All 10 Baroness Noakes contributions to the Financial Services Bill 2019-21

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Thu 28th Jan 2021
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Baroness Noakes Excerpts
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Thursday 28th January 2021

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Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I congratulate my noble friend Lord Hammond of Runnymede and the noble Baroness, Lady Shafik, on their excellent maiden speeches. I look forward to their future contributions in your Lordships’ House.

For the last nine years, I have largely sat on the sidelines on financial services legislation, as I was on the board of a major bank. Now liberated from that, I am enjoying putting my financial services legislation anorak back on. I remind the House of my financial interests, as declared in the register.

The Government have described this Bill as a portfolio Bill, which is a fancy name for what is not much more than a motley collection of topics that have little in common apart from fitting under a financial services umbrella. This Bill certainly gives us no strategic insights into the future of financial services. That said, I broadly welcome this Bill, as it deals with a number of items in a sensible, pragmatic way.

Financial services legislation is very complex. Since FiSMA was enacted over 20 years ago, there have been numerous revisions, some of which, such as the Financial Services Act 2012, were significant. Huge amounts of EU law have been imported and we can expect more changes as we embark upon our post-Brexit life. We are getting close to consolidation being essential if our financial services legislation is to be accessible. Can the Minister say whether the Government accept the need for consolidation?

My principal reservation about this Bill concerns the considerable new rule-making powers that are being conferred on the PRA and the FCA, and I agree with much of what other noble Lords have already said on this. I find it a bit odd that the Government have chosen to go down this route ahead of the outcome of the consultation on the future regulatory framework review, which is still open. This looks like another example of the Treasury mind being closed to challenge through consultation. We are somewhat used to this, but familiarity does not make it acceptable.

More substantively, the Government have made a good case for the rules to be set by the people with the best technical knowledge, but they have not, I am afraid, made a case for the quality or quantity of accountability alongside that. In particular, I am unpersuaded that adding a list of “have regards” against which the PRA or FCA must report when they consult on rules amounts to a significant addition to the accountability framework. The House will know that I have been steadfast in my commitment to our exit from the EU, but it was never my understanding that taking back control of our laws would mean less parliamentary control and oversight than before. The Bill proposes to hand significant rule-making powers to the PRA and the FCA without any noticeable Parliamentary oversight. Ad hoc scrutiny through the existing committees in both Houses is no substitute for regular and structured parliamentary involvement. I hope that the Government will engage with those of us who want to find a practical solution to this accountability deficit.

Before leaving this topic, I would say that we need to look carefully at the new “have regards” when we get to Committee. I share the exciting vision of the future prospects for financial services that my right honourable friend the Chancellor of the Exchequer outlined in his November statement, but I do not see that fully reflected in the Bill. Like many noble Lords who have spoken today, I believe that international competitiveness needs to be firmly embedded into our regulatory arrangements and the statutes that govern that. I particularly welcome my noble friend Lord Hammond’s enthusiasm for this, which goes a long way, I have to say, towards offsetting his lack of enthusiasm for Brexit in his former life.

Finally, on tough legacy contracts that use Libor, I completely support the powers in Clauses 14 and 15 that allow the FCA to make arrangements for legacy contracts. It is good that the Government have accepted the very real practical issues involved in dealing with a relatively small number of debt instruments. There are, however, two outstanding issues relating to continuity of contract and safe harbour. I know the Treasury is well aware of these issues. I will save arguing the detail of them until we get to Committee, but I expect to table amendments aimed at giving the UK equivalent protections to those being drafted for the US market.

Financial services are a major part of our economy and we must allow this sector to flourish now that we are unshackled from the EU. Strong regulation will remain essential but we need all players, regulators and industry alike, to build the UK as the undisputed leading global financial centre. I hope that the House will remember that as we scrutinise the Bill through its remaining stages.

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Baroness Noakes Excerpts
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Wednesday 24th February 2021

(3 years, 3 months ago)

Grand Committee
Read Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 162-III Third marshalled list for Grand Committee - (24 Feb 2021)
Moved by
10: Clause 2, page 2, line 28, at end insert—
“(2) Schedule 2 does not come into effect until each House of Parliament has approved accountability arrangements for the powers conferred on the FCA in that Schedule.(3) Accountability arrangements under subsection (2) include arrangements for—(a) draft rules to be laid before each House of Parliament;(b) final rules to be laid before each House of Parliament;(c) opportunities for each House of Parliament to take evidence on the draft or final rules and to express an opinion on them;(d) the consequences of an expression of opinion by either House of Parliament.”Member’s explanatory statement
This amendment would mean that the rule making powers given to the FCA in Schedule 2 can be exercised only when Parliament has agreed how accountability for those powers will be exercised by Parliament.
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Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, this is my first day in Committee and I place on record my interests as declared in the register, particularly my shareholdings in financial services companies.

I am very grateful to the Committee for going so slowly on Monday and not reaching Amendment 10. As I think noble Lords are aware, I was in the Chamber and could not have moved it myself. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, and my noble friend Lord Holmes of Richmond; not only have they added their names to my amendments in this group but they were standing by to deal with them without me on Monday. Normal service is resumed and I can move my amendment myself. I shall also speak to Amendment 26 in this group.

This is a fairly large group of amendments but its underlying theme is a search for the right balance between letting the specialist regulators get on with the job of regulatory rule-making and the role of Parliament in overseeing those regulators. My Amendment 10 to Clause 2 says that Schedule 2 to the Bill, which amends FiSMA to create rule-making powers for the FCA to undertake prudential regulation of investment firms, will not come into effect until each House of Parliament has approved accountability arrangements for those powers.

Amendment 26 is drafted in identical terms but relates to the rule-making powers conferred on the PRA by Schedule 3, which deals with the capital requirements regulation rules.

I make no attempt in these amendments to say what form of parliamentary accountability arrangements should be put in place, although the second part of my amendment says that accountability arrangements should include a number of things: arrangements for drafting the final rules being laid before Parliament; taking evidence on a draft of final rules and, importantly, Parliament expressing an opinion on them; and the consequences of any expression of opinion. On reflection, the drafting of my amendment is perhaps not clear enough as I was not intending to suggest that Parliament had to, for example, have the laying of draft rules as part of the accountability arrangements. I merely intended to indicate that it could have that as part of the arrangements.

My amendments are predicated on a belief that we should not grant significant new rule-making powers to the regulators without sufficient checks and balances in the system. Had the Government retained the rule-making powers repatriated from the EU, it would have been pretty clear that Parliament would have had an involvement. I am clear that passing these powers to the regulators should not allow the Government to write Parliament out of the picture. I am not, however, of a settled view as to what Parliament should do, which is why my amendment says that these new rule-making powers can go to the FCA and the PRA only when Parliament’s involvement is settled by Parliament itself. I am very conscious that it is not correct—or at least not normal—for legislation to cover the precise arrangements for parliamentary scrutiny. Those arrangements are for Parliament itself to determine, and I have tried to respect that.

Other amendments in this group seek to fill the void of what Parliament should do in practice, and I shall comment briefly on some of them. The noble Lords, Lord Tunnicliffe and Lord Eatwell, in their Amendments 20, 21, 40 and 41, have set out involvement, with time limits, for each House of Parliament reporting on draft rules, with the ability to report on them but no power of veto. I can certainly see the merits of these amendments, as they strike a balance, giving Parliament an opportunity to give its views on new regulations but without allowing it to overrule our independent regulators. They should allow Parliament to take evidence on the impact of proposed new regulations, for example, on different parts of the financial services sector. This could deal well with concerns about, for example, the impact of regulations on both small and large players in parts of the financial services sector, and whether regulations create new barriers to entry. I am not sure, however, that the amendments sit easily with a need to make new regulations rapidly, which I believe is necessary from time to time.

On the other hand, many in the financial services sector are fearful of regulators gold-plating regulations and imposing unnecessary costs on whole sectors. At the end of the day, costs get passed on to consumers, even though there is often no direct correlation between a rule or regulation and any particular increase in consumer costs. That would not necessarily be well dealt with by the amendments in the names of the noble Lords, Lord Tunnicliffe and Lord Eatwell.

Some elements of Amendment 27 in the names of the noble Baronesses, Lady Bowles of Berkhamsted and Lady Kramer, would allow more thematic or cumulative reviews. I particularly like the elevation of the statutory panels of the FCA and the PRA, though I do not believe that those panels should include Members of either House of Parliament. I know that these panels could be more effective voices for industry concerns. I have in mind, in particular, the PRA’s practitioner panel, which the PRA certainly did not want when it was set up by the Financial Services Act 2012, and has had no discernible impact since then. On the other hand, other elements of Amendment 27, for example Parliament’s involvement in the regulators’ meetings with the Basel Committee or IOSCO, seem to me to go beyond what it would be reasonable for Parliament to do.

My noble friend Lord Blackwell has an amendment with yet another variant with scrutiny of rules by parliamentary committees, but with any results being passed to the Secretary of State for action. My concern with that is that the only action that could in practice be taken, once the power to make rules has been passed to the FCA and the PRA, would be more primary legislation. That seems a sledgehammer to crack a nut and would, in practice, not really act as a restraint, a check or a balance on the undesirable use by the regulators of their powers.

The issue of the nature of parliamentary involvement is discussed in the Treasury’s future regulatory framework review. The consultation on part 2 of that process, started last October, has just closed—my noble friend the Minister may want to say something about where we are with that process. I thought the section on accountability in that consultation was not strong and that reliance on the existing committee structures of both Houses was the wrong direction of travel. Whatever our views on that, a longer-term overhaul of accountability structures will not help us; we will have to find a solution that works for this Bill and until any changes emerge from the framework review. That is the challenge before us. I beg to move.

Baroness Bowles of Berkhamsted Portrait Baroness Bowles of Berkhamsted (LD) [V]
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My Lords, my name is on eight amendments in this enlarged group. They cover different aspects of parliamentary accountability, although a common thread is Parliament’s right to information. Whether Parliament chooses a regime that scrutinises everything in detail or one which picks points of contention, and however it may develop over time, timely access to background and information is relevant.

My Amendment 18 and its counterpart, Amendment 38, relate to keeping Parliament informed about the discussions between the Treasury and the regulator concerning equivalence. In Schedules 2 and 3 this Bill establishes that, when making rules, the FCA or PRA may consult the Treasury about the likely effect of the rules on relevant equivalence decisions.

Parliament should be sighted of these considerations because they may affect the content and strength of rules and, as explained in the Government’s consultation, equivalence decisions may result in requirements being embedded in statutory instruments. Just as we used to have EU requirements in regulations, we may end up having equivalence requirements. There is nothing complicated about my amendment; it just says, “keep Parliament informed”. Unless Parliament establishes that right now, it will not exist.

To illustrate this, I quote from the recent FCA consultation on investment firms which, like this Bill, front-runs the Treasury consultation. Paragraph 9.68 states:

“we have discussed with HM Treasury the rules’ likely effect on relevant equivalence decisions. We are not expected under our new public accountability requirements to provide further detail on this.”

I think we need to know something, and I hope the Minister will appreciate that too.

I turn to my Amendments 19 and 39, which specify the level of detail that regulators’ explanations concerning compliance with statutory requirements should contain. I was provoked into tabling these amendments on reading the FCA’s explanations in its consultation. Although they gave a reasonable but qualitative explanation of its general approach to the Financial Services Bill, the statutory accountability statements were poor, containing nothing quantitative or illustrative. They consisted of “trust and believe me” statements littered with phrases such as “proportionality”, “business specific”, “bespoke” and “flexible”; no attempt was made to identify or quantify how that was done. Information would have to be extracted from the rest of the consultation and rules, if it were there at all; or—and this is the nub—we have to swallow that, as paragraph 9.71 states, it is left up to the

“investment firms and supervisors to focus on the core business model indicators of financial resilience relevant to each firm”.

There are no examples given.

The statutory explanations are an important part of accountability. They should be elaborated on as a stand-alone justification, perhaps to spoon-feed the non-skilled reader, but not just through assertions. We need more than assertions that supervisors cosying up with firms can decide how to get it right. That is not accountability. These statements should be written more like justifying a case in court and less like how to pander to industry. They should inform on the toughness of the regime and capital calculations.

My amendment proposes that the explanations

“must include specific, detailed and quantitative elaboration, with worked examples”,

and that Parliament may reject rules that are accompanied by inadequate explanation. By way of comparison, when I checked the PRA’s front-running consultation which came out on 12 February, it seems to have done a rather better job and included examples.

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My noble friend’s first question was about whether the Government have any plans for a second financial services Bill. I endeavoured to answer the same question put to me by the noble Baroness, Lady Bowles. I said that the Government have not made any decisions about legislation in future Sessions, but I indicated that the Future Regulatory Framework Review—FRF—is a high priority for the Government and we regard it as an essential basis for establishing the model for future legislation in this area.
Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I thank all noble Lords who have taken part in this debate and those who have supported my amendments. It has been a very thoughtful debate with contributions from all parts of the Committee, which sees this as a real issue that needs to be solved. On a personal basis, I welcome back the noble Lord, Lord Eatwell, to our consideration of financial services matters. We should remember that he has unique experience among noble Lords, having been a financial services regulator, so we must listen very carefully to what he has to say on many of these things.

One overriding theme has come out of our debate this afternoon. There is unanimity on the need for good parliamentary involvement in financial services. My noble friend Lord Howe affirmed the Government’s commitment to parliamentary accountability. The difference comes in how we define what form that accountability could take. The Minister made a case for going back to the FiSMA model, which he seemed to forget was brought in in the context of the existing EU arrangements for scrutiny and did not exist pre-EU scrutiny, so going back to that is not saying anything at all. Now that we are out of the EU, we are trying to see what can be done to deal with the changes that we need to accommodate within our system and to ensure that there is proper accountability for that. FiSMA may, or may not, provide an adequate basis for that, and I suspect not.

My noble friend also talked about the need for timeliness. I am sure that the Basel III implementation needs to be done on a timely basis, and it is not beyond the bounds of possibility that we could get that right with parliamentary scrutiny in this Bill. However, the implementation of Basel III does not need to be done by the PRA; it could as easily be done by a statutory instrument introducing it. I am not afraid of 300 pages of detail. I have seen the formulae on risk rating. I do not relish the opportunity to do it again, but one could do so if one needed to, so it is not necessary for us.

I get the impression that this is a rubber-stamp Bill. The Government have made up their mind. The PRA and the FCA will be roaring ahead as if they have all the powers and we are now just being invited to rubber -stamp it. I think we are saying back to the Government that we do not find that a satisfactory state of affairs.

The noble Baroness, Lady Kramer, rightly said that this is not a party-political issue, and there is a commonality of views across the Committee on this. The fact that there is different detail in our amendments today does not rule out the possibility that we can coalesce around a good solution to this. I was pleased to hear my noble friend the Minister say that he was keen to maintain a dialogue with noble Lords after Committee. That would be extremely helpful; obviously, we would prefer to move in step with the Government and not against them.

I think the Minister needs to recognise that we do not find convincing the narrative that the existing framework with a few tweaks in the Bill gives an adequate accountability framework for the additional powers that are being transferred to the regulators under the Bill. I look forward to continuing the dialogue outside Committee and I hope that that will be fruitful before we get to Report. With that, I beg leave to withdraw the amendment.

Amendment 10 withdrawn.
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If we really want to put financial services at the heart of green growth—and I hope we do—I also hope that my noble friend will take back to the department the strong view from this House that this group of amendments needs in some way to be incorporated into the Bill.
Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I will not speak on the substance of most of the amendments in this group. In general terms I do not believe that alterations are required to legislation governing the PRA and the FCA, in view of the enthusiastic work that they have already commenced to embed climate-related financial risks in their work and in the work of the institutions that they regulate. Neither the FCA nor the PRA needed any alteration to their statutory powers and duties to start this process, and I do not believe they need anything in statute to carry on their work.

My noble friend Lord Sharpe of Epsom said that he was worried about the meaning of “climate-related financial risk”. In practical terms, the sectors of the financial services industry have an understanding of what is meant by climate-related financial risk in relation to them, and that will inevitably evolve over time. If you take banks, it is fundamentally a credit risk problem; you can track almost all the issues back to credit risk. If you take an investment company, it is an investment risk problem, as I think the noble Baroness, Lady Sheehan, said in an earlier contribution. With insurance, we are talking about something like the shifting nature and scale of conventionally insured risks in that sector. I am sure that other parts of the financial services sector will have an understanding of climate-related financial risk. So I am not concerned about the definition of that; I am just not sure that it is necessary to find its way into legislation, because it is already being done.

