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My third topic is the governance of the Bank of England. There is general acceptance that the new responsibilities of the Bank of England come with a need for new accountability mechanisms. It appears that there have been improvements in recent years in the court's oversight of the Bank of England from a perspective of the Bank's financial and resource planning, although the noble Lord, Lord Myners, questioned that earlier this afternoon. The big issue now is whether there should be an enhanced role for the court in the
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My third observation is related to this. It is that we should avoid making this too complicated. In this Bill, there is a real danger of creating multiple committees with inconsistent memberships and oversight procedures along with overlapping and overprescriptive responsibilities. I see this in a large number of cases. The Minister has indicated that the Government are looking at this, and I hope that during this legislative process some simplification can be achieved. That may involve looking at the membership, structure and oversight arrangements of the MPC as well as of the FPC, but I find it quite alarming that there is so much difference between the approaches to these two committees. It is not clear why the structure of the MPC and the FPC should not be consistent in terms of numbers, the balance between executives and external members, the principle of an annual remit from the Treasury and the oversight arrangements. Indeed, as argued by Sir John Gieve in the Financial Times today-the noble Lord, Lord Desai, has mentioned this tonight-in the fullness of time I could easily see the two committees becoming a single committee. In the mean time, I suggest that the members of the FPC who are not on the MPC should have the right to attend, but not to vote, at the MPC and vice versa for members of the MPC who would like to attend the FPC so that they get a much broader view of the concerns of both committees.
I also agree with the Treasury Select Committee and the noble Lord, Lord Flight, that the court should act as far as possible in the style of a unitary company board. Given what has happened to so many other organisations in the public sector, it is not clear why it should not also go down this route. Under this arrangement, much is down to creating a successful working environment between the executives and the non-executives. That has to be both challenging and supportive. One important component is that there should be an appropriate and open method of reviewing decisions and the decision-making process after the event. I notice that there has been some disagreement between the court of the Bank of England and the Treasury Select Committee about the nature of reviews of policy decisions and the decision-making process and about whether policy decisions should be included or whether reviews should be only about the process.
My clear preference is for the court to have oversight of both the process and the outcome of policy decisions. Very often this can be done internally in a way from which organisations can learn for themselves. One sees this happening in many organisations, although sometimes the issues are complex and the differences of interpretation
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Lord Northbrook: My Lords, when the banking crisis hit the UK in 2007 and 2008, no one knew who was in charge. The tripartite authorities took a minimalist view of their respective responsibilities and necessary action fell between three stools. Thus, they failed to maintain financial stability. The tripartite system tried to segregate the regulation of banks from the management of the economy as a whole. I believe we must treat them as one part of a whole system.
The decision to turn the Bank of England into a monetary authority was good, but it was wrong to separate out regulation into the FSA as a micro-regulator. This was likely to fail because no one was in charge of the size of banks' balance sheets-not only in the bust, as we well know, but in the boom as well. The Bill reunites the banks and other financial institutions as part of one system and I strongly recommend this.
I will not oppose the structure of the new financial regulators, but will concentrate on possible amendments to the legislation. I emphasise, as have many other noble Lords, that a major part of the remit of either the MPC or the FPC-I am not quite sure which-should be to encourage economic growth, and that the words "reasonable" and "fair" should be added to "proportionate" in new Clause 3B on page 28. Also, the PRA should appoint practitioner and consumer panels, as well as hold a public meeting to discuss its annual report, as the FSA does.
I also approve of the amount of consultation undertaken by the Government on these proposals. The changes made to the Bill as a result are most welcome. However, it is very important that the proposed supervisory bodies co-ordinate to represent effectively our national interest at European and international levels, including with European supervisory authorities. The financial services industry, the Government and the UK regulatory authorities all have important roles to play in representing the UK in international discussions on financial regulation. However, I draw attention to paragraph 366 of the Select Committee report, which, as many noble Lords have said, states:
As usual these days, the other place was given far too little time to scrutinise the Bill. In the rest of my remarks, I will focus on areas of MPs' concern that are
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The second concern was that the appointment and dismissal of the governor would benefit from a parliamentary veto. I can see the attraction of this as, for instance, it might have prevented the appointment of rather weak governors as took place in the 1980s. A fixed term of eight years might be appropriate.
Thirdly, the Financial Policy Committee and the court should publish full minutes. Currently, the Government have said that a so-called record should be published. This has not satisfied the Treasury Select Committee and I agree. Fourthly, as the noble Lord, Lord Burns, has just said, the Chancellor needs a general power to direct the Bank of England in a crisis where public funds are at stake, and not the rather strictly circumscribed powers that the Bill contains.
Fifthly, there needs to be enhanced scrutiny of the secondary legislation that will accompany the Bank of England's macroprudential tools. The Treasury Select Committee wants a super-affirmative procedure, as mentioned by my noble friend Lady Noakes. I agree that we must have something which provides for full debate and time to consider the proposals except in emergencies.
Sixthly, the MPC and the FPC should have a majority of external members. The Treasury Select Committee feels that it is vital in the long term to guard against "group-think" on these committees, with which I agree. Seventhly, we need to look at the Financial Conduct Authority's objectives. The FCA would work better if it focused on a simple set of objectives. The Government in the other place added to the proposals what they describe as overarching strategic objectives. But the Treasury Select Committee feels that they add nothing to the operational objectives in the Bill and might take something away by creating confusion.
Eighthly, the FCA's accountability mechanisms need strengthening. The FCA should publish its own minutes, its chief executive should be subject to pre-appointment scrutiny and it should review its own performance without the need of the Treasury Select Committee to force it to do so. The committee managed to get the FSA to review the collapse of RBS but, apparently, it was hard work getting it to do so.
Finally, I should like to turn to the four specific issues on which I should like the FSA and its successors to focus. The first is to avoid a repeat of the MF Global saga-the derivative trader which collapsed in October 2010. Amazingly, the organisation was considered to be outside the scope of the regulatory authority, yet its balance sheet was more than £40 billion. The capital flows between the UK and the USA were huge
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Secondly, we have the Arch Cru type of problem. Arch Cru was established in 2006 and was sold as a vehicle to provide low-risk cautious management funds. It is reminiscent of Bernie Madoff's venture. Like all investment funds, it was regulated by the FSA. Needless to say, it invested in high-risk property, shipping and ferries. Clause 64(5) states that events occurring prior to December 2001 will not be subject to the power of inquiry. As I understand it, the Government still have the power to institute an inquiry under Section 14 of the Financial Services and Markets Act 2000. I hope that they will still make use of that power and that the FCA will pay particular attention to these types of "low-risk" organisations.
Thirdly, there is the problem of payday loans. While this may be a good and necessary route for very short-term loans, they can become a very dangerous process if allowed to continue for too long. Legislation may be difficult in this area, particularly when borrowers may not get loan finance anywhere else. I hope that the OFT investigation announced in February will produce positive results to allow reputable payday loan companies to continue but, as the right reverend Prelate the Bishop of Durham said, to ban loan sharks. Fourthly, like many others I am sure, I seem to be continually pestered by the PPI ambulance chasers. Even though I am ex-directory I get two or three calls a day. Cannot this cold calling practice be outlawed?
Lord Mitchell: My Lords, I suppose this late in the debate it is stating the obvious to say that this Financial Services Bill is probably the most important Bill that is to go through in this Parliament. The stakes are high-it goes to the heart of our economy and our well-being, and we have to get it absolutely right.
I stand in wonder at the depth of expertise of Members who have spoken in this debate, including ex-Chancellors, Treasury Ministers, civil servants and economists. I cannot help but wonder whether an elected House of Lords would be able to bring the same degree of heavyweight knowledge and practical expertise-but I guess that is a debate for another time. Now we are joined by another heavyweight, the noble Lord, Lord O'Donnell, who made a superb maiden speech. We get a very strong hint of some amazing debates with contributions that he will make in future.
This Second Reading is, correctly, about structure, governance and regulation. We got it wrong; it needs to be restructured, making sure that power and responsibility reside where they are most effective. But enough people have spoken about that today, and I am not going to do so. I am going to talk about an issue about which I feel most passionately, and which I have spoken about before in your Lordships' House-the issue of payday loans, which was also mentioned by the noble Lords, Lord Naseby and Lord Northbrook.
My background for 40 years was in equipment leasing. I understand compound interest-it runs through my blood-and I understand about rolling over compound interest commitments. I understand how you use public relations and advertising. My experience was in industrial not consumer finance; my customers were corporations, not desperate borrowers. But the calculations are the same, and I cannot be fooled by the hype that you see all the time on this issue.
In the other place there was an amendment to cap the level of interest charged by payday loan companies. In Clause 22, it was suggested that the Financial Conduct Authority should be able to make rules and apply sanctions or rules when credit is offered that the FCA judges causes consumer detriment. Consumer financing at 4,200% is detrimental to consumers, any way you look at it. We believe that that amendment, which was defeated in the other place, should be introduced.
