Lord Newby
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Financial Services Bill
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Lord Sharkey
My Lords, this amendment has two purposes. The first is to make sure that relevant data on each bank’s performance are in the public domain. This will make it possible to have an informed debate on whether the banks are competing effectively in the interests of consumers, as the FCA is required to promote. At the moment, all we have is aggregated and regional data. We do not know to what extent, or even whether, the banks are effectively competing, or indeed whether they are properly engaged in all the areas where we might want to see effective competition.
In a more general sense, increasing the amount of data on bank activity in the public domain is a very good thing. We need banks to change their practices, and their culture and transparency is a critical part of doing exactly that. We need to be able to see the changes in both practice and culture and not have to rely just on assertions that changes are taking place. For example, we need to see evidence that, as it says in the coalition agreement, the banking system serves businesses and not the other way round. Exactly the same applies to ordinary customers, too.
The second purpose is to focus attention on banks’ lending to SMEs. Your Lordships will have heard many times about the absolutely critical role of SMEs in our economy, and of their role as key providers of jobs. The importance is hard to exaggerate. Our economic recovery and our enduring economic health depend on the performance of our SMEs, as it always has. The ONS data for July 2011 show that SMEs provide 60% of all jobs in the private sector and generate 49% of private sector turnover. The BIS economics paper of 16 January this year re-emphasises the importance of SMEs to the economy, but goes on to say that,
“there are a number of structural market failures restricting some viable SMEs from accessing finance”.
The report notes that access to debt finance is now harder than before the credit crunch.
In 2007-08, 90% of SMEs seeking finance obtained it. This figure now stands at 74%—and, crucially, the total stock of lending to SMEs is in decline, especially to those with a turnover of less than £1 million. To place this in a long-term context, the Breeden report of March this year estimates that by 2016, if things go on as they are, there will be a shortfall of between £26 billion and £59 billion in the finance needed by SMEs for working capital and growth. The Government are very clearly alive to these problems and hope, as we all do, that the Funding for Lending scheme will succeed in making a real difference in funding for SMEs.
The data provided by the banks on lending to SMEs are provided on an aggregated basis. That means there is no information to allow assessment of performance and suggestion of improvement, or to show which banks are performing better than others or, critically, which are effectively absent from which areas. We do not know which banks are supporting—and to what extent—the third sector in taking advantage of the new rights conferred under the Localism Act. To do all this properly, we need access to disaggregated data and data on a postcode level so we can see clearly which banks are doing what and where with the vital SMEs. We need this data so we can identify in detail the areas of market failure and therefore of competitive failure, which the Government acknowledge do exist.
The SMEs are vital to the economy and to jobs. Funding SMEs is vital to their performance. Underfunding, which is the current situation, threatens our economic recovery and the creation of jobs. There is evidence of market failure and of a failure of competition. The amendment will allow us to identify that failure and will provide us with the information to help put right that failure. It will help promote effective competition, as the Bill requires the FCA to do, and it will help fulfil the coalition agreement’s pledge to develop effective proposals to ensure the flow of credit to viable SMEs.
Of course, I hope that my noble friend will agree to this amendment, but it has occurred to me that he may have one or two reservations about doing so. In particular, he may worry that the amendment imposes too onerous a burden on the banks. He may worry that the publication of a bank’s performance may somehow be prejudicial to its commercial activities. I hope that I can give him some comfort on both points.
The burden that this amendment imposes on the banks is not onerous. The FCA may decide, in general, what data it considers to be relevant. I am sure that, in general, it will take into account the burdens imposed. Specifically, publishing the disaggregated and postcode-level data on lending to SMEs imposes, if anything, a trivial additional burden on the banks. The BBA already publishes aggregated data on a quarterly basis, which includes lending to SMEs on a regional basis. By definition, disaggregated data exist before they can be aggregated. Surely, the banks know the postcodes of their customers—except, it appears, for some HSBC Cayman Island accounts.
For the worry that publication of disaggregated data may somehow be prejudicial to the bank’s commercial activities, it is hard to make a convincing case. Exactly like all other large, competitive organisations, the banks will already have detailed research on what their competitors are up to with SMEs—or, if they do not, they are even less competent and less competitive than we might have supposed. The amendment simply puts that information into the public domain.
The amendment is not onerous. It simply requires more transparency from the banks in the interest of more effective competition. It requires, in particular, more transparency about the banks’ support for the SME sector. We would all benefit from that, and people and businesses in deprived communities would benefit greatly. Even the banks would benefit from a move to greater transparency.
I very much hope that the Minister will be able to agree to this amendment or to assure the House that at Third Reading the Government will bring forward something equivalent. I beg to move.
Lord Newby
My Lords, it might be to the benefit of the House if I give the Government’s response to this amendment now. In responding to an earlier amendment, I said that the FCA would necessarily need to gather data from industry to understand what existing provision there was and whether it met the needs. But we need to make proper provision for any data requirements. Normally, that is in the FCA’s rulebook, or covered by commitments made by industry to provide and publish relevant information, working through trade bodies as appropriate. Ideally, we would not need to legislate to make that happen.
Let me be clear on our position: the Government agree that we should be able to see where provision is lacking, particularly where there are areas where bank lending is simply not being offered or getting through. Getting this data in the public domain will help to crystallise the problem, and what should be done about it by industry and by the Government if necessary.
I can confirm today that we will be working with industry, through the British Bankers’ Association and other interested parties, to get a commitment from the banks that they will publish more granular data. This will build on the work that industry is already doing and will deliver publication of the kind of data that all sides of the House clearly want to see. The members of the business lending taskforce already publish subregional aggregated lending data on an annual basis. While this is a good first step, I think we all agree that it is not enough. Therefore, we will work with industry to collate and publish lending data that is disaggregated by institution and presented on a postcode-level basis.
