Financial Services Bill

Lord Tunnicliffe Excerpts

Monday 15th October 2012 Lords Chamber

Moved by

[Lord Tunnicliffe]

187TE: Schedule 12, page 247, line 24, at end insert—
“(c) after subsection (10) insert—“(11) The PRA should require the submission of reports from any PRA-authorised person for the purpose of assessing the extent to which a financial activity or financial market in which the PRA-authorised person participates may pose a threat to financial stability in accordance with the PRA’s general objective. (12) The PRA shall collect, in a manner determined by the PRA and in consultation with the FPC, financial transaction data and position data from the PRA-authorised person companies.(13) For the purposes of subsection (12)—(a) “financial transaction data” shall mean data pertaining to the structure and legal description of a financial contract, with sufficient detail to describe the rights and obligations between counterparties and make possible an independent valuation; and(b) “position data” shall mean data pertaining to data on financial assets or liabilities held on the balance sheet of a financial company, where positions are created or changed by the execution of a financial transaction and which includes information that identifies counterparties, the valuation by the financial company of the position, and information that makes possible an independent valuation of the position.(14) The FCA shall assist the PRA in accordance with section 3D to ensure that the PRA is able to exercise its function as described in subsections (11) and (12).(15) To facilitate the effective collection of data, the PRA should prepare and publish, in a manner that is easily accessible to the public and in the form of a summary or collection of information so framed that it is not possible to ascertain from it information relating to any particular person—(a) a database detailing relevant counterparties;(b) a financial instrument reference database; and(c) formats and standards for PRA data, including standards for reporting financial transaction and position data to the PRA.(16) Where possible, the PRA shall co-operate with foreign regulators to the extent required to collect relevant information on PRA-authorised persons already collected by those foreign regulators.(17) The PRA shall develop and maintain sufficient resources to review the collection of data referred to in subsections (11) and (12) in order to—(a) develop and maintain metrics and reporting systems for risks to the financial stability of the United Kingdom;(b) evaluate stress tests or other stability-related evaluations of financial entities overseen;(c) investigate disruptions and failures in the financial markets;(d) conduct studies on the impact of policies relating to systemic risk;(e) promote best practices for financial risk management to PRA-authorised persons.(18) The PRA shall publish a report which compiles the data collected in accordance with subsections (11) and (12) on a periodic basis as determined by the PRA, which shall be—(a) made available to the public in an easily accessible medium; and(b) in the form of a summary or collection of information so framed that it is not possible to ascertain from it information relating to any particular person.””

[Lord Tunnicliffe]

My Lords, Amendment 187TE, in the name of my noble friend Lady Hayter of Kentish Town, is essentially about the quality of information and its provision. To put it in context, I should like to go back to the purpose of the Bill. I put to the House that its purpose is to prevent or mitigate a crisis in the financial services industry. The crisis from 2007 to 2009 came from the selling of subprime mortgages principally in the US. As we know, these mortgages were repackaged and moved down the line. Eventually, they ended up on the balance sheet of what one would have thought at the time were highly sensible banks of great stature and stability.

How did that happen? It happened because of the malicious intent of the original designers of these products and the people who designed the various packages to disguise the essential weakness that they contained. But when you read the various reports about the crisis, there is no question that a fundamental part of this crisis was caused by the poor knowledge and information that passed through the system. In a sense, the poor knowledge was in two places. It was within the firms, and between the firm and the regulator. In particular, the FSA’s report on the RBS brings this out well. Essentially, parts of RBS simply were not effectively communicating with each other.

[Lord Flight]

Perhaps I may add that in my estimate the US also wiped off about $1,000 billion of its overseas debt as a result of the failure of subprime mortgages.

[Lord Tunnicliffe]

As a great admirer of the US, I would never underestimate its ingenuity but I did not realise that that had been a principal objective. I thank the noble Lord for my improved education. Returning to my speech, the failure in RBS in particular was once again an internal management problem. The refreshingly honest report of the FSA brings that out but it goes on to criticise its own performance as a regulator. It criticises various ways in which it behaved and its allocation of resources but it also criticises the information that it was able to get during the crisis. That was because firms were unable to provide information that was sufficiently accurate, comprehensible and timely.

The Joint Committee on this Bill took a considerable interest in the whole matter of information and pointed out that in the US the,

“Dodd-Frank Act created the Office for Financial Research which was given responsibility for monitoring of systemic financial risks and, in order to undertake this task, has been given powers for the setting of data standards for the industry. In order to allow effective monitoring of systemic financial risk, the Dodd-Frank Act also requires that OTC derivative contracts are recorded in trade repositories, a step that requires standardisation of reporting across the industry”.

