Financial Services Bill (First sitting)

Angela Eagle Excerpts

Committee stage & Committee Debate: 1st sitting: House of Commons
Tuesday 17th November 2020 Public Bill Committees

[Alison Thewliss]

Okay. I will leave some questions for colleagues.

[Ms Angela Eagle (Wallasey) (Lab)]

Q Mr Mills, I wonder whether you could say a little more about the resource implications of the Bill. An awful lot of our financial services regulation—well, all of it—used to go on in the European Union, but now that is ending and all these complex and technical issues are being onshored. That must be the cause of a huge amount of extra technical work for the FCA, and in fact for the PRA. Is the FCA getting any extra resources? Are you trying to import all the people who used to live in Brussels back into the FCA?

Sheldon Mills: As I said, we have a significant amount of expertise in the United Kingdom. The reason we have that expertise is that—I have to be careful how I put this—much of the financial services legislation that has come about in the EU, the UK has fully participated in, often leading on the legislation. If we take the investment firms prudential regime, which is in the Bill, our colleagues at the FCA were leaders in that space, setting the pace and direction in the EU. So I think we have the expertise and the experience.

When I think about resources, there are areas where we will need to consider hiring more people, in particular the area of prudential expertise—that is a specific area within the FCA where we will need to hire. We will need to consider our resourcing carefully, as more parts of the acquis are onshored, but currently, where we stand, we think we are capable of moving around our resources in order to meet the demands.

The impact that it could have is of course the speed at which we are able to turn to the different pieces of legislation. If the ask was to do everything on day one, there would be an impact on resources; if we have a sensible framework and approach, I think we can manage.

[Ms Eagle]

Q Mr Mills, I am glad you think you can manage but, given that this onshoring is happening, we have already seen the beginnings of some quite fierce competition—if I may put it in a non-technical way—to nick some of the financial services that we have in this country and to take them abroad. We have already seen quite a competitive and non-co-operative environment develop, seeing who can get what when we are outside the European Union. That is an entirely new form of activity that somehow you have to take account of, and that has not had to be taken account of in the past.

Are you sure that will not cause your resources to be stretched in a way that you had not anticipated? For example, if we have to approve new ways of doing things, onshore all these things and get new systems up and running, those who might wish to carry on can just shift to the internal market and carry on doing things, without having to wait for all the consultations that you and your colleagues will be doing to try to re-establish a UK-based regulatory system.

Sheldon Mills: The starting point is that the foundations of the system are clear to all financial services markets in the UK, so there will not be a gap that means organisations will not know the type of regulatory system that they expect when they are authorised a licence to operate in the UK. We will ensure that that is maintained and is clear throughout the transition and into the future.

On what I think you are referring to as the competitive regulatory system that we might enter into, I can assure you that we are engaged internationally through all international bodies. We play leadership roles in the ESB, the Financial Stability Board and all sorts of international bodies in financial services. Therefore, we are key actors in regulatory systems and the latest approaches to regulation across the world, and that will also support our being a sensible regulatory environment in which firms wish to operate. We are clearly engaged with negotiations and discussions with the European Securities and Markets Authority in relation to a range of regulatory activity, so I am confident that we will not have any significant gaps or issues that would cause issues for the UK financial services industry or for those who wish to come and play an active role in that industry.

[Ms Eagle]

Q Thank you. It appears that the EU will not be in a position to offer us any equivalence, or to certify any of the things that we are doing as equivalent, until at least the middle of next year. There are noises that we will be diverging in some of the areas that we are re-onshoring. You said that would be the exception rather than the rule. Can you give us a bit more information on how divergence will work? I am concerned that the Bill has its Committee stage this side of the transition, and then its Report stage the other side of the transition, when we might be in a different situation. Are you planning for there to be big importations of new stuff into the Bill at the last minute?

Sheldon Mills: The Bill is a matter for Government to take through Parliament. The important thing for us, as regulators, is that the Bill provides us with sufficient flexibility to meet the needs that we face as we move through the transition and into the future. In a sense, the Bill is silent on whether we are divergent or equivalent. Equivalence is a policy matter for Government, as opposed to a matter for us. All we need is sufficient flexibility to ensure that we have an appropriate regulatory system, depending on how Government policy emerges in relation to equivalence.

[Ms Eagle]

Q Just to make that clear, you are basically saying that you are neutral on the amount of divergence or equivalence, and that you can cope with whatever is thrown at you?

