Committee (5th Day)(Continued)
122: Clause 5, page 21, line 16, leave out “and”
My Lords, I can assure the Minister that this amendment will not increase his blood pressure. We have a common aim here. Quite simply, it is for the FCA to appoint individuals to the smaller business practitioner panel. Given that the membership of the FPC adequately reflects the four constituent parts of the United Kingdom, we wish this to mirror what happens with the FPC. Given that more people work in financial services outwith London than in London, it is important to reinforce that the financial services industry is not London-centric but is a UK financial services industry. It says that in the Bill on page 20 at new Section 1I:
“In this Act ‘the UK financial system’ means the financial system operating in the United Kingdom”.
I feel that it is important to reflect the four constituent parts of the United Kingdom. I beg to move.
My Lords, I support the amendment with, predictably, an interest in ensuring that Wales is well represented on panels. Too often these westerly people are forgotten, especially as they have rather less of a financial sector. The needs of Welsh citizens are perhaps greater, given how poorly served they are in rural areas. The financially excluded, many of whom are found in Wales, are also poorly served by financial services. I thank my Scottish friend, my noble friend Lord McFall, for his concern for my country and, I am sure, for Northern Ireland.
I turn to Amendment 128 in this group, which provides that the panel should represent households using products. That seems to be key, if only to emphasise the importance of the financial services sector to the whole community. In effect, it is a public utility with some of the same obligations on the industry to provide a universal service even in non-profitable areas. It is equally important to ensure that users of the less profitable services are part of the system of regulation or its scrutiny. It is individuals and families who often rely most heavily on the financial services, even if they do not feature on a CEO’s radar.
Perhaps I should fess up at this point that I was vice-chair of the Financial Services Consumer Panel, so I am acutely aware of the absolute necessity of a broad range of experienced views and backgrounds on the panel. The new panel would deal with a range of issues that impact on a wide variety of consumers. That is part of the reason we so need a panel, because consumers are not a homogeneous group. Their needs, capabilities, life experience and expectation, as well as their interaction with the sector, cannot easily be slotted into a “consumers” box and ticked off by the regulator. The panel would need to draw on the policy, research, intelligence and expertise of those people long embedded in the consumer world, who bring with them in-depth knowledge and understanding of consumer behaviour, consumer detriment and—equally important—consumer law, debt management, credit, insolvency, complaint handling, redress, retail sales, the financial world and possibly even Europe. I am particularly pleased that the noble Baroness, Lady Wilcox, who is very experienced in consumer matters, particularly when speaking on redress, is in the Chamber at the moment. However, aside from that expertise, the panel will also need some streetwise input, perhaps from people less exposed to the intricacies of regulatory regimes, Europe, consumer law and research, but who know what the world feels like from less exalted heights than the portals of Canary Wharf.
I now turn to the major issue, which is Amendment 136ZA standing in the names of my noble friend Lord Eatwell and myself. It is about the need to balance the caveat emptor principle—buyer beware—with an equal responsibility on those advising or providing services to consumers to act in the “best interests of clients”. We have heard of the challenge facing consumers in judging whether a company is prudentially secure, or whether the product they are buying is fit for purpose, presents value for money or even covers the risk they assume it will. Added to that, as mentioned earlier today, the very pricing of products, their complexity and people’s lack of understanding of their own risks, let alone the risks inherent in products, makes it very hard for consumers to have the knowledge to take responsibility for the choices they make. The level of risk left with consumers is often unclear. The meaning of “guaranteed” or “tracker” may differ quite substantially from their common-use meaning. Consumers often bear a level of risk unknown to them and seldom explained; they are effectively making choices blindfold.
In an ideal world, of course, we support the responsibility principle. Markets are made to work by consumers shopping around and driving up standards. However, in this market, with those long-term “credence” goods, opaque structures and the asymmetry of information, we need to reintroduce some trust and transparency by balancing consumer duties with provider duties. It is an industry beset with low levels of compliance and high levels of complaints; there are no agreed standards for complex long-term products, so it is hard to expect consumers to adopt a higher degree of responsibility than is already legally acknowledged.
I have concerns, therefore, that by writing consumer responsibility into the Bill, new section 3B(1)(c) appears to “up” the existing situation. In law there are no obligations placed on consumers other than to act honestly. It is not clear what a greater emphasis on consumer responsibility might achieve. Why impose this possibly new principle of consumer responsibility without any countervailing responsibility on the service provider? Amendment 136ZA expresses the need for that balance, at the point where the industry might otherwise grab hold of this wording and say, “See—it was their responsibility and their choice”. The noble Lord, Lord Turner, whose chances of becoming Governor of the Bank of England I might now damage by quoting him approvingly, said yesterday that people,
“doubt banks’ values; and they doubt whether banks have their interests at heart”.
He went on to say that the boards of directors and managers must introduce,
“effective controls against dishonest behaviour”,
in order to change the perception of bankers. This amendment seeks to ensure that providers act in the best interests of clients, which would be just one way of guaranteeing the good behaviour for which the FSA chair awaits. Why should only consumers accept responsibility for their own decisions? Why not regulated firms, and authorised firms? It is as if the Bill’s draftsmen are at pains to ensure that consumers should have only themselves to blame. If this phrase “consumer responsibility” is to mean more than the current legal position, then the Minister needs to explain that to us. If it is only common law, then why include it?
