Financial Services Bill

Lord Eatwell Excerpts

Tuesday 6th November 2012 Lords Chamber

Moved by

[Lord Eatwell]

7A: Clause 4, page 12, line 33, after “Committee” insert “after consultation with the Treasury”

[Lord Eatwell]

My Lords, noble Lords will notice that this group includes Amendments 6M and 6Q. I apologise to the House for not moving those amendments at the appropriate time, but as noble Lords may recall, there was considerable confusion between the Deputy Chairman and the clerks and everyone here. The noble Lord, Lord Sassoon, was not confused. He never is. But in the confusion I inadvertently failed to move these amendments. I also apologise that at that time I failed to support the noble Baroness, Lady Noakes, when she presented her arguments for Amendment 7, which I wholeheartedly support, as indicated by the fact that I added my name to hers. With the leave of the House, I will proceed with the remaining amendments in group 19, namely Amendments 7A, 7B and 7C.

The purpose of this group of amendments is to ensure that there is regular consultation between the Treasury and the FPC over the FPC’s directions and its recommendations. Leaving aside—since the time has passed—the question of directions, even though they are more important, Amendments 7A, 7B and 7C serve to emphasise the interest that we all have in requiring that regular consultation takes place. The idea is simply that in making a recommendation the FPC would have a discussion with the Treasury about that to ensure that both sides are, if you like, singing from the same hymn sheet.

This is part of the endeavour that we have on this side of the House to ensure that the whole development of the financial stability analysis, the financial stability strategy and the financial stability actions is co-ordinated effectively between the FPC and the Bank as a whole—whether Bank means court or Bank or whatever—and the Treasury. I beg to move.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, this group of amendments seeks to require the FPC to consult with the Treasury before issuing a recommendation, directing the PRA or FCA to take action or revoking an existing direction. I am certain that not only are these amendments unnecessary, they would damage the independence of the FPC.

As I am sure noble Lords are aware, the Bill provides for a non-voting representative of the Treasury to be a member of the FPC. This Treasury representative will be able to ensure that the views of the Treasury are available to the committee if required. This renders these amendments unnecessary.

Let me explain why, more seriously, I feel that the amendments could be harmful to the work of the FPC. The Government have drafted the Bill so that the FPC will be housed within the independent Bank of England. It is paramount that macroprudential policy decisions are insulated from political considerations. The purpose of the FPC is to “take the punchbowl away” when the party is getting too raucous, something that politicians of any affiliation may be reluctant to do.

By insulating the decisions of the FPC from political considerations, it will be much easier for the committee to be a credible and effective policy-making body. The amendments would risk that credibility by requiring the FPC to consult the Treasury before it makes any policy decision. For that combination of reasons, I ask the noble Lord to withdraw his amendment.

[Lord Eatwell]

My Lords, the noble Lord has left me somewhat puzzled with his final point. First, as he is well aware, consultation does not necessarily mean acceptance of any argument or the idea that there should be any direct influence of the Treasury on the FPC. All we are trying to do is to ensure that there is effective communication. As I noted earlier, the Minister has in the past raised the fact that communication between the Bank and the Treasury has been very poor. There are other issues about the lack of communication which will be raised on Report.

The Minister says that somehow consultation between the Treasury and the FPC would endanger the credibility of the FPC and of the macroprudential strategy. Yet earlier it was argued that under the common law, as he put it, the Treasury may at any time make recommendations on the provisions of the Bank’s financial strategy. Is the Treasury involved or not? Surely recommendations and discussion are very valuable at all times, but that does not in any way limit independence. Perhaps the failure of the Bank and the Treasury to communicate, which the Minister has referred to in the past, arose from a mistaken idea that independence means non-communication. It does not; communication is important to the development of coherent policy. If he is saying that consultation would undermine independence, this is a very serious matter for an area of macroeconomic policy with which the financial stability strategy and the Financial Policy Committee, as its agent, will be intimately involved.

I find the Minister’s remarks very disturbing indeed. They suggest a fundamental misunderstanding of the way in which we can take forward constructive developments in this novel and important area of economic policy. It is a matter to which we may have to return but for the moment I beg leave to withdraw the amendment.

Amendment 7A withdrawn.

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Moved by

[Lord Eatwell]

7D: Clause 4, page 14, line 32, leave out from “9H” to end of line 33

[Lord Eatwell]

My Lords, this amendment refers to an oddity in the drafting of new Section 9T(1)(a). The Bill requires the Financial Policy Committee to review each direction that it makes over the relevant period, which is 12 months, other than,

“a direction revoked before the end of the review period”.

I do not understand this business about leaving out directions revoked before the end of the review period. Suppose the direction has been a great success but was enforced for only 11 months. Or suppose the direction was a great failure but lasted for only 11 months. Should not these directions be reviewed? Can lessons not be drawn from them just as much as from directions which are in force for 12 months? Why would you have a direction that has been revoked from which we are not allowed to draw lessons but a direction that has been kept in place from which we are? This is too limiting in a novel area of economic policy from which we should seek to get all the information and draw as many lessons as we possibly can, whether or not a direction has been revoked within the relevant period. I beg to move.

[Baroness Noakes]

My Lords, what the noble Lord, Lord Eatwell, has said is entirely sensible. I cannot see the distinction between those directions which have been made and continue in force and those which have been made and revoked. This is about public communication, the directions being made and their effect. The information that we gain from a revocation must be at least as good as from the making of a direction.

[Lord Sassoon]

My Lords, the amendment reflects a slight misunderstanding of the purpose of the reviews that we are talking about in new Section 9T of the Bank of England Act, as inserted by Clause 4. The purpose of these reviews centres around live actions and requiring the FPC regularly to look again at all live actions—in other words, at the directions and recommendations that still have effect—and to review whether or not the action is still needed. That is a rather different matter from the admittedly important question of reviewing past actions and learning lessons, which is not the subject of the clause.

The idea behind the new section is to ensure that FPC actions do not remain in place if the circumstances which originally merited them have disappeared or changed substantially. Of course, we would expect the FPC as a matter of course to keep its past actions under review and revoke them once they are no longer needed, but new Section 9T ensures that this will be the case by creating a formal requirement for the FPC to review regularly all of its live directions and recommendations.

Amendment 7D seeks to remove the wording in subsection (1)(a) which provides that the FPC need not review directions that have already been revoked. The provision is appropriate because once a direction has been revoked there is no need for the FPC to review it to determine whether it is still needed; the direction is already defunct. It is as simple as that.

The concern of the noble Lord, Lord Eatwell, lies clearly in the importance of the FPC evaluating the impact of its actions. I can reassure him that mechanisms already exist elsewhere in the clause to address this issue. First, new Section 9S requires the FPC to set out for each of its actions an explanation of its reasons for believing that the action is compatible with its objectives and associated “have regards”, including where practicable an estimate of the costs and benefits of the action. Secondly, subsection (4)(b) of new Section 9W requires the FPC to include in each financial stability report an assessment of how its actions have succeeded in achieving its objectives. Finally, the new oversight committee of the court has an explicit remit to oversee the FPC’s performance and can undertake or commission a more comprehensive review of the FPC’s past actions or approach where appropriate.

I am confident that the FPC’s actions are already subject to extensive mechanisms of oversight and evaluation and, as I said at the outset, that the amendment reflects, perhaps, a slight misunderstanding of what the purpose of the specific provisions in new Section 9T is all about. I hope that on the basis of that explanation the noble Lord will feel able to withdraw his amendment.

[Lord Eatwell]

My Lords, my immediate reaction is that if that is what the new section meant, why did it not say so? We persistently have a point where there is a lack of clarity in the Bill and, time and again, the noble Lord says, “That is what we said but it is not what we really meant”. It is truly unsatisfactory.

On the areas which he says cover the issues that I raised, proposed new Section 9S specifically refers, I think—although of course it may not mean this—to a prior explanation of specified purposes. It provides for an explanation of why the FPC is doing something, which seems to be a prior requirement, not an assessment of effect.

The Minister is on stronger ground on new Section 9W(4)(b), which refers to whether the functions of the FPC have succeeded, but it refers generally to its functions rather than to the specific issue in new Section 9T, which refers to the very sensitive and important area of directions.

There is another important point. It is quite possible that a direction would be introduced to deal with a particular set of circumstances and revoked because those circumstances have been mitigated, but then reintroduced some time later because the problem reappears. In those circumstances, all this stuff about live actions is irrelevant. We need to learn from both those actions that are contemporaneous and those that may be introduced from time to time to deal with specific circumstances. I really feel that this is a very unsatisfactory approach to the general issue of review.

I will keep talking so that the Minister can get his note and say why I have got it wrong; he has it now. The issue of keeping matters under review should include those matters that only last for a period within the relevant 12 months, as well as those that go forward. Shall I sit down? No, the Minister did not get a good reply in that note. This is an issue that I want people to think about: either the clause is badly drafted and not clear, or the amendment should be considered appropriate. However, for the moment I beg leave to withdraw the amendment.

Amendment 7D withdrawn.

Moved by

[Lord Eatwell]

7E: Clause 4, page 17, line 13, after “Bank” insert “, the Chief Executive of the FCA, the Chairman of the PRA”

[Lord Eatwell]

I assure the House that this is going to stop soon. First, I draw attention to a drafting error in the amendment as tabled. It refers to the “Chairman of the PRA”, who is of course the Governor of the Bank of England, rather than the chief executive. The objective of the amendment is to widen the group who meet to assess the importance of the Financial Stability Report, a very important document that has been one of the most interesting and creative documents published by the Bank for some years, not least because of the major intellectual influence of the executive responsible for financial stability. Since the FCA and the PRA are the vehicles through which the FPC—I apologise, everything is just three letters—exercises its influence, it is important that informed discussion and assessment between the Treasury and the Bank should include the chief executives of those two bodies and not simply be between the governor and the Chancellor.

The amendments have the added advantage that, should we have a governor who wishes to delegate responsibilities in order to reduce the excessive load placed on his or her shoulders by this Bill, this would in no way reduce the value of the Bank-Treasury meeting and the quality of the assessment of the Financial Stability Report. It seems enormously valuable to have these two individuals—the chief executives of the FCA and PRA—there, because they are the people who implement the proposals of the Financial Policy Committee and will help in the general assessment of the Financial Stability Report. I beg to move.

[Lord Sassoon]

My Lords, are we inserting “chief executive”?

[Lord Eatwell]

It was a drafting error. It should not have said “Chairman”.

[Lord Sassoon]

So it is chief executive. I am not sure whether I heard chairman or chief executive but it should have said, “Chief Executive of the PRA”.

In responding to Amendment 7E it may help if I explain the purpose of the meetings set out in new Section 9X of the 1998 Act. The success of the new regulatory structure will rely heavily on the relationship between the Treasury and the Bank of England. As has already been noted this evening, one of the major problems leading up to the financial crisis was that the tripartite committee established under the previous Government’s regime did not meet at the principals’ level for a decade. The Chancellor and the governor simply did not meet often enough to discuss financial stability. When the crisis hit—I am sorry the noble Lord, Lord Eatwell, thinks this is an amusing matter. Unfortunately, this was one of the most serious issues when it came to handling the crisis.

[Lord Eatwell]

I agree with the Minister. It is a terribly serious matter. When he adds the phrase “for a decade”, it is such desperately bad news that some degree of amusement is the only relief to the depression that one feels at the failure of this mechanism.

[Lord Sassoon]

Believe you me, I was on the standing committee of deputies for three years and I saw it at first hand. There we are—we understand the difficulty. At a personal level and in terms of institutional arrangements and practices, the absence of meetings clearly has a very significant impact when it comes to handling a crisis. However, everything is now different and as it should be. The Chancellor and the governor now meet often. Indeed, under the previous Government, once the crisis hit, of course that was also the case. But it was not always the case, as I have said, and as we understand. Without the requirement in new Section 9X, there would be no guarantee that the regular meetings would happen in the future, once the individuals concerned change and memories of the current crisis have faded.

New Section 9X therefore places a legal requirement on the Chancellor and the governor, in his capacity as chair of both the FPC and the PRA, to meet formally at least twice a year, shortly after the publication of the FPC’s twice-yearly Financial Stability Report. I agree that it is a truly creative, in the best sense of the word—which I am sure the noble Lord, Lord Eatwell, meant—and important document.

Of course, both the Chancellor and the governor may invite others to attend the meeting. For example, the Treasury’s Permanent Secretary or another senior official may attend. The Chancellor’s private secretary may also be in the room. On the Bank’s side, the governor may well choose to invite another deputy governor or the executive director responsible for financial stability to attend the meeting with him. However, I believe the approach taken in the Bill—for the legal requirement to meet to be on the Chancellor and governor only, leaving it up to each attendee to decide if others should be present—is the correct one. The governor will be best placed to decide, based on the content particularly of the Financial Stability Report and the wider financial stability context, which, if any, of his senior executives should attend the meeting.

If the chief executive of the PRA were required by statute to attend every meeting, surely there would be an argument for all the other senior Bank officials who had some responsibility for financial stability to also be added to the list. Equally, if the CEO of the FCA were required by legislation to attend every meeting, would there not be an equal argument for the external members of the FPC also to be required in the room? This could go off in all sorts of directions. A small, personal meeting between the Chancellor and governor could easily turn into a large committee if we were to take that approach.

This is an important opportunity to restate our common objective: to make sure that the principals meet. It should not be necessary to have such a meeting in legislation, but regrettably history has shown that it is. That is the purpose of the requirement, as a backstop for those meetings to happen, but it continues to be the Government’s view that the attendance of others should be left to the discretion of the principals. On the basis of that explanation I again ask the noble Lord to withdraw his amendment.

[Lord Eatwell]

Before the noble Lord sits down, perhaps we could probe the discretion of the principals a little. Supposing the governor wants to turn up alone and the Chancellor wishes the chief executive of the PRA to attend, would that be possible?

[Lord Sassoon]

That is not then a question of legislation but a question of common sense and how the parties get on with each other, and I am sure that common sense would prevail. For that sort of circumstance, no amount of legislation is going to get around people behaving sensibly. If we put a particular attendee or two into these meetings the same question arises about others who one side or the other might believe would be sensible to have at a particular meeting given the topics that might be under discussion. We have to rely on the good sense of the principals here.

[Lord Eatwell]

Yes, well, we hoped that we could rely on the good sense of the principals to run the Financial Stability Committee, but they did not meet for a decade so they were not very sensible, were they?

If I may respond to the noble Lord, I feel that his vision of the committee extending to indefinite size is really excessive. We are identifying the chairman of the Financial Policy Committee, namely the governor, and the two operational figures—the chief executive of the FCA and the chief executive of the PRA—to be in this meeting to assess the financial stability position in the light of the financial stability report. I think that would be valuable. I quite understand that others can be invited in but, as we have seen in the past, these matters are not necessarily as well handled as, in retrospect, we would like. I hope that this matter might be reconsidered in due course, but for the moment I beg leave to withdraw the amendment.

Amendment 7E withdrawn.

Moved by

[Lord Eatwell]

7F: Clause 4, page 18, line 40, at end insert—
“9ZZA Financial Stability Advisory Panel
(1) There will be a Financial Stability Advisory Panel.
(2) The membership of the Panel will be—
(a) the Deputy Governor for Financial Stability;(b) 6 members appointed by the Treasury, subject to approval by the Treasury Committee of the House of Commons; and the members appointed under paragraph (b) will be academics, members of staff of international organisations, practitioners, or others with particular skills in the analysis of systemic risk.
(3) The Financial Stability Advisory Panel will—
(a) provide written advice to the Financial Policy Committee concerning the analysis of systemic risk;(b) once a year prepare a report assessing the analysis of systemic risk by the Financial Policy Committee over the preceding 12 months (the first report to be twelve months after this section comes into force);(c) assess the effectiveness of measures prescribed under section 9K in the attainment of the financial stability objective of the Bank;(d) assess the effectiveness of directions and recommendations of the Financial Policy Committee under sections 9G and 9N in the attainment of the financial stability objective of the Bank;(e) prepare an annual report on matters referred to in section 9ZZA(3) to be presented by the Supervisory Board of the Bank, and subsequently published on the Bank website.”

[Lord Eatwell]

My Lords, Amendment 7F picks up an amendment that I moved in Committee and promised to return to on Report, concerning the establishment of a financial stability advisory panel.

I will not go through the whole argument of different forms of financial stability arrangements as between this country and the United States and so on, but I will deal with one central issue: we want people of very high quality advising and reflecting on financial stability issues. The appointed members of the Financial Policy Committee are crucial but there is going to be some difficulty in identifying them satisfactorily because there will be a number of conflicts of interest in the financial services industry that will be difficult to manage.

We can overcome that difficulty by creating an advisory panel that does not have powers, as such, to make decisions, but which can advise on a variety of areas, including the success of measures taken and general effectiveness, by presenting a report to the oversight committee—not the “Supervisory Board”, as mistakenly referred to in the amendment as printed on the Marshalled List. We could gather together a wider group of people who felt it to be their responsibility to follow carefully the actions of the Financial Policy Committee and to express their views even if they have significant conflicts of interest, because these could be taken into account in the assessment of their views. Of course, they are distanced from any actual decision-making, unlike the appointed members of the Financial Policy Committee, who are right at the heart of decision-making.

Given that we are dealing with an area of policy which, as I have said already this evening, is novel, we are going to encounter entirely new problems. We will probably make some mistakes. We want to be able to assess a very wide horizon of experience around the world, where the European Union, the United States and other major jurisdictions are introducing financial stability committees of one sort and another to deal with the issue of macroprudential regulation. An advisory committee could be a valuable supplement to the information and assessment to which the Bank and its committees have access. I beg to move.

[Baroness Noakes]

My Lords, we do not need to hardwire this into legislation. If the FPC thinks that it needs some form of advice from other parties in relation to most of the matters mentioned in subsection (3) of the amendment of the noble Lord, Lord Eatwell, it can arrange it. Similarly, if the oversight committee thinks that it needs any assistance from outside parties in relation to matters mentioned in paragraph (e) of subsection (3) of the amendment of the noble Lord, Lord Eatwell, it can arrange it. I do not see why these matters need to be enshrined in law. If there are gaps within the resources available to the Bank, it can supplement them, or it may have them sufficiently internally. The statute does not need to deal with these matters.

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[Lord Eatwell]

Before the noble Lord sits down, if the FPC wished to seek external advice, would it be suitably resourced to do so?

[Lord Sassoon]

Unequivocally, yes.

[Lord Eatwell]

In that case, I am far more content than I thought I would be, and I beg leave to withdraw the amendment.

Amendment 7F withdrawn.

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[Lord Eatwell]

My Lords, I agree that these are indeed sensible measures. I have just one question. These days many actions and investigations by regulators are taken on behalf of what are truly other regulators—that is, regulators in other jurisdictions—and that exchange of information and co-operation is a hugely important activity. When the British regulators are taking very sensitive information in an area where there is a great deal of legal activity—for example, the relationship between the FSA and the regulator in Austria is a particular case—would they have immunity in that case as well?

[Lord Sassoon]

If the situation that the noble Lord is suggesting is one in which the FSA or a successor body was taking an action at the request of the Austrian authorities, I can confirm that in that case the immunity provisions would apply to the actions of the UK regulators.

Financial Services Bill

Lord Eatwell Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Sassoon]

That the House do now resolve itself into Committee.

[Lord Eatwell]

My Lords, I rise to raise an important issue concerning the conduct of the Committee stage of the Bill. On 3 October—last Wednesday—I wrote to the noble Lord, Lord Sassoon, in these terms:

“The Wheatley study on the future of LIBOR has produced a series of conclusions with which the Labour Party is broadly in agreement. I congratulate both Martin Wheatley and his team for their achievement, and the Government for initiating this investigation.

I note from the statements of Treasury ministers, and from the Treasury website, that it is the Government’s intention to implement the Wheatley proposals by means of amendments to the Financial Services Bill. No such amendments have been tabled as of yesterday”.

That was 2 October, and indeed no amendments have been tabled as of today.

“I presume that such amendments will involve predominantly clauses that have not yet been debated (as suggested by reference to particular FSMA clauses in the Wheatley Report itself)”.

The Wheatley report refers to the first clause that we will debate today.

“However, it is possible that you will also need to introduce amendments to clauses already debated, in which case it would be entirely inappropriate to introduce such amendments at Report. Given the importance of these issues it is imperative that the House have the opportunity to debate these matters in the freedom of Committee, rather than under the constrained rules of the Report Stage.

May I therefore have your assurance that should the Government, as a consequence of the Libor scandal and of the recommendations in the Wheatley Report, plan to introduce amendments to clauses 1 to 5, or at some later stage, amendments to clauses at that time already debated, that you will re-commit the appropriate clauses, hence ensuring that the House of Lords has the scope for full debate”.

It has since become clear that the Government intend to introduce on Report all the entirely new material presaged in the Wheatley report. The noble Lord, Lord Sassoon, wrote to me on 2 October—the day before I wrote to him which was somewhat mysterious. He said:

“I do not believe that it is necessary to recommit the Bill, and see no reason why a substantive debate on the relevant clauses at Report stage would offer insufficient opportunity for scrutiny by the House.

