Banks: Funding for Lending Scheme
Lord Sharkey Excerpts(11 years, 5 months ago)
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Lord Sharkey
To ask Her Majesty’s Government what is their assessment of the performance to date of the Funding for Lending scheme.
Lord Newby
My Lords, we are still in the very early days of the scheme. However, initial indications have been positive. Bank funding costs have declined, mortgage availability has improved and quoted rates on fixed-rate mortgages have decreased since the scheme was announced. Participating banks have also introduced discounted loans for small and medium-sized companies.
Lord Sharkey
My Lords, there is a lot riding on the Funding for Lending scheme, but its current performance is far from clear. For example, in quarter 3, Barclays increased net lending by nearly £4 billion and the taxpayer banks—RBS and Lloyds—decreased lending by over £3 billion the same period. Overall, net lending to businesses continues to decline. Does the Minister agree that the Funding for Lending scheme can be judged a success only if it helps to produce an increase in lending to business, especially small businesses? Will he persuade the Bank to disaggregate the figures it publishes so that we can see exactly how much lending is going on to small businesses when we see the quarterly Funding for Lending scheme report?
Lord Newby
My Lords, one of the core principles and purposes behind the scheme is to increase lending to small and medium-sized businesses. We are confident that as the scheme gathers pace, it will be clearer that it has been effective. On figures on lending to small and medium-sized businesses, the Bank already publishes the quarterly Trends in Lending report, which covers SME lending. The most recent report was published in October. This report gives a very good time series about what is happening to lending to SMEs, and we are not convinced that having a second, broadly equivalent, series produced on a slightly different date would help to explain what is happening any more clearly than is already the case.
Bank of England
Lord Sharkey Excerpts(11 years, 5 months ago)
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Lord Sharkey
I thank the Minister for repeating the Statement and congratulate the Government on the appointment of Mr Carney. I send congratulations from these Benches, and perhaps commiserations too, to Mr Carney.
I note that two weeks ago, in a speech to the Canadian Club of Montreal, Mr Carney addressed the question of whether we have ended “too big to fail”. He concluded by saying that it is not yet clear that it has been ended. He said, quite explicitly, that each “global systemically important” financial institution,
“ must have mandatory recovery and resolution plans”
in place. I look forward to discussing Mr Carney’s views on this subject with the Minister when Report stage of the Financial Services Bill resumes later this afternoon.
Lord Sassoon
I am grateful to my noble friend and look forward to our further discussions on that important topic later this afternoon.
Financial Services Bill
Lord Sharkey Excerpts(11 years, 5 months ago)
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Lord Sharkey
“296A Additional power to direct UK clearing houses
(1) The Bank of England may direct a UK clearing house to take, or refrain from taking, specified action if the Bank is satisfied that it is desirable to give the direction, having regard to the public interest in—
(a) protecting and enhancing the stability of the UK financial system,(b) maintaining public confidence in the stability of the UK financial system,(c) maintaining the continuity of the central counterparty clearing services provided by the clearing house, and(d) maintaining and enhancing the financial resilience of the clearing house.(2) The direction may, in particular—
(a) specify the time for compliance with the direction,(b) require the rules of the clearing house to be amended, and (c) override such rules (whether generally or in their application to a particular case).(3) The direction is enforceable, on the application of the Bank, by an injunction or, in Scotland, by an order for specific performance under section 45 of the Court of Session Act 1988.
(4) The Bank may revoke a direction given under this section.
(5) In this section “central counterparty clearing services” has the same meaning as in section 155 of the Companies Act 1989 (see subsection (3A) of that section).
296B Additional power to direct UK clearing houses (No. 2)
(1) The Bank of England shall ensure that each authorised Clearing House draws up and maintains a recovery plan providing, through measures taken by the management of the clearing house or by a group entity, for the restoration of its financial situation following significant deterioration.
(2) The Bank of England shall ensure that the clearing houses update their recovery plans at least annually or after change to the legal or organisational structure of the clearing house, its business or its financial situation, which could have a material effect on, or necessitates a change to the recovery plan; and the Bank of England may require authorised clearing houses to update their recovery plans more frequently.
(3) Recovery plans shall not assume any access to or receipt of extraordinary public financial support but shall include, where applicable, an analysis of how and when a clearing house may apply for the use of central bank facilities in stressed conditions and available collateral.
(4) The Bank of England shall ensure that authorised clearing houses include in recovery plans appropriate conditions and procedures to ensure the timely implementation of recovery actions as well as a wide range of recovery options; and the Bank of England shall ensure that firms test their recovery plans against a range of scenarios of financial distress, varying in their severity including system wide events, legal-entity specific stress and group-wide stress.
296C Additional power to direct UK clearing houses (No. 3)
(1) The Bank of England shall require authorised clearing houses to submit recovery plans to it for review.
(2) The Bank of England shall review those plans and assess the extent to which each plan the following criteria—
(a) the implementation of the arrangements proposed in the plan would be likely to restore the viability and financial soundness of the clearing house, taking into account the preparatory measures that the clearing house has taken or has planned to take;(b) the plan or specific options could be implemented effectively in situations of financial stress and without causing any significant adverse effect on the financial system, including in the event that other clearing houses implemented recovery plans within the same time period.(3) Where the Bank of England assess that there are deficiencies in the recovery plan, or potential impediments to its implementation, they shall notify the clearing house of their assessment and require the clearing house to submit, within three months, a revised plan demonstrating how those deficiencies or impediments have been addressed.
(4) If the clearing house fails to submit a revised recovery plan, or if the Bank of England determines that the revised recovery plan does not adequately remedy the deficiencies or potential impediments identified in its original assessment, the Bank of England shall require the clearing house to take any measure it considers necessary to ensure that the deficiencies or impediments are removed; and the Bank of England may, in particular, require the clearing house to take actions to—
(a) facilitate the reduction of the risk profile of the clearing house;(b) enable timely recapitalisation measures;(c) make changes to the firm strategy;(d) make changes to the funding strategy so as to improve the resilience of the core business lines and critical operations;(e) make changes to the governance structure of the clearing house.”
Lord Sharkey
My Lords, Amendment 92A would require the Bank of England to ensure that UK-authorised clearing houses have in place a recovery plan. The amendment sets out the features of a recovery plan and requires each clearing house to submit a recovery plan to the Bank for assessment. The amendment also gives the Bank the power to require changes to recovery plans that it finds deficient against well defined criteria. In the case of continued deficiency, it gives the Bank the power to require the clearing house to take any measure that it considers necessary to remedy these deficiencies. The overriding purpose of the amendment is to put in place statutory provisions to make catastrophic clearing house failure less likely.
I know that the Government are entirely alive to the possible failure of clearing houses, and I am grateful for the discussions that I have had with the Ministers’ officials on the subject. I think that it is almost universally acknowledged that when the G20 proposals for putting almost all derivatives trading through clearing houses are in place, these greatly enlarged clearing houses will be the focus of greatly enlarged risk.
One of the immediate consequences of the huge enlargement of business through the clearing houses will be a huge increase in the demand for high-quality collateral. The IMF believes that this shift will boost demand for high-grade assets by between $2 trillion and $4 trillion. The question is, of course, where will these high-grade assets be found? It is entirely possible that there will not be enough of them to backstop the $700 trillion derivatives market. In fact, in the US at least seven banks plan to let customers swap lower-rated securities that do not meet clearing house standards in return for a loan of treasuries that do—a process which is known, rather alarmingly, as “collateral transformation”. We saw what happened with the collateral transformation of sub-prime bonds, and we can see where this new collateral transformation might lead.
