Lord Sassoon
Main Page: Lord Sassoon (Conservative - Life peer)Banking Reform
Lord Sassoon Excerpts
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, with leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Financial Secretary to the Treasury. The Statement is as follows.
“With permission, Mr Speaker, I wish to make a Statement on the Government’s plans to reform the institutional framework for financial regulation.
The tripartite system of financial regulation failed spectacularly in its mission to ensure financial stability and that failure cost the economy billions. The British people rightly ask how this Government will stop it happening again. This is why our coalition agreement committed us to reform the regulatory system for financial services in order to avoid a repeat of the financial crisis. Today I would like to set out in detail the changes to the regulatory architecture that will make this possible.
At the heart of the banking crisis was a rapid and unsustainable increase in debt. Our macroeconomic and regulatory system utterly failed to correctly identify the risk this posed, let alone prevent it. No one was controlling levels of debt, and when the crunch came no one knew who was in charge. So we need a macro-prudential regulator that has a more systematic and detailed knowledge of what is happening, not only in individual firms but across the financial system as a whole. Only central banks have the broad macroeconomic and markets understanding, the authority and the knowledge required to make macro-prudential judgments.
We will therefore place the Bank of England in charge of macro-prudential regulation by establishing within the Bank a Financial Policy Committee. We will also create two new, focused regulators: a new prudential regulator under the Bank of England, headed by a new Deputy Governor; and a new Consumer Protection and Markets Authority—the CPMA. All the new bodies will be accountable to Parliament and their remit will be clear, so that never again can someone ask who is in charge and get no answer.
First, we will legislate to create the Financial Policy Committee in the Bank of England. It will have the responsibility to look across the economy at the macroeconomic and financial issues that may threaten stability, and it will be given tools to address the risks it identifies. It will have the power to require the new Prudential Regulation Authority to implement its decisions by taking regulatory action with respect to all firms.
The FPC will be accountable to Parliament in two ways: directly, as is the case with the MPC; and also indirectly, through its accountability to the Bank’s Court of Directors. The governor will chair the new committee. Its membership will include the deputy governors for monetary policy and financial stability, the new deputy governor for prudential regulation, the chair of the new Consumer Protection and Markets Authority, as well as external members and a Treasury representative. An interim FPC will be set up by this autumn in advance of legislation.
Secondly, we will legislate to create a Prudential Regulation Authority—PRA—as a subsidiary of the Bank of England. It will conduct prudential regulation of sectors such as deposit-takers, insurers and investment banks. The PRA will be chaired by the Governor of the Bank of England, and the new deputy governor for prudential regulation will be the chief executive. The deputy governor for financial stability will also sit on the PRA board.
Thirdly, a new Consumer Protection and Markets Authority will take on the FSA's responsibility for consumer protection and conduct regulation. The CPMA will regulate the conduct of all firms, both retail and wholesale—including those regulated prudentially by the PRA—and will take a proactive role as a strong consumer champion. It will have a strong mandate for ensuring that financial services and markets are transparent in their operation so that everyone, from someone buying car insurance to a trader at a large bank, can have confidence in their dealings and know that they will get the protection they need if something goes wrong.
The CPMA will regulate the conduct of every financial service business, whether it trades on the high street or trades in high finance. We need to ensure that this body has a tougher, more proactive approach to regulating conduct, and its primary objective will be promoting confidence in financial services and markets.
The CPMA will maintain the FSA’s existing responsibility for the Financial Ombudsman Service and oversee the newly created Consumer Financial Education Body, which will play a key role in improving financial capability. The CPMA will also have responsibility for the Financial Services Compensation Scheme, but given the important role that it plays in crises, it will work closely with the FPC and the PRA. We will also fulfil the commitment in the coalition agreement to create a single agency to take on the work of tackling serious economic crime that is currently dispersed across a number of government departments and agencies.
