Financial Services Bill

Viscount Trenchard Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 24th February 2021 Grand Committee

[Viscount Trenchard (Con)]

My Lords, I declare my interests as stated in the register. I support both Amendments 10 and 26 in the name of my noble friend Lady Noakes. They do not mean that Parliament would be seeking to usurp the role of the regulators, or to attempt to rewrite MiFID II which, according to Forbes Magazine, has required 30,000 pages to explain its regulations.

It is right that the Bill enables our regulators to act quickly and flexibly to respond to changes in the markets or the introduction of new financial products. However, without the scrutiny formerly carried out by the European Parliament of each and every detail of regulations and directives, it is necessary that Parliament should have oversight of the regulators’ work. My noble friend is right that we need to agree the optimum balance and how this will be done before the powers conferred upon the PRA and FCA are made available for them to use.

Amendments 18 and 19 in the name of the noble Baroness, Lady Bowles of Berkhamsted, are motivated by a desire to continue to align to EU regulation, even though there are no expectations that the EU will make any further significant equivalence declarations in the short term. Amendment 19 places a large, poorly defined burden on the FCA to show where and how its draft rules have been influenced. It is clear that the FCA will consider many external factors in drafting its rules. As your Lordships know, it is intended to agree a basis on which both regulators will be made accountable to your Lordships’ House and another place for the way in which they carry out their work. Accordingly, I think it would be too restrictive on the FCA if this amendment were supported. It would also create uncertainty over the Bank of England’s ability to act quickly as necessary in exercising its macroprudential responsibilities.

Similarly, Amendment 20 seeks to allow committees of your Lordships’ House and another place to publish a report on proposed Part 9C rules. It is not clear which committees these will be in the future. It would slow down changes that the FCA will want to make quickly, which could be damaging to the standing and competitiveness of the City. Perhaps my noble friend can tell the House how the Government intend to amend the Bill in order to provide for the necessary scrutiny of acts of the regulators. I am not sure that that would be the effect of Amendment 22, in the name of the noble Lord, Lord Sharkey. The Government’s intention, which I support, is that we should move away from the cumbersome, codified nature of rules. I would expect the PRA to try to make rules that are shorter and clearer than the regulations they replace. It would not always be appropriate for them to include the full text of the general rules to be replaced.

Amendment 27, in the name of the noble Baroness, Lady Bowles, seems to place a very heavy demand on Parliament to become closely involved in what our regulators do at international conferences, in a way that might be too restrictive on their freedom to participate fully at those conferences. This would be likely to weaken British influence on the outcomes of discussions and decisions made at such conferences.

In Amendment 38, the noble Baroness, Lady Bowles, seeks to duplicate other arrangements which will be made to institute the necessary parliamentary accountability and again appears motivated by a desire to continue to align to EU rules. If the Government can bring forward an amendment to increase the attention that the PRA is required to give to the competitiveness of the markets, as strongly proposed by several noble Lords on Monday, I would suggest that Amendment 38 might be unnecessary.

While considering this matter, can the Minister confirm that it remains the Treasury’s intention to advise the Bank of England not to adopt a similar measure to the EBA to permit banks to capitalise software investments for the purpose of stress testing? This is one example of where, instead of equivalence, we will have higher standards than the EU, although regulatory standards are often not two-dimensional, high or low.

The effect of Amendment 39 is surely to transfer back to Parliament the detailed rule-making powers. Quite apart from the fact that neither your Lordships’ House nor another place is equipped to carry out such detailed, line-by-line scrutiny, the amendment would seriously slow down rule-changing, removing agility and flexibility from the regulators.

Amendment 40 in the name of the noble Lord, Lord Tunnicliffe, does not remove the ultimate power to change rules from the regulator but introduces a cumbersome process involving the issuance of reports by committees of both Houses. Does the noble Lord intend these committees to be new standing committees, and how will they be resourced? I also note that in the case of a draft being laid, say, a week before Parliament rises in July, it might be three months before 20 sitting days of either House have elapsed.

