Financial Services and Markets Act 2000 (Relevant Authorised Persons) Order 2015

Lord Tunnicliffe Excerpts

Tuesday 27th October 2015 Grand Committee

Finally, as my noble friend said, one of these orders introduces a new regime: the senior managers and certification regime. Under whose bailiwick does that fall? Is it the PRA or the FCA, or will yet another regulator be involved? I would like to see how that fits together in terms of the organisation which many thousands of people will have to comply with, in a field where the compliance costs and the difficulties of meeting the regulators’ requirements have become a lot more difficult. Of course I understand the importance of our financial services regime being kept up to date. We live in an era of rapid change, so we have to change our structures to keep up to date with evolving practices, but I am anxious that we should always think about the practical implications of what we are proposing for those working in the industry. I hope that my noble friend will be able to give me some reassurance on these points when he comes to wind up.

[Lord Tunnicliffe (Lab)]

My Lords, as the Minister has outlined, the three statutory instruments before us make a number of technical changes to the Financial Services and Markets Act 2000, as amended, which relate specifically to the expansion of the senior management and certification regime—or SM&CR—mortgage regulation and the extension of powers to the Prudential Regulation Authority. As my honourable friend Richard Burgon MP said in the other place, we will not oppose the orders—I want to place that on record again today. My party is committed to ensuring that we have a financial services sector that works in the interests of the public and we want to work with the Government to ensure that.

Banking regulation seems—in this House at the least—to be the flavour of the month, what with these orders today and the Second Reading of the Bank of England and Financial Services Bill only yesterday. Last night, we had a constructive and wide-ranging debate on what a modern and effective banking sector should look like. It was encouraging that we should have such passionate, experienced and committed colleagues engaging with this issue.

Some of the observations made last night have relevance today. Without wishing to detain your Lordships for very long, I want to ask the Minister a number of questions about how these small but nevertheless important changes fit into the Government’s broader proposals.

The Financial Services and Markets Act 2000 (Relevant Authorised Persons) Order extends the regulation governing individuals working in the UK banking sector to cover UK branches of foreign banks and investment firms. I note that the Economic Secretary to the Treasury said on Thursday that these changes would come into effect in March 2016, the same time as changes for senior managers in UK institutions. Can the Minister say today, or perhaps in writing at a later date, how many non-UK institutions which have a branch in the UK this will affect?

As the Minister will know, one of the changes made in the Bank of England and Financial Services Bill is the extension of the SM&CR to the entire financial services industry—not just senior managers in banks but to credit unions and investment firms from 2017. Once the expansion comes into effect, does the Minister expect non-UK institutions which have a branch in the UK to be included?

The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 3) Order 2015 will mean that from 31 March 2016 mortgages dating from before 31 October 2004, which are currently regulated as credit agreements, are regulated instead as mortgages. The Government claim that the proposed changes are necessary for the EU mortgage credit directive to work as intended. The Economic Secretary to the Treasury stated:

“During the course of that routine monitoring it came to light that, owing to the complexity of layering a new wave of legislation on top of existing legislation, in some areas the order did not achieve what was intended”.—[Official Report, Commons, Sixth Delegated Legislation Committee, 22/10/15; col. 5.]

For clarification, can the Minister confirm that these are just credit agreements which relate to property? Can he also indicate the scope of the aforementioned monitoring and the precise issues covered to bring about such change? I also understand that my honourable friend in the other place asked why pre-March 2004 mortgages were being regulated and not those after March 2004.

Finally, the Financial Services and Markets Act 2000 (Misconduct and Appropriate Regulator) Order 2015 confers powers to the PRA over individuals working in financial services, specifically in cases relating to the alternative investment management regulations. It also extends to the PRA the ability to take disciplinary action. We understand that the order is required so as to ensure that the appropriate regulators have sufficient powers to carry out their functions. However, I have a number of points on which I seek clarification.

Will the changes in the role and structure of the FPC as a full committee of the Bank and the desubservisation—if there is such a word—of the PRA alongside the creation of the new Prudential Regulation Committee require that these orders be amended again? Paragraph 5(1) of the aforementioned order states that:

“The Treasury must from time to time—

(a) carry out a review of the relevant provisions of the 2000 Act;

(b) set out the conclusions of the review in a report, and

(c) publish the report”.

I would be grateful if the Minister could go into more detail about the process and practice of this, in particular the timing. Does “from time to time” mean once a Parliament, once a Session or once a decade? I understand that the Minister may need to write in order to set this out in more detail.

Throughout the creation of this new regime, the noble Lord, Lord Hodgson of Astley Abbotts, has brought us the worm’s-eye view of the situation. I am not privileged to be a worm in the City, merely a worm at Westminster, but I recall that we spent many an hour layering clause on clause into the various Bills to define the difference between the PRA and the FCA. I am pleased to hear from the noble Lord, Lord Hodgson, that it is as clear as ever. I will be fascinated to hear the Minister’s reply, but I recognise that he may not be able to finesse it too accurately today, so perhaps I may be copied in to any letter he promises to his noble friend Lord Hodgson.