We have a terrible economy, with many people unemployed and people and their families in terrible situations. It is not surprising that loan sharking is back on the agenda. At its most extreme, it is about monstrous interest rates and baseball bats if payment is not made. The other week I watched "Godfather II" again and, believe me, it is very pertinent. But of course now it has gone respectable, and people talk about payday loans instead of loan sharking. Many high streets in this country have shops offering nothing but payday loans. They have become even more respectable recently; they do not even call themselves payday loans but talk about "short-term financial availability". Well, they can call it what they like, but it is loan sharking dressed in silk.
It used to be shameful to borrow money in this way. People had to do it, but they kept it quiet. Now it is encouraged; you see it advertised on buses, TV and in sports sponsorship-it is everywhere, and it is very slick. The advertising is amazing, and they have managed to introduce an almost blokey image. "Short of a few quid, need £300? Don't worry about it-go on the website and it's in your account in 15 minutes". These companies have cutesy names such as Uncle Buck, KwikCash and, of course, Wonga.
In 2011, payday loans equalling £1.7 billion were taken out, 4 million people in this country used them and interest rates varied from 440% to 16,500%-the mind boggles. It is rumoured that Wonga made £160 million profit and is going for an IPO of over £1 billion. You have to talk about Wonga as it is the market leader. I take my hat off to Wonga; it is a brilliant business. Its website is phenomenal-my background also lies in IT-and I have gone on to it and attempted to take out a loan. I assure your Lordships that I stopped at the final moment although I went through the process. A clock appears on the website telling you how many minutes it will take for the money to reach your bank account. The process is so easy; it is an availability issue. If you borrow £300, 21 days later you will have to repay £360. The company
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Payday loan operators say that 95% of their customers are happy. I suppose that if you were starving hungry and somebody came along with a really sexy website, you would feel happy if it enabled you to get some food. However, it is not like that. Payplan says that 47% of people who take out payday loans have six or more facilities at the same time and that 86% of these people use them to pay for basics such as food and transport and not for luxuries or short-term loans for Christmas presents. Three organisations-Consumer Focus, Citizens Advice and the financial services panel-all want the FCA to have specific powers to control these loans. Ministers have said that this is all being reviewed, perhaps by the OFT. However, I have the feeling that this issue has been kicked into the long grass. I suspect that nothing will happen in this regard unless we up the ante.
These payday loan companies can say what they like but the fact is this is gross usury, which affects people who are in dire financial straits, juggling credit cards, payday loans and anything else they can in order to survive from month to month. It is true that this is a vital service and that some people depend on it. Nobody can say that we have to get rid of it. The loan shark alternative is absolutely horrible. However, these companies have to be capped and need to be controlled. We plan to introduce an amendment to that effect.
Lord Teverson: My Lords, I was always rather in favour of the old FSMA system with the FSA as the one regulator. As the chief executive of a very minor fund management company, I knew where I was and where to refer to. When I rang up the FSA and asked it a question about how to operate my business, the fact that it felt unable to tell me in case that prejudiced the principles of regulation was not particularly useful, but the system was there and it was understandable. Nevertheless, it failed. That failure was not necessarily attributable to the fact that there was a single authority. Failure also occurred in the United States, which has multi-regulators comprising the Federal Reserve, the SEC and a number of others. It was quite clear that there was failure, particularly in macro-strategic risk, which was the one area missing-and it cost UK taxpayers £85 billion in bailing out the two banks. The National Audit Office put total UK taxpayer liabilities at £850 billion, or some £2,600 per taxpayer, in terms of exposure. That is truly a failure and it is why the system had to change.
There are four areas of importance. One is a stable financial sector. Because that sector in the UK is important and because, if things go wrong, there are
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An area on which I wish to concentrate is the need to make sure that there is full competition in the sector. That is not the case in the retail banking sector-an issue mentioned strongly by my noble friend Lord Flight, and to which I shall return. The fourth important issue is the international area, not just regarding competitiveness but, given everything that is going on in the eurozone at the moment, including European banking and financial regulation. We need to make sure that our interests there are protected and that we work together with Europe to our mutual benefit.
In terms of stability, we have moved from twin peak to triple peak or, as my noble friend Lady Kramer said, there may be a small range of mountains in terms of the different regulatory bodies. However, I very much welcome the Financial Policy Committee, which has become part of this architecture. It nevertheless has one of the most difficult tasks in terms of what it needs to achieve and in recognising the problems as they come along. I am a member of a pension committee for Cornwall as a local authority or collection of public bodies. There I was shown on a slide a definitive picture of Sweden, or possibly the whole of Scandinavia, and its debt cycle split between personal debt, corporate sector debt and public debt. It demonstrated how those matters needed to be, and were, managed. However, frankly, even as an economist, I saw very little of those issues in relation to the financial crisis. We heard about numbers but did not understand such things. The tools that are used in that area will be important.
The degree of independence that can be operated by the Financial Policy Committee will be difficult and, as the noble Lord, Lord Burns, said, there will be a lot of challenges regarding who has what responsibilities and the way that the tools will be used. Will we go back to the rationing of mortgages and other financial instruments that I remember in my younger days, or can we control this through interest rates? Either of those will have political costs.
Primarily, I wish to talk about competition in the retail banking sector, where there is an estimated concentration of 85% in terms of individuals and the banking market. We have the top five banks, and it was interesting to see in the Financial Times that Marks and Spencer is moving into this area, but if you look at the full picture, its banking operation is completely owned by one of the five, HSBC. That represents no more diversification than there is at the moment. We had promises from Tesco and Sainsbury's, the multiple retailers and Virgin Money of operating fully in this sector, yet we are not able to walk into any of those organisations and obtain a current account. These
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One group that I do not see mentioned at all in the Bill is the rating agencies. Personally, I think that they have a lot to answer for in terms of the grief that we have gone through as a national and international economy, and I should be interested in understanding how any future regulation there will take place, particularly within a European context. Also, the Government have not really been able to move forward on the Financial Services Compensation Scheme, where there have been a number of problems. At the moment it is seen as a rather unfair system, particularly given Keydata and other such instances. I think that we are stalling there because of European recommendations or legislation that is coming forward, but I have a question for the Minister. At what point do we say, "Okay, we can't wait any longer. Let's change the way that the scheme works."?
One thing is for certain: financial regulation, like democracy, is far from perfect. There is no perfect model. I was reading the magazine of the Chartered Institute for Securities and Investment, of which I am a member. It contained an article on this Bill called "Another New Dawn". At the end, it said that whatever system comes out of this Bill and however good it is, at some point in the future it will be perceived as a failure. Our challenge is to make sure that it is not at a cost of £850 billion, as was the case under FSMA.
Lord Stewartby: My Lords, this has been a remarkable debate, full of interesting and useful comments on the proposed new scheme of regulation. Having read a few pages of the Bill when it first became available, I felt a bit dizzy because it is very difficult and complex. I think that there is more than enough to keep us happy-if that is the right word-in Committee.
Many points at issue have been discussed. I do not want to rehearse all those that have been mentioned by other noble Lords but I have some personal experience of certain areas. First, I was a member of the FSA board in the 1990s and I subsequently became chairman of the audit committees of an international bank and an insurance company. I was able to observe the changes that took place in the functioning of the
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The first is that the Board of Banking Supervision was an innovative and very interesting move which unfortunately was not given the longer life that it deserved. It was an attempt to bring into consideration the practical experience of people who had been in the banking world, so that those with a lot of experience could be more conscious perhaps of the sort of qualities and experience needed to be able to do a thorough job and to spot the problem areas. That, unfortunately, as my noble friend has said, was abolished by the subsequent Chancellor, but it had shown up that a different cast of mind was needed for that role. I hope that the new regulatory system will be able to follow up that idea, and if not actually recreating the BoBS, nevertheless be very conscious of the sort of qualities and experience that are actually needed.
It has been said by a number of noble Lords today that architecture is not the system by which you can get all these things functioning properly together. It is the people who make the difference. If people come in with a lot of practical experience, they are much more likely to spot the things that are either going wrong or which are possible problem areas that will eventually cause difficulties. That is where another point comes in. The dialogue between auditors and supervisors should for years have been a means of spreading knowledge, understanding and experience in the bodies concerned. Until 1987 conversations between the auditors and supervisors were not allowed because of the problems of preserving confidentiality between auditors and others. That restriction was removed in 1987 and it certainly needs to be a legal and obligatory part of any structure of this kind. If something were to go wrong, or if there was some suspicion that it might, auditors could report to their supervisor, which is something that from here onwards should be built into everybody's processes.