Re-commitment would risk unnecessarily delaying the implementation of both these important reforms to LIBOR setting processes, and of the equally urgent reform of the UK’s financial regulation regime which we have been debating through the Committee sessions to date”.

The noble Lord’s reply does not take into account what I actually asked for. First, I was not asking for total recommitment. I was asking only for the clauses which deal with entirely new material from the Wheatley report to be recommitted. Secondly, I believe very strongly that with respect to financial regulation it is not an issue of quibbling about delay but of getting it right. These enormously complex matters deserve the iterative consideration which is possible only in Committee. I remind noble Lords that on Report they can speak only once. Thirdly, it is quite wrong to deny this House the opportunity to consider entirely new and complex material within a Committee setting. I would therefore ask the noble Lord, Lord Sassoon, to reconsider his rejection of my proposal that the relevant clauses be recommitted.

If he is unwilling to do that, perhaps I may make a constructive proposal. Either he or the Chief Whip, who unfortunately is not in her place, should give an assurance that the rules of Report will be relaxed for consideration of what might be called the “Wheatley” clauses when they are introduced.

[Lord Barnett]

I warmly agree with my noble friend on the Front Bench, and it gives me an opportunity to refer to the noble Lord, Lord Sassoon, himself. In the Recess I read with regret that he proposes to retire at the end of this year. He and I have had a few exchanges across the Floor and I will miss them, but I look forward to continuing with those exchanges until the end of the year.

Not only do I agree with my noble friend in the points he has made about the Bill, what is even more important is that the whole Bill should be dropped for the moment. There is no hurry for it and much of it will cause great damage to financial services in this country. As the noble Lord, in his new position, is no longer going to be quite so subservient to the Chancellor of the Exchequer, I certainly hope that he can tell us the truth, drop the Bill for the time being and, as my noble friend has suggested, come back to the House with a new one.

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[Lord Peston]

My Lords, we make the obvious point that getting it right is not the same as doing it quickly. We ought always to bear that in mind in your Lordships’ House. There is a straightforward solution to this. One is my noble friend’s suggestion for Report. Since I assume, particularly given the Leader of the House’s remarks, that we are not imminently in danger of being abolished, that we are still a self-governing House, we can therefore decide, if we wish to, one of two things: either my noble friend’s proposal, with which I strongly agree, that we would simply have Committee stage rules at Report stage for what is being proposed; the alternative is not to end the Committee stage until the Government can get their tiny mind around the Wheatley proposals and come up with their amendments.

I have read the Wheatley report. The proposals do not strike me as being intellectually very demanding—nowhere near as difficult as deciding on a railway line. Therefore, the noble Lord ought to respond positively instead of adopting this negative approach and remind himself that we will get only one chance to get this right. We ought to make sure that we do not bungle it.

[Lord Eatwell]

My Lords, I should make clear that I said that the Labour Party was broadly supporting the conclusions of the Wheatley report; not the Government’s policy because we do not know what that is yet. We look forward to seeing it. Perhaps we will support it; perhaps we will not. On the substantive matter, I welcome what I saw was the noble Lord’s support for a degree of flexibility at Report, referred to also by my noble friend Lord Peston. If it could be agreed in due course by the usual channels that for the Wheatley clauses a Committee-style procedure be permitted and the House agreed to that, then I think we could proceed with due speed.

Motion agreed.

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[Lord Barnett]

My Lords, I always like to be enlightened. I agree with my noble friend and I have a tendency to agree with the noble Lord, Lord Sharkey. However on this occasion I do not. I must apologise to the Committee. This matter is no doubt explained somewhere in the huge volume of papers we received at the outset, including the two volumes of the Bill. I must have missed it. I thought I was relatively assiduous in looking at this Bill. No doubt the noble Lord, Lord Sassoon, will tell us where it is. I am sure the officials with whom the Government generally agree—although not on every subject in the world, I understand, and sometimes they even prosecute or suspend them—must have explained what the noble Lord has failed to tell us. I hope either the noble Lord himself or the noble Lord, Lord Sassoon, will explain it more fully. I for one do not understand it.

[Lord Eatwell]

My Lords, although I agree with the noble Lord, Lord Sharkey, that it is enormously important that we improve the flow of funding to small firms, particularly given the complete failure of the Government’s attempts to improve the funding through banks to small firms, I believe that we should approach this proposal with great care. The problem with crowd funding is that crowds can often be subject to hysteria. We have seen hysterical funding levels in what might be deemed to be fashionable or popular companies: lastminute.com comes to mind, as does the recent launch of Facebook. In both cases, excessive hysteria associated with the popularity of the particular company led to investors losing quite a lot of money.

However in the SME sector, the fundamental problem for small investors is the risk to which they are exposed. They will necessarily have significantly less information than they would from a listed company. Given that lack of information, and the high mortality rate of small and medium-sized companies—thankfully they have a high birth-rate as well—it is likely to lead to a lot of not-very-well-off people losing significant sums of money.

[Lord Sassoon]

My Lords, I will put some things to one side before I deal with the main substance of my noble friend’s argument in this short and interesting debate around crowd funding. First, for the help of the noble Lord, Lord Barnett, there is indeed no Section 417 because crowd funding has been introduced into this Bill by my noble friend Lord Sharkey. I am sure that in due course he will table a Section 417 which will make us all a lot clearer about the definition. However, for the interim benefit of the noble Lord, Lord Peston, and rather than me banging on about what crowd funding is and boring the rest of the House, I draw his attention to the FSA guidance on this topic put out in August this year. It gives a helpful short introduction to what it is all about.

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Moved by

[Lord Eatwell]

149AA: Clause 9, page 42, line 28, at end insert—
“( ) The regulators must co-ordinate their procedures for, and provide clear and detailed guidance on, the processes for applying for, varying and cancelling permission that are applicable to authorised persons regulated by both PRA and the FCA.”

[Lord Eatwell]

My Lords, I will speak also to Amendment 149AC. Both amendments concern the process of applying to carry on regulated activities. I am sure that the Minister is aware that there is considerable disquiet at the moment about the very long delays associated with the application to carry on regulated activities. Undoubtedly this is having a deleterious effect on competition in financial services, and on what we might call the reformation of the financial services industry.

No doubt these delays are partly as a result of the fact that the legislation that will cover these organisations is in process, and therefore the appropriate officials at the FSA feel somewhat constrained in their ability to make decisions on what can sometimes be quite sensitive and contentious issues. None the less, those delays are very unfortunate. The two amendments are designed to facilitate the process of application and to ensure that it will be rather more efficient when the duties are passed over to the FCA and/or the PRA on what I have noticed is, rather unfortunately, All Fools Day.

Amendment 149AA calls for co-ordination between the FCA and the PRA when processing applications for permission to carry out regulated activities, in particular giving clear and detailed guidance—something that is not always in evidence at the moment—on applying for, varying or cancelling permission. I am particularly concerned about applying for permission.

It is important that when the responsibility is split, as it must inevitably be between the regulator responsible for risk, the PRA, and the regulator responsible for conduct of business, the FCA, the co-ordination between them when dealing with new applicants is as clear, transparent and carefully guided as possible. Amendment 149AA achieves exactly that—at least that is what it seeks to do—and if it does not achieve it, perhaps the noble Lord will tell us how he intends to achieve the same objective.

Amendment 149AC seeks to modernise and future-proof elements of the application process. The Bill does not refer to decisions previously made by the European Union regulatory authorities when referring to non-EEA firms and the weight to be attached to opinions on any non-EEA firms wishing to operate in this jurisdiction. The European Union regulatory authorities are going to be the major regulatory rule makers in this area, so leaving them out at this stage will limit and inhibit operation of the Bill in the future. We know that the European authorities will become important in this respect. Surely it is therefore imperative that some weight be given in the Bill to their opinion when non-EEA firms are likely to be offered the privilege of acting within this jurisdiction. I beg to move.

[Baroness Kramer]

My Lords, I want to speak very briefly to Amendment 150B in this group. As your Lordships will know, the Bill amends Section 55 of FiSMA. Section 55Q as now in the Bill refers to the,

“Exercise of power in support of overseas regulator”.

I would like the Minister to clarify the definition of “overseas regulator” because neither I nor some of those who are much more sophisticated than me in trying to understand regulation are fully certain whether that definition would include an agency or instrumentality of the European Union such as the three supervisory authorities—the ESMA, the EBA and the EIOPA—which have direct regulatory powers in their own right. All I am asking for at this point is some clarification as to whether these EU agencies or instrumentalities are encompassed in this and if they are not, why not.

--- Later in debate ---

[Lord Eatwell]

My Lords, I welcome the noble Lord, Lord Newby, to the consideration of the Bill but I suggest that he has failed to take the point of Amendment 149AA. His argument consisted of two points. First, he argued that there was sufficient requirement for the PRA and the FCA to work together in giving permissions under new Sections 55E, 55F and 55G. Secondly, he argued, extraordinarily, that it was not the task of the Bill to require either the PRA or the FCA to publish guidance on these matters. One of the great failures in the current process in giving permissions is the inadequate guidance which firms have in preparing their permissions. It is one reason why the permission process has become so extended and has so limited the development of competition in financial services which we would all like to see. In particular—

[Lord Newby]

What I said was that at present the FSA does make guidance available on its website. The new regulators intend to do the same. For that reason, I did not think there was a need for an express requirement in the Bill to do so.

[Lord Eatwell]

They may intend to do lots of things, but it would be nice if the Bill could actually require them to do so in this particular case. However, the more important point I would like the noble Lord to help me with is that Amendment 149A requires the collaborative activity of the FCA and the PRA to publish guidance for applicants, so that an applicant is not caught between two stools, continuously going backwards and forwards between one and the other in the application process. If this is already in new Sections 55E, 55F, and 55G, can the noble Lord point out to me precisely where this requirement appears?

[Lord Newby]

The PRA and FCA are under a duty to co-ordinate covering all their functions, including those related to authorisations. They are under a duty to set out in their MoU how that co-ordination will be delivered. Therefore, the noble Lord’s concern that there will not be adequate co-ordination, and that even if there were, it might not be readily available to regulated or would-be regulated firms, is mistaken. There is recognition that there is a potential problem, obviously, with two regulators, but the Bill and the MoU seek specifically to address those problems.

[Lord Eatwell]

Pushing things into the MoU is unsatisfactory, particularly when the noble Lord pleaded in aid new Sections 55E, 55F, 55G, and so on. It does seem that there is a problem with the whole current application process. Anybody who has been involved with, or been approached by, people involved in the application process knows that as it stands it is not working very well. Once we have two regulators responsible for the approval of applications, there is the possibility that it will work less well, which will not be good for the health and vitality of financial services, particularly banking, in this country. However, we will no doubt return to this matter at a later stage. In the mean time, I beg leave to withdraw the amendment.

Amendment 149AA withdrawn.

Financial Services Bill

Lord Eatwell Excerpts

Wednesday 25th July 2012 Lords Chamber

[Lord Eatwell]

My Lords, I support the noble Baroness, Lady Noakes, in the amendment that she proposes. I have added my name, as has my noble friend Lady Hayter. It is clear that there must be a satisfactory set of amendments for reviewing the effectiveness of this new regulatory structure and whether it provides value for money as conceived, particularly given the added complexity of what the noble Viscount, Lord Trenchard, referred to as the multiplicity of regulators now created out of this single structure.

I speak, too, to Amendments 128BB and 130AA in the name of myself and my noble friend Lady Hayter. Amendment 128BB adds to a definition of an independent person that a person appointed to review the FCA must be independent of the FCA but also of the Bank of England. We should have somebody standing outside this regulatory complexity who should be deemed to be independent. I suggest that if the person appointed is a staff member of the Bank of England, the notion of independence will be compromised, even though the FCA stands outwith the Bank of England. I hope that none the less there will be continuous regulatory dialogue between all the elements in the regulatory apparatus that we are designing here and that it will therefore be necessary, if somebody is independent, that they should stand outside that regulatory community, of which the Bank of England will be a leading part.

The point with Amendment 130AA is that the Treasury in appointing an independent person to conduct a review should inform the Treasury Select Committee of the nature and arrangements of the review, the idea being that that committee itself conducts reviews of the operations of regulatory institutions and will greatly economise on and facilitate the overall operation of a review procedure if there is no duplication and if there is clear communication and understanding between what the Treasury Select Committee and the independent person are doing. These two scrutiny agents should be co-ordinated and we should not have further segmentation; we have too much in this Bill already, and we should not have further segmentation in the procedures that we are designing.

[Lord Sassoon]

My Lords, first, I will make some comments on Amendments 128B and 130A, and explain who can initiate reviews. One of the main points made by my noble friend was essentially about how things are different from the way they have been up until now, and who can initiate reviews. I am sure we all agree that the Treasury’s power to appoint a person to carry out a value-for-money review is important to support accountability to the Government, to Parliament and to the public, not least because those reports of reviews must be published and laid before Parliament.

However, regarding my noble friend’s particular point, in future the NAO will also be able to initiate its own VFM reviews. As she identifies, that flows as a result of the Bill making the regulators subject to the NAO audit. I hope that provides reassurance to her on that important point. Clearly our expectations should be in the right place. The NAO can only conduct a certain number of VFM reviews each year across the whole of the public accounts which they audit, but I think my noble friend explicitly said—and I agree with her—that it would not be a question of an annual review. At the same time, the Government need to be able to order a review of the FCA at any time, with the option to focus on areas of the FCA’s activities they see as a priority, and be accountable for the way they exercise this power. In practice, the Treasury is likely to choose to appoint the NAO to carry out such a review. As such I do not see what would be added by placing an obligation on the Treasury to order reviews under new Section 1S, particularly as the amendment does not specify the time period or any of the other circumstances in which a review should be held; I think my noble friend recognises that. Particularly in the light of the fact that the NAO itself will be able to initiate VFM reviews, it would be too early to say how frequently the Treasury will use its power, because it will clearly dovetail to some extent with what flows from the audit. However, in response to my noble friend’s key point—she quoted my honourable friend the Financial Secretary—I am confident that the arrangements we have proposed will deliver a step change in the FCA’s accountability to Parliament, as compared to the way it has been with the FSA, for the way in which the FCA uses its resources to achieve value for money.

Amendment 128BB seeks to amend the requirement that a person appointed by the Treasury to conduct a review must be “independent of the FCA”, by adding the requirement that they must also be independent of the Bank of England. I absolutely agree that it is important that VFM studies of the FCA are carried out by someone independent of the FCA itself. That is what is proposed in the draft of the Bill itself, not least to provide assurance that they are objective and impartial. As I have said, in practice the Treasury is likely to choose the National Audit Office to carry out such a review. However, the Treasury will have the discretion to appoint an independent expert or a commercial firm with relevant specialist expertise to conduct a review. In that context the amendment is too wide, in that it could prevent any firm or expert which had done any significant amount of work for the Bank of England from carrying out such a role. From what the noble Lord said I appreciate that that was not the intention, but ruling out that population of firms or experts would be the effect of requiring the FCA reviewer to be independent of the Bank.

--- Later in debate ---

[Lord Eatwell]

If I may say so, that is absolute nonsense. Are we actually suggesting that any independent firm or individual who has done work for a government department is thereby compromised and no longer an independent person? Are we saying that an independent person who has happened to write a few papers for the research department of the Bank of England is now no longer an independent person and is thereby compromised because he is not independent of the Bank of England? That is a misuse of language.

[Lord Sassoon]

First, I am not sure why the noble Lord, Lord Eatwell, talks about advisers to government departments. Here, we are talking about finding firms to carry out value-for-money reviews of the FCA, and independence from the FCA would seem to be the overriding concern. We are not talking about the Bank of England itself or some part of the Bank of England’s wider group doing the review. As I am sure the noble Lord knows, with all the increasingly tough professional codes that exist, the definition of independence is becoming ever tougher. Therefore, although the noble Lord and all of us might like to go back to a sort of common-sense, gentlemanly world that once existed, I absolutely stand by what I said. The amendment—whose effect incidentally goes wider than the noble Lord indicated in speaking to it—would capture a range of firms just because of the way that professional independence has come to be defined these days. Therefore, I stand by my analysis of the amendment.

Amendment 130AA would require that when the Treasury orders a review of the economy and efficiency of the PRA, it informs the Treasury Select Committee of the nature of, and arrangements for, the review. I understand that the amendment is driving at the importance of accountability to Parliament. The Government agree that that is important, which is why there is already a large amount on this subject in the Bill, including the provision for NAO audit, which we have discussed.

Requiring the Treasury to inform the Treasury Select Committee of the nature of, and arrangements for, the review at such an early stage might have some benefits of the sort that the noble Lord identified but I fear that it is more likely to be seen as an invitation for the Treasury Select Committee to comment on or even attempt to change the remit of these important reviews. I suggest to this Committee—I would not suggest anything to the Treasury Select Committee—that adding another political hurdle could slow up the process of producing these reviews. It may even make it less likely that they will be commissioned in the first place if there has to be a negotiation of the sort that I fear.

I hope that those explanations are sufficient for my noble friend to be able to withdraw her amendment.

--- Later in debate ---

Moved by

[Lord Eatwell]

128BFA: Clause 5, page 24, line 31, leave out “UK financial system” and insert “financial markets in which UK financial institutions operate”

[Lord Eatwell]

My Lords, this amendment and Amendment 128BFB seek to ask the Government to clarify their definitions of the scope of the markets in which UK financial institutions operate. We have already seen some very peculiar UK-centric views in proposed new Section 9C of the Bank of England Act 1998, which I hope we will see extensively modified on Report. In this clause, however, the Bill currently refers to having,

“any adverse effect on the stability of the UK financial system”.

This fails to recognise the global nature of UK banking, and that risks may arise anywhere in the world where UK financial institutions operate.

We want to ensure that the actions of UK financial institutions are such as to sustain the stability of the entire financial system in which they operate. Why? It is because destabilising actions in foreign markets may destabilise subsidiaries of UK financial institutions and, ultimately, the home institution. However, this could not be said to refer to the UK financial system. I will put it again: if in a foreign market a subsidiary is destabilised by actions here, that subsidiary ultimately destabilises an institution here—not the system but an institution. Can the noble Lord please explain how the current wording of the Bill deals with the fact that the balance sheets of UK financial institutions are typically written on a global scale?

[Lord Sassoon]

My Lords, these amendments seek to give the PRA a global financial stability remit. Instead of the PRA looking at UK financial stability, the amendment would have it looking at the financial stability of every market around the world in which any PRA-authorised person operates. The PRA would have a new responsibility for the financial stability of many markets where it has no powers, no jurisdiction and no tools. I suggest that this is plainly an absurd position. Although cross-border co-operation is vital to ensure the effective supervision of international firms, it is ultimately for each country and its regulators to ensure its own financial stability, or a single currency bloc may decide that financial stability needs to be supervised ultimately on a currency bloc basis.

[Lord Eatwell]

My Lords, I think that the noble Lord has misunderstood the amendment. If he inserts the amendment and looks at subsection (3)(a), it would refer to,

“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect”,

on markets in which PRA institutions operate. The noble Lord is suggesting that the PRA would not have jurisdiction, whereas the PRA does have jurisdiction over PRA-authorised persons.

[Lord Sassoon]

I have read and reread these amendments and discussed them with officials on a number of occasions because I cannot believe that this was the effect that the noble Lord, Lord Eatwell, wanted. Actually, it is entirely the effect of his amendments to require that the PRA’s general objective is to be advanced by,

“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect on the stability of the”—

if amended—

“financial markets in which UK financial institutions operate”.

They would have to regulate in a way that had regard to the financial stability of all these markets around the world, which does very directly get the PRA into the protection of financial markets way beyond its own control in the UK.

I will explain why I think the Bill adequately covers the noble Lord’s justifiable concern. What I have said so far in no way means that the PRA will ignore the stability of any financial market outside the UK that is relevant to PRA-authorised firms. The PRA will take an interest in the stability of any market that has a significant impact on the safety and soundness of one or more PRA-authorised persons. It will do this not in order to improve the stability of this market but to understand the potential or actual impact on regulated firms and to take steps so that this impact is minimised using all the powers available to it. I cannot identify anything in the Bill that limits the PRA or prevents it from taking account of all those factors. It is quite a different thing to put in wording, as suggested in these amendments, that would make the PRA in some way responsible for the effects on the stability of financial systems outside the UK. With that explanation and reassurance, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Eatwell]

My Lords, it is very difficult to be reassured by a statement that the PRA would sit back quite happily and watch PRA firms take actions that would destabilise foreign markets. However, given that the Treasury seems to have no concern about PRA firms destabilising markets outside the UK, I beg leave to withdraw the amendment.

Amendment 128BFA withdrawn.

--- Later in debate ---

Moved by

[Lord Eatwell]

128BFC: Clause 5, page 24, line 34, at end insert—
“( ) seeking to minimise, as far as possible, the costs to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry”

[Lord Eatwell]

The amendment seeks to add to the overall objectives of the PRA the requirement that it operates efficiently, seeking to minimise costs,

“to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry”.

It seems remarkable that the PRA has a series of objectives that it is required to pursue to the very best of its ability and with the application of all necessary resources, but there is no constraint on the utilisation of those resources. It seems to be able to pursue its objectives without any concerns for the costs to the public purse in these particular contexts. The amendment would provide a balance in the approach of the PRA, with the desirable objective of ensuring stability and, in doing so, minimising the costs both to the FSCS and the public purse.

