Financial Services Bill

Lord Eatwell Excerpts

Report stage
Wednesday 14th April 2021 Lords Chamber

[Baroness Kramer (LD)]

My Lords, we do not oppose this amendment, particularly as we have the safeguard of the GDPR in place. However, I want to make one comment. One of our major frustrations with the regulator is how slow it has been to pick up on issues—how much information seems to have come its way that there is wrongdoing, yet all its actions seem to be delayed. We went through example after example of that in Grand Committee, Blackmore and London Capital being just two of the latest examples, and I think I have even missed two more scandals that have occurred in the last couple of weeks. I hope there are some other ways in which we can put pressure on the regulator to act and to do so in a more timely manner, and that it will not see this extension as an opportunity to relax and allow more time to pass before it begins to take action when it is needed.

[Lord Eatwell (Lab)]

My Lords, this seems to be an entirely sensible modification of an overly restrictive time limit on prosecutions for market abuse, and the Minister has certainly made a strong case.

I have one question associated with the Government’s note that accompanied the amendment. The Government stated that they had not found any clear rationale for the five-year limit applying in EU law and could see no reason for maintaining it in UK law. They said they understood that it had also been raised as an issue by EU regulators and they were considering a change to their law. Given that the EU is also considering a change, why have the UK Government not co-ordinated the change in our law with theirs? Is it not the Government’s “go it alone” approach that has been so damaging in the quest for equivalence? Could the Minister outline how the Government’s current stance on this change fits with the Memoranda of Understanding on trade in financial services with the EU?

[Baroness Penn (Con)]

My Lords, I thank noble Lords for their remarks in support of the amendment. As I have said, I recognise that the amendment has been tabled at a late stage of the Bill and that it would have been preferable to have included it earlier. However, as it seems the House agrees it is important that the FCA is able to effectively pursue its investigations into potentially criminal conduct, it is right that we make this minor change to ensure that it can continue to effectively identify, investigate and prosecute complex cases of market abuse. I reassure the noble Baroness, Lady Kramer, that this will not be seen as an opportunity by the FCA to take its foot off the pedal in such cases, but where it is undertaking this work it is essential that it is able to continue if the case spans a period of longer than five years.

To the question asked by the noble Lord, Lord Eatwell, the Government are committed to co-operation with the EU but it is now responsible for its own law and is aware of this issue and we are responsible for ours. As I set out in my opening remarks, without action now in this Bill the time limit would come to bite in July this year, and there is therefore an urgency with which we need to act. While we will continue to co-operate with the EU, it is right that we take this opportunity to address what we view as an unnecessary restriction on the retention of data.

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I very much look forward to the Minister’s comments. The letter from the Economic Secretary included a “must have regard to”—a useful phrase. Regard must be had to parliamentary responses to consultations. We can argue about whether the consultation process is sufficient or adequate, but that phrase is only in a letter; it is not in the Bill. I wonder why the Government are not willing to put some of the commitments that they are willing to describe either on the Floor of the House or in letters, into a form that could go on the face of a Bill, and so give this House confidence that the direction of travel is a direction that we can live with.

[Lord Eatwell (Lab)]

My Lords, I would like to begin by acknowledging the considerable efforts that have been made by the noble Earl, Lord Howe, to provide greater insight and information in the form of letters from the CEOs of the FCA and PRA, and to encourage the Economic Secretary to the Treasury to provide his letter today, all of which have enhanced and coloured this debate. These letters have been quoted by many speakers. I am most grateful to the noble Earl for his strenuous efforts and commitment to making this legislation useful.

In Committee, we had some valuable debates on parliamentary scrutiny and the activities of the financial services regulators that dealt with the important point that those activities are now entirely repatriated from the European Union. It is clear, as Sam Woods, the CEO of PRA, states in his letter to the noble Earl, Lord Howe, that

“it would seem natural to us that, if some rulemaking responsibilities previously conducted at EU level move to us, Parliament might choose to evolve the way it scrutinises that activity.”

Mr Woods is entirely correct, as the debate this evening has demonstrated.

The role the European Parliament has in the development of financial regulation reflects the EU’s preference for embedding high levels of technical detail in EU primary law. It has been made clear by the Treasury, notably in the consultation document on the regulatory framework review, that the approach to be developed in the UK is to be quite different. It is to be a principles-based approach, in which

“the setting of regulatory standards is delegated to expert, independent regulators that work within an overall policy framework set by Government and Parliament.”

However, it is also evident from that consultation document that in respect of parliamentary scrutiny, there has been an important—shall I say—oversight or error. As was made clear in that document, the FCA and the model of regulation introduced by that legislation continue to sit at the centre of the UK’s regulatory framework. However, it is FiSMA that sits at the centre. FiSMA is the model of regulation that was introduced, but it was produced in 2000, when the UK was a long-standing member of the European Union and UK politicians participated in the scrutiny of financial regulation at EU level. The noble Baroness, Lady Kramer, has emphasised this point.

The Treasury has failed to take into account the need for a different domestic approach to democratic scrutiny now we have left the European Union. Simply reproducing the structures that have worked for the past 20 years, as is done in chapter 3 of the consultation document, is just not good enough. This was the key issue debated on Second Reading and in Committee.

Powers returned from Brussels need to be redistributed between Parliament and the regulators. The nature of that redistribution is at the heart of our discussion. In the regulatory model adopted by the UK, an increase in the powers of the independent regulators is inevitable and necessary, as I agree they are best placed to take on the many technical functions previously handled at the EU level. But the inescapable conclusion is that this increase in regulators’ powers will need to be accompanied by new checks and balances. The role of Parliament in this new setting is what is at issue in these amendments.