That takes me to another area of difficulty about the valuation of derivatives and how liabilities were assessed for balance sheet purposes. I have asked a lot of people over the years how much sampling they knew about when "dodgy assets" were under consideration. The supervisory process appears to have been somewhat deficient. It did not throw up for a while the scale of misbehaviour-I suppose I could call it that; at the very least it was incompetence. Very little testing took place of these risky asset areas. I do not know why it happened, but there was a collective suspension of the critical faculties of auditors and others who dealt with these strange animals that caused so much concern. The situation is all the more curious because there were so many layers of consideration that one had to go through before one could take a relaxed view of the valuations, involving the management of the company, the company's internal audit department, the external auditors and the supervisors.
Much also depends on the individuals involved. The role of the audit committee has been enlarged to an enormous degree over the past few years. That is
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Baroness Drake: My Lords, the Bill replaces the tripartite system with a twin-peak model, but the witnesses to the Joint Committee of which I was a member were overwhelmingly of the view that the structure of financial regulation was not the determining factor in how successful a country was in handling a crisis. The chairman of the European Banking Authority said that,
As other noble Lords said, successful regulation depends less on the structural route taken and more on the regulatory culture, focus and philosophy. Controlling inflation and excesses in the financial system will require informed decisions that from time to time will be unpopular. That is a powerful argument for granting greater independence to the regulator to make informed rational decisions. Under the Bill, the Bank and the governor will acquire unprecedented new power. The granting of independence must be proportionate to the democratic authority vested in both the Government and Parliament. As Sir Mervyn King conceded in his 2012 "Today" programme lecture, when referring to the new powers:
With independence come the responsibilities of transparency and accountability. My concern is that the Bill does not yet sufficiently address those responsibilities. For example, it provides for the Bank to notify the Chancellor when there is a material risk to public funds, and for the Chancellor to be responsible for decisions in a crisis involving such funds. It is important that the Bill gives a high level of confidence that this requirement for the bank to notify the Treasury is set at a sufficiently low level that there should be no
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The memorandum of understanding between the Treasury and the bank details the process by which the judgment of materiality will be made, not the definition. The Government argue that giving a strict definition of material risk runs counter to the emphasis on judgment. While this argument has some merit, memorandums of understanding are easy to change and lack authority. Similarly, this House should satisfy itself that there is a high level of confidence which will not be thwarted by disputes between the Treasury and the bank and that the Chancellor has sufficient powers to direct the bank in a crisis-for there will certainly be future crises-but we know that the chair of the Treasury Select Committee has expressed his concern that the Bill currently grants powers to the Chancellor that are too circumscribed.
To fulfil its responsibilities, the Financial Policy Committee will have an armoury of powerful macroprudential tools, which Parliament should scrutinise through an enhanced affirmative procedure, to allow for consideration by Select Committees and for the Treasury to consider their recommendations. The Financial Secretary resisted such an enhanced procedure on the ground that,
The case for complementing the principle of caveat emptor with a duty on firms is compelling. We currently have systemic inequalities of knowledge and understanding and misaligned interests between consumer and provider, with the consumer consistently the loser. Confidence in financial products has been worn down by mistrust. Professor Kay recently observed that better performing companies are ultimately the only thing that generates long-term value for savers. However, this alignment is getting lost in an ocean of intermediation, where conflicts of interest and complex and high charges exist. The chain of intermediaries in the savings and investment market is increasing.
While there are new features in the Bill to be welcomed, the current framework still limits the ability to address such problems. Perhaps I may illustrate by reference to pensions. The asymmetries of information
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The obvious next question is: does it matter in practice? I have only limited time in which to answer that question, but research by Fair Pensions suggests that it does. For example, in its survey of the top 10 commercial pension providers, oversight of external managers' investment governance appeared to be virtually non-existent. The new philosophy of judgment-led supervision includes being forward-looking in anticipating the risks that threaten market integrity. The solution to the governance gaps among those with the discretion to manage other people's money does not lie in prescribing even more boxes to tick. The Bill should create a framework in which consumers can have trust. The basic principle is simple. If you are looking after someone else's money, whether as an asset manager, an insurance company, a trustee, a consultant or any other licensed agent, the starting point should be that you must act in that person's best interests. It is changed behaviour that we need, not simply compliance.
Finally, this Bill is not an easy read because it contains many amendments to the Financial Services and Markets Act 2000, although not to Section 348, which restricts the publication of confidential information by regulators. Consumer groups are concerned about this section. The Joint Committee shared this concern. It recommended that:
The Treasury review commissioned by the Financial Secretary found that even with Section 348 in place, the regulator could be far more open, and as a result the FSA has committed to a fundamental review of transparency. A letter from the Financial Secretary to the right honourable Peter Lilley on 21 May 2012 states that,
Viscount Trenchard: My Lords, I am grateful to my noble friend the Minister for introducing this important debate. I must first declare my interests in that I am employed by Mizuho International plc and am a non-executive director of two other financial services companies. I also wish to pay tribute to the excellent maiden speech of the noble Lord, Lord O'Donnell. If
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I believe that the financial regulatory arrangements that existed during the initial stages of the financial crisis were deficient in three principal ways. However, the crisis was not caused principally because the tripartite system in itself was deficient. As other noble Lords have commented, a regulator's culture and judgment are more important than its architecture. First, there was no bank resolution mechanism in place. If the Banking Act 2009, which enabled the swift resolution of the Dunfermline Building Society insolvency, had been in place, it is likely that the Northern Rock situation would have been quickly and relatively painlessly resolved.
Secondly, the deposit protection scheme that applied was inadequate, because it was not a 100% scheme. If today's scheme had been in place, there would not have been a bank run of such severity. Thirdly, although the Bank of England was charged with responsibility for financial stability, nobody was looking at the system as a whole. The Bank should have been given a power of direction over the FSA. Although I wholly accept my noble friend Lord Tugendhat's observations on the Bank's record as a regulator, I nevertheless believe that the body charged with financial stability should also have ultimate responsibility for regulating financial markets and their major participants.
In 2006, I was working in Brussels as the director-general of the European Fund and Asset Management Association. It is my recollection that at that time the FSA did not consider itself an activist, firm-specific regulator, even though most of its 300 bank supervision staff had come from the Bank of England. I felt that the FSA was more interested in attending conferences and engaging with other European regulators to discuss harmonisation of regulation than actively supervising the banks. It is also clear now that the levels of capital and liquidity required under the Basel I accord were completely inadequate.
I was privileged to serve on the Joint Committee on Financial Services and Markets under the inspired chairmanship of the noble Lord, Lord Burns, which scrutinised this Bill's predecessor before its introduction to Parliament in 1999. Some of us believed that competition and the competitiveness of our financial markets should have been made an objective of the FSA rather than merely one of the principles to which it had to have regard. I welcome the fact that the FCA is given a competition objective in the Bill, but it is inadequate in that it falls short of a responsibility to maintain or enhance the competitiveness of the UK's financial markets.
I am not persuaded that it was necessary to dismember the FSA in order to make our regulatory system fit for purpose. Besides, the Government are trying to reduce the number of public sector bodies with all their associated costs, boards of directors, et cetera. Some 2,000 firms will now have to report to two financial regulators, the PRA and the FCA, which will demand the provision of information-in part common to
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It is interesting that we consider it appropriate to redesign our regulatory framework in this country at a time when the EU has just established a different regulatory framework based not on the twin-peaks system that we have adopted but divided between banks, securities markets and insurers, including pension providers. The matrix of reporting lines between the UK and the European regulators certainly raises the question of whether the Bank, the FCA or the PRA will have the necessary influence on any of the European regulators commensurate with the UK's status as the world's pre-eminent financial market.
I appreciate that a lead regulator system will be adopted and that a memorandum of understanding to be drawn up by the PRA and FCA will establish arrangements for co-ordination with each other and with the three European regulators. However, I worry that the complicated matrix of communication channels that will be established as a result not only increases the risk that some vital piece of information will not be passed correctly but also makes it more likely that there will be a great deal of duplication, which is expensive for the taxpayer and for the regulated firms, which will have to satisfy the myriad of regulators' increasing hunger for ever more detailed and overlapping information on their businesses.
The draft MoU states that the FCA and the PRA will co-ordinate with each other on rule and policy-making, although my understanding is that very little scope remains for national regulators to make rules following the establishment of the three European sectoral regulators. As far as the 2,000 firms that will be dual-regulated are concerned, the draft MoU clearly anticipates a considerable amount of duplication. It provides for the establishment of supervisory colleges for individual firms and groups comprising members of both regulatory bodies. It is important that the Treasury should monitor the escalating costs and complexity of the regulatory system, having due regard to proportionality. The fastest growing departments in many financial institutions are compliance and IT, which certainly does not help the London markets maintain their international competitiveness. RSA Insurance has incurred a dramatic increase in regulatory fees, from less than £500,000 in 2007 to more than £9 million in 2011. As the CBI has urged, the new regulatory authorities should have as a specific objective the supporting of economic growth. There must be a joined-up approach between the FPC, PRA and FCA, and between them and the three European-level regulators.