[Lord Ashton of Hyde]

My Lords, we have had a brief but productive debate today and I am grateful to noble Lords for their constructive contributions. I am particularly grateful for allowing me to write if necessary to provide comprehensive answers. However, I will try to respond to some of the points, and I will make sure that I write on anything that I leave out. I will also certainly write to the noble Lord, Lord Tunnicliffe, with any answers that I give to my noble friend Lord Hodgson, who is, as always, too modest. As was said before somewhere else, my noble friend may be a worm, but he is certainly a glow worm.

My noble friend started off by asking me about the relationship between these orders and the Bill referred to by the noble Lord, Lord Tunnicliffe, the Bank of England and Financial Services Bill, which received its Second Reading last night. These orders largely complete the banking reform Act work programme, applying the senior managers and certification regime to banks, building societies, credit unions and PRA-regulated firms. The Bill will extend the regime to all other authorised persons under the Financial Services and Markets Act 2000—that is, to the rest of the financial services industry. So the proposed changes in the Bank of England and Financial Services Bill will not change any of those relationships.

My noble friend mentioned the question of duplication of effort when both regulators have enforcement powers, and of course that situation applies now. Nothing that we are doing today will change that. In answering the point, I can tell my noble friend that each regulator will enforce its own rules or directions to ensure compliance with or obligations owed to it. Further, it will usually be clear which rule or other requirement has been broken and therefore which regulator needs to enforce it, but the PRA and the FCA have a statutory duty to co-ordinate the exercise of all their functions, including enforcement. That applies today and will not change.

The question is why they both need enforcement powers, and the reason is that they both make rules or are the lead regulator for other requirements, which means that they must have such powers. Each regulator has a different statutory remit, so that they can simultaneously have an interest in different aspects of the same situation. However, I take the point made by the noble Lord; it is something that I was aware of when I worked in the City. If you are an institution that is fortunate enough to be under the regulation of both of those regulators, it is obviously important. However, they do co-ordinate and will continue to do so because they have, as I say, a statutory obligation in that regard.

[Lord Tunnicliffe]

Could the Minister assure me that he is a representative of the party of deregulation?

[Lord Ashton of Hyde]

I am able to give that assurance.

Both regulators look at fitness and propriety. Both the PRA and the FCA are concerned with whether an individual is fit and proper. This is the position now; the senior managers and certification regime does not change that. That is why, as I said before, both regulators may need enforcement powers.

To answer my noble friend’s question, there will not be another regulator. The PRA and FCA will run the senior managers and certification regime in the same way that they are involved in the approved persons regime, so there is no change in that. To follow on from the point raised by the noble Lord, Lord Tunnicliffe, there will not be another regulator. The PRA will have an enforcement role only when obligations are owed to it. As I said, normally which regulator matters is clear from primary legislation because they have different remits and focus.

The noble Lord, Lord Tunnicliffe, asked for some sense of the numbers. I will give him some today, but if I have not given him all the numbers he wants I am happy to write later. Obviously I will copy in my noble friend Lord Hodgson. There are currently about 155 banks and nine PRA-regulated investment firms. Those are investment banks that do not have a deposit-taking commission. These 164 firms will be within the senior managers and certification regime from next March as a result of the changes made by the banking reform Act. This order will add between 155 and 175 foreign banks, split approximately 50:50 between EEA and non-EEA firms.

The banking reform Act also brings approximately 45 building societies and approximately 550 credit unions into the senior managers and certification regime. Any foreign equivalents of these firms would be included as banks. Less than 10% of those banks would be considered large. The Bank of England and Financial Services Bill will not add any banks or other deposit-takers to the SM&CR. The Bill will add only insurers, investment firms and consumer credit firms, assuming that it is passed.

[Lord Ashton of Hyde]

I will not try to give a comprehensive answer today, but I will make the point that that was the position with the Financial Services Authority, which both Houses of Parliament decided was not an effective regulator. Everyone accepts that there were problems with having one regulator and that tripartite system. I will not go beyond that, but I take the point; I have noted it.

The noble Lord, Lord Tunnicliffe, asked whether the changes to the PRA required changes to these orders; they are not required. He also asked whether the regulated activities amendment order only affects credit agreements relating to property—I refer here to equitable loans that are normally used in Scotland—and the answer to that is that it does. If there are other points, I will take advantage of both noble Lords’ suggestions and write when we have reviewed what I have said today.

Can I make a couple of final points about the orders under consideration? First, the relevant authorised persons order is not about placing a more onerous regime on UK branches of foreign banks or for that matter letting them off the hook. We aim to ensure a proportionate and appropriate regime that reflects the status of branches and the nature of the business that they do.

The misconduct and appropriate regulator order makes some necessary technical changes arising from the introduction of the senior managers and certification regime. Finally—

[Lord Tunnicliffe]

Before the Minister sits down, does he have any initial reaction to my question about what “from time to time” means? It is quite difficult to get a more vague description of an interval.

[Lord Ashton of Hyde]

Luckily, I do have an answer to that. “Time to time” leaves scope to have a practical approach and the Treasury will keep under review how often it will consider the orders. The first review must be within five years. Each review must be at least every five years after that. At the moment that is where we are. I will consider the points that the noble Lord made in more detail and if I have anything more to add I will write to him.

The regulated activities amendment order will ensure that the PRA and the FCA have the right powers to regulate the mortgage market effectively, ensuring that both new and existing customers are protected from bad practice. I therefore ask the Committee to join me in supporting these statutory instruments today.