The Government will take this forward as an urgent and pressing matter. In reiterating our commitment to make progress in this area, I confirm that should our negotiations with industry fail to deliver—I sincerely hope that that does not happen—the Government will introduce amendments to the Banking Reform Bill along the lines proposed in the amendment we are debating today, to ensure that the data, in disaggregated and postcode-specific form, are published.
I hope that this reassures noble Lords that the Government share their commitment to making progress in this area and that the noble Lord will be prepared to withdraw his amendment in light of this commitment.
Lord Newby
Lord Newby
These amendments relate to the matter raised by the noble Lord, Lord Davies of Oldham, during earlier discussions of the FCA’s objectives. At the time, the noble Lord made the point that it seemed odd that the new section in this Bill setting out a number of indicative and non-exhaustive matters that may be considered to fall within the definition of financial crime should not include a matter of grave concern; namely, the financing of terrorism. My noble friend Lord Sassoon wholeheartedly agreed at the time that this was an odd state of affairs and promised to return to the matter on Report. That is why I am today tabling these two amendments, which have the effect of adding the financing of terrorism to subsection (3) of new Section 1H in Clause 6. This brings the provision very much into the 21st century and reflects the reality that we need our regulators to be ever more vigilant and do what they can to reduce the extent to which the financial system and firms within it can be used to finance terrorism.
I should stress that the list describing what may be considered to constitute financial crime is indicative and non-exhaustive and that there is no question that the FSA at present does not have the mandate to act in this space. It absolutely does. However, I agree with the noble Lord that this is very much a change worth making. I beg to move.
Lord Eatwell
My Lords, I am amazed at the inability of the Treasury to get this one right. My noble friend Lord Davies of Oldham pointed out that the definitions, even in this indicative list of financial crimes, do not accord with our international obligations to the Financial Action Task Force. The FATF defines the crucial area of international financial crime as money laundering, the financing of terrorism, with which the Government have now caught up, and the financing of the proliferation of weapons of mass destruction. Why are the Government not following the definition given in our international obligations? Why do they not consider including the financing of the proliferation of weapons of mass destruction—one of our key international obligations—as appropriate in the indicative list?
Lord Newby
My Lords, it is an indicative list. We have added to it on the basis of comments by the noble Lord, Lord Davies of Oldham. It is a non-exhaustive list and the question of weapons of mass destruction is already covered by the powers that we have. There can be no question but that the authorities will be bearing down very heavily if they think there is any question of the financing of weapons of mass destruction.
Lord Newby
(d) the financing of terrorism.”
Lord Newby
Lord Newby
My Lords, this group of amendments includes the government amendments which introduce a practitioner panel for the PRA. Government Amendments 32 to 36, 38, 39 and 64 introduce a standing practitioner panel for the PRA and make consequential amendments, for instance to make clear that there are now two practitioner panels—the PRA practitioner panel and the FCA practitioner panel.
We have always recognised that robust consultation arrangements will be vital if the PRA is to regulate effectively. The approach as originally envisaged in the Bill was to have a high-level duty to consult, giving the PRA substantial flexibility as to how that consultation was carried out. To ensure accountability, that approach also required the PRA to report on its consultation arrangements.
However, having listened to the arguments advanced by noble Lords, and in particular my noble friend Lady Noakes, I am persuaded that it is right that Parliament should set out more detail for the PRA about how it should go about that consultation. A standing practitioner panel will be well placed to monitor cumulative burdens of regulation and give advice to the PRA on an ongoing basis about the effectiveness of its co-ordination with the FCA.
Of course, the Government expect that the PRA will consult much more widely and draw on the expertise of academics and others and the Bill does not take away from its power to do so. The new panel will be a useful addition to these arrangements, and I hope that these amendments meet the concerns that the noble Baroness raised at an earlier stage.
I turn briefly to Amendment 37A, tabled by my noble friend Lord Flight. This would have a very similar effect to the government amendments except that it specifies that the FCA may appoint persons to the PRA’s panel. The PRA panel is, of course, intended to give advice to the PRA about the best way to achieve its objectives, and, as such, it is right that the PRA should appoint people who it thinks are appropriate to the panel. The FCA’s objectives and its expertise will be quite different and I do not think it is appropriate to have the FCA appointing people to the PRA practitioner panel.
Overall, I think that the Government’s proposed approach works well, and I am not persuaded that my noble friend’s amendment improves upon it. I hope that, having seen the government amendments and heard my explanation, my noble friend will feel able to withdraw his amendment.
Lord Flight
My Lords, I am delighted to see that my Amendment 37A has effectively been reproduced by the Government. I apologise as I note that my amendment states, “The FCA may appoint”, whereas it should refer to the PRA. I had taken the same wording for the PRA panel as for the FCA panel. It is healthy to have this structure, which will give people greater confidence to work with the PRA.
Baroness Hayter of Kentish Town
My Lords, as I said earlier today, it feels rather wrong to establish a PRA practitioner panel while excluding the views of those whose money and savings are at the heart of this industry and who depend on well regulated companies for their well-being. It also looks a bit too cosy a set-up between the regulator and the regulated community with no user-interest input. So, while we do not oppose these amendments, we do not think that they are a balanced response to the demand for the PRA to listen to those who work in financial services.
We know from the Treasury Select Committee report on RBS of the silos that existed even within the FSA between its prudential and conduct sections. With the move to two regulators, physically a mile apart, there is an even bigger risk of such silos. This will not be helped by having two separate practitioner panels, so that even within the industry there will be a split between those addressing one regulator and those focused on the other. This will be the case as regards numerous issues, including, for example, benchmarking. The proposal is for LIBOR to be overseen by the FCA, and therefore have input from the FCA practitioner panel, but how it is working out in practice, the inputs to it and the use made of it will be the preoccupation of that part of the regulated community represented by the PRA practitioner panel. This proposal might therefore not be the best that the Government could have come up with. It was not the first choice of the industry and it would not have been our first choice.