However, as my noble friend the Minister has said, there is no best or perfect structure. If I recall correctly, he also said that the structure of the industry is at least as important as the regulatory structure. Today is not the day to debate the implementation of Sir John Vickers' recommendations, but I should like to say that the current extremely difficult economic environment should lead the Government to do what they can to provide a stable and benevolent framework for our financial services industry, which directly employs more than 2 million people and accounts for some 20% of
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It is true that the existing single-regulator structure was not perfect either, so I do not advocate going back to it. There were difficulties in focusing clearly on prudential regulation, and pressure from consumer organisations inevitably tended to push consumer protection to the fore. Even if those difficulties could have been resolved without dismembering the FSA, we have moved on. What will be interesting is the extent to which the consumer agenda dominates the policies and strategy of the new European regulators which, as I mentioned, have not adopted the twin-peaks structure.
The European regulators and many in Europe believe that there will eventually be no need for national regulators except as local enforcement agencies and branch supervisors. In that case, all this complicated legislation may seem redundant in 10 years' time. However, if the rapid fiscal integration now sought by the eurozone is realised, the European regulators may eventually become the regulators purely for the eurozone and our own regulators will be restored to an independent and equal status among the world's leading financial regulators.
The new architecture is fiendishly complicated. It will no doubt be reformed again before many years have passed, as national and global markets are evolving at an accelerating pace. However, some parts of the Bill need to be improved. In certain areas, the powers of the FCA are too restricted for it to live up to the expectations placed on it. For example, the provision that it must consult before issuing warning notices should perhaps be limited. Otherwise it may effectively be prevented from doing so. The measures on greater regulatory transparency and misleading promotions are to be welcomed. The FCA should be given a power to prevent hidden charges. The objective to promote competition should be extended to maintain the competitiveness of the United Kingdom's markets, because this is surely as much in the interests of consumers as of taxpayers. The BBA has correctly stated that such a commitment would not conflict with the objective of ensuring that UK regulation is suitably robust and that it would send a strong signal that Britain was open for business if we were to commit to a competitive regulatory regime.
Why does the Minister consider it inappropriate to give the PRA a competition objective? At least the competition principle which exists in FSMA should be retained. After all, the FSA has recently stated that the regulation of capital markets has worked well. How will the FCA, the FPC and the PRA relate to the newly created Competition and Markets Authority?
I do not really like the name Prudential Regulation Authority because it does not make it clear that it is a regulator of financial institutions. It is surely sensible when something is reformed to give it a new name, but surely every regulator in the land is bound to exercise its functions in a prudential manner. However, I suspect that, increasingly, the PRA will be referred to as the Bank of England, of which it is indeed to be a part.
The FCA, in fulfilling its important consumer protection role, should also have regard to its impact on the real economy, as the FPC is required to do. As my noble friend Lady Wheatcroft has already commented on that, I ask the Minister to clarify the meaning of the regulatory principle to be applied by both regulators,
Another question identified by my noble friend Lady Noakes which needs to be closely considered is the diminished importance of the practitioner panel established under the FSMA, in particular the absence of any requirement on the PRA to establish a regular consultation mechanism such as the practitioner panel currently provides. I agree with the CBI that the FPC needs a more proactive focus on supporting economic growth. Clause 3(1) explains the financial stability strategy to be adopted by the Bank and the role of the FPC. Section 9C of the amended Bank of England Act 1998 lists the objectives of the FPC in subsections (1) to (7), but actually only subsections (1) and (2) are objectives. Subsections (3) to (7) contain parameters and principles to be followed by the committee in carrying out its two objectives. If a third objective, to promote growth, was included, the rather negative subsection (4) could be dispensed with.
The Bank of England's new structure with three deputy governors is certainly rather complicated and the Treasury Select Committee has correctly identified the need to strengthen the Bank's governance and accountability. I hope that your Lordships' House will be able to improve the Bill to mitigate the difficulties in putting this complicated structure into practice and ensuring that the United Kingdom has a financial regulatory system which is fit for purpose and a degree of security through the unseen storms that lie ahead.
Lord Stevenson of Balmacara: My Lords, I declare an interest as chair of the Consumer Credit Counselling Service, a debt advice charity. We have been helping more than 1.3 million people in the past four years to deal with their unmanageable debts, and it is the impact of the Bill on consumers of credit on which I focus tonight. As my noble friend Lord Mitchell said recently, there should be no doubt that personal debt is still a serious problem today. Over one-third of the people counselled by the CCCS had contractual payments for unsecured consumer credit that totalled more than 50% of their income, and almost one-quarter had total outstanding debts that exceeded their monthly incomes by a factor of 20 or more.
Of course, this is not an issue new to your Lordships' House. Enhanced consumer credit legislation was introduced in 2006 to deal with the irresponsible lending practices present then and gave the Office of Fair Trading strengthen powers to stamp out bad conduct and get rogue firms out of the market. That has been successful. It has helped to support an ongoing dialogue
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For this, we should commend the hard work and diligence of the OFT consumer credit team. A key challenge in transferring responsibility for consumer credit to the Financial Conduct Authority when the proposed new framework is in place will be ensuring that that expertise and experience is not lost and that there is no hiatus as the FCA takes on that role.
However, we must also recognise, as pointed out by my noble friend Lady Drake, that the current consumer credit rating has proved to be insufficiently powerful or agile to guarantee the fair and responsible consumer credit markets that consumers need. Consumers are still being harmed by long-standing unfair practices. We have also seen problems emerging in consumer credit sectors that have grown up since the 2006 Act changes. Several noble Lords have expressed concerns about payday lending practices. We recently analysed our clients with payday loans and discovered that about one in 10 had five or more such loans at the same time and that the average amount owed on those loans was about 95% of the net monthly income of their borrowers. The 2006 Act was supposed to stop unaffordable and unsustainable use of multiple credit products as a driver of debt problems. Yet here it is, back again, albeit in a new guise.
It is not hard to see where the weaknesses in the current regime are. The process for licensing action under the Consumer Credit Act can be very slow. Even when the OFT determines that a firm is unfit to hold a consumer credit licence, the legislation allows the firm to continue to trade and to cause consumer detriment throughout an appeals process that can take up to two years to complete. The threshold for getting a consumer credit licence is very low, even after the reforms, so it is both too easy for rogues to get into the market and too difficult for the regulator to get them out. The current regime also provides only minimal deterrence against bad practice. While the OFT indeed has a power to fine firms in respect of misconduct, it is capped at £50,000-surely far too low to deter many firms. The current legislation also forbids the OFT ordering firms directly to compensate customers who have been wronged, so firms can profit from unfair practices with little fear of being held to account.
The credit regime is still at heart a licensing regime with neither the focus nor the reach actively to ensure that consumer credit markets work well for consumers. It needs to be refocused and reformed-and here I part company with the noble Lord, Lord Hunt of Wirral. Self-regulation undoubtedly has a part to play here but, to my mind, moving responsibility for consumer credit to the Financial Conduct Authority represents a huge opportunity to introduce greater statutory consumer protection, which is now urgently needed.
The Financial Services and Markets Act 2000, as it will be amended by the Bill, has the power to clean up existing problems and prevent new consumer problems
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First, we need to ensure that the important substantive consumer protection measures in the Consumer Credit Act are retained, particularly those that cannot readily be replicated in an FCA rulebook. The intention is there but the detail needs to be fleshed out. Secondly, the FCA needs to develop both a rulebook and a regulatory strategy for consumer credit that are robust where they need to be but sufficiently flexible to take account of the wide variety of products and sectors in the consumer credit market. As the noble Lord, Lord O'Donnell, said in his excellent maiden speech, what we need is a robust architecture with a principled approach but with sufficient flexibility to allow for a judgmental approach to regulation.
Other issues come into play here, several of which have been mentioned by other noble Lords. There is the balance between a proportionate rulebook and a light-touch regulatory strategy, because proportionate must also mean effective. In the past the regulator has often failed to move quickly enough to deal with consumer detriment when it saw it, let alone prevent it happening in the first place, so it will be vital for the new structure to start with a clear mindset as to what outcomes the regime needs to deliver for consumers. If we are to have a proportionate regime-and we should-it must be based on a robust assessment of the risks that consumers actually face, based on accumulated past evidence of detriment arising from unfair practices and products.
Finally, there is a timing issue. Consumer detriment is happening now and financially vulnerable consumers cannot wait until 2014 for better protection against unfair practices and rogue firms, so I urge the Government to consider what can be done in the mean time to give the OFT, and then the FCA, more teeth to help consumers. There are some options here but I note that in the debate on this Bill in another place, the Government suggested the possibility of amending the current Consumer Credit Act to allow the OFT to prevent a firm trading new business while an appeal is pending against the regulator's determination to revoke or suspend a consumer credit licence. This could make a real difference for consumers while we wait for the new regime to come into effect. I very much hope that this approach will commend itself to the Minister when we come to the Committee stage.
