Financial Services (Banking Reform) Bill

Lord Turnbull Excerpts

Wednesday 27th November 2013 Lords Chamber

Moved by

[Lord Turnbull]

176: After Clause 119, insert the following new Clause—
“Other provisions about the FCA and the PRAAbolition of strategic objective of the FCA
In FSMA 2000—(a) In section 1B, omit—(i) in subsection (1), paragraph (a) (and the “and” following it)and, in paragraph (b), “operational”,(ii) subsection (2),(iii) in subsection (3), “operational”,(b) omit section 1F,(c) in subsection (1K), omit “operational”,(d) omit section 3B(3),(e) omit section 3D(4),(f) in section 55B(4), for the words after “advance” substitute “any of its objectives”,(g) in section 55H(4), omit “operational”,(h) in section 55I(5), omit “operational”,(i) in section 55J(1)(c), for the words after “advance” substitute “any of its objectives”,(j) in section 55L(6), omit “operational”,(k) in section 55T, omit “operational”,(l) in section 88E, in subsection (1) and in the heading, omit “operational”,(m) in section 89U, in subsection (1) and in the heading, omit “operational”,(n) in section 137A(1), omit “operational”,(o) in section 138A(5), omit “operational”,(p) in section 192C(2), for the words after “advance” substitute “any of its objectives”,(q) in section 194(1)(c), for the words after “advance” substitute “any of its objectives”,(r) in section 232A, omit “operational”,(s) in section 314(1), omit “operational”,(t) in section 316(1A)(a), omit “operational”,(u) in section 318(3A)(a), omit “operational”,(v) in section 340(8), for the words after “expedient” substitute “for the purpose of advancing any of its objectives”, (w) in section 395(3), for the words after “procedure and” substitute “the regulator considers that, in the particular case, it is necessary in order to advance any of its objectives.”,(x) in paragraph 11(1)(b) of Schedule 1ZA, omit “operational”,(y) in paragraphs 6 and 6B of Schedule 1A, omit “operational”, and (z) in paragraphs 3C(1) and 3D(1) of Schedule 6, omit “operational”.”

[Lord Turnbull (CB)]

My Lords, this amendment repeats an amendment tabled in Committee, the aim of which was to delete what the commission thought was an otiose strategic objective for the FCA and thereby increase the prominence and importance of what were previously called its three operational objectives, one of which was the promotion of competition. I thought that the reply from the noble Lord, Lord Newby, was unsatisfactory and I wanted to pursue it a bit further. The noble Lord concluded with the following remarks:

“After taking legal advice, the FCA has subsequently written and confirmed that it is happy with the strategic objective. On that basis, we are happy that the FCA is happy and wish to retain it”.—[Official Report, 15/10/13; col. 508.]

Perhaps I might respectfully comment that the object here is not to make the FCA happy but to make it pursue diligently the competition objective, about which a number of people have reservations. I would like to give the Minister the opportunity to give us some further assurance that the competition objective of the FCA will be pursued with the vigour that I think the Treasury and this House want.

[Lord Deighton]

My Lords, I confirm the observation of the noble Lord, Lord Turnbull, that it is of course not our objective simply to make the FCA happy. I will give a slightly longer explanation of why we think that the current situation will work just fine but, to get straight to the point, it is absolutely because we believe that the overriding mission statement is entirely consistent with the vigorous pursuit of the competition objective.

In looking at this from a personal point of view, I am very comfortable with the notion of an overriding mission statement which works in harmony with the operational objectives, can be used to support and enforce them and is very useful when it comes to shades of difference between them. I am very comfortable in this case because the overriding objective of making markets work well is entirely consistent with our mutual objective of ensuring that the FCA is pursing its competition objective with the utmost vigour.

I hope noble Lords have been able to witness that where we have been able to compromise, I have been very keen to compromise, but I am afraid here it is either yes or no, and in this case I ask the noble Lord to withdraw the amendment on the basis of my suggestion that I think it is going to be okay.

[Lord Deighton]

I shall look into that for my noble friend.

[Lord Turnbull]

In tabling amendments, there are a number of objectives. The first is to get an amendment accepted, the second is to make a point and the third is to receive an assurance. I think I have achieved the second and third objectives. On that basis, I beg leave to withdraw the amendment.

Amendment 176 withdrawn.