Sheldon Mills: Neutral is too strong a word. My point of view is that we are interested in what I would call outcomes-based regulation. Equivalence can be done in one of two ways within the bounds of equivalence: it can be done line by line and letter by letter, or it can be done on the basis of seeking to meet equivalence objectives within an outcomes-based regulatory system. We are moving towards the position of the latter. Overall, equivalence is a matter for Government.

[Ms Eagle]

Q Finally—I am conscious that I have put questions only to you, but I am sure colleagues will put questions to other witnesses—you were saying at the beginning that part of what the FCA has to do is protect financial services in this country and create a good environment for them, as well as protect consumers and ensure market stability. There is only so much bandwidth, so will all the work relating to onshoring compromise consumer protection?

Sheldon Mills: I do not think so at all. To give an example, it may look like it would take an army of 50 or 60 people to do the work of the investment firms prudential regime, but in reality it takes around 10 people to do that work. These are significant specialists in the technical architecture of designing prudential regulation. We would not ordinarily use those people in our consumer protection work, and they have different skills and are involved in different activities. I do not think that we will be any less vociferous in protecting consumers. During the crisis, those who watched us saw that we were at the forefront of ensuring that we tried to provide relief to consumers during the pandemic. We will continue in that vein. As the FCA’s conduct regulator, I am committed to ensuring that the consumer is at the heart of everything we do.

[Ms Eagle]

Thank you, Chair.

[Abena Oppong-Asare (Erith and Thamesmead) (Lab)]

Q Thank you for taking the time to speak to us. I know that you are in favour of the Bill, as it will give you greater agility and flexibility to deal with things. Going back to some of the comments you made earlier about the consultation process, in which you were clearly fully engaged, one of the things I want to find out relates to the consultation discussions, and obviously you have more responsibilities. Will you shed some light on what came out of those discussions in terms of making sure that there is effective accountability and oversight in relation to the additional powers that you are likely to be given?

Sheldon Mills: I will go first and then pass over to Vicky. It is useful to start with our current accountability, because the Bill and future regulatory frameworks being consulted on by the Government deal with that issue. We wish to be accountable. As an independent regulator, an important part of our process is for us to have public accountability. We serve the public and ultimately are scrutinised by Parliament. Our main form of scrutiny is that of the Treasury Select Committee, but we attend many other Committees. Explaining our activity to Parliament is an important part of our work. Below that, within the Financial Services and Markets Act for the FCA specifically, are our statutory panels. They are there to scrutinise our work in a much closer engagement with the organisation. Then we have the consumer panel, the practitioner panel and the small business practitioner panel, as well as the advisory panel on markets and listings. They are able to make public their views, and—believe me—they do very often make public their views on our activity. In addition to that, we will consult on our policies when we do policy-making work ourselves, as do other public authorities. We will also provide access to non-confidential information and data so that all interested parties can make their views known to us.

We also evaluate our work to ensure that it meets its intended outcomes. We already have an existing accountability framework that would sit well with the additional rule-making powers we may get through the Bill and as we move forward with the proposed reform to the financial services regulatory regime. The future regulatory framework is out for consultation, so I will not say much in relation to it, but we of course acknowledge that there may need to be adjustments to the accountability framework to accord with the additional powers that we are getting. We look forward to seeing the responses to the Government’s consultation in relation to that.

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[The Chair]

Do any other Members have any questions?

[Ms Eagle]

Q I was wondering, Daniel, whether there are any dangers in the move away from LIBOR. Obviously, we know about the dangers of staying with it, but are there things that keep you awake at night about the transition?

Daniel Cichocki: As the Committee can imagine, from an industry perspective, we are absolutely focused on ensuring that the transition away from LIBOR—which is the right thing to do—is done in a way that treats customers fairly and consistently.

There is an awful lot of work being done at both an international and domestic level to agree standardised approaches to transition, where possible, but also to ensure that there are clear expectations from our regulators—here in the UK, it is the Financial Conduct Authority—about how that transition should be done.

Lots of work has been done and lots of work remains to be done, and, as you can imagine, we are speaking very frequently to the regulators here in the UK, and also working through the national working group to ensure that customers are transitioned on a fair and transparent basis.