Before we set up these new bodies in their permanent form, we will conduct a full and comprehensive consultation process and publish a detailed policy document for public consultation before the Summer Recess. Our goal is radically to improve financial regulation in the UK, strengthening the prudential regime by placing it in the Bank of England and delivering the best possible protection for consumers.
During the period of transition to the new regime, the Government will also be guided by the following four principles: minimising uncertainty and transitional costs for firms; maintaining high-quality, focused regulation during the transition; balancing swift implementation with proper scrutiny and consultation; and providing as much clarity and certainty as possible for FSA, Bank and other staff affected during transition. In order to do this, we will ensure the passage of the necessary primary legislation within two years.
I am delighted that Hector Sants, the current CEO of the FSA, has agreed to stay on to lead the transition and become the CEO of the PRA. He will be supported by Andrew Bailey from the Bank of England as his deputy in the new regulator. This is a strong team to ensure a smooth transition.
The financial crisis has cost taxpayers dearly. The regulatory system needs radical reform to make the sector more stable and stronger. The last Government could not do this because they were caught up in a structure designed by the former Chancellor and Prime Minister. The fundamental flaws in its architecture contributed to the failure in the banking sector and ultimately undermined economic stability. The continuing financial and economic uncertainty across the eurozone strengthens the urgency with which we must equip ourselves with better tools and arrangements to tackle any future financial instability. We have already paid a high price for the previous Government’s failings, and we must do all we can to prevent this happening again. I commend the Statement to the House”.
My Lords, that concludes the Statement.
Lord Sassoon
My Lords, I thank the noble Lord, Lord Eatwell. It feels as if I am having four tutorials in a week, when one was what I was brought up to do. Let me try to take as many of the points as I can.
The noble Lord stresses the transition arrangements. These are very serious issues which we have been thinking a lot about, and my right honourable friend the Chancellor stressed that in his Mansion House speech. I would draw a sharp distinction, though, between what we are doing now and the task that Sir Howard Davies took on originally. He was trying to get somewhere between 10 and 20 bodies together to create the FSA, while here we have principally the Bank and the FSA; and as we explained, the transition will be managed by Hector Sants, who has very generously agreed to stay on and see the transition through. He will be managing that in conjunction with Andrew Bailey of the Bank of England. So I think that the transition will be in the hands of a very strong management team.
The noble Lord referred to the DNA of the Bank. He seems to be talking about DNA in rather a short-term way. As I understand it, DNA can be traced back through the generations over many thousands if not hundreds of thousands of years. I remind him that in this reorganisation of responsibilities we are getting responsibility back to the Bank of England for most of what it historically did throughout large parts of its existence. I would argue that the Bank has the DNA there and that we are putting right a short-term aberration of the past few years.
The noble Lord went on to question, quite properly, the governance and management of the Bank. It will be principally for the two management teams themselves to work out the details of how the management beds down, but it is clear, I hope, that the new PRA, although it will be structured as a subsidiary, will be embedded fully in the management structure of the Bank, reporting up to the governor. I have already said but would like to repeat that thoughts about governance processes will be critical to this. As regards the Financial Policy Committee, there will be reporting based on the MPC’s reporting methodology—direct accountability to Parliament, published minutes and a clear remit from the Chancellor. I absolutely share his view that governance needs to be thought of as part of the process.
As for assessing the costs and risks of the changes, I have said that the Government will undertake a full public consultation process on the plans. Of course, in that connection, we will publish a detailed policy document before the Summer Recess, which will include a regulatory impact assessment in the normal way.
On macro-prudential tools and putting carts before horses, if we took that approach to life we would never make any progress because we would always find reasons why the world was imperfect and we should not go forward. It is absolutely critical that we get a regulatory structure that makes it clear who is in charge. We cannot risk again the experience of the past three years, so we will put in place the FPC, which will be responsible for the macro-prudential judgments. It must have the toolkit, but it is clear from the international discussions at G20 level and in other fora that the emerging toolkit will almost certainly include capital liquidity and, in some role, leverage, and there may be other tools. I am confident that the FPC will not be short of tools.
