House of Lords: Governance

Viscount Trenchard Excerpts

Wednesday 8th December 2021 Grand Committee

[Viscount Trenchard (Con)]

My Lords, it is a great pleasure to follow my noble friend Lord Robathan, with whose every remark I strongly agree. I thank the Senior Deputy Speaker for introducing this important debate. It is clear that there has been growing unhappiness expressed by many noble Lords as to how the House is run and how decisions are taken. I recognise how difficult it has been to operate the House during the pandemic; credit is rightly due to those who worked hard to ensure that the hybrid House could continue to perform its essential roles of scrutinising legislation and trying to hold the Government to account. We had all hoped that the pandemic would be behind us by now but, alas, the omicron variant has delayed the removal of the remaining precautionary measures. However, I am optimistic that the mutated virus causes infections no more serious than those with which we are accustomed to living anyway, without having to restrict personal freedoms, which the British people will not stand for.

I have always believed that your Lordships’ House is self-regulating, and that decisions to change working practices and the way we do things happen only when supported by a clear majority and after proper debate. Many decisions during the last 21 months have been taken at very short notice and generally without any serious debate. In many cases, it has not been clear who took a decision or when it was taken. Before the establishment of the commission, responsibility was believed to rest in the hands of the Leader of the House, who would operate through the usual channels to determine whether there was support for a particular measure. That is described in the External Management Review, conducted by Keith Leslie, as “leadership by convention”. The review found that your Lordships’ House is “stuck in the middle” between that system and a transparent system of accountability. I fear that accountability for decisions is now even more opaque than it was when Mr Leslie published his review.

There appears to have been a continuing gradual accretion of power to the commission, but that is chaired by the Lord Speaker, who is not accountable to the House. I do not understand why it is not chaired by the Leader, who is so accountable. Furthermore, I do not understand why or how the commission could possibly be responsible for the political direction of the House, as already mentioned by my noble friends Lady Noakes and Lord Strathclyde. I understand that certain changes to our modus operandi were necessary as a result of the pandemic, but I had understood that the House would revert completely to the status quo ante, from which position we could consider carefully whether we wished to introduce any of those, or other changes, on a permanent basis.

In particular, as my noble friend Lord Howard of Rising has already told the Committee, I was given to understand that the clerks would return to their traditional uniforms of court dress and wigs once the need to maintain the hybrid House had passed. I welcome the fact that the clerks have again adopted a uniform, but it is not the same as what they wore before the pandemic. I believe that the clerks should return to their traditional uniforms and not make changes on a permanent basis without a decision by the House. That may not be the most important concern of your Lordships, but the manner in which the decision to change the uniforms was made has upset many.

Similarly, as has already been referred to, the decision by the Services Committee to discontinue the monthly accounts on the grounds that we are not compliant with the payment card industry data security standards is very strange, because other membership organisations with similar numbers of members appear to have had no difficulty whatever in becoming compliant. It is extraordinary that this matter was not quickly rectified months ago.

Many of your Lordships share my preference for the old writing paper. I was told that the old, embossed paper was too expensive, but I believe that the quantity we use today is greatly reduced in this digital age and, on the occasions when we do still need to use it, quality and appearance are important.

As for the changes to the catering facilities and the dining rooms, I understand that some Peers like the present use of the Members’ part of the Peers’ Dining Room as the Bishops’ Bar, but it has no bar. Also, to some extent, it duplicates the Peers’ Guest Room in function. Moving the long table to the guests’ part of the Peers’ Dining Room means that the long table is now clearly visible and audible to guests, which I think is undesirable.

I also refer to the Code of Conduct, which seems to lengthen inexorably at an alarming rate. The inclusion of the requirement to attend “Valuing Everyone” training opens the code to ridicule and resentment.

The need to appoint Tellers greatly restricts frivolous Divisions. Their wands bestow authority. Voting should return to the Lobbies exclusively at an early date.

I shall not labour the House by repeating other changes to which noble Lords have referred, but I ask the Senior Deputy Speaker to act on the opinions of many noble Lords and agree with the Leader, the Lord Speaker, the Clerk of the Parliaments and others a return in all respects to the status quo ante, from which position any permanent changes should be adequately debated and approved before implementation.

Ecocide

Viscount Trenchard Excerpts

Wednesday 21st July 2021 Lords Chamber

[Baroness Bloomfield of Hinton Waldrist (Con)]

That is an interesting question. The UK’s priority, as I said, is to reform the court so that it functions more effectively and to take a leadership role in persuading international parties of the importance of the environment. On the oil and gas industries, the noble Lord will be aware of a number of initiatives, such as the 10-point plan, the White Paper and the North Sea transition deal, which seeks to show the oil and gas industries a pathway to decarbonising and to reskilling many of their workforce towards more environmentally friendly things, such as carbon capture and storage and hydrogen technologies.

[Viscount Trenchard (Con)]

My Lords, the emotive term “ecocide” conjures up horrific images of serious and deliberate crimes against humanity, such as genocide. I understand that an application was made to the United Nations International Law Commission in 2010 that a crime of ecocide be added to the Rome statute, defined as

“the extensive damage to, destruction of or loss of ecosystem(s) of a given territory, whether by human agency or by other causes, to such an extent that peaceful enjoyment by the inhabitants of that territory has been … severely diminished.”

Does my noble friend not agree that it is hard to consider ecocide as so defined as a crime at all, let alone one equivalent to such serious war crimes, if it does not even need a person or a—

[The Lord Privy Seal (Baroness Evans of Bowes Park) (Con)]

My Lords, I am afraid we need to move on. We will hear from the Minister.

House of Lords: Remote Participation and Hybrid Sittings

Viscount Trenchard Excerpts

Thursday 20th May 2021 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, I thank my noble friend Lord Howe for introducing this debate with his customary charm, and I agree with everything he said. I too congratulate all those who have worked hard to ensure that we could operate, after a fashion, through the pandemic.

I wholly agree with what many noble Lords have said about the loss of spontaneity and decline in quality of debate and scrutiny. Under hybrid conditions, advisory speaking times are now risibly short and strictly enforced. This means that noble Lords are unable to add to their prepared speeches to refer to others’ contributions. In debates on Bill stages, since the order of speakers is predetermined and contributions are prepared in advance, many noble Lords speak when they would previously have remained silent because another has already made exactly the same point.

The briefing prepared by the Library in February on the impact of hybrid proceedings on participation makes interesting reading but, strangely, did not include any statistics on voting patterns. However, the Constitution Committee did cover this and the Minister confirmed that noble Lords have, on average, participated in a much higher proportion of Divisions than was the case before the introduction of remote voting. It is, of course, very much easier to vote, wherever you may be and whatever else you may be engaged in at the time a Division is called. I believe that remote voting should be abandoned completely as soon as possible. It seems to me unsustainable for legislators to be permitted to vote remotely, even if they may attend the House for a short time on the same day.

