Financial Services Bill

Lord Peston Excerpts

Monday 15th October 2012 Lords Chamber

[Lord Tunnicliffe]

My Lords, I thank the Minister for his introduction to the total package of measures to which the amendments relate and for his explanation of specific amendments. The way in which the amendments have been grouped means that a substantial part of the detail of the overall package will be debated in two working days. Accordingly, we will look at the detail during that period and respond then. The results of the consultation are being published today. Only when we have carefully looked at those will we make a detailed response. At a general level, we welcome the bringing of these financial institutions into the resolution regime.

[Lord Peston]

My Lords, will the Minister clarify one or two aspects of what he said? Am I right in thinking that the amendments, in so far as one can follow them at all, are relevant when something has already gone wrong; that is, when the institution in question is in trouble and something has to be done to cope with that?

[Lord Sassoon]

Yes, the noble Lord is right in that.

[Lord Peston]

Am I then also right that other aspects of the Bill are really to stop the problem arising in the first place? Would that be a valid interpretation of the whole legislation?

[Lord Sassoon]

My Lords, at the risk of oversimplifying matters, yes, indeed. We want a judgment-based system of regulation and supervision that makes it less likely that things will go wrong in the first place. That is entirely correct.

[Lord Peston]

The Minister must be aware by now that there is no way that he can oversimplify when he is dealing with me. Has a study been done of the costs and benefits of the effects of the amendments? In particular, if a crisis appears that is connected with insolvency et cetera, will costs be involved and who will bear them? I cannot find an answer to that anywhere in the amendments. Is it a responsibility of whoever is administering all this? Further, am I right in thinking that clearing houses will not be saved but essentially go out of business?

[Lord Sassoon]

My Lords, I can confirm that, as with just about everything that this Government and the previous Government have brought forward, an impact assessment of the measures was done as part of the consultation process. The noble Lord took us back to first principles. What we are trying to achieve in the broad sweep of the construct is for the costs to fall on the industry. The shareholders would be likely to be the first to be wiped out if an investment exchange or clearing house went out of business. That is where the costs would fall. At all times, our principal concern is to make sure that taxpayers are not exposed to material costs such as they were, very severely, in the financial crisis of 2007-08. I hope that that helps the noble Lord.

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[Lord Sassoon]

First, my Lords, there is no question in this of anything being transferred to or from the EU. This is just a regime around the winding-up administration for the insolvency of UK clearing houses, so I assure the noble Lord that that issue does not arise. It was his Government—the previous Labour Government—who identified this general area as one that needed to be dealt with, particularly in the context of deposit takers, where the need was identified to put additional provisions in place for resolution regimes. We built on the work initiated by the previous Government and have identified other systemically important parts of the system.

We are talking about clearing houses and recognised investment exchanges this afternoon, and we will go on in a future session to talk about investment banks. We are merely saying that we have identified other areas where the authorities need to have powers similar to the ones that came out of the legislation initiated by the previous Government, and are putting that in place.

As to the cumulative amount of responsibility that we are giving to the Bank of England, we have already in the course of the very useful scrutiny of this Bill made some important changes, including putting the oversight committee in place to respond to the sort of challenge that the ever-nimble-on-his-feet noble Lord, Lord Barnett, raises. I therefore think that we have covered that issue up front in this Bill and that the Government have made some big concessions.

[Lord Peston]

My Lords, I will not pursue the question of more powers to the Bank of England. After its performance over the last few years, it is the last thing I would do, and I do not think this is the occasion to debate that yet again. However, I am puzzled by two things. I thought that in his reply to the noble Lord, Lord Flight, he said we should not be discussing the European angle and that that would come at some other stage. Is that right? I do not think I misheard him.

[Lord Sassoon]

No, I said in my reply to my noble friend this afternoon that I would concentrate purely on the European angle of these amendments, which I dealt with. I was not going to be drawn into discussing a whole range of other European matters which my noble friend’s remarks address. It is as simple as that.

[Lord Peston]

I take it that we are not discussing—because if we were, I would make a speech—the fact that we believe strongly in a single market for financial services but that many of the European countries go to enormous lengths to prevent our highly efficient financial services firms getting into their markets. I would not mind having a debate on that some time during proceedings on this Bill. However, I gather that in the Minister’s view this is not the moment.

[Baroness Cohen of Pimlico]

Might I ask the Minister for a little guidance? If we are discussing all these amendments together, I have a set of problems that I would like to discuss on Amendment 176D. Is this the moment or are we going to do all the amendments separately?