I would also caution people who want change overnight in this area that a huge amount of work is needed to implement, for example, measuring the carbon intensity of a bank’s balance sheet, or indeed an investment company’s balance sheet. These are not simple things to do but require huge amounts of new data and new ways of manipulating it, and the industries need to work out how efficiently to do that. I know a little about insurance companies and I am sure that there are similar challenges to overcome there too. I make a plea to leave it to the regulators to determine the pace of change that is required and not to impose additional duties on them. They must judge themselves how best to achieve the aims which I believe they share with the people who have tabled and moved this amendment.

I have a couple of comments on two of the amendments. Amendment 48 would bring forward the timing of the disclosures from the task force on climate-related disclosure to the end of next year, with the draconian penalty of not allowing companies to continue to operate in the UK if they have not made the disclosures. Are the proposers of this amendment seriously saying that they will stop a FTSE 100 company from doing business in the UK if its disclosures are not quite in line with the recommendations? Are they prepared for UK employees to lose their jobs because of technical disclosures? I do not believe that the amendment does anything to advance substantive climate change measures, only disclosures in annual reports which, at the end of the day, very few people actually read. This is not a real-world amendment, in my view, and it seems to be drafted in a disproportionate way.

My main reason for putting my name down to speak on this group is Amendment 75, which provides for the appointment of a member of the FCA board to have responsibility for climate change. This contains a fundamental misunderstanding of the nature of boards, whether of public bodies such as the FCA or of private sector companies. Boards are there for governance purposes. They set strategy and hold chief executives to account for delivering against that strategy. They should review performance against what is required of them by statute and what they themselves set. They do not make operational decisions and should not get involved in day-to-day activities. That is why the FCA, like most major organisations, has to have a majority of non-executives on its board.

The amendment is silent as to whether this board member is to be an executive or a non-executive but I believe that either would be wrong. A non-executive should not have responsibility for particular activities within an organisation. This distracts from the core function of a non-executive which is around strategy, oversight and accountability. If the amendment is intended to create an executive board member with responsibility for climate change, that is misconceived as it implies that climate change is not the responsibility of the chief executive. The only way for any policy—whether it is climate change, diversity, social purpose or whatever—to gain traction in an organisation is through its leadership and that is sourced in the chief executive. I believe that the amendment is wrong, likely to be counterproductive or both.

I want to pick up on something that the noble Baroness, Lady Hayman, said. She said that this would bring it in line with the requirements of the senior managers and certification regime, which requires—I think she said—a board member to be responsible for climate change. That is not what the SMCR requires. It requires only the identification of a senior manager, as defined within the SMCR, who has to have identified responsibility. It is absolutely not required that it is a member at board level, so that is not an appropriate precedent to cite in aid of this amendment.

Baroness Kramer Portrait Baroness Kramer (LD)
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My Lords, listening to today’s really outstanding speeches, I think most of us can agree that tackling climate change is not an optional extra. It is necessary to the survival of a liveable and civilised world, and it is urgent. The noble Lord, Lord Sharpe of Epsom, seemed rather the stand-out among the speeches. If I understand him correctly, he shares the general principles but would like them parked in some very long grass for a very long time. That fails to recognise the real urgency that we face. We are past the point where long grass is an appropriate place to put concerns.

This is a substantial group of amendments. It looks to the financial regulators, influencing the financial sector as they do, to become part of the solution. The amendments break roughly into three parts—a cluster of “have regards” and “considerations” that would influence the FCA and the PRA in shaping the rules to support the net-zero target; disclosure and reporting requirements; and the setting of a climate change objective for the FCA, together with appointment to the governing board of an individual responsible for climate change. Here, I disagree with the noble Baroness, Lady Noakes. I think there should be an individual with particular responsibility at the highest level to make sure that things happen in organisations.

I almost wonder that we are having to discuss disclosure, because, in American terminology, it seems to me a slam dunk. Andrew Bailey, in his Mansion House speech last November, called for “data and disclosure”, and repeated that time-honoured but real truism:

“What we cannot measure we cannot manage”.


The other measures proposed are equally straightforward —it is a very straightforward set of amendments. I have my name to many of them, but the range of names on various amendments underscores the cross-party nature of the concern and the determination of this House to use the Bill to leverage change. I join others in saying, that if you cannot tackle the issue of climate change in a financial services Bill, it is going to be hard to tackle it at all.

The hour moves on, so I do not want to repeat the brilliant discussion, except to say that speaker after speaker detailed the urgency of acting on climate change and the necessity that it become a priority for this sector. My message to the Government is carpe diem, because this House will if the Government will not. If the UK is to be a leader—and of all the years in which we wish to show leadership, it must be this one—it must break new ground.

There will be more to say on the next group of climate change amendments, which I consider more powerful and radical. They deal with risk and capital requirements. I very much hope that we receive a strong response from the Minister. I can understand that someone looking at the Bill and a template of previous financial services Bills may not have thought that climate change had a place. By now, Ministers surely must. Included among this group of amendments are so many that are exceedingly reasonable and, frankly, quite uncontroversial. I hope that the Government will begin to shape some amendments of their own, drawing on the content so very firmly placed before them.

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Lord Holmes of Richmond Portrait Lord Holmes of Richmond (Con) [V]
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My Lords, it is a pleasure to take part in day three of our Committee deliberations on the Financial Services Bill. In doing so, I declare my interests as set out in the register. I will speak to Amendment 136A in my name, concerning environmental, social and governance—ESG—factors.

The rationale behind my amendment is quite simple: what is the point of profit if there is no planet to spend it on? In this amendment I am seeking to look at the funds’ billions of pounds of assets, under fund managers. It would probably be helpful for institutional investors and individuals to know a lot more about those funds and where their assets are invested. It is a very simple amendment, requiring the Secretary of State to make regulations to have fund managers report on how their funds—and, indeed, all the constituent parts of their funds—stack up against agreed ESG considerations.

The reason I stated it like that in the amendment is so that there can, I hope, be a public discourse around what all parties believe should be measurable and helpful when considering the operations and activities of these funds. The SDGs are obviously important—there is a reasonable level of global agreement around them—but there are other factors specifically relevant to certain sectors or regions of the UK. There could be a public debate, whereby the Secretary of State could consider what would form the particularities of the ESG for fund managers to report on.

I do not believe that the amendment would in any way fetter the market or overstep into the market—it certainly does not seek to—and nor does it seek to direct funds in one particular direction or another. What I hope it would do is throw light on the funds to enable far greater clarity of decision-making by investors, institutional or individual, into those funds. It is in no sense seeking to control or direct activity.

I hope the Minister will accept the amendment in the spirit in which it is being offered. It would aid a greater debate and understanding of funds and their operations. In some small way, it would indicate how we can move forward and have real-time analysis of these funds’ investments using many of the new technologies available to us, not least distributed ledger technology and elements of artificial intelligence, which can instantly adopt, analyse and report on the ESG performance of any fund and constituent part of it. The power that these new technologies affords us would not have been available three or five years ago, never mind a decade ago.

I ask my noble friend the Minister to consider both the positive impact that such a requirement could have and the deployment of new technologies to achieve the objectives set out in Amendment 136A.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, most of the amendments in this group are about bank capital. I believe strongly that the setting of the capital requirements of individual banks should be about prudential risk to the capital of the banks and the resilience of the financial system as whole. The setting of bank capital should not get caught up in wider policy issues.

On Amendment 28, the level of exposure to climate-related financial risk should indirectly already be taken into account in the conventional capital-setting process. Climate-related financial risk is very unlikely to be a separate risk category for a bank. It is primarily a credit risk—the risk that borrowers will not repay loans—and it does not need to be separately considered. There may need to be adjustments made to banks’ evaluation of how credit risk will crystallise due to climate change but the essential elements—calculating the exposure at default and the loss that would arise if default occurred—are already in the system.

The impact of climate change on banks is very much an emerging area. I am sure noble Lords will have heard of the so-called biennial exploratory stress test, which the major banks need to submit to the Bank of England later this year. It will focus on how these risks will evolve under various scenarios, which have not yet been published by the Bank of England.

It is pretty unlikely that climate-related financial risk would have a major impact on current bank capital because the determination of bank capital contains buffers which are derived from stress tests that focus on the next five years. Therefore, the impact of risks from climate change working their way through credit risk is unlikely to find its way into bank capital in the short term. That is why the Bank of England’s exploratory stress test seeks to understand how this will evolve over a longer period. In addition to credit risk, there may be an element of operational risk, but that too should be capable of being captured by the existing rules for the calculation of operational risk.

These points are also relevant to Amendment 42, which tries to get climate-related financial risk into credit ratings. I am sure that the credit rating agencies need no reminders about any kind of risk and I would expect the biennial exploratory stress test to be an important input to their thinking on how their ratings will evolve. But, again, this will be over time and not something that is done immediately.

Amendment 28 seeks to ensure that disclosure requirements are also taken account of in setting bank capital. It would be wholly inappropriate to include compliance with disclosure requirements in the calculation of bank capital requirements because disclosure can never have an impact on the amount of capital that a bank needs to keep. It is an extraneous consideration that should not feature in the determination of prudential capital. I have absolutely no idea on what rational basis capital requirements for individual banks could be adjusted for the climate change objectives of the Government, which also features in Amendment 28.

As the noble Lord, Lord Oates, has explained, Amendments 31 and 32 would require mandatory risk weights for exposures related to fossil fuel; namely, 150% for existing exposures and 1,250% for new funding. These are both penal and unrelated to the underlying credit risk. I accept that funding fossil fuel exploration might well carry higher risks in the future than it does currently, but that will be reflected in banks’ evolving lending policies, including pricing for risk, and in the risks that are reflected in how they calculate credit risk-weighted assets.

Risk weighting is about loss at default and these amendments are suggesting that there could be a total loss at default; that is the particular implication of the 1,250% risk weight for new exploration. Neither assumption is realistic. Banks do not lend in situations where default is likely or total losses will occur, and I did not understand the reference to 100% equity funding in the explanatory statement: banks lend money; they do not make equity investments in the companies with which they deal.

In general, corporate borrowing is not linked to specific activities. At the weekend, when I was at home thinking about what I was going to say on these amendments, I found a copy of Shell’s most recent accounts, which I looked at to see how its balance sheet was made up. Most of Shell’s debt is in generic corporate bonds, rather than for specific activities within Shell. Like other major oil and gas companies, Shell has a mix of activities, including those which the green lobby will approve of.

As drafted, by reference to

“exposures associated with the funding of existing fossil fuel production and exploitation”,

the amendments are probably ineffective because lending is not likely to be hypothecated in the way the amendments assume. I should also say that Shell, as a corporate borrower, currently has long-term credit ratings of A+ and Aa2, which imply a low risk of default and therefore a relatively low likelihood of loss needing to be taken account of in the way that assets are risk weighted.

Even if these amendments were drafted in a way that was effective and made sense, I suspect that the only real-world impact would be that debt financing for oil and gas companies would be driven out of the London market. Why on earth would we want to deprive the City of London of relatively low-risk, profitable business?

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Lord Russell of Liverpool Portrait The Deputy Chairman of Committees (Lord Russell of Liverpool) (CB)
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The noble Baroness, Lady Neville-Rolfe, has withdrawn from this group, so I call the next speaker, the noble Baroness, Lady Noakes.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, various amendments in this group address different aspects of small and medium-sized banks and other financial institutions, and I am not opposed to having more and different banks in the financial system. Indeed, anyone who has had a bad customer experience with one of the major banks, as I have in the past year, supports more competition and choice. However, I sound a note of caution: we have to be very careful not to send the regulators down a path that could lead to poorer outcomes for consumers.

I am always reminded of the history of building societies, the number of which has shrunk dramatically over the past 100 years or so. These were often small and regionally based, and the numbers have reduced for two main reasons. One reason for this was obviously the liberalisation measures which allowed a number of them to demutualise—one of the more recent trends—but, over time, the other reason was that these were small organisations which were often not managed particularly well and had insufficient financial resilience, and they often had to effectively sell themselves to other building societies in order to protect members when things went wrong.

Against that background, regional banks, as suggested in Amendment 126 in the name of my noble friend Lord Holmes of Richmond, are, in my view, unlikely to be a panacea. It is less than clear that the failure of a regional bank could easily be prevented in the current regulatory environment. I do not oppose the report that he suggests but I am a bit of a cynic when it comes to seeing that as a useful way forward.

I particularly want to speak to Amendment 91 in this group, in which the noble Baroness, Lady Kramer, has suggested restricting access to the term funding scheme if it is not then available for onlending to other banks and providers of finance. I accept that there may be an element of protectionism in the large banks that have access to the term funding scheme not wanting to share that advantage source of finance with other lending institutions. But the scheme suggested by the noble Baroness, Lady Kramer, would require the major banks to accept the credit risk of dealing with these smaller organisations without any ability to price for that risk. These organisations often struggle to raise equity capital, for good reason: they carry higher risk, they are often not profitable, and they do not all survive.

It seems to me that if the Government think it is a good idea to fund more lenders at preferential rates in order to fund the various lending schemes that have been introduced, they should instruct the Bank of England to vary its lending criteria for the term funding scheme. At the moment, it is restricted to those with access to the discount window facility. It would not take too much to get that changed, without trying to distort the lending decisions of the major banks. If the Bank of England were unwilling to assume that risk itself, it would be open to the Treasury to underwrite it for the Bank, without distorting the decisions made by the banks that do take term funding scheme finance.

Lord Naseby Portrait Lord Naseby (Con) [V]
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My Lords, I will speak to Amendments 29 and 126. Amendment 29 adds a hugely important new clause, clearly positioned by the mover, the noble Baroness, Lady Bowles, to whom I pay tribute.

By way of background, I have been involved in the mutual movement nearly all my life. My parents were active members of a co-operative. I bank with the Co-operative Bank. I have been politically involved since the days when I was leader of the London Borough of Islington, for some three years from 1968. I entered the Commons in 1974 and took an interest in debates from then onwards, becoming a non-executive director of the Tunbridge Wells Equitable Friendly Society in the 1980s. When I left the Commons in 1997, I became chairman of this society, the trading name of which was the Children’s Mutual. We built up a leading position for the child trust fund; to my deep regret, the Government of the day decided to end that fund. Finally, I had a Private Member’s Bill in your Lordships’ House, which became the Mutuals’ Deferred Shares Act 2015. So, I reckon to know a little bit about the mutual movement.

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Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, having been a director of a regulated bank for most of the last decade and therefore on the receiving end of regulation, the idea of a skilled person review of the regulators is immensely attractive.

The concept of a skilled person review appears in FiSMA as one of the regulators’ tools to be used when investigating the organisations they regulate. It was not used a great deal by the FSA, but over recent years skilled person reviews have become the weapon of choice for the PRA and the FCA, as the statistics given by my noble friend Lord Trenchard bore out. They can be effective tools for the regulators to get to the bottom of issues in individual institutions, but they are also very expensive and usually incentivise the skilled person to extend the work into later stages and wider remits. They can also be highly contentious, especially when the selected “skilled person” turns out to be less skilled than is needed for the task.

If there are to be skilled person reviews of the regulators, one thing that should have been included in subsection (3) of the amendment of the noble Baroness, Lady Bowles, is the use by regulators of their powers under Section 166 of FiSMA and more generally the provisions under Part XI. That could usefully be added to the list of items she has set out in proposed new subsection (3).

I was concerned that “skilled person” is not defined in the amendment—it is in FiSMA, but not in a way that would read across to this amendment. There also seems to be some confusion over whether a skilled person is involved or a body set up for the purpose, as seems to be suggested in subsection (2).

More substantively, I do not believe that a person nominated by your Lordships’ House and the other place should have any part in the conduct of such a review. I am not suggesting that there are no Members of either House who would have the skill to contribute to such a review; rather, I do not believe that Parliament should get involved in carrying out a review. Parliament should concentrate on its outcome, not its execution. I am also concerned that such a review could end up being a political football, given that proposed new subsection (3)(i) allows Parliament to request the inclusion of any matter in the review. The amendment is also silent on whom any report is to be made to and how it would interface with Parliament and its processes; for example, whether it is to be laid before Parliament or considered in any particular way.

I am sure my noble friend the Minister will not accept this amendment. However, if he does not, I invite him to explain to the Committee how the Government are satisfied that the PRA and the FCA are effective and fit for purpose, as it is not obvious that they are. If they are not, this makes a bigger case for bringing in some mechanism for an external review of the regulators to inform Parliament’s understanding of how well they discharge their responsibilities.

Lord Sikka Portrait Lord Sikka (Lab) [V]
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My Lords, I congratulate the noble Baronesses, Lady Bowles of Berkhamsted and Lady Kramer. I am delighted to support their suggestion for reform.

