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.

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[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.

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[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.