Lord Newby
I am grateful to the noble Lord, Lord Flight, for his support for what we are seeking to achieve. I am not surprised by the comments of the noble Baroness, Lady Hayter. However, I hope that the House will feel able to support these amendments.
Lord Newby
Lord Flight
My Lords, Amendments 36A and 36B are, to some extent, alternatives. I prefer Amendment 36A. As an objective for the PRA, it simply provides that the authority should be,
“seeking to sustain and encourage a competitive banking industry”.
Part of financial stability is a competitive banking industry. A considerable element of the problems that the banking industry got into were, to my mind, the result of a cartel, and cartels always cause trouble. Therefore, if you want a safer banking industry, you want it to be reasonably competitive. As it stands today, the British banking industry is not particularly competitive. I have forgotten the precise figures, but four banks have a very substantial proportion of the total deposit base. I should declare an interest as the senior NED of Metro Bank, which is pioneering banking competition—with, I am glad to report, considerable success—as a straightforward traditional retail bank.
However, I hope that the Government might at least consider Amendment 36A, which is not imposing anything particularly demanding on the PRA but which rightly includes that provision as one of the objectives in order to create a safer banking climate. Amendment 36B provides a wider definition of the banking objective of creating a competitive banking industry and, effectively, narrows the definition to the taking of deposits. It is based on the special PRA insurance objective.
Lord Newby
My Lords, I shall speak to the government amendments in this group and then I shall address the amendments in the name of my noble friend Lord Flight. In Committee we debated several amendments relating to whether the PRA should have a competition objective. Since then, the Government have considered further how the PRA should take account of competition considerations in its work, and decided to introduce provisions that, broadly speaking, require the PRA to be aware of the adverse effect that its actions can have on competition, and to minimise this wherever possible. In my view this strikes the right balance, ensuring that the PRA contributes to the creation of a more competitive environment in banking, but not to the detriment of safety and soundness. The PRA will have to explain how any rules it proposes to make are compatible with this new duty, as with its other regulatory principles.
I hope the new requirement addresses concerns that the PRA’s focus on safety and soundness will mean that it could impede competition within the financial services firms that it regulates or that it will ignore the impact of its actions or inactions on competition; for example, in setting barriers to entry for new entrants to the banking sector. In support of the new “have regard” requirement on the PRA, we are also introducing a requirement for the PRA’s annual report to include how it has complied with this new duty.
I turn to the amendments of my noble friend Lord Flight. As my noble friend Lord Sassoon stated in Committee, the FSA was required to balance multiple competing objectives and this led to a lack of institutional focus on prudential matters. Therefore, the Government remain firm on their decision that the PRA should have a single general objective against which it can be held to account by Parliament and the wider public. Giving the PRA a competition objective would also risk a new confusing overlap with the FCA’s competition objective, given that all firms regulated by the PRA will also be regulated by the FCA. As I have said, in our view a new “have regard” requirement strikes the right balance, ensuring that the PRA will provide an appropriate level of regulatory support to the need to have a more competitive environment in banking, but not to the detriment of safety and soundness.
Earlier in debates on this subject my noble friend Lord Flight suggested that there is a cartel operating in the banking sector. The OFT, rather than the FCA or indeed the PRA, has enforcement powers in relation to the prohibition of anticompetitive agreements, including cartels, in the Competition Act 1998. In addition, under the Enterprise Act 2002 it is a criminal offence for an individual to engage dishonestly in cartel activity and the Government are amending this provision to make prosecutions easier, via the Enterprise and Regulatory Reform Bill. If there is a cartel in any area of financial services then this is properly for the OFT to investigate as it has the appropriate expertise and powers. However, where I do completely agree with the noble Lord, Lord Flight, is that there are not enough banks. Whether it is Metro Bank or any of the other banks that are now getting established, there is general agreement that a more diverse and competitive banking sector will be very much to the benefit of the consumer. Therefore, while I thank the noble Lord, Lord Flight, for his amendments, we are unable to accept them and I hope that they will not be pressed.
Baroness Kramer
My Lords, I speak in support of the noble Lord, Lord Flight. I appreciate that the Government have moved in a significant way in their Amendment 37. What they have put in place is a sort of passive language that the PRA will not stand in the way and be an obstacle to the competition objective of the FSA. I would, however, very much like the Government to look at this again and see if they can turn it into the active, preferably with the same language as they use for the FCA, so that the two are aligned. The underlying reason for this is very straightforward. The PRA is the body that issues bank licences and is therefore significantly in control of the process that leads to more or fewer banks in this country. Its history has been one of discouraging the appearance of new banks. One in the last 137 years is really not the kind of target or the rate at which we want to continue in the future in order to have a more competitive environment. We need to be aware that competition is one of the underpinnings of banking reform—not competition for its own sake but competition because it impacts on standards and because it impacts on the potential for banks that provide customer service. It impacts across a whole range of behaviours, all of which are deeply embedded in the banking reform that everyone in this House is seeking.
Rather than just speak on my own account, I can refer this House to others who have spent more time than I going in detail through these issues. Having looked through many of the issues, the Treasury Select Committee of the other place, in its Financial Services Bill Report of May 2012—so it is recent—concluded:
“It remains our view that competitive markets need both freedom to exit and freedom to enter. The Bill contains no proposal for specific objectives related to competition for the Prudential Regulation Authority. We recommend that the House of Lords consider amending the Bill to make competition an objective of the Prudential Regulation Authority”.
So, that is a significant step on from the concession that the Government have made so far.
