Financial Services Bill

Lord Peston Excerpts

Tuesday 20th November 2012 Lords Chamber

[Lord Peston]

My Lords, my contribution is also entirely interrogative. I have a lot of questions. I shall put the matter in context. Before we started today's proceedings, I thought that this was all very straightforward and simple but I now realise that I did not understand any of it at all. I am not certain that I am alone in not understanding it. I shall go through my questions and give some examples to elucidate them. First, I may have missed the noble Lord, Lord Sassoon, making the relevant statement, but can noble Lords assume that everything in these amendments has been agreed by Mr Wheatley and that he also agrees that they do every single thing that he wanted done? That was not said, but I assume that perhaps we are to take that for granted. My second question, which was not in my original notes, but I listened to what was said, is: do these amendments go well beyond what is in the Wheatley report? I would like an answer to that. My third question is: why are we talking about benchmarks? That was the first thing I scribbled when I saw the amendment. Why are we using this expression? It is so broad that it seems to me to cover all sorts of things that have nothing to do with LIBOR. My main puzzle is that I thought that this was all about LIBOR, exactly LIBOR, no more than LIBOR and no less than LIBOR, but it seems to me that it is about 101 other things.

In order to elucidate that, perhaps I may give some examples. I am sticking to the investment paragraphs, whereas my noble friend Lord Eatwell rightly says that benchmarks are used for all sorts of contracts, not just investment contracts. Let us stick with investment contracts. Suppose a firm issues a long-term bond which is specified in the following way: “This firm agrees to pay the holders of this bond 5% interest over its life”, say 25 years, “plus the rate of rise of the GDP deflator”. That seems to me to be a good way of issuing a bond and raising money. Does the GDP deflator, and do all those who set the GDP deflator, come into the scope of this Bill? I can see nothing that stops them coming into the scope of the Bill, but those people are the Office for National Statistics and if the Government manipulate the GDP deflator by subsidising certain key elements of it, the Government may face criminal charges. I have seen nothing in this Bill to stop that happening. I mention that because the GDP deflator happens to be my favourite price index as compared with the CPI and the RPI, but it would apply just as well to them.

Let us go further. In order to produce stability in its enterprise, suppose a firm says, “I will pay you 3% per annum over the lifetime of this contract, which we wish to last for five years, plus the rate of rise of the GDP deflator. Will you agree to that?”. That relates to a question that occurred in your Lordships' House yesterday. It is the kind of wage contract many of us would like to see used in order to stabilise the economy but I can see nothing that prevents such a contract coming under the scope of this Bill. To my noble friend Lord Eatwell, I say that it is not just a matter of commodities trading, but it seems to me there is nothing in the Bill that prevents almost anything that is index linked coming under its scope. Am I right that this goes well beyond LIBOR? I would take the view that it should not; that is not what we are here for.

Those are my contributions, they are all interrogative and I am perfectly happy to be told that I have misunderstood everything that is going on here. I do however agree with my noble friend Lord Barnett that I may misunderstand it, but the lawyers involved in this kind of activity will not and they are going to look for trouble. Has the Minister asked his officials to guarantee that no trouble can arise in that way within this part of the Bill?

[Baroness Noakes]

My Lords, I ask my noble friend a simple question, for which I apologise for not having given him notice. It is a question I had intended to raise in respect of an earlier amendment but for various reasons I was not here when that amendment was dealt with. It relates to the definition of financial crime. The FCA has, as one of its integrity objectives, the financial system not being used for a purpose connected with financial crime, and financial crime is defined in new Section 1H. An amendment moved by my noble friend earlier was to include terrorism financing in the definition of financial crime. It seems to me that the definition as it stands does not automatically include the new offences that are created in this rather large group of amendments, which we can shorthand as the LIBOR offences, because it would not otherwise have been within the remit of the FCA. I would be grateful if my noble friend would answer that point.

[Lord Sassoon]

My Lords, I was rather getting into the swing of this. I have never had so many questions in such a short time and I was waiting for more to come. Noble Lords know that I usually try to group my answers together in some coherent way, but the questions have come so thick and fast that I fear that in answering as many as I can the answers may not be grouped together quite as efficiently as I would like.