The recommendation from the Joint Committee, which the Government effectively rejected, was:

“The Bill should be amended to place a duty on the Bank of England (or its subsidiary the PRA) to develop information standards for the UK financial services industry and to report regularly on progress in improving these information standards in order to support financial stability”.

This amendment does its best to give effect to that recommendation.

In researching the background to this amendment, I looked over a number of areas but perhaps the most inspirational thing I came across was a speech by Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Securities Industry and Financial Markets Association, “Building a Global Legal Entity Identifier Framework” symposium in New York on 14 March. That is a long introduction but it was called simply “Towards a common financial language”. He contended that a common financial language would improve risk management in firms because of better flows and understanding of information; improve risk management across firms; map the network of financial transactions; and, shock-horror, lower barriers to entry. He pointed out that the information standards and information systems within the industry are probably 10 or 20 years behind those in other industries, and particularly the major distribution industries.

We put forward this amendment and it will no doubt be countered by the noble Lord saying, “Well, they can do this anyway”. We are trying to say something different. We are trying to say that this is not just an enabler but a doer. It is a requirement not just that the PRA has the ability to take a positive role in the matter of information and information standards, but requires it to take a role. It is quite long so I will not go through it in any detail but it requires the PRA to require firms to report; it requires them to set standards in the manner in which they report; it requires that they should have sufficient resources to be able to use that information; and it requires them to publish reports.

The Bill has a purpose. It is about institutions, it is about governance and it is about enabling. The amendment is designed to give it some teeth. It is designed to make a requirement in the Bill. This is a “must” amendment, not a “may” amendment. I beg to move.

[Lord Newby]

My Lords, as the noble Lord has explained, Amendment 187TE would require the PRA to collect and publish financial transaction data, and require it to maintain the necessary resources to collect and review data from firms. In doing so, it mirrors exactly the provisions of the Dodd-Frank Act and in particular the provision in that Act for the powers within the Office of Financial Research.

We do not think that such a power is necessary because the regulators here have their own powers to gather information, including all the information referred to in the amendment. Indeed in some cases the FSA already requires firms to hold information in particular ways; for example, through rules requiring firms to be able to present a single customer view. The fact that there is now the concept and the practice of a single customer view shows how the system has been able to develop in the light of the stresses and strains that it has found itself under in recent years. Firms already report transaction data and will continue to do so. Specifically mandating the regulator to develop data standards and to publish collected data, as the noble Lord suggests, is not in our view the answer. The legislation will set the regulators clear and deliverable objectives and the regulators already have powers that could be used to require them to hold their data in specific formats if they judge that to be an appropriate and proportionate way of meeting their objectives.

If the FPC requires particular information in a particular format, whether about counterparty exposures or about anything else, this will be provided by the PRA. If for some reason the PRA is not providing the necessary information, the bank has a backstop power to direct the PRA to gather it and provide it. There is a belt-and-braces provision in the Bill.

The regulators will require a whole range of information from firms. It would not be possible or desirable to specify them all in legislation. The legislation gives clear and deliverable objectives and it is up to the regulators to maintain sufficient resources and to gather sufficient information to meet those objectives. They will be held to account for doing so. With that explanation, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Tunnicliffe]

My Lords, I have received an unsurprising response. The essence of it is that those powers exist anyway. Perhaps the noble Lord can help me—I am not asking him to do so now—by writing to me setting out where these powers are in the new Bill. I have followed up the invitation of the Treasury and downloaded its very helpful Bill as amended. When you download it, you are told that it is 624 pages long and, therefore, it is not entirely easy to find things. I would be very grateful if I could be told where in FiSMA, as revised, these powers are and which of those powers is new because of the Bill. If there are not new powers because of the Bill, we have had regulators with these powers for a considerable time and as far as I can see we do not have the level of standardisation of data, the matching priority or the counterparty exposure. We do not have anything like the ability to see into the systems that the new American provisions envisage. It is incumbent on us in this country, with our dependence on this important industry and the fact that the real economy depends on it as well, to have provisions which are not only wide in theoretical terms but provide actual knowledge of what is being done to make this industry safer, particularly as regards what this Bill does about making the industry safer. If the noble Lord leaps up now and reads his piece of paper I would not mind.

[Lord Newby]

Section 165 of FiSMA enables the regulators to require information or documents which may reasonably be required in connection with the discharge of their functions. Section 165A enables the regulators to gather information from certain categories of unregulated firms for financial stability purposes. Section 166 enables the regulators to appoint a skilled person to provide a report into any relevant matter that the authority may specify. The regulators can also make rules requiring firms to hold their data in specific formats, if the regulators judge that to be an appropriate and proportionate way of meeting their objectives. As I have already said, the FSA did so when it introduced the single customer view requirements.