Lord Hodgson of Astley Abbotts: My Lords, when one is the 36th and last speaker in a debate of this length and quality, inevitably most of one's foxes have been shot-in many cases, in fact, not so much shot as
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I declare an interest: I am chairman of two firms that are regulated by the FSA, and until recently I was chair of a third. I want to make three points about the Bill: my gloss on the architecture; something about the philosophy and culture that are currently around in the Financial Services Authority and which I fear may be transmitted to the new bodies; and an area that has been less well covered today-the question of social impact investment, which is important for the future.
I first became involved in City regulation some 12 years ago. I was one of the first directors appointed by the Bank of England to the then new Securities and Investments Board. Experience has taught me since then, and I have served on regulatory boards since, that every crisis is always followed by cries to move the architecture around and change the bodies. Indeed, the SIB itself was the result of a crisis-a rather minor one by today's standards-in that the Bank of England suddenly became enthusiastic when it found that, rather unpleasantly, its own pension fund had been adversely affected by the activities of a firm called Barlow Clowes. The Bank immediately agreed that there needed to be one central regulator, with subsidiary regulators that could carry on more specifically focused activities. In the end, there were three such: the Securities and Futures Authority, the Investment Management Regulatory Organisation and the Personal Investment Authority. In fact, this was a triple-peak regulatory system as opposed to a double-peak one.
Why did that system not prove successful? In a word, to follow what the noble Lord, Lord Desai, said: Barings. The overnight collapse of one of Britain's most historic merchant banks caused ripples of concern. The need for reform was given further impetus by the view that the subordinate regulators were too introverted-my noble friend Baroness Noakes referred earlier to regulatory capture-and not sufficiently accountable. We have had echoes of that today, and no doubt we will continue to in our discussions about the Bill. It was felt that a unitary approach should overcome these problems, and the FSA was the result. Now, with the events of 2008, that in turn has proved to be found wanting, and we are now going back to a more diversified structure.
The danger of changing a structure in response to a specific crisis is that you create one that is too backward-looking. In essence, generals tend to fight the battles of the previous war. The three issues that I hope that we can explore in Committee are whether the structure permits or encourages peering into the fog of the future and taking preventive action; how the relationships between the FPC, the PRA and the SCA will be integrated and managed in a way that does not place a double or triple regulatory burden on the regulated firms; and, as many noble Lords have said, whether the system contains a sufficient element of accountability.
So much for structure. I turn to the second issue, regulatory focus and culture, which the noble Lord, Lord Eatwell, referred to in his opening remarks, and many other noble Lords have referred to subsequently. In my view, the relationship between the Financial
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That focus on process has led to a number of undesirable consequences. First, there has been an increasing reluctance by firms to maintain an open relationship with their regulator. Any admission of weakness, however slight, is seized upon by the regulator, and no credit is given to the firms for having identified the weakness in the first place. That is an unproductive way to behave.
Secondly, there has been a dramatic increase in Section 116 investigations. Section 166 of FiSMA permits the FSA to require a skilled person investigation. It is clear from debates at the FiSMA proceedings that this idea should be used sparingly, but investigations are increasingly being thrown around like confetti. It is not just the cost of the investigation or the diversion of management time; it is the feeling abroad in the City that Section 166 achieved very little other than providing the regulator with cover, so that if something subsequently goes wrong he can say, "We had a Section 166 investigation. What more could we do?".
Thirdly, and finally, there is an abuse of power-and I use this phrase carefully-by the SIF committee. Where a person has a particularly influential position in the company, he or she requires specific approval by the FSA via the SIF committee. The SIF committee is a star chamber. It is as simple as that. Individuals can be left in regulatory limbo for months. I know of one man who has been in regulatory limbo for 11 months without recourse or redress and without being able to find out what he has been accused of because confidentiality is required by the FSA while the procedure investigation is going forward.
This is the philosophy that is prevalent in the regulator at present, and it is one that may be transmitted to the new organisations. Therefore I agree with my noble friends Lord Hunt and Lord Flight when they call for proportionality. Looking through the Bill, I see Clause 5 and the references there, but we will really need to bottom out the practical implications of the statement of intent and what they are going to mean on the ground in the operation of the City of London.
I now turn briefly to my third topic: social impact investment. It is something that the Government are very keen to encourage but about which the Bill is almost entirely silent. The social investment process poses particular challenges for all trustees, as well as for grant-giving foundations, especially those with a permanent endowment, but the real regulatory crunch and challenge that is relevant to this debate lies at the interface between the charity and its individual supporter or investor. The missing piece in the jigsaw at present is the ability to approach individuals about social impact investments without the need for a full Companies Act prospectus, the cost of which renders almost any
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I hope that in Committee we can discuss how we can help the social impact butterfly out of its chrysalis. We will need to create an appropriate position for the regulator and perhaps establish a class of individual supporters or investors, perhaps by creating a self-certified social investor along the existing lines of the self-certified sophisticated investor. To be fair to my noble friend on the Front Bench, it is not up to the Treasury alone. Contributions will be required from other government departments-BIS, the Ministry of Justice and the Cabinet Office-as well as, as we have covered this evening, from the professions: actuaries, investment managers and accountants. In my view, it will probably take a generation for the social impact investment movement to reach its full potential, but we need to plan now, and financial regulation, more than any other sector, holds the key, so I hope my noble friend will be able to help us during the passage of the Bill to speed this process on its way.
I do not doubt that the events of 2008 showed weaknesses in the regulatory structure and that we will need to give the Bill very careful consideration and examination in Committee if we are to manage to create the delicate balances between risk and reward and in doing so avoid hamstringing the dynamism of the City of London.
Baroness Hayter of Kentish Town: My Lords, I start by thanking the Joint Committee for its work in scrutinising this legislation. Three of its members spoke in the debate. I join others in welcoming the maiden speech of the noble Lord, Lord O'Donnell. When we come here, we all think that we have joined the most exclusive club in London but there is a more select one-that of former Cabinet Secretaries. In his notable speech today, the noble Lord showed himself a great initiate to that club, and he can now wear the tie.
I also particularly note the speech of my noble friend Lord Barnett, who referred to the "sexy bits" of the Bill. I have to say that I have not yet found these but I will now go back and look a little harder. I particularly thank the right reverend Prelate the Bishop of Durham, the noble Lord, Lord Sharkey, and my noble friend Lord Whitty for reminding us of those people who are denied access to financial services and of the areas where they are not available. We need to remember them.
The aim behind the Bill is laudable. It is to reform the regulatory system to avoid a repeat of the financial crisis. Amen to that, not least because the impact of failures is borne by the taxpayer and the consumer, as the noble Lord, Lord Flight, noted. We need to reduce the risk of failure without stamping out innovation, and to have effective mechanisms for dealing with any
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On the architecture, Europe was noted by the noble Baroness, Lady Valentine, and the noble Viscount, Lord Trenchard. Despite the increasing importance of the new European Systemic Risk Board and the three ESAs having the powers to override our regulators on occasion, our new regulation does not map with theirs. While Europe cuts by area, with one for banking, one for securities and markets, and one for insurance and occupational pensions, the Bill cuts between prudential and conduct. This means that the FCA will sit on one body-that for securities and markets-with the PRA sitting on those for banking and insurance and pensions. No doubt some agenda items will cut across FCA and PRA responsibilities, with different officials sliding into the hot seat at different times.
Our European Union Committee warned about this last July but the Government's response was simply an MoU between the Treasury, the Bank, the PRA and the FCA. There was no recognition of any problem by the Government, despite their commitment to,
I turn to the Financial Reporting Council, which gets no mention at all in the Bill, despite its role in the corporate governance of banks, the stewardship code and the setting of standards across much of the financial industry, including on issues that affect the work of accountants, actuaries and auditors, as has been mentioned today. Therefore, we should like to see a requirement for an MoU from the FCA and the PRA to the Financial Reporting Council. The PRA, in particular, will lead in the ESAs on the rulebooks, including binding technical standards.
"Not since the creation of the Bank of England ... has its senior management and Governor had so much power ... one cannot have enough scrutiny of this big beast that the Bank will become as a result of the Bill".-[Official Report, Commons, 23/4/12; col. 746.]
The Institute of Chartered Accountants has also called for the greater accountability of the Bank to Parliament and the public. Therefore, we will need the amendments suggested by noble friend Lord Eatwell and foreshadowed by the chair of the Treasury Select Committee in the other place, Andrew Tyrie. That deals with architecture.
Turning to consumers, there are undoubtedly things in the Bill that we welcome, not least the power to ban toxic products; the exposure of misleading financial promotions; the publication of warning notices; the supercomplaints regime; and the move of consumer credit to the FCA. I thank the Government for those. However, there are some problems, one of which is in the architecture of the FCA. To quote the words of Andrew Tyrie again, it will be the poor relation-not least because of the PRA's power of veto over it.