On 7 November, in his evidence to the Banking Standards Commission, in response to a question from my noble friend Lady Kramer, Andy Haldane of the Bank of England said that,
“many people are fearful that the next crisis may be in the infrastructure and particularly in the central counterparty space. For all the reasons you say, these will be entities that are too big to fail, on steroids”.
He was talking about clearing houses.
The Bill already contains a partial response to the fear that the failure of a clearing house would produce an even worse financial crisis than the one we are enduring. The Government have introduced in the Bill powers of resolution to deal in an orderly way with the failure of a clearing house. However, there is a stage before failure that is vital to consider if the chances of avoiding collapse are to be as high as possible—the stage that deals with recovery.
I am certain that all clearing houses already have in place detailed recovery plans aimed at preventing outright failure, allowing some continuation of trading and preventing infection spreading pervasively throughout the financial system. I am certain that these plans will have been discussed with the Bank. The Government may think that these discussions are sufficient. After all, there are only five recognised UK clearing houses and seven recognised overseas clearing houses under supervision.
The Government may also feel that the Bill already gives the Bank power to do pretty much as it sees fit, in the widest possible sense, if it sees a crisis developing. However, this assumes that it can see a crisis developing, which was obviously not true in the recent past. It also assumes that informal discussions are better than a clear, well defined statutory obligation. It places a higher value on informal contact than on an open, clear, regular and disciplined system of review. That attitude did not work too well with LIBOR. The Government’s Statement this afternoon about the new Governor of the Bank of England rather bizarrely stated:
“The role the Bank of England plays in our economy cannot be underestimated”.
It does not seem satisfactory essentially to say that because there are only 12 recognised clearing houses, the Bank can and will keep a very close eye on them. I am sure that the Bank already keeps a close eye on them, and its gaze will be even keener when the clearing houses’ risk to the entire financial system is enormously magnified. However, an eye, no matter how closely applied, is no substitute for a formal, disciplined, well defined and transparent supervisory process.
In a very real sense, the whole Bill is based on the premise that formal, disciplined, well defined and transparent supervisory processes are critical to the proper functioning and stability of the financial system. The EU also takes this point of view. An EU draft directive on recovery and resolution was published earlier this year. It requires a specific, formal and disciplined process for clearing houses to draw up recovery plans, maintain them and have them assessed and gives the appropriate regulator power to assess and to intervene. The language of the amendment comes almost directly from the draft directive. However, at the moment, the draft directive is not making much progress. It is still waiting for First Reading in the European Parliament.
The Government had anticipated that it may take time for European legislation to emerge. In their response to the consultation opened by the document, Financial Sector Resolution: Broadening the Regime, which covers central counterparties as a key group and closed on 24 September, the Government stated:
“In due course, the Government would therefore expect to see European legislation brought forward. However, the timing of any European legislation is uncertain at this stage. Even the Recovery and Resolution Directive, which is more advanced than other proposals, does not have a date that is certain for its adoption. The Government is therefore minded to develop the UK’s domestic regime in advance of the European process”.
This is exactly what the Government have done regarding the resolution half of the proposal. The question is why they have not done this for the recovery part of the proposal. Warding off collapse is every bit as important as dealing with collapse. The risks involved in the failure of a clearing house have the potential to make the current financial crisis look almost trivial. Why not take every precaution we can, and why not take them now?
The new Governor of the Bank of England is also of this mind. He said two weeks ago in a speech to the Canadian Club of Montreal that it was not yet clear that the “too big to fail” situation had been ended, and added, quite explicitly, that each global systemically important financial institution must have mandatory recovery resolution plans in place. I hope that the Minister will agree with Mr Carney and might reconsider the importance of having in place a rigorous recovery plan regime for clearing houses, rather than relying on informal supervision while we wait for the EU to regulate. I beg to move.
Baroness Cohen of Pimlico
My Lords, I draw attention to Amendments 92B and 92C in my name. I must declare my interest as a director of the London Stock Exchange and, for that matter, as vice president of the Borsa Italiana—and, as such, the owner of a clearing house in Italy. Subject to all the regulatory requirements, I have a 60% shareholding in LCH.Clearnet, a London-based clearing house.
London Stock Exchange Group supports recovery and resolution powers for the financial markets and believes that these will be best delivered in clear and consistent legislation. We expect to come under close scrutiny. The amendments in my name help with elements of proposed new Section 296A of the Financial Services and Markets Act, which gives the Bank of England additional powers to direct UK clearing houses that were introduced by the Government in Committee. That is why we have not heard quite so much about them until now.
I am grateful to the Minister for the assurance he provided to the House on 15 October that the Bank of England would not use these powers to require shareholders, members or clients of clearing houses to recapitalise or otherwise fund a failing clearing house. This is vital because owners of a clearing house need to know their maximum possible liabilities in order to manage and control their funding. Following helpful discussions with HM Treasury and the Bank of England, it is understood that the circumstances in which the power of direction would be exercised fall somewhere between the day-to-day powers and the other powers provided by the Banking Act. Again, I am grateful to HM Treasury and the Bank of England for their willingness to engage in dialogue on all this. I am sure that we all want effective regulation of clearing houses, but we need clarity and certainty around the scope of the powers and the circumstances of their use.
The amendment seeks to put in the Bill the government description of the circumstances in which the powers would be used, as is the case for the existing crisis powers, and when they are to be used. This should also include a requirement to consult the other regulators and the clearing house, as suggested in the amendment.
My amendments would bring clarity and would, to some extent, future-proof these powers in three key ways. First, Amendment 92B would clarify that the powers would be used only if “necessary”, rather than “desirable”, which is an objective and appropriate test.
Secondly, Amendment 92C seeks to characterise the new powers in proposed new Section 296A of the Financial Services and Markets Act more clearly as sitting between the day-to-day powers and the Bank of England’s crisis powers. My amendment seeks to introduce conditions on the Section 296A power, while stopping short of requirements provided for under the Banking Act powers, which have much stricter trigger conditions and consultation requirements. This would allow the Bank a clear ability to use the different sets of powers. If Government can improve on this wording to give greater clarity on exactly when the powers would be used, I would welcome that. I hope at this stage only to highlight the issue and seek closer definitions.
Thirdly, Amendment 92C would place a consultation requirement on the Bank before using the powers—and takes account of the changes being made to Section 298 of FiSMA—that would allow the Bank to waive consulting the clearing house, if necessary. This would ensure that the relevant authorities considered the wider market consequences of a proposed direction, while allowing flexibility for the Bank.
Taken together, these amendments would achieve the Government’s objectives and support the legitimate interest of clearing houses. The amendments would retain full flexibility of the Bill as drafted, while offering greater clarity and certainty for market infrastructure operators, which we all need.
Lord Sassoon
My Lords, the Government note the concerns expressed about the additional powers of direction to be conferred on the Bank of England. Some of these concerns are reflected in Amendments 92B and 92C, tabled by the noble Baroness, Lady Cohen of Pimlico. These amendments seek to impose more stringent conditions on the Bank of England’s ability to exercise the Section 296A power. I will say at the outset that in response, the Government are minded to bring forward amendments at Third Reading to address some of the concerns raised by the industry.