Voting in person makes it likely, or at least plausible, that noble Lords might have participated in discussing the subject of the vote with others, even if they have not participated in the debate in the Chamber. The informal chance meetings and discussions between noble Lords in the corridors, restaurants and Division Lobbies are also an invaluable part of the functioning of the House as a legislature. Physical voting also provides useful opportunities to buttonhole Ministers. Some have argued that it is good and should be made permanent that those with disabilities, in poor health or pregnant should be allowed to continue to participate remotely. However, it remains an unfortunate fact that if a noble Lord’s condition or circumstances prevent his or her attendance and ability to participate fully, it is hard to argue that that Member is fully capable of exercising his or her functions as a legislator. I welcome the fact that it has become easier for those with disabilities to participate fully, but exceptions to physical attendance requirements should be minimised.

Unlike another place, we are a self-regulating House and should reverse the accretion of authority to the chair that has taken place. It is no longer clear whether it remains the role of the Government Front Bench to call the House to order. In the hybrid House, it is often the Lord Speaker or the sitting Deputy Speaker who exercises this function. The time-wasting practice of the Lord Speaker calling on noble Lords to speak should also be discontinued.

The earlier sitting times adopted by the hybrid House make it difficult for those with interests outside the House to participate as they would wish. Of course, noble Lords’ improved technical skills will lead to an increase in job offers. Lastly, I ask whether it is intended to reverse the simplification of the clerks’ dress, which the previous Clerk of the Parliaments told me was a response to the need for a larger pool of Clerks at the Table during the pandemic. I am sure that Messrs Ede & Ravenscroft would have no difficulty in supplying the proper uniforms to all clerks who do not have it. I am keen that we should revert 100% to where we were before the pandemic—tellers, wands, wigs and all. They are all part of the panoply of this great Parliament. From that point, we can reflect on whether we should make any permanent changes.

Covid-19 Update

Viscount Trenchard Excerpts

Thursday 13th May 2021 Lords Chamber

[Baroness Evans of Bowes Park (Con)]

The noble Lord is right to set out the challenge, but I do not think it would be responsible of me to pluck a figure. “I do not know” is the obvious answer—I do not think anyone does. All I can say is that we are working hard with the NHS to tackle these backlogs. It is an absolute priority and we should thank our NHS staff for the incredible work they have done through the pandemic and what they will be doing to help us tackle this backlog.

[Viscount Trenchard (Con)]

My Lords, in declaring my interests as stated in the register, I ask whether my noble friend is aware that organisers of festivals and other live events need more clarity now on the basis on which they can stage events planned for this summer. They are already having to meet planning and preparation costs, but they are exposed to cancellation risks for which no insurance is available on the market. Are the Government still considering setting up a Government-backed insurance scheme?

[Baroness Evans of Bowes Park (Con)]

I thank my noble friend. We are obviously aware of the concerns raised about the challenge of securing indemnity for live events. Reopening when we are confident it is safe to do so will reduce the chance of cancellations and interruption, which is why the rollout of the vaccination programme is so critical. We also want to be sure that any investment or intervention would lead to an increase in activity. At the moment, for instance, we understand that social distancing remains one of the key barriers to activity. I can certainly reassure my noble friend that DCMS officials are working across government and with the affected sectors to understand the challenges and are keeping the situation under review to determine the most appropriate and effective response.

Financial Services Bill

Viscount Trenchard Excerpts

3rd reading & Report stage
Monday 19th April 2021 Lords Chamber

Any efforts to increase transparency and accountability are always welcome. I hope that the Government will reflect on this short debate and, if these are not the particular ways to enhance our financial regulators, come up with other ideas and resources so that we can work out how to be more effective in this vital area as we look to build a national and international reputation for these services.

[Viscount Trenchard (Con) [V]]

My Lords, I declare my interests in financial services businesses, as stated in the register. I would also like to record my sadness and offer my sincere condolences at the passing of both the noble Lord, Lord Dubs, and the noble Baroness, Lady Williams. Both made an enormous contribution to your Lordships’ House over very many years and will be much missed on all sides of the House.

It is a great pleasure to follow the right reverend Prelate the Bishop of St Albans. We agree on so much, but on this question and this amendment I have to take a slightly different view from his. The noble Lord, Lord Sikka, has brought back Amendment 34, substantially in the same form as his Amendment 120 in Committee.

The drafting of the amendment suggests that it is intended that there should be a single supervisory board of both regulators, the FCA and PRA. The Member’s explanatory statement on the other hand states:

“The new Clause will create a Supervisory Body for each of the FCA and the PRA.”


This implies one supervisory board for each of two regulators. That at least makes more sense than a single supervisory board for the two separate regulators, which is an impossible concept, as I pointed out on 10 March.

As the FCA and PRA are not the same organisation—although I sometimes wish they were—each has its own executive board. In the case of the FCA, this is the FCA board. However, the PRA board was replaced four years ago on 1 March 2017 by the Prudential Regulation Committee and the PRA was absorbed into the single legal entity of the Bank of England. I pointed this out to the noble Lord on 10 March, but he has not altered his approach. My noble friend Lady Noakes has also explained these fundamental errors clearly. A supervisory board such as he proposes, charged with exercising oversight over the board of the FCA and the Prudential Regulation Committee of the Bank of England, could not be a single entity. It would have to have two distinct personae, one within the FCA and one within the Bank of England.

My noble friend Lord Howe explained to the noble Lord that both the FCA and PRA must already

“attend … hearings before parliamentary committees, and those committees may also hear evidence from stakeholders about the performance of the regulators.”

He said:

“Parliamentary committees of both Houses are also able to summon the regulators to give evidence whenever they may choose.”


He added,

“the Treasury already has the capacity to order independent reviews into the regulators’ economy, efficiency and effectiveness. Therefore, all told, the amendment would result in a duplication of existing opportunities for scrutiny and oversight of the regulators’ resourcing.”

As I said on 10 March:

“I do not think that such a supervisory board would replace the need for parliamentary scrutiny of the regulators, which will in itself provide appropriate transparency and accountability, rather than the completely crushing, destructive oversight that I believe the noble Lord’s new board would cause.”


The noble Lord said that his new board would

“not duplicate in any way whatever what any parliamentary committee or review board might do. The supervisory board would simply be engaged in day-to-day strategic oversight. Those people would be in the organisation on a permanent basis, observing, requiring reports, making recommendations”.—[Official Report, 10/3/21; cols. GC 723-26.]

Such an advisory board would seriously and negatively impact the operation of the regulators.

The noble Lord has said that he will not press his amendment, which I think is a wise decision because I believe your Lordships would have rejected it as unworkable, impractical and likely to have a negative impact on the attractiveness of our financial markets which provide so many jobs and a large slice of the country’s tax revenues.

[Baroness Kramer (LD)]

I suspect that the noble Viscount, Lord Trenchard, was referring to the loss of the noble Lord, Lord Judd, which was just announced, rather than the noble Lord, Lord Dubs. I join with him; I am still feeling slightly in shock, frankly, at the news. We have all lost too many people of significance to this House over this last year. I think we all want to pay tribute to all of them, but we are all struggling a little with some of the very significant people who will not be here for future debates.

On this amendment, I will speak briefly. I understand where some of the thinking of the noble Lord, Lord Sikka, is coming from, but I cannot say that I see a supervisory board as the answer to the issue he raises. I am much more taken with the proposal made by my noble friend Lady Bowles in Committee, for an expert body—it takes experts to really understand how the regulator functions—regularly to follow the Australian model and review the regulators. This could be every three years; the number of years is not exactly the key issue. It would not second-guess the decisions the regulators have made but look at operations, resources and effectiveness. With the regulator now so detached in many ways, that is essential.