I believe that in this House many have a great deal of respect for Sir Donald Cruickshank and the work that he has done on competition. It is something of a scandal that a report produced more than a decade ago has seen so little action when evidently, in hindsight, it has been shown to have got to the heart of many of the issues. I quote from recent comments that Sir Donald has made to the Parliamentary Commission on Banking Standards:
“I can tell you that if the Financial Services Bill becomes an act in its present form, with that wording for the FCA relative to competition, it will have a minimal impact on the decisions of the FCA, because it is not a primary objective—it is qualified”.
The fact that it is not a primary objective of the FCA adds to the argument for introducing language for the PRA; it is an alternative mechanism if the FCA language is to stand. Sir Donald went on to say:
“If a regulatory body that is overseeing the activities of a sector of the economy that is central to the operation of the state does not have a competition objective … it is very likely that competition will be muted. Because it is then in the interests of both the regulated and the regulator to keep competition muted. It is easier for both parties … It would be extraordinarily difficult for the PRA in this case, if it thought that its objectives might be better delivered via better competition in a particular sector of the economy, to act to achieve that”.
His final comment was that,
“my preference would be to have both the PRA and the FCA with precisely the same competition objective and powers so that when they are asked to act together, they do so within the same framework vis-à-vis competition. Then, if there are real tensions between their other objectives, we have the FPC and the Bank itself moderating the answer”.
Lord Newby
(b) the need to minimise any adverse effect on competition in the relevant markets that may result from the manner in which the PRA discharges those functions.(2) In subsection (1)(b) “the relevant markets” means the markets for services provided by PRA-authorised persons in carrying on regulated activities.”
Lord Newby
Lord Newby
Lord Flight
My Lords, I rise to speak most strongly in favour of my noble friend Lord Hodgson’s amendment. I hope that the Government will heed what he said. First, it is quite clear—you have only to look it up in the dictionary—that “proportionate” does not mean “reasonable and fair” as well. It has an arithmetic type of meaning. Secondly, my understanding when my noble friend Lord Sassoon was working on his plans for regulatory reform was very much that we wanted to have a well equipped central bank regulator of banks that would act in a judgmental way and be bright enough to see problems coming, not work on a box-ticking basis, and head them off as, in the past, various central banks have done quite successfully. You really cannot have a judgmental regulator without the inclusion of “reasonable and fair” in their objectives.
I add to some of the figures quoted from the FT Weekend. It was not just about New York; it also pointed out that the number of people working in the financial services industry in Hong Kong is now larger than that in London and indeed that London has lost about 100,000 jobs in the financial services industry since 2007.
Within the territory—I may have made the point in a different way before—I perceive that what happened is that light-touch regulation got a bad name and should never have been what it turned out to be. The reaction to that has been regulators turning macho. The reaction to that has been even very large and proper businesses saying, “We do not want to discuss things with the regulators. We are not going to voice our objections. We will shut up because we are frightened we will be picked on if we cause trouble”. Again, I would like to see the regulators state publicly that they want to discuss things with the industry, they welcome comments and are certainly not in the business of taking it out on firms just because they may disagree with what the regulator proposes. We have an extremely unhealthy situation right now where there is not dialogue or constructive reaction and discussion to the proposals coming out of the regulator.
I repeat: my noble friend Lord Hodgson has got it absolutely right. The amendment is fundamental to the reforms going through, if they are to work as I believe the Government intend.
Lord Newby
My Lords, these amendments again look to amend the proportionality principle to which both regulators are required to have regard when carrying out their general functions. Noble Lords will not be surprised to hear me say that that principle will play an extremely important role in the new regulatory system. It ensures that the regulators must consider whether the burdens they impose will be proportionate to the benefits that are likely to result. I am sure that that principle is universally accepted.
Amendment 42 specifically adds a requirement for the regulators to have regard to being “reasonable and fair”, as well as “proportionate”. Noble Lords will remember that my noble friend Lord Sassoon expressed support for the sentiment behind the amendment at an earlier stage. I am sure that all noble Lords would accept that nobody from this Dispatch Box would be a proponent of a new regulatory system we were creating if for one second we thought that the regulators would act in a way that was unfair or unreasonable.
Does the Bill achieve that objective? We believe that it does. The regulators will not be required to have regard to being fair and reasonable; they will have legal duties to be fair and reasonable; they go further than the amendment proposes. As we explained at an earlier stage, the regulators will have a duty under public law to act reasonably; they are also under a duty to comply with the rules of natural justice, so they will be required to follow procedures and processes that are fair.
My noble friends Lord Hodgson and Lord Flight gave a definition of proportionality. The definition that they gave was narrower than most people’s view of what proportionality means. In certain circumstances, it is a mere mathematical concept, but if I say that I am going to give a proportionate response to something that someone does to me, it is not simply calibrated or adding up figures; I think that it is seen in common parlance as being synonymous with a reasonable and fair response. As I said, the requirement on the regulators under public law to act in that way underpins that thought.
I have considerable sympathy, however, in respect of the threats that London faces as a pre-eminent financial centre. It is not surprising that Hong Kong and Singapore are growing very quickly, given what has happened to the economies in those parts of the world. You would expect growth there, although London is contracting in part because some of the activities that have been undertaken in London are no longer either profitable or, in some cases, credible. When one sees, for example, UBS downsizing significantly in London, it is not doing it because of the regulatory regime; it is doing it for fundamental business purposes, against which these provisions would have no bearing.
Where I agree with my noble friends is that we must ensure that the mindset of regulators in the UK is not negative. It has always been our intention that they would adopt a judgment-based approach; that has been stated on many occasions. That is the key to effect a change of culture in the way that the regulators work. If the amendment would have that impact, the Government might be more sympathetic to it. We simply do not believe that it would. As I said, we believe that the Bill will require the regulators not just to act proportionately but, under their more general duties, to act reasonably and fairly as well. On that basis, I hope that my noble friend will feel able to withdraw the amendment.