I do not understand the intention of the noble Lord, Lord Sikka, in introducing Amendment 71—a requirement separately for the Treasury Committee in another place to assess the FCA’s conduct prior to the appointment of a new chief executive.

My noble friend Lord Blackwell’s Amendment 85 makes an interesting proposal as to how the regulators should be made accountable to Parliament. Does my noble friend Lord Howe think that, as far as your Lordships’ House is concerned, scrutiny would come from an existing or soon to be established Select Committee, such as the strangely named Industry and Regulators Committee, or whether a new standing committee should be set up to exercise these functions?

The noble Lord, Lord Bruce of Bennachie, in his Amendment 137 seeks to place a statutory duty to consult the devolved Administrations over a reserved matter. We await with bated breath the publication of the Dunlop review, which should inform us of how the Government intend to manage relations with the devolved Administrations in the future, including on reserved matters. However, I cannot support the noble Lord’s amendment, which is unnecessary and provocative to certain elements within the devolved authorities.

I look forward to other noble Lords’ contributions and the Minister’s reply.

[Lord Sikka (Lab) [V]]

My Lords, I will speak to Amendment 71, which is in my name and supported by the noble Baronesses, Lady Bennett of Manor Castle and Lady Bowles of Berkhamsted, and the right reverend Prelate the Bishop of St Albans.

The amendment seeks to strengthen the effectiveness of financial regulation and calls for scrutiny of the FCA’s conduct by the Treasury Committee prior to the appointment or reappointment of its chief executive. It effectively calls on the committee to act as a guide dog to the watchdog. We all know that effective regulation is a necessary condition for protecting people from malpractices, holding miscreants to account and promoting confidence in the finance industry.

The FCA has failed to deliver robust and effective enforcement and it needs to be helped. Its failures are documented everywhere. The recent report by Dame Elizabeth Gloster on the collapse of London Capital & Finance noted that the FCA did not discharge its functions in respect of LCF in a manner that enabled it to effectively fulfil its statutory objectives and that there were significant gaps and weaknesses in its practices. From my perspective, even more damning was the revelation that FCA staff were not even trained to read financial information to recognise unusual or suspicious transactions.

Another report on the scandal-ridden Connaught Income Fund concluded that the FCA’s regulation of the entities and individuals was not appropriate or effective. We are still awaiting the report on the Woodford Equity Income Fund, when thousands of investors are trapped. Regrettably that is not an independent investigation, but we await the outcome with considerable interest.

The FCA failed to act in the case of Carillion, a company that collapsed in January 2018. Carillion inflated its balance sheet and profits through aggressive accounting practices. These included the use of mark-to-market accounting, enabling the company to leave at least £1.1 billion-worth of worthless contracts on its balance sheet. It failed to amortise £1.57 billion of good will, which was effectively worthless. The company was disseminating that misleading information to the markets but the FCA took no action whatever. Curiously, on 18 September 2020, nearly 21 months after Carillion’s collapse, the FCA issued a warning notice saying that the company and some of its directors had recklessly misled markets and investors over the deteriorating state of its finances before the company collapsed. Where was the FCA for all the earlier years while Carillion was publishing that misleading information? It was nowhere to be seen.

There is now considerable public evidence that the banks have been forging customers’ signatures to alter key documents and repossess customers’ businesses and homes, and that evidence has been published in the mainstream media. I understand that there are over 500 documented cases and the FCA has not even started any investigation. A senior Metropolitan Police fraud officer wrote to the Treasury Select Committee in 2017, stating that the executive boards of some of the most prominent banks were “serious organised crime syndicates”, yet that has not resulted in any action by the FCA.