Secondly, there is insufficient transparency of the FCA. We all want to see its minutes published and its chief executive subject to pre-appointment scrutiny, as was mentioned by the noble Lord, Lord Northbrook, and the Treasury Select Committee. We also need to see retained the FiSMA's current Section 11 requirement for the FCA to give reasons when it rejects the advice of the consumer panel.
The Prudential Regulation Authority will deal with some issues that will have serious consumer implications, yet there will be no consumer input to it. It will be responsible for with-profits policy and the reattribution of orphan estates; perhaps for reserving for mis-selling with all the implications that that would have for the readiness to make redress; possibly for decisions affecting loan-to-value mortgage rates; and even, possibly, free banking rules in so far as its putative head, Andrew Bailey, has proposed outlawing these. Yet there is no consumer input to the PRA. Why is there no right for the views of the consumer panel to be heard on relevant PRA remit, along the lines suggested by my noble friend Lord Whitty, or even a consumer panel, as recommended by the noble Lord, Lord Northbrook, this evening?
On the content as it affects consumers, the competition objective for the FCA is very welcome but it does not solve all this industry's shortcomings, because this is a failing market. There is ongoing reliability in the Bill, which was mentioned unfortunately by the noble Lord, Lord Flight, on consumer responsibility, on buyer beware-caveat emptor-and the general principle that consumers should take responsibility for their decisions.
However, there are serious flaws to that. First, if consumers or their representatives have no say in, and cannot know about, the prudential security of a firm, how can consumers take responsibility for their choice of provider and not just of product? Secondly, how can consumers exercise caution over products, given the nature of this market? Recently, in an extraordinary statement, Philip Hammond of the Cabinet said he believes that consumers who borrowed too much during the economic boom must "accept responsibility" for their part in the financial crisis. He said that banks were not the only ones responsible but that those who took out loans, spent on credit cards or accepted large mortgages were "consenting adults".
Perhaps he needs reminding of those daily, very attractive approaches that we as consumers were getting all the time to extend our credit. Every time our credit card debt got anywhere near the limit, it was automatically revised upwards without our knowledge. Banks sent out credit card cheques and mortgage companies approached borrowers to increase their loans. Now, we learn, bonuses depended on that.
The Financial Services Consumer Panel warned repeatedly about self-cert mortgages. We knew that they were being given to people whose income, encouraged by the lenders, was exaggerated on the application form. These lenders were giving unsustainable loan-to-income, unsustainable loan-to-value and interest-only advances, despite the protests that we were making-I was on the Financial Services Consumer Panel-to the FSA and the culprits. The idea of consumer responsibility taking the blame seems a little wide of the mark.
The other problem about caveat emptor is that it works in a properly functioning market where the informed consumer can make choices. It is not like that in this market where we have vulnerable consumers and new entrants. These are not repeat purchases, so it is very hard for us as consumers to learn about them. There is often long-term outcomes, so we cannot work out which are good products. There is an inability to shop around. We simply do not know enough about prices, risk, assumptions behind the products and the likely outcomes to make informed choices. There is also a real asymmetry of information.
We must make, along the lines mentioned by my noble friend Lord Borrie, real changes to the information supplied to consumers. To make it fair, clear and not misleading is not a bad start, but information is not enough. There are so many imperfections in the market that we simply have to step in. Warm words about treating the customer fairly will not suffice without a fiduciary duty along the lines set out by my noble friend Lady Drake, which would require anyone dealing with a customer to exercise that fiduciary duty-not to be in a situation where personal interest and duty of care to the client conflict, not to profit at the expense of the client, and generally to give undivided loyalty. That has to be accepted and enforced and must enter the culture, training and rules, and it should apply as much to pension investment funds as to the retail market. Indeed, the ICAW wants the FCA to give as much attention to the conduct of the wholesale markets as it does to consumer protection. So perhaps fiduciary duty should extend far and wide.
On culture, we need regulation focused on consumers and their long-term interests, but that needs a culture change to put consumers centre stage and for them not to be seen as a means of generating high earnings for others. Consumers pay for regulation and compliance, but they also pay for failures-but somehow they never seem to walk away with golden handshakes when all has gone wrong. We need a regulatory regime designed to protect middle and lower-middle income people, because the opportunity for them to get ripped off is so high. We need regulators with the right nose for what is going on-people to interrogate data, listen to the warning and have the right feel for what the risk dashboard is highlighting. The Chartered Insurance Institute said:
That brings me to the questions of transparency and accountability. We need greater accountability and parliamentary scrutiny than is envisaged in this Bill. The proposed macroprudential tools must be via superaffirmative orders, as suggested by the noble Baroness, Lady Noakes, and the noble Lord, Lord Northbrook, and there must be proper input from the Treasury Select Committee and our own House.
We need a successful financial industry. We need it to stimulate innovation and help to create jobs and growth; we need it to facilitate borrowing and to help people to change savings into investment and hence income for their future. That needs confidence as well as good regulation-the latter depending on the culture of an organisation and its participants as well as on the numerical results. A continuation of bankers' bonuses; excess profit-taking; no care for the clients whose savings drive all this; irresponsible risk-taking; and rewards for failure have surely had their day. We look forward to enabling this Bill, as it aims to do, to make regulation work for the whole country.
The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, this debate has been every bit as rigorous and illuminating as I expected and I thank your Lordships for approaching the Bill in a thoroughly constructive and thoughtful manner. We have had many useful contributions during the afternoon and evening. Some I would characterise as sighting shots, and we had a few opening barrages. I thank in particular the noble Lord, Lord O'Donnell, for his characteristically clear, focused and constructive maiden speech, which certainly contained a number of well aimed rifle shots.
I was delighted that my noble friends who are former Chancellors welcomed the Bill. I was also pleased that at the start of the debate the noble Lord, Lord Eatwell, said that the fundamental thinking behind the Bill was well founded. Noble Lords who have direct experience of operating within the current structure, including the noble Lords, Lord Myners and Lord Burns, recognised that the tripartite system had not lived up to expectations, to use their measured terms. We have a major piece of legislation in front of us, the importance of which is widely recognised.
Before I get into the detail of some of the points that have been made, I wish to say a few words about the form of the Bill, as speakers, including the noble Lord, Lord Turnbull, and the noble Baroness, Lady Cohen of Pimlico, questioned the way in which it had been written as amending legislation as opposed to a wholesale rewrite of FSMA and other legislation. We thought about this approach very carefully. I appreciate that the Bill in its present form is not easy for any of us, but it is an approach that has been widely supported by consultation respondents and will minimise the extent to which regulated firms and other users of FSMA have to deal with legislative change. It should also allow for more focused scrutiny in this House and by stakeholders of the key changes in the regulatory regime. However, as I am sure noble Lords are aware, the Government have published a consolidated version of FSMA to help to show explicitly what the legislation will look like once it is amended by this Bill. That is available on the Treasury website.
I wish to make one other preliminary remark before we get into the content of the Bill. I noted the very interesting suggestion made by the noble Lord, Lord O'Donnell, of having a standing Joint Committee to assess the new framework. It is an interesting idea but it is for Parliament and not the Government to decide how best to organise its scrutiny activities. However, I repeat that the quality of the Joint Committee's work in scrutinising the new arrangements underlines the noble Lord's point. It was good to hear from members of that committee in the debate, such as my noble friend Lady Wheatcroft, the noble Baroness, Lady Drake, and the noble Lord, Lord McFall of Alcluith. However, I am very sorry, as I am sure is the whole House, that we have been robbed of the wisdom of my former noble friend Lord Maples, who would have very much enriched today's debate.
The hour is late. I will not take this opportunity to read a fully formed speech highlighting again why the Bill is so important to protect the UK financial services sector and the wider economy. I could reiterate the arguments, but I will use the time to answer as many of the points that have been brought up as I can. I will have to leave many others on the table for future discussion or letters as appropriate.
I have tried to group together the points. First, I shall pick up some of the issues on the overall architecture and the cross-cutting issues. Then I will address some of the points on the Bank of England, the FPC objectives and bank governance, and another area where many important points were raised concerning access to financial services, as well as one or two of the international issues that were raised.
On the overall architecture and some of the cross-cutting issues in the Bill, a point that was very clearly made by a number of noble Lords, including my noble friends Lord Lawson of Blaby and Lord Lamont of Lerwick, is the question of judgment and culture-architecture versus institutions. Many speakers have made the point that the culture of regulators is more important than institutional architecture. I agree of course that culture is vital but, as the noble Baroness, Lady Cohen of Pimlico, noted, architecture also matters. That is precisely why we are implementing these reforms to put in place an institutional framework that will allow a culture of focused expertise and judgment to flourish separately and distinctively within the new PRA and the FCA. That is reinforced in the Bill by, for example, imposing the legal duty to supervise firms, which will require the two bodies to develop and promote a culture of supervisory judgment.
There were questions about what is characterised as twin-peaks regulation. I do not like that tag but let me now use it for simplicity. The importance of co-ordination between the PRA and the FCA has been stressed by my noble friend Lady Kramer and others. We agree that this is important. That is why we have proposed cross-membership of the boards of the PRA and the FCA, and it is why there is a statutory duty to co-ordinate the requirement to prepare a memorandum of understanding. These issues have been thought about.