Lord Hodgson of Astley Abbotts
My noble friend will not be surprised to hear me say that I am extremely disappointed with that response. I thank my noble friend Lord Flight for his helpful comments, in particular, about effective regulation being a two-way street where people communicate issues and problems that they are facing, not in fear that they will have the book thrown at them but because it is in the regulators’ and regulatees’ interests to address problems and find solutions before they become unmanageable.
My noble friend falls back on the legal words that the regulator has to be fair and reasonable and that there is natural justice. I prefer his point about mindset. The fact is that “proportionate, fair and reasonable” imposes a different mindset on the regulator than “proportionate” on its own. He and the Government may have convinced themselves that the threat to London is coming from the natural effluxion of economic activity to the Far East. I think that they are in danger of being sadly mistaken. We have a chance in this Bill to address the problems that have bedevilled us until recently and to set out our stall for a new, judgment-based, regulatory regime, philosophy and approach. By these as by a series of other decisions taken by the Government, we are missing an opportunity which we will greatly regret having not taken in the years ahead. However, the hour is late, and though I am sorely tempted to divide the House just to have my own bit of testosterone, I beg leave to withdraw the amendment.
Lord Newby
“( ) the desirability of sustainable growth in the economy of the United Kingdom in the medium or long term;”
Lord Newby
My Lords, we all accept that the financial services sector is integral to the prosperity of the wider economy. However, we have also seen what happens when light-touch regulation and excessive risk-taking by financial institutions conspire to produce the perfect storm, culminating in the recent financial crisis. The aftermath of this, of course, is still an impediment to growth in the UK. An appropriately regulated financial sector will be key to the economy’s resurgence, and I am confident that the reforms that we are making to the regulatory system in this Bill will ensure this.
However, at Second Reading and in Committee, my noble friend Lord Sassoon listened to concerns from noble Lords on all sides of the House that the regulators would be excessively focused on their remits and would act in a disproportionate way which might constrain the financial services sector from acting to support activity in the wider economy. That is why a commitment was made to return with an amendment that would require the PRA and FCA to consider the wider impact of their actions.
Amendment 44 delivers on this commitment. It requires the FCA and PRA to have regard to the desirability of sustainable growth in the economy of the United Kingdom in the medium or long term. This is a concept with which of course it would be extremely difficult to disagree. Sustainable economy growth is desirable, and it is important that the regulators will now be required to show how they have considered this in carrying out their general functions.
To a certain extent, this gets back to the amendments that we have just debated. The regulators should not be the agents of the industry that they regulate. Regulation itself is not about enhancing the international competitiveness of our domestic financial sector, even if that is an outcome when regulation is proportionate and effective. This amendment recognises the link between an apparently appropriately regulated financial sector and the growth of the wider economy, and requires that the regulators bear it in mind. That is why the amendment I have tabled strikes an appropriate balance: it creates an expectation that the regulators must think carefully about the impact that their regulation may have on the wider economy; this is absolutely right. Seen in the light of the recent financial crisis, it is clear that taking appropriate regulatory action in good time would have served to safeguard sustainable economic growth in the medium to long term. This amendment will ensure that the regulators consider the wider economic impact of their actions. I beg to move.
Lord Hodgson of Astley Abbotts
My Lords, despite my disappointment over the last three amendments, I congratulate the Government on having brought forward this amendment. It follows the Government’s sensible decision earlier in the passage of the Bill to give the Financial Policy Committee an explicit objective of growth and employment. This amendment achieves a sensible and pragmatic solution, takes account of the needs of the economy and the priorities of business and the financial sector, and at the same time allows regulators rightly to focus on their important consumer protection and financial stability objectives.
There is a small sting in the tail for the Minister. Given that this is a new requirement for the regulators, I encourage him to ask the FCA to come forward with its vision of how it will interpret its regard to economic growth. The regulator is already up and running in shadow form, with designated leadership teams already starting to set out publicly their approach. It is clearly important that the will of the Government and indeed of Parliament is incorporated in that regulatory planning. I applaud the Government for bringing forward this amendment but would argue that in order to achieve their desired goal of supporting growth, work needs to begin now to set out how the regulators will interpret and implement this new requirement.
Lord Tunnicliffe
It is not often that I rise to offer sympathy to the Minister. He was quite right to say that the generality of this amendment, which in my recollection came from all sides of the House, particularly from these Benches, was stressed by us in another place. Every now and then, one has to look at a massive Bill such as this and recognise that the final test of all legislation is that it contributes to the general good. I think that the two lines of this growth amendment produce the right reminder to the regulators that they have to contribute to the general good—I share the emphasis placed by the noble Baroness, Lady Kramer, on the medium and long term—and I warmly welcome it.
Lord Newby
I am grateful for the contributions from all noble Lords who have spoken. I do not want to go into a lengthy response at this time of the evening, but not because I do not feel that we know the answers to the questions. I shall deal with a couple of specific points that were made. My noble friend Lord Hodgson asked in particular about crowd sourcing. To a certain extent, my noble friend Lady Kramer dealt with that. Government Amendment 26, which we debated earlier this evening, goes some way to recognise the validity of crowd sourcing. As my noble friend Lord Hodgson will know, there is already one fully authorised, equity-based crowd-funding platform operating here and growing. We will continue to consider how we can help this and other platforms grow. It is all part of increasing diversity of funding, which we strongly support.
My noble friend Lady Noakes asked whether this amendment relates to the financial services sector as it relates to the rest of the economy and whether the Government accept that sustainable growth in the financial services sector is desirable. We agree that it is crucial. The financial services sector plays a major part in the UK economy, not just in helping the rest of the UK economy to grow, but in its own right. It is a very significant source of export earnings. The whole of the Bill is designed to provide regulatory underpinning that will mean that the financial services sector is safe and secure and can grow in the medium and long term. I hope that with those comments the House will feel able to support the amendment.