Moved by

[Lord Turnbull]

177: After Clause 119, insert the following new Clause—
“Independent Banking Regulatory Decisions Committee of the FCA
(1) After section 1L of FSMA 2000 insert—
“1LA Independent Banking Regulatory Decisions Committee
(1) There is to be a Banking Regulatory Decisions Committee of the FCA (“the Committee”).
(2) The members of the Committee are to be appointed jointly by the FCA and the PRA and hold office in accordance with the terms of their appointment.
(3) The person appointed to chair the Committee must have experience of acting in a senior judicial capacity.
(4) A majority of the members of the Committee must be persons appearing to the FCA and the PRA to have (and to have had) no professional connection with the provision of financial services.
(5) The remaining members of the Committee must include persons appearing to the FCA and the PRA to have extensive experience in senior roles in banking.
(6) The function of the Committee is to exercise the banking regulatory decisions function of the FCA and the PRA.
(7) “Banking regulatory decisions function” means the function of taking decisions for enforcing compliance with relevant requirements, within the meaning of Part 14, in cases where the authorised person is a relevant authorised person within the meaning of section 71A of this Act.
(8) The banking regulatory decisions function of the FCA and the PRA is delegated to the Committee; and references in this Act to the FCA and the PRA in relation to that function are to be construed accordingly.
(9) The FCA shall meet the reasonable costs of the Committee in discharging its function but the Committee—
(a) is not subject to direction by the FCA or the PRA as to the exercise of its function,(b) is not accountable to the FCA or the PRA for the exercise of its function, and(c) may appoint its own officers and staff.(10) At least once a year the Committee must make a report to the Treasury on the discharge of its function.
(11) The Treasury must lay before Parliament a copy of each report received by them under subsection (10).”
(2) The FCA and the PRA must carry out a review of the operation of the Banking Regulatory Decisions Committee of the FCA.
(3) The review must be completed before the end of 2018.
(4) The FCA and the PRA must give the Treasury a report of the review.
(5) The report must include an assessment of whether the function of the Banking Regulatory Decisions Committee would be better discharged by a body that was entirely independent of the FCA and the PRA.
(6) The Treasury must lay a copy of the report before Parliament and publish it in such manner as they think fit.”

[Lord Turnbull]

This amendment is about the future structure of the Regulatory Decisions Committee. This is avowedly a placeholder amendment to allow further discussion. The commission originally proposed that the RDC should be given statutory autonomy within the FCA and that that new regulatory structure should be reviewed by 2018. On further reflection, my commission colleagues and I put forward a rather different proposition, which is that there should be a wider review but there is no reason why it should not start as soon as maybe.

There are a number of reasons why a wider review is justified. The first is obvious. Although we now have two regulators rather than one—the PRA and the FCA—events where enforcement is justified can arise from either of these domains and enforcement action taken by one could help or hinder the work of the other. The enforcement division and the RDC are embedded in the FCA, and it raises the question of whether the RDC should be placed, in a sense, more equidistant between the two.

The second reason for raising this question is that, in banking at least, enforcement decisions could be taking on a greater significance than in the past. Indeed, the past has been characterised by a surprising absence of enforcement, at least in relation to the events of the financial crisis. There have been some major enforcement decisions and some colossal fines around conduct, but virtually none in relation to events leading up to the financial crash. This therefore raises the question as to whether the RDC needs to be upgraded in terms of its chairmanship and membership so that it is capable of handling bigger and more important cases.

The third reason is that, in response to a regulatory infraction or lapse, there is a balance to be struck between using enforcement as an instrument and the supervisory instrument. We should not get into the mode of thinking that enforcement is always the first and best recourse. Supervisors may take the view that a case is better handled by what elsewhere might be called “special measures”, such as seeing that the people who are responsible for the poor behaviour and decisions are moved on, and possibly even sacked; or by getting new people in; or by securing undertakings from management about future conduct. Often, this can produce a quicker and more effective result, whereas recourse to enforcement can cut across this so that instead of a bank immediately getting into a constructive dialogue about what to do next, it begins to dig in and wait for a long, drawn-out litigation.

We therefore need to ensure that, in any particular case, the full range of options has been considered and that the interests of other regulators have been taken into account. In other words, the RDC should only receive a case after that balancing process has taken place. It would be helpful if the RDC was able to question whether all the options and possible responses have been explored.