Before bringing forward amendments at Third Reading, I will reflect further on the debate we have had today. However, I am happy to confirm that the Government are considering amendments to raise the threshold of the trigger for the power of direction to a “necessary” rather than a “desirable” test; to more clearly set out how the power is to be used, including specifying procedures with which the Bank should comply prior to issuing a direction, whether on a routine or an expedited basis; and, finally, to set out in statute the assurance that I have already given the House that the additional power of direction cannot be used to compel a clearing house to accept the business of a competitor.
I will now address the amendments in this group. Amendment 92A, tabled by my noble friend Lord Sharkey, seeks to introduce a requirement for clearing houses to draw up and maintain recovery plans. The appropriate place for a requirement for clearing houses to prepare recovery plans would be in Part III of the recognition requirement regulations made under Section 286 of FiSMA, not in primary legislation.
The Government have already outlined their intention to build on the positive developments around loss allocation arrangements that are being introduced by some clearing houses of their own volition, and will also consult on proposals to make changes to the recognition requirement regulations, which are the operating conditions under which clearing houses are licensed to operate in the UK. The changes would have the effect of requiring all UK clearing houses to have in place loss allocation rules. As part of the consultation exercise, the Government will also seek views on proposals to change the recognition requirement regulations to make mandatory the preparation and maintenance of recovery plans by clearing houses. We are on the case and certainly are not waiting for EU legislation. However, we believe that the recognition requirement regulations are the appropriate place for these conditions, and we will take action to that end.
Amendment 93A, tabled by my noble friend Lord Flight, would impose further preconditions on the exercise of the power, would limit the scope of any direction given under the power and would apply various provisions of the special resolution regime provided for in Part 1 of the Banking Act 2009 to any direction given. It would not be appropriate for the Bank of England to wait until the financial position of a clearing house had deteriorated to the extent that it posed a serious threat to financial stability or failed to meet its recognition requirements before exercising the additional power of direction. The additional power of direction is a supervisory power, not a resolution power. It will allow the Bank of England to manage the considerable risks that may be posed by the actions of a clearing house which do not constitute a breach of its recognition requirements or its obligations under FiSMA 2000. If Amendment 93A were agreed, the Bank of England might be unable to give a direction that would safeguard the solvency of a clearing house, forcing the use of resolution powers as a last resort in order to minimise the impact of the failure of the clearing house on wider financial stability.
It would also be inappropriate to limit the scope of any direction that the Bank of England might give in the way suggested by Amendment 93A. The additional power of direction is intentionally wide-ranging. The Government feel that this is essential in order to build in sufficient flexibility to enable the Bank to manage and respond to new and unusual risks that may require regulatory action that goes beyond the purposes specified in Amendment 93A. The Government also believe that requiring a court order to be obtained before any direction could be given by the Bank could undermine successful regulatory intervention in instances where there was a need to act with alacrity in the event of a crisis. The court may not necessarily be well placed to make judgments on whether action is necessary having regard to the relevant public interest criteria.
Finally, it would not be feasible to apply the provisions of the special resolution regime provided for in Part 1 of the Banking Act 2009 to this power of direction. The additional supervisory power of direction provided for by Section 296A is separate and distinct from the stabilisation powers, exercisable in respect of UK clearing houses, provided for by Amendment 193G. In contrast to the power of direction, which is a supervisory tool, the stabilisation powers are resolution tools that would be deployed to minimise the impact of the failure of a clearing house on wider financial stability. Given that alternative, specific resolution powers exist, it would be unreasonable for the Bank of England to use the power of direction to effect “partial property transfers”. Such an action would be contrary to the constraints under which the Bank operates as a public authority.
With those explanations and assurances about what we intend to come forward with at Third Reading, I hope that my noble friend will feel able to withdraw his amendment.
Lord Sharkey
My Lords, I seem to have put my amendment in the wrong place, but I think I heard the Minister say that recovery plans would be made mandatory in any case but by other means. Given the risks involved, it would be nice to have some sense of when that may actually happen, but in the mean time I beg leave to withdraw the amendment.
Financial Services Bill
Lord Sharkey Excerpts(11 years, 6 months ago)
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Lord Newby
I am sure that the noble Lord is right. However, with this amendment, we are seeking to address the problem that people in deprived communities are denied access to many of the products that are available in more affluent communities. We want to give the FCA a nudge towards trying to see how simple products and various other products can be developed, which will support people in deprived communities. It does not in any way detract from the FCA’s requirement to protect unsophisticated investors from sophisticated investment products.
The challenge that this amendment seeks to deal with is that, for many people in deprived communities, the range of products available, even simple products, is very limited. We want to see how we can help to ensure that the regulatory framework does not keep that straitjacket as tight as it sometimes has been.
I hope that I have been able to persuade your Lordships that the government amendment will have a material impact on access in deprived communities. I hope that I have also been able to reassure noble Lords that what they intend to provide through Amendment 25F is already enshrined in the Bill and that the noble Lord will be persuaded to withdraw his amendment.
Lord Sharkey
I support Amendment 27 and I am grateful to the Minister for bringing it forward. It is a significant and important change. As we discussed in Committee, we believe that the question of ease of access to financial services is key to a proper and robust regulatory system. Ease of access to financial services absolutely needs to be a factor in any consideration of whether competition is effective or not. Nowhere is this more true than in areas of social and economic deprivation. There is already evidence of market failure in precisely these areas, to which we will return in some detail with Amendment 28A.
I am very glad to see that in this amendment the Government propose to put explicitly into the Bill consideration of ease of access to financial services in areas affected by social or economic deprivation.
Baroness Kramer
My Lords, perhaps I may add a word. Frequently when I get to my feet in the debate on this Bill, it is to criticise the language being used by the Government. In this case, I want to express real pleasure at what is now becoming the “access clause”. As others have said, this is quite a big step forward for the regulator. The original concept of the role of the regulator was financial stability, guarding against anything that would challenge financial stability and looking out for and dealing with market abuse, partly because the language in the Bill has been very much driven by the appalling experiences of the financial crisis of 2007.
As time has gone on, it has become more and more evident that we also have an underlying problem with market failure. I am one of the many who think that when market failure occurs, in some way the regulator must be engaged in that process. The banking institutions take notice of the regulator in a way which they will never do either of BIS or the Treasury. If you look at other countries, the United States is a very good example where the regulator is absolutely key in tackling issues around market failure with the consequence that even in the most deprived communities of the United States, a range of products is available to individuals and small companies which, frankly, we can only dream of in the UK. We will be going on to the data issue later.
I am on the Parliamentary Commission on Banking Standards, as are others here including the right reverend Prelate. I, too, will take this opportunity to offer congratulations. I think that in this House we are all thrilled at his role of designated leader of the Church of England. However, the whole issue of socially useful banking has been absolutely key. This access provision in many ways deals with, or takes on, that issue of socially useful banking. It makes sure that there is a role for the regulator to look particularly at areas of social deprivation—but it is broader than that—to ensure that there is genuine access to financial services. In today’s world, without financial services, it is very difficult to live successfully as an individual and even harder to begin to thrive as a small business.
I very much want to congratulate the Government on a forward-looking amendment, rather than one that simply responds to the crisis of 2007.