[Ms Eagle]

Q Obviously, LIBOR is a benchmark. Any benchmark is a sign of some of the profit that can be made on a transaction. If there are differences of approach or changes, there are areas where customers can be fleeced or left out of pocket without, in some ways, even realising it because of the very technical nature of these kinds of transactions. To what extent do you have a consumer protection voice helping you with these changes? Do you think that the protections for consumers who may be disadvantaged during this transition are strong enough?

Daniel Cichocki: We are one voice from the perspective of the banking and finance industries, but it is important also to recognise that, within the overall national working group in the UK, there are voices that, rightly and properly, represent the end users of LIBOR, be they corporates themselves or the representatives of corporates. Although those voices are important in our national transition working group, it is equally important to address the concern that you articulate, which is absolutely right: the guidance that the FCA has provided to all firms that are transitioning their customers that the process should not be used to move customers on to inferior terms or rates that would be expected to be higher than LIBOR would have been. After speaking to our members in the industry, that message from the UK conduct authority has been heard loudly and clearly. All of us who are focused on moving away from LIBOR are acutely aware of the history of the benchmark and committed to ensuring that we move away from it in the right way and in a manner that treats customers fairly.

[Ms Eagle]

Q Obviously we will be keeping an eye on that as it happens.

Mr Hills, the industry has been lobbying the Government, Parliament and regulators to design regulations that will make UK firms more internationally competitive. Indeed, all of us in the room would share the aim of protecting our financial services industry. Do you think that the Bill achieves that?

Simon Hills: Yes, I think it does. The important thing is that the Bill achieves that by setting expectations of how the Basel 3.1 framework is implemented in an internationally coherent way. The PRA has to think about not only international competitiveness, but financial services equivalence, and the Bill achieves that.

[Ms Eagle]

Q So you are not too worried about divergence because you do not think there will be very much of it.

Simon Hills: I do not think that it is in the interests of the UK financial services industry and banks to introduce a divergent regime. We are talking about the importance of the City, and we want people to bring their money to the City for the right reasons, not the wrong ones. UK Finance members are certain that it is in no one’s interest to diverge from internationally agreed frameworks because that creates the risk that we bring in the wrong sort of people.

[Ms Eagle]

Thank you very much.

[The Chair]

If there are no further questions, I thank the witnesses for their evidence.

Examination of Witness

Paul Richards gave evidence.

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[Alison Thewliss]

Okay. It sounds like a good time to be a lawyer in this area. Thank you.

[Ms Eagle]

Q Do the provisions of continuity and safe harbour apply in America as it converts away from LIBOR? Are the things that you are asking the Committee to consider putting in the Bill happening in other jurisdictions?

Paul Richards: In the US, the alternative reference rates committee, which is the group equivalent to the sterling risk-free reference rates working group, has proposed legislation that is not identical to the UK’s but has the same effect, and so the concepts of continuity of contract and protection through safe harbours in the UK context will be recognised, we think, internationally as well.

Of course, we are not dealing here just with the proposals under New York law. We are having to look more generally. The EU has a proposal for legislation as well. It is important to recognise that the FCA has an international role, because the FCA is the regulator of the administrator of LIBOR, so what the FCA, through this Committee, decides in the UK will have an international impact.

[Ms Eagle]

Q Okay. You did not answer the question from my right hon. Friend the Member for Wolverhampton South East earlier about whether you had asked the Government for this and they had said, “No, the FCA can do it; we’re not putting it on the face of the Bill,” and so you have come here to make the argument again, or whether it is work that you are in the process of doing and you have got to the stage where you want to make these proposals, as the Bill has arrived. Have the Government considered this and said no, or is it something that you have just proposed?

Paul Richards: No, I hope that the Government will consider this and say yes. I hope that that will happen, but it needs to be looked at in the context of the Bill as a great help to the market. It needs to be looked at in this context: can anything be done to strengthen the wholesale market?

[Ms Eagle]

Q I understand your point about how those things would calm things down in the changeover, but why do you not trust the FCA to do this? Why does it have to be in the Bill?

Paul Richards: The FCA has great powers under the Bill and I am sure that it will exercise them wisely, but we are dealing here with law internationally, and anything that can be done to strengthen that—and the Bill has the capacity to do that—will be helpful. I hope that it will also be helpful to the FCA.

[The Chair]

If there are no further questions from Members, I thank the witness for his evidence. That brings us to the end of our morning sitting. The Committee will meet again at 2 pm in the same room to take further evidence.

Ordered, That further consideration be now adjourned. —(David Rutley.)