Let me start with the definitional issues around what we are trying to cover here. First, to the noble Lord, Lord Barnett, benchmark may be defined by Chambers Dictionary, on Google and in many other places, but it has never before been defined in FSMA and I think it is necessary to have a FSMA definition. I am sorry the noble Lord went to all these other sources and did not look at the very particular definition in the Bill, but that is where these amendments start. The noble Lord, Lord Eatwell, asked if the definition was wide enough and the noble Lord, Lord Peston, takes the view we should only be talking about LIBOR so the definition may be too wide.

[Lord Peston]

All I was saying was I thought that the Bill team, when we met them, told us that these amendments dealt with LIBOR, end of story. I am asking whether they deal with lots of other things. I am not saying it is wrong to do so, I am simply asking.

--- Later in debate ---

[Lord Sassoon]

Again, to an extent the noble Lord, Lord Eatwell, pre-empts what I was going to say. First, let me deal with this question about the international situation, which I believe I addressed in my opening remarks. We have identified a clear problem with a critical benchmark, LIBOR. We intend to fix it. Work is going on in the international arena to look at questions of benchmarks more generally. As and when there is a conclusion, that will then be factored in as to whether within this framework there is more to be done to regulate other benchmarks. Of course, if through applicable international rules there were some change to the framework required, which we do not anticipate, we could also change the framework through primary legislation.

In the mean time, having identified LIBOR, we will have a consultation. That will be an opportunity to people to give their views about what other benchmarks, if any, should be regulated. I do not see any contradiction in my remarks with my right honourable friend the Financial Secretary’s remarks at all. We will see what the international community comes up with as IOSCO and the FSB look at these matters.

The noble Lord, Lord Eatwell, is of course right that the definition here is one of the more difficult ones. I will have a look again to see whether anything of the sort that he suggests might be missed out is not covered. Although clear understanding is that the word “investment” as taken sometimes in a common- sense way does not necessarily fit with some of the examples that he gave, I will take it away and have a look at it again to make sure that it does cover everything.

On the series of petroleum-related examples that the noble Lord gave, I am not going to say whether the manipulation of the Californian electricity market would fit within the regulations because that is beyond the scope of what we are talking about, but let me talk about the gas market. I do not want to pre-empt the specifics of the gas market review, but I am quite clear that, between the provisions that we are putting in place in this Bill, and those to which I have already drawn attention and the powers of Ofgem, we will be covered.

Also in this definitional area, one or two questions were asked about GDP and RPI. In particular, the noble Lord, Lord Peston, asked about references to the GDP deflator. Since the GDP deflator is not set by reference to the state of a market but is wholly different, I do not see that coming within the scope of what we are looking at here. GDP is clearly a matter for the ONS; it is not derived from the markets in the sense that we are talking about here.

[Lord Peston]

The answer is that it is. It is a price index, and all price indexes are derived from markets because markets set prices. There is no question that it is not an index. I think that this is a matter of language and we hope that the Minister will clarify it for us. Will he also point to where in any amendment that he has put down the acronym LIBOR appears?

[Lord Sassoon]

The definition of “benchmark”, as we have already been through, has a number of legs to it, the first of which is that it is set by reference to the state of the market. Even if for the moment we park that one, we then come to the investment-related test, for which the GDP deflator would not apply. I know that in the example which the noble Lord gave it was part of something else, but the mere fact that it is part of something else does not mean that the GDP deflator is covered by the definition here.

On why LIBOR is not mentioned anywhere, which it is not, it is precisely because we are putting in place a framework. The secondary legislation, which will be preceded by a consultation coming very shortly, will be around what the first regulated benchmark should be. The Government will propose that it should be LIBOR and at this stage only LIBOR, but we will ask whether anything else should be covered. That is why LIBOR is not mentioned in the Bill; it will come in the secondary legislation.

[Lord Peston]

Am I right, therefore, that anybody looking at the Bill would not know that it had anything to do with LIBOR? I am pretty sure that I must be. They will know now, because the Minister has told us, but why does he not then put it in his amendments? What we are discussing is a badly drafted Bill that could be improved if it merely contained the sentence, “The object of all of this is to deal with the LIBOR problem”, and he could then deal with it via secondary legislation. No one would have known about any of that until we had this debate in your Lordships’ House—which is why we are here, I suppose.