Financial Services Bill
Lord Sharkey Excerpts(11 years, 6 months ago)
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Lord Sharkey
“(3) In order to facilitate the objective set out in subsection (1), the FCA must require each holder of a banking licence to publish relevant data each quarter, by post code, including the total amount of lending to small and medium sized enterprises.”
Lord Sharkey
My Lords, this amendment has two purposes. The first is to make sure that relevant data on each bank’s performance are in the public domain. This will make it possible to have an informed debate on whether the banks are competing effectively in the interests of consumers, as the FCA is required to promote. At the moment, all we have is aggregated and regional data. We do not know to what extent, or even whether, the banks are effectively competing, or indeed whether they are properly engaged in all the areas where we might want to see effective competition.
In a more general sense, increasing the amount of data on bank activity in the public domain is a very good thing. We need banks to change their practices, and their culture and transparency is a critical part of doing exactly that. We need to be able to see the changes in both practice and culture and not have to rely just on assertions that changes are taking place. For example, we need to see evidence that, as it says in the coalition agreement, the banking system serves businesses and not the other way round. Exactly the same applies to ordinary customers, too.
The second purpose is to focus attention on banks’ lending to SMEs. Your Lordships will have heard many times about the absolutely critical role of SMEs in our economy, and of their role as key providers of jobs. The importance is hard to exaggerate. Our economic recovery and our enduring economic health depend on the performance of our SMEs, as it always has. The ONS data for July 2011 show that SMEs provide 60% of all jobs in the private sector and generate 49% of private sector turnover. The BIS economics paper of 16 January this year re-emphasises the importance of SMEs to the economy, but goes on to say that,
“there are a number of structural market failures restricting some viable SMEs from accessing finance”.
The report notes that access to debt finance is now harder than before the credit crunch.
In 2007-08, 90% of SMEs seeking finance obtained it. This figure now stands at 74%—and, crucially, the total stock of lending to SMEs is in decline, especially to those with a turnover of less than £1 million. To place this in a long-term context, the Breeden report of March this year estimates that by 2016, if things go on as they are, there will be a shortfall of between £26 billion and £59 billion in the finance needed by SMEs for working capital and growth. The Government are very clearly alive to these problems and hope, as we all do, that the Funding for Lending scheme will succeed in making a real difference in funding for SMEs.
The data provided by the banks on lending to SMEs are provided on an aggregated basis. That means there is no information to allow assessment of performance and suggestion of improvement, or to show which banks are performing better than others or, critically, which are effectively absent from which areas. We do not know which banks are supporting—and to what extent—the third sector in taking advantage of the new rights conferred under the Localism Act. To do all this properly, we need access to disaggregated data and data on a postcode level so we can see clearly which banks are doing what and where with the vital SMEs. We need this data so we can identify in detail the areas of market failure and therefore of competitive failure, which the Government acknowledge do exist.
The SMEs are vital to the economy and to jobs. Funding SMEs is vital to their performance. Underfunding, which is the current situation, threatens our economic recovery and the creation of jobs. There is evidence of market failure and of a failure of competition. The amendment will allow us to identify that failure and will provide us with the information to help put right that failure. It will help promote effective competition, as the Bill requires the FCA to do, and it will help fulfil the coalition agreement’s pledge to develop effective proposals to ensure the flow of credit to viable SMEs.
Of course, I hope that my noble friend will agree to this amendment, but it has occurred to me that he may have one or two reservations about doing so. In particular, he may worry that the amendment imposes too onerous a burden on the banks. He may worry that the publication of a bank’s performance may somehow be prejudicial to its commercial activities. I hope that I can give him some comfort on both points.
The burden that this amendment imposes on the banks is not onerous. The FCA may decide, in general, what data it considers to be relevant. I am sure that, in general, it will take into account the burdens imposed. Specifically, publishing the disaggregated and postcode-level data on lending to SMEs imposes, if anything, a trivial additional burden on the banks. The BBA already publishes aggregated data on a quarterly basis, which includes lending to SMEs on a regional basis. By definition, disaggregated data exist before they can be aggregated. Surely, the banks know the postcodes of their customers—except, it appears, for some HSBC Cayman Island accounts.
For the worry that publication of disaggregated data may somehow be prejudicial to the bank’s commercial activities, it is hard to make a convincing case. Exactly like all other large, competitive organisations, the banks will already have detailed research on what their competitors are up to with SMEs—or, if they do not, they are even less competent and less competitive than we might have supposed. The amendment simply puts that information into the public domain.
The amendment is not onerous. It simply requires more transparency from the banks in the interest of more effective competition. It requires, in particular, more transparency about the banks’ support for the SME sector. We would all benefit from that, and people and businesses in deprived communities would benefit greatly. Even the banks would benefit from a move to greater transparency.
I very much hope that the Minister will be able to agree to this amendment or to assure the House that at Third Reading the Government will bring forward something equivalent. I beg to move.
Lord Newby
My Lords, it might be to the benefit of the House if I give the Government’s response to this amendment now. In responding to an earlier amendment, I said that the FCA would necessarily need to gather data from industry to understand what existing provision there was and whether it met the needs. But we need to make proper provision for any data requirements. Normally, that is in the FCA’s rulebook, or covered by commitments made by industry to provide and publish relevant information, working through trade bodies as appropriate. Ideally, we would not need to legislate to make that happen.
Let me be clear on our position: the Government agree that we should be able to see where provision is lacking, particularly where there are areas where bank lending is simply not being offered or getting through. Getting this data in the public domain will help to crystallise the problem, and what should be done about it by industry and by the Government if necessary.
I can confirm today that we will be working with industry, through the British Bankers’ Association and other interested parties, to get a commitment from the banks that they will publish more granular data. This will build on the work that industry is already doing and will deliver publication of the kind of data that all sides of the House clearly want to see. The members of the business lending taskforce already publish subregional aggregated lending data on an annual basis. While this is a good first step, I think we all agree that it is not enough. Therefore, we will work with industry to collate and publish lending data that is disaggregated by institution and presented on a postcode-level basis.
The Government will take this forward as an urgent and pressing matter. In reiterating our commitment to make progress in this area, I confirm that should our negotiations with industry fail to deliver—I sincerely hope that that does not happen—the Government will introduce amendments to the Banking Reform Bill along the lines proposed in the amendment we are debating today, to ensure that the data, in disaggregated and postcode-specific form, are published.
I hope that this reassures noble Lords that the Government share their commitment to making progress in this area and that the noble Lord will be prepared to withdraw his amendment in light of this commitment.
Baroness Hayter of Kentish Town
My Lords, I am delighted, nay honoured, to see my name alongside that of the future Archbishop of Canterbury, the right reverend Prelate the Bishop of Durham. If his contribution today is anything to go by, we can look forward to a thoughtful, progressive and determined ministry, which will serve this House and this country well. Like all my colleagues, I warmly welcome his appointment and congratulate the right reverend Prelate. I wish him well in the challenges ahead, which may be a little more demanding than getting an amendment accepted by the Government.