Lord Newby
“(da) the desirability where appropriate of each regulator exercising its functions in a way that recognises differences in the nature of, and objectives of, businesses carried on by different persons subject to requirements imposed by or under this Act;”
Lord Newby
Lord Newby
My Lords, no one would doubt the importance of stewardship and of ensuring the proper conduct of those authorised persons who manage investments on behalf of others, including in relation to the exercise of voting rights. Stewardship is also a matter for a wider range of authorities than the financial regulators—in particular, the Financial Reporting Council which has issued a stewardship code.
Amendment 46A would require the regulators to include in their MoU provision about the exercise of their functions relating to stewardship. This amendment is based on the premise that the PRA has a role in stewardship. I do not think that this is a correct premise. First, only the FCA will have any powers in relation to listed companies themselves. The PRA has no responsibilities in relation to listing. Secondly, the regulated activities which cover managing investments are not PRA-regulated activities. The PRA will need to regulate an authorised person who manages investments only if the firm also has a permission to carry on a PRA-regulated activity, such as accepting deposits or effecting or carrying out contracts of insurance. In those cases, the PRA will be the prudential supervisor and the MoU will already cover the co-ordination of FCA and PRA interests in these firms.
Amendment 79B would make clear that the FCA’s powers to make general rules include the ability to make rules relating to stewardship. I can assure the noble Baroness that the amendment is not needed. First, there is no doubt that the FCA’s general rule-making powers extend to making rules about stewardship. New Section 137A to be inserted into FiSMA 2000 under Clause 23 of the Bill is quite clear. It states:
“The FCA may make such rules applying to authorised persons … with respect to the carrying on by them of … activities … as appear to the FCA to be necessary or expedient for the purpose of advancing … its operational objectives”.
Secondly, the FCA’s powers essentially follow the existing FSA powers. The FSA has already made a rule which requires UK-authorised asset managers to put statements of commitment to the FRC’s stewardship code on its websites or, if an asset manager does not commit to the code, to provide its alternative investment strategy there. I expect the FCA to continue with this rule. Far from any suggestion that the responsibility will fall through the cracks between the two regulators, it is absolutely clear that the FCA will take on the FSA’s existing powers in respect of stewardship and ensure that they are properly implemented. I hope, therefore, that the noble Baroness will agree to withdraw her amendment.
Baroness Hayter of Kentish Town
I thank the noble Lord, Lord Newby, for that. Of course, he did not answer the point that I made. When research is done, it is found that details of the “the comply or explain” commitment are not on the web—neither what is being complied with in the code nor what is there instead.
However, I thank him for the clarity of his answer that it is an FCA responsibility. That rather begs a question that I asked in Committee, and to which I may return, that the code is the responsibility of the Financial Reporting Council, which gets no mention in this Bill. In Committee, the Government refused my suggestion that there should be an MoU between the FCA and the FRC, which is regrettable. The importance that the noble Lord has said about the code and the ability of the FCA to make rules, including the commitment to follow it, strengthens the case for a better connection between them. I at least thank him for clarity on that, but we may need to come back to look at the FCA aspects. For the moment, I beg leave to withdraw the amendment.
Lord Newby
“(1) The regulators must prepare and maintain a memorandum which describes in general terms—
(a) the role of each regulator in relation to the exercise of functions conferred by or under this Act so far as they relate to with-profits insurers, and(b) how the regulators intend to comply with section 3D in relation to the exercise of those functions so far as they relate to the effecting or carrying out of with-profits policies by with-profits insurers. (2) The memorandum required by this section may be combined with the memorandum required by section 3E.
(3) If the memorandum required by this section is contained in a separate document, the PRA and the FCA must publish the memorandum as currently in force in such manner as they think fit.
(4) Subsections (1) to (3) apply only if the effecting or carrying out of with-profits policies is a PRA-regulated activity.
(5) For the purposes of this section—
(a) a “with-profits policy” is a contract of insurance under which the policyholder is eligible to receive a financial benefit at the discretion of the insurer;(b) a “with-profits insurer” is a PRA-authorised person who has a Part 4A permission, or permission resulting from any other provision of this Act, relating to the effecting or carrying out of with-profits policies (whether or not the permission also relates to contracts of insurance of other kinds).(6) The Treasury may by order amend the definition of “with-profits policy” applying for the purposes of this section.”
Lord Newby
The government amendments in this group make a change to the way that with-profits policies will be regulated under the new framework. We had a very useful debate on this subject in Committee. As my noble friend Lord Sassoon stated at the time, with-profits policies give rise to a particular risk of unfairness because the benefits that policyholders receive are largely at the discretion of the firm. The tensions between the firm treating current and future policyholders fairly, and maintaining safety and soundness, are especially acute. It is therefore difficult to separate the prudential and conduct issues in the regulation of “with-profits”, much more so than in any other type of financial services business. The Government’s main objective, therefore, is to ensure that there is clarity in decision-making in this area. The approach that was originally envisaged in the Bill was that this clarity would be delivered by giving the PRA sole responsibility for ensuring an appropriate degree of protection for policyholders in relation to the making of discretionary payments.
The noble Baroness, Lady Drake, raised a number of concerns including the possibility that excluding the FCA from decision-making would lead to consumer detriment, as the prudentially focused culture of the PRA may lead it to pay insufficient attention to the fairness element of policyholder protection. The Government have now given further consideration to this, and on balance we agree that this is an area where the Bill could be improved. We have therefore brought forward amendments that will ensure that both the FCA and the PRA have a responsibility in relation to the regulation of with-profits, rather than giving sole responsibility to the PRA. This will mean that the FCA has a full role in consumer protection, as it does in other firms. The PRA and FCA will have to put in place an MoU setting out their respective responsibilities in this area.