Last week, a number of proposals for arresting regulatory failures were put forward, each offering to help the regulator—what I call “acting as a guide dog for the watchdog”. This is another proposal which has considerable merit. It builds on the notion of an independent skilled person review, a practice that is already well established to some extent. However, in the details of the amendment, it differs from the conventional notion of a skilled person review in focusing on systemic factors rather than individual cases. These include matters relating to internal controls and operations, regulatory parameters, effectiveness, treatment of whistleblowers, public policy objectives and, more importantly, matters of public concern.

Although the amendment does not explicitly say so, I am sure that the noble Baronesses, Lady Bowles and Lady Kramer, would not be opposed to the independent skilled person review being conducted by a panel of retired judges; that could be feasible. The review in any case should be in the open, take evidence on oath and require the production of key documents from producers, consumers, intermediaries and other key parties in the finance industry. The panel could travel to different parts of the UK to take evidence and report within a specified period, like the Australian royal commission that we heard about earlier.

The main aim of the inquiry would be to focus on systemic problems, get to the bottom of the recurring and unresolved scandals in the industry, enable consumers to share their experiences with the industry and its regulators, and facilitate the legislative changes needed to secure confidence in the industry. The proposed review would be a necessary step to bring about a much-needed change in organisational culture and a sense of personal responsibility and accountability in the regulatory bodies, as well as the industry.

The proposed review and its specified headings of “regulatory perimeters”, “public concerns” and “effectiveness of relevant legislation” can also focus on neglected and emerging issues. A good example of issues totally neglected in the Bill, and by the FCA and PRA, are those about the impact of shadow banking. The shadow banking sector is intertwined with retail and investment banks, insurance companies, pension funds and others, and any crisis there is bound to have a huge impact on the rest of the economy. The sector could be worth nearly $117 trillion, far bigger than the world’s GDP; it is lightly regulated, and normal prudential rules do not apply to it. I remind the Committee that the 2007-08 financial crash was triggered not by mass withdrawals of bank deposits by savers but by the inability of Lehman Brothers and Bear Stearns, key players in the shadow banking system, to meet their contractual obligations arising out of speculative gambles. So there is an urgent need for an independent review; that is what we should be aiming for.

I want to reply to a couple of comments made earlier. The noble Viscount, Lord Trenchard, and the noble Baroness, Lady Noakes, referred to the issue of costs. As the noble Lord, Lord Desai, pointed out, the biggest cost is associated with the status quo, which has never been cost free. Over the months and years I have spoken to many victims of bank frauds who have lost their homes, businesses, savings, investments and pensions. All that any review panel or committee has to do is talk to them, and they will soon understand that there is a cost associated with the status quo.

The second point was the question of where on earth we would find these skilled persons. It is a sobering thought that it is not the skilled persons who told the world about any of the frauds or scandals. Journalists and ordinary people have been far more aware of what is wrong, and I am quite happy to trust their judgment to tell us what is wrong with the system, rather than having a very legalistic explanation.

I hope that in his response the Minister will now tell us how the Government have weighed up the evidence of systemic failures of the FCA and what assessment they have made of the impact of such failures on people’s lives. So far, Ministers have not supported any proposals for assisting the regulators or put forward any suggestions. Maybe the Government plan to appoint a royal commission or an independent public inquiry under the Inquiries Act 2005, or something else. It would be very helpful to know whether the Government are content or not content with the current state of affairs in the finance industry.

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Moved by
44: After Clause 15, insert the following new Clause—
“Continuity of contract
If the FCA exercises one or more of the powers under Article 23D of the Benchmarks Regulation in respect of a benchmark, any reference to or description of that benchmark in a contract, security or instrument must be, with effect from the date of such exercise, interpreted as a reference to or description of the benchmark as modified by the FCA under its powers under Article 23D.”Member’s explanatory statement
This amendment would ensure that if the FCA revised a benchmark under Article 23D (inserted by Clause 15) there would be continuity of contract by replacing references to the earlier benchmark with the revised one.
Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, in moving Amendment 44 I shall speak to Amendment 45 in this group. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, and my noble friend Lord Holmes of Richmond for adding their names, especially as I had not expected to have any companions at all for these amendments, which are pretty technical and lack the sex appeal of some of the other groups of amendments.

These amendments concern what are known as tough legacy contracts in the context of the transition from Libor, which is expected to complete by the end of this year. The cessation of the use of Libor was first announced in 2017, and banks and other financial services firms have been working on transition since then. A principal focus for financial services firms has been on ensuring that new loans and other transactions do not reference Libor or, if they do, that there is legally watertight fallback language allowing the use of alternative rates once Libor is no longer available. This may sound easy, but I can assure the Committee that it has not been easy, and work is still ongoing. However, that is not the focus of these amendments, which are targeted at past contracts that reference Libor.

Despite considerable efforts, which will continue throughout this year, the industry has been clear from the outset that it is highly likely that there will be contracts at the end of 2021 which either have no fallback provisions or where the fallback provisions are effectively inoperable or would result in an uneconomic or unintended outcome. The regulators have been clear that the industry should solve this problem itself through bilateral or multilateral negotiations, and very considerable progress has been made. In particular, there is a revised ISDA protocol that will deal with the vast majority of derivative contracts. However, it is the case that not all contracts can be dealt with before the end of the year and possibly not at all, because there will be cases where there is no realistic means of proactive restructuring or where restructuring attempts fail.

The contracts in this legacy bucket are very varied. At one extreme, there are complex bonds which have multiple parties in many different jurisdictions, which range from hedge funds to Japanese retail investors. Getting agreement from all parties, which some bond documentation requires, is not feasible. At the other end of the spectrum are individual or SME borrowers who, for various reasons, such as default or dispute, may refuse to engage with the banks or lenders. The banks are particularly sensitised to the conduct issues that can arise if individuals or SMEs are unduly pressured to engage, especially in the context of the economic and health stresses of Covid-19.

The good news is that the regulators and the Treasury have accepted that there is a problem that needs to be solved, and this Bill contains some changes to the benchmarks regulation which will allow some legacy use of Libor, together with the ability for the FCA to set out how the benchmark is to be determined—the so-called “synthetic Libor”. These provisions have been widely welcomed by the financial services industry. However, the new provisions leave some legal loose ends, which I seek to address with my amendments.

Amendment 44 seeks to ensure that there is continuity of contract, so that any contracts transferred to synthetic Libor under the new provisions of the benchmark regulations are treated as if references to Libor were to the synthetic Libor. This is important, because a counterparty could well argue that the terms of the contract meant that, if Libor became unavailable, the contractual fallback provisions should be used instead of synthetic Libor. In the bond markets, I understand that this will in effect result in a floating rate bond becoming a fixed rate bond. In other commercial lending, the fallback will in many instances be some form of “cost of own funds”, the exact meaning of which is likely itself to be the subject of litigation. I understand that derivative contracts that cannot be restructured have no effective fallback language. I believe that a continuity of contract provision such as that provided in my Amendment 44 is essential to provide legal certainty for these situations.

Amendment 45 is a companion amendment, designed to give safe harbour from any legal claims. The opportunities for litigation could be significant, whether vexatious or not. In the retail and SME space there could even be a new opening for the dreadful claims management companies.

I should say that I claim no particular merit for the drafting of the amendments; I know that parliamentary counsel have their own ways of doing things, were the Government minded to accept the principle of these amendments. I have been assisted in the drafting by the International Capital Market Association and specialist City lawyers involved in its working groups. This has in turn drawn on the drafting of similar provisions by ARCC, the American Alternative Reference Rates Committee, for New York law. Given the international nature of some of the markets affected by tough legacy contracts, I believe the UK would be wise to act in a similar manner.

Since I tabled my amendments, the Treasury has issued a consultation paper on continuity of contract and safe harbour, which is a bit behind the pace but none the less very welcome. I know that the consultation period will run until 15 March; I hope my noble friend the Minister will update the Committee on how the Government now see this progressing.

The problems of continuity of contract and safe harbour cannot be dealt with by the FCA or the PRA because that is beyond their powers. The solution needs to reach beyond “supervised entities”, as it is not just banks and the like that need to be covered. The problems can be solved only by primary legislation. If we lose the opportunity of this Bill, I fail to see how the Government will be able to act, given that the deadline of the end of this year will be rushing up on us. Financial Services Bills are not an everyday occurrence —thank goodness—and it is important to understand how the Government will progress this important issue. I will be especially interested in my noble friend’s comments on how the Government see this. I beg to move.

Lord Holmes of Richmond Portrait Lord Holmes of Richmond (Con) [V]
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My Lords, it is a pleasure to speak on this group; I declare my interests as set out in the register. It is an even greater pleasure to follow my noble friend Lady Noakes. She declared that she thought she would be a solitary performer on Amendments 44 and 45 because of their technical nature; they are certainly technical, but none the worse for it. They are absolutely necessary, as she set out. Almost irrespective of what happens beyond this point—much needs to happen—she has done a great service in throwing such a spotlight on this issue for everyone involved in this phase.

Like my noble friend, I was concerned about the seeming inoperability of many fallback positions in which various entities will find themselves. Like her, I ask my noble friend the Minister to look at that point. Similarly, can my noble friend the Minister say where the thinking is on synthetic Libor? Does she think that it is complete and that all reasonable eventualities have been considered within that construction? Alongside that, what representations has Her Majesty’s Treasury received, not least from the City and in relation to derivatives, which my noble friend Lady Noakes pointed out are a particularly sticky part of this issue?

On a previous group, my noble friend Lady Noakes described herself as a cynic—not a bit of it. She is certainly a healthy sceptic, and all the better for it.

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Baroness Penn Portrait Baroness Penn (Con)
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My Lords, as this debate has illustrated, when you hear about Libor it is hard not to think about the benchmark’s manipulation in the wake of the financial crisis. However, since then there has been substantial reform to the regulation of benchmarks and significant improvements have been made to the governance and controls around the submission and administration of Libor itself.

As a result of declining activity in the wholesale lending market that Libor seeks to measure, in 2015 the Financial Stability Board recommended a transition away from certain interest rate benchmarks including Libor to alternative rates based on active and liquid underlying markets. As Andrew Bailey remarked in his speech on Libor wind-down last summer,

“Public authorities and market participants … have … been working together to transition away from reliance on Libor for a number of years.”


It remains of the utmost importance that firms continue to prioritise the move away from the use of the Libor benchmark where possible. We need to reduce the number of contracts that refer to the Libor benchmark as much as possible before the agreement between the FCA and panel banks to continue submissions to Libor to facilitate this transition ends. For most Libor currencies, that is the end of this year.

However, it has been clear for some time that there will be certain tough legacy contracts that will not be able to transition away from Libor in time. In May 2020, the Working Group on Sterling Risk-Free Reference Rates highlighted the need for legislation to support these contracts. Without government intervention, parties to these contracts would be left without a means of determining contractual obligations when panel bank submissions cease, resulting in significant disruption.

Shortly after that, the Government announced their plans to give the FCA the powers to manage an orderly Libor wind-down through this Bill in a manner that protects consumers and market integrity. This includes legislation to deal with these tough legacy contracts. The UK was the first country to set out an appropriate regulatory framework to manage the wind-down of critical benchmarks, and this legislation has been very well received by industry.

My noble friend Lord Holmes and the noble Viscount, Lord Trenchard, asked about synthetic Libor. The proposed legislation does not prescribe what a synthetic benchmark might look like but allows the FCA flexibility and discretion as to what methodology change it might choose to impose. For example, the FCA could use this power to direct a change to Libor’s methodology so it is no longer reliant on panel bank submissions. The FCA has recently consulted the market on its proposed policy approach to using this power.

Turning to the amendments, Amendment 44 would require that where the FCA has used the powers given to it in this Bill to impose a change in the methodology of the benchmark, that new benchmark must be interpreted as the same benchmark in any contracts which reference the original benchmark. Amendment 45 seeks to reduce the scope for litigation where the FCA has exercised this power.

Since the introduction of this Bill, the Government have received representations from some key industry participants, highlighting a residual risk of disruption and potential litigation that they are concerned would remain even once the FCA has exercised its powers under this Bill. This risk is separate from the wider risks and impacts on markets that would materialise if the Government had not introduced legislation under this Bill, and it is this potential residual risk that these amendments seek to address. I appreciate noble Lords’ interest in this important issue and I reassure them that the Government are committed to looking at it and, if necessary, providing industry with any reassurance it needs. But I will now turn to the two fundamental reasons why we are unable to accept these amendments.

First, critical benchmarks such as Libor are widely used in a diverse range of products and contracts across the economy, so any action of the kind proposed in this amendment would affect a wide range of individuals and businesses. This must be taken into account before determining whether and how to act. As the noble Baroness, Lady Kramer, and the noble Lord, Lord Eatwell, have described, this would impact people outside the financial services industry.

Secondly, these amendments would intervene directly in private contracts, restricting the ability of contractual parties to seek legal redress were they to disagree with the imposition of synthetic Libor. I am sure that noble Lords agree that any such interference would need to be carefully considered and designed to be as narrow and targeted as possible while achieving the intended effect. It is therefore critical that the Government consider to the greatest extent reasonably possible the full range of Libor-referencing contracts and the impact any legal provisions, such as the ones proposed in these amendments, would have on parties to these contracts before deciding how to proceed on this issue.

For example, I am concerned that Amendment 45 would provide wide legal protection to parties using the revised benchmark against all forms of claim or causes of legal action associated with the exercise of the FCA’s Article 23D(2) power, as opposed to a more targeted form of legal protection. I have not yet been convinced that such a wide-ranging legal protection is appropriate, and it could have serious and significant unintended consequences.

For these reasons, the Treasury published a consultation specifically on this matter on 15 February, which is currently open for responses. This will allow us to properly consider these issues with the benefit of feedback from a broad range of Libor users. As the consultation is still open, I cannot say at this stage whether the responses provide evidence that a provision of this nature is necessary, or how such a provision should be structured, but I reassure noble Lords that the Government take this matter very seriously. Guided by the evidence gathered through this consultation, the Government will be well placed to decide if an intervention along the lines that these amendments intend is appropriate. I therefore ask that these amendments be withdrawn.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I start by thanking all noble Lords for taking part in this debate; I think all have supported my Amendment 44 on continuity of contract, and I think the noble Lord, Lord Eatwell, expressed some concerns in relation to Amendment 45, which dealt with safe harbour.

It is worth re-emphasising a point made by my noble friend the Minister: we should not confuse what happened with the Libor manipulation scandal—which was dreadful and affected not just the London market but the New York and other markets—with the reasons for withdrawal of Libor. As my noble friend has said, these were much more technical reasons regarding the suitability, durability and stability of Libor as a benchmark going forward. It is a more technical issue than harking back to the fact that it had been manipulated prior to the very significant improvements in benchmark administration that came about as a result of the benchmarks regulation.

Financial Services Bill Debate

Full Debate: Read Full Debate
Department: Cabinet Office

Financial Services Bill

Baroness Noakes Excerpts
Committee stage & Lords Hansard
Wednesday 3rd March 2021

(3 years, 2 months ago)

Grand Committee
Read Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 162-V Fifth marshalled list for Grand Committee - (3 Mar 2021)
The OECD is not a radical campaigning group but very much a mainstream organisation. Its report recommends tougher laws to hold these enablers criminally liable, as we are aiming for here. Surely the Government must act. If they will not listen to the experts here in Grand Committee, maybe they will listen to this group and consider how the rest of the world sees this. The report also says that countries should create national strategies to deal with the problem of professional enablers. Perhaps in responding, the Minister can indicate whether the Government plan to follow this recommendation, if not now, perhaps through correspondence in the future.
Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, this is a large group of amendments and I shall not comment on all of them. I had not intended to speak about Amendment 51A, to which the noble Lord, Lord Sikka, spoke a while ago, but the way in which he framed his comments has prompted me to do so. The noble Lord persistently used the term “trade associations” to describe the professional bodies that are involved in supervisory activities in relation to money laundering. I declare an interest as a member, and former president, of the largest of the professional bodies to which he referred, namely the Institute of Chartered Accountants in England and Wales.

The ICAEW does act as a regulatory body for its members in relation to money laundering, as it does in relation to other activities, but its members carry out as professionals. This activity is overseen by an independent regulatory board, which is chaired by a QC and has lay members on it. I fear that the noble Lord, Lord Sikka, has not presented the whole story on this—perhaps he did not know it; those who listened to his contribution ought to be aware that it is not the whole picture by any means.

