Financial Services Bill

Lord Hodgson of Astley Abbotts Excerpts

Tuesday 10th July 2012 Lords Chamber

[Baroness Kramer]

My Lords, I was delighted to add my name to Amendment 139A. The excellent speeches which precede me really laid out the case, so I have just a couple of comments. Although the financial services industry is currently the target of very much justified anger, I hope that this legislation sets a regulator in place which will last more than a decade. I think that the previous legislation lasted pretty much for 12 years. We have to take the long-term view and make sure that it is fit for purpose for the long term and when the period of correction within the industry has passed.

It also seems that the language is carefully crafted in such a way that it did not in any way encourage the regulator to look at this as an opportunity to take more risk but as an opportunity to make sure that there was healthy and sustainable growth within the financial services sector. Perhaps I may give a simple example: in a few later amendments we will look at social investment, which is one of the new fields that are beginning to gather some momentum. That is an aspect of the financial services industry which has initially gone to Luxembourg.

The City now is expressing serious interest in the opportunities. Many institutions in the UK could use those kinds of instruments. But the regulator has not been aware of the differences between that sector and other sectors and, therefore, the sensitivity of regulation necessary to support the growth in a new area. I think most people would agree that we are not talking about unethical behaviour or the kind of risk that might be involved in some aspects of the more casino side of investment banking.

There are many areas where there is huge potential going forward. It will be absolutely essential that the regulator takes that on board and is a supporter of the healthy and sustainable growth of this industry, both to support the real economy and the many direct jobs involved with the sector.

[Lord Hodgson of Astley Abbotts]

My Lords, I support Amendment 101A in the name of my noble friend Lord Flight about the importance of maintaining the competitive position and that that needs to be uppermost in our minds. But I am also attracted by Amendment 139A which has drawn in the regulatory principles that are to be followed by both regulators. It seems to me that here we will be starting to set the culture. It is the culture of the regulator that will have such an important impact on the way our financial services develop and the way the people who work in them behave. As my noble friend Lady Noakes said, it is important not just to see this through the prism of City eyes but to realise that there are a wide range of financial services in Edinburgh and the provinces of this country which require the appropriate regulatory framework.

Competition, by its nature, introduces novelty—novelty being something that the regulators tend to fear. It carries risk, but of course what is old and familiar is much easier to deal with. In a way, that is liked. But, particularly when established firms tend to draw attention to the risks of novelty, the regulator tends to back down. I am not suggesting that we should not take risks. We need to be risk aware but we must not be risk averse. There is a danger that in the pendulum within the Financial Services Authority and, no doubt, driven by the criticism that it has faced, we have gone to the end of the risk-averse scale. There is a great deal we still need to do in this Bill to provide the right framework and culture. I shall look forward to returning to this in amendments to which we will come shortly. For the time being, I am delighted to support my noble friends’ two amendments.

[Baroness Hayter of Kentish Town]

My Lords, this side of the House has already acknowledged the role of competition in serving the consumer. Indeed, we could do with rather more of it in the retail banking sector. A rather more creative vision of competition could address some of our concerns in that regard. For example, Age UK has suggested shared branches which offer a perfectly competitive environment, ease of comparison, and switching from one customer to another within the same location. We are wholly in favour of a competitive environment for the benefit of consumers.

That being so, I obviously support most of the amendments in this group. However, I ask the noble Lord, Lord Flight, why the first amendment is needed, given that it seems to put competition as a brake on the FCA. I worry what the driver is behind this. I hope it is not to protect bankers’ bonuses, given there are still some in the City who seem to believe that high wages and bonuses are a vital aspect of what makes the UK competitive in this sector. I would instead call on the coalition programme, which says the Government will bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector. Amen to that, although I am rather sad that—I think it is today—the Chancellor of the Exchequer is in Brussels voting against such an amendment.

Or is the amendment drafted because there is a feeling that regulation is too burdensome? I hope it is not for that reason, but the Prime Minister has form in this regard. In 2008, he said he thought that the problem of the past decade was too much regulation. The current Chancellor also said, in 2006, that financial regulation was,

“burdensome, complex and makes cross-border market penetration more difficult … and it threatens the global competitiveness of the City of London”.

I hope that the Prime Minister and the Chancellor of the Exchequer are now grown up enough to accept that it was too little rather than too much regulation from which we suffered.

I hope it is not—maybe we can get some assurance on this—the idea that international competitiveness should trump consumer protection. The noble Baroness, Lady Noakes, was much more concerned about the wholesale market. I think she will also understand the concern of consumers that this might trump the consumer protection aspects. Although we very much want this to be an internationally competitive industry, we do not want it at any price. We do not want a race to the bottom for moving wherever regulation is cheapest or less obvious.