As has been said, there is a real lack of transparency in the financial sector, which is a key problem, given our reliance on competition to make the market work. Without information, choices of customers or of policy-makers are hampered. We know a few things but not enough; we know that one-third of a million small and medium-sized businesses could not get access to finance from mainstream banks in 2011. Indeed, only half of the young, fast-growing, small businesses had their loans fully met last year compared with 90% in 2007, so it is no wonder that our economy has stalled. But regulators and others cannot take action until we have these better, more precise and locally based data. Banks have to made to be more open about what and where they are lending. They are too important to work in the shadow. I am delighted that the Government have accepted this amendment, although I note that the Financial Services (Banking Reform) Bill is potentially growing larger by the amendment. I think that this is the third reference today to something that may be in the Bill. Nevertheless, we welcome the Government’s move on this matter.
Lord Sharkey
I would like to thank all noble Lords who have spoken in this brief debate, particularly my noble friend Lord Newby for his commitment to the publication of disaggregated, postcode-level data in this important area and also, in a way, for helping us to look forward to a slightly more varied Financial Services (Banking Reform) Bill than we might have expected in the new year.
Last week it was the noble Baroness, Lady Noakes, who told us what the correct technical response was to this kind of government commitment: she said it was “bingo”. I would like to echo that. I finish by saying that, although I hope we will be able to get a satisfactory voluntary agreement on this, I am enormously encouraged by the Government’s firm commitment to legislate should this not be the case. I beg leave to withdraw the amendment.
Small and Medium-sized Enterprises
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Lord Sharkey
To ask Her Majesty’s Government what additional funding to small and medium-sized enterprises, particularly in deprived communities, has resulted from the Funding for Lending scheme.
Lord Newby
My Lords, the Funding for Lending scheme is not specifically targeted at particular regions or sectors of the economy; it is designed to incentivise banks to increase lending in aggregate, which will of course have a positive effect on the economy as a whole. The early indications have been encouraging but it is too soon to judge the impact of the scheme. The Bank of England will publish quarterly net lending figures for each participating bank from 3 December.
Lord Sharkey
I thank the Minister for that Answer. However, the fact is that the Bank of England’s last quarterly report shows that the stock of lending to SMEs continues to decline. It also shows that the number of loan applications themselves is down. I note that only 50% of SMEs had ever heard of Project Merlin. Could the same lack of awareness of Funding for Lending be contributing to the problem? Do the Government know how many SMEs are aware of this scheme? What are the Government doing to make sure that they are aware of the scheme?
Lord Newby
My Lords, the figures so far published do not take account of the impact of Funding for Lending, which only opened in August, and not least because it takes some time for loan approvals under the scheme to be finalised. I absolutely agree that promoting the scheme will be crucial. We are encouraged by the steps that the banks and building societies have already taken to do so, including double-page advertisements in national newspapers and promoting mortgage products very actively, not least through their websites. The Bank of England is administering the scheme but the Treasury is directly involved in monitoring it via a joint oversight board with the Bank.
Financial Regulators: Examinations
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Lord Sassoon
My Lords, as well as getting the architecture of supervision and regulation right—on which this House has rightly spent many hours and to which the noble Lord, Lord Peston, has made some important contributions—the Government should within that appoint to those bodies an appropriate board with appropriate expertise and experience. It would then rightfully be up to the two successor bodies to the FSA to decide how to equip their staff properly to do the job. The FSA’s approach to testing and competence will be continued by the FCA. The FCA is also exploring whether to have training externally accredited, which the FSA has not done up to this point. The PRA, on the other side, is developing a comprehensive strategy, including a three-year training programme for new graduates. These matters are therefore being taken extremely seriously by both the successor bodies, which is how it should be.
Lord Sharkey
My Lords, it seems clear that the FSA was blind to the moral and ethical failings of the banks as well as to their regulatory failings. How will the FCA do better in this respect? It is all very well worrying about the locks on the stable door, but should we not also be worried about the mindset of the horse?
Lord Sassoon
My Lords, one of the things that is very striking about the FSA is the speed with which it put in place an inquiry into what had gone wrong on Northern Rock. It was very frank about its failings and has changed an awful lot of things already. One should be fair to the FSA and recognise that it acknowledged the failings of its supervisory regime, which is already reflected in differences to its approach to training and continual assessment.
Financial Services Bill
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Lord Northbrook
My Lords, I rise to support my noble friend Lord Flight in his Amendment 190A. As far as I can see, Clause 62 currently contains no reference to consulting the financial services industry or, where appropriate, consumers in this area. I think that the clause should be amended to this effect as it is a useful and important potential extra area of consultation.
Lord Sharkey
My Lords, my noble friend Lord Flight seeks to amend Clause 62(6). The paragraph states that the MoU that we are discussing,
“need not make provision about co-ordination between the FCA and the PRA in relation to membership of, or relations with, the European Supervisory Authorities”.
However, subsection (1) of the same clause states:
“The Treasury, the Bank of England, the FCA and the PRA … must”—
I emphasise “must”—
“prepare … a memorandum describing how they intend to co-ordinate the exercise of their relevant functions so far as they relate to membership of, or relations with, the European Supervisory Authorities”,
and some others. On the face of it, these two paragraphs appear to directly contradict each other. I am sure that that is not actually the case, but I would be very grateful if my noble friend the Minister could explain why there is no contradiction here and perhaps also explain the purpose of subsection (6).
Financial Services Bill
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Lord Sharkey
Will the Minister clarify a point in sub-paragraph (3)(b) of paragraph 28 in Schedule 9, which would survive whether or not the amendments of the noble Baroness, Lady Hayter, were accepted? The sub-paragraph adds to the sentence in FiSMA the words,
“, or by 2 or more persons who include a person not directly involved in establishing that evidence”.
The whole paragraph now reads:
“That procedure must be designed to secure, among other things, that the decision which gives rise to the obligation to give any such notice is taken by a person not directly involved in establishing the evidence on which that decision is based, or by 2 or more persons who include a person not directly involved in establishing that evidence”.
FiSMA already permits a procedure that allows, in certain circumstances, the decision to issue a notice to be made solely by a person directly involved in establishing the evidence on which that decision is based. Why has the Minister felt it necessary to change this? Why, in particular, regularly allow the decision to issue a notice to be made by a person directly involved in establishing the evidence for the notice if he or she can persuade just one other person to agree? Does he have a particular type of case or set of circumstances in mind that would make this desirable or necessary, or is there some now apparent defect in the current regime as exemplified within the FSA by the Regulatory Decisions Committee?
Lord Deben
I hesitate to return to the previous discussion, but I just remark to the Minister that his whole list of examples of what this might have prevented of course misses the point. My point was that we could have done all those things with the RDC. The real question is: who makes that decision? I have never had an explanation of why it is necessary to have a power that is never referred to any independent group. That is all I am interested in and I feel very strongly about it. We have recently been trying to complete a very valuable thing called “treating customers fairly”. I want all customers to be treated fairly, and I entirely agree with the speech of the noble Baroness, Lady Hayter, who is absolutely right.
I say to the Minister very personally and directly that when one of those most likely to be a senior regulator tells the industry that he intends to shoot first and ask questions later, he should understand why the industry has some concerns. That is all I say. All I am asking is that before such a decision is made, there should be reference to an independent body, and I think that the proposals put forward—albeit, as the noble Baroness rightly said, that they might need a little tweaking here and there—would seem to everyone to be fair.
We have the same situation—parallels have often been drawn—in police prosecution when someone outside asks whether this is a proper circumstance and whether it is likely to stand up. That is all that is necessary. Do that and most of us, I think, would be perfectly happy. Our issue is that, without making things more difficult in these debates, there are too many examples of decisions made that appeared to be hasty and when people have not looked too carefully at the details. This would make sure that they do.