My noble and learned friend Lord Garnier made a strong case for his new offence of failing to prevent an economic crime. He will know that there is considerable concern about the practical impacts of such an offence on the commercial world and that there was only a small majority in favour of a new offence when the Government consulted on it. I have no idea what is in the Economic Secretary’s letter, to which he referred, but I believe that the Government made a wise decision last year in referring the matter to the Law Commission for further study. We should await its findings. I understand that it is due to report by the end of this year; that is not a huge delay for something that could have significant consequences for a large part of the commercial world.

I support the idea behind Amendment 51 in the name of my noble friend Lord Holmes of Richmond, namely a review of the “know your customer” regulations. All noble Lords taking part in this Committee are PEPs—politically exposed persons—and I am sure that we have all bumped up against the ludicrous way in which some banks and other financial institutions act under the guise of their customer due diligence obligations. Looking again at this whole territory is definitely worth while.

Further, the UK’s money laundering rules were made in the EU. Now that we have left it, we have the opportunity to see whether the money laundering directives and regulations now embedded in our law are fit for purpose. The UK must remain committed to high standards in the fight against financial crime, but looking at the efficiency and effectiveness of the rules is entirely consistent with maintaining high standards.

The KYC rules are just one part of the money laundering rule set, and I would urge any review to go beyond KYC and look at the whole range of rules. For example, the SARs regime for suspicious activity reports is very burdensome for all involved, both the firms that make the reports and the regulators that receive them. In addition, there are restrictions on banks’ ability to communicate with each other about customers or potential customers, which increases costs and certainly reduces effectiveness. So, I urge my noble friend Lord Holmes to be even more ambitious in the review that he seeks.

Lastly, Amendment 96 in the name of the noble Baroness, Lady Kramer, seeks the establishment of a financial services whistleblower office. I wonder whether she has taken account of the changes made by the regulators to whistleblowing arrangements in regulated firms. Since early 2016, firms have had to have a nominated non-executive director as a whistleblowers champion—not responsible for whistleblowing but, effectively, for its oversight. Most firms align that specific required responsibility with the responsibilities of the audit committee chairman. In addition, the whistleblowing rules themselves were overhauled at the same time. I have not yet heard the noble Baroness speak to her amendment but I wonder whether the evidence base that she relied on as a background to her amendments pre-dates those new arrangements, and whether it would be wise to review how well the new arrangements are working in practice before creating yet another quango.

Lord Hodgson of Astley Abbotts Portrait Lord Hodgson of Astley Abbotts (Con)
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My Lords, I have put my name to Amendment 84, in the name of the noble Baroness, Lady Bowles, so I am afraid I am going to disappoint my noble friend Lady Noakes. We are normally on the same side but I am afraid that, on this issue, we are not. Perhaps I can turn away her wrath somewhat by saying that I much supported her views on Amendment 51A, which is a worthy amendment but does not go nearly far enough. We need to look at the whole regime; looking at one part of it is not sufficient, a point I was trying to make on an amendment we debated on the first day in Committee.

Like my noble and learned friend Lord Garnier, I am grateful to the noble Baroness, Lady Penn, and to the Economic Secretary to the Treasury for their briefing and correspondence. I apologise that the briefing was cut short for me because I had a power cut. My computer therefore went down, but I am grateful for the letter that was received earlier today.

The issue of failure to prevent has been pretty widely forked over in the speeches on this group, so I want to make two pretty quick points. The first flows from my membership of the Committee in your Lordships’ House which undertook the post-legislative scrutiny of the Bribery Act. We reported in March 2019 and our report found that the Act was:

“an excellent piece of legislation which creates offences which are clear and all-embracing.”

We went on to say that

“the new offence of corporate failure to prevent bribery is regarded as particularly effective, enabling those in a position to influence a company’s manner of conducting business to ensure that it is ethical, and to take steps to remedy matters where it is not.”

In our report, we noted, as did the noble Lord, Lord Rooker, that it was as long ago as May 2016 that the then Prime Minister, David Cameron, called for a consultation on a new offence of failure to prevent economic crime. We also noted that when Ministers gave evidence to the bribery committee on 4 December 2018, now over two years ago,

“Mr Argar said: ‘We intend to publish our response to it [the consultation] next year,’ and Ben Wallace MP added: ‘The Solicitor-General and I are pretty keen that we explore further the failure to prevent in broader economic crime … We raised it at the last inter-ministerial government meeting’”.

He added that John Penrose, the Government’s anticorruption champion,

“and I are keen to see this.”

The responses to the government consultation, although unpublished, and those suggested by Mr Glen to be inconclusive, are not as inconclusive as all that. The staff of our committee were able to find a lot of the submissions, which were available on the websites of the respondents, and none that we could find opposed the extension of the failure to prevent offence. Indeed, many supported it.

That takes me to my second point: the road to hell is paved with good intentions. The Government said in May 2019 that the call for evidence had closed in March 2017 and a response “will be issued shortly”. So, what are we waiting for? The Government have been standing on the edge of the pool for over two years. Each time they seem ready to jump in, inertia overcomes them and another round of consultation begins—now with the Law Commission, for which I have the highest regard. When my noble friend comes to reply, it would be helpful if she could let the Committee know what angles the Law Commission is supposed to focus on in this latest review and, in particular, what angles it will examine that have not been extensively looked over during the past four years.

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Lord Davies of Brixton Portrait Lord Davies of Brixton (Lab) [V]
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I want to say a few words at this late hour strongly in favour of Amendment 55 and mention the possibility of a wider-ranging debt jubilee. There is clearly a case for this amendment, and the same case can be made for a wider-ranging approach to relieving the burden that debt places on us all, not just on the individuals. Clearly it ruins lives and leads to much misery, but it also affects the rest of us: it acts as a drag on the economy and the recovery that we now so desperately need. Anything that we as a society can do to relieve the absolute burden of debt, the better.

The proposal in the amendment for a fair debt write-down is a welcome development to the debt relief scheme. The moral case for passing on some of the discount that currently goes to debt collection agencies is clear, and there is an advantage to the Treasury. The same case fundamentally applies to us as a whole. We need a more comprehensive package of debt cancellations, targeted at the household sector. We want a way of writing off debts, just as so many debts were written off in the financial sector 12 or 13 years ago. We were told then that some banks were too big to fail, because of the harm it would cause the economy. I argue that the challenges facing individuals, because of their debt, mean as much or even greater harm for us all.

The main argument today is that such a scheme, as well as relieving much individual misery, would provide a direct, targeted macroeconomic boost to the economy, exactly where it is needed, helping some of the most hard-up in our society. It will boost economic growth, and help those who have fallen into the misery of debt—and all of us.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I will offer a slightly different perspective on this. I understand the problems of overindebtedness among poor people, but I do not believe that Amendment 55 makes sense. If I understand the proposed scheme correctly and if a debt under a debt respite scheme is sold for less than its face value, the original borrower has to pay back only that lower amount plus 20%. Let us say that I buy a debt with a face value of £100, for which I pay £80. I can recoup £96, which is £80 plus 20% of £80. That might seem reasonable on a loan-by-loan basis but, in practice, loans are sold in groups or books.

To the extent that there is a market for debt respite scheme debts, the amount that a purchaser pays will take account of two main things—first, the likelihood that the debt will be repaid; and, secondly, the difference between the income receivable on the debt, if any, and the purchaser’s cost of funds.

Financial Services Bill Debate

Full Debate: Read Full Debate
Department: Leader of the House

Financial Services Bill

Baroness Noakes Excerpts
Baroness Bowles of Berkhamsted Portrait Baroness Bowles of Berkhamsted (LD) [V]
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My Lords, I declare my financial services interests as in the register. The two amendments in this group concern the use of international financial reporting standards, particularly with regard to banks. Their aim is to permit a very abbreviated explanation of some of the problems with and lack of transparency of IFRS and to probe the return of a role for the Bank of England concerning the endorsement of accounting standards now that the approval of IFRS is repatriated to the UK and their approval under UK legislation involves an economic interest test. I thank my noble friend Lady Kramer and the noble Lord, Lord Sikka, for signing my amendments.

It is undeniable that IFRS played a part in the financial crisis and, even though they have been amended since in recognition of that role, they are still not fit for purpose for calculating prudential capital. As far as banks are concerned, they have two sets of numbers: statutory accounts for Companies Act going concern, on which there is an auditor’s opinion, and numbers for the prudential regulator which—if I may put it this way—really show the going concern situation, because that is what prudential regulators want to know.

It is worth looking at a couple of points to see the sort of thing that regulators discount for prudential purposes. Good will is taken out, because obviously it is not loss-absorbing and is not much good when a company is running out of money. It is also the case that a bank’s debt can be shown merely at the junk bond debt value in a bank’s IFRS accounts rather than the sum actually owed, which again is not the real money situation. For a bank that is going bust, or just not doing so well, the published accounts can show a rosier picture than the prudential numbers. I do not know any serious analysts who use the IFRS accounts rather than regulators’ numbers.

Regrettably, there are many other anomalies affecting other businesses. IFRS 15, for example, can introduce a smoothing effect, changing some sales into an income spread over future years and therefore providing exactly the kind of disguising of downturns that has caused problems in the past.

Given that a bank’s ability to trade is determined by its prudential solvency and banking licence rather than its IFRS accounts disclosed to the market, it is actually a bit absurd to say that a set of accounts can fit the Companies Act going-concern requirements and be signed off for the market when a bank might be a gone concern as far as the regulator is concerned and no longer able to trade. That may be the theoretical end-game problem, but it would seem more sensible for the banks to have to disclose to the markets the accounts that they have to live by for their licence. That is probably a better set of numbers on which to reward executives as well.

Many other countries recognise such anomalies and do not allow IFRS to be used without modification. Australia has its guidance note AGN 220.2, Impairment, Provisioning and the General Reserve for Credit Losses, and fared better in the financial crisis as a result. EU countries do not allow IFRS or IFRS-like calculations at the company level for determining going concern. The US will have nothing to do with it and only very grudgingly allows it to be used by non-US companies. I know that because I helped to negotiate it. The UK is really the outlier here.

Amendment 74 suggests that where the prudential capital and profit or loss for a banking company are less than the accounting numbers, the accounting numbers should be adjusted to the prudential numbers in the balance sheet and the profit-and-loss account because it is the regulatory capital that is the true amount for limiting growth, the real going-concern number, the safe distribution calculation and the fair director remuneration assessment. Yes, I am being provocative because I want some thinking on this, not the usual bland leave-us-alone acceptance.

I turn to Amendment 77. The PRA is the body closest to dealing with the unrealities still existent in IFRS that affect banks and recognising the effects that they have on the safety and stability of companies. The Bank of England is surely the pre-eminent body for analysing economic effects in the UK. Therefore, my Amendment 77 proposes to give the Bank of England a role in determining whether there is an adverse effect on the economy of the UK—the test set in the relevant statutory instrument for endorsing IFRS—and whether the standard is suitable for use in prudential regulation and, if not, to require that it not be used for the purpose of prudential regulation. Of course, some of this overlaps with what it is already doing.

I am sure that the Minister and other Members of the Committee realise that I am using this opportunity to highlight a matter that should be looked at more carefully, rather than just letting the IFRS juggernaut trundle on, whether that be for another HBOS or another Carillion. There are significant issues that affect the economy as well as many other issues with IFRS that depart from the normal logic of what accounts should mean and that are hard, if not impossible, to reconcile with the various requirements of company law. They have been swept under the carpet for far too long. I beg to move.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I am struggling with Amendment 74 because I think that it is aiming at a target that does not really exist, and it confuses capital and profits and losses.

The amendment would require what are quaintly called the “accounting numbers” to be adjusted to align with regulatory capital. Apart from anything else, that would result in accounts that do not comply with the Companies Act 2006, which requires, under Section 393, that accounts show

“a true and fair view of the assets, liabilities, financial position and profit or loss”.

The amendment seems to suggest that adjustments would be made to the accounts other than for the purposes of compliance with international accounting standards or to show a “true and fair view”, and, in that case, I believe that the resulting accounts would not comply with the Companies Act. We have to emphasise that these are international accounting standards, to which all countries that sign up follow, so this would be a major departure for accounting by banks and other institutions in this country.

I also note that, in proposed new paragraph (d), this is to apply to “profits for distribution purposes”, but that seems to misunderstand the fact that distributable profits are determined at the level of the parent entity solo accounts, whereas the adjustments that I believe are being targeted would be found in the accounts of subsidiary regulated entities or in the consolidated accounts, rather than those of the parent itself.

Regulatory capital already operates as a constraint on lending, so I fail to see what real-world impact any adjustments in the statutory accounts would have. While I understand the concept of regulatory capital, I do not understand the concept of “prudential” or “regulatory” profits or losses. I do not believe that “regulatory profits or losses” is a term that really exists, except to the extent that accumulated profits or losses form part of regulatory capital. It is difficult to see how proposed new paragraph (c) in Amendment 74 would work in relation to remuneration.

The noble Baroness, Lady Bowles of Berkhamsted, has explained the sorts of adjustments that are made for regulatory purposes and that, under her amendment, would be taken into the statutory accounts—for example, the treatment of intangible assets. It is not clear to me why the prudential treatment of these items should be imported into true and fair accounts. The treatment for regulatory capital is linked to loss absorbency, which is not an underlying principle of financial accounting, and it therefore cannot readily be accommodated within the structure of accounting standards.

Pillar 3 statements, which are required to be produced by all regulatory banks, set out the information required in much detail. If the noble Baroness is correct—I am not sure that she is—that analysts use and rely on Pillar 3 statements, not statutory accounts, they already have that information: all of it is in the public domain.

Amendment 77 is unnecessary. It is already open to the PRA to base regulatory capital on different numbers from those in the annual accounts. I have already mentioned intangible assets. It also ignores gains or losses or known liabilities, a very arcane bit of the accounting standards that makes companies recognise gains when their credit ratings reduce the fair value of their outstanding liabilities. The PRA has not needed any special statutory cover to eliminate that from regulatory capital.

Furthermore, it is unsound for the Bank of England to approach accounting for individual institutions on the basis of the impact that a standard may have on the economy of the UK, as if accounting were a mere plaything of policymakers. I hope that the noble Baroness, Lady Bowles, will not press these amendments.

Lord Sikka Portrait Lord Sikka (Lab) [V]
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My Lords, it is a great pleasure to follow the noble Baronesses, Lady Bowles of Berkhamsted and Lady Noakes. I will speak to Amendments 74 and 77 because they both raise some real, important and fundamental issues.

As the noble Baroness, Lady Bowles, indicated, vastly different numbers for bank capital and profits are communicated through conventional financial statements and by the regulators—because they are prepared on different assumptions, for different audiences and for different purposes. I hope that the Minister will tell us which of those numbers can considered true and fair. Can he also say whether the regulators are justified in relying on something that does not pass that test?

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Lord Holmes of Richmond Portrait Lord Holmes of Richmond (Con) [V]
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My Lords, it is a pleasure to take part in day five of Committee of the Financial Services Bill. In doing so, I declare my interests as set out in the register.

I was keen to speak to the amendment in the name of my noble friend Lady McIntosh of Pickering—and have put my name to it—mainly because of the reasons set out by my noble friend and the noble Baroness, Lady Bowles. That is, given the position we are now in with financial services, it seems opportune to review this practice. In saying that, I agree with the noble Baroness, Lady Bowles, that it makes sense to see this as part of a wider review of a number of other market practices. Indeed, it reflects an earlier amendment that I put forward on day one on the opportune moment to review all our financial services regulations and regulators’ rules, given that our situation is so fundamentally different from what it was a matter of weeks ago.

On short selling, it is important to understand the difference between different markets, as the noble Baroness, Lady Bowles, eloquently set out. It is important for that to be understood, not least as a number of people’s understanding of short selling will have been informed by the earlier situation with GameStop on the exchange in the United States and the excellent film “The Big Short”—excellent unless you happen to be on the wrong end of that practice. However, it is different in different jurisdictions. Which jurisdictions would the Minister look at in considering potential better practices around the world? Would she also see this as a positive, opportune step to take as part of a wider review of all financial services regulations and the rules of our regulators?

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I support the call of my noble friend Lady McIntosh of Pickering for a review of short-selling legislation, although I start from a very different position to her. As she explained, our short-selling rules were acquired via the EU, which is how they found their way on to our statute book. I believe that all EU-derived legislation should be reviewed at some stage; I am not sure this is the most pressing area, but it should certainly be reviewed.

When the EU introduced its short-selling rules in 2012, we had to follow, but it is far from clear that, left to our own devices, the UK would have introduced such rules. The FCA has been clear that the existing powers to trigger a ban on short selling would not be exercised lightly and the bar must be set very high. That must call into question whether we actually need the powers. The trouble with regulators is that, once they have powers, they never give them up voluntarily, even if they can never envisage when they would be used. A review would allow us to look at this again. We ought not to allow regulators to keep draconian powers to intervene in markets without very strong justification.