My Lords, I will take Amendments 122 to 127 and 128 first of all. As the noble Lord, Lord McFall of Alcluith, has explained, these would require the FCA to appoint persons representing the constituent parts of the United Kingdom to each of its consultative panels. The role of the panels is to provide a forum for focused consultation. I believe that the current provisions, which require the persons appointed to be representative of consumers and practitioners in particular sectors, provide the right focus here. To do this requires the FSA now, and the FCA in the future, to seek a diverse range of panel members. I am satisfied that the FSA already takes account of these matters in making appointments. For example, as a matter of practice in making appointments to the consumer panel, which is done through a fair and open process, the FSA aims to make sure that the panel as a whole not only encompasses a broad range of relevant expertise and experience but also represents the constituent parts of the UK. That is as it already is.
The FSA also looks for some geographical spread in the smaller business practitioner panel membership, where that is possible. The large retail firms that sit on the other practitioner panel, by definition, tend to have a large geographical spread that they bring to the table as national firms. Diversity in terms of geographical spread of representation can, therefore, be achieved in the existing model where members are appointed to represent the interests of consumers and practitioners rather than to represent parts of the UK.
For these reasons, although it is important to have on the record how this operates now and how I would expect the FCA to operate in the future, I would be concerned that these amendments could reduce the effectiveness of the panels as forums for focused consultation on the issues which matter most to those most affected by the FCA regulations. I would not want in any way to either dilute or change the focus of the panels on what they are ultimately there to represent.
Amendment 136ZA would expand the principle to which the regulators are required to have regard, such that consumers should take responsibility for their decisions only where firms abide by,
“the duty to act in the best interests of clients”.
The consumer responsibility principle set out at new Section 3B(1)(c) establishes that the regulators should not be aiming for a regime where consumers abdicate all responsibility for their decisions. As I think the noble Baroness recognises, that is balanced by Section 3B(1)(d), which requires the regulator to have regard to the principle that senior management of authorised firms should be responsible for ensuring that they comply with the regulator’s requirements. Taken together, the two principles confirm that the transaction between a firm and its customer involves responsibility on both sides. Although strong regulation ensures that firms are required to provide important information in a comprehensible fashion, it is ultimately the customer’s decision whether to enter into the transaction, and it is the firm’s responsibility to comply with the regulator’s requirements.
The consumer responsibility principle is a matter to which the regulators must have regard but does not create a duty, or impose any new or additional responsibility, on consumers. I am not suggesting that the noble Baroness was saying that it did but, in talking about common law and so on, there is a danger that we might stray into convincing ourselves that it does create a duty or an obligation on consumers. However, we should be clear that it does not. The consumer responsibility principle exists to inform the way that the authorities pursue their general functions and does not bite directly on individual firms or individual regulatory decisions.
This amendment would only serve to dilute and perhaps confuse the way in which the authorities have to have regard to consumer responsibility, such that the regulator’s rules and requirements would have to envisage that consumers do not take any responsibility for their decisions when they judge that firms have not been acting in their best interests. I do not believe that can be right. Although I agree that consumers and firms should enter into transactions in good faith and that firms should be sanctioned when they do not comply with the regulator’s requirements, the authorities should not be required to regulate under the assumption that consumers, however sophisticated they may be, abdicate all responsibility for their decisions when firms fail to act in their best interests.
The Bill contains a wide range of powers to protect the interests of the full range of consumers who might transact with authorised firms. This amendment would blur the boundaries between consumers, firms and the regulator. For that reason, I cannot accept it. On the basis of those explanations, I ask the noble Lord, Lord McFall of Alcluith, to consider withdrawing his amendment.
Amendment 122 withdrawn.
Amendments 123 to 127 not moved.
127ZA: Clause 5, page 22, line 26, at end insert—
“(7) The Bank must consult with the Markets Practitioner Panel on the regulation of clearing and settlement infrastructure when the FCA agrees that proposed changes will have an impact on the regulation of trading infrastructure.
(8) The Markets Practitioner Panel will be able to request information from the Bank via the FCA to enable them to provide appropriate advice to the FCA.”
My Lords, with the leave of the Committee and at the request of my noble friend Lord Northbrook, I rise to move Amendment 127ZA and also speak to Amendment 128AAA in his name. My noble friend is unable to be with us to speak to these amendments due to other commitments.
The new regulators will have many new powers to add to the formidable armoury of powers already held by the FSA. Consultation with practitioners in the industry about the practical aspects of policy, rules and practice is crucial. Amendment 127ZA concerns consultations carried out by the Bank of England in relation to the clearing and settlement systems that it will regulate in future, together with the role of the FCA in that. In general, the consultation arrangements in the Bill for the market areas covered by the FCA are welcomed by practitioners. In particular, the Bill, which mandates several panels to be used for consultation, includes a specific markets panel. However, there is concern in relation to the clearing and settlements systems, which are to be regulated by the Bank of England rather than the FCA. I understand the reasons that led to that decision, but it results in some fragmentation of regulation. Clearing and settlements systems will now be separate from the rest of markets regulation and practitioners are concerned that, in the absence of provisions in this Bill for consulting practitioners about clearing and settlement aspects, there could be problems.
Amendment 127ZA sets up a consultation requirement in this respect by requiring the Bank of England to consult the markets practitioner panel, which is set up under new Section 1P as part of the FCA’s consultation mechanisms. This amendment also allows the panel to request information from the Bank via the FCA in order that the panel can then advise the FCA on any related issues—for example, regulatory changes made by the Bank in relation to clearing and settlement systems, which may well have an impact on trading infrastructure, which the FCA itself will be regulating.
I thank the Minister’s officials for explaining to me how the Bank’s new powers will work legislatively and how the consultation provisions fit in. As I understand it, there will be a statutory requirement for the Bank to consult generally on the exercise of its new regulatory powers in relation to recognised clearing houses, but the consultation with practitioner panels or the FCA is not mandated. The Bill is silent in relation to settlement systems, and we have to wait to see what the eventual regulations will say.
