Financial Services and Markets Bill

Lord Tyrie Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

[Lord Bridges of Headley (Con)]

My Lords, I once again declare my interest as an adviser to and shareholder in Banco Santander. It gives me great pleasure to open today’s proceedings. After several days of debate on this Bill, I get a sense that there is widespread agreement from all sides of the Committee on one point: the measures in this Bill to improve accountability and scrutiny are insufficient and must be strengthened. While the regulators are getting more powers, there is no commensurate increase in their scrutiny and accountability. That comes at a time when many of us were already concerned that that level of scrutiny is too low and the accountability too weak. The breadth of that concern is shown by the fact that there is cross-party support for this amendment. I thank those who put their names to it.

That said, as I have said before, in addressing our concerns we need to proceed with some care. We must get the balance right between accountability and independence and we need to avoid new forms of accountability and scrutiny, politicising the regulatory system and thereby creating uncertainty. With those caveats in mind, we need to do three things, all of which require amendments to this Bill. We need to improve the reporting by the regulators; improve parliamentary scrutiny; and—this is the purpose of these amendments, Amendments 160 to 166, to which I have put my name—improve the quality of scrutiny and accountability by providing independent and impartial assessment and analysis of two things.

First, we need an assessment of the FCA’s and PRA’s overall performance in meeting their statutory objectives and regulatory principles under FSMA 2000. Secondly, we need to provide analysis of the impact assessments for specific pieces of financial regulation so as to determine how those regulations are contributing to meeting the regulators’ objectives, also under FSMA 2000. That can be achieved, as the amendments set out, by creating an office for financial regulatory accountability, a specialist, independent, statutory advisory body, which would work to a charter set by the Government and laid before Parliament. To be clear, this is not a new concept. It has been proposed in various guises by others—and here I am thinking particularly of the noble Baroness, Lady Bowles, as well as the International Regulatory Strategy Group in the City of London and the London Market Group, with which I have worked on this proposal. While I accept full responsibility for any flaws in these amendments, I cannot take credit for the idea.

I shall not waste your Lordships’ time in giving a line-by-line description of each amendment, from Amendment 160 to Amendment 166, which set out the body’s role, its powers and duties and its membership and financing. I think, or rather I hope, that they all speak for themselves—and for that I am thankful for the work of the Delegated Powers and Regulatory Reform Committee, which set out precisely how these kinds of bodies should be set up and whose approach these amendments follow.

I am sure that the amendments could be improved and I would be delighted to discuss with any of your Lordships, on any side of the Committee—in particular, my noble friend the Minister—how we might do so. Rather than regurgitate what the amendments say, instead I shall address questions that may be in the minds of those who may be wary or sceptical of the need for this body.

First, is it not going to duplicate the work of the Treasury Select Committee? No, it will not. As we all know, parliamentary committees are there to hold regulators to account, not to provide the rigorous analysis needed to do so—nor do they have the capacity to do so, as we have discussed previously. Furthermore, few question whether the OBR duplicates the work of parliamentary committees; it provides analysis for Parliament and everyone else to use. The same applies here.

Secondly, will not this body duplicate the work of the cost-benefit analysis panels that the FCA and PRA will now be required to set up? No, it will draw on their work and analyse and interrogate it, but it will also take a wider view. Perhaps more important, this new body will be utterly independent of the regulators, not a body created by them—nor, for that matter, will it duplicate the work of the Regulatory Policy Committee, whose focus is on government departments.

Thirdly, what about cost: can we afford to set up this body? Of course, setting up a new body will carry cost, but I argue that this will be outweighed by its benefit. Let us not forget the enormous contribution that financial services make to our national coffers. They demand, if not deserve, special attention to ensure their regulation meets the objectives that Parliament has set.

Fourthly, will not this simply be a regulator of the regulator? No, as I have said, its role and purpose is one of analysis, to improve and inform scrutiny by and accountability to Parliament and others, period.

Finally, and most important, will this new body undermine the regulators’ independence? I argue—this is crucial—that it will do the reverse. If we have a source of independent analysis of their actions, we can have a debate about that based on fact. It should therefore strengthen the legitimacy of regulators which are fulfilling their objectives and acting in a proportionate and timely manner.

I cannot see any real objection to the overall concept. As I said, I am sure that the amendment can be improved and I look forward to hearing from others how that might be done. Given the wide support that it has, I very much hope that my noble friend the Minister will give it a supportive reply. Many of us want to avoid unnecessary confrontation with the Government on Report, not just on this point but on all the other proposals we have debated that would strengthen accountability and I stand ready to work with her and others to turn this idea into reality. I beg to move.

