Financial Services Bill

Viscount Trenchard Excerpts

Report stage
Wednesday 24th March 2021 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, the noble Lord, Lord Oates, and the noble Baroness, Lady Hayman, eloquently introduced Amendment 3. There was much discussion on this matter in Committee but I still consider that such a review would place too heavy a burden, and a disproportionate one at that, on the PRA. I thank my noble friend the Minister for the diligent manner in which he has responded to noble Lords’ concerns about raising the importance of climate-change issues in the list of factors to which our regulators must have regard in making rules.

The Government’s credentials as global leaders in the movement away from reliance on fossil fuels are well established and will, I hope, be further enhanced by the G7 meetings and the COP 26 conference later this year. However, this should be kept in perspective and balanced against the need for economic recovery and the needs of industry. There is no point in pricing what remains of our steel industry out of the market if the result would be an increase in imports from countries which have not adopted energy policies as green as ours, especially if the impact on global emissions is negligible.

When I first read my noble friend Earl Howe’s amendments I was puzzled, because it seemed that he was giving with one hand and taking away with the other. I look forward to his clarification of how Amendments 43, 46, 47 and 49 net off against each other.

I am loath to saddle the regulators with increased obligations which go beyond the practices that they have already adopted. The letter from Sam Woods makes it clear that climate change is already an important consideration in the PRA’s supervision and regulation of banks and insurers, under its existing statutory objectives. Similarly, the letter from Nikhil Rathi makes it clear that the FCA is committed to helping market participants manage the risks in moving to a low-carbon economy and supports the commitment to match, at least, the ambition of the EU sustainable finance action plan in the UK. Since the FCA has already decided to recruit a director with specific responsibility for ESG matters, I do not think that Amendment 23, in the name of the noble Baroness, Lady Hayman, is necessary. The remit of the senior manager whom she suggests should be appointed would clash with that of the new director who is already in the process of being recruited.

Amendment 22, in the name of the noble Baroness, Lady Hayman, also goes too far and is too prescriptive. My noble friend the Minister was right when he said to the Committee, on 24 February, that

“it is important that we act carefully and rationally, consult appropriately with interested parties and therefore make progress in the right way.”

He was also right in stating that

“the changes the Bill enables serve to implement a number of vital reforms following the financial crisis. These reforms reinforce the safety and soundness of the UK financial system.”—[Official Report, 24/2/21; col. GC 224.]

Surely we should not amend the Bill in any way that might prevent us giving effect to updated prudential rules. I also agree that there is no evidence that greener means prudentially safer, at least not yet. Therefore, it is not clear that a regulator, whose primary objective is the safety and soundness of financial institutions, should be burdened with disproportionate climate obligations now, especially at a time when it is essential to maintain and enhance the competitiveness and attractiveness of the UK’s financial markets. With regard to individual regulators’ objectives and rule-making powers on climate change-related risks, the ABI recommends the need for holistic debate across stakeholders before adding new objectives to the remit of regulators, given the need to balance the various priorities. I believe that my noble friend’s amendments strike the right balance, and I will support them.

While I agree with the noble Baroness, Lady Bennett of Manor Castle, that biodiversity is important, I believe she wants to go a step too far in her Amendment 44 in adding this to the FCA’s “have regard to.” There are countless other policies that could be added, but too many will muddy the waters and distract the FCA from its efficient operation in performing its core duties and objectives.

[Lord Judd (Lab) [V]]

My Lords, these amendments, and this Bill, are crucial to the future of the United Kingdom. We have heard repeatedly in the arguments deployed of an interaction. There is the need for financial services to be successful and effective because they play such an important part in ensuring the well-being on which the rest of our society depends. That is beyond question. However, we know that they have implications, socially and beyond, for which they need regulation, and this has been well spelled out.

I shall focus on Amendments 3, 22, 23 and 44 in particular. Fossil fuels inevitably have considerable and extensive risks for the climate. There can be no argument about that. They have great implications in terms of climate change, and I am glad to see that Amendment 3 is grappling with this.

Amendment 22 deals with the point I have just made in that climate change poses risks to financial services. Therefore, it is essential to have the right arrangements in place to ensure that those risks are, if not eliminated, minimised.

Amendment 23 makes the point I have often felt strongly about in legislation: it is sometimes crucial to have a specific person carrying a specific responsibility for bringing together the various threads in the policy for which we are aiming and ensure their delivery. It is a good amendment.

I do not share the rather dismissive approach of the noble Viscount, Lord Trenchard, to Amendment 44. My view is that the noble Baroness, Lady Bennett of Manor Castle, deserves considerable commendation for having tabled this amendment. We have happily joined these UN conventions, and our diplomats have usually played a large part in bringing them about, but we sometimes lack the discipline to follow through with what they require of us. At this point in our consideration of the Bill, it is appropriate to talk about the convention and the undertakings we have thereby committed ourselves to on biodiversity. On that issue, I find myself dismayed by the position of the noble Viscount, Lord Trenchard, because we are surrounded by a major crisis. The biodiversity of the world is in danger of collapse, and the consequences have direct implications for the survival of humanity itself. There is urgency about this situation.