Will the Minister explain how the Government intend consultation to work for settlement systems? Can he also say how the Government see proper co-ordination between the FCA and the Bank of England in this area? Is there, for example, any intention to involve the markets panel—and if not, why not? In respect of clearing houses, can the Minister explain why the requirements in respect of consultation by the Bank for clearing houses in Schedule 7, which applies the general PRA requirements for consultation on rules, specifically remove the requirement for the PRA to consult the FCA and has no requirement to consult panels?
Amendment 128AAA in this group tackles a rather broader issue. Under new Section 1R, the FCA must consider representations made to it by the panels and must publish responses to representations. The corresponding FiSMA requirements were for the FSA to respond in writing with reasons for disagreeing with a panel’s recommendations but this has been omitted from the Bill. The amendment of my noble friend Lord Northbrook reinstates that requirement.
Everybody understands that the FCA will not accept every single recommendation or view put to it, but it is not acceptable that the FCA can merely ignore any recommendations put to it by the panels and merely publish a response “from time to time”, which is all that new Section 1R requires. The FCA ought to be open to the possibility of dialogue with the panels. It is entirely possible, for example, that the FCA could misinterpret a comment or recommendation made to it. The Bill might make the FCA near-omnipotent, but it should not be predicated on the FCA being near-omniscient.
Both these amendments have been suggested by the existing financial services practitioner panel, which has done good work since the FSA was set up. It knows what it is talking about and if it is concerned, I believe that the Committee should be too. I do not claim that the drafting of my noble friend’s amendments is perfect but they are probing amendments. I beg to move.
My Lords, I support the amendment in the name of my noble friend Lord Northbrook and moved by my noble friend Lady Noakes. While I understand very well the reasoning behind splitting regulators into a multitude of new regulators, it nevertheless remains very necessary to make sure that regulation is well co-ordinated, not duplicated, and made as understandable as possible to practitioners and consumers alike. It is very sensible indeed that the regulation of trading infrastructure also be brought within the sphere of influence of the FCA. The requirement that,
“The bank must consult with the Markets Practitioner Panel on the regulation of clearing and settlement infrastructure”—
deals with that. I agree with my noble friend that the drafting is not yet perfect. In particular, I find somewhat confusing the second paragraph, which states:
“The Markets Practitioner Panel will be able to request information from the Bank via the FCA to enable them to provide appropriate advice to the FCA”.
However, in principle, this is a move in the right direction and I strongly support it.
One of the problems with regulation is that regulators, even if they have practical experience of banking, insurance or other financial services, very rapidly become out of date because markets change so rapidly. There are many very competent former bankers working for the FSA who are out of date with the way markets actually operate today. Therefore, I think it very necessary to have a practitioner panel for the PRA as well as for the FCA. However, that is the subject of a subsequent amendment.
Amendment 128AAA also deserves support for putting the requirement back on the FCA to give a statement in writing of its reasons if it disagrees with a view expressed by the practitioner panel. That is very sensible.
My Lords, I shall speak in support of Amendment 128AB in the name of myself and my noble friend Lord Eatwell. I shall also speak to Amendments 128AAA and 130ZB. Accountability means not just listening, but a dialogue: a conversation which hears and responds, and gives written reasons for disagreements. As the noble Baroness, Lady Noakes, said, they will not always agree, but that is quite healthy: we just want to know why. It has really worked very well with the FSA panels under the old Section 11. The proposal would just take that forward and continue it in the new Bill. This encourages transparency and forces the panels to think very hard about what they say and to do their homework well. It also makes the regulator consider submissions carefully and set out where and why they have problems, either with the analysis or with the conclusions. This adds to the openness of the regulator’s thinking, but also to that of the panels, so that consumers and practitioners can also track the record and impact of those who purport to represent their interests, and know how well they are impacting on the regulator’s work. I hope this is one of the areas where the Minister is able to “say yes”.
My Lords, to manage expectations before the break I attempted to say that I was not going to be as accommodating all through the day. In qualitative terms I will be as accommodating, but I can only work with the material that is in front of us. In this case, it is possibly a matter of explanation and reassurance. I hope that some, if not all, of the matters here are going to be covered satisfactorily.
Amendment 127ZA to which my noble friend Lady Noakes spoke would mandate some quite complicated arrangements for the Bank of England to consult the markets practitioner panel of the FCA, in certain cases. I do not make a comment about the drafting, but the general arrangements here would be quite complicated. In addition, the markets practitioner panel would also have the ability to request information from the Bank, but only via the FCA and only for the purpose of assisting the FCA. I had not been quite sure what the amendment was trying to achieve, but I now understand from my noble friend that it is a matter of strengthening the co-ordination between the Bank and the FCA in relation to market infrastructure, as well as strengthening the consultation arrangements in relation to infrastructure matters. I understand why this is important, but will attempt to explain why I believe it to be unnecessary.
There is of course nothing to stop the Bank of England consulting the markets practitioner panel or any other panel, or their members or anyone else. It is worth remembering that. It is also important to bear in mind—it may be more important in this case—that the Bank of England will be regulating only a very small number of institutions in this highly specialist area. That really is the key point. I suggest that there is not a lot to be gained by trying to institutionalise consultation arrangements in this way because of the small number of specialist players.
The Bank will indeed be able to consult each of the entities that it regulates individually, should it wish to do so. That is of course an inconceivable position for most of the other subsectors of financial services, where a panel arrangement is therefore necessary to corral views efficiently. I am not sure what a requirement to consult the markets practitioner panel would necessarily add here. More generally, the Bill already introduces a requirement for the Bank and the FCA to have a memorandum of understanding relating to infrastructure regulation, while there is of course nothing to stop the Bank and the FCA working together in any way that they want, subject to the framework of the Bill.