Against that background, I was particularly disappointed to see that the EU’s temporary—though extended several times—reduction of the threshold for notification of short selling, which expired when we left the EU, was almost immediately reinstated into UK law. That is not a good direction of travel.

There is nothing intrinsically wrong with short selling. It can provide liquidity to markets, improve bid-ask spreads and assist in price discovery; it also offers a route to hedging long-only exposures. There are, of course, downsides, including the potential for unlimited losses, so the risks have to be well understood and managed. We recently saw in the US that some hedge funds got their fingers burned on short selling GameStop shares due to action taken by amateur investors; but that merely highlights the need for sound risk management—it does not speak to short-selling itself being a problem or suggest that powers are needed for market intervention.

Lord Sharpe of Epsom Portrait Lord Sharpe of Epsom (Con)
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My Lords, I refer to my interests in the register. It is always a pleasure to follow the noble Baroness, Lady Noakes; it is also something of a challenge as she speaks so authoritatively on matters such as these and I often find myself agreeing with her.

The noble Baroness, Lady McIntosh, spoke compellingly in her introduction to this amendment. She made the point that she has misgivings about the practice. Clearly, for a practice that dates back to the first days of stock markets, short selling retains its ability to attract controversy. Indeed, a short seller was accused of manipulating the share price of the Dutch East India Company in Amsterdam as long ago as 1609. The noble Baroness, Lady Bowles, suggested that it is sometimes regarded as an evil practice, so I felt that it deserved a defender today.

The goals and effects of short selling are often misunderstood and, when markets enter a downturn, many are quick to call for short selling to be banned. While such bans are unfortunate, they have left us with a wealth of data on the effects of short selling and how the practice contributes to the proper functioning of markets. The practice of selling a stock short is always the same but the intention behind it varies considerably. At its most common and passive, short selling is a conservative investment technique used to hedge against risk, as the noble Baroness, Lady Noakes, has just highlighted, but obviously at the cost of forgoing some returns. On the point made by the noble Baroness, Lady McIntosh, about the volatile first quarter of 2020, the Alternative Investment Management Association, which represents 2,000 corporate members in 60 countries, reported that funds which had hedged in this way outperformed the broader market by 20%.

To be sold short, a stock has to be borrowed, and it will usually be borrowed from an asset owner for a fee. The fee helps the returns to the holders of that stock—in practice, anyone who participates in a long-term equity fund and, therefore, probably everybody involved in this debate. The fact of selling the stock helps create valuable liquidity, which is often essential to ensure the smooth functioning particularly of smaller markets, but it also works in reverse during periods of market turbulence. In practice, short sellers are often the buyers of last resort when markets are under pressure; they take profits in their short positions and therefore help to provide stability to markets.

The more controversial end of the short-selling spectrum is that populated by activist short sellers. They are often characterised as predators who create and exploit misery, but that is simply not the case. These investors act as the canaries in the coal mine. Short selling does not directly undermine the health of a company any more than buying its shares improves its fundamentals. Companies are not deprived of funds when investors sell shares, nor do they become financially stronger when investors buy shares in public markets. Short sellers cannot send a good business under. What they can do is expose bad business models, bad management, dodgy accounting, fraud and other bad behaviour. At a more mundane level, they can expose unjustifiable valuations.

There are plenty of recent examples but one will suffice as the regulatory reaction was instructive; here I am very grateful to Jack Inglis, the CEO of the Alternative Investment Management Association, who provided me with some detailed facts. In 2019, Wirecard in Germany famously went bust. It was at the time a member of the main German index, the DAX 30. The first queries into the company’s accounting practices date back to 2014, when short positions began to be initiated. However, when the pressure mounted on the company to explain itself, the German regulator instead went after journalists at the Financial Times who had published a deep dive into the company—and, of course, the short sellers. They filed a criminal complaint against them, accusing them of market manipulation, and, in February 2019, initiated a two-month ban on short selling the shares, citing the need to curb

“a serious threat to market confidence”.

As we all know, the company subsequently went bust, the subject of a multiyear fraud involving €1.9 billion going missing and the CEO being arrested, among other things.

Since then, Germany has become much more circumspect about joining other European states in banning the practice. Indeed, the regulator’s president apologised and paid tribute to those

“journalists, analysts or yes, let it be short sellers, who have been digging out inconsistencies persistently and rigorously.”

In saying this, he was following a long historical tradition—such bans are inevitably repealed.

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Baroness Bowles of Berkhamsted Portrait Baroness Bowles of Berkhamsted (LD) [V]
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My Lords, I have some sympathy with the motivation for this amendment concerning co-ordination of regulators and combined regulatory agendas. Of course, there is already an MoU between the PRA and the FCA about modes of co-operation, who leads on which issues, and how to escalate to the two CEOs to resolve. I took the opportunity to remind myself of it; it is only an agreement to consult on deliberations that are equally relevant to both regulators’ objectives or which might have a material effect on the others’ objectives. Senior executives have discussions every quarter and report to their respective boards. It is perhaps disappointing that it does not contain more. It reminded me that it can be hard to force independent regulators to co-operate, especially at the moment that they are created. They fiercely guard their independence, not just wanting to do things their own way but vehement that they are obliged to do so.

In the EU, my committee insisted that there be a joint committee of the three regulators; we got it into legislation, albeit in a very sketchy form, with the intention that they got together to thrash out different positions. However, in that, they stayed as equals and there was no overarching power, rather as it is in the MoU between the PRA and the FCA. I can tell you that the regulators did not like the idea. When they came to committee hearings, we had to keep asking whether they had met yet. The answer was that they were concentrating on their own set-up and procedures first. Eventually, there came to be a few problems and, as happened back then in the EU, the Parliament was seen as part of the solution. So, they came to me, discovered that I knew all about this since industry had alerted me as well, and, after a chat and—perhaps—a bit of pressure, I remember saying that that was why we had invented the joint committee and kept asking about it. Slowly, they started to use it, then decided it was quite a good thing and, finally, wondered how they could ever have done without it; maybe they were also a little afraid of what Parliament might say if they did not make it work.

I have thought about that experience and whether the UK is better off with the MoU—which actually has more definition in it—or worse off because, in the end, it reinforces territories rather than being a less formal get-together. There is a problem with the proposal by the noble Lord, Lord Blackwell, in that it is formalised with the Governor of the Bank of England as chair. I am not sure that establishing a pecking order as it does is the right thing, even if it does end up going back to the two CEOs, which, of course, is where the MoU takes it all to anyway. I certainly do not like it as a step towards abandoning the “twin peaks” idea.

The present Governor also has FCA experience but, in the circumstances, that might complicate matters. One thing the amendment proposes is for the joint committee to check that the MoU is working. That check is important; it will surprise nobody that, in my view, if the MoU is not working, that is just the sort of matter that Parliament should get involved with to see if it can catalyse some action. The rest of the amendment also seems to be on things Parliament should be asking about and could ask to have reports about. Although I do not think that the noble Lord, Lord Blackwell, has directed attention towards the right body, he highlights some issues on which the regulators should be quizzed.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, my noble friend Lord Blackwell’s Amendment 86 identifies a very real problem that has existed since the Government decided to abolish the Financial Services Authority and split responsibility for conduct and prudential regulation.

I was never in favour of splitting the FSA. It had certainly failed as a regulator, as the financial crisis laid bare, although it must be said that other regulators around the world, whether combined or separate, fared no better. The FSA had not managed to get the balance right between conduct and prudential regulation; it had an obsession with conduct matters and treating customers fairly, which often dominated its thinking, while banks in particular were allowed to run on wafer-thin capital ratios. It needed reform rather than a wrecking ball.

When they were separated by the Financial Services Act 2012, many concerns were expressed about the possibility of a lack of co-operation. As has been said, a number of mechanisms were put in place, including the statutory duty to co-operate, the memorandum of understanding and cross-membership of the boards of the PRA and the FCA. However, as my noble friend Lord Blackwell explained, it has not always worked well in practice. There are problems of overlap and overload. Some issues, such as cybersecurity, are of interest to both the PRA and the FCA. Such an overlap comes with the split between the two regulatory peaks, but often they focus on the issues in different ways, on different timescales and with different objectives. This is often inefficient from the perspective of regulated firms.

The cumulative impact of the requirements of the PRA and the FCA can lead to significant overload. There is no real prioritisation mechanism. Regulated firms can be bombarded by each regulator and, even if the individual regulator prioritises its own demands, which is not always the case, there is no real mechanism for the competing demands of the FCA and the PRA. For example, I recall in the middle of stress testing, which is led by the PRA and tends to absorb the resources of subject matter experts specialising in credit risk, the FCA produced big data demands in exactly the same area and requiring exactly the same subject matter experts. It would not have occurred to either regulator to see regulatory demands from the other regulator as more important than its own.

I support the aims of this amendment. Whether another committee would have any impact is another matter, especially if it met only once a year. We must remember that the tripartite arrangements that failed during the financial crisis looked good on paper. It was just that they were never taken seriously and were allowed to fall into disuse. The same could happen to a committee.

My noble friend might want to look at how his amendment could be improved by incorporating an element of reporting to Parliament. On the first day of Committee, we debated parliamentary accountability more widely in the context of the new rule-making powers that are being transferred to the FCA and the PRA. The new accountability arrangements, which some of us advocated, could include examining how well the regulators are working together and co-ordinating their activities; that should be strongly considered if my noble friend chooses to bring this issue back on Report.

Baroness McIntosh of Pickering Portrait Baroness McIntosh of Pickering (Con) [V]
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My Lords, I am looking closely at Amendment 86, introduced so eloquently by my noble friend Lord Blackwell, and asking myself why it would be needed in view of the comments made by my noble friend Lady Noakes and the noble Baroness, Lady Bowles.

These are both deemed to be independent bodies. While my noble friend Lord Blackwell has rightly identified a number of shortcomings, I do not really understand why a joint co-ordinating committee, as my noble friend Lady Noakes pointed out and as it says in proposed new subsection (5), would meet only at least once every year—I presume it could meet more often.

In any event, I imagine that these issues are dealt with to some degree by the Treasury Select Committee in the other place. My noble friend Lord Blackwell probably has identified issues but there are very good reasons—he set out the background to this—why the PRA and the FCA replaced the FSA. Each should be able to enjoy a degree of independence in its operation. My noble friend Lady Noakes rightly identified a number of areas of overlap and overload, but I think that this can be addressed through the functioning of the memorandum of understanding. I struggle to see why this amendment is required.

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Viscount Trenchard Portrait Viscount Trenchard (Con) [V]
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My Lords, all three amendments in this group would increase the importance of equivalence determinations, which might ultimately be counterproductive.

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

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

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

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

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

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

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

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

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

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

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

Baroness Fookes Portrait The Deputy Chairman of Committees (Baroness Fookes) (Con)
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My Lords, there is a Division in the Chamber. The Committee stands adjourned for five minutes.

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Baroness Noakes Portrait Baroness Noakes (Con)
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As I was saying, my Lords, of much greater importance are the plans that the Government have to support and promote the future growth of our financial services sector. The amendments on international competitiveness debated on our first day in Committee are far more important than EU equivalence.

Baroness Neville-Rolfe Portrait Baroness Neville-Rolfe (Con)
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My Lords, I am delighted to follow my noble friend Lady Noakes. Like her, I was struck by the comments of the Governor of the Bank of England, and I feel she has given us a welcome dose of reality this evening.

I speak as a member of the EU Committee and its Services Sub-Committee. We have wrestled long and hard on the vexed question of the granting of equivalence by the EU, including the important issue of reciprocity, highlighted by the noble Baroness, Lady Bowles. I want to make three points and ask one question.

First, once one has decided to leave the EU, it makes little sense to be tied to its rules and regulations—in effect, as the Governor of the Bank of England has said recently, thereby becoming a rule taker without being able to make any input to the new rules. So we will have to plough our own furrow on financial services. But that does not stop us agreeing equivalence arrangements in areas where there is strong mutual interest such as central counterparties, known as CCPs, already temporarily approved, and perhaps insurance. We have granted equivalence to European banks and other bodies, as has been said, and the prospect of maintaining that equivalence gives us some leverage.

Secondly, I do not see why we should necessarily refuse equivalence to third countries which do not have similar legal and supervisory standards. Flexibility is important if we are to welcome investors here, and they may have different yet adequate regimes, bringing in innovation and diversity of offer, which could be valuable in the UK. Trade in services is absolutely vital to the future of this country.

Thirdly, I can see the value of some form of reporting to Parliament, as proposed by the noble Lord, Lord Tunnicliffe, in Amendment 100 and my noble friend Lord Hodgson in Amendment 105—although in different ways. Even on the EU Committee, we have had the greatest difficulty extracting information on the progress of negotiations on financial services, partly because this is in the hands of the Treasury and its officials, while the main spokesman has been my noble friend Lord Frost, who has led our negotiations across the board with such tenacity.

My question is this. How does my noble friend the Deputy Leader feel about the balance between UK-owned banks and financial service operators and their EU competitors now that we have granted equivalence and the EU, in the main, has not? Am I right in thinking that a German bank such as Deutsche Bank, a Dutch bank such as Rabobank or a French asset management firm such as Amundi is regulated in its own country and less subject to UK regulator bureaucracy and aggressive enforcement of something like MiFID than its UK counterparts? Is there any sense in which it is privileged, and is this true also of smaller operators? Does this matter to UK plc?

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Baroness Noakes Excerpts
The Economic Secretary to the Treasury has said that he is committed to helping borrowers with inactive lenders and that he “remains open” to “considering practical solutions”. The Chancellor told Martin Lewis after the Budget that he would keep working on the issue and was committed to finding a workable solution. Amendments 99, 116 and 117 are three practical solutions which we hope that he will consider. We very much hope that the Chancellor and the Economic Secretary will recognise their continuing moral obligation. We hope that they will support these three proposals and take action now to ensure that all mortgage prisoners are finally set free.
Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, Amendments 99 and 116 deal with the difficult area of mortgage prisoners. Both amendments seek to go beyond what has already been achieved for mortgage prisoners by the relaxation of affordability rules by the FCA.

I have much sympathy for mortgage prisoners, but we should not lose sight of the fact that these borrowers do not have sufficient financial credentials to qualify for new mortgage lending under current regulatory rules and hence cannot remortgage. They are a hangover from the period when lending criteria were much less strict than they are now and include interest-only borrowers who lack a credible way of repaying capital.

We should be wary of going beyond what the FCA has already done. In particular, making the FCA specify maximum interest rates is an unwarranted market intervention. The FCA is best placed to judge whether any further solutions can be found for these problem borrowers. We should not try to solve the problems of a relatively small number of people with blunderbuss legislation.

My main reason for speaking on this group is Amendment 117, which is fundamentally misconceived. My noble friend Lord True, when he spoke to the large group of amendments headed by Amendment 79 on our previous Committee day, talked about the importance of the securitisation market for mortgage providers. Securitisation ensures that lenders can carry on originating new debt by freeing up capital and liquidity. This is especially important in the mortgage market.

Amendment 117, which requires written consent for every mortgage sold, is not practical. It is likely to mean that lenders will be shut out of the securitisation market. Mortgages are not sold individually: they are parcelled up into books. Requiring consent will make this very much harder to do and will significantly add to the costs of the procedure. Anyone who has tried to get responses from individual account holders where there is no incentive for the account holder to respond will tell you that this is mission impossible.

Mortgage securitisation is a normal balance sheet financing strategy for both retail and commercial lenders. Making it more difficult or expensive for mortgages will have consequences for consumers, whether by restricting the availability of credit or increasing its cost, or both. I cannot support any of the amendments in this group.

Lord Griffiths of Burry Port Portrait Lord Griffiths of Burry Port (Lab)
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My Lords, I will not detain the Committee long. I would not normally be seen near a finance Bill, largely because I do not have and do not ever expect to have any finance to bother me. Nor would I presume to discuss mortgage payments, since I do not have and never will have a mortgage to worry about. However, what I do have is some experience of people in all kinds of situations, good and bad, from the cradle to the grave.

It was a conversation with someone whom I knew well that made me aware of the truly dreadful situation that we are debating and that they found themselves in. Here was someone who was in a bad—a very bad —situation: they and 250,000 others. My noble friend Lord Stevenson of Balmacara and the noble Lord, Lord Sharkey, have done us a great service in highlighting the plight of these people and have worked out a reasonable way to help them. I am happy to leave the heavy lifting on the matter to them and, no doubt, other Members of the Committee who will chip in on the same side of the argument. They have made a compelling case in detail and with passion, all of which will help to disguise the extent of my own ignorance.