In conclusion, I simply make this point: I said that we wanted the financial services sector to be successful and effective, because we recognise its indispensability, but we also must recognise that on climate change, we are long past the age of rhetorical language and theoretical commitment. We have to demonstrate that we have the leverage and the arrangements in place to ensure delivery; if we do not ensure delivery on the measures we want to see to protect the climate, we will be party to a cruise towards catastrophe for the global community. It is vital to have these disciplines, and these amendments spell out how we can bring those disciplines to bear.

--- Later in debate ---

[Baroness Noakes (Con)]

My Lords, in moving Amendment 4, I shall speak to the other two amendments in this group in my name. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Eatwell, for adding their names to Amendment 6.

I spoke at length in Committee about the problems of tough legacy contracts, and I shall not repeat all of that. To summarise, when Libor ceases to be available at the end of this year there will be a number of contracts which reference Libor but which have not been renegotiated to substitute an alternative rate. We do not know exactly how many contracts are involved, but it is thought to be a significant number. It is not a niche problem; it arises in both the capital market and retail markets and in many different kinds of contract. While sustained efforts by financial services providers have reduced the scale of the problem, it cannot be fully resolved for various reasons, and I think that that has been accepted by all parties.

The Bill helpfully provides for the FCA to ensure that what is known as synthetic Libor will be available for use in those contracts which have not been renegotiated, but two problems remain. First, while the FCA has made synthetic Libor available for use, the FCA cannot change the contracts itself; it requires separate provision in law. Amendment 4 would provide for continuity of contract so that any contract, loan or security referencing Libor will be taken to reference synthetic Libor instead. Secondly, even if references to Libor are regarded as meaning synthetic Libor, there remains a risk of litigation if one or more parties object to the substitution of synthetic Libor and believes that some other fallback is more appropriate. Amendment 5 says that no claim or cause of action can arise due to the use of synthetic Libor. This is a safe harbour provision.

I recognise that the exact drafting of continuity of contract and safe harbour is not straightforward, though I emphasise that my amendments have been drafted with the help of lawyers who are specialists in capital markets, and that they mirror the draft legislation which has been drawn up for New York law by the Alternative Reference Rates Committee. Nevertheless, I have also tabled Amendment 6, which takes a slightly different approach by giving the Treasury the power to make regulations dealing with contract continuity and/ or safe harbour. It does not require the Treasury to do either or both of those things but offers a straightforward method of dealing with the problem in secondary legislation if, for some reason, the Government feel unable to legislate directly at this stage.

I tabled Amendments 4 and 5 in Committee and was met with the expected response that the Government had recently issued a consultation on contract continuity and safe harbour, and that the consultation period had not concluded. The Government would decide what to do once they had considered the consultation responses. The consultation has now concluded, so it is time for the Government to decide what to do. As I understand it, there were only a relatively small number of responses to the consultation, and they are overwhelmingly in favour of proceeding with continuity of contract and safe harbour. I hope that my noble friend the Minster will confirm that.

I had hoped that the Government would table amendments of their own on Report, but life is full of disappointments. The clock is counting down to 31 December this year and those areas of the financial services market which are impacted by tough legacy contracts desperately need some certainty about the way forward. I therefore call on the Government to either accept one of my amendment variants—Amendments 4 and 5 or, alternatively, Amendment 6—or commit to bringing their own amendment forward at Third Reading. If the opportunity of this Bill is missed, it is by no means clear whether there will be a later opportunity in time for the cessation of Libor, which is only nine months from now. I hope that the Government will want to avoid creating a long period of uncertainty and will not let this Bill pass into law without fully dealing with tough legacy contracts. I beg to move.

[Viscount Trenchard (Con)]

My Lords, I apologise for forgetting to declare my interest as a director of two financial services regulated companies.

I support Amendments 4, 5 and 6, ably moved by my noble friend Lady Noakes, whose long experience and mastery of the detail of financial markets and regulation is an invaluable asset to your Lordships’ House. As far as Amendments 4 and 5 are concerned, she presented the arguments very well in Committee and today. I was also impressed by the arguments deployed by the noble Lord, Lord Eatwell, who quoted the FCA’s view that in cases where parties to contracts referencing Libor cannot reach agreement on how those contracts would operate in the event of Libor’s cessation, discontinuation could cause uncertainty, litigation, or loss of value because contracts no longer function as intended.

The Minister recognised that we must reduce contracts referencing Libor as much as possible by the end of this year. Given the vast number of outstanding contracts, clearly that will not be possible, and rightly the Government have initiated a consultation process on this subject. However, does he not agree that the risk of uncertainty and litigation is significant and that there is unlikely to be a better opportunity to legislate in time to mitigate such risks than that which this Bill provides?

In Amendment 6, my noble friend Lady Noakes, supported by the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Eatwell, has offered an alternative method of mitigating these risks. As a rule, I do not like the trend towards taking excessive Henry VIII powers, which greatly reduce the transparency and accountability of the Government. However, if my noble friend the Minister cannot accept Amendments 4 and 5, the alternative—Amendment 6—would in that case be acceptable as being much better than the situation that will otherwise quite possibly evolve with great damage to market integrity and much expensive litigation.

I hope that the Minister has thought more about these issues since our last debate and I look forward to hearing how her thinking has evolved to meet the very sensible points that my noble friend’s amendments would address.