In respect of Amendment 104A in the name of the noble Baroness, Lady Noakes, I know that Martin Wheatley, the CEO designate of the FCA, is very unkeen to have this duty. He does not think that in its intervention it is the function of a regulator to have to have regard to that as well as to consumer protection, and is concerned that it would create a set of conflicts. He said that,

“to have a specific UK competitiveness competition point can only lead to compromises in regulation”.

Perhaps the Minister can indicate whether the Government have the same concerns. Perhaps the “no regard” comment of the noble Baroness, Lady Noakes, is a better way of describing this, rather than making it trump some of the other aspects. I imagine the Minister will say something similar, because I know the Government, in responding to the Treasury Select Committee on this issue, while recognising the importance of a competitive sector, do not feel that these words would add much to the Bill.

Amendment 129 in the name of the noble Lord, Lord Flight, is rather easier. It requires the PRA to consider the desirability of promoting the UK’s competitive position within financial services. We have no argument with that. London First I know is particularly supportive of this, stressing also the stability of regulation in financial services, which means no more change after this.

Amendment 110 in the name of my noble friend Lord McFall refines the FCA’s objective so that the integrity of the UK’s financial system includes the confidence that it generates within the UK, as well as in foreign financial markets. This would encompass consumer confidence, which would clearly be vital in rebuilding trust in savings and investment, so we are happy to support this amendment.

Finally, Amendment 139A in the names of the noble Baroness, Lady Noakes, and my noble friends Lord McFall and Lady Cohen of Pimlico provides that the objectives of both the PRA and the FCA should include consideration of the capacity of the sector to contribute to the UK’s economic growth, also supported by the CBI. As the coalition programme said:

“We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to … create a more competitive banking industry”.

I am pleased to say that this is one element of the coalition programme that, again, we are very happy to endorse. Given that, sadly, growth continues to flatline under this Government, if ever there was a time to ensure that these new and powerful institutions focused on job creation, this surely is it, and we happily support that.

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[Lord Hodgson of Astley Abbotts]

My Lords, my name is down to four amendments, Amendments 104, 120, 137 and 139, and I support very strongly what my noble friend Lord Phillips has just said. I take issue with him on only one technicality. He talked about “not for profit”. I think the words should be “not for profit distribution” because these small organisations must be able to accumulate reserves for the bad times, for the contracts that do not go quite as well as—

[Lord Phillips of Sudbury]

I am grateful to my noble friend for making the point. He is absolutely correct.

[Lord Hodgson of Astley Abbotts]

Apart from that, I agree with the thrust of his remarks.

I chaired the task force that produced Unshackling Good Neighbours, and I am glad to be able to tell my noble friend that we have already had the Government’s response and are meeting on 26 July to produce our follow up. The problem with this is not making the recommendations but making sure that they are followed through. As I have told the House before, I am completing the review of the Charities Act 2006 for the Government and will be publishing a report on that next week. The terms of reference for that review required me to consider the barriers to the growth of social investment.

This is a very interesting area. The market is immature and therefore carries with it some dangers, such as overexpansion, perhaps of too much money being raised before there are projects sufficiently ready to absorb that money, and of overoptimism. There is a weight of expectation about what can be done that we have to make sure is not disappointed. As my noble friend made clear, this idea has the capacity to transform the financing structures in the charity and voluntary sector and so radically increase the amount of funding and the number of people who will give support to those sorts of endeavours. As I have said elsewhere, how do we persuade someone who would give £50 to invest or lend £500? How do we turn this social investment chrysalis into a butterfly?

There are lots of regulatory challenges, and not all of them are in my noble friend’s department. Not all of them are actually for the Government; they are also for the professions and the sector. As my noble friend said, we need to send signals from this area because this is the keystone that will set in train other serious changes. Therefore, the enabling provisions contained in Amendments 104, 120, 137 and 139 are important because they recognise, and ask the regulator to recognise, the distinctive features of social investment and regulate appropriately in an even-handed way. The hour is late. I could go on for a lot longer, but this is important, and I very much support what my noble friend said.

Amendment 104ZA is tabled in the name of the noble Baroness, Lady Hayter. That amendment is not suitable, because it requires the FCA to promote the growth and development of social finance and social investment. The role of a regulator is not to promote but to enable. It can promote good behaviour and good approaches, but it should not promote a particular form of finance, because that could lead to the disillusionment that I have referred to. I quite understand her good intentions, but they do not help us. Nevertheless, I very much support Amendments 104, 120, 137 and 139, and I hope that my noble friend will be receptive to this important part of the big society and localism, on which we as a party and a Government have placed such stress.