I simply must express my bewilderment at the way, when this subject was debated in the House of Commons, no less a person than the Economic Secretary to the Treasury gave voice to some rather misleading statements. He said, for example, that “mortgage prisoners” were paying a mere 0.4% higher than average mortgages. That figure has been mentioned more than once and is simply not true, according to the picture that I have seen painted in reliable reports from various quarters. He also suggested that when the mortgages in question were sold to “vulture funds” and other non-regulated bodies, the borrowers retained all the same conditions stipulated in their original agreements. From the conversation that I had and other cases that I have subsequently read about, that just is not the case.

The Government seem to have treated mortgage prisoners as cash cows, a means of paying down Treasury debt, after the decision to rescue the banks after the crisis of 2008. On the day that conversation arose, I thought that it would be a friendly interchange on the streets of my home town, with perhaps a mention of the unexpected good fortune of the Welsh rugby team—but it actually opened a can of worms. The person I was speaking to is considered to be a “problem borrower”, one of the people referred to by the noble Baroness, Lady Noakes. But my friend is a problem borrower largely because of the depredation of resources due to the fact that she has been paying mortgages over the odds for 10 years now. Even someone whose only qualification for speaking in this debate is an O-level in economics found himself smelling a rat as he spotted an egregious injustice being done to mortgage prisoners.

The amendments seek to correct this situation. They are balanced and sensible. Martin Lewis, who was quoted more than once by the noble Lord, Lord Sharkey, and is a true expert in this field, writes this:

“Mortgage prisoners are the forgotten victims of the 2008 financial crash. The Government at the time chose to bail out the banks, but unfairly—immorally—hundreds of thousands of their victims were left without adequate help, trapped in their mortgages and the financial misery caused by it.”


No wonder they are problem borrowers. He continued:

“And they have been forgotten ever since.”


The Bill and the amendments give us an opportunity to unforget them, to make good on past failures, and to bring justice to a situation yearning for it. The Minister is a decent and fair man but will of course be bound by the usual conventions in a debate of this kind. It would be good to hear him promise to go back to his department to try to find a way of bringing a little hope and cheer to those who suffer in this way.

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Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, as many Members of the Committee have already noted, my noble friend Lady Neville-Rolfe is well known in your Lordships’ House for her pursuit of impact assessments and is a stern critic of government departments that hide behind the exact wording of Cabinet Office guidance. Recently, many of us have joined her in being appalled by the complete lack of impact statements published to support the Government’s coronavirus policies, involving—I remind the Committee—the greatest ever peacetime infringement of civil liberties. The Department of Health and Social Care used the flimsy excuse that the Cabinet Office does not require impact assessments for policies intended to have a temporary effect.

I am particularly interested in my noble friend’s Amendment 104, which requires an annual report to Parliament. I am not wholly in favour of annual reports, because they can degenerate into boiler plate and have a very short-term horizon; I prefer the concept of periodic reports that can look at impacts over a longer time span. However, whether such reviews are annual or less frequent, I suggest to my noble friend that the report could also usefully concentrate on the quality of consultation carried out by the regulators, and that would include the quality of impact statements.

Consultations by the PRA and the FCA often feel like not much more than going through the motions. They are not alone in the public sector in seeming to exaggerate the benefits and underestimate the costs. HMRC, for example, is a particular case in point, having been criticised more than once by the Economic Affairs Committee of your Lordships’ House for the use of cost assumptions that seem to bear little relationship to reality. Similarly, the PRA’s consultation on ring-fencing rules was widely regarded as a massive underestimate of the cost of compliance, as was borne out by subsequent cost experience. A superficial impact assessment, or one that overstates the benefits or systematically underestimates the costs, is worse than useless and can lead to poor policy-making. It would be wise to ensure that the regulator’s performance in this regard is kept under review.

Baroness Kramer Portrait Baroness Kramer (LD)
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My Lords, in many of the groups of amendments to the Bill we have discussed the issue of accountability, and it has been a very important discussion. However, we have also discussed the necessity to have proper evidence and information to make that accountability worthwhile, valid and effective. These amendments follow exactly that direction.

One of the pleas that I will put in is that an impact assessment should be studied and then reviewed. The noble Lord, Lord Tunnicliffe, is not speaking in this group of amendments but I can think of numerous occasions when he has spoken on a financial services Bill and pointed out that the information in the assessment did not seem to answer any of the obvious questions that a sensible person would ask in order to understand the regulations involved. I would join him in that. We seem to have narrow definitions of what an impact assessment is, and it seems to me that it should do what it says on the tin. It ought actually to assess the impact in a way that is meaningful to the regulation or piece of legislation in front of us.

This push for evidence and information, and quality in both, is an important thrust of the conversations and debates that we have had around the Bill. I very much hope that Ministers take that on board, because this is starting a pressure that will not go away. In fact, for the Government, if they want to produce the highest-quality legislation possible, the discussion created by developing a high-quality impact assessment will lead in the end to far better legislation.

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Baroness Noakes Excerpts
Lord Davies of Brixton Portrait Lord Davies of Brixton (Lab) [V]
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My Lords, the issue I want to highlight, as I did at earlier stages, is how to make regulators more accountable, given the well-established phenomenon of regulatory capture. Regulatory capture is where an industry regulator like the FCA and the other bodies mentioned in the amendment comes to be dominated by the industry that it is charged with regulating. The result is that the agency, which is meant to act in the public interest, works instead in ways that benefit the industry.

I do not think that there is any doubt that this happens, and the question is: what do we do about it? The important point to understand is that this does not happen because of inadequate, ineffective or corrupt individuals—rather, it happens because it is systemic. It is an institutional rather than an individual problem. There are various reasons for why it happens. First, a regulated industry has a keen and immediate interest in influencing the regulator, whereas customers are less motivated. They have normal lives to lead and they engage with the industry only for brief periods. However, participants in the industry are there all the time. Secondly, industries tend to devote large budgets to influencing the regulator, which inevitably has an impact. Lastly, there is the aspect of the whole industry community. People tend to move from the regulator to the industry and back to the regulator. That is bound to have some impact on the personal relationships that are established.

There is therefore no question that the phenomenon exists. How bad it gets and what we do about it is what we need to address. The first step is to acknowledge the problem and to recognise and address the challenge. The next step is to make the regulators as accountable as possible, which poses the question: who regulates the regulators? There are many ways to do that but we have before us in Amendment 2 a proposal for a periodic, independent review of the regulators.

What I have in mind is something akin to a school inspection, which does not happen because a school has demonstrated problems but is just part and parcel of a regular process that focuses the minds of all those involved. At the moment, regulating the regulators is effectively left to the Government whenever they care to turn their minds to the issue. The problem is that Governments have many other things to think about and the result is that addressing the problem tends to happen only after it has arisen. The public become aware that there is some deficiency in the regulator and therefore action has to be taken. How much better it would be to pose questions as to how the system can be improved before we encounter the problems. That happens only under a regular, independent review, as proposed under the terms of the amendment.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, this is the first time that I have spoken on the Bill on Report and I draw the attention of the House to my interests as set out in the register—in particular, shares that I hold in listed financial services companies.

I have considerable sympathy for the amendment because the financial regulators are not very accountable. At the moment, there are set-piece appearances before the Treasury Select Committee in the other place and occasional appearances before committees of your Lordships’ House but these do not amount to a systematic and comprehensive examination. The Government often rely on the fact that annual reports are laid before Parliament but the annual reports of regulators get no more attention paid to them than the annual reports of companies. With rare exceptions, they provide few insights of value. By their very nature, annual reports accentuate the positive and shy away from the negative.

The problem of the accountability of regulators is not confined to financial services regulators. I could say much the same about Ofcom, Ofgem and other regulators, but we cannot solve the problems of the world in this Bill. The accountability of the PRA and the FCA is covered in the future regulatory framework, the consultation that has recently been completed. We discussed this a little on our first day in Committee and I hope that my noble friend the Minister will provide some information on the next steps when he responds to the amendment. The consultation closed over a month ago and the Treasury must have some idea on what it will be doing next and when.

If the outcome of that review, so far as accountability is concerned, is a well-developed form of parliamentary scrutiny, either jointly between both Houses of Parliament or within each House, the need for an independent review clause such as that contained in Amendment 2 would recede. Parliamentary committees can look at issues in depth but only if they are properly focused and well resourced. On that basis, the noble Baroness, Lady Bowles of Berkhamsted, might want to await the legislation implementing the outcome of that review rather than tackle the issue in this legislation, because action could be set in a broader, more holistic context regarding how the regulators will operate overall in due course.

If the noble Baroness, Lady Bowles, wishes to pursue her amendment—I thought I heard her say that it was more of a probing amendment for today—it would be wise to look again at its drafting because it calls for one review covering four regulators, but they are all different in what they do and how they do it. I am not convinced that there would be sufficient focus if one review tried to cover all the regulators—the two major ones and the two smaller units with regulatory responsibilities, one in the Bank of England and the other being the Payment Systems Regulator in the FCA.

In addition, I, like the ABI, wonder whether a review every two or three years is too frequent for the kind of in-depth review that the noble Baroness, Lady Bowles, has in mind. A rolling series of reviews, perhaps carried out over five years but concentrating on individual regulators, would provide more information of value to those seeking to hold them to account. However, the noble Baroness, Lady Bowles, has the right ideas in the amendment, although it may not be right for this Bill.

Lord Sikka Portrait Lord Sikka (Lab) [V]
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My Lords, it is a great pleasure to support Amendment 2. Throughout the earlier stages of the Bill, a number of noble Lords have drawn attention to the failures of financial regulators. Essentially, it was argued that they are captured by the finance industry and therefore advance its interests. They are too slow to protect people from malpractices. Over the years, numerous financial products have been fraudulently sold, including pensions, endowment mortgages, precipice bonds, split capital investment trusts, interest rate swaps, payment protection insurance and much more. The names of the products change from the aforementioned to mini-bonds and supply chain finance, but the basic problems are still the same and the regulators have failed to secure positive change in the culture of financial services enterprises.

During debates, Ministers have emphasised the tax contribution of the finance industry but have been silent on the costs imposed by that industry on society. Scholarly research shows that between 1995 and 2015 the oversized and scandal-ridden finance industry made a negative contribution of £4,500 billion to the UK economy, equivalent to around £67,500 for every woman, man and child in the UK. Of the £4,500 billion, £2,700 billion is accounted for by misallocation, whereby resources, skills and investments are diverted away from productive non-financial activities to the financial sector. The other £1,800 billion arises from the 2007-08 banking crisis that ushered in never-ending austerity. The economy and most people are yet to recover from that. That £4,500 billion is a massive cost and we simply cannot afford it. The status quo is not tenable and it is too expensive. The cost of the financial curse for the UK cannot be reduced by carrying on the regulatory business as usual, which is what the Government seemed to indicate in Committee.

Our regulators need to be effective and proactive but they seem to neglect their duty to the people. This is well documented in the reports on London Capital & Finance and the Connaught Income Fund. The FCA knew that mini-bonds were a problem but was slow to act at London Capital & Finance, and the same pattern has now been repeated at Blackmore Bond. The FCA does not welcome public scrutiny. Just look at the excuses it concocted to conceal the report on frauds at HBOS. The saga is still not resolved and same goes for frauds at RBS.

It is well documented that thousands of people are trapped in the £3.7 billion collapse of Woodford Investment Management. The Woodford Equity Income Fund was first authorised by the FCA in 2014. In 2015, the FCA was informed about the fund’s precarious existence as it was investing excessively in unlisted securities that affected its liquidity, but the FCA ignored the information until at least 2017.

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

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

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

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

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

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

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I shall speak mainly to Amendments 3 and 23 in this group.

On Amendment 3, I should say I am not generally in favour of littering legislation with reviews, though I confess to having tabled a few amendments of that nature myself in the past. More substantively, I think this particular amendment as drafted is a waste of time.

I can predict the outcome of the review if this amendment is passed. The PRA will find that banks do not hold any significant “investments”—the wording used in the amendment—in fossil fuel assets, whether linked to existing exploitation and production or to new exploration. So all the things mentioned in proposed subsection (2) of the amendment will be irrelevant.

Risk weighting applies to the assets that banks hold. Banks’ assets will largely be loans of various kinds. Banks do not normally invest in physical assets used by other companies, nor do they invest in shares in the companies that own the assets. Banking is fundamentally about lending and not investing.

The noble Lord, Lord Oates, cited the recent speech by the deputy governor talking about prudential regulation being risk-based, which indeed it is, but he failed to understand that he was talking to insurers at the time. They do have investments. This is a fundamental difference between banks and insurers—they have completely different balance sheets.

As I said in Committee, most borrowing by oil and gas companies will be generic—for example, by way of bond issuance or commercial paper—and by one of the companies in a group. It will not be hypothecated to individual assets or groups of assets. Money is fungible and cannot be linked to any specific use. Bank balance sheets might have some leasing arrangements that might be caught by this amendment, but my main point is that the amendment is fundamentally aimed at the wrong target and, therefore, amounts to not much more than virtue signalling.

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Moved by
4: After Clause 15, insert the following new Clause—
“Continuity of contract
If the FCA exercises one or more of the powers under Article 23D of the Benchmarks Regulation in respect of a benchmark, any reference to or description of that benchmark in a contract, security or instrument must be, with effect from the date of such exercise, interpreted as a reference to or description of the benchmark as modified by the FCA under its powers under Article 23D.”Member’s explanatory statement
This amendment would ensure that if the FCA revised a benchmark under Article 23D (inserted by Clause 15) there would be continuity of contract by replacing references to the earlier benchmark with the revised one.
Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, in moving Amendment 4, I shall speak to the other two amendments in this group in my name. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Eatwell, for adding their names to Amendment 6.

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

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

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

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

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

Viscount Trenchard Portrait Viscount Trenchard (Con)
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My Lords, I apologise for forgetting to declare my interest as a director of two financial services regulated companies.

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

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

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

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

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However, I reiterate that the Government take the issues raised by my noble friend and others in this debate very seriously and will consider carefully the full range of issues raised through the consultation responses before deciding on an appropriate next step. I am afraid to say to my noble friend Lord Blackwell and others that I do not think that this will be in time for Third Reading, and nor can I, at this stage, point my noble friend Lord Holmes to a subsequent specific Bill in future. What I can say is that the Economic Secretary to the Treasury is fully apprised of the need quickly to ensure clarity on this important issue. He has been leading on this matter for the Government, and has agreed to meet my noble friend Lady Noakes and update the House as appropriate, as soon as he is in a position to provide a substantive update on the outcome of the consultation. On that basis, although my noble friend will perhaps not be happy to withdraw her amendment, I nevertheless ask if she would consider doing so.
Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I thank all noble Lords who have spoken in this short debate. I even include my noble friend the Minister, although she will know that much of what she said was very disappointing—not only to noble Lords who have taken part in this debate but to the financial services industry, which was hoping for a more definitive outcome.

Letting the opportunity for legislating in this Bill go by, even if only by way of a regulation-making power, is a major loss. I am struggling to understand how the Treasury could have got itself into this position. The need to deal with tough legacy contracts is most certainly not a new issue. The fact that both contract continuity and safe-harbour provisions were an issue for the financial services sector has been known for more than a year. In the US, there is already draft legislation for New York law, and even the EU has brought forward a partial solution. But the Treasury seems like a rabbit staring into the headlights, too frightened to move. This does not auger well for the UK’s ability to build and maintain our financial services sector as world-leading, which I thought was one of the aims of my right honourable friend the Chancellor of the Exchequer.

We cannot blame the suffocating bureaucracy of the EU any more if our financial services sector is held back or harmed. Taking back control requires that the Government take responsibility for their role in making the UK a good place for financial services firms. Their inability to deal with the issue of tough legacy Libor contracts in the Bill is not a good look.

The Government and, in particular, the Treasury need to take a long, hard look at themselves and work out if they are yet up to the task of supporting this sector, which is so important to the UK as a whole. Their ability to act at pace and decisively is important; I do not yet detect that they are showing those characteristics. Having said that, I was grateful that my noble friend confirmed that the Government remained committed to a framework for an orderly transition from Libor next year, and that they are taking this seriously and will find a way forward. She did not, however, indicate what timeframe it would be decided in. She ought to be aware that the financial services sector is watching and expects the Government to take this forward.