The fourth reason is that, in many walks of life, there has been a trend which continues to this day of greater separation between those investigating a case, those who decide whether a prosecution should be undertaken and those who reach a verdict. You could go back to the creation of the Crown Prosecution Service more than two decades ago, and you can see this in a number of professional bodies covering medicine, solicitors and accounting. The hot topic of the moment is the Independent Police Complaints Commission. There is a perception that the RDC is not as independent of enforcement as it could be. It is co-located. It is part of the FCA. Would we be able to achieve both actual enhancement of its independence and, certainly, the perception of that independence if it stood in a more independent position?

Finally, the RDC has to ensure that before any accusation is made in a decision notice that enforcement has been properly researched, the accused has been given a proper chance to put their case, and the case has been gone into thoroughly. This is of particular relevance to smaller practitioners who can be severely damaged by accusations and are not able to clear their name until maybe years later. Unlike big firms, such businesses, such as IFAs, can find that they clear their name but there is no business left to go back to.

All this indicates to me that there is more than enough material on which to base a review and no reason to delay that until 2018, which was included in the earlier amendment. Rather than attempt to legislate now in a process that does not allow proper consultation with practitioners, and which would be confined only to banks, I argue that we should have a wider review. I hope that between now and Third Reading we can have further discussions on this idea. I beg to move.

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[Lord Deighton]

In the spirit of the noble Lord’s approach, which was to move on from the specific amendment, I will not read out my speaking note, as entertaining and well structured as it is. I thank the noble Lord, Lord Eatwell, for his valuable experience here. I feel as the noble Lord does—something in here needs to be sorted out, but at the moment we are not exactly sure quite what the right thing is. However, it is certainly likely to involve a review, as is recommended as part of the amendment. Therefore I am more than happy, in preparation for Report—I am sorry, I mean Third Reading—to see what we can come up with together on a review.

[Lord Turnbull]

On the basis of that quite generous assurance, I am very happy to withdraw the amendment.

Amendment 177 withdrawn.

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Moved by

[Lord Turnbull]

182: After Clause 120, insert the following new Clause—
“Remuneration code
(1) The FCA and the PRA must prepare (and may from time to time revise) a remuneration code.
(2) The remuneration code is to apply to all persons who have approval under section 59 of FSMA 2000 to perform a function in relation to the carrying on by a relevant authorised person of a regulated activity which is designated under subsection (6B) or (6C) of that section as a senior management function.
(3) The remuneration code must—
(a) require that persons to whom the remuneration code applies are, except in specified circumstances, to receive a proportion of their remuneration in the form of variable remuneration,(b) require that a specified measure of profits is to be used in calculating any variable remuneration which is calculated by reference to profits,(c) require that the nature and amount of variable remuneration is to strike an appropriate balance between risk to the relevant authorised person providing it and fair reward for the recipient of it,(d) require a proportion of variable remuneration to be deferred for such period, not exceeding 10 years, as is appropriate to strike a balance between risk to the relevant authorised person providing it and fair reward for the recipient of it,(e) require that no, or only a limited amount of, variable remuneration of a person to whom the remuneration code applies is to be calculated by reference to sales made by the person or by any group of persons employed by the relevant authorised person providing it, and (f) require that non-executive directors of a relevant authorised person are not to receive variable remuneration.(4) A requirement imposed by the remuneration code is a relevant requirement for the purposes of Part 14 of FSMA 2000.
(5) In this section—
(a) “relevant authorised person” has the meaning given by section 71A of FSMA 2000,(b) “variable remuneration” means remuneration (whether in money or in securities or any other form of money’s worth) the amount or value of which varies in accordance with profits, sales or other matters.”

[Lord Turnbull]

I shall speak also to Amendment 183. This is about whether there should be a statutory basis for the existing remuneration code. One can analyse this at three levels. First, does the current code permit the kind of actions that the parliamentary commission recommended, such as longer deferrals where the nature of the risk justifies it, and more extensive clawback? Secondly, will those powers be used more rigorously than they have been in the past, particularly for banks? Thirdly, is giving statutory backing through the Bill necessary in order to ensure the correct answer to the second question?