However, to preserve the sense that there should be a final decision-maker, the PRA will be given the power to require the FCA to refrain from actions that conflict with its general or insurance objectives, for example if it considers the FCA action could harm the safety and soundness of a particular with-profits insurer or with-profits insurers generally. To ensure scrutiny and accountability, any such veto must be published unless the PRA considers it is against the public interest to do so. The Government’s view is that this approach strikes the right balance between giving the FCA a much stronger mandate, and preserving clarity of decision-making and responsibility in this exceptionally complicated area. I hope that the amendment meets the noble Baroness’s concerns, and I beg to move.
Lord Tunnicliffe
My Lords, I thank the Government for bringing forward this group of amendments, which meets the concerns raised by the noble Baroness, Lady Drake. I particularly thank the Minister for mentioning her in his speech. She regrets that she cannot be here, but I am sure she will feel her efforts were worthwhile by resulting in this group of amendments.
Lord Newby
Lord Newby
Baroness Hayter of Kentish Town
My Lords, we have spoken already about the need to have information from banks about their lending to different communities and sizes of business. The noble Lord, Lord Newby, said that the FCA will collect data about access to financial services. In the amendments we seek to obtain information to identify how well markets are working for lower-income communities. This is therefore broader than simply small businesses, and is about whether lower-income households can get credit, insurance, saving products and banking services. We know already, for example, that about 1.5 million people have no bank account, but we need to know more about what other groups are excluded from such services and products. We therefore ask for the FCA—which will be able to obtain the information—to research and assess whether such needs are being met and to include its findings together with any strategy for dealing with identified unmet need in its annual report. If the FCA is doing its job, it will do this anyway, but this is belt and braces so let us write down our expectations of it in this regard. I beg to move.
Lord Newby
My Lords, having agreed earlier today that we want to require the FCA to obtain and publish these data, obviously we have considerable sympathy with these amendments to the extent that they seek to flesh out how that remit should be undertaken. However, that is the end of the good news because we think that the amendments are in part unnecessary and in part inappropriate because they are too prescriptive.
We believe that there is no need for a specific provision relating to the annual report for the FCA because in paragraph 11(1)(b) of Schedule 3 we state that the annual report must cover,
“the extent to which, in its opinion, its operational objectives have been advanced”.
Given that in a series of amendments today we have strengthened the role of the FCA in looking at disadvantage and making that a new area where the FCA has a very specific responsibility, it will have to report in those areas in any respect.
Amendment 61B is very prescriptive. Our view is that with the FCA reporting on this, as with many other things that it will report on, the Bill itself should not have detailed prescription as to how the FCA should do its work. It has a legal requirement to report and it is up to the FCA to respond as it thinks fit. If there is any sense that it is falling down on its objectives, it will be reporting to Parliament and will be questioned by Parliament and Parliament will have the opportunity to raise with representatives of the FCA on a regular basis how it is meeting this and any other of its statutory objectives. I hope that the noble Baroness will feel that the outcomes that she seeks will be achieved in any event and that she can withdraw her amendment.
Baroness Hayter of Kentish Town
My Lords, I warmly thank the Minister because sympathy was much more than I got when I spoke on consumer input to the PRA. So I think that I will bank that one. I thank him, too, for endorsing the spirit of my amendments on the record so that when the report comes out people will be able to quote his very wise words that that was what we were looking to the FCA for. With that, I beg leave to withdraw the amendment.
Lord Newby
“19A (1) The FCA must in respect of each of its financial years pay to the Treasury its penalty receipts after deducting its enforcement costs.
(2) The FCA’s “penalty receipts” in respect of a financial year are any amounts received by it during the year by way of penalties imposed under this Act.
(3) The FCA’s “enforcement costs” in respect of a financial year are the expenses incurred by it during the year in connection with—
(a) the exercise, or consideration of the possible exercise, of any of its enforcement powers in particular cases, or(b) the recovery of penalties imposed under this Act.(4) For this purpose the FCA’s enforcement powers are—
(a) its powers under any of the provisions mentioned in section 133(7A),(b) its powers under section 56 (prohibition orders), (c) its powers under Part 25 of this Act (injunctions and restitution),(d) its powers under any other enactment specified by the Treasury by order,(e) its powers in relation to the investigation of relevant offences, and(f) its powers in England and Wales or Northern Ireland in relation to the prosecution of relevant offences.(5) “Relevant offences” are—
(a) offences under FSMA 2000,(b) offences under subordinate legislation made under that Act,(c) offences falling within section 402(1) of that Act,(d) offences under Part 6A of the Financial Services Act 2012, and(e) any other offences specified by the Treasury by order.(6) The Treasury may give directions to the FCA as to how the FCA is to comply with its duty under sub-paragraph (1).
(7) The directions may in particular—
(a) specify descriptions of expenditure that are, or are not, to be regarded as incurred in connection with either of the matters mentioned in sub-paragraph (3),(b) relate to the calculation and timing of the deduction in respect of the FCA’s enforcement costs, and(c) specify the time when any payment is required to be made to the Treasury.(8) The directions may also require the FCA to provide the Treasury at specified times with specified information relating to—
(a) penalties that the FCA has imposed under this Act, or(b) the FCA’s enforcement costs.(9) The Treasury must pay into the Consolidated Fund any sums received by them under this paragraph.
19B (1) The FCA must prepare and operate a scheme (“the financial penalty scheme”) for ensuring that the amounts that, as a result of the deduction for which paragraph 19A(1) provides, are retained by the FCA in respect of amounts paid to it by way of penalties imposed under this Act are applied for the benefit of regulated persons.