Let us be clear on another issue of co-ordination, which relates to crisis management and particularly the involvement of the Treasury. That issue was raised
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On one or two other cross-cutting issues, the importance of cost control and proportionality was raised by a significant number of speakers, including my noble friends Lord Flight and Lord Naseby, and the noble Lord, Lord Bilimoria. The Government agree that cost control and proportionality are fundamental. The PRA and the FCA are required to have regard to proportionality. Both regulators are of course required to carry out cost-benefit analyses and to consult on their rules, as one would expect, but there are a number of areas in which the Bill goes further than previous practice. For example, for the first time, the financial services regulators are subject to National Audit Office audit, and the NAO is able to conduct value-for-money studies. That is something new in the structure to be introduced.
There were one or two specific questions on the scope of regulation. My noble friend Lord Flight asked about life companies and observed that they are very different from banks. I certainly agree with my noble friend on that, and it is precisely why we have a different insurance objective for the PRA and explicit provision covering the PRA's duties in the regulation of with-profits policies. My noble friend Lord Teverson raised a question on rating agencies. The reason why they are not addressed directly in the Bill is that they are now a European competence, and the lead is taken by one of the three European bodies-ESMA-with the Commission.
Two other important areas concerning scope were raised. A number of speakers, including the noble Lord, Lord McFall of Alcluith, my noble friends Lord Lawson of Blaby and Lady Wheatcroft, and others, talked about bank auditors. As with other topics, I cannot do this justice this evening. I simply remind the House that responsibility for looking after auditors and their regulation remains with the Financial Reporting Council, and so it is not part of the Bill. The FRC is doing a significant amount of work around the scope of audit. I was pleased that my noble friend recognised that we had picked up one important issue, going back to his legislation. The practice of dialogue between auditors and regulators, which needs to be addressed, is now in the code of practice, although I heard the suggestion that it might be embodied in the legislation.
Lastly in this area, the question of central counterparty clearing houses-another important issue-was raised by my noble friend Lady Kramer. I remind the House that there is an important European directive coming in this area-the so-called EMIR, the European Market Infrastructure Regulation-which aims to reduce systemic
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I turn to some of the issues concerning the Bank of England's FPC bank governance. First, on the question of the FPC and its objective, the Government recognise that the pursuit of financial stability needs to be balanced against the wider contribution of the financial system to economic growth. As I explained at the outset, the Bill seeks to provide this balance by requiring the FPC to have regard to the proportionality of its actions and by preventing it taking any action that would have a significant adverse impact on sustainable economic growth. Having said that, I listened very carefully to the significant number of noble Lords who pointed out that there should be more recognition of growth in the FPC objective. I have already mentioned many of the speakers who addressed that point but the others included the noble Lord, Lord Mawson, who did so in his characteristic way. I cannot promise any amendments in this area. I listened very carefully but I certainly cannot promise one that directs the FPC to have specific regard to the interests of the Lower Lea Valley, although I think that the House heard very clearly all the great things that are going on there. However, I listened to the points that were made.
Points were also raised concerning co-ordination. On the one hand, the Bill is solving the co-ordination problems by making the Bank and the governor responsible for what some characterised as everything; on the other hand, that presents challenges not only for the person of the governor but for bankers and institutions-something that my noble friend Lord Tugendhat and others brought up. Of course, I certainly accept that monetary policy, financial stability policy and prudential regulation are intimately connected. That is why having these responsibilities under one roof is the best way to ensure that co-ordination. Within that framework, in each role the governor does not act alone but is supported by external and non-executive members and others.
There were other points made by the right reverend Prelate the Bishop of Durham and others on Bank of England governance. I said again at the outset that this is an area in which the Government recognise the need to go further, and I have listened to what has been said tonight. I was grateful to my noble friend Lord Stewartby for pointing out some of the lessons from the Board of Banking Supervision and for recognising that we cannot expect to pick up exactly what it was. However, I believe that the lessons from that experience have been picked up in the design of the PRA board. On the power of direction, I heard speakers say that they believed it to be too constrained. I do not believe that that is the case in relation to the scope that it has in special support operations and the provision of emergency liquidity in relation to the special resolution regime, but I am sure that this is something that we will come back to.
Let me turn to a few remarks about issues on access to financial services. I will be unable to do them full justice, but there were issues around diversity of provision-specifically on mutuals. The coalition agreement makes clear the Government's commitment on mutuals. The Bill requires regulators to analyse the effect of their rules on mutuals, which is a new measure that will help to ensure the fair treatment that we want. The noble Lord, Lord Whitty, and the right reverend Prelate, raised questions about the inclusion and universal provision of financial services. They are very important questions but they are essentially questions of social policy, so are for the Government and not directly for the regulatory structure. On SME lending and questions asked by my noble friend Lord Sharkey and others, the Government are taking significant action, which we have discussed before, outside the framework of this legislation to ensure the flow of lending to SMEs. That work will continue.
In another related area, my noble friend Lord Hodgson of Astley Abbotts talked about the importance of social impact investors. I agree with that but I question the role of the legislation that we are talking about in that area. On consumer credit regulation-important points were made again from my noble friend Lord Hunt of Wirral and others-the Government are committed to designing a proportionate model of FCA regulation for the sector. The Government will consult on this and detailed proposals will come forward early in 2013. My noble friend raised the question of self-regulation. I agree with him that self-regulation which is credible, transparent and effective is an important complement to statutory regulation. The FSA is at the moment looking at different industry codes in the credit industry considering whether, and if so, how they can be incorporated into the new FCA regime.
On payday loans, which was addressed by the noble Lord, Lord Mitchell, the right reverend Prelate, and others, we are awaiting the research being done by Bristol University's Personal Finance Research Centre at the impact on consumers and business of introducing a cap on the total cost of credit-not an easy topic. The final report is on course to be published this summer.
Finally in this area, I will address briefly the question of peer-to-peer lending raised by my noble friend Lord Lucas and others. The Government do not think that statutory regulation is appropriate at this point. The sector is very small and such regulation would be a barrier to new entrants and innovation. However, this is a matter that we will keep under review, and I am grateful to my noble friend for raising it.
On confidential information and its disclosure, I was asked by the noble Baroness, Lady Drake, about the FSA review. If the FSA concludes as a result of the review that changes to primary legislation are needed, we will consider the proposals very carefully and bring forward legislation as appropriate. It is an important issue.
A couple of points were made on the international front, which clearly is highly relevant. The first concerned the mismatch between the architecture in the UK and the developing architecture in Europe. I say to the noble Baroness, Lady Valentine, that this House probably
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I am sure that we will come back at length to the question of international competitiveness that was raised by my noble friend Lord Trenchard and others. The Government's position is that it is what the regulators-the FCA and the PRA-do that will make the difference in determining whether the UK is or is not a competitive place in which to do business, not having a statement about competitiveness. It will be the high regulatory standards and the stability of the financial sector to which these will contribute-the reliability, fairness and consistency of regulation-that will be important in maintaining and driving forward the attractiveness and competitiveness of London. It is those issues that will address the substance of the point.
A challenge was thrown down at a number of points in the debate. The noble Lords, Lord Bilimoria, Lord Barnett and Lord Burns, asked whether this structure would have prevented the recent crisis. In my opening remarks I did not mean to say-and did not say-that the structure was the direct cause of the crisis. Of course the principal cause was the behaviour of firms. However, I was in the structure between 2003 and 2005, and I know that that behaviour contributed to the severity of the impact of the crisis in the UK. No one had the responsibility, the authority or the tools to monitor the system as a whole in the way that will be provided for in the FPC. I sat in the monthly meetings of the tripartite deputies at which the stability side of the Bank, which was being significantly reduced, nevertheless came forward with very good analyses of some of the problems that were welling up.
This was in 2005; I did not have the benefit of seeing what happened in 2006 or 2007. However, the analysis was brought forward but the Bank did not take it upon itself to do anything with it, and the FSA did not take away the lessons from the analysis. The deputy governor of the Bank and his team were doing very good work but it went nowhere. The FSA had insufficient focus on its roles as the microprudential regulator and the conduct regulator. This is why the Bill creates two new focused regulators. There was also a lack of clarity in the run-up to the crisis and the way in which it hit.
This has been a wide-ranging debate, for which I am very grateful. The provisions in the Bill have already undergone a great deal of scrutiny-three rounds of public consultation, pre-legislative scrutiny, the attention of the Treasury Committee and its passage through another place. The Government have already shown that they are flexible and committed to making the Bill as good as it can be by amending it in response. It is already strong legislation, but I look forward to
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Lord Northbrook: Will the Minister write to me and the other Members who asked about strengthening the powers of the Court of the Bank of England and of non-executive members on the regulatory bodies?