I am grateful for the opportunity to discuss progress with the Economic Secretary in due course, but discussion with me is not the most important thing. I think it is telling Parliament what is to be done, when and how it is to be done, and telling the financial services sector, which needs certainty for the way forward. It is with considerable regret that I beg leave to withdraw my amendment.

Amendment 4 withdrawn.

Financial Services Bill Debate

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Department: Cabinet Office

Financial Services Bill

Baroness Noakes Excerpts
Lord Holmes of Richmond Portrait Lord Holmes of Richmond (Con)
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My Lords, it is a pleasure to follow the Minister. In doing so, I declare my financial services interests as set out in the register. I would like to be the first to offer my support for Amendment 14 and what it seeks to achieve. I congratulate my noble friend on the decision to use the affirmative procedure to bring these powers into force.

I will now speak to Amendment 35 in my name. The thinking behind it is quite straightforward: financial exclusion has dogged our nation for decades, ruining individual lives and putting down potential. Solutions exist and thousands of people are working so hard in this area, but we need to do more and we need more innovation: hence the two elements in Amendment 35. It seeks to give the Bank of England—our central bank—a more significant role when it comes to financial exclusion. The Bank has an enviable brand, respected right across the UK and revered around the world. This brand could be well put towards solving the problem of financial exclusion.

The first part of Amendment 35 seeks to give the Financial Policy Committee of the Bank of England an objective to monitor financial exclusion. As noble Lords know, the FPC is responsible for financial stability in the UK. I believe there are 407 billion new reasons to take this opportunity to reconsider financial stability and include financial exclusion within the remit of the FPC.

The second limb of the amendment seeks to suggest the opportunity for the Bank to offer basic bank accounts to those who find themselves financially excluded. The take-up of bank accounts for those financially excluded is not just a measure of what is currently available from retail providers. The history of those individuals also plays a key part, so, again, the brand and the central place of the Bank could play a critical role here. If we considered some of those accounts potentially being digital accounts—perhaps central bank digital currency accounts or digital pound accounts—the Bank might play a critical role in addressing digital as well as financial exclusion.

The Old Lady of Threadneedle Street could be not just lender of last resort but potentially, through Amendment 35, provider of first support for those individuals en route to financial inclusion. Provider of first support is certainly worth a thought. Does the Minister agree?

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I shall speak only in respect of Amendment 35. My noble friend’s amendment is very well intentioned, covering financial exclusion and basic bank accounts. Despite basic bank accounts having been in existence for nearly 20 years now, there remain problems with take-up. The know-your-customer rules, about which my noble friend Lord Holmes of Richmond raised concerns in Committee on this Bill, also make life difficult for individuals trying to access them. It is no secret that the banks regard basic bank accounts as a costly burden that they have to bear, which is probably at the heart of some of the issues.

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Lord Blackwell Portrait Lord Blackwell (Con) [V]
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My Lords, I should like to speak to Amendment 37A in my name and remind the House of my former interest as chairman of a regulated bank until the beginning of the year.

As the noble Baroness, Lady Bowles, set out, within the group there is a range of amendments that seek to serve the same purpose and there is a lot of common ground, as indeed there is in the letter of the Economic Secretary that was circulated today. All the amendments reflect a broad consensus, as expressed in previous stages of the Bill, that with the new rule-making powers post Brexit, there is a need to establish more formal parliamentary scrutiny. There has been consensus in the debate that scrutiny requires a committee charged with that role and appropriate technical support. I and others have made the case that that should involve a joint committee of both Houses, although that is not for this legislative stage.

There is also agreement in all these amendments that where regulators precede their regulation with a public consultation, the information should be provided to Parliament at the same time to allow time for it to comment and its views to be taken into account before the rules are finalised. There is also common ground that regulators should take note of Parliament’s views and respond in some form.

I therefore have some sympathy with the amendment, and Amendments 19 and 20, moved and spoken to by the noble Baroness, Lady Bowles, but I prefer mine because those amendments, particularly Amendment 20, are overly prescriptive on the nature of the information and the interaction between the regulator and a parliamentary committee. It should be up to the committee charged with this responsibility to set out exactly the information it wants and how it should interact, as a parliamentary, rather than legislative, matter.

My amendment also adds the requirement for Her Majesty’s Treasury to set the regulations through secondary legislation, to take note of the parliamentary scrutiny and to bring forward statutory instruments to change the secondary legislation that provides the legal framework for rule-making, which may be a necessary response to the comments made. That is also fully consistent with the Economic Secretary’s letter.

The big divide is between my amendment and Amendments 45 and 48, which introduce a requirement for parliamentary approval of rules before their introduction, other than in exceptional circumstances. Such a requirement would fundamentally change the relationship and role of regulators, originally established as independent, apolitical experts acting under parliamentary laws. Of course, regulators should be subject to scrutiny in their role but for Parliament to approve rules before they are enacted removes the independence of the regulators, effectively thereby making Parliament the operational rule-maker and those rules more subject to political views and intervention. We do not impose that ex-ante approval of rules on any other regulator in any other sector, so far as I know. I cannot imagine that our expert regulators in the financial services sector would be comfortable operating under those straits, whereby anything they did had to be pre-approved by Parliament.

The case for parliamentary oversight is unanswerable, but the proper regime is for Parliament to charge the regulators with independently operating the legal framework that it sets up, and then for Parliament to scrutinise how they operate those responsibilities and to change the legal framework if it wants to change the outcome, rather than Parliament seeking to supervise and approve the detailed rule-making on a day-to-day basis. Rather than wait for future legislation, I hope my noble friend the Minister will find it possible to support my amendment. Failing that, I hope the House will clearly reject Amendments 45 and 48 and the huge —and, in my view, undesirable—shift in the relationship between regulators and Parliament that they would represent. I look forward to my noble friend’s response.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I have added my name to Amendments 45 and 48 in the name of the noble Lord, Lord Eatwell. I also support the intent behind the amendments in the name of the noble Baroness, Lady Bowles of Berkhamsted, and I know that she too supports his amendments. As has been said, these amendments concern one of the key issues that emerged during scrutiny of the Bill: the parliamentary accountability of regulators and the scrutiny of their actions. As already noted, there was widespread agreement around the House at Second Reading and in Committee that Parliament should have a role in scrutinising the rules that the FCA and PRA may make under the new rule-making powers created by the Bill.

Of much greater importance will be what happens when the Government expand the rule-making powers of the FCA and the PRA, as they have outlined in their consultation document on the review of the financial regulation framework. What we do in the context of the Bill is clearly important in signalling what we expect in the context of a larger shift in rule-making powers, if that is what the Government decide to do following consultation. This is particularly important because the Government’s analysis of parliamentary scrutiny in their consultation document was not encouraging; it was largely a defence of the existing committee activities in each House, with no regard to the new circumstances created by the extensive new rule-making powers. The Government—somewhat surprisingly, given their excellent Brexit credentials—seem not to have taken on board that the scrutiny context has changed significantly with the repatriation of financial services regulatory powers from the EU. That context should drive how we see the way forward.

Since our debate in Committee, my noble friend Lord Howe has made available to us the texts of letters from the PRA and the FCA which broadly say that they will do whatever Parliament decides, which is only right and proper. I do not think the letters add much to the analysis of the issues we debated in Committee, but they nevertheless demonstrate a constructive willingness to co-operate with parliamentary scrutiny. When my noble friend responded to our debate in Committee, I was not filled with confidence that the Government really understand the dimensions of the issues around scrutiny and accountability in the context of these additional rule-making powers. I have seen the rather late-in-the-day letter from the Economic Secretary which landed in our email boxes this afternoon. I shall be kind and say that the direction of travel is positive, but we have not yet reached a satisfactory landing point for this debate. I expect we will continue to pursue this issue well beyond the passage of the Bill.

As my noble friend Lord Blackwell knows, I do not support his Amendment 37A because it is a rear-view mirror amendment. I strongly believe that Parliament should have the opportunity to get involved with the rules made by the FCA and the PRA in time to influence their final shape. It is not satisfactory to think that ex-post scrutiny is an effective mechanism for parliamentary involvement. I do not believe the independence of the PRA and the FCA is threatened by this intervention in how rules are made, given the context of the very significant new regulatory rule-making powers expected to be devolved to them. That is why I support the amendments in this group in the names of the noble Lord, Lord Eatwell, and the noble Baroness, Lady Bowles of Berkhamsted, which provide a much better basis for Parliament’s future involvement in additional rule-making powers.

Lord Davies of Brixton Portrait Lord Davies of Brixton (Lab) [V]
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My Lords, these amendments are all on the same broad theme. As the previous speaker mentioned, there is a broad consensus that something needs to be done to provide a formal role for parliamentary scrutiny in the work of financial regulators. I do not want to detain the House, but I will take the opportunity to emphasise points that I have made at earlier stages. The basic question, to me, is: who regulates the regulators? The question is why we should trust the regulators; the answer is openness and engagement. Clearly, we have a particular interest here but can, I believe, contribute massively to the work of the regulator.

For us to raise these issues is not to question the expertise or good will of the people who serve on the regulators’ boards or work in their offices. It is simply wrong to assume that, once appointed, they can be left to get on with the job. As is apparent in the debate, there is clear consensus about the need for scrutiny. That is not contested. Obviously, there are clear reasons why they would benefit—the expertise of this House is a factor—but my particular concern is to establish systems that minimise the risk of regulatory capture. This is the experience, widely found, whereby regulators tend to become dominated by the interests they regulate and not by public interest.

I emphasise that this is not about corruption; it is more, in my mind, a social and cultural problem. I do not think the concept, in theory, is contested. The answer is to strengthen and develop the widest possible involvement of all sorts of bodies in the work of the regulators. Clearly, Parliament has a particular role and these amendments explore possible approaches to it. I hope the Minister can say a bit more than what was in the letter. Does the Minister consider regulatory capture to be something that occurs, and where the systems that are established address it and minimise the risk?

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Lord Stevenson of Balmacara Portrait Lord Stevenson of Balmacara (Lab) [V]
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My Lords, I speak in support of the amendments just proposed by the noble Lord, Lord Sharkey, which I have signed. One’s heart goes out to him—it must be very difficult to make a speech of this complexity and passion with all these breaks. Despite the technical difficulties, however, he has made the case for action very well, and as co-chair of the all-party parliamentary group on these issues he is very well briefed on the situation faced by these fellow citizens of ours, and the extra costs that they face. It is indeed a very difficult situation, and one hears a lot of despair when one talks to these people.

I am sure that when he responds the Minister will, as the noble Lord, Lord Sharkey, hinted, dwell at length on the numbers of this group in various categories. There is of course a debate on how the prisoners can be split up—I think that the only thing that we agree on is that the total is probably about 250,000. As with the noble Lord, Lord Sharkey, however, my argument is not about the numbers. Simply put, it is clear that a significant number of people, through no fault of their own, cannot exercise the choices about their mortgage that the rest of us can. While some would argue that this is the direct fault of the Government, I think that someone needs to take responsibility for providing a fair outcome for those who are in a position to take advantage of it.

As the noble Lord, Lord Sharkey, says, this group of amendments offers two options: one that focuses on what the FCA might do within the parameters set by the Bill and another—37B, a late amendment that we drafted for Report—that suggests that the Treasury might wish to take powers to act in the way that is most suitable for it. Both have merits, in their ways. As the noble Lord, Lord Sharkey, said, they have detailed implications that need to be followed through carefully. My preference would be for Amendment 37B, for the very good reasons set out by the noble Lord, Lord Sharkey. If, as he said he might, the noble Lord decides to test the opinion of the House, we will support him.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, the amendments in this group are misconceived, for a number of reasons that I shall explain. I have much sympathy with the plight of mortgage prisoners, who find themselves in a difficult position as a result of taking on debt when market conditions and regulation allowed mortgage lending in ways that are not generally possible now. We have to remember that many of the borrowers we are talking about would not qualify for a mortgage in today’s environment, either because of the type of mortgage that they have or their own financial circumstances. This is not to blame them, but it is a relevant fact.

Mortgage prisoners are not the only groups who are facing financial problems. Covid-19 has brought financial stress for many individuals and families, and indeed the problems of mortgage prisoners may have increased during the pandemic. Any solutions for mortgage prisoners need to be put in the context of all who are facing debt problems, and we must be careful that solutions for one category of financial distress are fair and proportionate.

Covid-19 has also caused delays in the implementation of the FCA’s initial solution, which relaxed the regulatory affordability rules. We do not, therefore, know how effective those will be in solving the problems of mortgage prisoners, and we should be wary of leaping to further solutions until existing remedies have had time to take effect.

Although a number of statistics have been cited by the supporters of the amendments, hard data on the mortgage prisoner population are not readily available. This was underlined in last year’s report by the London School of Economics, and the FCA has never claimed to have a perfect picture. Although the report by the group UK Mortgage Prisoners purports to offer a definitive analysis, its membership is only a fraction of the number potentially within the mortgage prisoner net, so its report should be treated with appropriate caution. It is hard to make policy in this environment.

The amendments include a cap on standard variable rates—SVRs—for all mortgage prisoners with inactive or unregulated lenders, plus two approaches for making new fixed-rate deals available to those who are basically good payers. The proposal to cap SVRs responds to a fairly vociferous demand from lobby groups. Amendment 21 would cap SVR rates at 2 percentage points above base rate. The result would be a rate broadly aligned with the competitive rates available in the active mortgage market, but those rates are available only to low loan-to-value ratios, and to borrowers with the most robust financial profiles. The market rates for riskier high LTVs are probably twice that level, even if the personal financial profile of the borrower is resilient. In addition, there is not an unlimited supply of fixed-rate deals. Many lenders simply do not offer fixed-rate deals on high LTV loans, especially when combined with weaker personal financial profiles.

The amendment says that mortgage prisoners with inactive or unregulated lenders should have rates that are available only to other mortgage borrowers who have completely different loan and borrower characteristics, and it would apply to them even if they did have opportunities to switch mortgages, which the FCA estimates is roughly half the total population. It is unsurprising that the LSE did not recommend this, and noted that it could create market harm. The FCA’s own analysis, comparing the rates paid by mortgage prisoners who are stuck on SVRs and cannot switch, indicates that the real problem is only about 40 basis points, if the correct comparator is used. I do not accept the assertion of the noble Lord, Lord Sharkey, that that is an incorrect calculation. Those 40 basis points are no proper foundation for market intervention.

As the noble Lord, Lord Sharkey, explained, the proposals for the availability of fixed-rate mortgages for good payers in Amendments 21 and 37B take slightly different approaches. Amendment 21 says that FCA rules should

“make new fixed interest rate deals available to mortgage prisoners”,

while under Amendment 37B the Treasury must provide for them to be offered fixed-rate mortgages. Neither amendment says how this can be achieved.

In the case of Amendment 21, it would be a startling new direction for regulation if the FCA could tell regulated lenders that they were obliged to offer particular deals to people who by definition are not their own customers. As for Amendment 37B, clearly the Treasury will not itself be providing loans, as it is not in the business of retail lending. The Treasury also has no power to tell banks or building societies to make any particular loans. If either of the amendments resulted in regulated mortgage providers being told that they had to lend to certain groups of non-customers, the impact on the financial services industry would be chilling.

It might be possible for the Treasury to procure that regulated lenders offered fixed-rate deals if the Treasury itself guaranteed all or part of the debt, as it does for some first-time buyers. But that is not what Amendment 37B says, and it would not be a plain reading of the proposed new clause to cover such an intervention.

As if telling lenders what products they should offer and to whom were not bad enough, both amendments go on to try to cap the price of these fixed-rate deals. Amendment 21 would do this at a rate to be fixed by the FCA, using LTV ratios and average rates available to customers of active lenders. This ignores the basic fact of life that mortgage prisoners who have not remortgaged are not like other borrowers, and do not satisfy the lending criteria of most mortgage lenders—whether that is because the LTVs are too high or because the other financial characteristics of those borrowers place them outside the risk appetite of active lenders. For some borrower circumstances there is no market rate at all, and it is not right to assume otherwise.

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Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, at this late stage of the evening I shall not try to emulate the previous speaker’s length of contribution—indeed, I shall deliver a slightly shorter version of what I had originally intended to say. I speak in favour of Amendment 24, in the name of my noble friend Lady Neville-Rolfe.

Amendment 24 focuses on ex post analysis of the impact of changes introduced by the regulators or the Government. It therefore gives us a different lens on the impact that interventions have had in practice. My noble friend normally focuses on impact statements, which are ex ante evaluations and often suffer from highly questionable assumptions and confirmation bias. When we deal with ex post analysis, however, we can rely on outcomes and facts. That kind of analysis is really important when helping to shape policy going forward or correcting any mistakes in policy already introduced, so I support this amendment. I personally would not have gone for an annual report, because the ability to see the cumulative impact of changes is quite important but difficult to track in an annual report. However, a report is an extremely good idea.