[Lord Sassoon]

My Lords, this amendment reflects a recommendation from the Joint Committee that a secondary general microprudential objective be given to the PRA. It seeks to specify a further means by which the PRA’s general objective should be achieved, by minimising the costs to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry. A similar amendment to this was tabled and debated in another place.

The Government acknowledge that there are some attractions to reframing the objective in terms of the prudential outcomes that the PRA will seek to achieve, as the Joint Committee suggested. However, specifying particular desired outcomes creates difficulties. For example, whether the failure of a firm results in a call on public funds will depend to an extent on the actions of the Government of the day—for example, in taking a decision to nationalise or recapitalise a failing institution. In some circumstances, the orderly failure of a firm followed by an FSCS payout may be the best way of protecting depositors and taxpayers while maintaining market discipline. The effect of specifying such outcomes could be to encourage the PRA to take a highly aggressive and expensive approach to supervision with an end goal of ensuring that, if a firm failed, its potential costs of failure to the FSCS and public funds would be zero or negligible. To ensure this outcome, the PRA would need to intervene extensively in a firm’s day-to-day affairs, undermining the responsibility of firms’ management for running their firm. Ultimately, in an extreme case, it could turn PRA supervisors into shadow directors.

To place such a duty on the regulator would be against the Government’s intention, endorsed by the Joint Committee and confirmed in new Section 2F inserted by the Bill, that the new regulatory regime should not be a zero-failure regime. The amendment would bias the PRA towards a zero-failure regime. On balance, the Government believe that it is better to frame the objective more broadly, requiring the PRA to focus on the safety and soundness of individual firms, so as to improve financial stability. This objective gives the PRA a clear mandate to intervene to address risk-taking by firms.

I hope I have been able to make clear to the Committee why I cannot accept this amendment, and why I ask the noble Lord to withdraw it.

[Lord Eatwell]

The Minister has exposed some very interesting arguments here in the relationship between the degree of protection which should be provided to consumers and the public purse, balancing that against the degree of supervision of firms. The Government seem to want to err on the side of jeopardising the public purse a little rather than providing supervision that would protect the public purse. However, in the context I can see that a balance is being discussed here, and the Minister has made clear where the Government’s view of that balance lies. In that light, I beg leave to withdraw the amendment.

Amendment 128BFC withdrawn.

--- Later in debate ---

Moved by

[Lord Eatwell]

128BHA: Clause 5, page 25, leave out lines 18 to 35

[Lord Eatwell]

My Lords, this is a probing amendment seeking clarification of the role of “the specified objective”, as it is called in the Bill. An aspect of regulation that is important is that it should be transparent and predictable. The characterisation of the specified objective is neither. Indeed, the boundaries of regulation now seem to be rather arbitrary in the sense that the Treasury can regularly, perhaps, introduce specified objectives and change the boundaries of PRA activities. This cannot but have a dampening effect on financial innovation, because financial innovation depends upon some notion of predictability. Innovation has, as a result of the crisis, a rather bad name at the moment, but there have of course been entirely beneficial innovations over the years, and regulators stifle innovation at their peril.

Of course, the problem is how to secure good innovation while discouraging bad innovation. This is where clear objectives come in, and clarity and transparency are important. This section, I am afraid, seems notably unclear in that the boundaries of regulation would not be predictable. Having such a degree of unpredictability is bound to have a dampening effect.

I understand that any order under this section will require parliamentary approval under new Section 22A, but it is not at all clear how changes will acquire a sense of being anything other than arbitrary, since no concept of consultation with those institutions which would be affected is referred to. Could the Minister please explain?

[Lord Sassoon]

My Lords, the noble Lord, Lord Eatwell, raises an important point here that we want to on one hand future-proof the Bill, and on the other hand make sure that the future ring-fence around regulated activities—the regulatory perimeter—is not widened on a whim. It is not an easy line to draw. If it required primary legislation—not that the noble Lord was suggesting that—to extend the PRA’s objectives to bring other activities within the regulatory perimeter, that would be a complicated 12-to-18 month process that would not allow for a timely response.

The situation that I generally envisage is one where the FPC would ask for the regulatory perimeter to be widened. That, I suggest, is sensible and necessary future-proofing that enables the authorities to react to changes in financial markets and financial risks in a pragmatic way, whether it is to allow for innovation, or for any other reason. To give a couple of examples which could come up where the FPC could recommend such an extension of the perimeter, it might relate to some or all shadow banking activities or to peer-to-peer platforms or activities, which we have discussed fairly regularly.

I am looking to see whether my noble friend Lord Lucas is here, or some of my other noble friends—the noble Baroness, Lady Kramer, and the noble Lord, Lord Sharkey, among them—because at some point activities like this could well be recommended by the FPC to the Treasury to be brought within the regulatory perimeter. The Treasury would then make an order to make these activities PRA-regulated ones, and if necessary apply additional objectives to these activities.

I assure the noble Lord that in this context, in accordance with convention and Cabinet Office guidance, the Treasury, as the relevant department, would of course conduct the consultation in the normal form at that point. I hope that explains why this part of the Bill is drafted in the way that it is, and that there are protections in there.

[Lord Eatwell]

My Lords, that was very interesting because the FPC has not been mentioned at all and it is suddenly being prayed in aid in support of this section. I remain puzzled as to why the Government are willing to risk the Bill appearing to be so restrictive by not including some notion of general consultation. Of course, if the FPC were involved there would be consultation issues around which the FPC itself is hedged. But changes could appear on a whim, as the noble Lord himself put it. I would not expect the Treasury to behave on a whim, but it might appear that way to the industry.

[Lord Sassoon]

I am sorry, but I am pretty sure that I did not say that the Treasury would do anything on a whim: far from it. I would not like the record to say that. Of course the Treasury would not do something on a whim. I would expect recommendations to come from the FPC, which, as the noble Lord said, has its consultation procedures. It does not need a reference in the Bill to say that if the Treasury makes recommendations or an order under this clause nothing else needs to be said. Of course the Treasury will follow the normal consultation processes applicable to this form of order.

[Lord Eatwell]

One should hope so too. One would have hoped that new Section 22A and other relevant sections, perhaps to be added, would recognise that fact. However, having had an interesting discussion of responsibilities and whims, I beg leave to withdraw the amendment.

Amendment 128BHA withdrawn.

--- Later in debate ---

[Lord Sassoon]

I well understand my noble friend’s argument. It is, of course, far from the case that the PRA and the Bank of England will be able to hide from direct questioning of what they do because I am sure that they will be in front of the Treasury Committee much more frequently than annually, under the full spotlight of television cameras and so on. It is not like a normal corporate situation in which the board may be able to hide away from that sort of scrutiny except annually. There will be very regular public challenge, principally through the Treasury Committee, and I can only repeat that it would have been the simple, easy answer to just put both requirements on both the successor bodies, but I come back to the underlying point: we must remember that we are creating two bodies that have to be, in very many respects, different from what we have with the FSA at the moment. If it is merely shifting the chairs around, we need not be spending the many hours that we are spending over the Bill.

[Lord Eatwell]

Hear, hear.

[Lord Sassoon]

Well, that is why we are not merely shifting the chairs around; there will be a very fundamentally better structure in place for all sorts of reasons that we have debated, but as a consequence of that, some of the easy solutions of “one size fits both regulators” is not the right way to go and in this case it is essentially a disproportionate imposition of the public meeting on the PRA, for the reasons I have given.

Amendment 144B seeks to require the FCA to account in its annual report for how often the FCA used the product intervention power in Section 137C and financial promotions power in Section 137P, what the outcome of each intervention was, and how the FCA complied with the statement of policy concerning the temporary product intervention rules in Section 137N. Both powers are very important, but they are also a departure from the current regime and therefore it is important that the regulator accounts for how it uses them. As such, I fully agree with the sentiment behind this amendment, but I reassure my noble friend that it is not necessary. Paragraph 10 (1)(a) of Schedule 3 requires the FCA to report on the discharge of its functions and the FCA’s general functions include making and policing of the rules. The Government therefore fully expect the regulator to account, in this area, for how it has used these powers.

I think that I have dealt with all the amendments in the group.

Financial Services Bill

Lord Eatwell Excerpts

Tuesday 10th July 2012 Lords Chamber

Moved by

[Lord Eatwell]

54: Clause 3, page 7, line 40, after “Committee” insert “and the public”

[Lord Eatwell]

My Lords, I shall address Amendment 54, in my name and that of my noble friend Lady Hayter. I will also speak to Amendments 55, 57, 58 and 61. I apologise to the Committee if there is some confusion over the grouping with respect to these amendments. We asked this morning for this amendment to be degrouped from the amendment tabled by the noble Lord, Lord Flight, which deals with something rather different.

I will preface my remarks by saying that over the next several groups we will examine the exceptionalism of the Financial Policy Committee. This committee is an experiment, and it has powers transferred from persons who have the authority of election behind them and are part of the executive, to an administrative function. These powers are substantial: they manage the supply of credit, and possibly, if particular measures were handed over to the FPC, they will manage the demand for credit. Hence, it will have a major impact on the overall macroperformance of the economy.

There is also the potential for the FPC to be in conflict with the Monetary Policy Committee—the MPC—which controls the price of credit. That contradiction could be a serious element in the overall operation and management of the economy. The exceptionalism of the FPC, in our view, requires exceptional scrutiny and consultation as this experiment unfolds. I call it an experiment because we do not as yet know how effective these administrative measures are going to be. We do not as yet know even what they will be in content, so a degree of extra scrutiny and consultation is required at every stage to ensure that major mistakes are not made and that we design effective procedures and secure public acceptance for the role of the Financial Policy Committee.

Amendment 54 introduces a minor element, which has wider significance than might at first appear. It simply introduces the expression “and the public” into those who must be consulted with respect to the makings of an order. The public here is a term of art, meaning those who have a direct interest in this area. It would essentially involve the industry and perhaps a few specialist academics or others who have a particular interest in the field. Amendment 54 seeks, as does Amendment 55, to introduce the possibility of that wider consultation, which I believe is vital if this experiment—and it is an experiment—is to succeed.

Amendment 57 simply adds to the requirements for consultation by providing a back-up. When there is some failure to consult, perhaps because of the urgency of a particular measure, that failure should be,

“subject to scrutiny by the Treasury Select Committee”,

in a way which has been recognised in other parts of the Bill. Amendment 61 adds to the conditions associated with urgency that there should be a statement published within 10 days of an urgent measure on which consultation has not taken place. Those four amendments provide a wider framework of consultation for this experiment than is provided in the Bill. It seems to me that they are entirely unexceptional and would be widely welcomed throughout the financial services industry, and indeed the policy community.

Amendment 58 is a little different and really should have been degrouped, but we feel we should not go too far in our enthusiasm for degrouping. Here we have a slightly different element that focuses, however, on the exceptionalism of the Financial Policy Committee because that committee has a particular responsibility for measures that are specific macroeconomic controls. I simply do not see how that responsibility can be in any way transferred to the FCA or the PRA, which do not have such a responsibility in their objectives or their specification of roles. This seems to be a major mistake in the drafting of the Bill. It is also unnecessary with respect to the directions by the FPC, since the ability of the FPC to authorise the exercise of discretion is covered in proposed new Section 9G(5). This part is therefore going too far, as the necessary role for the FPC is already covered.

This is a dangerous amendment—no, it is a dangerous position, not a dangerous amendment. It is a very beneficial amendment, which would remove a potential danger in the sense that the provision, as drafted, takes these experimental powers which we are handing to the FPC and allows them to be generalised outwith that very special framework that we are creating in the Bill. I urge the Government to accept Amendment 58. All the powers that the committee needs are covered by proposed new Section 9G(5) and this position is entirely unnecessary.

In dealing with the exceptionalism of the Financial Policy Committee, therefore, the amendments I am discussing in this group enhance the underpinning of consultation that will provide validity and acceptance to the powers of the FPC and remove what was perhaps an unwitting extension of those powers, which might undermine the entire project. I beg to move.

--- Later in debate ---

[Lord Sassoon]

I am sure that we will not have to wait for very long. I shall address what is more directly the subject of these amendments and the question about possible conflicts between the FPC and the MPC. While it is conceivable that the two committees might seemingly appear to be taking conflicting action, I do not actually believe that that is likely to be the case as each committee’s actions will be designed to address very different aspects of the economy and the financial system. That said, there are mechanisms in place to ensure that conflict does not arise. The committees will share information and briefing in order to aid co-ordination, and the Bill makes provision for joint meetings of the two policy committees if at any time that is required. The Bank has also said that it agrees with the Treasury Committee’s recommendation on this question and that the governor should consult the chairman of court if a conflict arises. It is unlikely, but the Bill makes provision through joint meetings and the consultation with the chairman of court.

I turn to the specifics of Amendments 54 and 55. These amendments seek to require the Treasury to consult the public before making any order which makes macroprudential tools available to the FPC. I agree with the noble Lord, Lord Eatwell, that effective consultation on macroprudential tools is essential, but this amendment is not the best way to achieve it. The practice of public consultation on important matters of policy and legislation is now well established and is engrained in good government practice. My honourable friend the Financial Secretary said in another place:

“As a matter of course and as part of the usual statutory instrument process, I expect that the Treasury will consult on macro-prudential tools”.—[Official Report, Commons, 28/2/12; col.46.]

The Government have already committed to a consultation on their proposals for the FPC’s initial toolkit and will produce a draft statutory instrument as a part of that consultation. The Bill as currently drafted does not prevent the Treasury from consulting the public. The Government have already shown their willingness to consult on macroprudential tools and demonstrated their commitment to transparency by asking the interim FPC to make public recommendations regarding its tools.

I do not quibble with the term “public”. From what the noble Lord said, I suspect that he might have been expecting me to come back and say that this is not for the public, but for consultation with the industry. I accept the context in which he uses the word “public”. That is not my objection. It is good practice to do it. We are doing it. The FPC has been asked to make public its recommendations regarding tools. However, it may not always be appropriate to consult the public, which is why this requirement should not be in the legislation. Not all macroprudential orders will make large changes to the FPC’s direction powers. It is possible that some orders will contain only minor and technical changes and in this instance a three-month public consultation would be unnecessary. The previous Government rightly recognised the risks of undertaking full public consultation in cases where it is not necessary. Their own code of consultation listed seven criteria, one of which stated:

“Keeping the burden of consultation to a minimum is essential if consultations are to be effective and if consultees’ buy-in to the process is to be obtained”.

The Government have stated that they will, in compliance with the principles of good government, consult the public when material changes to the FPC’s direction powers are proposed and in non-urgent cases. I hope that that provides reassurance which the Committee seeks.

[Lord Eatwell]

My Lords, while we are on this point and before the noble Lord, Lord Sassoon, moves on to other elements, I am grateful for his clarification on this issue of consultation. I heard that we expect the Treasury to consult and there is nothing to prevent it consulting. I was seeking that the Treasury be required to consult.

Turning to the point which the noble Lord has just raised about the consultation criteria, which is enormously helpful, would it not be appropriate to write the criteria in to the conditionality with respect to when the Treasury should consult? Then we will not have simply an expectation or a desire and we will not be saying that there is nothing to prevent consultation. We will be saying that the Treasury should consult in all circumstances other than those specified under the consultation criteria. Would that not be helpful?

[Lord Sassoon]

My Lords, of course that could be done, but I make the point again that it is now engrained in the principles of good government that there should normally be three months’ public consultation. There is a code of consultation that the previous Government put out. It sets it all out very clearly, including the point about burdens and so on that I read out. In its full richness, it cannot easily be drafted in legislation. Indeed, if we were going to do it in this Bill, I imagine there could be hundreds of other Bills in which it could be spelled out. I suggest that the Committee should not only take comfort from the standard governmental practice but from the fact that we have already indicated what we are going to do with the FPC toolkit. I believe we have covered it all and do not need to burden this Bill with a lot of detail any more than other Bills are burdened with it.

Amendment 57 seeks to provide that the reasons for making an order without consulting the FPC or the public be subject to scrutiny by the Treasury Select Committee. While I agree that accountability to Parliament will be important and the provisions within the Bill reflect that, I believe, as I have said on other occasions, that it is for parliamentary committees themselves to decide what they will scrutinise. I would expect the Treasury Committee to take a great interest in any circumstances where the Treasury felt it necessary to create a new macroprudential tool on an urgent and therefore possibly not-consulted basis.

I suggest to the Committee that it would be inappropriate for the Government to use primary legislation to force the Treasury Select Committee to scrutinise something. It must be a decision for the committee itself. The committee has already taken great interest in the interim FPC and I hope that this will continue. For those reasons I believe that Amendment 57 is neither appropriate nor necessary.

We then get to Amendment 58—I was going to say “the dangerous amendment”. It seeks to deal with what the noble Lord says is a potentially dangerous situation. He was entirely clear in his reasoning. The amendment seeks to remove the FPC’s ability to confer discretion on the PRA and the FCA as part of a direction.

[Lord Eatwell]

It removes the Treasury’s ability.

[Lord Sassoon]

The noble Lord says that it is the Treasury’s ability to confer discretion. Whoever’s ability to confer discretion it is—I am just turning back to the drafting of the amendment, which really means looking at the clause as well. I will do that as I speak. I believe it is the FPC’s ability to confer discretion, but whether it is the FPC or the Treasury, the purpose of the provision is to allow the direction-making entity to take advantage of the expertise of the PRA and the FCA. Indeed, the noble Lord is completely right. I have now checked the text and it is the Treasury. However, the point is the same. We need to take advantage of the expertise of the PRA and the FCA which hold the expert knowledge relating to the supervision of individual firms. This provision allows the Treasury to take advantage of that expertise in its directions. For example, if the direction required the PRA to require firms with large exposures to hold additional capital, it would be for the PRA to decide which firms had large exposures. That would be something for the supervisor—the regulator—to do. Therefore, I believe that the amendment would unnecessarily hamper the ability of the direction to have proper effect.

[Lord Eatwell]

Shall we deal with it as I go along? It would be easier for the Committee if we deal with Amendment 58.

There is a mistake here. The text of the Bill says that the Treasury may make an order which,

“may confer a discretion on … the FCA or the PRA”.

In other words, the Treasury has direct macroprudential tool access to the FCA or PRA, not via the FPC. Proposed new Section 9G(5) describes the correct procedure, in that a discretion that could be given to the PRA or the FCA comes via the FPC. In other words, it comes via the macroprudential authority—the institution that is responsible for macroprudential measures. The example given by the noble Lord is particularly pertinent in this case. If there were a requirement to increase the capital that is relative, let us say, to large exposures or to other risk-weighted measures, then that must be a decision of the FPC. I do not see how the Treasury could give that macroprudential role in any shape or form directly to the FCA or the PRA.

If the provision’s wording was that an order may confer a discretion on the Financial Policy Committee, which may then be transferred to the FCA or the PRA at the will of the Financial Policy Committee, the point that the noble Lord has just made about expertise would be entirely well taken. However, if we are to maintain the integrity of this experiment, or indeed project, then we must maintain the FPC as the focus for macroprudential regulatory management. That is why I referred to this element as dangerous, in the sense that it undermines that clear structure within the Bill.

[Lord Sassoon]

My Lords, according to these provisions, when the Treasury specifies what macroprudential measures the FPC may exercise, the Treasury may, in relation to those macroprudential measures, confer functions on the regulator. It is intended that this is likely to be used for minor matters such as definitions. For example, the Treasury could provide that the FPC may impose additional capital requirements on exposures to residential property, and that the PRA, as the microregulator, would define the meaning of “residential property”.

There is, therefore, a web of interlocking provisions here, which I fear I did not do justice to in my first attempt to cut through this. Would it help the noble Lord if I take this one away, write to him and copy it to the other Members of the Committee who are here, to try to explain how these provisions will work together? I do not believe that there is any gap here, because it is ancillary to the basic directions that will come via the macroprudentials of the FPC. But there may be some ancillary matters, particularly definitional ones, where the expertise of the PRA or the FCA would be operative and for which we need therefore to keep this element and not to close this off in the way that Amendment 58 seeks to do. I will write to try to set that out more clearly. I am grateful to the noble Lord for that.

Amendment 61 would require the FPC to publish a policy statement within 10 days of a direction being made in relation to a measure made before the FPC had been able to issue a statement of policy under new Section 9L to be inserted into the Bank of England Act 1998 under Clause 3. Again, the Government agree that transparency and openness will be vital to ensure sufficient accountability for the FPC and the use of its tools. However, I believe that this amendment is not appropriate.

The Bill already provides that a policy statement is produced and maintained for each of the Bank’s macroprudential tools. This would also apply to those measures granted using the emergency procedure. However, if a situation were urgent, it would be counterproductive to require the FPC to wait until it has drafted and published a statement of policy before it could use that tool.

We would expect the FPC to produce a statement of policy for the tool as soon as reasonably practical afterwards, assuming that the tool remains in the FPC’s toolkit. I suggest that the requirement in Amendment 61 would be excessively restrictive.