[Lord Tyrie (Non-Afl)]

I am surprised that nobody else is rising to support this; I was hoping that everyone would. I certainly agree with just about everything that the noble Lord, Lord Bridges, said, but then again I agreed with just about everything that the noble Baronesses, Lady Bowles and Lady Noakes, the noble Lord, Lord Forsyth, and others said on 20 February, about all this. We are all agreed because we can all see the same problem. As has been suggested, the Bill confers huge new powers on the regulators, repatriated from the EU, without making any meaningful suggestions to make them more accountable when they exercise those powers. I will support any and all amendments that improve scrutiny and accountability until and unless the Government come forward with a meaningful proposal of their own. I will come to how they might go about that in a moment.

Our first job as a Committee must be to make sure that the Government grasp that we just cannot carry on as we are. I am not sure that Ministers and, in particular, the Treasury have fully grasped how inadequate the existing structure of accountability is. There are four major bodies that should be contributing and all of them, in their various ways, will be defective. There is the NAO, but we cannot rely on VFM studies alone; the Treasury is frequently conflicted in its relationship with both the regulators; nor can we rely on the boards of those bodies. In principle, there should be some rigorous internal challenge—and that achieves a lot in some regulators—but in practice the boards are all too easily captured by the senior executives and there is a massive problem of asymmetric information.

As the noble Lord, Lord Bridges, said, parliamentary Select Committees should be on the case, and frequently they are, but on the current resources available to them it is simply not reasonable to expect them fully to plug the gap, particularly given their range of other responsibilities —at least not in enough detail on a sustained basis to make the difference that I think most of the Committee thinks is necessary.

The clearest evidence that something needs to be done is the performance of the regulators themselves. Among the many criticisms of the financial regulators have been neglect of some of their objectives and duties, a box-ticking culture, excessive and unnecessary regulation stifling innovation—the “confetti before quality” problem—and inadequate ex post scrutiny of existing rules, without which a steady one-way ratchet develops right across the regulatory piece. A slow and legalistic approach is also a frequent complaint.

In defence of the financial regulators, for the most part they are in much better shape since the crash. That shook them to the core—indeed, one of them was split. Both the Bank and the FCA provide much better explanations for their actions and decisions than prior to the crash. No doubt some of the criticisms have been levelled unfairly, but not all of them.

In any case, we are not in a steady state. With new powers conferred by the Bill will come more of what has come to be known as the restless regulator syndrome. As the regulators identify new problems—real, imaginary or media fuelled—the risk must be of further inadequately considered additions to the rulebook. If the Government can be brought to agree that something needs to be done, one or more of at least three routes to forcing greater accountability are available.

First of all, and in principle the most attractive route for the Government, could be to try to pre-empt pressure from Parliament by creating their own much more rigorous scrutiny team at the heart of Whitehall, probably in the Cabinet Office. A body such as that could do some good work, but I am not convinced that it could fend off the vested interests that all too easily cluster around the sponsor departments at the moment and will no doubt cluster around such a group in the Cabinet Office over time.

A second approach has been set up by the noble Lord, Lord Bridges, today. It is the statutory independence of the body he proposes that makes it particularly attractive. Like the OBR, on which I think it is modelled, it has a reasonable chance of fending off those lobby groups. Therefore, I will certainly support his proposal if it is put to a vote.

But by far the most straightforward approach would be for Parliament to plug the accountability gap directly, as colleagues from all sides of the Committee have suggested, by creating its own specialist scrutiny committee. To be effective, a new committee would need support from a small group of specialists in financial regulation, much as the PAC is supported by audit specialists from the NAO, now a much larger group. This body would need only a small group, but it cannot hope to rely on the kind of very ad hoc tiny group, without institutional memory across Parliaments after elections, that Select Committees rely on at the moment.

Furthermore, in my view the committee—the Joint Committee, if some want that—would need to empower the specialists in a number of ways. Among the tools that should be considered are powers to see all people and papers, the authority to embed experienced and specialist staff into the Bank or the FCA where a particular concern has been identified, and the power to attend key decision-making committees to check out the quality of governance in regulators. In theory, all Select Committees have those powers already, but in practice, for various reasons, few use them fully. Those powers were all deployed to good effect by the Parliamentary Commission on Banking Standards without being disruptive to the work of regulators.

My main concern about this whole issue is that the Government will now listen carefully to what we have all said and murmur friendly noises but do nothing. The Minister told the Committee on 20 February that

“it is not for the Government to impose”—[Official Report, 20/2/23; col. GC 394.]

a scrutiny tool on Parliament. I understand where she is coming from but, as she well knows, that is not a strong line. If the Government come forward with a worked-up proposal for a new committee with adequate staff support—that is essential—and commit to supporting a change to Standing Orders to implement that reform, it will happen. If they did so, I for one would reconsider my support for statutory reform of scrutiny, and I think many others would too.