I would want the Treasury to be a good distance from anything like this because, like it or not, the Treasury will always be seen as an influencer of decision-making. An expert view is needed to help us ensure that our regulators are functioning in the way that they need to, given the enormous challenges and responsibilities that they have. With that, I have to say that I cannot support this amendment.

--- Later in debate ---

With that, I will sit down quietly and assure the House that I am not going to move this amendment. But I am very glad and very impressed by the debate that has taken place on all Benches.

[Viscount Trenchard (Con) [V]]

My Lords, it is a pleasure to follow the noble Baroness, Lady Kramer, and I thank her for correcting my earlier incorrect inadvertent reference to the noble Lord, Lord Dubs, to whom I apologise, while expressing my sincere condolences on the death of Lord Judd.

The noble Baroness rightly returns again to the subject of parliamentary oversight, which we have discussed extensively, including on the second day of Report, last Wednesday. My noble friend the Minister has argued that it is difficult to decide definitively how parliamentary scrutiny will work ahead of the conclusions of the future regulatory framework review.

I had put my name to Amendment 37A in the name of my noble friend Lord Blackwell, which provides for timely scrutiny of rules proposed by either regulator, either before taking effect or, at latest, within five days of taking effect. It does not refer to a specific committee of either House or a specific Joint Committee of both Houses, but provides for both Houses to agree and resolve which committees or Joint Committee should be charged with this responsibility.

I prefer Amendment 37A to Amendment 37F, because it does not damage the independence of the regulators. Furthermore, it requires a written response to any prospective rule change before the rule change comes into effect, whereas if the rule change has already come into effect, a written response is required only within 12 weeks of any expression of parliamentary concern.

This does not provide for a consistent approach. In the first case, it shackles the regulators too much, but in the second case seems to provide for a very relaxed response, devoid of a necessary level of influence on the regulators. I regret that the Government have not brought forward their own ideas about parliamentary scrutiny, especially as the House has accepted their proposal to dispense with a separate Third Reading for this Bill. I trust that the Minister will let us know the apparent thinking of the Government on this matter.

I thank the Minister and my other noble friends on the Front Bench for the courteous way in which they have conducted the House’s scrutiny of the Bill. I thank the Bill team for all their work, and will welcome passage of the Bill as it completes its remaining stages.

His Royal Highness The Prince Philip, Duke of Edinburgh

Viscount Trenchard Excerpts

Monday 12th April 2021 Lords Chamber

[Viscount Trenchard (Con) [V]]

My Lords, I join all noble Lords in expressing my sadness on the passing of His Royal Highness the Duke of Edinburgh, who made such an enormous contribution to our nation over so many years. As a former officer of 4th (Volunteer) Battalion, The Royal Green Jackets, I know how much his presence as colonel-in-chief of The Rifles did to ensure the successful merger of the predecessor regiments and the creation of a single identity and spirit drawing on their strengths.

He was immensely knowledgeable about the detail of many strands of our nation’s life. You certainly needed to have your wits about you at all times with him. He had a better understanding of the dynamics of the British countryside than practically any British-born person I have encountered. His leadership of the Game and Wildlife Conservation Trust, as president and then as patron for 57 years, started the initiative to save the grey partridge, which he described as

“our favourite native game-species”.

He said:

“If we can solve the problem for the partridges, we shall be conferring enormous benefits on many other like species which are also in trouble.”


As your Lordships are aware, he was a most accomplished sailor. It is less well-known that he was also an accomplished pilot, as mentioned by my noble friend Lord Glenarthur. On one occasion more than 20 years ago when he flew into Islay Airport, I was asked by my father-in-law to drive him from the apron to the quayside at Port Askaig, where he was due to embark in the Royal Barge and join the other members of the Royal Family. I think it was the last voyage of “Britannia” around the Western Isles.

The journey was some 16 miles along the route agreed in advance between Strathclyde Police and the Royal Household. Across the peatlands to the north of the airport, we observed cutting in progress and Prince Philip revealed his knowledge of the detail of the process and science of distilling whisky, asking many penetrating questions about the differences between the various iconic Islay whiskies.

As we moved into higher ground, he asked me many questions about the deer population, including the average weight of an Islay stag, as they are bigger and heavier than their mainland cousins. Filled with shame that I did not have the facts at my fingertips, I asked him if he wanted to see some large stags, pointing out that we would have to change the approved route I had been instructed to drive him along. He said that he would like me to do that, so I slowed down and performed a U-turn to proceed by the high road. I can still see the faces of the shocked police officers in the following car, who did not expect any unauthorised deviation from the approved route. His Royal Highness certainly possessed a rebellious streak and enjoyed both our decision to change the route and the opportunity to observe some very fine stags during the rest of our slightly extended journey to the quayside at Port Askaig.

As the noble Baroness, Lady Grey-Thompson, and other noble Lords have observed, the Duke of Edinburgh’s Award scheme is an important one of his many creations, for which he will rightly be very long remembered. Indeed, I know from the experience of my own children what an important contribution it made to their broader education. I believe that what it has taught nearly 7 million young people in this country has hugely contributed to the strength of our voluntary sector. Also, if I may say so, it has helped to prepare the British people to make the most of the opportunities offered by global Britain as we embark on this new chapter in our nation’s life. The Duke of Edinburgh’s Award scheme continues to grow across the world, even 65 years after its foundation, and is already present or represented in more than 140 countries.

As many noble Lords have noted, it is only now he has gone that so many people realise how vast is the void that Prince Philip leaves in our national life. But, of course, by far the largest void he leaves is that in the life of Her Majesty the Queen. I am honoured to have the opportunity to speak in this debate and, together with so many other noble Lords, to offer my most sincere condolences to Her Majesty and all members of the Royal Family.

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.

Financial Services Bill

Viscount Trenchard Excerpts

Committee stage
Wednesday 10th March 2021 Grand Committee

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

My Lords, for the purposes of today’s debates I again remind Grand Committee of my financial services interests as in the register.

I have signed Amendments 103 and 104 and agree with the noble Baroness, Lady Neville-Rolfe, so I will not repeat what has already been said. It is a subject that the noble Baroness pursues with diligence, and it is right to do so, even if at times—at least as far as I am concerned—the scope and content of impact assessments are a little disappointing. The amendment relates to the final impact assessments as rules are coming into effect, although, of course, to be useful, impact assessments are needed at each stage. Indeed, if proportionality is to be properly taken into account, that is surely a prerequisite for the regulator.

But returning again to the FiSMA theme, where much of the proportionality, flexibility—call it what you will—will be done on an institution-by-institution basis, so the rules will enable that but not demonstrate how it is to be carried out, I am not sure how that will be properly assessed in an impact assessment based only on the rules. Therefore, it will also be important to be able to capture what actually happens after the rules have come into operation. That might be by way of a retrospective impact assessment after a period of time, and would seem to be another matter that Parliament will need to investigate.