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176D: After Clause 28, insert the following new Clause—
“Additional power to direct UK clearing houses
After section 296 of FSMA 2000 insert—“296A Additional power to direct UK clearing houses
(1) The Bank of England may direct a UK clearing house to take, or refrain from taking, specified action if the Bank is satisfied that it is desirable to give the direction, having regard to the public interest in—
(a) protecting and enhancing the stability of the UK financial system,(b) maintaining public confidence in the stability of the UK financial system,(c) maintaining the continuity of the central counterparty clearing services provided by the clearing house, and(d) maintaining and enhancing the financial resilience of the clearing house. (2) The direction may, in particular—
(a) specify the time for compliance with the direction,(b) require the rules of the clearing house to be amended, and(c) override such rules (whether generally or in their application to a particular case).(3) The direction is enforceable, on the application of the Bank, by an injunction or, in Scotland, by an order for specific performance under section 45 of the Court of Session Act 1988.
(4) The Bank may revoke a direction given under this section.
(5) In this section “central counterparty clearing services” has the same meaning as in section 155 of the Companies Act 1989 (see subsection (3A) of that section).”

[Lord Peston]

My Lords, before the Minister moves this amendment, can I ask him one other thing that intrigues me? On the bit of paper that we get every day when we meet on this, it says:

“Target for the day: to complete the group beginning amendment 190ZZA”.

Are we to take that seriously? At the rate we are going, we will be going for a very early supper.

[Lord Sassoon]

My Lords, as ever, these things are discussed and agreed through the usual channels. I certainly take my side of the usual channels extremely seriously. The noble Lord can discuss it with his side, but I believe that is where we are headed. I thought we might have got through the previous group of amendments rather more quickly, so I do not know what time we will finish, but in only a moment I have been able to move on to Amendment 176D.

Amendments 176D and 182ZA build on the existing powers of direction that the Financial Services Authority has under the Financial Services and Markets Act 2000, or FiSMA. This group of amendments gives the Bank of England additional powers to direct UK clearing houses to address risks to their solvency, or indeed any other matter. Specifically, the direction could require a clearing house to make changes to its rules or introduce emergency rules, or require rules to be activated. The existing powers of direction provided for in FiSMA can be used only to direct a clearing house to ensure that it complies with the recognition requirements or its obligations under FiSMA. Here, in answer to a point that the noble Lord, Lord Peston, raised, we are talking about powers that go with the previous group of amendments, which were all to do with clearing up a mess when we got there. We are now talking about additional powers to make sure, specifically, that we minimise the chances of getting into trouble.

Providing the Bank with additional powers of direction over UK clearing houses is essential to allow the Bank to manage the considerable risks that may be posed by actions of a clearing house that is nevertheless not in breach of its recognition requirements or obligations under FiSMA. Put simply, the powers will enable the Bank to intervene as required to help to ensure that clearing houses act in a way that is consistent with the maintenance of financial stability and wider market confidence. For example, these provisions allow the Bank to issue a direction requiring a UK clearing house to refuse to accept certain investments as collateral, or to require all collateral in relation to specified types of financial transaction to be provided in cash. They also allow the Bank to require a UK clearing house to alter the rules concerning its operation in order to ensure that certain matters do not constitute events on which specified rights become available—for example, early termination rights—or to require a UK clearing house to take action or to refrain from taking action under its default rules.

Although these powers are wide-ranging, building in essential flexibility to manage new and unusual risks, they may be exercised only where the Bank is satisfied that it is desirable to do so, having regard to various clearly defined public interest tests. With one exception, the Bank of England cannot use this power to require shareholders, members or clients to recapitalise or otherwise fund a failing recognised clearing house. The power of direction relates only to the recognised clearing house itself. The exception is where the UK clearing house already has recapitalisation arrangements and agreements in place with its shareholders. In this instance, the Bank of England could use this power to direct the UK clearing house to enforce those arrangements, provided that the necessary conditions and safeguards are met. This is to ensure that the clearing house acts in a way that is consistent with the maintenance of financial stability and wider market confidence. I beg to move.

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[Lord Peston]

My Lords, I hate to abandon a “may” and “must” debate, because it is my favourite activity. However, in this case, since we are discussing additional powers, I hate to say it but I think that “may” is simply the word that corresponds grammatically to giving the additional powers. Given the circumstances in which the amendment lists when those powers can be used, it is perfectly obvious that “must” is then implicit. Why else would these criteria be taken into account? I do not want the Minister to stop annoying the parliamentary draftsmen but perhaps for once they have got it right.