All I say to the Minister is that he would have pretty overwhelming support for the changes that he wants if he were prepared to do what the noble Baroness has put forward. I would certainly be happy to argue that. If he does not do that, this will be difficult to support, and I am interested in the point that my noble friend has just made that there seems to have been an attempt to move even further away from what we should have.
I have one other point. The key thing is that the murmurings that somehow the RDC will disappear would be overcome by having this measure in the Bill. It is not unreasonable to have the concerns that people have, and I have not yet seen why introducing this measure would make things more difficult or less transparent. I would be happy to take the risk of people being warned and turning out to be guiltless, if it were done with this degree of protection. Then the Minister would have us all on his side.
Financial Services Bill
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Lord Sharkey
“(2A) After paragraph 9A insert—
“Part 1BThe activity of establishing, operating or winding up a crowdfunding scheme“Crowdfunding Scheme” has the meaning given in section 417.””
Lord Sharkey
My Lords, this is a probing amendment. Its purpose is to allow discussion of the issues surrounding crowd funding in the United Kingdom. The informal meaning of crowd funding is probably entirely obvious. However, as far as I can tell there is no generally accepted legal or technical definition of the term. Wikipedia describes crowd funding as,
“the collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or organizations”.
More particularly crowd funding also refers to,
“the funding of a company by selling small amounts of equity to many investors”.
This was the meaning directly addressed in President Obama’s JOBS Act of April this year which, among other things, gave the SEC 270 days to bring in appropriate regulatory regimes for crowd funding in order to encourage its take up and its expansion.
In the UK, as elsewhere, there are essentially three possible forms of crowd funding. The first is the donation model in which funders provide money to an organisation for no commercial or financial return. The second is the lending model, in which funders provide money by way of repayable interest-bearing loans. These two models are actively used in the UK and do not seem to face significant regulatory barriers, provided that loans do not involve the provision of consumer credit. However, neither of these is suited to the more speculative form of SME or start-up enterprises: donations because enthusiasm, although often surprisingly generous, will be restricted to a fan base, and lending because many organisations will be conventionally assessed as not credit-worthy.
The third method of crowd funding, investment, is potentially a significant source of funds for start-ups and similar high-risk ventures but it faces regulatory problems in the United Kingdom. There are two kinds of investment crowd funding: the equity model, where investors receive shares in the company; and the collective investment scheme model, where investors receive a right to a share in profits or revenue but no shares. As a general rule, it is not possible for a company in the UK to raise money by crowd funding using either the equity or the CIS models. With some limited exceptions, both these models fall within the UK regulatory regime’s prohibition of such activities. That is the problem about which I would like very much to hear the Minister’s views.
Specifically, does the Minister accept that crowd funding may be a very useful way of getting substantial funds into the UK’s SMEs, an area where our banks are currently underperforming? If so, does he acknowledge a degree of urgency in setting up an appropriate regulatory framework, and can he accept that the existence of high levels of risk in investing in small companies need not necessarily mean that ordinary people should not be allowed, or even encouraged, to invest their money in such enterprises? Perhaps, in this context, it is worth remembering the conclusion for the US jobs market of the Kauffman report: that for 20 of the past 27 years, all net new jobs came from start-ups.
My noble friend the Minister will know of the report published in February this year by the Association of UK Interactive Entertainment, entitled A Proposal to Facilitate Crowd Funding in the UK. This report rehearses the benefits to business of making crowd funding more easily accessible to ordinary people. It makes, in some detail, recommendations for regulatory change in order to achieve it. In summary, the report recommends that crowd funding be permitted generally and not restricted to some qualified class of investor; that any regulation be light touch; that there should be no absolute requirement that shares be issued to investors, so that the CIS model may be applied; that there should be no upper limit on what can be raised for projects, with certain conditions applying; and there should be an investment limit per person to limit individual exposure.
Perhaps I could ask the Minister to give his views on these proposals, to consider in a general sense how we may use crowd funding to both increase and speed up the flow of funds into the SME sector, and to give some indication of the Government’s intentions in this area and of timings. I beg to move.
Lord Peston
My Lords, the noble Lord has introduced his amendment as a probing amendment, which I take to mean that it is meant to be educative. My natural tendency is to agree with him, but I have great difficulty in that I do not have the faintest idea what he is talking about. In particular, I do not know what crowd funding is. The amendment says it should have,
“the meaning given in section 417”,
but there is no Section 417 in any of the documents that I have. It would help me enormously if he could extend my education and tell me what this is all about.
Lord Sassoon
That is one way of dealing with it, but it is not the way in which the Government wish to deal with it, which I shall explain in a moment. I say to my noble friend Lord Stewartby that I have a hunch that before we pass this clause we will have a discussion about timetabling. If he will forgive me, I shall come back to the matter then, but if we do not I will make sure that I raise the timetable in question later.
Crowd funding is an innovative new source of funding for start-ups and other small enterprises. I share my noble friend’s hope that it will continue to grow in the coming years, so my answer to his first question is a resounding yes. However, on his second question, which is the subject of the amendment, while I understand my noble friend’s enthusiasm for establishing discrete legislative provision to bring this very new sector into regulation, I do not agree that it is needed at this stage and so cannot accept the amendment.
My noble friend raised the US JOBS Act. In the US, there was a very distinct problem and a pressing need, which led to the introduction of that Act. The situation is different in the UK. Among other things, there has been no clarion call from industry for more regulation. However, we should not be complacent, and the FSA is not waiting until there is a problem before doing things.
Platforms seeking to operate what are in effect collective investment schemes must obtain authorisation from the FSA. The FSA already has powers to take action against firms operating without appropriate authorisation. It is up to the FSA to work with platforms seeking to offer equity returns to their investors to ensure that they obtain relevant permissions before the activity that is most likely to apply here—arranging deals in investments—starts. This is happening already, with one such platform securing authorisation from the FSA prior to its launch.
Of course, the regulator must balance the need to allow innovative models to flourish with ensuring that consumers understand the risks involved with new platforms. In this regard, the FSA’s recent guidance on crowd funding makes clear its concerns, which are evidently shared by the noble Lord, Lord Peston. This is the right sort of regulatory response. It shows that we should not rush to create new regulated activities here.
I am also concerned that amending the Bill in this way could create confusion that stifled the growth of the new sector. There are currently many forms of crowd funding. We do not yet know precisely what definition my noble friend had in mind, but the vast majority of these platforms ask customers to make donations rather than investments. They have been very successful in doing that. The world’s largest crowd-fundng site, Kickstarter, for example, which will launch in the UK very soon, raised more than $100 million for creative projects in the past year. A platform such as that does not pose the same risks to investors, who expect no money in return for their donation, so we have to be mindful of the risk of legislating in a way that does not fully take account of the breadth of the businesses in this new area.
In conclusion, although industry standards and further FSA and FCA guidance may have an important role to play in future, my view is that the regulatory structure proposed in the Bill is suitably flexible to support the growth of the full variety of crowd-funding platforms, with a careful eye on the needs of the consumer throughout. With that, I hope that my noble friend will agree to withdraw his probing amendment.