I think that panels are not required in this area. I hesitate a bit because my noble friend Lady Noakes may come back at me on the settlement question. I accept that on that aspect I should possibly take a bit more time to reflect on my noble friend’s views, just to make sure that all angles have been covered in what I have said and in what has been indicated by the Bank and the FCA, so far as it is relevant to them. However, specifically on settlements, I appreciate that I might reflect a little further.
I turn to Amendments 128AAA, 128AB and 130ZB, the first two of which require the FCA to provide a statement in writing to any panels it establishes where it disagrees with any of the representations. Amendment 130ZB would make a similar provision for the PRA. I note that these amendments replicate the existing provisions in FiSMA. It may help if I explain the thinking behind why the Government consider it right to depart from the existing approach in FiSMA. It is because the Bill imposes a general duty on the regulators to publish responses to the representations they have received, which is wider than the current requirement in FiSMA. The regulators must respond to all representations, rather than simply those with which they may disagree. That was a conscious change because it did not seem right that the only responses the regulators should have to give to the panels are where they disagree with them.
We do not want to promote an antagonistic relationship between the regulators and any of the panels that they may establish. We have also required the regulators to publish their responses to help inform public understanding and enhance accountability. I reassure the Committee that this duty will, in practice, require the regulators to give their reasons for rejecting or departing in any significant way from a recommendation of one of their panels. With those explanations, I hope that my noble friend will feel able to withdraw her amendment.
My Lords, I thank my noble friend Lord Trenchard and the noble Baroness, Lady Hayter, for their contributions to the short debate and I thank my noble friend the Minister for his response. I note that he will look again at the settlement system, which raises slightly different issues because of the different way that it is dealt with legislatively. I doubtless await a letter from him during the summer, which I shall look forward to.
The Minister said that there was nothing to stop the Bank of England from consulting anybody—it may be that he was playing that for laughs. The real purpose of tabling this amendment was because there is no specific mention of panels, and there is a concern that the Bank of England will not use its general obligation to consult the right people. The right people are not necessarily just the people they are regulating but also those who are impacted by regulation, such as the people you would find on something like the markets panel. That is also why I tried to press my noble friend the Minister on why the Bank did not have to consult the FCA when dealing with regulatory matters in this area. I put it to my noble friend that he has not quite addressed those issues. I hope that he will think further on this before we get to Report, and I will certainly reflect on what he has said.
In respect of the second amendment in this group relating to explanations in writing, the Bill states:
“The FCA must from time to time publish in such manner as it thinks fit responses to the representations”.
This does not convey the sense of what the noble Baroness, Lady Hayter, referred to, which is dialogue. At the moment the panels operate in a much more collaborative mode, feeding through ideas as well as making formal representations, and they are being seen here, I think, as just another consultee to be dealt with along with responses from any other consultee. The sense that the practitioners have is that the quality of relationships will deteriorate going forward, and that is a matter of concern.
These amendments were tabled by my noble friend, as I said, following the comments made by the financial services. I know that my noble friend will want to talk to them before we return to this Bill at Report. I thank my noble friend the Minister for his reply today but I do not think that I can regard the issues as settled. However, I am prepared to withdraw the amendment today.
Amendment 127ZA withdrawn.
Amendments 127A to 128AB not moved.
128B: Clause 5, page 23, line 8, leave out “may” and insert “must”
My Lords, I shall speak also to Amendment 130A in this group. These amendments deal with value-for-money studies for the FCA and the PRA respectively. I am delighted to see that the noble Lord, Lord Eatwell, and the noble Baroness, Lady Hayter, share my enthusiasm for value-for-money studies for the FCA and I hope to persuade them that they should be enthusiastic about value-for-money studies for the PRA as well.
Amendment 128B amends new Section 1S of FiSMA, inserted by Clause 5 of the Bill. The new section states:
“The Treasury may appoint an independent person to conduct a review of the economy, efficiency and effectiveness with which the FCA has used its resources in discharging its functions”.
My amendment would change that “may” to “must”. Amendment 130A does exactly the same thing to the equivalent new Section 2M for the PRA. These are probing amendments. As a veteran of may/must debates, I am well aware that the Government will argue for flexibility to respond to circumstances and not be tied to any particular course of action, so my noble friend need not spend a long time reading out all of those comments from his notes.
My purpose in tabling these amendments is to ask the Government to state how they intend to use the powers. There is a similar power in FiSMA in respect of value-for-money reviews of the FSA, but the only time that I can recall it being used was when the C and AG was asked to carry out a review around 2007. I believe that my honourable friend Mr Mark Hoban last year described Section 12 of FiSMA as being “underused”. Because the existing power was used so sparingly, the simply rollover of the FiSMA formulation into this Bill is surprising.
My amendments say that the Government “must” set up independent reviews, but I accept the criticism of the Minister’s officials that I have not rounded that off by saying how often such reviews should be conducted. My own view is that they do not need to be conducted absolutely every year but they do need to happen reasonably often—for example, every three years. I hope that the Minister will set out how the Government intend to use the powers to subject the FSA and the PRA to VFM reviews.
My noble friend will be aware that the FSA was much criticised by large swathes of the regulated community for lack of economy, efficiency and effectiveness. The FSA raises its moneys through fees, and the only thing that appeared certain was that fees would go up, often by significant amounts. Consultation on its key proposals did little to silence its critics. Subjecting the FSA to an independent VFM review was seen as important as there are no natural downward pressures on the FSA’s costs. It obviously has no marketing wish to compete and it is not accountable to the Treasury for its use of resources. This is a recipe for inefficiency, and it is important that the successor bodies to the FSA are genuinely put under pressures to deliver regulation at a cost that is proportionate to the benefits.
