carefully weighed up by any investor who is considering the potential returns from their investment.

In the interests of time, I will now speak to my Amendment 241A. I hope that my noble friend will be interested in this amendment and, indeed, that other Members of the Committee might consider that there is merit in this proposal. It is a relatively modest reform. It would be deregulatory. It supports the transition to net zero and nature preservation and it would encourage innovation. I hope it would garner more of our domestic institutional asset base to be used for the kinds of investments that all of us who are concerned about the long-term impact of human activity on the climate and nature would want to see happen.

I thank the Public Bill Office and Susannah Street, as well as Peers for the Planet, for their assistance in trying to ensure that the amendment is in scope of the Bill, which was quite a feat. It is a probing amendment; I am not wedded to the wording, but the principle of the proposal would make it easier for funded occupational pension schemes to join together to establish fund managers under a lighter-touch regime that already exists in order to invest in and support climate and nature protection. We all know that there is a growing need to find the funding to rebuild, repurpose or have new infrastructure for low-carbon and nature-friendly projects. Indeed, nature’s impact on and interaction with climate change and net zero is increasingly recognised. These issues feature in the other amendments I have attached my name to, so I hope that the scientific and political consensus that we need urgent action might help my noble friend and the Committee recognise that this could be a win-win for pension funds to get better long-term returns, for pensions to be perhaps better than they otherwise might be, and for the economy.

Much of the investment needed to reach net zero will be in very large long-term projects. It is not always easy to find the money. Normally, perhaps, with a Government who were in a much stronger fiscal position than most western Governments now are, we might look to the majority of this being funded by government, but that is less likely at the moment. Yet we have in this country this enormous pool of long-term assets that is currently being encouraged to invest in assets with a much lower expected return or so-called safe assets—gilts and corporate bonds, for example—shunning long-term growth with equities and projects such as the one I have in mind for this type of approach. Only 100 schemes or so have more than £5 billion worth of assets. Even with the kind of forecast consolidation, it is unlikely that we will have very many of the £5 billion-type scale that is normally suggested to be required to put forward a prudent, risk-diversified portfolio of such infrastructure and other protective investments.

My amendment would facilitate asset pooling for the smaller pension funds as well, so they can all join together in FCA-authorised investment managers specifically for pools of pension assets to benefit from and contribute to the benefits for green growth and sustainable long-term returns for the specific purposes set out in proposed new subsection (3) of my amendment. The Local Government Pension Scheme is already starting to do this, but private schemes would have to use commercial fund managers, which often either deters such investing or incurs much higher costs, whereas big schemes such as USS and NEST are already looking to invest or have the expertise to do so, but they are not joined with the smaller schemes.

I hope that the currently existing lighter-touch regime that the FCA offers in its occupational pension scheme firm rules, which currently apply only to fund management firms that are wholly owned by one pension fund, could be applied to a combination of pension funds that are investing for their own purposes in the various schemes that belong to it. It is not commercially available or available to other members of the public, but it is for long-term pension investing.

I would be grateful if my noble friend considered this modest reform, or, if she feels that there is some flaw in the wording of the amendment that could be changed and still facilitate this, I would be happy if she, or indeed any other noble Lords, wanted to meet to discuss it. As I said, it is deregulatory, it supports the aims of net zero and nature preservation, it would encourage innovation and it should provide better diversification and therefore long-term risk reduction for a number of occupational pension schemes which otherwise could not take advantage of it.

[Lord Davies of Brixton (Lab)]

My Lords, I support the objectives behind all these amendments. I was going to direct my remarks specifically to Amendment 237, but I want to make a narrow but important point of qualification. I support the principle, but I cannot stop myself responding to the discussion we had earlier, led by the noble Lord, Lord Lilley, about fossil fuels. The important point about fossil fuels is that there are massive externalities—external costs—which are not caught in the market, and, unless we do something now, our children, and their children, will pay the price. It is not just a question of moving the market now; we need to stop using this stuff, which is poisoning the planet.

[Lord Lilley (Con)]

I was not disputing that; I was saying that we accept that we have to find the route to net zero, but the question is: should we phase out demand for fossil fuels, as the noble Lord’s last sentence indicated, or should we phase out supply? Which does he prefer?

[Lord Davies of Brixton (Lab)]

Both. I am not really being given that choice but, as I said, it was just a narrow point.

My question on Amendment 237 is: would you take investment advice or guidance from the Secretary of State? Is the Secretary of State even authorised to provide investment guidance or advice? I am troubled by the involvement of the Secretary of State, and I hope that we could perhaps consider a different wording if we wish to raise this on Report. If the Government want something to happen—net zero—as a matter of public policy, they have to accept the risk themselves and not pass it on to private individuals. I am talking about pension schemes, and the underlying point is that the money in a person’s pension scheme is their money, provided to them to be used in accordance with their wishes to provide them with a retirement income. Part of that retirement income depends on solving climate change—that is clear. I do not doubt the importance of taking these issues into account; I simply question the relevance and role of the Secretary of State in that process.

Over many years’ involvement with pension funds, I have seen that, when people see the massive amount of money involved, as highlighted by the noble Baroness, Lady Altmann, they see that the economic power is there, but it is there on behalf of the members’ interests and not, in principle, as a means of implementing government policies—however worthy. They might be in alignment, but the leading factor should be the members’ interests.