Included in that, it should be relevant to capture the effects of frequency of rule change, which is presently greatly emphasised by regulators and the Government as part of the reasoning behind the Bill, yet somehow I doubt that rule churning was what industry felt it was signing up for by supporting FiSMA. It will be important to understand the scale and nature of that rule tweaking. Amendment 104 gets in part to that with the Government producing a report, but perhaps it should be part of the annual report or an annual impact assessment from the regulators, so that it can be further queried and those regulated can be interviewed by the relevant parliamentary committee. So perhaps the Minister can confirm how this frequency of tweaking will be tracked, what is the Government’s planned part in it and would they support Amendment 104 in particular as part of the way to do that?

[Viscount Trenchard (Con)]

My Lords, I declare again my interests as stated in the register in respect of financial services companies. I am delighted to support Amendments 103 and 104 in the name of my noble friend Lady Neville-Rolfe. My noble friend is a champion of impact assessments and she speaks from experience. The impact of many financial services regulations on smaller firms has been very damaging. I mention just two examples. The unbundling provisions contained within the MiFID II directive, requiring asset management companies to pay separately for research, have been disastrous in their effect on smaller companies with interesting strategies, which have either been forced out of business or forced into mergers where their innovative strategies have not been taken forward. The effects have been less choice for customers and less coverage as a result of the significant reduction in the number of securities analysts, particularly those covering smaller and growth companies.

The effects were predictable, but ESMA ploughed ahead and the FCA acquiesced. It is small comfort now that ESMA itself realises that the unbundling provisions were a mistake, and may move to make changes, but much damage has been done. An impact assessment, such as recommended by my noble friend, would have avoided this.

I also mention the alternative investment fund managers directive. When I worked in Brussels as director-general of the European Fund and Asset Management Association —EFAMA—my French and German colleagues said that they did not think that the EU should move to regulate alternative funds; that was London’s market, and largely London’s alone. Furthermore, it was of interest only to professional investors, who did not need protection from investment risks. They thought that it would be wrong for the EU to try to regulate it. However, three years later, Michel Barnier, as Commissioner for the Internal Market, moved to introduce the AIFMD. Again we were overruled and reluctantly went along with it. An impact assessment might have encouraged the FSA to fight harder against it than it did.

For the reasons so well explained by my noble friend, I support her amendments and look forward to hearing the Minister’s reply.

[Lord Stevenson of Balmacara (Lab) [V]]

My Lords, I am pleased to be part of this debate, which is narrow in some senses but has the capacity to reach quite widely. It is narrow in the sense that it has been framed through Amendments 103 and 104, which I broadly support, about the need to try and get more of an impact assessment model into the way in which we review the changes that may come through as a result of the return to the UK of powers previously exercised at EU level. It also raises much wider issues, which I will come to before I end my short contribution to this debate.

I am sure that the case made by the noble Baroness, Lady Neville-Rolfe, is about good government. Better regulation was always part of the argument she used when she was a Minister. I well remember the discussions we had across the Dispatch Box about intellectual property, in both primary and subsequently secondary legislation. The material on this was much enhanced by the good work done by her civil servants in bringing forward some of the issues raised and trying to give them a quantitative—not just qualitative—feel when the debates were organised. A lot of the work that they do on better regulation does not get properly recognised, and this is a good opportunity to pay tribute to it. As an example, I particularly enjoyed the annual work that I was often asked to do in relation to the setting of the national minimum wage, now the national living wage. It was always accompanied by a formidable document, created mainly I think by the Low Pay Commission but endorsed by civil servants. It went into every conceivable aspect of the way in which the setting of a minimum threshold for wages would, or could, affect the labour market, with particular reference to women and other low-paid groups in society. It was always a red-letter day in my diary when I saw that coming up; I knew that I was going to be given a very meaty topic to research, read up on and debate. I enjoyed the debates that we had on that.

While I say yes to the thrust of what is being said here, and recognise the benefits that will come from good impact assessments, properly debated, particularly in relation to the regulatory framework in the Bill, I wonder whether there is a slight irony here. The substance of what the noble Baroness is saying in her amendment is that better scrutiny of proposals brought forward for legislation—and, of course, for secondary legislation —would happen if there were better impact assessments. I say in passing, and in reverse order, that a secondary instrument is very much a creature of the primary legislation that has preceded it. It is not uncommon to find in SI impact assessments binary choices, usually not very helpful in detailed essence. The proposition set up in the impact assessment is often, “What would happen if this legislation did not go through?” and then “What will happen when it does go through?” In other words, if there is a change in regulations, you impact; no change and you impact the change. You do not get a range of options.

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[Lord Sikka (Lab) [V]]

My Lords, I wanted to provide some examples of the kind of questions which the supervisory board might raise. For example, it could ask the FCA/PRA executive board to explain the delay in securing compensation for the victims of the HBOS and RBS frauds—that could be one question; I shall give a few more examples. It could ask why no one at the board level of HBOS and RBS has so far been prosecuted or why HSBC took 20 hours to respond to calls on its fraud helpline—which is of concern to many people. It could ask whether it was appropriate for the FCA to commission Section 166 reports from organisations involved in antisocial practices, or what progress the FCA had made in dealing with the issues relating to banks forging customers’ signatures. It could ask what policies were being developed to deal with global warming—which, again, is of interest to many people. It could ask what the regulators were doing to protect people from predatory lending practices—payday lending problems have not gone away, as we all know—or to protect businesses, especially small businesses, from excessive charges by credit card companies. It could ask what the PRA was doing to address the shortcomings of the Basel III recommendations. Lastly, as we all know that a remit of the FCA is to promote competition in respect of financial services, the supervisory board could ask how the FCA would do that given that many towns now lack bank branches.

These kinds of probing questions do not interfere with the day-to-day running, but they provide oversight and they push back against regulatory silence and capture. A supervisory board will erode the space for regulators to sweep things under their dusty carpets. It can transform our country and ensure that regulators work to protect the people and address their concerns.

Ministers often say that regulators are there to serve the people, so what objections can there be to empowering people to sit on the supervisory boards and democratise the regulatory structures and our society? Empowering people has a much lower cost than that associated with scandals and financial crisis.

I beg to move the amendment.

[Viscount Trenchard (Con)]

My Lords, I understand that Amendment 120 in the name of the noble Lord, Lord Sikka, seeks to establish a supervisory board for the two regulators. My first thought was that the noble Lord intended that this board should function in the same way as a joint co-ordination committee, as proposed in Amendment 86 in the name of my noble friend Lord Blackwell, which we debated on Monday. The explanatory statement, however, does not suggest that the board would co-ordinate the activities of the two regulators; rather, it would simply monitor the executive boards of the regulators and provide a diversity of views on their conduct.

From his opening remarks, I understand that the noble Lord’s intention is very different. While there have inevitably been some mistakes, I do not recognise the picture that he paints. The regulators have always been willing to learn from what has not gone as well as it might have. As long as the PRA and FCA remain separate organisations with different functions and objectives, it seems to me that this supervisory board would, in effect, have two separate personae or incarnations. It would have to function separately as a supervisory board of the FCA and as one of the PRA. I think it cannot be a part of the legal structure of either regulator or of both regulators. It would seem to duplicate the arrangements for parliamentary oversight which we have discussed and on which I would ask my noble friend the Minister to tell the Committee how his thinking is developing.