The FSA’s current budget is going up very considerably and people understand in part why that is, although not all sections of the regulated community understand why their particular share of the costs is going up. Generally people accept that the costs of regulation will rise, but I hope that the Government will agree that lack of efficiency or effectiveness must not be allowed to shelter behind the banner of tougher regulation and that the successor bodies to the FSA must routinely be exposed to an examination of how well they spend their money.
I would also like to use this amendment to ask how the Minister explains the relationship between the reviews that can be set up under the new Sections 1S and 2M and the annual audits of the new bodies. Under Schedule 3, the Comptroller and Auditor-General will carry out the annual audits of the bodies, which is fine, but will the C and AG be entitled and expected to carry out regular value for money reviews of the FCA and the PRA? Will value for money reviews therefore happen when the C and AG wants it to happen or only if the Treasury uses its powers under this Bill? I hope that my noble friend will be able to respond positively to the thrust behind these amendments.
My Lords, I support the noble Baroness, Lady Noakes, in the amendment that she proposes. I have added my name, as has my noble friend Lady Hayter. It is clear that there must be a satisfactory set of amendments for reviewing the effectiveness of this new regulatory structure and whether it provides value for money as conceived, particularly given the added complexity of what the noble Viscount, Lord Trenchard, referred to as the multiplicity of regulators now created out of this single structure.
I speak, too, to Amendments 128BB and 130AA in the name of myself and my noble friend Lady Hayter. Amendment 128BB adds to a definition of an independent person that a person appointed to review the FCA must be independent of the FCA but also of the Bank of England. We should have somebody standing outside this regulatory complexity who should be deemed to be independent. I suggest that if the person appointed is a staff member of the Bank of England, the notion of independence will be compromised, even though the FCA stands outwith the Bank of England. I hope that none the less there will be continuous regulatory dialogue between all the elements in the regulatory apparatus that we are designing here and that it will therefore be necessary, if somebody is independent, that they should stand outside that regulatory community, of which the Bank of England will be a leading part.
The point with Amendment 130AA is that the Treasury in appointing an independent person to conduct a review should inform the Treasury Select Committee of the nature and arrangements of the review, the idea being that that committee itself conducts reviews of the operations of regulatory institutions and will greatly economise on and facilitate the overall operation of a review procedure if there is no duplication and if there is clear communication and understanding between what the Treasury Select Committee and the independent person are doing. These two scrutiny agents should be co-ordinated and we should not have further segmentation; we have too much in this Bill already, and we should not have further segmentation in the procedures that we are designing.
My Lords, first, I will make some comments on Amendments 128B and 130A, and explain who can initiate reviews. One of the main points made by my noble friend was essentially about how things are different from the way they have been up until now, and who can initiate reviews. I am sure we all agree that the Treasury’s power to appoint a person to carry out a value-for-money review is important to support accountability to the Government, to Parliament and to the public, not least because those reports of reviews must be published and laid before Parliament.
However, regarding my noble friend’s particular point, in future the NAO will also be able to initiate its own VFM reviews. As she identifies, that flows as a result of the Bill making the regulators subject to the NAO audit. I hope that provides reassurance to her on that important point. Clearly our expectations should be in the right place. The NAO can only conduct a certain number of VFM reviews each year across the whole of the public accounts which they audit, but I think my noble friend explicitly said—and I agree with her—that it would not be a question of an annual review. At the same time, the Government need to be able to order a review of the FCA at any time, with the option to focus on areas of the FCA’s activities they see as a priority, and be accountable for the way they exercise this power. In practice, the Treasury is likely to choose to appoint the NAO to carry out such a review. As such I do not see what would be added by placing an obligation on the Treasury to order reviews under new Section 1S, particularly as the amendment does not specify the time period or any of the other circumstances in which a review should be held; I think my noble friend recognises that. Particularly in the light of the fact that the NAO itself will be able to initiate VFM reviews, it would be too early to say how frequently the Treasury will use its power, because it will clearly dovetail to some extent with what flows from the audit. However, in response to my noble friend’s key point—she quoted my honourable friend the Financial Secretary—I am confident that the arrangements we have proposed will deliver a step change in the FCA’s accountability to Parliament, as compared to the way it has been with the FSA, for the way in which the FCA uses its resources to achieve value for money.
Amendment 128BB seeks to amend the requirement that a person appointed by the Treasury to conduct a review must be “independent of the FCA”, by adding the requirement that they must also be independent of the Bank of England. I absolutely agree that it is important that VFM studies of the FCA are carried out by someone independent of the FCA itself. That is what is proposed in the draft of the Bill itself, not least to provide assurance that they are objective and impartial. As I have said, in practice the Treasury is likely to choose the National Audit Office to carry out such a review. However, the Treasury will have the discretion to appoint an independent expert or a commercial firm with relevant specialist expertise to conduct a review. In that context the amendment is too wide, in that it could prevent any firm or expert which had done any significant amount of work for the Bank of England from carrying out such a role. From what the noble Lord said I appreciate that that was not the intention, but ruling out that population of firms or experts would be the effect of requiring the FCA reviewer to be independent of the Bank.
If I may say so, that is absolute nonsense. Are we actually suggesting that any independent firm or individual who has done work for a government department is thereby compromised and no longer an independent person? Are we saying that an independent person who has happened to write a few papers for the research department of the Bank of England is now no longer an independent person and is thereby compromised because he is not independent of the Bank of England? That is a misuse of language.