[Lord Sassoon]

My Lords, the requirement is there for the statement to be made. Indeed, it would be the full expectation that a statement would be made. We believe that the Bill does not need any extra amendment in relation to statements that relate to macroprudential measures where they are exercised as a matter of urgency. The statement has to be made in any case.

[Lord Eatwell]

Perhaps I may help the noble Lord. I think that there was a slight misunderstanding in what he said in his initial answer on this amendment. He said that if there were an urgent situation, it would be inappropriate to wait for a statement to be made. That is not what this amendment says. It in no way prevents urgent measures being taken immediately. It simply says that if that is the case—as the noble Lord said, as soon as possible, and as I say, within 10 days—a statement should be produced. Surely, it is appropriate to give confidence and comfort to the markets that they can have some degree of expectation that a measure taken in urgency would be subject to a statement within a timeframe which is known to the markets and therefore provides them with appropriate comfort.

[Lord Sassoon]

My Lords, I do not believe that any additional requirement needs to be put in. The FPC already has transparency requirements at the heart of what it does. I completely agree that in certain cases, if it was an urgent matter, 10 days would not be the answer. It would make a statement based on the merits of the case either immediately, or on some other timescale. The Treasury would need to lay secondary legislation on an urgent basis to create the new tools required. Regardless of this provision, the laying of this secondary legislation would involve a public statement about the need for the tool and how it would be used. There is another backstop. If the new tool was required to be created, Parliament would immediately have a statement in front of it to back up the secondary legislation.

For a variety of reasons, Amendment 61 is redundant. On the basis of some partial explanations, and my commitment to write to him—particularly to explain in more detail how I believe the matters around Amendment 58 will operate—I ask if the noble Lord will withdraw his amendment.

[Lord Eatwell]

I am grateful to the noble Lord. Having a committee process where we go backwards and forwards on each particular amendment is helpful and removes the need for me to make a long summing-up speech. I will simply focus on Amendment 58, which has been the main matter of substance within this group which has exercised us, especially after the noble Lord clarified the issues of the consultations so well. Amendment 58 is still a serious problem, and I look forward to the noble Lord writing to me about it. Once I have his views in writing, perhaps we can consult further to find an appropriate way of sustaining the position of the FPC in the way that I have described. In the mean time, I beg leave to withdraw the amendment.

Amendment 54 withdrawn.

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Moved by

[Lord Eatwell]

56: Clause 3, page 7, line 43, at end insert “and the Deputy Governor for Financial Stability”

[Lord Eatwell]

And now, my Lords, for something completely different. One of the objects relating to the governance of the Bank of England which we discussed in the first two days in Committee, and which is now coming up again, is to increase the collegiality of decision-making within the Bank, particularly with respect to this project. It seems that the deputy governor for financial stability is going to have an important role in the development of the FPC, the development of its activities and, indeed, its overall credibility and acceptance. It therefore seems entirely appropriate in these circumstances that the deputy governor for financial stability should be given a special status within the legislation, both in respect to consultation with the Treasury when an emergency order is introduced, and with respect to the discussions with the Chancellor of the Exchequer after the publication of the Financial Stability Report.

Amendment 56 seeks to place the deputy governor for financial stability within the framework of consultation when there is an emergency order. Overall responsibility rests with the governor. However, surely the deputy governor, who has the prime responsibility, should be consulted when there is likely to be an emergency order. Moreover, when the Treasury and the Bank have their formal discussions, which are required by the Bill, following the publication of the Financial Stability Report, it is surely appropriate that the person responsible for that report—the deputy governor for financial stability is the acting element in this respect—should be part of those conversations, as we require in Amendment 79.

If the Government accepted these amendments, we would feel much more comfortable about the overall governance structure of the Bank. It would acquire a more collegial framework, which we strongly feel is very appropriate to the development of these new measures. I beg to move.

[Lord Sassoon]

My Lords, these amendments reprise an argument that was raised by the shadow Chancellor during the Bill’s Second Reading in another place.

As the noble Lord, Lord Eatwell, said, Amendment 56 would require the Treasury to inform not only the governor but the deputy governor for financial stability when it considers that there is insufficient time for the FPC to be consulted on the introduction of a new macroprudential tool.

Amendment 79 would place in the Bill a requirement for the deputy governor for financial stability to attend the biannual meetings between the Chancellor and the governor following the publication of the FPC’s annual stability report.

Clearly the Bank plays a crucial role not only in relation to the management of the UK’s economy but specifically, under the Bill, in relation to macroprudential and microprudential regulation. In fulfilling these very important responsibilities, we expect the Bank to act as the serious and respected organisation that it is. This means that the senior executives of the Bank will work as a team to determine the best course of action to achieve the Bank’s objectives and comply with the legal obligations placed upon it. The governor is the leader of that team and, working closely with his senior executives, will ultimately take the key decisions within the Bank.

It is clear that the success of the new regulatory structure, which, rightly, we are spending so much time debating, relies heavily on the relationship between the Treasury and the Bank of England, and I believe that the Bill provides the necessary clarity of responsibilities. However, it also depends on the personal relationships at play here, particularly between the most senior leaders of the two bodies—the Chancellor of the Exchequer and the Governor of the Bank of England. One of the major problems leading up to the financial crisis was that the tripartite committee did not meet at principals level during the previous decade.

Therefore, there are clearly things that need to be legislated for, and this is not what the noble Lord is in any way seeking to argue against, but it is important background to this discussion. The Chancellor and the governor must meet regularly to discuss financial stability. That is why the Bill and the regulatory structure that it establishes place at the heart of the matter the institutional relationship between the Treasury and the Bank, and the personal relationship between the Chancellor and the governor.

I do not see any reason to attempt to insert into that relationship a further statutory channel of communication. First, I just do not believe that it is needed. The Treasury ministerial team regularly meets the current deputy governor for financial stability and the chief executive of the FSA. There is also a constant dialogue between the deputy governor and senior Treasury officials via meetings, phone calls and e-mails. The same was true under the previous Government, as I know, since I was part of it for three years, and it was very effective at working level. That has not changed and it will not change under the new structure. In practice, the deputy governor may well attend the biannual meetings between the two principals. If the Treasury notified the governor that a new macroprudential instrument needed to be introduced on an urgent basis, the deputy governor would be well aware of that.

I will just point out one slight correction that is relevant to this, which is that the FPC is responsible for the financial stability report to the deputy governor. That is relevant to the discussion of this amendment because it shows that we should not excessively personalise the relationships or draw attention to particular individuals if that risks, as it may do in this instance, causing confusion about who is responsible for what. I agree that the relationship with the two leaders of the bodies, the Treasury and the Bank of England, should be hard-wired in, as we have done. In practice, the deputy governor is, and will be, very much involved in all the relevant discussions. Amendments 79 and 56 are not necessary and go too far.

There is a strong argument here that such a provision could be positively unhelpful by opening the door to the possibility that the Bank may be divided and encouraged to speak with more than one voice. There is a risk of recreating elements of dysfunctionality that were in the system as it used to exist. I do not want to overplay this, since the main argument is the earlier one. However, I do see a slight but secondary danger that this provision could be built on in the wrong circumstances. On the basis of the earlier explanations, I hope the noble Lord, Lord Eatwell, will withdraw this amendment.

[Lord Eatwell]

My Lords, the noble Lord’s comments have been very valuable. The Government have continuously argued that the tripartite system set out by the previous Government did not work because of its structure. He has now admitted that it did not work because the principals did not work it and did not meet. That is a very different issue. The fact that the principals did not meet, and that we now find the need for them to meet in primary legislation, illustrates that it was not the structure that was wrong but the people working in it that went wrong.

I agree with the noble Lord that the Bank should work as a team. I am very much in favour of that. However, we have to distinguish between the captain of the team and those who take the penalty kicks. We may want Martin Johnson to be the captain but we want Jonny Wilkinson to take the kicks. In those circumstances, the particular specialist role of the deputy governor for financial stability seems to be an important element in effective communication between the Treasury and the Bank. Moreover, the noble Lord expressed, in a careful way, that this might expose differences in the Bank’s position and suggested that this might create dysfunctionality. There are differences in this Committee, but this Committee is not dysfunctional. It is making progress. The differences between us are highlighting, as it is their role to highlight, some problems in the Bill that can make it a better Bill, which is our entire objective. I do not accept that differences within a reasonably run organisation necessarily lead to dysfunctionality. That seems to be Sir Humphrey rampant, determined that there is a singular position.

The whole issue of governance of the Bank is still somewhat in the air. This is one element that we wished to put in the Bill and felt would be enormously helpful. Now the noble Lord has recognised that the tripartite system did not fail because of its structure, but because of the personalities who failed to work it, I hope that he will consider the value of these amendments when we return to them on Report.

--- Later in debate ---

[Lord Barnett]

We are talking about possible serious financial crises and stability. At the end of the day, the Chancellor will be held responsible if something goes wrong with financial stability. There could be as many teams as we liked, but the Chancellor would ultimately have to accept responsibility, even if he knew nothing about it. I am sure that any Chancellor—I am looking at one now—would know everything that was going on in his team.

I am confused about what the clause or the Bill will do to help us in this matter. My noble friend’s amendment might help, although we are told by the Minister that it could “excessively personalise”. I am blessed if I know what that is supposed to mean, but no doubt the Minister will tell us. At the moment, I am more confused than ever. I thought that I understood a few things about financial matters but, listening to the exchange between my noble friend and the Minister, I am confused more than ever.

[Lord Eatwell]

Perhaps before I sit down I can help my noble friend. We are discussing what is perceived to be an essential failure of the previous system. The failure was that the people responsible for working it did not take advantage of the tools that were provided. Here in the Bill, as the Minister pointed out, the Government have rightly insisted that the Treasury and the Bank convey information to each other, consult each other and act collectively when necessary. That is appropriate, and I commend the Government in that respect. I simply think that they have not gone far enough.

[Lord Peston]

If my noble friend were to ask himself who would know most about a macroprudential measure in the Bank, surely that would be the deputy governor, because that is his job. My noble friend is saying that the Treasury should consult. I would argue that the Treasury is sensible enough to know that it should consult the one person who would know what was going on.

[Lord Eatwell]

Just to reinforce what I said, neither the Government nor this side have entire confidence in the consultation procedure between the Bank and Treasury as it has taken place in the past. The Government are seeking to reinforce that confidence, and I wanted to reinforce it further. But at this stage I beg leave to withdraw the amendment.

Amendment 56 withdrawn.

--- Later in debate ---

[Lord Eatwell]

My Lords, I, too, support the noble Baroness, Lady Noakes, in her amendment. I also commend the Treasury Select Committee on having done such a good job in presenting the arguments for appropriate scrutiny of elements in the Bill.

As the noble Baroness, Lady Noakes, pointed out, the measures which the Financial Policy Committee is to have in its hands are extremely powerful. Let us consider introducing a leverage ratio in British banking. That notion has not existed within the structure or organisation of British banking. It would change entirely the relationship between the liability side and the asset side of the balance sheet of British banks. It is a major measure which thereby deserves appropriate consideration of the sort set out in the amendment.

Let us consider also the other tool which the FPC is claiming as appropriate for itself: pro-cyclical provisioning. Pro-cyclical provisioning involves enormously complicated decisions, both in the banking sector and in accountancy. Accountants tend to be very hostile to the notion of provisioning since it can be used to hide profits. It is a standard procedure which was common in the Enron case. If we are going to formulate a structure of pro-cyclical provisioning which not only achieves the goals that the FPC and all of us want but satisfies the complex needs of appropriate accounting—we have seen recently how accounting can be misused in the banking sector—these measures require very careful scrutiny. As the noble Baroness said so clearly, a 90-minute debate, which is then a rubber stamp, is entirely inappropriate. The procedure set out in the amendment would not only provide that level of scrutiny but contribute to the public confidence in these procedures which is vital if we are to achieve the goals which we have set out for the FPC.

[Lord Peston]

My Lords, I remind the Committee by way of background that we are discussing adverse, exogenous shocks to the financial intermediation process. Those shocks are impossible to forecast and extremely hard to recognise even when they hit the system. My understanding of why we require macroprudential measures is that it improves the way in which the system works so as to be able to cope with those shocks. It is partly to protect the system of financial intermediation and partly to improve its effectiveness and efficiency—so we have no difficulty about that.

However, if we need these instruments, it follows that in a democracy—and I still include your Lordships’ House as part of our democracy—Parliament must be able to scrutinise them appropriately. As the noble Baroness, Lady Noakes, is well aware, I am not an expert on all the different kinds of orders, and she simply lost me on them, but I ask her whether the measures set out in her amendment give Parliament, including your Lordships' House, a full right to scrutinise the introduction of the macroprudential measures and—here I got a bit lost—to amend them in the sense of saying to the Government, “We think that what you are doing is right, but you can do it in a rather better way.”? If that is what the amendment says, and I see the noble Baroness nodding, the Minister has a duty to the House to say, at the very least, that he will take it away and think it through.

--- Later in debate ---

[Lord Myners]

As I listened to the Minister, it seemed to me that he was implying that there may be times when the FPC has no recommendations outstanding. Surely, however, the FPC will always have recommendations outstanding. It will always have a preferred leverage ratio or a gearing ratio or a deposit to loan or some other of the macroeconomic tools that it has to apply to the banking sector. I am not sure how keeping recommendations under review and reporting on them actually works in a situation in which there will always be recommendations in place. I cannot envisage a situation in which the FPC will say, “We have no views on anything, and therefore there is nothing that we need to be reporting and monitoring”. I may have misunderstood the point; if I have, I apologise, but I would appreciate some guidance from the Minister.

[Lord Eatwell]

My Lords, we broadly welcome these amendments, in the sense that they are adding to the overall scrutiny and assessment of the activities of the FPC and thereby reinforcing, we believe, its general acceptability and strength of purpose. However, I want to raise a warning flag with respect to new Section 9QA(3), in which it is argued that the FPC will have to prepare,

“an estimate of the costs and an estimate of the benefits that would arise from … the direction or recommendation in question”.

These are macroeconomic measures. It is virtually impossible to provide a simple numerical estimate of the cost or benefit of a macro measure. There will be either a tendency to overestimate the costs, or a tendency to overestimate the benefit, in this particular case. Presenting an assessment in quantitative terms will give spurious precision and, indeed, spurious credibility to a particular measure. I assure the Minister that for any macro measure, I could write an entirely credible report saying that the costs exceeded the benefits and an equally credible report saying that the benefits exceeded the costs. This is simply extending the whole notion of cost-benefit analysis beyond the range in which it can effectively operate. It would be valuable to take account of an attempt to describe in broad qualitative terms the costs and benefits. However, please let us not have the spurious precision of numerical calculations of variables which, by their very nature, cannot be expressed in precise terms.

[Lord De Mauley]

My Lords, I am grateful to noble Lords for those questions. The noble Lord, Lord Myners, says that effectively there will always be a recommendation that is extant. He is probably right about that. The requirement is to review regularly any recommendations that have a continuing effect, and that includes any recommendations to set or maintain any particular level of leverage or capital, as the noble Lord suggests. I broadly agree with him, actually.

The noble Lord, Lord Eatwell, is right to say that a cost-benefit analysis is a difficult thing to do. That does not mean that the committee should not attempt it, so that at least interested parties have an opportunity to review it and make their comments.

--- Later in debate ---

Moved by

[Lord Eatwell]

89: Clause 3, page 14, line 12, at end insert—
“9WA Financial Stability Advisory Panel
(1) There will be a Financial Stability Advisory Panel.
(2) The membership of the Panel will be—
(a) the Deputy Governor for Financial Stability;(b) 6 members appointed by the Treasury, subject to approval by the Treasury Committee of the House of Commons;and the members appointed under paragraph (b) will be academics, members of staff of international organisations, practitioners, or others with particular skills in the analysis of systemic risk. (3) The Financial Stability Advisory Panel will—
(a) provide written advice to the Financial Policy Committee concerning the analysis of systemic risk;(b) once a year prepare a report assessing the analysis of systemic risk by the Financial Policy Committee over the preceding 12 months (the first report to be twelve months after this section comes into force);(c) assess the effectiveness of measures prescribed under section 9K in the attainment of the financial stability objective of the Bank;(d) assess the effectiveness of directions and recommendations of the Financial Policy Committee under sections 9G and 9N in the attainment of the financial stability objective of the Bank;(e) prepare an annual report on matters referred to in section 9WA(3) to be presented by the Supervisory Board of the Bank, and subsequently published on the Bank website.”

[Lord Eatwell]

My Lords, the development of macroprudential regulators, the instruments for introducing macroprudential regulation, is a common theme in the UK, the European Union and the United States. Different models have been developed for the institution that is to be responsible for macroprudential regulation. In our own model, the Financial Policy Committee, we see what could be called a “central bank model”, where the alternative voices being brought to the table are to be represented by the independent members of the FPC. It will fall to them to challenge Bank of England house thinking and provide alternative perspectives. There is only a very small number of external members on the FPC and finding members with the experience and skills necessary to perform the role that we demand of them is, as has already been seen, very difficult, although at the moment we have an excellent group in the shadow FPC. An alternative model, which has been adopted by the United States Financial Stability Oversight Council, pursues a more stakeholder-oriented approach in which the appropriate voices from stakeholders actually have a direct role in the organisation of macroprudential measures within the United States.

Both the central bank model that we have pursued, which also applies to the European systemic risk board, and the stakeholder model have disadvantages. The key disadvantage of our central bank model is that we do not have enough diversity of opinion or access to new research and critical assessments of FPC measures that the stakeholder model might have. The problem with the stakeholder model is that the United States may find that its Financial Stability Oversight Council becomes mired in differences of opinion from different stakeholder interests and has difficulty in pursuing the coherent macroprudential policy that is required of it.

As we know, this whole area is, as I said earlier, an experiment—or, if the Minister prefers, a project. We are dealing with areas and matters that at present are uncertain. There is little agreed analysis or clear empirical assessment of how some of these tools will actually work. We will find out. We are going to experiment. We therefore need to harvest the widest possible spectrum of analysis. The amendment proposes that there should be a financial stability advisory panel, not a panel that is intimately involved in designing and implementing the measures. Those independent voices are provided by the independent members of the FPC but they are necessarily compromised by their role in dealing with very sensitive matters as they might have conflicts of interest if they have a wider role in the financial services industry. The financial stability advisory panel could contain individuals with such conflicts of interest because they would not have a role in actually managing the macroprudential organisation of the FPC.

The amendment suggests that we have this financial stability advisory panel providing that diversity of view from academics, perhaps from members of staff of international organisations such as the Bank for International Settlements, which is making a lot of the running in the development of macroprudential tools, and potentially from others who have particular skills in the analysis of systemic risk. It will be their responsibility to provide written advice to the FPC, prepare an annual assessment of the FPC’s performance, look at the effectiveness of individual measures and assess the effectiveness of particular directions and recommendations in the context of an annual report or assessment. This cannot do anything but good. It is simply an institutionalisation of the detailed examination, the variety of voices and the consideration of effectiveness that are so necessary in providing both coherence to the FPC and its general acceptance. A panel of this sort, given the responsibilities that are set out in the amendment, would add significantly to the effectiveness of the Financial Policy Committee. I beg to move.

[Lord Stewartby]

My Lords, I was interested to hear the comments from the noble Lord, Lord Eatwell, on the nature of the work that will face the panel. It sounds like something that overlaps considerably with the Board of Banking Supervision in the late 1980s. Obviously that was working in different circumstances, but each of the bodies require, or required, people of an unusual stripe who combine a practical experience of banking, and the difficult areas that it brings with it, with a particular canniness in identifying areas where they think that things are not as they should be, particularly in cases where that is not always evident until later when events have already taken place.

Are the would-be members of the panel now shadowing the work that will be theirs in statutory form as a result of the Bill? It is terribly important to get the people involved carrying a great deal of weight and clout but at the same time having inquiring minds—something that will help us to ferret out areas that have been unsatisfactorily dealt with. I will not say more now, but I am pleased that some of the reasons for having a panel such as this—20 years ago or more it was called the Board of Banking Supervision, or the BoBS—have been recognised as important in today’s different but difficult circumstances.

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[Lord De Mauley]

I will, if I may, respond on that point. The noble Lord, Lord Myners, is right, and my noble friend Lord Sassoon acknowledged earlier, that previously the Bank was slow to recognise the MPC external members’ need to have access to dedicated support. The Bank has learnt its lesson.

[Lord Eatwell]

Gosh, that is a bold statement. In replying to the comments made by the noble Lord, Lord De Mauley, I would point out that he has overlooked two crucial elements that underpin the logic of this amendment. First, there are indeed highly skilled and independent members of the Financial Policy Committee, but they are involved in making the decisions and the recommendations. They are the organised part of the organisation which will in due course be responsible for what happens. They are not in any sense an evaluative mechanism. They are adding grist to the mill of a decision-making mechanism; an evaluative mechanism is a different thing altogether.

Secondly, the noble Lord referred to the role of the new oversight committee. I would remind Members of the Committee that the oversight committee will be composed of members of the court; it will not be anybody outwith the internal structure of the Bank. I am enormously disappointed—the most disappointed I have been with anything I have done in relation to this organisation—that the Government have not taken this on board. We are trying to formalise a continuous process of debate, review and assessment by people who have high levels of skill in this area but who are not otherwise involved. That is what a truly effective advisory panel should do. I was struck by my noble friend Lord Liddle’s comments on what is happening at the European Systemic Risk Board. As the noble Lord, Lord Stewartby, said, we want people with the right sort of skills doing this sort of assessment. He is absolutely right.