The bank RBS has systematically defrauded its customers but the FCA has been dragging its feet, often pushed by parliamentary committees and others to do its job. In November 2013 a 20-page report prepared by Lawrence Tomlinson summarised this abuse of bank customers and small businesses at RBS’s global restructuring group, or GRG. The Tomlinson report stated that rather than nurturing small businesses, the bank actually pulled the financial rug and sent them to premature bankruptcy. GRG operated from 2005 to 2013, and at its peak handled 16,000 companies with total assets of around £65 billion. A proportion of those companies were not viable but a great number were and had never defaulted on loans. The FCA’s approach was to bury its own Section 166 report on the RBS frauds. In February 2018, the Treasury Committee ignored the FCA’s reluctance and published the report. The committee said:

“The treatment of vast numbers of SME customers placed in RBS’s Global Restructuring Group was nothing short of scandalous.”


In June 2019 the FCA published what it described as its final report on the investigation into RBS’s treatment of small and medium-sized businesses. The co-chair of the All-Party Parliamentary Group on Fair Business Banking and Finance said:

“This report is another complete whitewash and another demonstrable failure of the regulator to perform its role.”


The timidity of the FCA is also evident from the long-running HBOS frauds, which show no sign of resolution. In 2013, a report codenamed “Project Lord Turnbull” was published by Sally Masterton, Lloyds senior manager in credit risk oversight in the regulation and governance section of its risk division. It was prepared in response to inquiries made during Thames Valley Police’s investigation into the frauds at the Reading branch of HBOS, and also covered the period before the 2007-08 banking crash and bailouts and the subsequent takeover of HBOS by Lloyds Banking Group. The report noted that HBOS executives had “concealed” asset-stripping frauds at its Reading branch ahead of the bank’s takeover by Lloyds in 2008. The FCA did nothing to bring fraudsters to book.

--- Later in debate ---

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, the noble Lord, Lord Tunnicliffe, has reminded us that this is the clause where the legislation on the CRR gets waived away into rules without any legislative replacement. This follows the pattern that the Government proposed in their consultation: once there are rules from the regulators, the statutory instruments are revoked.

Paragraph 2.25 of the Financial Services Future Regulatory Framework Review states:

“The default approach would be for any retained EU law provision that is in scope of the regulators’ FSMA rule-making powers to be taken off the statute book to become the responsibility of the appropriate regulator.”


Therefore, although there may be consultations on replacement rules at the point of revoking the SIs, there are no checks further down the track, so at some time further on all the rules could be revoked too. As a practical matter, that will not happen, but it is possible that for some things big changes could happen. It is probably more of a worry when it is happening to the wider generality of financial services legislation than with standards that are underpinned by Basel provisions, but I make this point because the Minister said on Monday at the start of Committee that everything is being listened to in the context of the consultation, although I must say that his replies so far do not inspire too much confidence.

It may seem convenient to have a more flexible arrangement of having regulators doing everything and not bothering Parliament with statutory instruments, and the view being pushed by the Government seems to be that Parliament should not become too bothered by rules because they contain frightening Greek letters such as Σ that really just indicate some very simple sums that could easily be explained in a sentence. Underlying that is that there should not really be challenge, only fig leaves and what the noble Lord, Lord Holmes, called the rear-view mirror.

Even though I have no great love of statutory instruments as a measure for showing parliamentary consent, there is a qualitative difference compared with rules, and I want to flag up that this clause is where the notion that we will no longer have any firm policy against which to hold the regulator accountable is endorsed. From here on, the regulator makes the policy, and there is no policy guidance between the regulator’s rules and the simple objectives, have-regards clauses and perhaps a few generalised statements, such as supporting UK economic growth. I do not like this sparseness, and it is ridiculous to suggest that rules are constantly, rapidly needing change. That is not true and not internationally sustainable.