First, I am not sure why the noble Lord, Lord Eatwell, talks about advisers to government departments. Here, we are talking about finding firms to carry out value-for-money reviews of the FCA, and independence from the FCA would seem to be the overriding concern. We are not talking about the Bank of England itself or some part of the Bank of England’s wider group doing the review. As I am sure the noble Lord knows, with all the increasingly tough professional codes that exist, the definition of independence is becoming ever tougher. Therefore, although the noble Lord and all of us might like to go back to a sort of common-sense, gentlemanly world that once existed, I absolutely stand by what I said. The amendment—whose effect incidentally goes wider than the noble Lord indicated in speaking to it—would capture a range of firms just because of the way that professional independence has come to be defined these days. Therefore, I stand by my analysis of the amendment.
Amendment 130AA would require that when the Treasury orders a review of the economy and efficiency of the PRA, it informs the Treasury Select Committee of the nature of, and arrangements for, the review. I understand that the amendment is driving at the importance of accountability to Parliament. The Government agree that that is important, which is why there is already a large amount on this subject in the Bill, including the provision for NAO audit, which we have discussed.
Requiring the Treasury to inform the Treasury Select Committee of the nature of, and arrangements for, the review at such an early stage might have some benefits of the sort that the noble Lord identified but I fear that it is more likely to be seen as an invitation for the Treasury Select Committee to comment on or even attempt to change the remit of these important reviews. I suggest to this Committee—I would not suggest anything to the Treasury Select Committee—that adding another political hurdle could slow up the process of producing these reviews. It may even make it less likely that they will be commissioned in the first place if there has to be a negotiation of the sort that I fear.
I hope that those explanations are sufficient for my noble friend to be able to withdraw her amendment.
My Lords, I am grateful for the contribution of the noble Lord, Lord Eatwell, to this debate and for my noble friend’s reply. Perhaps I may comment on Amendment 128BB in the name of the noble Lord, Lord Eatwell, concerning independence. I think that my noble friend has stretched even the most stringent modern interpretation of independence way too far. On his interpretation, the NAO might not be independent of the FCA and therefore might not be able to carry out any further reviews of the FCA. I hope that my noble friend will reflect on the need for independence. We have to remember that when the Bank of England, rather belatedly, appointed people to carry out reviews of itself recently, independence was not exactly plain in the appointments that were made.
I thank my noble friend for his responses on value for money. It is slightly odd that the Government intend to use the NAO to carry out value-for-money studies, but they have set up the NAO to be appointed the auditors, so it might carry out value-for-money studies. I am still left with the feeling that the carryover of the ability to appoint somebody to do a review is just repeated legislation which might lay fallow, as the FiSMA legislation largely lay fallow. However, I thank my noble friend for his response and beg leave to withdraw the amendment.
Amendment 128B withdrawn.
Amendment 128BA had been withdrawn from the Marshalled List.
Amendment 128BB not moved.
128BC: Clause 5, page 23, line 28, at end insert—
“1SA Report to Treasury Select Committee
(1) The FCA must conduct reviews of its own policy and performance if requested by the Treasury Committee of the House of Commons.
(2) On completion of a review, the FCA must make a written report to the Treasury Select Committee setting out the result of the review.”
My Lords, in moving Amendment 128BC I shall speak also to Amendment 143B in this group. These amendments are in the name of the noble Lord, Lord McFall, and myself and are part of the suite of amendments we have tabled to ensure that the views of the Treasury Select Committee in another place are given a proper hearing and receive a proper government response.
Amendment 128BC introduces a new Section 1SA which requires the FCA to review its own policy and performance, if requested by the Treasury Select Committee, and to send a written report of the review to the TSC. We have just debated the Government’s powers to initiate value-for-money reviews of the FCA. This amendment goes further and allows Parliament, through the TSC, to require reviews.
The cause célèbre which underpins this amendment is the FCA’s review of the failure at RBS and its own role in that. I should remind the Committee that I am a director of RBS, but, thankfully, I was not involved at all during the period covered by the report. It took huge pressure from the Treasury Select Committee to get that report into the public domain.
The Government’s response has been that such reviews and their publication are a matter for the Executive, rather than Parliament. However, the problem that the Government have is that it did not work in the case of the RBS report, which leaves Parliament without any direct means of dealing with any similar cases in future. It is not always self-evident that the Government of the day have the same interest in transparency and accountability as Parliament, especially when the Government have themselves been so closely involved in a particular event or series of events.
Amendment 143B features another aspect of the role of the Treasury Select Committee—this time in relation to the appointment of the chief executive of the FCA. Under the new Schedule 1ZA of FiSMA the chief executive is to be appointed by the Treasury and the amendment would add the words,
“following consideration by the Treasury Select Committee of the House of Commons”.
On our first Committee day, which I was unable to attend, there was much discussion of the role of the Treasury Select Committee in relation to the appointment of the Governor of the Bank of England. The Government’s position appears to be that the Treasury Select Committee is to have no role whatever in the appointment but that it may hold pre-commencement hearings. My noble friend Lord McFall—sorry, he is not my noble friend; it feels like he is my noble friend but he is actually the noble Lord, Lord McFall—asked the Government to think again about that.
The reasons usually trotted out by the Government are unproven assertions. In particular, the role of the governor is said to be so market sensitive that it has to take place without any parliamentary involvement. I am not sure that there has been any empirical evidence to back that up, but it is much more extraordinary that the Government are citing market sensitivity for the appointment of the chief executive of the FCA. The Treasury Select Committee does not accept this assertion, and it calls into question exactly how the Government think that markets work in practice.
The age of parliamentary examination of candidates for major public offices is already upon us. In general, they go well; but there have already been reports of cases from committees in another place which have not gone well. In at least one pre-appointment hearing the candidate withdrew because the hearing did not go well. Provided that this can be handled with dignity, it seems to me that this is a sensible part of a parliamentary democracy. However, post-appointment and pre-commencement hearings raise quite different issues. I recall a distinctly lukewarm if not completely damning report by the Treasury Select Committee in respect of one of the MPC appointees. It did not invalidate the appointment but it got off to a difficult start and certainly undermined the credibility of the individual involved.