I ask the Government to think again on this issue. This area can contribute significantly to the overall success of the FPC. I assure the Government that I will return to this matter at later stages, but for now I beg leave to withdraw the amendment.

Amendment 89 withdrawn.

--- Later in debate ---

[Lord Eatwell]

My Lords, I have an amendment in this group of a slightly different variety but I have enormous sympathy with what the noble Baroness, Lady Noakes, has said about the strategic objective. When I first read the Bill, my note in the margin said “vacuous”. This notion that “relevant markets … function well” really is gamma minus stuff. It is pathetic and does not mean anything at all. One immediately asks for a definition of “function well”. We find that the objectives for competition, integrity and consumer protection are all defined, but there is no definition of what “function well” might mean.

Moreover, not only is this expression vacuous but it has no separate life. Whenever the FCA’s objectives are referred to in the Bill, it is the other objectives—the consumer objective, the integrity objective, the competition objective and the operational objectives—that are referred to. This strategic objective only has coherent life in other references in the Bill in so far as it lives through these more concrete proposals. If it is to be left as it is, it adds nothing other than spurious solidity and real complexity to the structure of objectives for the FCA. I have tried to give it some life. In our Amendment 101D in this group, my noble friend Lady Hayter and I have added the phrase,

“in the best interests of society as a whole”,

to the term “functions well”. That phrase captures the concept of the social optimum as defined in classical welfare economics. One does not want the technicalities of welfare economics within the definition of the Bill, but serving the best interests of society as a whole is the sort of expression that is used by Professor Amartya Sen in his discussions of evaluations of philosophical propositions relative to the social good. By adding,

“in the best interests of society as a whole”,

I would hope to provide this previously vacuous statement with some structure that could be referred to as a mission statement. Although I take on board the objections of the noble Baroness, Lady Noakes, to mission statements, I must say that I tend to agree with them. A mission statement could provide some framework within which the other operational objectives could be seen. For example, on the competition objective, one would look at the objective of stimulating competition in terms of the best interests of society as a whole. There may be circumstances in which the stimulation of competition is not in the best interests of society as a whole perhaps because it causes some distortion to the operation of the market, but, more generally, we would expect the encouragement of competition to act in the best interests of society as a whole.

We have a simple binary choice. Either we must give this vacuous statement some substance or we should remove it from the Bill, as proposed by the noble Baroness, Lady Noakes. What we should not do is leave this statement, which can do no good other than cause a bit of innocent amusement about how silly some clauses in the Bill might be.

[Lord Sassoon]

My Lords, I was not quick in getting to my feet because I am not sure whether Amendment 101D was moved, taken separately, or where we are.

[Lord Eatwell]

I have just spoken to the amendment, which is in the group.

--- Later in debate ---

[Lord Eatwell]

Will the noble Lord indulge me? What does function well mean? “Function well” for whom? Does it mean functioning well for a consumer? Does it mean functioning well for a trader? Does it mean functioning well in terms of working smoothly without any hiccups but not allocating resources terribly well? Does it mean allocating resources efficiently? All those things come under the term “function well” but contradict one another. What does it mean, and for whom?

[Lord Sassoon]

My Lords, in giving those four examples the noble Lord knows very well that the first and fourth of his examples very much fit the bill, and the second and third very much do not. This is all about markets that work essentially to assist the end user of those markets. It has nothing within it to do with working well for a trader or something superficial that all looks smooth on the surface but does not provide the end result of liquidity, price discovery or choice for consumers. The noble Lord knows very well that it would be impossible within the compass of such a piece of legislation to try to define the well working of a market, but the Bill spells out the main ways in which the FCA will seek to promote the well functioning of markets—those operational objectives that I touched on.

Those operational objectives give clues and pointers to the FCA. It will be for the FCA’s board to consider if and when it needs to consider these questions of well functioning markets. I believe that it will be well equipped with its expertise to consider market by market what well functioning means. I see absolutely no problem with this. However, there needs to be something that brings together the FCA’s very diverse and individual functions, roles and responsibilities.

That relates to one of the questions asked by my noble friend Lady Noakes, who asked why the FPC and the PRA do not have strategic objectives. It is precisely because they have much more narrowly focused objectives that they do not need the overall strategic objectives that the FCA needs because of the breadth of its responsibilities. I agree with my noble friend and others that we have not provided this strategic objective for the FCA on some whim. We have not put it in for the FPC and the PRA because it is not necessary. It is precisely because of the diversity and the potentially conflicting nature of the objectives of the other bodies that we believe it is right to have it in the case of the FCA.

By the same logic, the strategic objective will act as a check and balance. If, say, the FCA seeks to advance its consumer protection objective by placing detailed requirements on firms, we want it always to ask itself whether what it is doing contributes to the ultimate end goal of ensuring that markets function well. What functioning well means will be determined with some commonality across all markets, but some of it will be market-specific, particularly depending on whether it is a consumer or a wholesale market. This is no afterthought. It reflects the Government’s desire to enshrine regulation which seeks to ensure that markets can do their job.

My noble friend also asked a question about how the FCA could act in a way that was not compatible with its objectives. There are examples which we need to take into account, one of which might be a short-selling ban which is, arguably, in the interests of end-consumers but is a measure which is not normally thought to be compatible with a well functioning market.

--- Later in debate ---

[Lord Eatwell]

Before the Minister sits down, did I hear him correctly when he said that the choice of the benefit to society as a whole was not a matter for the regulator but a matter for the governor? Or did he say Government? I did not quite hear him properly.

[Lord Sassoon]

I said the Government. I hope he would agree that it was for the Government, not the governor. Good.

Universities: VAT on Alterations to Listed Buildings

Lord Eatwell Excerpts

Thursday 5th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, there has been a consultation; there have been extensive discussions; and the response to the consultation was published on 28 June. Concessions have been made that will significantly help university listed buildings; for example, certain transitional repairs will be allowed to carry on for four summers. I shall not be drawn again into a discussion of listed places of worship, save to say that some of the same considerations apply. For example, anomalies in the arrangements affecting universities include the fact that those listed buildings which are used for business purposes such as teaching are already subject to VAT as are alterations to all non-listed university buildings, so there are very considerable anomalies here which we are clearing up.

[Lord Eatwell]

My Lords, I declare an interest as the president of Queens’ College, Cambridge, which contains some of the most beautiful grade 1 listed buildings in the country. The Minister did not accept the figure of £150 million put forward by the noble Baroness, Lady Deech, so I can perhaps help him by giving him a precise figure for the impact on my institution. My senior bursar tells me that the impact of this change on my institution will be up to 5% of the teaching, research and student support budget. Was that the Government’s intention?

[Lord Sassoon]

My Lords, the intention was to reduce a number of VAT anomalies, of which this was one, and to introduce generous transitional provisions relating to those measures.

Economic Policies

Lord Eatwell Excerpts

Wednesday 4th July 2012 Lords Chamber

[Lord Sassoon]

I entirely agree with my noble friend.

[Lord Eatwell]

My Lords, as but one little wavelet on the sea of outrage, may I ask the noble Lord whether, when he referred to the Government achieving stability for the British economy, he was referring to their achievement of reducing the growth rate from 2% to zero?

[Lord Sassoon]

My Lords, I was referring to 800,000 new private sector jobs since the election. I am talking about interest rates at levels we have not seen for 300 years, and more of the same.

Royal Bank of Scotland: LIBOR

Lord Eatwell Excerpts

Wednesday 4th July 2012 Lords Chamber

[Lord Sassoon]

It is a fascinating suggestion. Thank you for that.

[Lord Eatwell]

My Lords, the Minister will be aware that at Prime Minister’s Questions today my right honourable friend Ed Miliband emphasised the need for great speed in sorting out the issues around the LIBOR scandal, and the need for more considered speed with respect to wider issues. Surely the greatest speed would be achieved by a judicial inquiry which could now sit for five days per week. How many days per week will a parliamentary inquiry sit?

[Lord Sassoon]

My Lords, it is not a question of trading how many days one inquiry or another will sit. I could read out the long list of judicial inquiries that have taken two, three, four, five or 10 years and more. We believe that a parliamentary inquiry can do its work effectively by Christmas. These matters will be debated in another place tomorrow.

Financial Services Bill

Lord Eatwell Excerpts

Tuesday 3rd July 2012 Lords Chamber

Moved by

[Lord Eatwell]

34: Clause 3, page 3, line 34, after “functions” insert “having regard to the Government’s growth, employment and other economic objectives”

[Lord Eatwell]

My Lords, the amendment stands in my name and that of my noble friend Lady Hayter of Kentish Town. Members of the Committee will be aware that there has been considerable debate about the relationship between directions of the Financial Policy Committee and the attainment of a satisfactory rate of growth and employment in the economy. The issue at stake has been whether financial stability is achieved at the expense of growth and employment or whether financial stability can enhance the growth performance of the economy.

The amendments in this group—those in my name and that of my noble friend Lady Hayter, as well as those in the name of the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, and the right reverend Prelate the Bishop of Durham and those in the name of the noble Lord, Lord Sassoon—all seek to include growth and employment within the broad remit of the Financial Policy Committee. My amendment would balance a similar requirement on the Monetary Policy Committee to have regard to the general economic policies of the Government and argues that the Financial Policy Committee should have regard to the Government’s growth, employment and other economic objectives.

I suggest that “having regard to” is the appropriate admonition to the Financial Policy Committee at this stage and that the amendments in the names of the noble Baroness, Lady Kramer, and others and of the noble Lord, Lord Sassoon, are defective. They are defective because they are too insistent. The noble Baroness’s amendment, Amendment 35, states,

“in relation to financial policy in a manner designed to contribute to the achievement by the Bank of the Financial Stability Objective; and this shall include promoting … a stable and sustainable supply of finance to the economy, and … subject to that, the economic policy of Her Majesty’s Government, including its objectives for economic growth and employment”.

That of the noble Lord, Lord Sassoon, refers to the Financial Policy Committee “supporting” the economic policy of Her Majesty's Government.

In 2006, the economic policy of Her Majesty's Government resulted in an unsustainable boom. “Supporting” or “promoting” that policy would have been exactly the wrong thing to do. The role of the Financial Policy Committee is to lean against the wind in terms of what is happening in financial markets. When markets are overheated and expanding too fast and when the economy is growing too fast, it is the role of the Financial Policy Committee to use the levers at its disposal to change the supply of credit in the economy and consequently to slow growth down. That is why the careful wording, “having regard to”, embodied in my amendment is superior to “promoting” growth and employment, in the amendment of the noble Baroness, Lady Kramer, and to “supporting” growth and employment, in the amendment of the noble Lord, Lord Sassoon.

I have great respect for the position that the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, and the right reverend Prelate the Bishop of Durham are taking, because their intentions are entirely sound. Especially at a time of recession in Britain we all want to support growth and employment but we have to be careful in assessing the role of the Financial Policy Committee. In the amendments tabled by the noble Lord, Lord Sassoon, which were announced by the Chancellor in the Mansion House speech a few days ago, the emphasis on supporting is again excessive.

I suggest that the noble Baroness, Lady Kramer, and friends and the noble Lord, Lord Sassoon, look to a more careful wording than they have here. I think they have gone over the top in these recessionary times, but good times will return one day and in circumstances where growth is high, perhaps excessive, it will be the role of the Financial Policy Committee not to support the growth and employment policy of the Government of the day. I beg to move.

--- Later in debate ---

In answer to the question of whether the Government’s amendment goes too far, I stress that the FPC’s primary objective is, and will remain, financial stability. The secondary objective is subject to the primary stability remit. This means that the FPC cannot act to further growth if that action would damage stability. The MPC has always had a secondary objective to support the Government’s economic policy without any concerns that this goes too far. It has been an interesting and important debate to kick off today’s discussions but I ask the noble Lord, Lord Eatwell, to withdraw his amendment and the Committee to support the government amendments in this group.

[Lord Eatwell]

My Lords, I am grateful to all noble Lords who have taken part in this debate. I was going to say “short debate” but it got a bit longer as we went along, as these things tend to do. The reason is because, although it appeared at the beginning to be a debate on semantics, it actually addressed the fundamental issue of giving powers to unelected officials in the form of the Financial Policy Committee, the exercise of which would in the past have typically been associated with elected, accountable politicians. That is a fundamental philosophical issue in the Bill and it is interesting to reflect for a moment on why it has arisen.

First, there is a fundamental difference among many in this House about whether it is more desirable to have a separable economic policy, in which monetary and financial policies are pursued entirely separately from policies on growth and employment, or a collective economic policy conducted with the Bank, the Treasury and all relative institutions collectively deciding on the overall stance that should be taken. That is a fundamental debate in economic analysis. However, it is not the point here, which is why we have been slightly diverted.

The point here is about the role of the Financial Policy Committee, which is an innovation that has arisen because of the change in economic circumstances, involving the speed at which innovation in financial policy can dramatically change the environment of a given government policy. The Government can suddenly find that a particular economic stance is being undermined or distorted by significant innovation in financial markets. The development, for example, of the credit derivatives that underpinned sub-prime mortgages in the United States changed the whole housing finance policy of the United States—an innovation by financial institutions that changed the environment of government policy.

The key role of the Financial Policy Committee is to watch out exactly for those sorts of things. That is what it is there for: to maintain a persistent study of what is happening in financial markets and how that might change the environment for government policy, and of the implications of any particular stance that the Government and/or other economic policy actors, such as the Bank, have taken.

Having said that, this was an interesting debate and we have eventually focused on the issue of “supporting” or “having regard to”. Obviously, since I put the amendment down with my noble friend, I think “having regard to” is a more appropriate relationship given the role of the Financial Policy Committee, but, in light of the debate, I beg leave to withdraw the amendment.

Amendment 34 withdrawn.

--- Later in debate ---

Moved by

[Lord Eatwell]

35AB: Clause 3, page 3, line 36, at end insert—
“(1A) The Financial Policy Committee is to exercise its functions with a view to contributing to the achievement by the Bank of the FCA's integrity objectives, including but not limited to those set out in subsection (2)(f) of section 1D and section 1DA of FSMA 2000 as inserted by section 5 of the Financial Services Act 2012.”

[Lord Eatwell]

My Lords, I rise to move manuscript Amendment 35AB and speak to manuscript Amendment 110ZA, which is associated with it. First, I apologise to the Committee for introducing a manuscript amendment and, indeed, for introducing a manuscript amendment to replace a manuscript amendment. It displays the serious defects in my own drafting abilities and I hope to do better in future. I apologise for that but it is a testimony to the flexibility of your Lordships’ House that we are able to consider these amendments now, which are designed to give the Committee the opportunity to address a very important matter that, as we know, has arisen in the last few days. It would be foolish to pretend that these amendments have not been brought forward as a result of the revelations of the LIBOR scandal in the last few days. However, it is valuable to give the Committee the opportunity to debate these issues in a concrete way and with a concrete proposal on which it can opine.

The consequences of this scandal are so serious and so far-reaching that their implications for this Bill are immediate. Fortunately, we had not reached what might be deemed the relevant part of the Bill that should be amended to take account of what we now know—something that, a week ago, we did not know. We now know that the setting of benchmark prices is a fundamental element in the efficient operation and stability of financial markets as a whole—that is, of the generation of systemic risk as defined in the operating principles of the FPC—and that the process of setting one of the most important benchmark prices in the world, the dollar LIBOR, has been severely compromised.

--- Later in debate ---

[Lord Kerr of Kinlochard]

Given that the noble Lord has explained that the public inquiry he seeks is not an alternative to the Tyrie inquiry, can he confirm that the Opposition will be co-operating in full with the Joint Committee to be set up under Mr Tyrie?

[Lord Eatwell]

I certainly think that Mr Tyrie and the Treasury Committee can and will pursue their activities in their normal way, including perhaps the pursuit of this particular inquiry. As to the future policy of the Opposition on the organisation of that inquiry, we are trying to achieve the best possible outcome. I see the best possible outcome as a three-dimensional one.

[Lord Carlile of Berriew]

My Lords, I welcome the opportunity for this short debate on a matter of great public interest. I have to say to the noble Lord on the opposition Front Bench that the Opposition have asked the right question but given the wrong answer to that question. The LIBOR issue is an immense financial scandal. It appears to have not just the scope of one bank, but possibly to affect other financial institutions. It affects not only what has happened in the United Kingdom, but affects at least four jurisdictions, including the United States of America. It affects the reputation of the City of London in a major way. Those of us who are as old as I am remember bankers in the City of London by the adage, “My word is my bond”. Now we see, “My Maserati is my success”, as the evidence of what happens in the City of London. I hope that noble Lords of all parties and none will agree that, as a result of this scandal, we need to emerge from it with “my word” being “my bond” once again. The trust in the City of London is why the City of London succeeded in the past. It will not succeed in the future if those who do business there, if I may use a Scouse expression, are seen merely to be “wide loads”.

What has happened undoubtedly potentially merits investigation for criminality. I do not believe that a parliamentary inquiry is the right way to winkle out criminality, welcome though a parliamentary inquiry is. It is not a way in which criminal investigations are carried out. In fact, it is a ludicrous proposition to suggest that this is the job of a parliamentary committee, however well led. I do not for one moment question the leadership and integrity of Mr Tyrie. He is obviously very good at what he does. I do not favour a judicial inquiry, because a judicial inquiry can quickly become a behemoth. I do not draw a comparison with the Leveson inquiry. Lord Justice Leveson is not merely an old friend; he is doing a brilliant job with a very specific inquiry of an entirely different kind. However, I fear that if a judicial inquiry were established, within a few days we would see some of the best lawyers in London—including some Members of your Lordships’ House—earning vast sums of money from lining up in front of a senior judge, expecting an outcome at some distant time, possibly in this decade, possibly not.

--- Later in debate ---

[Baroness Kramer]

My Lords, I want to associate myself with the words we have just heard from the noble Lord, Lord Kerr, on the importance of acting quickly. I speak as someone who has spent most of her career in banking, working with clients on transactions that involve the LIBOR rate and I understand the significance of the issues we have discussed in this House.

As others have said, this is not just a UK issue. The earliest that any inquiry, as proposed by the noble Lord, Lord Eatwell, could begin would be the autumn, so we are looking at something like a two-year inquiry. I am not sure that he understands—

[Lord Eatwell]

If the noble Baroness would allow me, perhaps it would be for the benefit of the Committee if I said that I certainly did not rule out the Wheatley or Tyrie inquiries: I argued that both have something to contribute. I say that to the noble Lord, Lord Kerr, as well. Therefore, I accept the whole notion of acting quickly—it can be handled—but we then have to ask: what next?

[Baroness Kramer]

When the noble Lord, Lord Eatwell, talks about the Tyrie inquiry, I am still not clear whether he is talking about the Joint Committee of both Houses, in which the Lords are as involved as the Commons, or whether he is simply talking about the Treasury Select Committee acting, if you like, in its normal way. I think that he has avoided giving us clarity around that issue.

The critical thing here is that other jurisdictions will act. The United States will not sit around while a committee lasting one or two years talks about the fundamental issues of banking, so the actions that we are going to take have to be decided in a far more immediate way. We have great opportunity with this Bill and with the forthcoming banking reform Bill. The changes will have to be embedded in those Bills at the latest if we are to stem the tide of real disadvantage.

If anyone doubts that work is afoot elsewhere to deal with the problems that we have been so slow to pick up and deal with, I suggest they take a look at today’s Wall Street Journal. There is an article in there called “Lining Up Potential Successors to Libor”. It is very clear that we in the UK are on the back foot and we need right now to get on to the front foot and not start playing for the long grass, however worthy that is. It is that sense of urgency that I want to convey. If we hear that the answer for the British Government is going to be a commission, there will be a very cynical reaction in the United States that once again the Brits are going for another long-term committee with navel-gazing and endless discussion, rather than immediate action. Perhaps someone can tell me what the value is of a commission that reports after all the changes have taken place. That sounds to me like a method for closing a stable door long after the horse has bolted. It is crucial to get that horse moving now, without delay.





I also have to say that I regard a Committee of both Houses as an extraordinarily effective way of getting to the root of a problem. Think of the expertise we have in this House. Surely that is exactly what we should be using. The breadth of the experience we can bring is important. Moreover, it is very different from Leveson because at the heart of that inquiry is the reality that it is investigating a relationship between politicians and the media, one in which there is a high suspicion—outside here I would probably go further, but that would not be tactful—of collusion and corruption. Politicians cannot investigate themselves under those circumstances, but I do not think anyone is suggesting that that is the situation in the banking industry. We are not talking about political collusion or corruption here.

Indeed, if we doubt the effectiveness of the political system in handling this, let us look at Bob Diamond’s resignation this morning. It is easy to see what happened. He knew he would face the Treasury Select Committee on Wednesday, so he sat down with his lawyers—I am guessing that, but I suspect I am right—and started to role-play how he would behave in the meeting. Soon he realised that his position was totally untenable. That is effective action, and it is what we should be building on, not going back to some sort of long-term commission. The additional benefit is that if there is leadership from Parliament, it will continue to observe and supervise the banking industry for many years. It will not pack up and go away after 18 or 24 months. We should build on that, not lose it.