Since tabling this amendment, we received a letter from the noble Lord, Lord Newby, on Monday, which in my view gives a satisfactory answer to the first question. All that the parliamentary commission sought, with the possible exception of forfeiture of some pension rights, can be imposed under existing powers. With regard to the second question—will those powers be used more rigorously?—the letter from the noble Lord, Lord Newby, says that the regulators,

“have stated that they will revise the … Code following consultation in 2014. The Government will work with regulators to ensure that …the Code [takes] full account of the views of the PCBS and the debates”,

on this Bill. Therefore, it is a matter of judgment for the House. Does it want to accept those assurances or does it feel that further amendments are needed to embed this presumption more fully? I think that the correct way forward is for there to be some further discussion about precisely what the review and the outcome might be. I look forward to hearing what the noble Lord has to say.

[Lord Newby]

My Lords, I am extremely pleased that my letter has at least partially satisfied the noble Lord. He has left me with a remaining question, which is: are we happy to continue to engage with him and his colleagues as we work towards, and consider, the review? I can give him the absolute assurance that we will be very happy to do so. On that basis, I hope that he will feel content to withdraw his amendment.

[Lord Turnbull]

On the basis of that assurance, I am indeed content to beg leave to withdraw the amendment.

Amendment 182 withdrawn.

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Moved by

[Lord Turnbull]

184: After Clause 120, insert the following new Clause—
“Special measures
(1) This section applies where the FCA or the PRA—
(a) has reason to believe that a relevant authorised person’s systems or professional standards or culture do not provide sufficient safeguards against the commission of actions in respect of which the FCA or the PRA has power to take action, but(b) do not have reason to believe that any such action has been committed (ignoring any action which is already being investigated or in respect of which action has been or is being taken).(2) The FCA or the PRA may give notice to the relevant authorised person of the belief mentioned in subsection (1)(a).
(3) If the FCA or the PRA gives notice under subsection (2), it must invite the relevant authorised person to make representations showing that sufficient safeguards are in place.
(4) Following the giving of a notice under subsection (2) and the receipt of representations under subsection (3) (if any are made), the FCA or the PRA may commission an independent investigation into the relevant authorised person’s systems and professional standards and culture with a view to establishing whether sufficient safeguards are in place; and for that purpose—
(a) “independent” means independent of the FCA, the PRA and the relevant authorised person, and(b) an investigation may not be commissioned from a person involved in the auditing of companies.(5) The relevant authorised person must cooperate with the investigation.
(6) Following receipt of the report of the investigation under subsection (4), the FCA or the PRA may by notice require the relevant authorised person to take measures to provide sufficient safeguards and to monitor their effectiveness.
(7) The relevant authorised person must—
(a) comply with the notice, and(b) appoint an appropriately senior member of the relevant authorised person’s staff to oversee compliance.(8) Compliance by a relevant authorised person with a duty under this section may be considered for the purposes of the exercise by the FCA or the PRA of functions under FSMA 2000.
(9) In this section, “relevant authorised person” has the meaning given by section 71A of FSMA 2000.”

[Lord Turnbull]

This amendment concerns the concept of special measures. We were again told, as we often have been, that all the powers necessary are there and that, indeed, they are being used. That may well be the case. However, the Minister did not respond to my suggestion that, if this is part of the armoury of the regulators, it would be helpful if they set that out so that there was wider understanding of the special measures regime. I do not think that the regime has an identity in the way that it has in the US, where they talk about memorandums of understanding. Subject to that, I would be happy to put this matter into the box labelled “For further discussions”. I beg to move.

[Lord Newby]

My Lords, I think that this is now having the appearance of a Christmas box, in that the noble Lord is asking the Government to agree to things and we are tending to agree to agree to things.

Given all the powers that the regulators already have, we have been slightly sceptical about whether they need to have, as it were, an Ofsted power of special measures. We do not think that they need more powers but, in order to address the noble Lord’s concern that failings in professional standards and cultures should not be overlooked, we shall be happy to discuss this with him further and to involve the PRA in discussions about how we move towards a firm policy in this area.

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[Lord Newby]

My Lords, I understand the point being made by the noble Lord. I am not sure at this point, without further discussion, whether we need an amendment at Third Reading. We think that the way forward might be a PRA policy statement, but we can have urgent discussions with the noble Lord on that.

[Lord Turnbull]

It is indeed a PRA policy statement that I am after. I am trying to establish a regime in which the regulator sees things that are going wrong and gets into dialogue with the company about remedial measures to head off the long-drawn-out agony of enforcement. If it is already doing it, it would be helpful to codify it but I am very happy to work with the Minister on that basis. I beg leave to withdraw the amendment.

Amendment 184 withdrawn.