I think the Minister is listening—she certainly is now. I hope that her department and a couple of Treasury Ministers in the Commons listen to her and that she will tell us in a moment that she has been listening carefully and agrees to this amendment or to the lion’s share of what was said on 20 February.

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[Lord Eatwell (Lab)]

My Lords, I regret that I was not able to take part at Second Reading as I was working in the United States. I hope I have the indulgence of the Committee to make some comments on this set of amendments. As someone who has chaired a major regulator, I found the representation of the principles and approach to regulation as “vague” a rather chilling remark.

What we have seen with the amendments of the noble Lord, Lilley, and those who have supported them, is an attempt significantly to change the entire philosophy on which the regulatory system has so successfully developed in this country. That philosophy has been based on principles-based regulations. Those principles are not vague, as has been asserted; they are determined by Parliament. The rules have then been developed on the basis of serving an industry which is dynamic and continuously changing, unlike the building industry, many of whose practices have not changed since Tudor England.

The fact that the regulatory system can adapt to a rapidly changing industry has been a source of considerable strength within our regulatory system. If we are to introduce an entirely different legal approach, that has to be argued out. There should be a Green Paper, a White Paper and a proper Bill saying that the regulatory approach in this country is going to be fundamentally changed. That is what I fear: the amendments of the noble Lord, Lord Lilley, would effectively introduce a wedge of change that would fit very uncomfortably with the current structure.

On the other hand, I support the amendments proposed by the noble Lord, Lord Bridges, and particularly commend the remarks of the noble Lords, Lord Hill and Lord Forsyth. They argued that although this new accountability device—this new entity—would deal with, let us say, the technical side of regulatory issues, we still need a parliamentary committee to deal with the political side because regulation is both highly technical and has an essential political core. That is why we need both components. Therefore, I strongly support the amendments of the noble Lord, Lord Bridges, and the views put forward by the noble Lords, Lord Hill and Lord Forsyth, on the need for the dual structure to ensure a proper level of both technical and political accountability.

[Lord Tyrie (Non-Afl)]

First, I declare my interest as in the register. I am deeply concerned about this second set of amendments; they could have a profound impact on and consequences for the SMR, the ombudsman’s service and the RDC in particular, and I shall go through each in turn. I strongly agree with what has just been said about the nature of regulation and the risks of moving at such pace to a wholly different approach, bearing in mind for how many decades this system has been in place and has become understood and accepted—at some cost, by the way, and, therefore, changing it is itself something whose costs we need to bear in mind.

On the question of predictability, consistency and unintended consequences, in response to an earlier amendment I cited abuse of cryptocurrency technology, which might be made more difficult for the regulator to adapt to if it has to show that what it has done was predictable on the basis of existing law. That could be spread betting or, to take a topical example of 15 years ago, asset-backed securities. I am extremely nervous about including this without substantial consultation, which should be preceded by a detailed explanation of what is intended. We have not had any of that, and it is certainly not suitable to be put in this Bill.

Although I have not said very much so far on the Bill, I fear I will speak at some length on these three areas, which in my view are crucial to providing fairness and making sure that we are better prepared for the next financial crash that will inevitably come.

As I read Amendment 169, it would create a defence before the Upper Tribunal, and possibly a complete defence if a person could show that they had acted reasonably and in good faith. That might sound quite reasonable in itself—more apple pie—but a defence of reasonableness and good faith would mean that if an individual did not know about a problem, he could not be held responsible for it. That would be goodbye to the SMR, at least, as an effective regulatory tool. It strikes me as likely to reintroduce all the gateways to unacceptable risk and risk taking that the SMR was designed to expunge.

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[Baroness Penn (Con)]

As I have said, I will set out further detail on the consultation process in writing. It is worth just noting that this question was also considered by Parliament through the Treasury Select Committee in its report The Future Framework for Regulation of Financial Services, which said that

“The creation of a new independent body to assess whether regulators were fulfilling their statutory objectives would not remove the responsibility of this Committee to hold the regulators to account, and it would also add a further body to the financial services regulatory regime which we would need to scrutinise.”

[Lord Tyrie (Non-Afl)]

Can the Minister explain whether that constitutes opposition? I had a cup of tea with the chairman of the Treasury Select Committee only the day before yesterday to try to establish exactly that. She is fully supportive of the idea—we ought to get that on the record—although I should also say that she had not specifically consulted her committee on it.

The Minister must see that the Government are probably going to lose a vote on this at Report. Would she be prepared to sit down with a group of us to see whether we can work up some sort of proposal that she might be prepared to accept? To make that meeting effective, in the meantime, would she be prepared to ask her officials, on a contingency basis and without any commitment at all on her part, to write down on the back of an envelope—a long envelope, I admit—what it is that might conceivably, in certain circumstances, be acceptable to the Government?