[Lord Sassoon]

I am very grateful to the noble Lord, as I am sure the officials will be.

Amendment 176D agreed.

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[Lord Peston]

I admonish the Minister in a trifling way. It seems to me that the issuing of warning notices is enormously beneficial to those being regulated. That is one bit of a Bill that I do not like which I am totally in favour of. I am surprised that the Minister would even consider any backtracking on that. It is immensely beneficial to people to be told, “We are concerned about what you are doing and would like you to modify your behaviour so that it does not create a loss to the public interest”. That is one of the really good bits of the Bill.

[Lord Sassoon]

My Lords, let me stress again that we are not backtracking at all. Our commitment to the new policy instrument remains extremely firm. It may be that the industry will come to take the view expressed by the noble Lord, Lord Peston. We will see. I have been struck by not only our debate this afternoon but our conversations in the run-up to it that because we are taking such a bold step, which I believe to be the right one and which I believe that the FCA will exercise properly, we should have the reserve power, which we do not have in the Bill, should things not turn out as I and the noble Lord, Lord Peston, expect.

I hope, on the basis of that explanation of our intention, that my noble friend will feel able to withdraw his amendment.

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[Lord Flight]

My Lords, all that I was really calling for previously was for the RDC to be embodied in statute to provide this role. The amendment proposed by the noble Baroness, Lady Hayter, offers something rather better because it is a duly organised and independent body that would provide the safeguard of justice. That, it seems to me, is what we all want.

[Lord Peston]

My Lords, I support my noble friend’s amendment, but I would like to place it in context. I start from the position that the Minister started from when he reminded us that the Bill and these regulators have not been picked like a rabbit out of a hat. There was a problem to be solved and this, even though I do not like aspects of it, is the Government’s best attempt to solve it. There was a problem in this sector of the economy, the public demanded that something be done to prevent it from happening again and the solution is regulation. Since the only alternative solution that I know about would be to nationalise the whole of the financial sector, which I would not favour, the Government are clearly doing the right thing in broad terms—even though, I repeat, there is a lot of this Bill that I do not like.

The second aspect of the context is the old adage, “Quis custodiet ipsos custodes?”. The trouble is that once you go down that path, you get an infinite regress; whoever you set up to regulate the regulators, you then ask, “Who’s going to regulate them?”, and it goes on for ever. We ought to bear that in mind.

My general point is that, while I hope that the Government will either agree precisely to my noble friend’s amendment or come up with a suitably tweaked amendment of their own, we should not be naive about this. The moment the regulator starts looking at any particular organisation—and certainly when it starts considering, suggesting or indeed issuing a warning notice—the idea that this will not leak out is a bit on the naive side, to put it bluntly.

Although I support my noble friend’s amendment, I think she will agree that it does not protect us from the world in which we live, a world in which there is, in a sense, money to be made by leaking secrets. I believe that the Government ought to go down the line suggested by my noble friend and respond sympathetically, but whether or not I live long enough to see the first case that arises, I would not be in the least surprised if the first warning notice gets leaked within minutes of being sent. That should not stop my noble friend from going ahead with this, but it illustrates that some of us are rather cynical when it comes to what happens in the world in which we live.

[Lord Turnbull]

Can the noble Baroness clarify for me what right the accused has to make representations to this committee? Does it simply take the presentation of a case from the FCA and examine that for its strengths and weaknesses, or is representation from those accused of the regulatory breach built in? To answer the noble Lord, Lord Peston, it is a criminal offence to leak the existence of a decision notice before its appropriate time.

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[Lord Sassoon]

With all due respect to the noble Lord, this slightly misses the point. As I have explained, within much the same remit under FiSMA, to which we have added one additional piece of protection, the FSA exercises the judgment and comes up with the structure that this Committee seems broadly happy with. It is entirely fair and proper to allow the successor body the space to come up with a decision which finds approval in decisions that were previously taken about this structure. Therefore, based on our approval of how it has done up to now, we should have confidence that it will do it again. It has heard loudly and clearly the support that your Lordships will give it if it takes that approach.

[Lord Peston]

I am really lost as to what the Minister is saying. Apart from the fact that he was made a very good offer—I would have thought that the Minister, in his right mind, would never reject a good offer—is he saying that this amendment is not needed because the regulators could set up committees of this sort themselves with no statutory powers behind them and that they can do exactly what is in this amendment already? Can he guarantee that it is right that each regulator can set up a committee so the only difference is that we are saying that they must and he is saying that they can? For the record, is that what he is saying?