The noble Lord, Lord Sharkey, has tried to add a consumer focus to the report that my noble friend Lady Neville-Rolfe has proposed. I think it is better focused on small business, innovation and competitiveness; to add consumer matters would dilute the focus of that report. I am not against a report on consumer protection but it would not help to stick it in the middle of something focusing on issues such as competitiveness.

The noble Baroness, Lady Bennett of Manor Castle, will not expect me to support her Amendment 37. The analysis we got from her and the noble Lord, Lord Sikka, seemed to be of a world I do not really recognise. I believe the financial services sector is a great success story for this country and makes a big contribution to our economy. A number of the things that noble Lords cited seemed to be clinging to an outdated bricks-and-mortar vision of what banking is really about; frankly, that is not the world we live in today. Just as we have seen that bricks-and-mortar retail is not the way forward, it will not be for banking either. We must not keep tying ourselves to the way things were in the past.

Baroness Kramer Portrait Baroness Kramer (LD)
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My Lords, given the hour I shall also be very brief, but I have to say I rather like the amendments in this group. I like Amendment 24, as amended by Amendment 25—I do not care if it is a separate chapter. But it is quite dangerous to get tangled into issues around competitiveness without making sure there is a lens on consumer protection at the same time. Many small businesses fall into the consumer category in reality, certainly the micro end of small businesses.

What I like about this amendment is: what you measure, you manage. We are so constantly focused on change, new regulation and new rules, without ever going back and looking at the consequences of what we have done and trying to identify what worked, what did not and where the gaps are. It seems that this proposal goes absolutely in the right direction.

There is something interesting in Amendment 37 because one of the big questions that has never been answered is: how does our financial services industry impact on the real economy, in contrast to something much more circular within the financial services economy? I do not think that one is good and the other bad but they are very significant questions, particularly in a country where we have such a dominant investment banking culture, which does not necessarily provide a wide range of relevant services to a great deal of our economic base—particularly our small business base. There is a very interesting question wrapped up in all of that. The approach of saying “We need to look at this in a serious and consistent way, perhaps regularly” strikes me as important when feeding the strategy which then informs the way in which the regulator, the Treasury and the Government behave.

Financial Services Bill Debate

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Department: Leader of the House

Financial Services Bill

Baroness Noakes Excerpts
3rd reading & Report stage
Monday 19th April 2021

(3 years, 1 month ago)

Lords Chamber
Read Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 162-R-III Third marshalled list for Report - (14 Apr 2021)
Baroness Neville-Rolfe Portrait Baroness Neville-Rolfe (Con)
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I start by sharing the powerful words of my noble friend the Deputy Leader on the sudden loss of the noble Lord, Lord Judd, who contributed so very recently to this Bill and whom I remember well as an effective Minister of State at the FCO when I was a young civil servant. His death is a great loss.

As I understand it, Amendment 34 is designed to improve the culture of the financial services sector—a sentiment that I empathise with—although it would do so by adding an extra layer of regulation through a stakeholder supervisory board. I am against this for the FCA, the PRA and other regulators. I have substantial experience of regulation from my Civil Service past, as an executive and a non-executive of non-financial companies, as a Minister and, currently, as a non-executive of a small bank. In my judgment, adding an extra layer of board members without practical experience could have a perverse and negative effect.

For good outcomes, one needs clear, simple and outcome-based regulation, and company directors who take their responsibilities seriously and promote a good culture, with a focus on customers and protection, on risk and the good use of capital, on fraud and cyber, on the people who operate the business—from the top right down to the bottom—and on innovation and cost control. Above all, one needs directors who will challenge, get into the detail and be listened to.

I have been a non-exec for over 20 years and, until recently, there has not been enough attention paid to, or appreciation of, the challenge function and directors who challenge. Cases such as the HBOS scam, which we have been concerned about today, are the result. This needs to change, in terms of the selection of non-executives and with strong internal challenge in the executive structure of companies. This applies to financial services companies and more broadly.

An extra layer in the form of a supervisory board will not solve the problems of culture that have been highlighted. It risks introducing a further confusion of responsibility. To my mind it is, I am afraid, a bad idea.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I am sure that the noble Lord, Lord Sikka, will not be surprised to find that I do not support his Amendment 34. In particular, as a former director of a supervised bank, I do not recognise the regulatory capture that he majored on in Committee and again today. In my experience, the relationships are always challenging and, sometimes, worse than that.

I have two main reasons for opposing the amendment. First, a supervisory board sitting over the top of the existing regulators undermines a fundamental characteristic of regulation in the UK—namely, that regulators are independent. That means that they are independent of government, certainly, and of Parliament and anyone else who thinks that they might have an interest in what they do. They are certainly accountable for delivering against their objectives and expect to be scrutinised by Parliament, but they are autonomous bodies. This amendment runs against that.

Secondly, the regulators already have governance structures that oversee the work that the executives undertake. In the FCA, it is the FCA’s own board, which has a chairman and a majority of non-executive directors. I believe that the only executive on the FCA board is, in fact, its chief executive. In the case of the PRA, there is a Prudential Regulation Committee, which has Bank of England executives and outside members, and is chaired by the Governor of the Bank of England. More importantly, in governance terms, as the PRA is part of the Bank of England it is overseen by the Court of the Bank of England, which, again, is a largely non-executive body chaired by a non-executive, although it does have the governor and the deputy governors, including the head of the PRA.

Governance of the regulators is carried out in the way in which governance in the UK is normally done. It covers the very things mentioned in proposed new subsection (8), which is therefore duplicative. If there are concerns, they should be dealt with within the organisations concerned, without writing reports to Parliament. I believe in transparency, but there is a point at which transparency becomes counterproductive, and I am sure that this amendment is way beyond that point.

Accountability to Parliament takes many forms, a key one being the annual reports that are laid before Parliament, setting out the regulators’ performance against their objectives, which is required by existing statute. It really is difficult to see what added value this amendment would create.

The amendment is also deficient in a number of respects. Perhaps the most glaring is the reference to the “Executive Board” of the PRA and of the FCA. As far as I am aware, there is no such thing specified in legislation or the governance arrangements of either body. I believe that each regulator has an executive committee or equivalent, but they do not have an “Executive Board”, with a capital “E” and a capital “B”.

The amendment would require the exclusion from the supervisory board of anyone who might actually understand what the PRA and the FCA actually do. Proposed new subsection (5) would disqualify “current and past employees” not just of the FCA and the PRA but of any organisation that they supervise. I have never thought that ignorance was a good qualification to be a member of a board.

Proposed new subsection (10) talks about “open meetings” but does not explain what that means in practice. Proposed new subsection (11) says that all the supervisory boards papers must “be made publicly available”, but it seems to pay no heed to the need for confidentiality or data protection. I could go on. These are unnecessary and ill-thought-out proposals, and I hope that my noble friend the Minister will not accept them.

Lord Bishop of St Albans Portrait The Lord Bishop of St Albans [V]
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My Lords, I will speak in support of Amendment 34, in the name of the noble Lord, Lord Sikka, which is an interesting contribution to the question of governance. I am keen that we find any ways that we can to speak into those organisational cultures that every industry adopts and promotes, and which sometimes lead to groupthink.

There are times when it takes someone from the outside to ask intelligent questions. I am reminded of Her Majesty the Queen asking the Bank of England why there had been a financial crash back in 2008, when many people in the industry, who were paid extraordinary amounts of money because of their supposed expertise, had not spotted that it was coming. I do not think that this is about inviting people who are ignorant to come on to boards; this is a question about whether there is a wider contribution that might be very useful and of help to thinking about issues of governance responsibility.

I will comment briefly on a further development in the FCA’s investigation into car finance, which I have referred to in the House in the past. Since the FCA introduced its new rules banning discretionary commission models in January 2021 and subsequently closed its investigations into Lookers, the car dealership firm, for possible mis-selling, it was revealed that the UK’s accounting watchdog, the Financial Reporting Council, was investigating accounting giant Deloitte for its role in auditing the very same Lookers that the FCA had only just ended its investigation into a few weeks earlier. The FCA never confirmed or dismissed whether there had been any mis-selling, remarking that it had made its concerns clear and did not intend to impose penalties on this FTSE 250 firm. However, the opening of a new investigation relating to Lookers raises questions about the thoroughness of the original FCA investigation: were all aspects investigated?

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Baroness Bennett of Manor Castle Portrait Baroness Bennett of Manor Castle (GP) [V]
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My Lords, before moving the amendment, I join the noble Earl, Lord Howe, the noble Lord, Lord Sikka, and the noble Baroness, Lady Kramer, in expressing my sadness at the death of the noble Lord, Lord Judd. I send my condolences to his family. The noble Lord, Lord Judd, was the first person to ask me a question while I was in the middle of delivering a speech in your Lordships’ House and did so in his characteristically kind and generous manner. It was a good lesson—perhaps intentionally so—for a newbie.

In light of our time-truncated debate in Committee, Amendment 36 in my name, also backed, kindly, by the noble Lord, Lord Sikka, is a somewhat adapted version of the amendment that I presented there. It would create a UK equivalent of the EU’s Finance Watch. I have chosen at this time to use this name for clarity as well as pronounceability.

I really must thank the noble Lord, Lord Eatwell, who made the case for this amendment—intentionally or not, I am not sure—in our previous session on Report. He suggested that there were flaws in my Amendment 37, criticisms with which I would not necessarily disagree. He said the amendment

“asks the FCA and the PRA to—to use a phrase that has become popular today—mark their own homework. They are not really the right people to assess themselves; there are plenty of research institutes around this country that do a first-class job of assessing exactly these issues. However, we have not brought them together very well.”—[Official Report, 14/4/21; cols. 1425-26.]

I highlight the last sentence in particular because bringing together expertise, knowledge and analysis is exactly what “UK Finance Watch” would be designed to achieve—to bring together the undoubtedly wide range of expertise around the country to provide independent technical advice to enable Members of your Lordships’ House and the other place to contribute to public debate.

I set out in Committee and in briefings circulated before the Committee debate a detailed explanation of what the comparable EU body has achieved, and I will not repeat that here; nor will I repeat comments I made then about the thinness of the scrutiny of this Bill by your Lordships’ House, except to repeat that that is not a criticism of those here but rather a call for many more Peers to be engaged. The financial sector impacts on every aspect of modern life. We live in a financialised society, whether it is hedge fund ownership of care homes, water supplies or the PFI contracts and their successors doing such damage to our schools and hospitals. Peers who are experts in these areas have interests in these areas and many other Peers from all aspects of society need to be engaged in debates on financial Bills. But that is clearly not customary and could easily be daunting.

However, there is a need for a co-ordinated independent source of information, expertise and detailed knowledge that can, in some way, match the lobbying firepower and influence. I have in mind here the position of remembrancer, to empower Peers concerned with every aspect of society in overseeing the impact of the financial services laws and regulations that are so crucial. This would help the House obtain the complete picture that I was calling for in the amendment last week.

I thank the noble Baroness, Lady Kramer, for her comments in that debate. She said that

“one of the big questions that has never been answered is: how does our financial services industry impact on the real economy, in contrast to something much more circular within the financial services economy?”—[Official Report, 14/4/21; col. 1425.]

She has entirely identified what I was seeking to do with that amendment. This amendment would not, as drafted, achieve that aim, being focused on ensuring the quality and effectiveness of legislation and regulation. However, when I put the words of noble Baroness, Lady Kramer, and the noble Lord, Lord Eatwell, together, if UK Finance Watch proved to be a network, a clearing house—as the noble Baroness, Lady Kramer, suggested it could be in our debate in Committee on a similar amendment—of the information that the noble Lord, Lord Eatwell, referred to, then we would have made real progress in the oversight and public legislative understanding of what is currently a far too opaque and little-understood area. As the right reverend Prelate the Bishop of St Albans said earlier, we need far more people asking questions about the financial sector from the outside, but they need help to be able to do that effectively.

I feel that the noble Baroness, Lady Kramer, made the arguments for me but I note that Greensill is just the latest brand name for which the UK financial sector will be famous—or infamous. I hope this model being based on one in the EU does not prejudice noble Lords or, indeed, the Government against it. Being world leading surely means looking around the world, seeing best practice and copying it.

It is not my intention to divide the House on this amendment. The oversight and scrutiny of regulation and laws for our financial sector is clearly an ongoing debate of considerable concern to a wide range of Members of your Lordships’ House. I beg to move.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, we simply do not need another body set up to look at the financial services industry. It is already in effect a core function of the Treasury and if the Treasury thought that it needed some help in identifying the issues that the proposer of this amendment identifies, it does not need the cover of primary legislation to set one up. In addition, Parliament itself has always taken a keen interest in the financial services industry. The long-standing Treasury Select Committee of the other place examines regulators as well as key emerging themes in relation to financial services and your Lordships’ House has recently created an Industry and Regulators Committee, which is having its first meeting as we speak. Indeed, the noble Lord, Lord Eatwell, the noble Baroness, Lady Bowles of Berkhamsted, my noble friend Lord Blackwell and I are members of the new committee. Therefore, it should not surprise the House if in due course there is a focus on matters relating to the financial services sector.

I suspect that the subtext of this amendment is a belief that the financial services sector is wicked and has a negative impact on the UK economy. I do not believe that belief is widely shared in your Lordships’ House. On the other hand, there are few—if any—Members of your Lordships’ House who think that the financial services sector is perfect, and that includes me. The important point is that we already have the scrutiny mechanisms that I have described to give a proper focus to the activities and the impact of the financial services sector. I agree with the noble Baroness, Lady Bennett of Manor Castle, that this amendment should not be pressed to a vote.

Lord Sikka Portrait Lord Sikka (Lab) [V]
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My Lords, it is always a pleasure to speak after the noble Baroness, Lady Bennett of Manor Castle. The key issue, which has been touched on by a number of speakers, has been how to secure effective, responsible and accountable regulation. This amendment presents another model. We have already heard about a number of models.

Numerous aspects of life have been financialised, and the finance industry affects every household and almost every walk of life—all the more reason to examine its effects on the economy and daily life. The last 50 years have been littered with examples of mis-sold financial products. We have had a banking crisis in every decade since the 1970s, but still the finance lobby is too powerful for Governments to resist. We need structures and policies that can mitigate the negative effects of the finance industry.

Financial Services Bill Debate

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Department: Leader of the House

Financial Services Bill

Baroness Noakes Excerpts
Baroness McIntosh of Hudnall Portrait The Deputy Speaker (Baroness McIntosh of Hudnall) (Lab)
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The noble Baroness, Lady Noakes, has indicated a wish to speak.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, I spoke at length on this amendment on Report, and I will be brief today. The first part of the amendment proposes to cap SVRs at two percentage points over base rate. As my noble friend the Minister pointed out, this is a potentially dangerous market intervention with financial stability connotations. A recent study by the London School of Economics specifically recommended against this solution to the problem of mortgage prisoners. As my noble friend the Minister explained, it would confer a benefit on mortgage prisoners beyond what they could have obtained as customers of current mainstream mortgage lenders. The loan and borrower characteristics of mortgage prisoners often put them in the high-risk and therefore high-interest rate categories. It is just not fair to confer better terms than are available to borrowers with active lenders but in similar financial positions.

The second half of the amendment proposes that the FCA should make rules that some borrowers would be offered new fixed-rate deals, but this is probably incapable of operation given that the FCA cannot tell mortgage providers it regulates to whom they should lend and on what terms. Alternatively, if the FCA really could dictate to mortgage providers in this way, it would be a stake in the heart of financial regulation as it works in this country.

I have great sympathy for those who find themselves on high SVRs because they took out their mortgages with lenders that for whatever reason are no longer active in the market. However, we should be very wary of solutions that do not take account of the particular characteristics of these borrowers. It is a far from homogenous population with, at one extreme, borrowers who can and probably should remortgage, through to those who simply do not fit the risk appetite criteria of any active lenders. The devil really is in the detail, and across-the-board solutions such as Amendment 8 will throw up more problems than they solve.

My noble friend the Minister has explained how the Government are committed to finding practical solutions to help those trapped on mortgage terms unrepresentative of market rates on offer for equivalent mortgage situations. In the other place, my honourable friend the Economic Secretary said he was “absolutely committed” to working with the FCA to find practical solutions and to being in touch with active lenders to see to what extent they can help with this problem. I believe that he is sincere in his commitment and that we should await the outcome of the further work he now plans to carry out, which should come to fruition later this year. I urge the noble Lord, Lord Sharkey, not to press his amendment.