Lord Hamilton of Epsom: My Lords, this Bill is of major importance-this is not my idea; it comes from the Minister-and is very significant indeed. However, for some reason the Minister wants to shuffle it off into the Grand Committee Room. The Bill needs close scrutiny and will bring forth the exquisite qualities of your Lordships' House. There is a massive amount of expertise here that can make positive comment on the Bill and make it better than it is today. It would be quite wrong if we were to vote for the Bill to go into the Grand Committee Room. It should be debated in Committee on the Floor of the House and I hope that the committal Motion will be negatived by the House.
Lord Foulkes of Cumnock: My Lords, it is seldom that the noble Lord, Lord Hamilton, and I agree. We were introduced into the House on the same day and I found it a privilege to be introduced on that day. However, I fully agree with him on this issue. I returned from the Recess to find this Motion on the Order Paper. I was not aware of it before and, as far as I know, there was no consultation about it. Members did not know that it was going to be remitted to a Grand Committee. I may have shown a lack of acuity in picking this up but I have discussed today the fact that many Members were not aware that it was going to be suggested that this important Bill should be committed to a Grand Committee.
As the noble Lord, Lord Hamilton, said, this is an important issue. It may not be politically contentious but it is vital. As the Minister said, it arises to some extent from a major financial crisis that hit the headlines. He described the Bill as major legislation and, after talking with Members who have been in the House much longer than me, I believe it is very unusual for such major legislation to be remitted to a Grand Committee for discussion. As the noble Lord, Lord Hamilton, said, it would be normal for it to be taken on the Floor of the House.
There may be other reasons-far be it from me to suggest them-why the Government want to remit the Bill to a Grand Committee, but our decisions as Members of the House should be on the merits of the Bill and not on any secondary reasons beyond the basis of the Bill.
It would be unfortunate if we had to divide on this, so I urge the Minister to withdraw his Motion on the basis that there will be further discussion and consultation with all parties and all sides of the House. I hope he will see fit to do so.
Having been in his position for many years, I understand completely the noble Lord, Lord Eatwell, who expressed earlier his view that we could have a more intimate discussion about issues with the Minister in Grand Committee. Equally, when I was in his position, I always took the view that Bills of major significance, which this one is, should be considered in the Chamber.
There is a particular reason for that. When a lot of issues have to be debated and decided, the only time you can divide in Committee is when a Bill is considered by the whole House, not in Grand Committee. In Grand Committee you have one fundamental opportunity to test the opinion of the House, which is on Report because there is a restricted ability to test matters at Third Reading. So for a Bill like this, with quite a lot of issues, it would be much better for the whole House to consider them so that we can settle them in Committee. Otherwise we will have one of those invidious things where we have to consider how many issues we can deal with by 7.30 in the evening before people go away. You have to take things over from Grand Committee to the whole House on Report.
This Bill is very significant and covers many issues. That has been reflected in our debate over the past seven hours or so. It is our responsibility as a revising Chamber to do this in the proper way by considering it not in Grand Committee but by the whole House.
Lord Myners: My Lords, I rise briefly to add my support to the views expressed by the previous speakers. There are significant issues in this Bill which require attention. They are not issues that divide on party political lines, and it is clear from today's debate that there is a wealth of information and understanding in the House. Having previously taken legislation through Committee both in the House when I was a Minister and in Grand Committee, I have no doubt that this Bill should be appropriately considered by the whole House in order to be able fully to draw upon the knowledge and expertise of your Lordships. I would enjoin the Minister to withdraw the Motion that the Bill be taken in Grand Committee in order to allow further time for discussions through the usual channels-taking into account the views which have been expressed this evening from all sides of the House.
Lord Bilimoria: My Lords, perhaps I may add that this came to a head with the Welfare Reform Bill, which was committed to a Grand Committee. I remember
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Lord Lucas: My Lords, we have to face the fact that we do not do as good a job in Grand Committee as we do in a Committee of the Whole House. There is no opportunity for Peers widely to participate in Grand Committee in the way that there is in the Chamber. Given the importance of the Bill and the depth of interest in it, I hope very much that the Government will listen to what has been said.
Lord McFall of Alcluith: My Lords, perhaps I may remind the House that Finance Bills in the other place are accorded the greatest status by being debated on the Floor of the House. If we are going to have equal status in terms of the scrutiny and examination of this Bill, the least we can do is send a message to the other place that we take this seriously, and that it has to be done on the Floor of the House.
Baroness Liddell of Coatdyke: My Lords, this should not go into Grand Committee, not least because of the historic significance of the past four years and what has happened to financial services-against the background of financial services as a major industry for this country-but also because this is a classic opportunity to showcase the wide range of expertise that is available in your Lordships' House. This is not a Bill to be put into a corner and forgotten about. It deserves-and the public deserve to see us give-the kind of detailed scrutiny that legislation of this importance merits.
Lord Sassoon: My Lords, I am a little surprised by this discussion, not because I do not think it is an important debate but there have been one or two interventions from noble Lords who unfortunately were not here to hear this point addressed during the debate.
First, this was not a decision of mine. I will do whatever the House wants. I was not asked whether I wanted to do it one way or another and I see arguments for doing it either in Grand Committee or on the Floor of the House. This was discussed through the usual channels. I have not seen this sort of discussion in anything I have been involved in. I believe that the usual channels go through these things very carefully, and they came up with an agreement on this that I certainly am prepared to accept.
I also heard the noble Lord, Lord Eatwell, and the noble Lord, Lord Barnett, who is not in his place at the moment, arguing during the debate that the Grand Committee was a better place to take this legislation. I think the noble Lord, Lord Eatwell, referred to the detailed scrutiny of the Bill establishing the Office for Budget Responsibility, on which I had the pleasure and the responsibility of leading. Indeed, that Bill was
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The Welfare Reform Bill can hardly be said to have been an unimportant Bill. What Bill of greater importance has this House considered in the past two years? Everything I have heard suggests that the scrutiny it got in Grand Committee actually worked extremely well, notwithstanding the understandable doubts there were about it.
I do not want to withdraw the Motion. It has been agreed by the usual channels, in which all these matters will have been debated, and I believe that we should stick with what the usual channels have agreed.
Lord Lamont of Lerwick: My Lords, I ask my noble friend to think again about this. This may have been agreed by the usual channels but it is not the usual channels that should entirely count on this; it is the will of the House. Almost all the people who have spoken in the debate are present now and a large number of them have expressed the view that this would be an unsatisfactory way of proceeding. The view has been put that this is comparable to the OBR. With great respect, I suggest that this is a much, much more important measure than the OBR.
Secondly, the Grand Committee is a much more restricted form of scrutiny in that you cannot actually vote on amendments; you cannot have a Division. I know that it is the practice of the House that we do not have too many Divisions in Committee on the Floor of the House. None the less, the pressure on Ministers to give a clear explanation to pointed amendments when there is a threat of a Division is much greater and it makes for a much sharper and more lucid Committee when there is the possibility of a Division. Just to have debates in which there are no Divisions and there are many more Divisions on Report does not seem the best and the most satisfactory way of proceeding. I strongly urge the Minister to reconsider.
Lord Foulkes of Cumnock: The Minister has said that he personally does not mind whether the Bill is dealt with on the Floor of the House or in Grand Committee, which is very helpful. He founds his argument principally on an agreement through the usual channels-and I have great respect for the usual channels. However, I fear that, because of the recess, the usual channels may not have worked as efficiently and effectively as otherwise. If the Minister were to agree to withdraw the Motion, which would be preferable to a Division, we could have a few days to have further discussion and consultation. By that time, the groups will have met; the Cross-Benchers will have had an opportunity to meet; and we can consider this matter again. All we are doing is suggesting that this matter be postponed for three or four days.
Lord Sassoon: My Lords, I have every faith in the ability of the usual channels to work these things out very thoroughly, recess or no recess. We should do what is customary and stick with what the usual channels have agreed.
Baroness Kramer: I have relatively little experience in this area, but it is my understanding that one of the advantages of Grand Committee is the easy access to officials. If the Government are seriously considering a range of amendments, as the Minister has indicated in the debate today, I presume that the ability to discuss and negotiate those and to make sure that government amendments come forward that meet the required standard will be easier within the Grand Committee context. I am something of a novice on this, so I would take the guidance of the House.
Baroness Noakes: Perhaps I may challenge the suggestion made by the noble Baroness, Lady Kramer. While officials sit rather nearer to the Ministers in Grand Committee, I think that they take no active
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The Lord Speaker (Baroness D'Souza): The Question is that this Bill be committed to a Grand Committee. As many as are of that opinion will say content.
Noble Lords: Content.
Baroness D'Souza: To the contrary not content.
Noble Lords: Not content.
Lord Sassoon: My Lords, I hear the opposition to this Motion loud and clear. Rather than put ourselves through the agony of going through the Division Lobbies at this late hour, let me withdraw the Motion and let some more discussions go ahead.
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