Financial Services (Banking Reform) Bill

Lord Phillips of Sudbury Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Eatwell]

My Lords, I am grateful to the Minister for introducing these amendments. However, can we reflect a little on the rush towards competition? A competitive system, if it is working effectively, is likely to result in the elimination of institutions from time to time, a process that was famously described as “creative destruction”. That sort of process can be seen quite clearly in countries that have large numbers of relatively small banks. Banks fail regularly in the United States—it is quite a common process. The process is, of course, managed effectively because these banks are relatively small. Has some thought been given to the relationship between the size of banking institutions in Britain and the effectiveness of competition? If competition were truly enhanced, one bank managed to eliminate another and both were relatively large, that could be extremely disruptive. This is not to argue against a competitive process but simply to say that it should not be regarded as an exclusive guideline with respect to what are desirable policies. Has the FPC been consulted on these clauses, and what is its view?

[Lord Phillips of Sudbury (LD)]

My Lords, there is an assumption that competition is essentially and necessarily good and that more competition is better. We have had manifest evidence in the past six years in the City—and indeed much longer than that— that there is a point at which competition turns in on itself. Indeed, the values of out-and-out aggressive competition are inimical to the values of integrity and honesty. I want to strike a note of caution, because this word is overdone in terms of its necessary public benefit.

[Lord Newby]

My Lords, we spent the first part of the afternoon talking about how we get more diversity and competition into the sector. Obviously there is a danger that this can go too far. It is important, however, to realise what these powers do. There are two principal powers. First, Competition Act enforcement powers deal with restrictive practices. Most people would agree that, almost by definition, restrictive practices are not a good thing. The second power is the ability to carry out market studies and make references to the Competition and Markets Authority for a decision on whether action should be taken. Earlier we were discussing the need for the Competition and Markets Authority potentially to do just that. These are not powers that are going to force the FCA to put competition at all costs, at any price, ahead of everything else. They are relatively limited and I think we will find that they are beneficial.

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Moved by

[Lord Phillips of Sudbury]

91B: After Clause 15, insert the following new Clause—
“Review of the exemption of certain business gaming contracts from the Gaming Acts
(1) The Treasury must institute a review of the effects of certain business gaming contracts having been made enforceable by the repeal of certain provisions of the Gaming Acts pursuant to the Financial Services Act 1986 (as amended).
(2) “Effect” shall include the social, cultural and ethical effects.
(3) The Treasury may appoint one or more persons to undertake the review after consultation with the Bank of England, the PRA, the FCA and such others as it decides on such terms as it shall think fit.
(4) The review shall culminate in a report to the Treasury within two years of the coming into force of this Act.
(5) The Treasury must lay the report before Parliament and thereafter publish the same.”

[Lord Phillips of Sudbury]

My Lords, after 10.20 pm and with less than a dozen of us still hanging on, I shall be remarkably brief in moving this amendment, which I hope has the advantage of self-clarity.

My starting point is the Financial Services Act 1986, which, as noble Lords will remember, ushered in big bang. Section 63 of and Schedule 1 to the 1986 Act exempted certain City dealing contracts from the effects of the Gaming Acts 1845 and 1892. Up until that time those contracts—which were purely gaming contracts—were unenforceable. Since then, the exemptions have been extended, first by the Financial Services and Markets Act 2000 and further by the Gambling Act 2005.

It is a matter of considerable debate, within the City in particular, about just what the impact of this extremely fast-growing market has been over the years, because fast-growing it has been. I suppose that among all the types of City dealing that have benefited most from exemption from the Gaming Acts there would be much hedge fund activity, which now runs into trades worth trillions of pounds.

It would be beneficial for all concerned to have a review, simply set up and in the hands of the Treasury. The disadvantages of this type of market may be few; they may be beneficial. Many consider that they are a dangerous element in our economic life, because they exaggerate swings and drive markets to extremes. I am afraid that they are susceptible to corruption, in particular, and the most famous or notorious summation of these markets, depending on your point of view, was when Adair Turner—the noble Lord, Lord Turner of Ecchinswell—described them as “socially useless”. I seem to remember from when I was at Cambridge reading economics, ploughing through John Maynard Keynes’s General Theory, that there was one very striking comment in there. I have not quite got it word for word, but the gist is that when the operation of the markets becomes akin to that of a casino, the job is likely to be ill done.

This amendment carries no pre-judgment, but will allow us a cool and collected—and, some would say, overdue—look at the impact of this particular market, the gambling market as you might call it, and see just how it stands. Noble Lords will note in particular that when saying that the Treasury must institute a review of the effects of these gaming contracts, in proposed new subsection (2) of Amendment 91B “effect” is defined as including the,

“social, cultural and ethical effects”,

of this type of gaming business.

As I say, the framework I have provided is a light one. The Treasury will appoint the members of the review committee and describe its terms of reference within the constraints I have put down. In deciding who is going to be part of the review, the Treasury has to consult the Bank of England, the PRA and the FCA. Then there is simply an obligation for the review committee to report within two years of the Act coming into force, and for the Treasury to lay the report before Parliament and then publish more widely. I hope that this will commend itself to the House. I beg to move.