Perhaps I can make a last comment. We seem to be going through an extraordinary trend, if you like, of subcontracting out our responsibilities. As politicians with the privilege of being part of this Parliament, surely we ought to be taking the tough decisions. We should not be trying to find someone else to contract out to every time there is something tough to do, otherwise we might as well just become a commissioning body. I would argue that we should look at our strengths and skills and take this opportunity to act. That would show the banking industry and the wider world what we can do. The longer term is too late, and we have to be aware of that.

--- Later in debate ---

[Lord Eatwell]

My Lords, I am grateful to noble Lords who have taken part in a debate which, as the noble Lord, Lord Sassoon, said, is timely and important. I was impressed by the fact that virtually every noble Lord who spoke, with one or two exceptions to whom I shall refer in a moment, felt some wider consideration was needed than that currently envisaged in the Government’s proposals with respect to Mr Wheatley and—if I may be forgiven by the noble Lord, Lord Higgins, for using the shorthand—Mr Tyrie’s review. The noble Lord, Lord Carlile, wanted to go wider in a different way by introducing the innovation of a special prosecutor. Special prosecutors have at best a very mixed record in the United States, which should be taken into account. Focusing on the legal issues is too narrow an approach in the circumstances that we face. As the noble Lord, Lord Phillips, said, there is “a huge congregation of issues”; my noble friend Lord Myners said that a fundamental review was needed; a “strategic inquiry” was the phrase used by the noble Lord, Lord Higgins. As my noble friend Lord Peston pointed out, the next major financial crisis is unlikely to occur in the LIBOR market; the next scandal will occur somewhere else. Unless we look at the underlying foundations of problems in our banking industry, we will not be in the least prepared. The noble Lord, Lord Blair, with his experience of legal matters in financial regulation, referred to a need to consider things “in the round”—I could not have chosen a better phrase.

The major difference, as I detected, with the arguments that I put forward came from those who felt that I was trying to slow things down. That is the last thing that I am trying to do. As I pointed out, I am entirely supportive of Mr Wheatley’s proposals and I am supportive of the idea of a Joint Committee moving forward to deal with the specific implications and consequences of the LIBOR element—what Mr Tyrie refers to as the ring-fence proposals. However, as the noble Lords, Lord O’Donnell and Lord Kerr, said, if there is no sign of getting to a solution, then we can have an inquiry. As the noble Lord, Lord O’Donnell, said, we should perhaps consider whether we need to go further.

The key issue then becomes one of timing and why we should not get on with all three? We should understand of course the legal issues with respect to prosecution—I take that under advisement—but what is the problem with addressing these matters? There is no other reason not to deal with all three. I reject entirely the caricature that I was suggesting that things be slowed down; I certainly was not. We need to get on with the immediate issues, but there are much wider issues affecting the future of this country that need to be addressed.

[Lord Howard of Lympne]

The noble Lord has repeatedly talked about the need for a wider inquiry than what I think we have all agreed to call the Tyrie inquiry. Given what on any view are the extraordinarily wide terms of reference of which the Minister has informed the Committee today, can the noble Lord identify any specific angle, matter or issue that is not covered by those wide terms of reference?

[Lord Eatwell]

Yes, indeed, my Lords, I can do that straightaway. Those terms refer to,

“drawing on the conclusions of UK and international regulatory and competition investigations into the LIBOR rate-setting process, consider what lessons are to be learnt from them in relation to transparency, conflicts of interest, culture and the professional standards”.

It is from them that lessons will be learnt—not from the wider characteristics of the industry; not from what the regulators were doing; not from the unintended consequences of the reforms of the 1980s; and not from the change in the nature and conglomeration of the banking industry. Lessons will not be learnt from any of those issues, which are much wider than those in the terms of reference. I am happy to provide the noble Lord with a copy.

[Lord Anderson of Swansea]

Has my noble friend considered the problems caused by the timetable set by the Government? If the proposed Joint Committee goes through the normal procedures, it will have to call for evidence. That process will take several weeks, which will eat up the rest of July until the Recess begins. This House does not return until the beginning of October. If the timetable is to end by Christmas, the committee will have to have several weeks prior to Christmas before the publication of its report, which essentially means that only the months of October and November will be available for its considerations. That would be a wholly impossible timetable.

[Lord Eatwell]

My noble friend has made an important point about the pressures that will be faced by Mr Wheatley’s committee and, if we may call it that, the Tyrie committee.

I do not want to delay the Committee. I have made two major arguments in favour of the amendments put before your Lordships. First, the terms of reference, to which the noble Lord, Lord Howard, has just referred, are too narrow. My Tyrie refers to them as “ring-fenced”. That is his expert view, which I accept. Secondly, we have to take this matter out of party politics. It was awful how yesterday’s discussions degenerated into a spat about which politician said what to whom and when, and who was responsible. That is not the issue; the issue is the future of our financial services industry. Let us get this matter out of party politics. I believe that I have heard around the Chamber support for the position that I have taken and therefore wish to test the opinion of the Committee.

--- Later in debate ---

Moved by

[Lord Eatwell]

36: Clause 3, page 4, line 3, at end insert—
“( ) factors likely to lead to a loss of confidence in the financial system as a whole”

[Lord Eatwell]

My Lords, this group of amendments is a rather mixed bag but all of them refer to various duties of the Financial Policy Committee. The first, Amendment 36, which is in my name and that of my noble friend Lady Hayter, adds to the definitions of systemic risk in new Section 9C(3) of the Bank of England Act 1998 the collapse,

“of confidence in the financial system as a whole”.

Academic research has identified four major sources of systemic risk, at least to date: first, linkages, or the connections between markets, referred to in new Section 9C(3)(a); secondly, the distribution of risk, particularly in the context of cyclical variations in risk, referred to in new subsection (3)(b); thirdly, excessive leverage, debt and credit growth, as referred to in new subsection (3)(c); and fourthly, the general collapse of confidence, which is not referred to at all. This is a serious omission—probably a slip in drafting, but none the less a serious omission in the analysis of systemic risk.

There can be a major systemic failure that is not associated with any of new subsection (3)(a), (b) and (c). You can have a situation that is not represented by linkages between firms, is not to do with the distribution of risk, and is not due to excessive leveraged debt or credit growth, but is due to the collapse of a firm in a particular strategic position within the industry, which leads to a general collapse of confidence. There is no necessary visible linkage between the firms, but the collapse of confidence can lead to a general systemic failure. Adding this fourth component—which is completely standard in the usual list of four in the academic literature—would complete the set from which, for some reason, this element has been neglected. To use the felicitous expression of the noble Lord, Lord Sassoon, it would plug the gap.

Amendment 37 is a probing amendment, although it has more substance than that. New Section 9C(4) of the Bank of England Act says:

“Subsections (1) and (2) do not require or authorise the Committee”—

the FPC—

“to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect”,

et cetera. The phrase “in its opinion” seems to me to make the new section completely meaningless. How would you ever tell? If something happened and the committee pursued some set of objectives that had a significant adverse affect on the capacity of the financial sector to contribute to growth—something the noble Lord earlier this afternoon pointed to as a very positive provision in the Bill—how would you then know whether this had been “in its opinion” or not? You would go along to the committee and ask, “Why did you do this?”. It would respond: “In our opinion, it was the right thing to do. End of story”. Consideration of the implications of its acts has been ruled out of court. The phrase “in its opinion” seems to make the clause devoid of meaningful content. If we remove it, we will improve the overall import of the Bill and, significantly, of this section that refers to the functions of the FPC.

With Amendment 39, I have a real mystery. Systemic risks are defined as credit growth, debt and leverage. However, in new Section 9C(7), all those terms are defined with respect to the UK only. Why is that? We live in a global financial market. Why do they refer to the UK? If these conditions had been in place and the FPC was considering the position of the Royal Bank of Scotland, that bank would have been found to be totally secure, because almost all the problems that assailed it occurred outwith the UK. The growth of credit from that bank was excessive outwith the UK. Its debt position was defined not by the debt it owed to individuals in the UK but to bond-holders and individuals throughout the world. I must be reading this completely wrongly but am totally mystified as to why credit growth, debt and leverage, as referred to in the definition of systemic risk, are confined to the UK. I would be very grateful if I could be enlightened and told that somehow I have got this wrong and that this does not confine consideration to the UK but is dealing with some other, wider element.

Continuing the international theme in this pot-pourri of amendments, I turn to Amendment 44, which deals with page 5, line 39, and refers to the overall functions of the Committee, suggesting that it should be,

“assessing its functions in the light of the policies of the European Financial Stability Board”.

As we know, much of the structure of the regulatory rule book for the UK will be written in Brussels. The EU, like the UK, is feeling its way towards defining the proper role of its macroprudential regulator, namely the European Financial Stability Board. The EFSB will, over the next couple of years, build a toolkit not unlike one that we desire for the FPC—rules on leverage ratios, procyclical provisioning, risk-weighted capital ratios and so on.

It is essential that measures taken in the UK are compatible with measures taken at the EU level, and vice versa. That is why the FPC must, at the very least, assess its functions in the light of what the European Financial Stability Board is doing. We will have an independent position, and the EFSB does not have the same European-wide status as the banking securities markets and insurance regulators, but none the less we want the activities of our FPC to be compatible with those of the EFSB.

To sum up, this is somewhat of a bran-tub. You put your hand in and take out amendments to see which aspect you would like to look at, so it is a slightly diverse group. Amendment 36 adds to systemic risk the risk of collapse of confidence in the system as a whole. Amendment 37 removes “in its opinion” from the new subsection whereby the FPC must take account of its impact on the financial sector’s contribution to growth, as the phrase would render the clause meaningless, or at least inoperable. Amendment 39 raises the question of why growth, debt and leverage are defined purely with respect to the UK, when—for goodness’ sake—we in Britain are dealing with some of the largest global financial institutions in the world. Amendment 44 simply adds to the functions and the need to take into account the actions of the European Financial Stability Board. Going back to Amendment 36 and the collapse of confidence in the system as a whole, I beg to move.

[Lord Sassoon]

My Lords, I do not know whether this group is a pot-pourri or a bran-tub, but let me attempt to do justice to a number of these amendments. Fine group though they make, they do not entirely find favour with the Government, as the noble Lord will know, because I do not believe they are necessary. I shall address each of them in turn.

Amendment 36 attempts to add,

“factors likely to lead to a loss of confidence in the financial system as a whole”,

to the list of specific types of systemic risks. I can reassure the Committee and the noble Lord in particular that new subsection (3) is not intended to be an exhaustive definition of systemic risk. The types of risk that have been highlighted in this section are generally accepted to be the main types of macroprudential risk, but systemic risks may well arise in future that are not included in these categories. That is why the FPC is free to look at anything else that it believes might pose a systemic risk to financial stability, and I would certainly expect that something that would undermine confidence in the system as a whole would have an impact on stability. It could be argued that market confidence is a necessary component for financial stability. I therefore believe that this is already included in the FPC’s objectives as they stand, and that Amendment 36 is not necessary.

On a related point, Amendment 39 seeks to remove the definitions of aggregate credit growth, debt and leverage for the purposes of subsection (3). I can assure the Committee that these definitions have been carefully constructed so as to capture the main aggregate metrics that affect UK financial stability. They were carefully considered by the Joint Committee—indeed, the Government have amended these definitions in light of the Joint Committee’s recommendations—but critically this does not mean that systemic risks that have their origins in other countries are outside the scope of the FPC. In fact, in response to a recommendation from the Joint Committee, we put this point beyond doubt by adding new subsection (6), which makes it clear that it is immaterial whether systemic risks arise in the UK or elsewhere. I think the noble Lord’s concerns are misplaced on this one.

[Lord Eatwell]

Yes, I can see that. I put a little question mark linking the two new subsections which seem to me to be contradictory, or at least inconsistent. I still do not understand why new subsection (3)(c) says that the systemic risks which the Financial Policy Committee has to consider are those which include,

“in particular … systemic risks attributable to structural features”,

and,

“unsustainable levels of leverage, debt or credit growth”.

How do we define leverage? It means,

“the leverage of the financial sector in the United Kingdom”.

Why? Debt means,

“debt owed to the financial sector by individuals in the United Kingdom”.

Why? Credit growth means,

“the growth in lending by the financial sector to individuals in the United Kingdom”.

Why? Why do we have these definitions when the noble Lord is quite right that new subsection (6) seems to contradict them?

[Lord Sassoon]

My Lords, the most important thing is that we are talking about financial stability in the UK, and the FPC needs to consider first and most importantly the metrics and indicators of financial stability in the UK. After all, the objective is for the FPC to protect and enhance the stability of the UK, so it is quite right that the definitions refer to the effects in the UK. We are not interested in the FPC deeming that it is not its business to deal with leverage in non-UK markets, but on the other hand it is quite right that the risks themselves may come from factors that arise outside the UK; I think that that is the point the noble Lord is trying to get to, which I believe is well covered by new subsection (6) and which we have made clear in the response to the Joint Committee. It is not the responsibility of the FPC to actually engender results outside the UK; it should be engendering results in the UK.

[Lord Eatwell]

I am sorry; the noble Lord must be wrong on that. If a bank is lending excessively outside the UK, then the FPC most certainly should be concerned. The idea that the FPC should be concerned only in managing results in the UK must be entirely wrong and could not be the basis of successful stability for the UK financial sector.

[Lord Sassoon]

No, my Lords, it is not wrong. If we are talking about a British bank, it is a British bank, and that is linked to these metrics and to the remit of the FPC. Of course that is captured in the FPC’s remit. I think we are getting ourselves excessively excited about a simple issue that is perfectly well drafted in the Bill, which is that the FPC has a wide and appropriate remit to deal with financial stability in the UK, but that it should properly take account of systemic risks that may arise both inside and outside the UK. That is exactly what the drafting of the two clauses taken together means. If the noble Lord had been critiquing the Bill as it was introduced in another place, he would have proper grounds for questioning that, but we have plugged a possible gap, and the construction now works.

[Lord Sassoon]

I shall have another go, because this is tricky but important. The Financial Policy Committee is charged with responsibility for the overall financial stability of the UK: the systemic risks and the macroprudential role. We need to distinguish that from the situation of individual firms which will or may contribute to the overall systemic risk. In this discussion we risk conflating two things. One is the systemic risk in the system, which the FPC is charged with dealing with. That is credit growth, debt and leverage as defined by subsection (7), which is referenced to the United Kingdom. The financial stability of the United Kingdom is the concern of the FPC. That does not mean that risk may not come from the international financial system—that is made completely clear by subsection (6). However, for individual financial institutions for which the PRA will have first responsibility, if the FPC considers that they contribute to the overall situation, it does not rule out or limit consideration of the factors that affect individual financial institutions. The clause and the definitions do not rule that out. We should not confuse what is being defined here. The definitions are not exhaustive of the systemic risks which the FPC should consider. It may consider whatever else it considers relevant.

[Lord Eatwell]

Let me try this just one more time, because the argument that the list is not exhaustive is a toss-away argument: we did not include that, but it does not matter, because it covers everything. Let us be a bit more serious and deal with precisely what is in the Bill. To make the discussion concrete, I shall deal with the first part of subsection (7), which refers to credit growth. In my opinion, credit growth is an important indicator of systemic risk. Indeed, Professor Shin of Princeton University, who is the authority in this field, has identified credit growth as one of the key variables which any macroprudential regulator should have in its sights.

Let us consider credit growth. We are told that with regard to systemic risks in particular,

“‘credit growth’ means the growth in lending by the financial sector to individuals in the United Kingdom and businesses carried on in the United Kingdom”.

That cannot be right, because the stability of banks and financial institutions in the UK often crucially depends on the nature of credit growth in lending to individuals outside the UK. The businesses to which they lend will operate within and outwith the UK. What is the notion that somehow it must be businesses carried on in the UK? Will, say, British Aerospace be included? It happens to be a British company, but I believe that most of its operations take place outside the United Kingdom. I may be wrong about that, but a substantial proportion of its operations take place outside the United Kingdom. Would British Aerospace be covered in respect of lending to businesses carried on in the UK?

We could take out subsection (7) and lose nothing. It is the old adage that you teach pupils all the time: when in doubt, take it out. It adds nothing but confusion to the specification of the role of the FPC and the definition of systemic risk. Of course, the FPC is responsible for systemic risk in the UK, because that is its juridical domain, but that systemic risk can arise from activities by UK institutions on a worldwide scale. When in doubt, take it out. Let us drop subsection (7) and make the Bill more coherent.

[Lord Sassoon]

As there is doubt about this—considerable doubt, it seems, in the noble Lord’s mind—that is precisely why we need to leave it in. Again, he conflates the role of the FPC, which is to deal with financial stability issues, threats and risks in the UK. He says that it is clear that the Financial Policy Committee's remit is only for the UK. I do not know how he comes to that conclusion. If there were no definition of levels of unsustainable leveraged debt or credit growth, that would precisely raise in people’s minds the question of what is their geographic limit.

[Lord Eatwell]

My Lords—

[Lord Sassoon]

If the noble Lord will let me continue, this discussion precisely makes the point that the FPC is responsible for systemic risk, which may be measured in terms of these factors and others listed in the clause. In that respect, we are talking about the UK. That is independent of whether banks are or were lending excessively to foreign companies. That is dealt with in other ways, as I have explained: partly through the PRA looking at the individual leverage ratios or whatever for the individual bank. Equally, if there is a systemically important institution about which the FPC is concerned, this in no way limits the considerations to the business of that institution simply in the United Kingdom, because this is dealing with something else. This is dealing with the overall systemic risk that the FPC is trying to deal with, not any question about where individual firms are doing business.

[Lord Eatwell]

My Lords, if it in no way limits the consideration of systemic risk, I would say again that it is otiose; it is worthless. It adds only confusion to the Bill. With respect to the noble Lord, the juridical domain of the FPC is defined by the definition of “regulated persons”.

[Lord Sassoon]

My Lords, we risk confusing different things again. The definition of “regulated persons” is wholly different from the question of financial stability for the UK. The concept of “regulated persons” is dealt with elsewhere. We are in a completely different part of the financial landscape. We are risking mixing up the microprudential with the macroprudential. When the noble Lord reflects on this debate, he will understand that these definitions are appropriate. He would say that they are unnecessary; I say that they are necessary in order to define the objectives of the Financial Policy Committee. However, a careful reading will show that they in no way restrict the FPC or the PRA in looking at the activities of individual regulated businesses, wherever they are, in so far as they relate to regulated activities or to the financial stability objective.

I shall move on to Amendment 37, which seeks to remove the words “in its opinion” from the economic growth “brake” that prevents the FPC taking action that would have a significant adverse affect on the ability of the financial sector to contribute to long-term sustainable growth. I disagree with this for three reasons.

First, in principle, the FPC is the best placed to assess the likely effect of its own actions. We do not want the FPC to rely on other people in forming this assessment. The FPC will be the expert macroprudential regulator. It is the right body to decide how the brake applies and the drafting should reflect that. Secondly, that assessment will be completely open, transparent and subject to outside scrutiny via publication of the decisions in the FPC’s meeting records. The government amendment, which we will discuss shortly, will go further and require the FPC to explain how it has complied with the duty to consider the “brake”. Thirdly, in practical terms I do not believe that there is any sensible alternative to this approach. In whose opinion would it be, if not that of the FPC itself? I am sure that the noble Lord does not envisage the FPC’s meeting adjourning while it seeks the opinion of some other body.

Amendment 44 would add to the FPC a function of assessing its functions in the light of the policies of the European Systemic Risk Board, or ESRB. I appreciate the sentiment behind this amendment. The Government believe that, given the international nature of financial markets, macroprudential policy will be most effective when co-ordinated internationally. I assure the Committee that, in the Government’s view, the current measures in the Bill and other arrangements are more than sufficient to achieve this.

The Bill requires the FPC to have regard to the international obligations of the United Kingdom. This will encompass the obligation to have regard to any warnings or recommendations from the ESRB that apply to the UK. It is also worth noting that the Governor of the Bank of England, like all European central bank governors, is a member of the ESRB. The current governor is also the first vice-chair of the board. The Bank is, and will continue to be, closely involved with the work of the ESRB and this will be reflected in the work of the FPC. The governor will be able to feed back the decisions and policies of the ESRB directly to the FPC. As the governor and the Bank will influence the policy of the ESRB, I expect that it will often be closely aligned to that of the FPC. As I am sure the Committee is aware, the UK authorities are required to respond to any recommendations that they receive from the ESRB. I am sure that they will give careful consideration to the policies of that board.

On the basis of this more extensive debate than I had anticipated, I hope that the noble Lord, Lord Eatwell, will agree, on reflection, that his bran tub of amendments is not completely necessary. I would ask him to withdraw his amendment.

[Lord Eatwell]

My Lords, I think I am naïve, because I am bemused by the drafting of this Bill. Sometimes we are told that things are unnecessary; of course they are being done, but they do not need to be on the face of the Bill. At other times we are told, “We have got to describe everything in extreme detail. Even though there might be some apparent internal contradictions, at least it covers every base”. We do not seem to care very much, with respect to the logic of the story, whether we have the one or the other. I will comment on the amendments, so that we can take them formally as we go through.

