Financial Services Bill

Viscount Trenchard Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Thursday 28th January 2021 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, I declare my interests as stated in the register. I too congratulate my noble friend Lord Hammond of Runnymede on his excellent and entertaining maiden speech, and the noble Baroness, Lady Shafik, on her most inspirational one. I thank my noble friend the Minister for introducing this important Bill, which will help to ensure that the City of London remains the pre-eminent global financial centre. For more than 100 years the City has rightly enjoyed a reputation as the safest centre in the world in which to conduct financial business, and the old maxim “My word is my bond” continues to reflect the high level of trust accorded to financial firms operating in this country.

Many commentators have lamented the fact that the financial services chapters of the trade and co-operation agreement with the EU are thin. This partly reflects the fact that the EU’s single market in financial services is only partially developed, although in recent years the European Commission has made progress in its drive to harmonise financial regulation across the bloc.

We have certainly influenced the development and formulation of this regulation, but we have had to work within the EU’s Napoleonic-style framework. We therefore have cumbersome and bureaucratic rulebooks, which explains why the fastest-growing departments of banks and other regulated companies have been compliance and legal departments, rather than those devoted to innovation and the development of new products, and those that actually conduct business and earn revenues.

Sometimes we have been overruled by excessively cautious Commission technocrats and by the European regulators, especially since the pendulum swung too far towards tighter regulation after the financial markets crash of 2008. I shall give just two examples of this: first, the whole of the AIFMD, which is disproportionate and expensive for many smaller asset management companies, driving some offshore and forcing others to merge or discontinue operations. The second example is Solvency II, which prescribes excessive capital requirements for UK insurers. The Treasury has said that it intends to change the rules to make them less prescriptive and less complex, and to increase the ability of regulators to apply supervisory judgment. Can the Minister confirm that this Bill will enable that to happen?

Miles Celic, of TheCityUK, told the EU Services Sub-Committee, on which I am privileged to serve under the excellent chairmanship of the noble Baroness, Lady Donaghy, that negotiations on post-Brexit financial services arrangements are being driven by political concerns rather than regulatory or legal issues, and that equivalence is becoming increasingly politicised. Does the Minister expect that the MoU will be completed by the end of March, and does he expect the EU to have made any further equivalence assessments by that time?

I am not surprised that the EU is unwilling to grant equivalence decisions in many areas, because we have rightly made it clear that we intend to diverge from the EU model. I would encourage the Government to be bold and to develop a plan to move in an orderly manner to a completely different regulatory system, based on principles rather than prescriptive statutory regulations.

I was privileged to serve on the Joint Committee on Financial Services and Markets, chaired by the noble Lord, Lord Burns, in 1999. We had much discussion on whether the FSA should have a competitiveness objective. It was ultimately decided that the need to minimise adverse effects on competition should be supported merely by a principle, listed fifth out of five. The PRA today has a secondary competition objective, which is subordinate to its two primary objectives—to promote the safety and soundness of the firms it regulates, and to protect holders of insurance policies.

The FCA has been charged, since 2015, as the third of three operational objectives, with the promotion of effective competition in the interests of consumers. Does my noble friend think that the promotion of competitiveness of financial markets is too low down the priority list? Ultimately, as Adam Smith argued, the invisible hand of competition, and the eradication of anti-competitive behaviour, will surely accord with consumers’ best interests.

The Treasury’s phase 2 consultation paper on the future regulatory framework review suggests that the Government are responding positively to powerful evidence from the coalface, but I question any acceptance of the argument that an excessive concern for competitiveness contributed to the financial crisis. I believe that both regulators should have a clear, unqualified objective to promote the international competitiveness of financial markets. This should be an important part of the Government’s agenda for global Britain. The Minister told your Lordships that the Bill has three objectives, but none of them is competitiveness. Does he not agree that the Bill’s second objective, which is described as

“openness between the UK and international markets”,

should be “the competitiveness of the UK’s international markets”? My noble friend Lord Hill of Oareford’s review of the Stock Exchange’s listing rules should also help in this regard.

Clause 36 is especially welcome in handing the damaging PRIIPs regulation and the troublesome KIDs to the regulators. They should also deal with the corresponding parts of MiFID II. I greatly welcome the direction of travel of the future regulatory framework. It is, however, necessary to make arrangements for the proper accountability to Parliament of the regulators before they start to exercise their new powers. Can the Minister tell the House how the Government intend that that should be done? I look forward to other noble Lords’ contributions and to my noble friend’s reply.