[Lord Newby]

My Lords, this amendment proposes that the Treasury should be required to undertake a review into the effects, including the social, cultural and ethical effects, of exempting certain gaming contracts from the rule which used to provide that no gaming contract or wager can be enforced in a court of law. That exemption applied to certain categories of financial contracts, such as derivative contracts like contracts for differences, which could be regarded as gaming contracts within the meaning of the Gaming Acts because of their characteristics. Only those transactions which were subject to regulation under Financial Services legislation, such as the Financial Services Act 1986, and more recently the Financial Services and Markets Act 2000, ever benefited from the exemption.

However, the law has changed significantly in this area. Since the Gambling Act 2005 came into force, gaming contracts and wagers are now enforceable through the courts, except in Northern Ireland, and the effect of the exemption is therefore limited to Northern Ireland. In the rest of the United Kingdom, there is no difference in the enforceability of derivative investments and other gaming contracts and wagers. Much of the purpose of the review proposed has therefore, in the Government’s view, gone.

It is also unclear what action could be taken following such a review. Trading in financial instruments is subject to European law, and in particular the markets in financial instruments directive. This limits the extent of the action this country could take in relation to financial instruments falling within the scope of the directive. It is unclear what benefits such a review could bring and we suggest that the noble Lord withdraws his amendment on the basis that it is not proportionate or objectively justified.

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[The Archbishop of Canterbury]

My Lords, I am slightly surprised that the Minister should be resistant to what seems to me a very reasonable amendment. One of the dangers that we have faced in the markets over many years is that of parallel markets. The derivatives markets are, as we know, opaque, as has already been remarked on, and we examined them in some detail in the banking standards commission. The computer-driven markets are also very opaque. We examined those markets and remarked that they would constitute the next great crash. When you have these gambling markets on the side that no one quite understands or knows who is participating in them, and which often take place offshore, it seems to me that at the very least there are grounds to hold an inquiry into the effect they are having on market prices through their impact on the shadow market—we should also examine the psychology of the dealers—and on those involved directly in the more regulated market.

One of the great lessons learnt from the events of 2008 was the ineffectiveness of the clearing system for over-the-counter derivatives, which there was no means of settling. That has been one of the major problems for the liquidators of Lehmans. The gambling markets have much the same problem. We are setting up mechanisms—they are being set up internationally—to deal with the settlement of derivatives contracts, but nothing is being done in this parallel market. The noble Lord, Lord Phillips, has made a very useful point, albeit that the hour is late and it is almost 10.40 pm, which may enable this issue to become slightly clearer in terms of understanding what can be done.

[Lord Phillips of Sudbury]

My Lords, I am grateful to the most reverend Primate and to the noble Lord, Lord McFall. However, I am not so grateful to my noble friend the Minister, as I thought that he rather missed the point. The fact that Tom, Dick and Harry can go down to the betting shop or the local casino, run up a debt and be sued for it has nothing whatever to do with the amendment that I propose tonight. As noble Lords have commented, and as is obvious, we are dealing here with huge sums of our money which are gambled, often to the excessive benefit of the gamblers. We do not know how they function and have not looked carefully and closely, as we should, at the impact of this. I refer not so much to the economic impact, although it may be found that the destabilising effects of this market are greater than we realise, but to the ethical, cultural and social effects. For the life of me, I cannot see why a liberal-minded Government should want to staunch such an investigation. I see no downside to it; it would not be expensive and would be simple to operate. It would all be within the purview of the Treasury and it might yield some surprising and valuable results. I therefore hope that the Minister will give this a little further thought, as I am very inclined to bring this back on Report.

[Lord Newby]

My Lords, I am extremely grateful to my noble friend for clarifying exactly what lies behind his amendment. I am sorry if I in any way misconstrued it. The issues that he raises about the social and broader consequences of some aspects of the “socially useless” parts of the financial services world are obviously important. I am somewhat less certain about whether the kind of inquiry that he is seeking would produce any decisive results.

I wonder whether he may wish to consider between now and Report whether there is another means of achieving the same result because these issues are very much in the public domain. A dry inquiry might not get us to the answer that he wanted. I wonder whether there might be some broader inquiry, bringing together groups of people with expertise and concern, possibly moderated by a think tank or charity, to look at some these issues. The membership of such an inquiry would be important in determining the result. Too narrow a membership would tend to produce a series of dry, probably useless, recommendations, whereas a broader group operating in a relaxed and unconstrained manner might produce more wide-ranging and socially useful conclusions.

[Lord Phillips of Sudbury]

I am not sure whether I am supposed to say any more to the Minister except, “Thank you”. I thought that at the end he was arguing my case rather better than I was. I will certainly think between now and next time, and talk with him. I beg leave to withdraw the amendment.

Amendment 91B withdrawn.