With respect to the collapse of confidence in the system as a whole, that is just leaving a hole in the Bill. If the Minister wants to leave a hole in the Bill, that is up to him. I was trying to make it a bit better, and more comprehensive; just the sort of thing we are told that we should do. It would have helped; it would have provided the FPC with another stimulus in its overall definitions of its objectives, which would have contributed to its effectiveness. The idea that it is just rolled into everything else is not true. It is easy to construct models which do not have the other elements, and this element is important. I refer noble Lords to the literature: Professor Shin is the name reference.

If we turn to “in its opinion”, the noble Lord was very convincing on that one, so I take his arguments. On Amendment 39, and the whole addition of this business about the UK, I think that it is a mess. The noble Lord has been completely unconvincing. He has not been able to justify in any coherent way subsection (7) and that is regrettable. It is regrettable that the Bill is left like this. One would think that the Minister would at least say, “Let’s take it away and look at it, just to make sure that I have got it right”, since he cannot defend it on this occasion.

On Amendment 44, we are told, “Oh, it’s all going to happen anyhow. There are nice informal procedures, whereby these things will be taken into account. So you don’t need it, because it’s going to happen anyhow.” It is going to happen anyhow because the governor happens to have yet another hat: was it vice-president of the organisation? I am sure that the vice-president of that organisation is busier and better informed than the Vice-President of the United States is reputed to be on policy there. None the less, how can we be sure that our next governor—whoever it might be; maybe it will be the noble Lord, Lord O’Donnell, who is not in his place—will not also be the vice-president and be as engaged and whatever else it might be?

We cannot make laws on an ad hominem basis; that is not the right way to do it. Surely, if the noble Lord accepts that these functions are appropriate—indeed necessary—he should accept Amendment 44 or agree to have a look at it and come back with some rather better drafting than mine. In the mean time, I am sorry to be grumpy about this process, but I really thought that we were trying to improve the Bill. I beg leave to withdraw the amendment.

Amendment 36 withdrawn.

--- Later in debate ---

[Lord Northbrook]

I support the very sensible amendment in the names of the noble Lord, Lord McFall, and my noble friend Lady Noakes. As the noble Lord, Lord McFall, stated, the MPC’s remit is to target inflation. Finding an indicator—or a set of indicators—for the FPC is difficult. There is merit in amending the Bill to ensure that a set of statistics is available to help external bodies, including the Treasury, to assess the performance of the FPC. The recommendation in the Treasury Committee’s report says:

“The selected range of indicators must be flexible and under constant challenge and review, not only by Parliament, Government and the Bank of England, but also by others such as financial industry practitioners, the media, academia and the public. The indicators should be published so that the performance in maintaining financial stability may be monitored and so that it can be held accountable for that performance. The FPC should report against these criteria at regular intervals”.

To the same extent, the Joint Committee said:

“The FPC should begin work towards developing indicators of financial stability in dialogue with the Treasury. They should be published and the FPC should report against them. The set of indicators should be flexible and subject to regular review”.

The recommendations of these two committees are very powerful and, as the noble Lord, Lord McFall, has already stated, the court was generally supportive but did not believe that they should be put in the Bill. I happen to disagree: I think it would be much clearer to have these in the Bill.

[Lord Eatwell]

My Lords, I support the amendment in the name of my noble friend Lord McFall, and the noble Baroness, Lady Noakes. This is—reflecting our earlier discussions—one of the Tyrie amendments. It is very cleverly drafted because it does not attempt to specify a particular set of indicators. It knows that the FPC is in a learning experience: that we are all going to be in a debate over indicators, instruments and so on in the years to come. Nothing could further that debate better than to propose a set of indicators, such as, for example, the rate of credit growth, which we have just been talking about, although not just in the UK. This is an extremely valuable amendment which, is, I hear, supported all round the Committee and I would expect the Minister to take account of the weight of this support.

Also in this group is a series of amendments in my name and that of my noble friend Lady Hayter. I would like to take a few minutes to address these. They are all concerned with the reports that the Financial Policy Committee is required to make and they all specify characteristics of the report. The first one requires the presentation of scenarios: the attempt by the Financial Policy Committee to look at various potential crises—stress-testing, we call it at a micro level—and assess the impact of their policies and of various events. We have learnt from the Office for Budget Responsibility how useful this technique can be and I am sure it will be extremely effective in the assessment of macroprudential measures. Amendment 73, requiring the presentation of scenarios, fits in with the philosophy of policy-making and of the empirical basis of evidence-based policy-making in finance today. I therefore hope the Government will accept it.

Amendment 74 is consequential upon today’s acceptance of the Government’s Amendment 35A, which we agreed earlier this afternoon. After all, if the Financial Policy Committee is required to take into account government policies on growth and employment, then it is surely appropriate that it should report on its performance on what it is required to take into account. This should really have been down as a consequential amendment to Amendment 35A but I am happy to help the Government out and introduce their consequential amendment for them.

Amendment 75, on the issue of indicators, referred to by the noble Lord, Lord McFall, and the noble Baroness, Lady Noakes, places those indicators in the reporting structure of the FPC. Amendment 76 would relate the FPC’s report to the functioning of financial markets and of the wider economy. If they do not discuss that then I am blowed if I know what they are going to discuss. So let us at least hope that that is agreed by everyone around the Committee.

These are just four amendments to flesh out the characteristics of FPC reporting which will be a crucial part of FPC accountability. Given that we are handing these powers to unelected officials, the reporting structure is an important component. That reporting structure— and the debates over the role of the FPC—would be enormously enhanced by the acceptance of Amendment 40 in the name of my noble friend Lord McFall and of the noble Baroness, Lady Noakes.

[Lord Sassoon]

My Lords, I wish we had a simple tag that we could use for amendments which come up so often when talking about legislation where we all agree on the substance but there is a kind of debate on whether it needs to be in or not. We are substantially in that territory with a number of amendments in this group. I will take them in turn.

First, Amendments 40 and 75 seek to require the Financial Policy Committee to publish a set of indicators of financial stability. I agree that financial indicators will aid the Committee, Parliament and the public in assessing the effectiveness of the FPC’s actions, but I hope I can assure the Committee that the amendments are unnecessary. The noble Lord may groan, but I acknowledged at the outset that this is one of those “is it necessary or not” amendments. Let me try to give the evidence because it is important to adduce the evidence of how things are going already—of which there is quite a lot—to put flesh on to the bones of why I believe it. We have looked very carefully at the Treasury Committee’s recommendations and have accepted a lot of amendments as a result. The Government’s record in picking up the Treasury Committee’s recommendations is very clear. We have been through them very seriously, and we have accepted a lot of them. I am grateful to the noble Lord, Lord McFall of Alcluith, and my noble friend Lady Noakes for assiduously going through them and provoking a further debate on the ones we have not picked up. That is quite right and proper. This is one amendment that we believe is unnecessary. I will give some reasons why I think the Committee should be satisfied on this.

The starting point is the Bank’s statement, in its response to the Treasury Committee’s report on bank accountability, that the FPC will publish and report against a set of indicators. Further than that, the FPC has already given some signals of the indicators it finds most useful for assessing risk through its oversight of the Bank’s financial stability reports over the past year and so too has the governor via a letter to the Chairman of the Treasury Committee last year.

Financial Services Bill

Lord Eatwell Excerpts

Tuesday 3rd July 2012 Lords Chamber

Moved by

[Lord Eatwell]

42: Clause 3, page 5, line 16, after first “of” insert “its strategic objective and”

[Lord Eatwell]

My Lords, this is another of those bran-tubs full of amendments, to jump us around various aspects of the functions of the FPC as set out on pages 5 and 6 of the Bill. Let us deal first with Amendment 42. I do not know whether this is a slip in drafting—although I know those never occur in the Treasury—but with respect to the need to understand or support the objectives of the FCA, the strategic objective of the FCA is left out. Since the FCA very emphatically has both operational and strategic objectives, it is interesting to know why the FPC does not have to avoid prejudicing the strategic objective of the FCA. According to this drafting, the FPC can readily prejudice the strategic objective that markets should function well. That is a mystery. We are going to have the FPC being able to ensure by its measures that markets do not function well. I think if it got up to that, it would rapidly get short shrift from the Treasury and, indeed, from Parliament, so I presume that this is just a slip and that the strategic objective of the FCA will be added to the operational objectives.

In Amendment 47, here the issue is knowledge collection for the FPC, in the sense that it is important that the FPC has knowledge of levels of leverage, as we discussed earlier this afternoon. Knowing levels of leverage is a vital part of systemic risk analysis so the amendment ensures that the FPC will have access to that information, either from the FCA or from the PRA, divulging levels of leverage as defined clearly in the Basel III agreement. You could take other definitions but the Basel III agreement is a perfectly reasonable definition of leverage and that is why my noble friend and I have used it here.

Amendment 51 is a probing amendment, tabled because I did not understand the issue of a “publication”, as referred to in new Section 9G(10) of the Bank of England Act 1998. Describing directions issued by the FPC, it says:

“The direction may refer to a publication issued by the FCA, the PRA, another body in the United Kingdom”—

so any other body, such as my local sports club—

“or an international organisation, as the publication has effect from time to time”.

I am sure that “publication” in this sense must be a term of art and I am missing something. I would be grateful if the noble Lord could elucidate the issue both of what a publication is in this context and what is “another body” in the UK. Does it include my local sports club, and if not, why not, since it is another body in the UK?

Amendment 53 is one of the standard openness amendments, which have been encouraged by the Treasury Select Committee in another place, requiring the chairman of the Treasury Select Committee to be informed and given reasons if a copy of a report on a direction is not laid before Parliament. A persistent problem that we are going to face in the workings of the FPC is that it is going to be using powers that have traditionally been those of the Executive or of Parliament. There is therefore always going to be this tension of accountability between the FPC and the Executive and Parliament until, after a few years, the process has settled down, we hope. In these circumstances, it seems important that if for some reason a report on a direction is not to be laid before Parliament, the chairman of the Treasury Select Committee should be informed and given reasons.

Amendment 64 is rather more important, particularly in respect of some of the discussions we have had over the last few days, including this afternoon, and relates to the definition of “regulated persons” and the scope of exemptions. We know from the whole LIBOR debacle that one of the problems was that this particular market did not come within the scope of regulation. I am sure the FPC would have been quick off the mark last March, when the Treasury first knew, or presumably even earlier when the FSA knew what was going on, and would have included the setting of benchmark prices within the definition of regulated persons or dealt with it under the scope of exemptions. The recommendations that the FPC should make on the scope of financial regulation are enormously important and it is vital that the FPC has the powers to keep these matters under review. Amendment 64 is, if anything, the most important amendment in this whole group. We have to give the FPC the power to make recommendations with respect to the scope of regulation as it affects financial stability and systemic risk.

Amendment 65, which applies to page 9, line 34, is one of these amendments to which I have already referred where the committee is given discretion over its own action, even though the action seems to be firmly defined in the particular new subsection of the Bill, which reads:

“The Committee may make a recommendation under subsection (2)(e)”—

with respect to additional persons who may be required by the PRA to provide information, so this is very important indeed—

“only if it considers that the exercise by the Treasury of their power to make an order under section 165A(2)(d) of FSMA 2000 in the manner proposed is desirable”.

It is only “if it considers” that. Why should it be its consideration that limits whether it makes a recommendation? Either this is just trivial—in other words it would not have acted if it had not thought it should act—or this is limiting the scope of any legitimate limitation on the recommendations that the committee might make. If we took out the phrase “it considers that”, it would read “The Committee may make a recommendation under subsection (2)(e) only if the exercise by the Treasury of their power to make an order under section 165A(2)(d) of FSMA 2000 in the manner proposed is desirable”.

There the test is the desirability of the Treasury’s action, whereas at the moment the test is whether “it considers that” it is a desirable action. How do we want the test to be posed? Should the test be posed that the committee decides to act, or that there is an objective consideration of the desirability of the action under consideration?

Amendment 88 is thrown into this group for reasons which are not entirely obvious, but I will speak to it because again it is a straightforward openness amendment requiring that the chair of the Treasury Committee be informed and given reasons should information concerning a direction not be published.

These amendments are all to do with the very important activity of directions and recommendations by the Financial Policy Committee. We have the need for information derived through directions and the openness issues, which are hugely important. The most important, particularly in the light of what we have seen over the last couple of days, is the question about the scope of financial regulation and the recommendations that the FPC may make about that scope as set out in Amendment 64.

To go back to the beginning of this bran tub-list, let us deal with Amendment 42. I simply want to ask the noble Lord why the FPC can actually, if it wishes, endanger the FCA’s pursuit of its strategic objective of having markets function well. I beg to move.

[Baroness Noakes]

May I clarify one item with the noble Lord, Lord Eatwell? He said in relation to Amendment 64 that the important thing was the definition of regulated persons and that that would have been necessary to ensure that the events in relation to LIBOR were kept under review. Is it not the definition of regulated activities rather than regulated persons that would have been relevant in that instance? That is to say, the activities were already being carried out by regulated persons but they were not regulated activities.

[Lord Eatwell]

The noble Baroness has made a very interesting point. I have forgotten the precise names, but you have a person who submits the information, and a person who receives it and then has the responsibility of transmitting that received information into the LIBOR setting. That is the person I have in mind.

[Lord McFall of Alcluith]

My Lords, I shall speak to Amendment 43. The four main Financial Policy Committee functions have been outlined in the Bill, but I would like the Minister to consider providing clear regulatory statements for both the FCA and the PRA, given that clarity is essential: there is an outside audience here, so transparency and clarity are very important. For both those bodies, that would be a helpful submission from the FPC.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, we are into another bran-tub—not a pot-pourri this time, but a bran-tub, I note; I am not sure what the distinction is. This is a varied group of amendments about the functions of the FPC.

I say to the noble Lord, Lord Eatwell, and all other noble Lords taking part in Committee that if there are definitional difficulties—we have got into one or two tangles about definitions, construction of difficult clauses and the interrelationship between clauses and subsections —I am very happy for the noble Lord or any other noble Lord to have meetings including the Bill team to try to thrash out some of those difficult issues outside the Committee if that would be helpful. Some of these things might more easily be done away from the constraints and formality of the debate. I lay that offer on the table to all noble Lords who are interested.

I will come back to Amendment 42, but let me start with Amendment 43, which would require the FPC to prepare and publish regulatory statements for the PRA and FCA. One of the most glaring flaws of the tripartite system of regulation was a lack of clarity about who was responsible for what. As we know, the Bill will create regulatory bodies with clear and separate responsibilities. Although the FPC will have the power to direct the FCA and the PRA, that will apply only in the case of actions required to address systemic risk. The Bill makes it clear that the FPC cannot make recommendations or directions that relate to specified persons—that is, individual firms. Decisions on the policy approach of the PRA and the FCA will be made by their respective boards, not the FPC. As such, the amendment would risk blurring those clear responsibilities of the regulators.

Amendment 47, which would provide the FPC with the power to direct the PRA to require the disclosure of leverage ratios, is simply unnecessary. The Government agree that the disclosure of leverage ratios would be beneficial. That is why we supported the Basel III proposals to require its calculation from 1 January 2013 and its disclosure from 1 January 2015. The Government have pushed for full implementation of Basel III.

The interim FPC recommended in November last year that the FSA encourage UK banks to disclose their leveraged ratios from 1 January 2013, and an update on the progress of that recommendation was included in the financial stability report published last week. I will not, but I could quote extensively from that report. It is clear from reading that FSR that the FPC is already using recommendations to address disclosure issues effectively, so I suggest that Amendment 47 is unnecessary.

[Lord Eatwell]

I do not want to delay the Committee, but will the noble Lord elaborate a little on “addressing effectively”?

[Lord Sassoon]

Perhaps the best thing is to quote what was written by the FPC in its most recent financial stability report, which was published last week. It states:

“Following FSA discussions with chief financial officers earlier this year, the major UK banks and building societies are expected to disclose leverage ratios, calculated according to the fully implemented Basel III definitions, in their end-2012 annual reports. Thereafter, UK banks and building societies will report on both a half-year and end-year basis”.

That is an example of the FPC in interim form, already using recommendations to address disclosure issues to pointed effect.

--- Later in debate ---

As to the noble Lord’s question of what constitutes a publication, that could include rules, codes and guidance, as well as formal statements by other appropriate bodies. I hope that that answers—

[Lord Eatwell]

I should have been clearer at the time about what I had in mind. Would it, for example, include a speech made by, say, the Governor of the Bank of England, if that speech had not actually been printed somewhere or issued on a website, but the governor had made a statement about some matter relevant to the FPC?

[Lord Sassoon]

First, it would be difficult to define the governor as a regulator or other body. If the governor had made a speech that had not been published, it would certainly not be a document. Even if it is a published speech, it is unlikely to be a document in the sense of what I am suggesting—rules, codes, guidance or formal statements. The situation which the noble Lord postulates would not be one that would fall within what we are talking about here; there is no question of that.

Amendment 64 is identical to one that was debated in Committee in another place. They debated a number of amendments, although they did not spend as long as we are going to spend, quite rightly, on all this. However, this was one that debated in another place. I should start by repeating what my honourable friend the Financial Secretary made clear there, which is that the FPC’s responsibility to monitor the perimeter of regulation is not only for the outer perimeter covered by Amendment 64. It also has responsibility for the inner perimeter, between those firms regulated prudentially by the PRA and those that fall outside the PRA’s regulation; that is one of the FPC’s most vital roles. To do this effectively, the FPC must monitor whether activities outside the perimeter of regulation or outside the PRA’s scope are being undertaken in such a way that could cause systemic risk or sufficient risk to other firms or consumers that they need to be made subject either to regulation or to a different style of regulation. When the FPC believes that the perimeter of regulation needs to be changed to bring such activities within regulation or within PRA regulation, it can make recommendations to the Treasury under new Section 90. The Treasury can then use its powers to modify the perimeter of regulation accordingly.

I do not agree that the way to ensure that the FPC undertakes the role effectively is to place it under an inflexible and bureaucratic requirement to produce an annual report on the matter. In particular, it seems unrealistic to expect the FPC to produce recommendations within 30 days of coming into formal existence. We need to allow it to use its own judgment and discretion to decide what activities might pose a risk and how and when it should investigate them.

Amendment 65 would amend the FPC’s power to make recommendations to the Treasury to extend the scope of the PRA’s ability to obtain information from unauthorised persons. Given its expertise in systemic financial stability, new Section 90 gives the FPC a power to make recommendations to the Treasury if it believes that the ability of the PRA to obtain information from those outside the perimeter of regulation is needed for financial stability reasons.

[Lord Eatwell]

If I may interrupt the Minister, for the information of all noble Lords, he is referring not to new Section 90 but to new Section 9O. He lost me for some moments.

[Lord Sassoon]

I am very grateful to the noble Lord. I should have been referring to new Section 9O in the previous amendment as well. What can I say, other than that the hour is late? I was thinking, “Why is there a typo in my speaking notes?”. I probably have a flood of notes coming from the Box on the matter, but the noble Lord got there first—in fact, I see I have only one.

As I was saying, new Section 9O gives the FPC a power to make recommendations to the Treasury if it believes that the ability of the PRA to obtain information from those outside the perimeter of regulation is needed for financial stability reasons. Removing the words “it considers that” from subsection (4) of new Section 9O —O for orange—would defeat the purpose of the recommendation power, which is to allow the FPC to make its own expert judgment about the need for the PRA to be able to obtain information that is relevant to financial stability from the wider class of person and make recommendations to the Treasury accordingly.

It is important to note that the decision to extend the PRA’s power still lies solely with the Treasury and is subject to approval by both Houses. It will be for the Treasury to look at the recommendation from the FPC alongside other information from the PRA and others and make a call on whether the power needs to be extended.

I shall now address Amendments 53, 87 and 88, all of which deal in some way with transparency and publication requirements around the FPC’s direction-making powers. Amendments 53 and 88 would require the Treasury to inform the chair of the Treasury Select Committee if the directions by the FPC were not laid before Parliament or published. The Government do not believe that it is necessary to make a restrictive legislative provision to provide that Parliament is informed in all cases when the publication of information or documents is deferred for public interest reasons. There is a well established principle that where public money is used to resolve threats to financial stability, the chairs of the relevant parliamentary committees are informed, in confidence if necessary. There are formal and informal mechanisms for this to happen, although I would point out that they are non-legislative mechanisms. I do not believe that the case has been made that it would be necessary, reasonable or proportionate to extend this principle to sensitive material that does not involve the use of public funds. The Bill already provides for the FPC to keep any decision to defer publication of information or documents relating to FPC decisions under review and to publish that material as soon as the threat to the public interest has passed—something we discussed in the previous Committee session. The Bill also requires that a copy of any direction included in the record of an FPC meeting must be laid before Parliament. Given these extensive requirements for the publication of FPC decisions, I do not believe that Amendments 53 and 58 are necessary or appropriate.

Turning briefly to Amendment 87, the provision which the noble Lord, Lord McFall, is attempting to amend already has the effect he desires. New Section 9W(3) reads:

“A direction under Section 9V must be in writing and may be revoked by a notice in writing”.