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[Baroness Kramer (LD)]

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.

[Lord Eatwell (Lab)]

My Lords, Amendments 24 and 25 develop the notion of an information system—the information that will be provided by the FCA, PRA and the Government to feed into an assessment of the performance and impact of the financial services sector and the regulators. Amendment 37 goes much wider, as one might have gathered from its presentation, seeking to make, or ask for, a general economic assessment of the role of financial services generally within the UK, particularly the impact of the various regulators and the Treasury.

One of the themes particularly around the discussion of Amendment 37 was that this is not done. There are shelves of academic books that do this, and there are libraries of this material, but what has not happened is that it has not been brought together and assessed in a decision-making environment on a regular basis. The problem with Amendment 37 is that it 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. What is so valuable about Amendments 24 and 25 is that they are targeted on that bringing together—bringing information into what I have called the “New Scrutiny”.

I would be interested to hear the Minister reflect, when he sums up, on the information role that is represented by the amendment of the noble Baroness, Lady Neville-Rolfe, and the role that that sort of information system will play in our regulatory future.

[Earl Howe (Con)]

My Lords, Amendments 24, 25 and 37 return to an issue that I know is of keen interest to many in this House. They seek to introduce requirements to publish reports on the impact of financial services regulation and to undertake assessments of the impact of the financial services sector on the UK more broadly.

The noble Baroness, Lady Bennett of Manor Castle, many not feel able to assent to what I am about to say, but, as we consider this topic, we should remind ourselves of the vital role that the financial services sector plays in our economy, employing more than 1 million people nationwide. It is also a critical source of tax revenue, which has proved especially important during these difficult times. We can argue about how we should calculate the precise amount of such revenue, but, by any measure, it is very substantial. We also should not forget the role that the sector plays in enhancing the nation’s standing abroad. The UK exported over £50 billion-worth of financial and insurance activities in 2019, a trade surplus of £41 billion.

Amendment 24 would require the Government to publish a report on the “impact of measures” taken by the FCA, PRA and the Government to regulate this most important financial services sector. In particular, it seeks understanding of the impact of measures on small businesses, innovation and competitiveness. Amendment 25 would add “consumer protection” to the list of things that the Government would be required to report on.

Lest there be any doubt, the Government are wholly committed to ensuring that the financial services sector supports competition, innovation and competitiveness. I hope that this is evidenced by the last set of remit letters issued to the FCA and the PRA by the Chancellor, which requested that the regulators have regard to these three priorities when advancing their objectives and discharging their duties.

In respect of reporting, the FCA and the PRA both have a statutory objective to promote effective competition. What does that involve? It involves promoting a financial services framework that supports new firms to enter the market and grow, promotes innovation and allows successful, innovative firms to grow and thrive. Those, surely, are the key aims for the sector when we talk about effective competition.

I remind my noble friend Lady Neville-Rolfe that both regulators are obliged to prepare annual reports that analyse the extent to which their objectives, including this competition objective, have been advanced that year. Those reports are in turn laid before Parliament for scrutiny. Moreover, I should say to her that, under the Financial Services and Markets Act, the FCA and the PRA are required to publish cost-benefit analyses when proposing new rules. The regulatory initiatives grid, a relatively recent innovation, sets out the regulatory pipeline that allows the financial services industry and other interested parties to understand and plan for the timings of initiatives that may have a significant operational impact. The grid is published at least twice a year, so Parliament has a forward look at upcoming proposals in a material and transparent way.

Turning to my noble friend Lady Neville-Rolfe’s point about small firms, in my letter to her of 2 March, I set out the Government’s actions to support smaller innovative firms to grow to their full potential, including through the FCA’s regulatory sandbox and our support for the fintech sector. The amendment would therefore duplicate reporting obligations and arrangements that already exist.

I should also note the new accountability frameworks that the Bill puts in place for prudential measures. These require the FCA and PRA to have regard to UK competitiveness, among other things, when making rules to implement Basel or the investment firms prudential regime. Furthermore, the regulators will then be required to report on how having regard to competitiveness has affected their proposed rules.

On consumer protection, which is the subject of the amendment, let me first reassure noble Lords that the protection of consumers is at the heart of our existing regulatory framework. The FCA has an operational objective to secure an appropriate degree of protection for consumers and is required under the Financial Services and Markets Act 2000 to consult a consumer panel on the impact of its work. The panel ensures that consumers play an integral role in the regulator’s rule-making and policy development.

The FCA has repeatedly demonstrated its commitment to consumer protection. One of the key areas of focus in the FCA’s Business Plan 2020/21 is,

“ensuring…that the most vulnerable are protected”.

The FCA has also recently published guidance on how firms can treat vulnerable customers fairly. As consumer protection is one of the FCA’s statutory objectives, as set out in FSMA 2000, the FCA must already report on how consumer protection has been advanced in its annual report, as outlined earlier. Therefore, as with a previous amendment, the amendment would duplicate reporting that already exists. As regards the PRA, it is important to remember that it already has an important role in protecting consumers indirectly by promoting the safety and soundness of PRA-authorised firms. This means that consumers are protected from the significant distress and suffering caused by disorderly bank failures.

I now turn to Amendment 37, which would require regular reports on the impact of the financial services sector on a range of topics, including economic development and regional inequality. I have already set out some examples of the overwhelmingly positive impact that the sector has on jobs, productivity and tax revenues across the whole UK.