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[Lord Sassoon]

My Lords, we will have to disagree on the construction of some of the words here. Taking some of the amendments in the group, I appreciate that some of them are couched in the way in which my noble friend has just elaborated. However, for example, Amendment 103 inserts into new Section 1B(4) the words “and society” at the end of a very critical recital of what the FCA must do. It says it must,

“discharge its general functions in a way which promotes effective competition in the interests of consumers and society”.

I accept that it is all driven with an override,

“so far as is compatible with acting”,

in a way that advances the consumer protection objective, but it would add something which is tantamount to asking the FCA to be proactive in driving forward the social objective.

[Lord Hodgson of Astley Abbotts]

I am sorry. The hour is late, but that simply cannot be the construction. As I explained in my remarks, I could not support the amendments of the noble Baroness, Lady Hayter, because it said “promote”. The four that I have signed up to, and the only four, are the ones which are entirely neutral, and all they are is enabling. With the greatest respect to my noble friend, who has dealt with us with courtesy and kept smiling despite the most enormous amount of provocation, the fact of the matter is that a lot of what he is saying is about investor protection in conventional investments. We are not talking about conventional investments here; we are talking about social investments, where the parameters are entirely different. The Treasury will persist in seeing it as a profit-making type of investment, as opposed to a profit and a social return. It simply cannot get it into its head that this is a different type of investment. It keeps writing for my noble friend speaking notes that do not recognise that difference.

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[Baroness Kramer]

I am sorry and recognise the late hour, but if we let this opportunity go we will not get it back again. I wonder whether the Minister will—even if it is afterwards—sit back and think through this issue. I am a simple person. I come from a banking background where you look at outputs. We know that investors are seriously interested in these kinds of products. We know that there is a need on the far side, whether individuals, small start-up businesses, charities, social enterprises and whatever else. In the middle we have a regulatory pattern of behaviour. If the regulation was not acting as a barrier, surely the outputs we would have would be a thriving community development banking sector, a thriving social investment sector, and a thriving social bond market. We can look at other countries and see these things in far more advanced states of development than we have. The conclusion has to be that the regulator is playing a significant role as a barrier in this process. If we cannot tackle that in this legislation, how on earth can we tackle it?

[Lord Hodgson of Astley Abbotts]

The FSA currently has responsibility for one particular sector of the social enterprise movement—the industrial and provident societies. I suggest that the Minister asks his officials in the morning to ring the FSA and ask how many people are working in the industrial and provident society section. The answer is half.

[Lord Sassoon]

I am not quite sure what happens to the other half of this unfortunate person.

[Lord Hodgson of Astley Abbotts]

They only work part time.

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[Lord Phillips of Sudbury]

My Lords, that is a strictly out-of-court request at the moment. However, if the Committee will indulge the noble Lord, Lord Lucas, and myself, I will give him a short answer.

I am concerned, and those who have supported the amendment and the whole of the social investment sector are deeply concerned, that there is no single recognition in 168 pages of its special nature—not one single indication. I agree with them—others have made the point—that that is a profound omission given where we are, the financial sector we have got and the innovative drive and importance—potentially more than actually—of this new social sector.

[Lord Hodgson of Astley Abbotts]

Does the noble Lord not accept that we have a very immature sector still? We have not got the right corporate forms that will combine the different streams of investor, whether it be a Government, a charity which is running the scheme, a grant-giving charity or private investors, who may be corporate or private individuals. We must be very careful not to put too much weight on the structure too early because if we arouse expectations about what it can deliver and it crumbles away, not only will the sector be disappointed but—dare I say it with my noble friend on the Front Bench?—the regulator will say, “I told you so”. We need to be very careful about that.

[Lord Phillips of Sudbury]

I wholly agree. That consideration is not at all incompatible with the intent of this group of amendments—indeed, my noble friend has strongly supported the group. It is partly because I share his concern about the immaturity of this new branch of the financial sector that I want it to be incorporated within the regime that will follow on from this massive piece of legislation.

At this time of night and with this tiny number of people present, the Minister can be safe in the expectation of there not being a vote called, but I say to him that we must, by hook or by crook, have included in the Bill by Report some form of words which recognises this new sector and gives it proper allowance and scope to develop and thrive, because, as everybody agrees, including the Government, it has the potential to be hugely important in the future. If the Minister will agree to meet between now and Report, which I hope will be after the Summer Recess, we may be able to concoct something which satisfies the new financial sector and those of us who supported the amendment. I do not think that that is beyond the wit of man. I beg leave to withdraw the amendment.