What the second part of this means is that a direction may be revoked as long as the Bank sends a notice in writing to revoke it. The Bank does not have any discretion to revoke a direction without sending a notice in writing. The Bank cannot revoke a direction orally. I hope that provides reassurance on why Amendment 87 is unnecessary.

I return briefly to Amendment 42, where we began, and an important question asked by the noble Lord, Lord Eatwell, about why, in his interpretation, the FPC can endanger the FCA’s objective of making sure that markets function well. I hope I have got his key question right, because it is an important one. I will try to explain why I believe that it is a misunderstanding and how it actually works. The strategic objective is an overarching umbrella objective to provide a common goal for the regulator and, in that sense, it acts as a mission statement. It is an objective which has been amended in line with the recommendation of the Independent Commission on Banking; it was endorsed by the Joint Committee and now reads “ensuring that markets function well”. Legally, actions taken by the FCA in discharging its general functions need only be compatible with the strategic objective but must advance one or more of its operational objectives. As such, it is the operational objectives which provide the crucial mandate for the FCA to act in these areas. The Treasury Committee states that the case has not been made for the strategic objective. The Government believe that the strategic objective will act as a high level mission statement that brings together the diverse aspects of the FCA’s work and, as such, it will serve a useful purpose in focusing the new, regulatory culture of the FSA. It will also operate as a check and balance on the operational objectives and help to ensure that the FCA does not pursue any single operational objective in a manner that undermines the overall functioning of the market.

It might also be worth adding that effective mission statements commonly clarify an organisation’s purpose. They usually set out the aims of an organisation and its key target for shareholders. They do not go into detail of an organisation’s goals or targets and the approach taken in achieving them. The FCA’s strategic objective clearly meets these criteria. It gives an overall purpose or aim to the FSA, which is to ensure that markets function well, and it clarifies that this only refers to the relevant markets as defined in new Section 1F in Clause 5.

It is therefore important to understand the different status of the strategic objective, or umbrella objective, as compared with the operational objectives. The Government’s position is that we disagree with the Treasury Committee’s assertion that a mission statement has no place in primary legislation. Indeed, it has precedence. With that understanding of the different levels of objective that are in operation here, I believe that the amendment is not necessary and the noble Lord’s fears are unfounded. It is not in any sense a drafting flaw that the strategic objective, because of its different nature, is not covered by the function that we are talking about. I hope that on that basis the noble Lord will be reassured and can withdraw the amendment.

[Lord Eatwell]

I wonder if I have got it right. The noble Lord’s argument about the position being somehow at a different level does not work. What works in the definition of the FCA’s general duties is the following: the Bill states that the FCA must discharge its functions to,

“act in a way which … is compatible with its strategic objective, and … advances one or more of its operational objectives”.

Consequently, the only way in which the FCA can pursue its strategic objective is via one of the operational objectives. Consequently, if you do not prejudice the operational objectives, you do not prejudice the strategic objective. It therefore has nothing to do with higher levels, but simply relates to the word “and” at a relevant point that I had missed—for which I apologise—in the general duties of the FCA. Is that correct?

[Lord Sassoon]

My Lords, I believe that the drafting is fine. I reiterate that in discharging its general functions, the FCA must act in a way that is compatible with its strategic objective but which advances one or more of its operational objectives. The drafting is, I believe, appropriate, but I will of course have another look to see whether the “and” is appropriate. The noble Lord’s colleague in another place was, I am sure, given a clearer explanation by my colleague the Financial Secretary on exactly this point. Of course I will look again, but my belief is that the drafting works. If, on reflection, it does not, I will, in the customary way, write to all noble Lords who have taken part in this discussion.

--- Later in debate ---

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for working through this particular bran-tub. The point that I was trying to make on the amendment is that the drafting is right, but not for the reason he gave. That was why I apologised for not having spotted the relevant “and” in the drafting of the responsibilities of and pursuit of objectives by the FCA.

Perhaps I may comment on a couple of the other amendments in the group. The issue raised by Amendment 47 has not been satisfactorily dealt with by the piece that the noble Lord read from the Financial Stability Report. There was a meeting, and a willingness to provide information was expressed, but no requirement. The issue here is the requirement because it is imperative that the FPC has knowledge of the leverage ratios of regulated persons, and Amendment 47 ensures that it will. I urge the Minister to have a look at that amendment and see whether I am not right and it is perhaps a good idea to have this requirement rather than the informal relationship which he described earlier.

I am grateful to the Minister for the elucidation on publications and other bodies. I suppose it really means other relevant bodies, but then people would have a great debate about relevance. I hope that my research centre at Cambridge University is included, since it is devoted to financial regulatory issues. That is just a commercial.

Amendment 64 was about the scope of financial regulation. I would like to go away and consider the words of the Minister, and think about the issue of the scope and boundaries. As he said, it is enormously important and we have got to get it right. I am not at all convinced that I have got it right here, so it would be helpful for me to have a think about it, look it over again, and come back to this issue if necessary on Report.

In the mean time, since I now know that Amendment 42 is unnecessary—not for the reasons advanced by the noble Lord, but for other reasons—I beg leave to withdraw the amendment.

Amendment 42 withdrawn.

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[Viscount Trenchard]

My Lords, I also support my noble friend’s amendment. In particular I think that this whole section is unclear and muddled. It is extraordinary to state that a committee of the court, which is the board of directors, may make recommendations within the Bank. The Financial Policy Committee is clearly a committee of the court. That has been stated. It is strange that it is asymmetric and different from the MPC. This is a recipe for muddle because if it is a committee of the board—that is, the court—it has no authority beyond the court. Any authority that it has is the authority of the court. To state that a committee of the board—the court—may make recommendations within the Bank seems weird.

Similarly, in making recommendations to the Treasury, if it is a committee of the court, it should be the court that makes those recommendations. We are getting very confused. The difference between the FPC, dealing with macroprudential regulation as a committee of the Court of the Bank of England, and the PRA not as a committee but a different body, but again within the Bank of England, is strange. I just think it all needs to be clarified a bit more.

[Lord Eatwell]

My Lords, I first address the amendment moved by the noble Baroness, Lady Noakes. I am now very puzzled by the status of recommendations, given that a recommendation is not necessarily something which needs to be followed. Given that there seems to be no indication, as the noble Baroness, Lady Noakes, pointed out, about the reactions to recommendations, it is difficult to assess the status of this concept within the structure of the Bill. My Amendment 69 simply deals with the offending new Section 9Q and deletes it. It states:

“The Financial Policy Committee may make recommendations to”,

the world. I am sure the world would be very grateful, but we should not expend public money on making recommendations to the world, and especially not on confirming them in writing. It would be interesting to know who these “persons other than those” are defined to be when we are talking about the context of macroprudential regulation; we are not talking about relationships, say, with individual firms or whatever. The noble Baroness, Lady Noakes, has picked up on some important and valuable obscurities in the Bill and it would be helpful if the Minister could elucidate them.

A sort of bran-tub of my amendments has again been grouped together. I am sorry about that but I am not responsible for the groupings. I could ungroup them but that would be tedious for everyone, so let us deal with them. Amendment 48 is included in the group, which again has been tabled in the context of directions. It refers to the point made with respect to the nature of directions. The Bill states in proposed new Section 9G(4) that:

“The direction may relate to all regulated persons or to regulated persons of a specified description, but may not relate to a specified regulated person”.

I understand entirely what the drafting is supposed to do, but given the level of conglomeration and concentration in the financial services industry, I do not think that this will work as it is quite possible to refer to,

“regulated persons of a specified description”,

but for there to be only one firm of that description. It is quite possible for that to happen. If this may not “relate to” in the sense that it may not have a relationship to, that would rule out, say, a reference to,

“regulated persons of a specified description”,

if it just so happened that the set of persons of that description contained but one element—just one firm of that type. We can see that there are various niche firms and highly specialised companies in the City. I can think of very highly specialised money brokers of which only one performs a particular role in the money markets. Perhaps my amendment would have been more helpful if it had changed the word “relate” to “refer”, so that the direction could not refer to an individual specified regulated person. That would be inappropriate and would go beyond what the FPC is designed to do. However, I am nervous that the activities of the FPC may be unreasonably limited by the possibility that there might be just one specific regulated person within a given class of persons to which the FPC wishes to issue a direction.

I turn to Amendment 50, which again refers to new Section 9G. Subsection (6) refers to the fact that a direction,

“may not require its provisions to be implemented by specified means”—

I am not quite sure what that means—but then it goes on to say,

“or within a specified period”.

This is very dangerous in the sense that it may be enormously important that a direction should be operational within a specified period. It may be important for the financial stability of Britain that actions take place within a month or six weeks, or whatever the period might be. Being unable to require that provisions be implemented within a specified period seriously weakens the ability of the FPC to pursue effectively the stability objective. I am also a bit worried about the term “specified means”, but again, I am not sure what it means. Perhaps the Minister could help me on that when he replies. I really think that the business of a specified period should be looked at very carefully indeed for fear of weakening the powers of the FPC.

Amendment 63 has been withdrawn, so I turn now to Amendment 66. It refers to the making of recommendations under new Section 9P(2), and states specifically that:

“The recommendations may relate to all regulated persons or to regulated persons of a specified description, but may not relate to the exercise of the functions of the FCA or the PRA in relation to a specified regulated person”.

Again, this is the problem. It is quite possible that a generic description could apply to just one regulated person. Therefore, this is the same point that I made with respect to Amendment 48. The word “relate”—that is, “have a relationship to”—could result in the FPC not being able to make recommendations because the specified activity was performed by only one particular institution.

Finally, Amendment 69 is where I follow on from the noble Baroness, Lady Noakes, and comments that have been made by the noble Lord, Lord Hodgson, and the noble Viscount, Lord Trenchard, about new Section 9Q being very odd. It states that:

“The Financial Policy Committee may make recommendations to persons other than those”,

namely, the rest of the world. With those comments, I look forward to hearing the Minister’s comments on the amendments in the name of the noble Baroness, Lady Noakes, and the various amendments in my bran-tub in this case.

[Lord Sassoon]

Yet another bran-tub—I am looking forward to another pot-pourri, which will come in due course, no doubt.

On this group of amendments around the levers and powers of the FPC, I will start with Amendments 42A and 62A in the name of my noble friend Lady Noakes, and I will follow with Amendment 69 from the noble Lord, Lord Eatwell. These amendments seek to remove the FPC’s powers to make recommendations. As my noble friend has said, she does not seek to remove those powers but to probe how they will operate and why they are necessary in some particulars, although Amendment 69 is intended to remove the wider recommendation power.

I say at the outset that recommendations will be the primary means by which the FPC will seek to address systemic risks, and I do not think that any noble Lords who have spoken are challenging that. It is a question of how they will operate and whether some of the power is redundant, but I hope that we would agree that recommendations will be at the heart of the FPC’s ability to do its job. My noble friend talked a bit about how it used to work; once upon a time there was, of course, regulation by the governor’s eyebrows, and a carefully calculated arching could elicit all sorts of reactions from the City.

I suggest that recommendations to industry from the FPC will fulfil a broadly similar—if more wordy—role to that of the governor’s eyebrows, by allowing the committee to highlight risks or unsustainable behaviour. However, recommendations, unlike the governor’s eyebrows, will have and need to have legal backing. The Bill allows the FPC to make recommendations to the PRA and FCA. In a moment I will come back to where the reciprocal requirement on those two bodies to follow through on the explanations is—to the Bank, to the Treasury and to other persons.

On the PRA and FCA, the question was: where is the duty? I am slightly puzzled by this, because it seems very clear, in new Section 9P(3), that the FCA and the PRA have a clear duty to comply or explain. They must either,

“act in accordance with the recommendations”,

or explain why not, and that is a firm legal duty.

--- Later in debate ---

The FPC will have significant influence over the timing of a direction. The committee will be able to make a recommendation as to how and when a direction should be implemented. These recommendations can be made on a “comply or explain” basis. This will require the regulator to implement the direction in line with the FPC’s recommended timetable or explain publicly why it has not done so. But the Bill consciously prevents the FPC from directing the precise timing of implementation, because it will be the PRA and the FCA which hold the expertise identified by the Joint Committee to implement a direction most effectively and ensure that unintended consequences are avoided. I believe that the Bill as drafted strikes the right balance.

[Lord Eatwell]

My Lords, I want to refer to that discussion on Amendment 50. First, the amendment would not give the FPC the power to specify a precise time. It could specify a period: by the end of the month, within six weeks, within two months, or whatever it might be. The notion of a precise time is an inaccurate reading of the amended subsection. Secondly, while it is clearly right that the PRA and the FCA may have specialist knowledge at the micro level of the regulatory system, we are giving these powers to the FPC because it has specialised knowledge with respect to macro- prudential measures. If the FPC feels that it is urgent, for macroprudential reasons, that measures be taken within a specified period and it has the specialised knowledge, it seems to me that denying it the ability to require something to be done within a given time seriously weakens its effectiveness.

[Lord Sassoon]

My Lords, we could discuss at some length what the meaning of a “specified period” might be. Clearly it could, if interpreted as the noble Lord says, be by a certain month end. Equally, it could mean tomorrow, on the day after tomorrow or at the beginning of next month. I did not want to detain the Committee for too long at this late hour but a recommendation or direction dictating that an action be implemented within a certain timescale could have a serious negative implication for the safety and soundness of individual firms or for consumers. The FPC will not necessarily be aware of those negative implications on individual firms or consumers but the regulators themselves will be.

There are scenarios that could be highly undesirable if they led to consumer detriment because the FPC had been specific about the timing of implementation. On the other hand, the arrangements that I have explained at some length, which mean that the FPC could issue the direction on a “comply or explain” basis, would put the individual supervisor or regulator in a position where it had to come back and justify very clearly why it had taken a particular course of action. I believe we have struck the right balance here, which avoids the difficulties to which I have referred.

Turning to Amendments 48 and 66, I will go straight to the critical issue that I was asked about on a couple of occasions in different ways. There may be other points that need to be made, but I will be clear on the questions about whether the FPC can be specific about one firm. The FPC can describe a type or class of firms even if that, in practice, only captures one firm. This is allowed so long as the FPC targets the risk and not the firm. The FPC is not allowed to say: “Do X to Barclays or prevent RBS doing Y”. However, in the circumstances that the noble Lord postulated, where a firm was the only one in a particular area or type of business, the FPC would not be prohibited or prevented from describing a class of one in those circumstances.

[Lord Eatwell]

I do not see how that can be right. Taking the first of the two amendments, the new Section 9G(4) would read:

“The direction … may not relate to a specified regulated person”.

If the direction is a generic direction and there is only one person who satisfies that generic description, it does relate to—that is, it has a relationship to. I think it is just the wrong verb. If you said “refer to”, you would be entirely right. “Relate to” is wrong. Perhaps later, over a glass of wine, we can turn to the Oxford English Dictionary, but I believe the word “relate” does not mean what the noble Lord has suggested it means. The word “refer” would mean that, but “relate” means “to have a relationship to”, and in the case that I have just described, it would certainly have a relationship to a specified regulated person.

[Lord Sassoon]

My Lords, my clear understanding of the drafting here—and like these other drafting points that we have dealt with, if I have got it wrong I will of course write—is that a specified regulated person is the key thing, which in the examples I gave would be Barclays or the RBS. We should not be concentrating on the verb “relate” but what we need to be looking at in new Section 9G(4) is the construction on “specified regulated person” and that would be naming an individual firm.

If the FPC were to make a direction related to regulated persons of a specified direction which happened only to be a class of one firm, then I am clear that that is what is intended here. If I have got it wrong, which I do not believe I have, I will clarify the situation. I wish I had the complete Oxford English Dictionary. It would be quite difficult to bring it in to discuss it over a glass of wine, but I have the Concise Oxford English Dictionary at my fingertips and it might help the noble Lord to say that the concise edition defines “relate” interalia as meaning “having reference to”. I do not know whether that helps him, but perhaps we can move on.

We were on Amendments 48 and 66, and I think that that particular point was the major one here concerning the Committee. I would just say more generally that we are absolutely committed to maintaining clarity of responsibilities and distinguishing micro or firm-specific roles from the macro role. We do not want any lack of clarity here, but on the situation which the noble Lord postulates, I hope that I have satisfied him that indeed the drafting is correct. After that long and interesting discussion, I would ask my noble friend to consider withdrawing her amendment.

FSA Investigation into LIBOR

Lord Eatwell Excerpts

Monday 2nd July 2012 Lords Chamber

[Lord Eatwell]

My Lords, I am most grateful to the noble Lord, Lord Sassoon, for repeating the Statement made by the Chancellor of the Exchequer in the other place. I welcome the content of the Statement as far as it goes, but it does not go far enough.

It is difficult to exaggerate the seriousness of the LIBOR scandal for three reasons. First, because of the manipulation of this key benchmark rate, a London standard recognised throughout the world has accordingly affected financial transactions worldwide, directly impacting on the financial well-being of millions of families and firms.

The Serious Fraud Office has powers to investigate and to bring prosecutions in cases of fraud defined as,

“an act of deception intended for personal gain”.

This includes publishing false information to mislead investors as well as fraudulent trading. I am no lawyer, but common-sense interpretation of those words would suggest that the people with whom we are dealing have indeed been practising deception for personal gain. But they are not simply persons with some sort of criminal bent; they have been moulded by the environment in which they work and by what is regarded as acceptable practice on a day-to-day basis—fine for the firms for which they work, just so long as they make money for them.

Secondly, their actions have done enormous damage to our financial services industry in general and to the City of London in particular. They have not merely undermined but blown up the City’s hard-earned reputation for integrity and fair dealing and, most of all, destroyed the trust without which no honest financial system can operate. Every honest firm should welcome effective regulation. I am sick of hearing that regulation limits the operations of free markets and that if legislation results in more effective regulation banks will leave the country. Now we know just how free those markets actually are. We should not be held to ransom.

Thirdly, the financial services industry is, I am afraid, an industry with form. In the same week as we learnt of the manipulation of LIBOR, we learnt of the mis-selling of interest rate swaps, following on from the PPI mis-selling scandal. As the Chancellor commented, all of this is on top of the irresponsible lending practices at home and abroad that brought about the international financial crisis—practices in which British banks played a leading role, inflicting huge economic costs on the British people.

In the light of those three factors, an inquiry should meet the following criteria. First, it must address the culture of banking and the financial services industry as a whole in relation to the internal organisation of industries and the regulatory framework in which they operate. Secondly, it must address the key question of the boundaries of civil and criminal culpability. Thirdly, it must fundamentally reassess the scope of regulated activities. The inquiries that have been announced today meet only one of those criteria—the second, on the boundaries of civil and criminal culpability. I am delighted to hear that Martin Wheatley will conduct a speedy investigation into the narrow issue of the setting of LIBOR and the related issues of criminal sanctions.

The proposal for the parliamentary inquiry fails on the following grounds. First, the scope of the terms of reference, although it sound quite broad, is in fact limited to the lessons learnt from,

“regulatory and competition investigations into the LIBOR”.

So it is just about the lessons learnt from that particular problem, not the broader issues of professional standards in the industry as a whole and the structure of the industry. Secondly, it fails to address the overall question of the scope of regulated activities. Thirdly, a parliamentary inquiry will fail to restore public trust by creating a national consensus about what has got to be done. I have great respect for the chairman of the Commons Treasury Select Committee, not least because of the excellent critique of the Financial Services Bill by his Select Committee. Let us note that the most important elements of that critique have been pointedly ignored by the Government. A parliamentary inquiry is bound to appear to the public to be too introverted—a closed, establishment shop to which they have limited access, working within terms of reference that are far too restrictive. That is why there must be a full public inquiry that addresses all the issues at stake. As the Chancellor said, we know what has gone wrong. Yes, indeed, we do—but, at the most fundamental level, we do not know why or how.

I quite understand the argument that a proper inquiry might take too much time, but that can be easily dealt with by instructing the public inquiry to deal with issues sequentially. After Mr Wheatley’s report there could be an interim report on the immediate LIBOR issue, described in the terms of reference for the parliamentary committee. Following on from that, a much more considered report on corporate failings in compliance, culture, governance and organisation throughout financial services is the only full answer to the question: why did this happen? We owe the honest, committed people in the financial services industry that inquiry to lift the cloud that will otherwise hang over them.

The development of the financial services industry in this country has been guided by great public inquiries: the Macmillan Committee in the 1930s and the Radcliffe Committee in 1958 produced landmark reports. Now is the time for another. The reforms of the 1980s, while bringing many benefits, have had potentially disastrous, unintended consequences. There is a need for fundamental reform to the structure, style and content of the financial services industry to provide a framework for successful development in the future.

The Government have been bold in establishing the Vickers inquiry and bringing forward the current proposals and they deserve credit for that. However, the current proposal for a parliamentary inquiry, I regretfully say, by its very limitations—and especially the limitations of the terms of reference—can only do harm.

I should like to ask the Minister a couple of brief questions. First, why have the Government limited the scope to lessons drawn from international regulatory and competition investigations into the LIBOR rate-setting process? Why does it not go wider? Secondly, when did the Treasury first know of the substance of the FSA inquiry into LIBOR-fixing at Barclays?