Lord Sharkey
I thank the noble Lord for his answer. The noble Lord, Lord Peston, invited me to extend his education, but I think I should decline any such attempt. The noble Lord, Lord Barnett, did not believe that there was a definition there, and he was right—there is no definition. I shall not do it again now, but I did try to explain what forms crowd funding currently takes. Perhaps I did not give a clear impression of how important or what size it currently is, and that is my fault, but crowd funding exists and plays quite a large part in the landscape of small companies, both in the United States and already here in the United Kingdom.
I think I noticed an expression of perhaps amazement on the face of the noble Lord, Lord Peston, at the notion that people should donate $100 million to commercial enterprises for no return at all—an aspect of crowd funding that clearly he was not familiar with.
Lord Peston
I take it that if the thing goes ahead, it will be made clear to people putting money into this sort of thing that they are essentially going to a betting shop, where they may win or lose. That is what it is about. Since our country appears to be gambling mad at the moment, there seems no reason to prevent this new form of gambling from being introduced. However, as someone who knows—coming, as I have said before, from a large family of gamblers—that gambling is a total mug’s game, I hope there is someone around who tells people that crowd funding is a mug’s game.
Lord Sharkey
It is nice to know that the noble Lord, Lord Peston, approves of gambling. Returning to the Minister’s response to the amendment, I note the objections that he raises, some of which were raised by the noble Lord, Lord Peston, as well. I accept that this is a new area that is full of dangers for unwary investors, and I also accept the dangers of regulating an infant industry too early. However, we are about to see a significant expansion in this area, which we should all keep an eye on for the future. Having said that, I beg leave to withdraw the amendment.
Lord Sharkey
“137B FCA general rules: clients’ money, right to rescind etc.
(1) Rules relating to the handling of money received or held by an authorised person in specified circumstances (“clients’ money”) may—
(a) make provision which results in that clients’ money being held on trust in accordance with the rules;(b) treat two or more accounts as a single account for specified purposes (which may include the distribution of money held in the accounts);(c) authorise the retention by the authorised person of interest accruing on the clients’ money; and(d) make provision as to the distribution of such interest which is not to be retained by the authorised person.(2) An institution with which an account is kept in pursuance of rules relating to the handling of clients’ money does not incur any liability as constructive trustee if money is wrongfully paid from the account, unless the institution permits the payment—
(a) with knowledge that it is wrongful; or(b) having deliberately failed to make enquiries in circumstances in which a reasonable and honest person would have done so.(3) In the application of subsection (1) to Scotland, the reference to money being held on trust is to be read as a reference to its being held as agent for the person who is entitled to call for it to be paid over to him or to be paid on his direction or to have it otherwise credited to him.
(4) Rules may—
(a) confer rights on persons to rescind agreements with, or withdraw offers to, authorised persons within a specified period; and(b) make provision, in respect of authorised persons and persons exercising those rights, for the restitution of property and the making or recovery of payments where those rights are exercised.(5) “Rules” means general rules of the FCA.
(6) “Specified” means specified in the rules.”
Lord Sharkey
My Lords, Section 55 of the Financial Services Act 1986 provided that the regulator may make regulations with respect to money that authorised persons of any description hold in such circumstances as are specified in the regulations. This was augmented by the EU investment services directive which in 1996 required the UK to,
“make adequate arrangements especially in the event of the investment firm’s insolvency”,
and most recently by the European Market Infrastructure Regulation as well. The power of the regulator to make rules under Section 139 of FiSMA has been hotly debated and contested in the courts. Many hundreds of thousands—probably millions—of pounds have been expended in legal and administrators’ fees in determining the scope and application of the rules when an authorised firm becomes insolvent.
In addition to that of Lehman Brothers International (Europe), the credit crunch resulted in a number of failures where client money rules continued to be at the centre of identifying and returning to clients’ money held for them by an authorised firm, bank, clearing house or intermediate broker to whom the money had been paid on behalf of the clients. One important and complicating factor in trying to resolve the proper and speedy return of cash lies in the arguably different status of cash held and cash received. The Supreme Court has ruled that the protection of clients’ money extends to money received by the firm and not just money held in client money bank accounts. We are therefore proposing in Amendment 173ZAB that the power to make rules includes the power to make rules relating to the handling of money received by the firm as well as that held by the firm.
In addition, the Bill appears to delete specific provision in relation to the application of these rules in Scotland. I ask the Minister to confirm that, in proposing the deletion of Section 139(3) of FiSMA, relating to the position of the statutory trust in Scotland, they have taken appropriate Scots law advice and in particular to confirm that the proposed change would not give those contracting under Scots law—for example, under most agreements with the Royal Bank of Scotland—a different outcome in relation to the receiving and holding of client money than would be obtained by those contracting under English law. I beg to move.
Lord Sassoon
My Lords, I shall start with Amendment 173ZAB. We are talking about new Section 137B which provides for FCA rules about the handling of clients’ money and related matters. It will replace existing Section 139 of FiSMA which is entitled, somewhat enigmatically, “Miscellaneous ancillary matters”, which does not really do it justice. However, as my noble friends have identified, it does not exactly reproduce Section 139. Their amendment would ensure that it tracks Section 139 in every respect by reinserting one subsection which, as my noble friend explained, relates to how references to money held on trust are to be construed in Scotland. Following consultation with the Scottish Law Commission, we reached the view that the relevant law in Scotland was sufficiently similar to the rest of the UK that it was neither necessary nor desirable to make different provision for Scotland in this way. I can reassure my noble friend that the recent Supreme Court judgment on Lehman Brothers also supports the view that a firm in Scotland which receives and holds a client’s money is obliged to hold that money in a way which preserves it for the client’s benefit as a trustee. This confirms that the approach taken in England, Wales and Northern Ireland is also correct for Scotland and that it is unnecessary to carry forward Section 139(3). I am happy to confirm that.
I turn now to social enterprise rules and Amendment 173AAZA, which seeks to give the FCA a new power to make social enterprise rules. I was of course delighted that my noble friend reminded us that social enterprises have not gone away over the summer break. I could leave it at that but I should probably do slightly more justice to this, although what I say will be entirely consistent with where I was before the break. We discussed in some detail the role that the FCA should or should not play in relation to social investment and enterprise and I will not repeat the whole of that debate. For the purposes of this amendment, I simply wish to put on record that where those running a social enterprise are carrying out a regulated activity, they will need to be authorised and will therefore be regulated by the FCA and will be subject to the rules that the FCA makes.
The drafting of the FCA’s objectives as well as new Section 137R make clear that the FCA should distinguish between different types of authorised persons and their consumers. There is therefore no need for a bespoke power. Specific rule-making powers in Clause 22 exist only where such rules go beyond the general rule-making power—for example, because they extend to unauthorised persons or affect third party rights. I would suggest that that is plainly not the case here.
On product intervention, I turn first to the group of amendments that seek to amend the FCA’s new product intervention power. This new power provides the FCA with a clear mandate from Parliament and the right tools to support a new and more proactive approach to consumer protection with greater regulatory scrutiny of the products themselves. I am grateful to the noble Baroness for her recognition of and support for the importance of the new rules in this area.