On the composition of the banking commission, I do not think that my right honourable friend the Chancellor has any intention of adding anybody else to it. However, let me point out one or two things that the noble Lord omitted to say. Martin Taylor, before he was the chief executive of Barclays Bank, ran Courtaulds, a major manufacturing company. He also referred to Clare Spottiswoode. She has been the regulator in other regulated industries, well away from the financial services sector, including, of course, gas. So the experience of the commissioners goes much wider than the noble Lord set out.
The noble Lord then talked about putting more power into the hands of unelected officials, as he put it, in the Bank of England. As I explained, we need to make it clear that there is somebody in charge of taking the decisions. He pointed out that the Bank of England had a significant number of people in its financial stability division in the run-up to the crisis, but the trouble was that they did not have a clear and unequivocal mandate and they had no statutory duty to be responsible for financial stability. Now we will have people in place with a statutory responsibility, which the Bank of England did not have, although the previous Government, in their botched attempt to patch things up, did at last give the Bank a statutory responsibility. They did not have that before the crisis. So we will have somebody in charge—it is the Bank of England, appropriately, and there will be a high degree of accountability, including in the ways that I have laid out.
The Bill was set out in the Queen’s Speech, and it will be introduced in this Session. I am sure that it will follow the normal processes for a Bill of this sort.
Lord Newby
My Lords, our concerns about plans to abolish the FSA in the run-up to the election centred, first, on our concern that the governor was not the person to be in charge of micro-prudential regulation and, secondly, that there would be a long period of hiatus in which there would be no continuity in senior management on financial regulations. We are greatly reassured by the fact that Hector Sants has been persuaded to stay on to deal with the second problem and, given his new position, will be able to deal largely with the first. Can the Minister reassure us that both the Government’s and the Governor’s top priority over the next few months will be to ensure that as many of the senior members of the FSA staff as possible remain in place to work with Hector Sants and to ensure the continuity which everybody thinks is so important?
Lord Sassoon
I am grateful to my noble friend Lord Newby for pointing out, very helpfully, how the Government’s programme in this area has taken account of some of his concerns from before the election. On the transition, it might be helpful if I additionally confirm that the FSA will remain the financial services regulator until the legislation is implemented, so it is quite clear who will be doing what. I am grateful to my noble friend for stressing the management arrangements and I will relay to both the Bank and the FSA his concern that they do what is of course a high priority—to make sure that they retain the essential and extremely good staff they have in both organisations.
Lord Haskel
I thank the Minister for telling us about the regulation of debt and banking, and about taking care of the consumer at the Bank of England. Who will take care of inflation? Will it just be the poor relation, somewhere between the Bank of England and the Monetary Policy Committee, or will it be somebody’s special responsibility?
Lord Sassoon
I am grateful to the noble Lord, Lord Haskel, for raising this rather important question. Let me stress absolutely clearly that the Monetary Policy Committee will continue just as now, with an unchanged remit. It will have, if the Chancellor does not change the remit, the 2 per cent inflation target, and nothing in that respect will change.
Lord Higgins
Could my noble friend clarify the position regarding ministerial responsibility? As I understand it, this Statement was made in another place by the Financial Secretary to the Treasury—an office which I once held a very long while ago. Is he now responsible for the banking side, and how has the situation changed from that under the previous Government, who created a financial secretary for banking? Will my noble friend the Minister assume that role? Could he clarify the overall position? The position was, of course, previously filled by the noble Lord, Lord Myners.
Lord Sassoon
I am grateful to my noble friend Lord Higgins for asking that question. Since I carry the newly-minted title of Commercial Secretary, I can try and explain that my responsibilities straddle both the financial services sector and wider business interests. My friend in the other place, the Financial Secretary to the Treasury, bears the primary responsibility in most areas of financial services policy. If my noble friend would like to look at the Treasury website, he will see a much clearer explanation of the split of ministerial responsibilities. I would be happy to send him a copy.