(2) “Regulated persons” means—
(a) authorised persons,(b) recognised investment exchanges,(c) issuers of securities admitted to the official list, and(d) issuers who have requested or approved the admission of financial instruments to trading on a regulated market.(3) The financial penalty scheme may, in particular, make different provision with respect to different classes of regulated person.
(3A) The financial penalty scheme must ensure that those who have become liable to pay a penalty to the FCA in any financial year of the FCA do not receive any benefit under the scheme in the following financial year.”
Lord Newby
My Lords, this group of amendments provides for new arrangements for the use of revenue from financial services fines. In future, regulatory fines revenue in excess of enforcement case costs for the year will go to the Consolidated Fund. The new arrangements will apply to all fines imposed by new FCA and PRA and to fines imposed by the Bank of England in the course of exercising its regulatory powers in relation to financial services. This will apply to FSA fines received from 1 April 2012, so the measure will include the penalty imposed on Barclays in relation to the attempted manipulation of LIBOR.
Under the current arrangements, where enforcement action results in a firm paying a financial penalty, this is applied as a discount to fees paid by other firms in the following year. Without reform, unprecedented fines such as the Barclays fine would have represented a significant windfall to regulated firms. We have of course thought carefully about the impact on those firms which obey the rules. Compliant financial services firms will still be protected from costs directly attributable to the misconduct of others, as the regulators will be able to net off enforcement case costs before handing over penalties to the Treasury and provide a rebate to compliant firms the following year. However, in future, any benefit above these costs will go to the taxpaying public, rather than the financial services industry.
For this year, the Government have announced that £35 million received this year from fines imposed for attempted LIBOR manipulation and other unacceptable behaviour will be used to support Britain’s Armed Forces community. Additionally, £5 million will go towards the creation of the new, ground-breaking First World War galleries at the Imperial War Museum. I beg to move.
Lord Flight
My Lords, I just want to say that clearly the Government could do with the money, but the original arrangements where, in essence, fines revenue benefited the clients of financial institutions—because it is always ultimately the clients who pay for everything—seemed to be fair and appropriate. There is less logic for saying that the fines revenue should benefit citizens as a whole rather than that it should benefit the clients of all the institutions that have to bear regulatory costs, which clearly get reduced if the fines go as they did go. I rather assume that the logic is that the Government need all the revenue they can get, but with whom was this discussed to reach this conclusion? Certainly, at the time of FiSMA, I remember there was quite a bit of debate about the subject and it was concluded that the proposed arrangements then were the fair ones.
Lord Newby
Possibly the new component in the equation is just the scale of the fines that we have seen. The Government took the view that, in those circumstances, the taxpaying public as a whole should get the benefit rather than that there should be a rebate to the industry. I hear what the noble Lord says about policy-holders benefiting from that. Of course, there is a large overlap between people who have financial services products and the electorate as a whole. It is not a complete overlap. It is one of those issues where it is simply a judgment call and the Government’s judgment was that, in future, where a significant amount of money is levied as fines, the benefit of that revenue should flow to the community as a whole.
Lord Newby
“(1A) Anything done or omitted by a person mentioned in sub-paragraph (1)(a) or (b) while acting, or purporting to act, as a result of an appointment under any of sections 166 to 169 is to be taken for the purposes of sub-paragraph (1) to have been done or omitted in the discharge, or as the case may be purported discharge, of the FCA’s functions.”
Lord Hodgson of Astley Abbotts
I will briefly support my noble friend’s amendment. There has been quite a lot of talk about how the Bill is oriented towards banking and that particular sector of the financial services industry. The insurance industry—particularly the life insurance industry, which marches to the beat of several different types of drum, one of which, in respect of solvency, my noble friend referred to—needs to make sure that its voice can be heard, because it is such a critical part of our savings industry. While one does not wish to be too prescriptive in the way these bodies are made up, I am sure that some reassurance to the life insurance industry that its particular expertise and particular needs will not be overlooked would be welcome and desirable.
Lord Newby
My Lords, the Government absolutely agree that insurance expertise should be represented on the PRA board. That is why my noble friend Lord De Mauley said when we previously debated this matter that the Bank had committed to that principle and that there would be insurance expertise on the PRA board. However, we believe that it is up to the Bank to ensure that the board has the right balance of skills and experience to enable it to make effective decisions and deliver its objectives in respect of all the firms it regulates. The trouble with the amendment is that if we were to require in the Bill that the board should have insurance expertise, people would rightly ask why the Government had not made similar provision for other sectors such as mutuals and investment banks. We do not think that that is a sensible way to go. However, with the commitment that there will be insurance expertise on the PRA board, I hope that the noble Lord will feel able to withdraw his amendment.
Baroness Noakes
Before my noble friend sits down, when we discussed this matter before, the Minister replied in the same terms as the noble Lord, Lord Newby, has today, and said that there would be insurance expertise on the board. I sought to clarify whether that would include the non-executive component or whether there was a possibility that there would be simply an executive member. Subsequent to the Committee stage, the noble Lord, Lord De Mauley, wrote to me—I am not sure whether the letter has been circulated more widely—to say that the intention was that there would be an insurance non-executive member. Will the Minister confirm that that is still the Government’s intention?
Lord Newby
My Lords, nothing has changed since the point at which the noble Lord, Lord De Mauley, wrote his letter.
Lord Flight
Is it felt that a single representative is sufficient in relation to the overall size of the board?
Lord Newby
My Lords, neither the Government nor the Bank have said that there will never be more than one insurance representative on the board. The commitment is the other way round. We have said that there will be at least one insurance representative on the board. At some points there may be more than one, but whether or not that is ever the case, there will always be one. That is the core commitment that we wish to make.
Lord Flight
I thank the noble Lord for his comments and beg leave to withdraw the amendment.
Lord Newby