If the Government stick with post-appointment hearings only for posts such as chief executive of the FSA, it is only a matter of time before the Treasury Select Committee, or a similar committee, reaches a different conclusion from the Government and makes its views plain, as indeed it should do. Where does that leave the position of an appointed but disapproved of chief executive of the FCA?
The Government need to think this through again. If, as I suspect, the evidence which stacks up shows that the case for market sensitivity is not convincing, it would be wise to ensure that Parliament’s view is taken fully into account before executive decision-making. I beg to move.
My Lords, I rise to give particular support to the second amendment to which the noble Baroness has spoken. I shall not repeat the very strong arguments that she made about the need for this to be pre rather than post-appointment. I would just add a few comments about the importance of the role of the chief executive of the FCA to consumers—as may be a bit expected of me now. After all, consumers are the people on whose savings, or need to borrow, this industry depends.
The Financial Conduct Authority has been called the consumer champion, albeit the word “consumer” no longer appears in the title. That is how, I am delighted to say, the newly appointed chair described it to me. I know that that is what consumers will want it to be. We need this new architecture to have the confidence of the public—some of whom undoubtedly hold financial products at the moment, while some may have done so in the past, and some might do so in the future. Without the confidence that this sector will behave and conduct itself in their interests—with integrity, professionalism and high standards of behaviour—what chance is there that those individuals will save for their homes or pensions, or that small businesses will borrow to produce growth and jobs?
The people who can hold the FCA to account and to scrutiny on behalf of all those millions of small savers, borrowers and those with simply a bank account are, of course, our Members of Parliament. They should, therefore, through their Treasury Select Committee, hold a pre-appointment hearing of the chief executive. This will establish in successful candidates’ minds that they are responsible to the people for the performance of their organisations. Chief executives will know that they will return to the Treasury Select Committee from time to time to account for their record and explain their decisions. That will be a healthy relationship. It does not give the Treasury Select Committee a veto, but it makes clear that the candidate needs to establish the confidence of that committee before taking up the post, and that before appointment she or he has the capability and the vision to stand in the shoes of clients and safeguard their interests. That is not too much to ask.
My Lords, my noble friend’s Amendment 128BC would require the FCA to conduct reviews of its policy and performance if requested to do so by the Treasury Select Committee, and to report to it on that review. It is clear that, under the current system, the regulator is not sufficiently accountable when things have gone wrong, so the regulator itself needs to take primary responsibility for initiating reviews. The Bill provides a much clearer framework for when the FCA should initiate a review into regulatory failure. It includes a number of measures intended to rectify this.
In future the FCA will be required to conduct an investigation and report on possible regulatory failure with the triggers set out in statute. This is supplemented by the power of the Treasury to order an investigation when it considers that an investigation would be in the public interest. The Treasury must, subject to limited exceptions, then lay such a report before Parliament. There are also the value-for-money and NAO audit powers to which my noble friend referred in the previous group. This is an extensive framework that should significantly enhance the ability of Parliament to hold the regulators to account in future.
I understand that the Treasury Select Committee has recommended that the Bill should go further, and clearly Parliament has an important role in calling for reviews. However, it does not need additional powers to do so. If the Treasury Select Committee believed that a review under Clauses 69 to 76 was required but was not being conducted, it could request such a review. The FCA will in any but the most unusual circumstances comply, as is the convention. Of course, the FCA would be available to report back to the Treasury Select Committee. This is, in fact, what happened in the case of the FCA’s report on the failure of RBS. Additional wording in the Bill is not necessary.
Amendment 143B seeks to create a statutory requirement for pre-appointment scrutiny of the FCA chief executive. This is something that the TSC recommended in its report on the FCA. The Government believe that it is more appropriate that the appointment should be subject to a pre-commencement hearing. Let me explain why. This is the same approach that has been taken for the appointment of the chair of the FSA, and appointments to the MPC. Pre-appointment Select Committee hearings are not convened for all public appointments and, indeed, have seldom been held for chief executive posts. They are not held for the appointment of chief executives at other sectoral regulators such as Ofcom and the Office of Rail Regulation. They are generally used for appointments where the post plays a key role in regulating government itself, or in protecting public rights, or where independence from Ministers is particularly vital to the credibility of the post.
Although this process is appropriate for some offices and non-executive appointments, it introduces scope for delay and public disagreement over whether a candidate is fit for an appointment, which risks damaging confidence and undermining the effective operation of the ultimate appointee. It would not be appropriate for appointments to a regulator of financial markets and services, which is, additionally, a market-sensitive appointment. Pre-commencement hearings will provide the right balance between allowing for TSC scrutiny and protecting markets from undue uncertainty.
I therefore hope that noble Lords can accept that the Government’s proposal will significantly enhance the Parliament’s ability to hold the regulators to account, and that I have explained why I do not believe that it is necessary or appropriate to go further in the way that the amendments suggest. I therefore hope that my noble friend will feel able to withdraw her amendment.
My Lords, I thank the noble Baroness, Lady Hayter, for her response to Amendment 143B, and I thank the Minister for his reply.
In connection with the reviews, my noble friend relied heavily on the provisions which are in the Bill—which we will come to later—in respect of regulatory failure leading to reviews, as if that was the beginning and end of it. My amendment and the amendment suggested to us by the Treasury Select Committee itself—or by the clerks to the committee—provide that the FCA must conduct reviews of its own policy and performance. That is to say, it is much broader. It does not wait until things have gone very badly wrong before asking the FSA to carry out a review. I am not sure that the Minister’s response has dealt with that point. It seems that he is still keeping all the power to the Executive, except when there is clear and manifest regulatory failure, when all the pressures would build up and the Treasury Select Committee might be required again to argue its corner, as it had to do in the case of the RBS report.