Baroness Noakes
My Lords, I welcome this Statement and I am sure that the City will welcome the clear directional steer that it was given yesterday. In particular, the staff at the FSA who have been very concerned about what the future would hold for them can now see a clear path forward. The suggestion made by the Benches opposite about pre-legislative scrutiny needs to be looked at very carefully. The Financial Services and Markets Bill indeed underwent pre-legislative scrutiny, but that Bill was a much more complicated matter, bringing together a large number of bodies into a completely new body whereas, as I understand them, my noble friend’s proposals are that the existing FSA will be split into a number of pieces and put into different places.
In addition, notwithstanding that that Bill had pre-legislative scrutiny it did not, as far as I am told by those who bear the scars, save one single minute of time in Committee when all the arguments that went on in pre-legislative scrutiny were re-run on the Floor of the House. I am not at all sure that doing that is a good use of time, but that question is above my pay grade—and, doubtless, above my noble friend’s pay grade.
I have two questions for my noble friend. First, what is to happen to the financial stability committee in the Bank of England, which was created in the Banking Act 2009? It seems to me that we are accumulating rather a lot of committees all over the place with a lot of cross-membership. I wonder whether it will have the same purpose once the financial policy committee is created. Can he also say what is to happen to the UK Listing Authority, one of the functions of the FSA which I do not think was covered in his Statement?
Lord Sassoon
I am grateful to my noble friend Lady Noakes for letting me off from answering her first observation, but I take the point. There are others better equipped than I to know what will be the appropriate way to take this particular legislation through. On the financial stability committee, that was of course introduced by the previous Government as part of their sticking-plaster job, trying to put together something out of the wreckage of the tripartite system. That will fall away when the new structure gets into place. As I have already stressed, the financial policy committee will be up and running in shadow form. It is also important to note that through the transitional period, the Chancellor, the Governor of the Bank of England and the chairman of the FSA will need to be in close discussion regularly. Concerning the UKLA, the Treasury will be bringing forward proposals prior to the Summer Recess on its future, along with the significant number of other matters on which we will consult.
The Earl of Caithness
My Lords, this is my first opportunity to congratulate my noble friend on his appointment to the Front Bench. Whether or not his is a newly-minted position, it is still very good to see somebody in this House on the Treasury Bench. Does my noble friend agree that the current financial crisis started not with the bankers but with the banking system? All that the bankers have done is to use the banking system which was established by judicial review rather than by legislation. In order to combat debt and, as the Statement says,
“to get the best possible protection for consumers”,
can my noble friend update me on the current thinking of the Government about separating deposit and current accounts and returning ownership of a deposit to the depositor, rather than having it in the control of the bank?
Lord Sassoon
I am grateful to my noble friend Lord Caithness. This gives me an opportunity to pay tribute to him as, I think, my predecessor but one representing the Treasury on the Front Bench in this House—a job which he carried with distinction. He makes a very important point on the banking system, one on which we have not touched in detail this afternoon. It is fine and very important to have an appropriate regulatory system but we need to examine the structure of the banking system, something which the previous Government—for reasons that I genuinely fail to understand—did not want at all to look at. That is why we have, yesterday, established the banking commission. There will be many detailed and important points on which your Lordships will want to make direct representations to the commission; the structure of deposit and current accounting might will be one of them.
Viscount Trenchard
My Lords, I also take this opportunity to congratulate for the first time my noble friend Lord Sassoon both on his ennoblement and his appointment, which is indeed excellent news. I believe that there are three of us in your Lordships’ House today who served on the pre-scrutiny committee on the Financial Services and Markets Bill under the noble Lord, Lord Burns, who is in his place. Although I think that the noble Lord, Lord Eatwell, did not share that view at the time—it was 10 or maybe 11 years ago—I recall that there was extensive debate then on whether the FSA was being given too many powers. Certainly, some of us on the committee felt that the FSA should have been in a subordinate position to the Bank of England even from that time. Therefore I welcome the Government’s proposal that financial stability and monetary policy should be combined—in other words, the prudential regulatory functions of the FSA should be either transferred to the Bank of England or made subject to oversight by it. That is indeed a positive move and will help to ensure that there is no doubt in future as to who is in charge.