The amendment refers to the executive board of the PRA, although the noble Lord, Lord Sikka, should be aware that the board of the PRA was replaced by the Prudential Regulation Committee of the Bank of England in 2017. I do not think that such a supervisory board would replace the need for parliamentary scrutiny of the regulators, which will in itself provide appropriate transparency and accountability, rather than the completely crushing, destructive oversight that I believe the noble Lord’s new board would cause. It would be a cumbersome, expensive and bureaucratic body that would have a negative effect on the future attractiveness and competitiveness of the City of London as a global financial centre, so I cannot support his amendment.

Financial Services Bill

Viscount Trenchard Excerpts

Committee stage
Monday 8th March 2021 Grand Committee

[Viscount Trenchard (Con) [V]]

My Lords, these amendments, which are technical in nature, require banks that prepare their accounts in accordance with international accounting standards to apply prudential filters discounting capital to the banks’ statutory accounts. Having read the amendment, I am not clear which is the tail and which is the dog. Amendment 74 in the name of the noble Baroness, Lady Bowles of Berkhamsted, requires a bank to align its accounts with its regulatory capital or prudential capital, and at the same time requires the bank to align its regulatory capital with its accounting capital, for three separate purposes.

I agree with my noble friend Lady Noakes’s forensic criticism of the amendment. I am not a chartered accountant, but I have worked in corporate finance and mergers and acquisitions for many years, and I find the amendment confusing. Does

“then the accounting numbers must have an adjustment to the … profit and loss account”

mean that the bank concerned must alter its accounting principles and adjust its accounts to use the prescriptive and conservative accounting principles used by the PRA for the monitoring of banks? If so, would a bank be required to restate past years’ published accounts for consistency’s sake? Proposed new paragraph (a) suggests that the PRA’s measurement of capital must be carried through to the bank’s accounts, but proposed new paragraphs (b) to (d) suggest that the bank’s regulatory accounts should be adjusted to conform with the PRA’s measurements. I am not clear how that can be done and what the PRA would have to say about it.

The amendment refers to international accounting standards, which were standards issued by the International Accounting Standards Board, based in London. EU legislation has continued to use the term “international accounting standards”, but they were replaced in 2001 by international financial reporting standards—IFRS. The noble Baroness confirmed that she meant IFRS rather than IAS in her amendment, but how does she intend that her amendment should affect banks that apply other accounting standards, such as American banks, which still prepare their accounts according to GAAP? Concepts in the amendment such as accounting numbers and regulatory capital need proper definition.

I have rather more sympathy with Amendment 77. The International Accounting Standards Board develops and issues IFRS for use internationally. In the EU, things are then at the discretion of the European Financial Reporting Advisory Group—EFRAG—which advises the European Commission on whether and how the IFRS should be adopted for businesses in the EU. EFRAG will consult the relevant national bodies as part of that process; for example, if a new or revised IFRS is issued by the IASB that impacts the banking industry, EFRAG will consult the European Central Bank on the impact of that standard before making a decision on its adoption.

Now that the UK is able to establish an independent endorsement process, it seems sensible that that process should similarly involve the Bank of England in matters relating to IFRS that may impact the institutions over which the PRA has regulatory authority. I am not sure whether the amendment as drafted is satisfactory, but I would support the introduction here of an endorsement role for the Bank. I look forward to hearing my noble friend the Minister’s views on that.

[Baroness Kramer (LD)]

My Lords, in this area I cannot pretend to have the scope of knowledge or the expertise of my noble friend Lady Bowles or the noble Lord, Lord Sikka, but I have a great deal of sympathy with their amendments which comes from long frustration with trying to deal with banking standards. I probably had some small part to play in the focus that the Parliamentary Commission on Banking Standards applied to looking at IFRS and other banking frameworks. I would defy almost anybody looking at the published accounts of Northern Rock, HBOS or RBS to have identified how fragile those institutions were and how easily they would crack the moment any pressure was applied to the very fragile arrangements they had in place. It is no wonder that it was missed by the regulators if they were looking at the disclosures that came from those institutions. They were not falsified; it is just that working your way through the disclosures very often discloses very little.

I spent a good part of my banking career trying to extract real and consistent information from accounting statements. That was largely in the States, so we were using GAAP, which I think many people will acknowledge tells one a lot more than IRFS ever does, but a bank has the resource to do that kind of deconstruction for a potential or existing credit client. Investment firms have the resources to do that kind of deconstruction, and so do regulators, but for any normal investor, and certainly for any smaller creditor such as a trade creditor, it is impossible to have those resources, as it is for any normal politician, even if in the end we carry the buck, in a sense, for whether or not we have a system that works. Over many years, the only clients who ever handed me a straightforward deconstructed set of accounts were Warren Buffett and Charlie Munger, who headed up the GEICO insurance subsidiary. They did it simply because they felt that bankers should know what was going on. That is a good enough recommendation for any company or regulator.

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As the noble Baroness, Lady Bowles of Berkhamsted, pointed out, under the current rules, short selling is a remarkably transparent activity—rather more transparent than the opposite, in fact. From 1 February this year, the notification threshold for reporting short positions was reduced to 0.1% of the issued share capital of an issuer, down from 0.2%. Under reporting requirements such as these, this can never be a shadowy practice; short figures are made available to all market participants in as close to real time as possible. If the Government are minded to accept these amendments, will they encourage a review of the current short selling rules with a view to making them less onerous, in acknowledgement of short selling’s proven utility?

[Viscount Trenchard (Con) [V]]

My Lords, Amendment 78, in the names of my noble friends Lady McIntosh of Pickering and Lord Holmes of Richmond, seeks to commission a review of legislation relating to short selling. It is a pleasure to follow my noble friends Lady Noakes and Lord Sharpe of Epsom; I must say, I agree with everything they said.

From time to time in the UK and in other countries, financial regulators have sought to restrict short selling, as the British Government did to stabilise the market after the bursting of the South Sea bubble in 1720. While short selling has been blamed for market crashes and is considered unethical by some as it is a bet against positive growth, many economists and financial practitioners now recognise short selling as a key component of a well-functioning and efficient market, providing liquidity to buyers and promoting a greater degree of price discovery.

I note that, under the statutory instrument transposing the European regulation into UK law, the minimum threshold for the notification of short positions has been set permanently at 0.1% of the issued share capital of a listed company, whereas in the EU, the threshold will revert to the less onerous 0.2% of issued share capital on 19 March. I consider both thresholds unnecessarily restrictive and wonder why the Government have adopted a rule that will be even more cumbersome and bureaucratic than the EU’s, when the Prime Minister and the Governor of the Bank of England have said that we will get rid of red tape. The EU will relax its red tape on short selling reporting on 19 March but we will not. That is disappointing, is it not? What does my noble friend the Minister have to say about that?

In any case, the competitiveness of the market would be best served by removing the current restrictions on short selling. However, I do not think it would be helpful to place in the Bill this kind of requirement, which will add to uncertainty over the freedom to sell short in future and send the wrong message about the kind of regulatory framework the Government intend to adopt.

[Baroness Kramer (LD)]

My Lords, once again, I am moving outside of any area where I can claim expertise. Essentially, I have no problem with short selling in the right place and time and under the right regulations, but I am concerned that, in the current environment, any move to look at the regulations again would listen more closely to the noble Lord, Lord Sharpe, the noble Viscount, Lord Trenchard, and the noble Baroness, Lady Noakes—in other words, look for opportunities to reduce the restrictions on short selling.