Amendment 173AA would restrict the circumstances in which the FCA may make product intervention rules. I should like to reassure my noble friend that to a large extent the Bill already requires the FCA to exercise the power in the way intended in the amendment. To be clear, however, there is one respect in which I do not sympathise with the amendment; namely, proposed new subsection (11)(a). This seeks to raise the threshold for intervention to where a product or practice,
“gives rise to significant investor protection concerns or poses a serious threat”,
to market integrity or financial stability. The amendment would prevent the FCA intervening to advance its competition objective in relation, for example, to high exit fees which, I am sure my noble friend would agree, have a negative impact on switching. The Government believe that this is an important feature that we want to see in the marketplace. The power would therefore become an exclusively negative rather than a positive tool. That would represent a significant step back in terms of consumer protection and is why I cannot support my noble friend’s amendment.
Amendment 173AF deletes the option for the FCA to make temporary product intervention rules. It is correct that the FCA’s rule-making power is very broad. The new power puts beyond doubt that the FCA has a mandate in this area. It also introduces a safeguard as temporary rules expire after 12 months plus breach of a ban can render a contract unenforceable. The default will be that any product intervention rules are made under the normal rule-making procedure, with prior cost-benefit analysis and public consultation. However, given the speed with which a new product can gain traction in the market, and the fact that the FCA cost-benefit analysis and consultation take a minimum of six months, we think it is important that, specifically for product intervention rules, the FCA has the option to intervene more swiftly albeit with the limitation that I have just outlined.
I turn to Amendments 173AG and 173AH on the FCA’s statements of policy under this power. The purpose of the statement of policy is to provide industry and consumers with clarity around the circumstances in which the FCA will make temporary product intervention rules in the absence of prior consultation. The FSA has published a draft of the statement on its website and noble Lords will see that it sets out the factors that the FCA will take into account before and the process it will go through. Linking the statement to the temporary rule-making power does not, of course, preclude the FCA from publishing information about its general approach to product intervention. Indeed, the FSA has already published a discussion paper and a policy statement on this topic.
However, the link we have here is consistent with the wider approach taken in FiSMA and in the Bill that policy statements are required only where there is a very specific need to provide further guidance on how the regulator will exercise a power or function; for example, the power to impose penalties. Therefore, out of the very many policy statements that the FCA and the FSA have and will have, only 10 policy statements are required by FiSMA, as amended by the Bill, principally relating to enforcement and imposition of penalties. In this instance, the need for guidance does not extend to the general product intervention power as the process for making such rules is set out in the Bill itself so the statement is deliberately limited to the temporary power because of the very particular effect that a temporary power will have through the short cut to making it. Finally, while I can reassure my noble friend that I expect the FCA’s statement of policy to cover the main points in Amendment 173AH, I do not believe it appropriate to specify this much detail in the Bill.
I turn to the group of amendments that start with Amendment 173AAC relating to the issue of a longstop requirement for complaints about financial services. When the FSA last looked at the issue in 2007, it said that to introduce a time bar, it would need to be clear that the potential detriment to consumers was outweighed by the benefits to consumers and firms arising from greater certainly among independent financial advisers about the extent of their liabilities. It is this cost benefit analysis that needs to be addressed. The FSA said in its published response of 5 November 2011 to the Treasury Committee’s retail distribution review report that,
“the FSA believes the FCA should review this issue again at some point in the future”.
I certainly believe it is important that the expert regulator looks at this issue and undertakes the necessary consultation with consumers and firms. I am grateful to my noble friend for this amendment because it has prompted me to look back at the rather unspecific commitment that the FSA gave to the Treasury Committee. As a consequence of my noble friend’s prompting, I followed up on the point with the FSA and it has made a commitment that the FCA will consider whether to investigate the case for a long stop as part of its business planning for 2014-15. The timing of that is linked to the settling down of the RDR. Therefore, I am grateful to him for prompting this and I would encourage industry and consumer groups to continue a dialogue with the FSA on this topic.
I turn to the Amendments starting with 173ACA on the new power to make rules concerning financial promotions. I cannot agree with Amendments 173AC and 173ACA. Financial promotions can have an immediate detrimental impact if consumers act on them. Quick and decisive action is therefore needed on the part of the regulator and we must empower the regulator to use its judgment to make a call on a promotion. It may be too late once the promotion has been made or while the regulator undertakes further investigation. This is why the power applies both where it is clear that rules have been breached, and where in the view of the regulator this is likely to be the case, and enables the regulator to prevent a promotion from being made. To provide the most obvious example of why “likely to” is required, the FCA needs to be able to require a firm not to circulate a promotion where it becomes aware of a promotion before it is actually circulated and the FCA is of the view that it is likely to breach financial promotion rules if circulated.
Finally, I turn to Amendments 173AD and 173AE, which seek to change the disclosure obligations attached to this power. Amendment 173AD seeks to change the duty on the FCA to publish information about a direction it has given to a power to do so. Amendment 173AE seeks to block the FCA from publishing information where a direction has been revoked. The fundamental shortcoming of the current financial promotions regime is that in most cases the FSA is not able to publish the fact that it has asked a firm to withdraw a misleading promotion. The power—which I am grateful to the noble Baroness for giving her support to—is designed to address the deficiency by giving the FCA a broad requirement, including a requirement to publish such information about the matter as it considers appropriate.
The Government believe it is important that the FCA should disclose what it has found for a number of reasons: it will help consumers, as they will be able to see what the regulator did and why; and, importantly, it will also increase the accountability of the regulator, as it will have to outline its thinking and set out where it has or has not taken action. The importance of the regulator both taking effective action and being seen to be taking effective action in this area is vital.
However, I accept that there may be circumstances when it is not necessary or appropriate to publish the information about a direction. Therefore we will look again at subsection (11) and consider carefully whether we should change the provisions relating to disclosure from a duty to a power. We will return to this issue on Report. On the basis of those reassurances and explanations I hope that my noble friend Lord Sharkey will feel able to withdraw his amendment.
Lord Sharkey
I am grateful to the Minister for confirming the Scottish situation. However, I am not entirely sure whether I am correct in understanding him to say that there is now no need to add explicitly cash received to cash held in Amendment 137B. On the assumption that that is the case—I can see that he is nodding to say that it is—I am happy to withdraw the amendment.
Lord Flight
My Lords, I congratulate the Minister on embracing such a broad range of issues, which have been grouped together here. I would like to add only the following. I am pleased to hear what he had to say about the publication of directions relating to promotions, which was really the main point of my amendment. Regarding the issue of the Limitation Act and the 15-year longstop, I am also very pleased to hear that the Minister is focusing on this. As things stand, RDR is likely to result in many thousands of financial advisers ceasing to be in business, with other major problems that can be dealt with at another time in another place. It will be a much bigger issue than it is at present in terms of all these people who are, if you like, retiring and going out of business, and it seems fundamentally equitable that the general law of limitations should apply to all transactions without any special treatment for financial services claims or ombudsmen’s complaints. I wonder whether the judiciary should be advising about this, at least as well as the regulator.
The general issue of promotions will be an interesting double-edged sword for the regulator. I am a commissioner of the regulator that was the first to ban split-level investment trusts at a time when I think the regulator over here was rather slow in being aware of the problems and issues. The very full powers given to the FCA will put it in the limelight to get there in good time and do it right. As I said at the outset, I am certainly not opposed to the power. There has been an obvious need to be able to deal with “wrong” products quickly and effectively. I am still slightly concerned that the framework of the FCA using those powers is pretty broad and I suspect that the FCA itself may want to have a more defined framework for fear of criticism.
Those are the main thoughts behind my amendments in that area. I thank the Minister for his response, which essentially satisfied the points I raised.