[Lord Sassoon]

I am sorry that I have not been sufficiently clear. Yes, that is exactly what I am saying. In fact, I am saying more than that. Within the very similar provision for FiSMA, that is exactly what the FSA did. Not only can it do it but it has a track record of having done that. I think we should trust it to do whatever is appropriate again.

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[Lord Peston]

My Lords, in supporting my noble friend’s amendment, I say that I am a strong supporter of the European Union, and that I hope one day to live in a country where the Government is also a strong supporter of our membership of the European Union—something that has not been the case for many years. I refer not just to the present Government but to the previous one. However, although I regard myself as a supporter of the European Union, I am well aware that often it drips into areas that are none of its business. When I first saw the amendment, I thought: what possible grounds are there for the European Union to consider supporting charities, let alone setting limits on how they can be supported? I assume that this is a probing amendment, although my noble friend has not told me so. Really the European Union has no business to be in this field; that is the message we would like to get over.

[Lord Hodgson of Astley Abbotts]

My Lords, my Amendment 187CA in this group relates to another aspect of the operation of the Financial Services Compensation Scheme. The current wording by which the scheme operates gives it a lot of discretion in the way that the costs of the scheme are allocated. Section 213(5) of FiSMA states:

“In making any provision of the scheme … the Authority must take account of the desirability of ensuring that the amount of the levies imposed on a particular class of authorised persons reflects, so far as practicable, the amount of the claims made, or likely to be made, in respect of that class of person”.

There are two get-outs.

I make it clear that this is not about restricting the rights of consumers to obtain compensation. It is a critical and essential part of maintaining proper confidence in our financial system that there are proper and appropriate ways for people to claim and get compensation for mis-selling or other malfeasance. However, the amendment is about ensuring that the polluter pays. It has become more difficult in recent years to trace the allocations and levies made by the Financial Services Compensation Scheme to the particular class of persons and businesses to which they have been applied. Often, there appears to be a shifting of the pea around the plate, with a disproportionate share landing on those perhaps least able to complain. I hope that my noble friend will listen to the amendment with sympathy. The funding system must reflect the differences in risk and instability posed to the public and to the wider economy by firms and the financial products they offer.

I make it absolutely clear that my amendment does not enforce an unacceptable level of correlation. The words “as far as practicable” will remain, and will therefore provide the scheme with a degree of flexibility—a get-out, if you like. However, the additional words, “take account of the desirability of ensuring”, are too woolly. They lead to situations where people feel that the scheme is not operating fairly. Therefore, I would like to see those words replaced by the single word, “ensure”, as a means of ensuring that the Financial Services Compensation Scheme penalises the polluter and not the wider financial community.

[Lord Newby]

My Lords, Amendment 187AB, moved by the noble Baroness, Lady Hayter, would require the Government to notify other EU member states that the limits on compensation payments to charities in the event of a loss of their bank deposits should be reviewed. The noble Lord, Lord Peston, asked what on earth this had to do with the EU. I suspect that he, like me, had not heard of the deposit guarantee scheme directive, which is an extremely valuable piece of legislation. It means that across the EU there is a maximum harmonised limit of compensation per depositor in the case of banks or other financial institutions going bust. It makes sure that across the EU there is a common framework for paying out when organisations get into financial difficulties.

[Lord Peston]

The Minister said that that was a very good idea. I cannot imagine why it is such a good idea. What business is it of the European Union what the taxpayers of an individual country decide they will spend on compensating people who have lost money because of the misbehaviour of banks? Why is it a European issue? I do not want to pursue this because it is a European question that is broader than what the Bill is about. I merely made the rather tart remark that occasionally the overpaid officials in Brussels have to justify their overpaid existence by finding things to do. Otherwise, they might eventually be asked to retire—although I might say that then they get incredibly good compensation arrangements. I was just being my normal tart, nasty self.

[Lord Harrison]

My Lords, I came to listen to the Statement. However, it may be of interest to some of my colleagues that we on Sub-Committee A of your Lordships’ European Union economic and finance committee are studying the banking union proposals and the recovery and resolution directive. The deposit guarantee scheme is an integral part of Herman Van Rompuy’s proposals, and of the response that we have got from the four presidents. That is the reason I am here today. I was slightly taken aback when my noble friend Lord Peston mentioned charities. As I understand it, the deposit guarantee scheme is a separate matter. The proposal has yet to mature. This will be done in Brussels over the coming weeks and months. I do not know whether that helps.