Financial Services Bill

Lord Blackwell Excerpts

Committee stage
Monday 1st March 2021 Grand Committee

[Lord Desai (Non-Afl)]

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

[Lord Blackwell (Con) [V]]

My Lords, I too support these amendments and welcome the fact that the Bill addresses these issues. While Libor may have been effective in the past, we all know that it was becoming an unviable way of setting rates and was subject to manipulation, in the way mentioned by the noble Lord, Lord Desai. It is therefore important that the regulators have taken a firm line in moving us on from Libor to other benchmarks. But, as my noble friend Lady Noakes set out, in doing that, there are lots of problems with continuity of contracts. The legislation is necessary to help address those issues and ensure that partners in contracts move together to a new common contract based on a synthetic Libor.

We have to recognise that no substitute for Libor will have exactly the same characteristics. There is no perfect substitute. Most contracts will be based on SONIA, the sterling overnight index average rate, but getting SONIA terms that have the same characteristics over time is not perfect, so there will be winners and losers. That is one reason why it is important that, to give certainty, the legislation requires the regulator to ensure that synthetic Libor interest rates are taken in the contracts as substituting for Libor for both parties.

As my noble friend Lady Noakes set out, however, some parties will not accept that. They will take the change in the contract as the basis to believe, argue or litigate that the contract has been abrogated. Some parties will be out of the money in a contract and it will simply serve their convenience to choose this method to abrogate the contract. Safe harbour is therefore an important secondary requirement. If banks are following the requirement of the regulator to stop using Libor, and following its instructions in substituting synthetic Libor, they cannot then be subject to litigation from counterparties claiming that, by following the instructions of the regulator, they have abrogated their contracts. This is an important thing for those contracts, which could, in particularly vulnerable contracts, involve vast sums of money.

The Government have launched a consultation on this, but I do not think that is a reason not to legislate in the timescale of this Bill. The problem has been known about for many months—indeed, years—and has been discussed. I do not believe the Government need a consultation to understand that there is a problem or that it must be dealt with. During the passage of this Bill, if not in these amendments then in the Government’s amendments, it is important for this to be incorporated into the Bill. Otherwise, the uncertainty will go on far too long. Libor will come to an end and these issues will present themselves. This Bill is the opportunity to address them.

In taking this issue seriously, can my noble friend the Minister commit that the Government will bring back amendments, or accept these amendments, during the passage of this Bill through the House?

[Baroness Kramer (LD)]

My Lords, I know we have to accept the safe harbour provisions in Amendment 45, but it would be slightly less galling if we had not had to drag the FCA kicking and screaming to investigate the Libor scandal. As noble Lords know, it was finally revealed after a series of American journalists published an investigation into Libor; it then took parliamentarians months to actually get the FCA to do anything about investigating. It first did so because, by that point, the Bank of England was involved in manipulating Libor as well, although, as I think I said in my Second Reading speech, it intervened to try to provide some element of financial stability for the more honourable purpose of disguising to the world how badly the banks had been hit by the 2008 crisis. However, all of them had been aware for years that Libor was being manipulated.

I say to the noble Lord, Lord Desai, that this was no secret cartel; traders were shouting their required Libor benchmarks—the ones that would assist their bonuses—openly across the trading floors of various banks. There was nothing secret in this. At the time, under the UK approach—which is that anything not forbidden is permitted; since there was nothing to say, you could not lie in contributing to a financial benchmark —it was apparently not a criminal act or fraud. I do not think it ever even invoked the senior managers regime which came in later, but many of the players who were deeply involved in all this were obviously still around. It is a real stain on London.

I accept the safe harbour, but one of the things that saddens me is that some of those who will be hardest hit by the transition are small companies. Loans with spreads over Libor were not restricted to large, sophisticated companies; those companies will manage to work their way through this and make sure, if they are moving to a particular benchmark or negotiating a contract with the financial organisation they are set up with, that they do not come out damaged. However, many small businesses are exceedingly worried and have no idea which way to turn—do they get shifted to a new benchmark or stay with synthetic Libor? I hate to say this, but I think the assumption will turn out to be justified that, whatever happens, the amount they will pay in interest will be ratcheted up compared to the interest they would have paid had Libor remained. I find it very hard to conceive of banks saying, “We will move you to Sonia and you will pay less than you would have”. I am afraid there will be rounding up involved in all this. I am not sure how we provide any kind of fairness and justice, but maybe the Minister can talk about that.