To some extent the Government acknowledge this, otherwise there would not be the statement in the consultation that some things may have to be put into SIs as a consequence of equivalence decisions. So other countries can measure our standards, but not Parliament. How embarrassing. I heard what the Minister said in reply to my equivalence information point in the first group today. He said that such things may have to stay out of the public domain—at least until they become a statutory instrument—but I never suggested that they be public, just that there should be some sharing with Parliament about the policy direction. I am pretty sure that the EU will take the view that regulator rules alone are not enough and are potentially too transient when it comes to such a large financial centre as London, not least when it comes to looking at the lavish use of “bespoke”, which was always one of Brussel’s most hated words because it thought, and I tend to agree, that it was tailoring cut to flatter and trick the eye. That is fine for clothes, but not so good for financial services rules.

As I want to mark resistance to this passing of all policy to the regulators so they end up held accountable only to their own rules, I support the noble Baroness, Lady Bennett, in the suggestion that Clause 3 does not stand part.

[Viscount Trenchard (Con)]

My Lords, I understand the purpose of Amendments 24 and 25, in the name of the noble Lord, Lord Tunnicliffe, but do they suggest that he would like to stick with the enormously detailed and prescriptive provisions of the CRR as they are in retained EU law? The Government’s intention to transfer most of the provisions of the CRR into more flexible rules is right. The PRA will be able to react more quickly if it needs to change particular rules, and this should reduce the risk of failure of banks in the future.

The Government have been clear that the UK’s regulators are the right people to set the detailed, firm-level rules to implement the remaining Basel standards. Of course, as discussed in previous debates, and supported by noble Lords on all sides of the Committee, we need proper parliamentary oversight of the PRA before it starts to use its new powers. The wording in the noble Lord’s amendments suggests that he wishes to reduce the degree of flexibility that the Treasury will grant the PRA, but I think that that might be counterproductive. Does he not accept that, as we move to a simpler, more flexible, outcomes-based regulatory framework, there should be less detailed prescriptive rules?

The noble Baroness, Lady Bennett of Manor Castle, wants to retain all the CRR rules in legislation. I cannot agree with her approach, which might damage the attractiveness of the City as a financial centre. She referred to Singapore-on-Thames, which is becoming a fashionable way to describe a light-touch regulatory regime, but is she not aware that Singapore is one of the best and most strictly regulated centres in the world? It is strict, yes, but much simpler and less cumbersome and bureaucratic. Does the Minister agree that we need to return to a simpler, different, more flexible and agile regulatory style?

[Baroness Kramer (LD)]

My Lords, I do not have a great deal to say but there are a couple of points that I would like to make. First, the two probing amendments from the noble Lords, Lord Tunnicliffe and Lord Eatwell, make a great deal of sense to me, so I hope that the Government will pay attention to them and provide some substantial answers.

However, what struck me more than anything else was that this was an opportunity to comment on Clause 3. That suddenly dawned on me as I looked at the language both in the Bill and in two amendments which appear in later groups. One I have added my name to and the other is in my name only at this point in time. The first, in the name of my noble friend Lord Oates, looks at capital adequacy ratios for investments in fossil fuel relating to exploitation and exploration. The other amendment, which stands in my name and is in what could loosely be called a regulatory group, deals with MREL thresholds for medium-sized banks.

It occurred to me that this is the last time that we will be able to raise issues such as these in government time in this House if the Bill passes with Clause 3 in it. All the rules issues detailed in Clause 3, which are in effect fundamental to policy, will be transferred to the book of the regulator. Were I to look for an opportunity to raise these issues, which I shall follow up on in later debates on the Bill, the Government would say to me either, “You’re out of scope”, or, “Those are dealt with by the regulator, so wait a year or two and the regulator might do a consultation on one of these issues, then you can make your opinions heard.” They might say to me, “Write a letter to the Treasury Select Committee and see whether it considers the issue important enough to take up its very precious time, in dealing with its very heavy workload, by picking up your issue as part of one of its broader consultations.”

If ever we needed a graphic illustration of the loss of authority of Parliament and the loss of accountability to it, this is the time to illustrate and say it. I am really curious to hear from the Minister how he feels that that is justified and why he will explain to me that the amendments we have tabled are such an irritant to him that he is quite determined that never again will they fall into the scope of a debate on government time.