We have had a number of exchanges on short selling in the Chamber. The noble Lord, Lord Leigh of Hurley, is particularly vocal, and I do not think that I represent him unfairly by saying that he believes that the restrictions on short selling that were set in place in 2012, which severely limited naked short selling on AIM, are too onerous and that relaxation would be a good thing. He would argue for bringing more liquidity into AIM. I remember that campaign, which was strong and led by companies that were either listed on AIM or wished to be so but that were concerned about becoming the target of speculators who were not interested in supporting sustainable growth but were very interested in bubbles. Of course, this is a risk that goes alongside naked short selling in particular.

I suspect that this issue will be reviewed; I am sure my noble friend Lady Bowles is right that it should be done in a much wider context—I think the noble Lord, Lord Holmes, agreed with that. But I would not work on the assumption that this comes from a concern that rules need to be tightened and safeguards increased; this will very quickly become a process of trying to see whether we can return to the old animal spirits and largely casino-like speculation that once fired London so powerfully and which many of us think largely contributed to the financial crash in 2007-8. While I understand the concerns of the City of London that it needs to make itself more of an exception in order to gather increasing amounts of business, I am rather disturbed if that mode of exception is to allow a great deal more risk to be taken in ways that then impact on the real economy.

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[Baroness Neville-Rolfe (Con)]

My Lords, it is always a great pleasure to follow my noble friend Lady McIntosh of Pickering, who is sitting today in front of a superb backdrop of the Houses of Parliament—in my opinion, one of the best views in Europe. I await my noble friend the Deputy Leader’s comments with great interest.

I have great respect for my noble friend Lord Blackwell and for all he has achieved. However, I have some doubts about this proposal, not least the amendment’s apparent focus on bigger operators. For me, the second-class treatment of small operators in the financial services sector as a result of regulation by two regulators is the bigger issue. It is there that the pressure on investment funds and on capital, the prioritisation of IT resources and the lack of management capacity—described so well by my noble friend Lord Blackwell—is at its most apparent. Smaller firms also suffer from the overlap and overload mentioned by my very experienced and expert noble friend Lady Noakes. I should say that I speak as a non-executive director of Secure Trust Bank, which is a smaller bank.

I was pleased to see the Chancellor focus on smaller businesses in last week’s Budget—for the first time, I felt—although I am not sure how much that will help in the financial services context.

In conclusion, is this amendment necessary, or can we tackle the issues rightly raised by my noble friend in another way?

[Viscount Trenchard (Con) [V]]

My Lords, my noble friend Lord Blackwell’s amendment is an interesting idea and deserves serious consideration. It requires the establishment of a new joint co-ordination committee, comprising delegates of both regulators under the chairmanship of the Governor of the Bank of England. As long as we retain a “twin peaks” regulatory structure, it is clearly right that both regulators carry out their duties in a co-ordinated manner, ensuring that their activities are consistent and proportionate in meeting their respective general duties and objectives.

At the time of the introduction of the “twin peaks” system, we were told that it was necessary because there was a conflict between the interests of the consumer and those of the Government in maintaining financial stability. However, the FCA is responsible for both consumer protection and the prudential regulation of all regulated companies except very large ones that are considered systemically important. Might not the best way to be sure that the regulators’ actions are consistent and proportionate be to merge them into a single regulator—the FSA—but leave the Bank responsible for macroprudential regulation?

As I failed to add my name to the speakers’ list for the group of amendments beginning with Amendment 2, debated on 22 February, I was able to speak only briefly after the Minister. My noble friend’s amendment deals with much the same ground, which gives me an opportunity, with the Committee’s leave, to make some of the points that I had wanted to make on the first day.

My noble friend’s amendment seeks to ensure consistent priorities between the two regulators. This is hard to do if the objectives confer conflicting priorities on the two regulators. Indeed, it can be argued that being dual regulated at all is time-consuming, expensive and unattractive. However, I strongly believe that we must move quickly to maximise the attractiveness of London’s markets in order to be assured that the City, including our wider financial services industry, will remain one of the two truly leading global financial centres, with all that that means for our prosperity as a nation.

In 1999, I was privileged to serve on the Joint Committee on Financial Services and Markets under the chairmanship of the noble Lord, Lord Burns, during my first incarnation in your Lordships’ House. At that time, we considered arguments that the FSA should be given a competition objective as a fifth objective. This was supported by the BBA and the ABI, but the Government argued, and the committee ultimately decided, to put competition and competitiveness among the principles rather than the statutory objectives. Two arguments that led us so to decide were that ensuring competition was the primary task of the OFT, not the FSA, and that making competitiveness of UK financial services an objective could damage the FSA’s relations with overseas regulators. Our report at that time noted that some members of the committee would have preferred competition and competitiveness to feature among the FSA’s statutory objectives.

Much water has flowed under the bridge since 1999. Following the financial crisis of 2008, the FSA was split into two regulators, and we adopted the “twin peaks” model that had first been introduced by Australia. On 22 February, my noble friend Lord Howe said that discussions about the balance of the regulator’s objectives

“are not arguments for today. The Government’s future regulatory framework review is considering how the UK’s financial services regulatory framework must adapt to reflect our future outside of the EU. That has to be the right place to consider issues such as the regulators’ objectives”.—[Official Report, 22/2/21; col. GC 142.]

The Minister’s response was disappointing. Does he not agree that our departure from the EU and freedom to adopt an entirely different, principles-based, outcomes-oriented regulatory model suggests that the Government should look seriously at this question as soon as possible?

Some encouraging proposals are included in the phase 2 framework consultation, such as the introduction of “activity-specific regulatory principles”, described in section 2.38. However, it seems that the Government do not plan wholesale changes. They conclude in section 2.46 that these regulatory principles could bring about

“enhanced regulator focus on … competitiveness, without needing to change the regulators’ overarching objectives”.

Such an approach is dangerously complacent. Can the Minister confirm that the Government agree with Andrew Bailey that it would be unrealistic and dangerous to stick to EU banking rules in the future? Surely, in financial services, where we enjoy the advantages of scale and can influence the emergence of global consensus around principles-based regulations that support innovation, we should move quickly to establish the right regulatory framework to do that.

Co-ordination between our two regulators has served us fairly well to date, but it is likely that the regulators will continue to face difficulties inherent in a multi-agency regulatory structure where the performance of one regulator is often dependent on that of the other. There is also a challenge in establishing the borders of financial regulation for allocating functions between the FCA and the PRA. In particular, the increased focus on systemic stability and macroprudential regulations has resulted in overlap between the two regulators. The FCA has responsibility for the prudential regulation of more than 24,000 firms in the UK, whereas the PRA is responsible only for the prudential regulation of some 1,500 systemically important banks and investment firms. Further, the “twin peaks” system is inherently anti-competitive for dual-regulated banks and investment companies, which have to report a large amount of monthly data in two different formats to two different regulators.

The PRA’s secondary competition objective is, by definition, subordinate to its other two objectives. In effect, it is simply a principle to which the PRA should have regard. Many countries have financial regulators that incorporate some kind of competition objective among their statutory objectives, and I do not think that there is any evidence that this has damaged their relationships with either the PRA or the FCA.