[Lord Sassoon]

My Lords, the problem that we are trying to deal with is that it has been revealed this summer that benchmarks are open to the sorts of abuse that need to be dealt with. We are putting in place a framework that enables abuse or potential abuse of benchmarks to be dealt with. There was never any intention to put in LIBOR. I expended about 1,900 words explaining why we were doing this and I probably mentioned LIBOR a dozen times. I hope that the noble Lord is now clearer. I see that he is; I am grateful. That probably deals with the main definitional and scope questions.

--- Later in debate ---

[Lord Peston]

I take it that the people who have already behaved in a criminal way can be prosecuted under the criminal law as it is. In other words, there is no need for retrospection because there is a criminal law sitting out there waiting. For all we know, it is already dealing with them.

[Lord Sassoon]

I am grateful to the noble Lord. As I have answered before in Questions on the LIBOR issue and as I said earlier, there are potentially other offences which may have been committed, and the prosecuting authorities and investigators are looking to see whether anybody could be charged under pre-existing law, so I am grateful for that clarification. The point is that it would be much more effective to have a targeted offence, which is what we are putting in place here.

Turning to Amendment 80A, under which the noble Lord, Lord Eatwell, would like the FCA to have the ability to refer to codes published by the Financial Reporting Council, as well as the body responsible for setting the benchmark, I believe that Amendment 80 already allows the FCA to make such a reference since it would be able to make,

“reference to any code or other document published by the person responsible for the setting of the benchmark or any other person”.

As Amendment 80 stands, the FCA is able to refer to a code issued by the FRC or any other body.

Having said that, while from time to time the Financial Reporting Council publishes codes and documents relating to standards of corporate governance and so on, it is unlikely that they will be directly relevant to the setting of specific benchmarks. Of course, as the noble Baroness, Lady Hogg, is here, if she would like to correct me I am very happy to be corrected, but I think that is very unlikely. The intention of the provision in the Bill is to allow the FCA to make reference to detailed codes, allowing the detailed instruction of how, when and to whom information should be provided to a benchmark. I certainly do not anticipate that the FRC would publish codes relating to benchmarks in that detailed way. I therefore do not believe that the amendment extends or affects the powers of the FCA to make the rules in any material way, and I cannot accept it.

I spoke earlier of my gratitude—and this has been repeated by other noble Lords—to the noble Baroness, Lady Hayter of Kentish Town, for spotting the small drafting mistake, and confirm my intention to accept her proposed Amendment 80B. I encourage her to move it.

I now turn to Amendment 80C and the recommendation that the BBA transfer responsibility for administrating LIBOR to a successor body. I have already dealt in some detail with aspects of this, but let me go through it again. The nomination for that successor body will be determined through an open and transparent tender process that will be run by an independently chaired committee comprised of respected individuals from the financial services industry and the UK authorities. As I have already said, I am delighted that the noble Baroness, Lady Hogg, has agreed to chair that committee. The committee’s work is in its preliminary stages, but further information will of course be published in due course. I acknowledge the noble Lord’s concern that there is a risk that a suitable rate administration will not be willing or able to administer LIBOR; I firmly believe, however, that this risk is of very low probability. As I said, a considerable number of expressions of interest have already been received.

In the unlikely event that there is no appointable administrator, or in the event that we have already discussed that the administrator is appointed and then fails, the FCA will already have power to step in to administer LIBOR, should that be necessary. A disorderly collapse or the unavailability of LIBOR would have severe implications for institutions and financial markets across the globe, as the Wheatley review sets out in detail. It is under the objectives of the FCA, particularly its consumer protection and integrity objectives, that would give it sufficient basis to step in and administer the rate. The FCA therefore would not need any specific legislative power to administer LIBOR, and it is worth reminding ourselves that LIBOR is currently administered by the BBA without a statutory underpinning. We know that this is unsatisfactory, but I am just making the point that the setting of LIBOR itself has never required any statutory powers. I am quite clear that the FCA’s powers, as outlined elsewhere in the Bill, are sufficient for it to undertake such a course of action, although we anticipate that being very unlikely.

I do not wish to put a specific time limit on how long the FCA could maintain the administration of LIBOR, but neither the Government nor the FCA would want the FCA to administer LIBOR in the long term. We want the regulator to concentrate on regulating the market, not to fill a gap in the market on a permanent basis. I do not consider Amendment 80C is needed.