I ask my noble friend, though, whether there is not some concern about creating too many new quangos—too many new bodies. I see that the FSA is going to be replaced by three bodies: the CPA, the CFEB and the PRA, the rump of the FSA, each with its own board and, to some extent, with overlapping functions. I worry about the cost of these new bodies to the financial services industry. I wonder whether the consumer protection functions could not equally efficiently, or perhaps more efficiently, be taken on by existing consumer protection bodies, such as the one whose name I forget that operates under the business department.
I have a second question. I note the four principles that the Government will be guided by during the transition to the new regime, but might the Government consider adding a fifth—the maintenance of the competitiveness of the City of London as a financial centre? If we fail to do that, it will not be much good for us, however perfect a regulatory system we establish.
Lord Sassoon
I am grateful to my noble friend Lord Trenchard for his warm words. He mentions the question of too many powers under the old regime. I stress that I think it is more a question of the mindset and the regulatory approach rather than the powers themselves; it is the whole approach to regulation that needs to be changed. He raises the important question of whether we are creating too many bodies. I shall try to reassure him on that; indeed, the landscape is being simplified. Although the PRA will be a subsidiary of the Bank of England, it will be fully embedded in the bank structure. In that sense, I do not see that as the creation of a new body. My noble friend draws attention to the CFEB, which was created as a self-standing body but will now come under the auspices of the CPMA. We are creating a much simpler and more efficient structure in the landscape that should not create any additional difficulties.
My noble friend asks about the remit of the CPMA. Although its principal remit will be to ensure that the conduct of business is properly regulated across all markets, the question of secondary responsibilities, which could become primary responsibilities, including the competitiveness of markets, needs to be considered during the consultation process.
Lord Haskel
My Lords, the noble Viscount, Lord Trenchard, reminded me that I too served on the Joint Committee for the Financial Services Act, under the chairmanship of the noble Lord, Lord Burns. I remember that we imposed a duty on the FSA to educate the public about financial matters and financial regulations; indeed, we ring-fenced money so that that could be done. Will all this remain in place?
Lord Sassoon
I ask the noble Lord, Lord Haskel, to be patient with us and, as we get into the detailed design, to see how we deal with all these matters. I take his point that this is another thing that needs to be addressed in the detail of the proposals.
Lord Christopher
My Lords, I apologise to the Minister in advance; I did not register his reply to one of my noble friend Lord Eatwell’s points. Has there been a risk assessment of this, and if there has, is it to be published? It is relevant that there should be one because, as I understand it, nowhere in the world is there a model like the one that is now being created from which we can draw any experience at all. I remind him that the Financial Services Authority requires financial services companies not only to have regularly revised risk assessment reports but to have plans B, C, D and E in the event that the risks appear to be too great.
We have talked about the top brass, but no one has mentioned the staff. Is it going to be an easy matter to integrate them? What discussions will be taking place with them?
Lord Sassoon
The noble Lord enables me to repeat again, for the avoidance of doubt, that we will publish a detailed policy document before the Summer Recess that will include a regulatory impact assessment in the normal way. In preparing the plans for the transition and for the regime thereafter, alternative scenarios have already been, and will continue to be, thought about.
The noble Lord makes an important point about the staff of the FSA. I should take the opportunity to say that the staff of the FSA and of the Bank of England have done an extraordinary job through the very tough conditions of the past few years. I know that the management, led through the transition by Hector Sants and Andrew Bailey on the two sides, are seized of the need to keep the staff fully informed of the transition arrangements, and the noble Lord’s point is well taken.