Furthermore, in his recent report on competition and markets, John Penrose found that

“our independent competition and consumer regulation regime currently has a good reputation, but not a great one. International rankings put our major competition institutions behind USA, France, Germany, EU and Australia. We have stopped making progress on cutting the costs of red tape and, in recent years, have gone backwards”.

This is largely as a result of a constantly increasing number of sectors, including many in financial services, being caught by the tentacles of the very cumbersome, expensive and complicated system of regulation that has been increasingly pushed by the Commission in the interests of harmonisation.

We have prospered and succeeded as a global financial centre not because of our EU regulatory framework but in spite of it. We may have devised much of the financial regulation ourselves and may even have gold-plated some of it, but we did not choose to work within the codified structures on which European law is based. Besides, our regulators are not that different from anyone else’s: they like to make rules, and gold-plating has been the only way that they could do that in recent years.

As Barnabas Reynolds explains well in his recent paper, published by Politeia and entitled Restoring UK Law: Freeing the UK’s Global Financial Market, common law is

“pivotal to the success of a global financial centre … A key element of London's attractiveness to investors is its legal framework, which underpins a flourishing commercial environment with the rule of law”.

I worry that the Government do not yet recognise that we have to replace the entire directives-based, cumbersome, EU-derived financial services rulebook and go back to something more like how we used to regulate: based on common law principles and outcomes. There is huge resistance to change among trade associations and larger financial services groups because the present system helps the strong incumbent against the innovator and the challenger—and is, in fact, a form of protectionism.

I look forward to hearing what my noble friend the Minister intends to do to move in the direction in which we need to go. I believe that my noble friend’s amendment may provide a first step on that journey.

[Baroness Kramer (LD)]

My Lords, I will respond to the noble Viscount, Lord Trenchard. I for one would be very reluctant to go back to the pre-2008 principles-based approach to regulation that led us into a long, slow crash that, frankly, seriously undermined the financial stability of the UK and caused years of austerity. I do not think that is a good example to hold up of the world that we want to return to.

When the FCA and PRA were created—at that point the latter had a degree of independence from the Bank of England, although I think the Governor was always going to be its chair—one of the reasons that it was important to keep some distinct separation was to prevent the groupthink that had been fundamental to the failures that led to 2007-08. Those were failures to identify systemic risk, to ask questions, to create challenge and to recognise that conduct and prudential regulation are equally important in keeping a system as complex and difficult to regulate as the financial services industry on some kind of transparent and rational platform.

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[Viscount Trenchard (Con) [V]]

My Lords, all three amendments in this group would increase the importance of equivalence determinations, which might ultimately be counterproductive.

Amendment 90 seeks to prevent the Treasury making equivalence decisions for reciprocal reasons alone. I cannot see a shred of evidence that the Treasury might do that. When my right honourable friend the Chief Secretary to the Treasury and Katharine Braddick, director-general for financial services, gave evidence to the EU Services Sub-Committee, they made it very clear that, although they would have preferred a comprehensive set of equivalence determinations, the EU declined to grant any, besides two time-limited determinations for the central counterparties, such as LCH, which clear derivatives transactions. It is good news that the Government decided to make their equivalence determinations unilaterally, based on economics and efficiency of markets, and have no intention of making equivalence determinations for political or reciprocal reasons. I suggest that the noble Baroness’s amendment is unnecessary.

Amendment 100 in the names of the noble Lords, Lord Tunnicliffe and Lord Eatwell, is clearly fighting yesterday’s battle. It presumes that the memorandum of understanding now under negotiation with the EU on future regulatory co-operation is likely to lead to the granting by the EU of a number of positive equivalence determinations. This would indeed provide much-needed clarity in the short term but would also make divergence more difficult. Furthermore, the EU has been unwilling to make equivalence determinations on the basis of equivalence of outcomes. Rather, it has made it clear that it expects the UK to copy its rules exactly, line by line, as the price for equivalence determinations.

The Governor of the Bank of England, Andrew Bailey, has said we will not become a “rule-taker” from the EU. He said that, just as we will not diverge for divergence’s sake, we will not align for alignment’s sake. It is unrealistic to think the EU will grant any significant equivalence assessments to the UK in areas where it thinks we may diverge from its cumbersome and expensive regulations. The majority of the financial services industry, rather than looking for equivalence determinations, which can be withdrawn unilaterally on 30 days’ notice, is now looking to the Government to adopt a new and different pro-innovation, pro-competition, common law-based regulatory regime. That is the way to retain and further enhance the position of our financial services industry and our leadership role in developing proportionate, sound regulation at the global level.

Furthermore, the explanatory notes prepared by the noble Lord are puzzling. The decision of the EU not to grant equivalence determinations to the UK has no effect on UK retail investors, because we have granted equivalence to EU firms in many areas to continue to offer their services and products in the UK. I can see that it may well disadvantage EU retail investors, who will be denied access to products and services produced by UK financial services firms, so I do not think this amendment is helpful under any circumstances.

Amendment 105 in the name of my noble friend Lord Hodgson of Astley Abbotts would require a report on the progress towards agreeing the MoU with the EU on regulatory co-operation. This report will be due within two months of the passage of this Bill. However, the TCA requires this MoU to be entered into by the end of March. It seems unlikely that this Bill will even be enacted by then.

Can the Minister tell the Committee when he expects the MoU to be agreed, when a draft will be available and the Government’s expectations as to its content? I usually find common cause with my noble friend but, in relation to his amendment, I believe the retention of freedom to diverge from EU regulations in order to adopt a better regulatory regime in a particular area, ensuring or enhancing the city’s continuing leading role in that area, is more important than slavish alignment to EU rules to beg or ask for the grant of equivalence determinations which could be unilaterally withdrawn at any time. I therefore doubt whether his amendment is necessary but I am interested to hear what the Minister has to say about it.

[Baroness Noakes (Con)]

My Lords, it is a pleasure to follow my noble friend Lord Trenchard who, as usual, speaks good sense on this matter. While these are clearly probing amendments designed to get the Government to say how they see the future of various aspects of financial services, it seems to me that, as regards equivalence with the EU, they are rooted in the language of the past. It has been clear for a long time that the EU sees equivalence either as a route to dictate how the UK’s financial services sector is regulated or as a weapon to be used against the UK as a competitor. The Governor of the Bank of England has spoken strongly against the EU’s apparent positioning on equivalence. He said that either it was trying to say that our rules should never change, which he described as dangerous, or that our rules should change whenever the EU changed its rules, which was “not acceptable”.

There is no doubt that the EU sees the UK as a threat to its way of doing things. It no longer has a leading financial centre within the EU and will struggle to create one, especially if its only weapon is protectionism. We have long been one of the leading financial markets in the world and I hope that we get our number one slot back now that we are unshackled from the EU. That may well take us into new areas of financial services; it should certainly lead to the dismantling of some elements of the EU’s rules that we never liked. The alternative investment funds directive is one clear example; Solvency II and MiFID are others. They never reflected what we regarded as important, and introduced rules which we regarded as unnecessary and cumbersome.