In terms of the system as a whole and what is new about the Bill as regards ensuring that the regulators get the information that they require in order to prevent some of the problems that we have seen in recent years, the whole purpose of the Bill is to put in place an architecture that enables a clearer focus by splitting the regulators into two halves so that they will concentrate on those parts of the industry for which they have now been given specific responsibility. I am sure that having those powers in the legislation, coupled with a new, more laser-like focus on ensuring that the system is safe and secure, will ensure that the concerns of the noble Lord about the information that is collected are not realised.

[Lord Tunnicliffe]

My Lords, I do not want this to go on, but there is a world of difference between having powers and knowing what people are doing with them. It is absolutely clear where the Americans are coming from; they want something done and they want something changed. I can now try to find these quotes in FiSMA and see how they impact but really I want to know what the regulators are doing. We are not opposing the Bill in general, certainly not in this House, and we wish the Government luck in its implementation, but at the end of the day it only moves people about and has a lot of interconnecting clauses. It does not specifically mandate a requirement to improve the quality of information. Any reasonable observer of the recent crisis has to say that one of the key issues in that crisis was the quality of information moving around within firms, between firms, and between firms and the regulator. The Government have to make a persuasive case that they are doing something about this deficit. Having said all that, I beg leave to withdraw the amendment.

Amendment 187TE withdrawn.

--- Later in debate ---

[Lord Marlesford]

My Lords, I will add my voice to support very strongly the amendment of my noble friend Lady Wheatcroft. I will do it in a short and simple way, by giving a reason and an example. The reason is that a very important function of auditors concerns hazards, and it falls into three parts. First, they must identify hazards; secondly, assess them; and thirdly, expose them.

My example comes from something that I have agitated about for a long while: namely, the level of credit card debt in this country. This is not the credit card debt that noble Lords may have, and which they pay off monthly, but that part of the debt that overruns and is therefore subject to very high interest rates, which very often the people with the debt have no hope of paying back. That level of credit card debt for the British banks is currently still more than £50 billion. The figures are from the British Bankers’ Association and the Bank of England, which both publish a series of monthly figures.

I have mentioned this over a long while in your Lordships’ House. When the previous Government were in power, at my instigation the noble Lord, Lord Myners, who as Treasury Minister fulfilled the role that my noble friend Lord Sassoon now fulfils, wrote to the chief executives or chairmen of the major banks, asking them for details of their credit card debt. The crucial question is: at what value do the banks hold this credit card debt on their balance sheets? Unless they have written it down hugely, the debt is unlikely to be paid and could be a serious hazard to the sustainability, liquidity and indeed continuing existence of those banks. This is the sort of thing that a narrative account by auditors would identify and reveal. I ask the Minister to refer to this example when he replies to my noble friend’s amendment.

[Lord Tunnicliffe]

My Lords, I will not take up the time of the House with detailed comments on the amendment. We have listened to the debate, and all noble Lords who spoke were most persuasive. I hope that the Minister will give careful consideration to their points. We will certainly listen with great care as we decide on the extent to which we may support the noble Baroness, Lady Wheatcroft, if she plans to take the matter further.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, the question of the audit of banks is indeed an important one, and one which has recurred in policy debates over the past 20 years. I looked back to see what the Banking Act 1987 had to say on the topic and what Lord Justice Bingham had to say when he looked into the BCCI collapse. Various changes were made at that time and since in FiSMA but it is important that we learn lessons from the recent banking disasters, and I address the particularities of this amendment from a position of agreeing with the considerable concern around this issue. However, I do not believe that the amendment before us completely achieves what we are trying to do.

Clearly auditors are uniquely placed to identify and flag to the PRA current and potential risks in a firm. We would also expect the PRA to share relevant information with auditors, for example where it views a firm’s approach to asset valuation or provisioning to be significantly out of line with its peers. It is worth pointing out that there are areas in which the present regulator, the FSA, believes that auditors should be looking at particular issues and reporting on them and it can require that to be done in rules under Part 22 of FiSMA. So, for example, under the client asset rules, auditors are required to report on whether investment firms have properly segregated their client assets.

I do however have some difficulty with this particular amendment. My noble friend Lady Wheatcroft says that if only provision like this had been in place before or at the time of the crisis the auditors might have given a lot more help which might have prevented some of the disasters. On the other hand my noble friend Lord Lawson of Blaby quotes from your Lordships’ committee’s report which talks of the complacency of bank auditors at the time. Taking as read for the moment that the complacency thesis is the right one, I wonder if that complacency would have run through what was required to be done under a particular provision like this one in the amendment. I think that we are on to something important here but I am not convinced that this quite hits the sweet spot that the Committee is aiming for and that requiring auditors to provide this general narrative report will achieve what we want. Risk assessment is a highly-specialised process and it goes to the heart of the job of the prudential regulator. What I think we want of auditors is to see if there is something more that they can do which supports the prudential judgment rather than cuts across it.