Financial Services Bill

Lord Stewartby Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Stewartby]

My Lords, this has been a remarkable debate, full of interesting and useful comments on the proposed new scheme of regulation. Having read a few pages of the Bill when it first became available, I felt a bit dizzy because it is very difficult and complex. I think that there is more than enough to keep us happy—if that is the right word—in Committee.

Many points at issue have been discussed. I do not want to rehearse all those that have been mentioned by other noble Lords but I have some personal experience of certain areas. First, I was a member of the FSA board in the 1990s and I subsequently became chairman of the audit committees of an international bank and an insurance company. I was able to observe the changes that took place in the functioning of the internal committees within those companies and to draw some rather hesitant conclusions from them. Therefore, I should like to go back to the 1987 Act for a moment. My noble friend Lord Lawson spoke about some of the most important aspects of that at that time and I should like to pick up two of them.

The first is that the Board of Banking Supervision was an innovative and very interesting move which unfortunately was not given the longer life that it deserved. It was an attempt to bring into consideration the practical experience of people who had been in the banking world, so that those with a lot of experience could be more conscious perhaps of the sort of qualities and experience needed to be able to do a thorough job and to spot the problem areas. That, unfortunately, as my noble friend has said, was abolished by the subsequent Chancellor, but it had shown up that a different cast of mind was needed for that role. I hope that the new regulatory system will be able to follow up that idea, and if not actually recreating the BoBS, nevertheless be very conscious of the sort of qualities and experience that are actually needed.

It has been said by a number of noble Lords today that architecture is not the system by which you can get all these things functioning properly together. It is the people who make the difference. If people come in with a lot of practical experience, they are much more likely to spot the things that are either going wrong or which are possible problem areas that will eventually cause difficulties. That is where another point comes in. The dialogue between auditors and supervisors should for years have been a means of spreading knowledge, understanding and experience in the bodies concerned. Until 1987 conversations between the auditors and supervisors were not allowed because of the problems of preserving confidentiality between auditors and others. That restriction was removed in 1987 and it certainly needs to be a legal and obligatory part of any structure of this kind. If something were to go wrong, or if there was some suspicion that it might, auditors could report to their supervisor, which is something that from here onwards should be built into everybody’s processes.

That takes me to another area of difficulty about the valuation of derivatives and how liabilities were assessed for balance sheet purposes. I have asked a lot of people over the years how much sampling they knew about when “dodgy assets” were under consideration. The supervisory process appears to have been somewhat deficient. It did not throw up for a while the scale of misbehaviour—I suppose I could call it that; at the very least it was incompetence. Very little testing took place of these risky asset areas. I do not know why it happened, but there was a collective suspension of the critical faculties of auditors and others who dealt with these strange animals that caused so much concern. The situation is all the more curious because there were so many layers of consideration that one had to go through before one could take a relaxed view of the valuations, involving the management of the company, the company’s internal audit department, the external auditors and the supervisors.

Much also depends on the individuals involved. The role of the audit committee has been enlarged to an enormous degree over the past few years. That is necessary; the people dealing with this must be well informed. However, the audit committee must not try to second guess management. What is needed is a combination of knowledge and experience. The only thing about the Financial Policy Committee that gives me concern is that it may be too big for safety. It is a multifarious body. I am not sure how the interface between the FPC and the PRA will work. That will be critical. Purely on the grounds of the FPC’s size and complexity, this is an area where I feel a degree of discomfort. However, in general I am glad that we are legislating in this way. I have no doubt that we will make many changes as we go through the Bill in detail, and I wish it well.