It would have been very easy for the EU to have granted us equivalence at the end of the transition period; we were completely aligned. However, there is a misguided belief in the EU that they can create a rival to the UK and that the best way of doing that is to make it difficult for UK firms to operate in the EU. My own view is that we should abandon any interest in equivalence. Even if we were to get a favourable decision, the EU has retained the right to remove any such decision at short notice. We know that decisions on granting or removing equivalence will not be made on technical merit. They will be political decisions designed to advance the EU’s financial services industry at the expense of the UK. I do not believe that a UK-based financial services operator could ever build a viable business model on the shifting sands of equivalence as determined by a body—the EU—which does not wish us well.

In addition, I do not think that it matters very much. We may find that some areas of our financial services as currently operated will become less profitable—for example, if the EU cuts off its nose to spite its face and denies Euro-denominated derivatives the advantages of London’s liquidity via UK clearing exchanges. Many UK banks and other financial institutions have already set up EU-based subsidiaries to carry out the business that was previously carried out under passporting. That is now water under the bridge—those subsidiary structures will carry on while the business is profitable and cease if it is not.

For these reasons, I believe that the amendments in this group are looking in the rear-view mirror. Of much greater importance is what plans the Government have to support and promote the future—

Financial Services Bill

Viscount Trenchard Excerpts

Committee stage
Monday 1st March 2021 Grand Committee

It is especially important for the FCA, where it looks like so much has returned to invisible case-by-case decisions by supervisory teams, and which is so very exposed to system failure and capture. But the PRA should be included too in what will, I suspect, become the new best international practice in financial regulator oversight. After all, Australia got to twin peaks regulators first in 1998, so let us not be a decade behind it this time. I beg to move.

[Viscount Trenchard (Con) [V]]

My Lords, the noble Baroness, Lady Bowles of Berkhamsted, makes a good case for introducing skilled person reviews of the regulators in addition to the parliamentary oversight arrangements that I hope will be agreed satisfactorily. This transfers the boot to the other foot; the difficulty would be in deciding who could be skilled enough to assess the regulators. Would the costs ultimately be borne by the regulated firms?

In the first three years after the introduction of skilled person reviews by the regulators in 2014, fees paid for skilled person reviews, generally confined to a number of issues on parts of a firm’s business, or only one, amounted to more than £500 million. The cost of a review may amount to several hundred thousand pounds. The real cost in terms of diverted management time, legal costs and remediation activities is often much greater than the simple cost.

It is interesting that only some 8% of skilled person reviews have led to enforcement actions, even though many reviews at the time of launch were feared by firms as likely precursors to enforcement. The number of skilled person reviews commissioned by the PRA and FCA increased from 44 in 2017-18 to 51—or nearly one a week—in 2018-19. I worry that regular reviews of the regulators would be very expensive, in terms of money and time. As my noble friend Lady Neville-Rolfe often suggests, is this not a clear example of a case where an impact assessment should be undertaken before introducing a statutory requirement? I look forward to the views of other noble Lords and the Minister on this matter.

[Lord Desai (Non-Afl)]

My Lords, I very much welcome the amendment. I have been a Member of your Lordships’ House for 30 years. Throughout that time we have had one crisis after another in the financial markets. I have the impression that most of the time they have been due to ignorance by top people of how the market is changing and of the new products and challenges. When I first got here in 1991 we had the Baring Brothers crisis. There was no doubt that the people sitting in London had no idea what a derivatives market was, and nor did the Bank of England. Nobody knew that Nick Leeson was operating on the Yokohama stock exchange. Public information was available, but nobody in London knew where it was. Therefore, they completely missed it. We also had the BCCI crisis, but that was a pure, untechnical fraud. That is another matter.

Most importantly, I remember debating the legislation that set up the FSA. At that time we thought the problem was that self-regulation had failed in various sectors, and that these sectors were interdependent, so we had to have an overarching framework. We set it all up, but it did not help when the crisis occurred in 2008. I remember reading the report by Adair Turner—now the noble Lord, Lord Turner. He said that they had been told by the experts not to disturb the markets and to trust them. We were very impressed by that and trusted the markets, but they were wrong.

Obviously, the interesting point is that by then the market had so many new products, with fairly sophisticated probability models behind them, that it would have been necessary for the regulators to be constantly aware of new developments in this field to be one step ahead of where the market was. I will give a slightly technical example. Adair Turner said that they were told that the markets were efficient, and therefore we should try not to correct what the markets were doing. We now know that the people who believed the market efficiency hypothesis and all that—and who convinced the world—were using very simple normal or bell-shaped distribution to model movements in the stock market. While normal distribution is very easy and frequently used, it is not suitable for every occasion in the market. What we call fat-tailed distribution would have been better and predicted the crisis much sooner. But this is a technical matter.

The regulator might not know what is happening out there in the financial, economics field. It ought to be informed periodically where the knowledge has got to and where the products are. This is not something where the skilled person can necessarily come from the banking sector of one country or another. We might have to find a skilled person who knows how rapidly the market is changing, how new products are being developed, and how the nature of uncertainty itself is changing.

I believe that the amendment is very welcome. I will add one more thing. When I first read the Bill I was appalled that so much weight is being put on the FCA. I really feel that the FCA is not up to the task. I hope that after all this legislation, the Treasury review and so on we might get a better FCA, but I have grave doubts. If we are to have the FCA as it is right now, we urgently need a skilled person review, maybe not every five years but more frequently than that.

The noble Viscount, Lord Trenchard, referred to the cost. I can tell noble Lords that the cost of not doing this will be much more horrendous than the cost of doing it.

--- Later in debate ---

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

The next speaker is the noble Viscount, Lord Trenchard.

I believe the noble Viscount is muted. Would he be kind enough to unmute?

[Viscount Trenchard (Con) [V]]

[Inaudible]—Amendment 45 in the names of my noble friends Lady Noakes and Lord Holmes of Richmond, and of the noble Baroness, Lady Bowles of Berkhamsted. We are midway through the process of transitioning from the familiar Libor benchmarks, the replacements for which have become more necessary since banks’ funding patterns have changed following the financial crisis. My noble friend Lord Holmes already asked the Minister what he thinks about synthetic Libor. I would also be most interested to hear his reply on that.

The Investment Association welcomes the additional powers for the FCA in the Bill as it will be better able to manage the transition, which should help to mitigate the uncertainty for holders of derivative contracts. There is the additional uncertainty caused by the existence of only temporary equivalence between UK and EU benchmark regulations. It is to be hoped that the EU will soon adopt the European Council’s recommendation to extend the transitioning period for third-country benchmark administrators to the end of 2025.

My noble friend’s Amendments 44 and 45 would be helpful improvements to the Bill, by making it clear that changes to benchmarks made by the FCA will apply to contracts made under benchmarks being revised. Rightly, they offer a safe harbour protecting parties to such contracts from legal actions resulting from benchmark changes. It is encouraging, as I mentioned, that the Investment Association supports this part of the Bill and I welcome these powers being handed to the FCA. My noble friend’s amendments would improve and reduce the risks inherent in exercising these powers and I support them.

[Lord Desai (Non-Afl)]

My Lords, this is a technical matter and I have nothing to add to what was said by the noble Baroness, Lady Noakes. I am merely an academic but, when these things were going on, I wondered how people who swore by the free market could have had a cartel sitting in a little room, generating a rate of interest on which billions were based. Someday, somebody ought to explain to us how anybody could trust a cartel and hope that it will not be dishonest.