On the pre-commencement as opposed to the pre-appointment hearings in respect of the chief executive, I hear what my noble friend says in respect of chief executive appointments, and I would like to reflect on that. However, I think that he was making up policy on the hoof in relation to other public appointments. It is a relatively recent phenomenon that public appointments have been subject to pre-appointment hearings, and it is my impression that they have been expanding, not declining, in scope in recent years. It may be that my noble friend is indicating that the Government are now trying to significantly row back on what was regarded as an important expansion of the ability of Parliament to be involved in these important decisions and to hold the Executive to account.
I would like to think more carefully about what my noble friend has said in response to that, and possibly discuss it further before coming back at Report. However, I beg leave to withdraw the amendment.
Amendment 128BC withdrawn.
Amendments 128BD and 128BE
128BD: Clause 5, page 24, line 20, leave out “or”
128BE: Clause 5, page 24, line 21, at end insert “or
(d) a qualifying EU provision that is specified, or of a description specified, for the purposes of this subsection by the Treasury by order.”
Amendments 128BD and 128BE agreed.
128BF: Clause 5, page 24, line 26, after “promoting” insert “competition among and”
My Lords, I feel a bit like a number 11 bus—it does not come along for a long time and all of a sudden four come along at once. In moving Amendment 128BF, I shall also speak to Amendment 128BG in this group. Both amendments stand in my name and that of the noble Lord, Lord McFall, and deal with a further issue that the Treasury Select Committee in another place believes was not dealt with properly before the Bill left the other place.
Amendment 128BF amends the PRA’s general objectives in subsection (2) of new Section 2B. The objective currently says that it is for promoting the safety and soundness of PRA-authorised persons. The amendment would mean that it would promote competition among PRA-authorised persons.
Amendment 128BG is similar, but adds a subsection to new Section 2B requiring the PRA to discharge its functions in a way that promotes effective competition in the interests of consumers. But that has to be compatible with its general and insurance objectives.
The Treasury Select Committee was concerned that the PRA’s low tolerance of failure, as expressed in particular by its former chief executive, would entrench the market position of larger market players. The committee noted that competitive markets needed what it called the freedom to exit as well as freedom to enter, although I doubt that a failing bank would regard its impending implosion as a freedom. The theory is that a market that artificially restricts exit will almost inevitably inhibit entry as well.
The Government have said that no firm is too important to fail and they point quite rightly to the fact that the legislation is predicated on allowing failure. I fully accept that. I also accept that the FSA has been clear that it does not regard the job of the prudential regulator to prevent failure at all costs. But—and this is a big but—it is also clear that the new regime will be failure averse. New rules on regulatory capital, liquidity and leverage are designed to make banks safer and the implementation of the Vickers proposals in the way recently announced by the Government will do the same. Bail-in capital will also tend to work in that direction. The resolution plans that banks are working on are themselves in effect partly about preserving the status quo. Ownership may change, but large chunks of banks will remain in the market.
We all want financial stability, but a consequence of that is that the default assumption will be that bank failure is a last resort. Even then, resolution will preserve much of what has failed. All that the amendments do is to correct that balance. Without upsetting the core prudential objectives, the PRA has to have regard to the desirability of effective competition.
While supporting the thrust of the amendments, I do not wholly support their wording and I believe that “promoting competition” may go a little too far. I do not really like Amendment 128BG to the extent that it refers to competition in the interests only of consumers, because competition benefits not only the consumers but the wider economy by creating efficient businesses that can compete internationally to the benefit of everyone, not just the people who use their particular services. For that reason, I also support my noble friend Lord Hodgson’s Amendment 129ZA in this group, which is rather more rounded and balanced approach to ensuring that the PRA does not forget the wider environment of the business that it will be regulating. I beg to move.
My Lords, my Amendment 129ZA in this group follows the line of argument ably put forward by my noble friend Lady Noakes. It is about how we set the regulatory bar at a level that does not discourage and squeeze out innovation if it is too high but not so low that there is a free for all and loss of reputation. As someone who briefed me on this said, “This is the Goldilocks’ porridge issue: not too hot and not too cold”.
As my noble friend said, there is a danger of regulators becoming risk averse and, as she put it, having a low tolerance for failure. Innovation stifled because the bar is too high will not cause problems for the regulator because the innovation will disappear, but the failure of a firm trying innovation obviously does. We have a particular interest in the UK because our financial services industry is vulnerable; it is not backed, as is that of the US, say, by a very large domestic market and therefore we have to be smarter, quicker and more innovative. That is what my amendment intends to facilitate.
To give a real-life example of what I mean, some noble Lords may have seen the briefing from the Equity Release Council, which is the industry body for equity release, which allows individuals aged 55 and over to respot money from the property they live in without having to make any monthly repayments. They have a no-negative-equity insurance policy so that people cannot go overdrawn. This equity release is a thriving, growing industry with 150,000 customers and about 25,000 new customers each year.
We have discussed in this House the problems of funding old age. Of course, equity release enables people to stay in their home, either by withdrawing some equity to pay for care, or to make physical alterations to their home to make it easier for them to stay there, but it is not a concept that has taken root anywhere else in the EU, so if the PRA does not have a competition objective, there will be no formal requirement for the regulator to strive for this effective balance between financial stability and an appropriate level of market competition and growth. This could lead to the PRA taking the default position of, first, increasing capital buffers in response to any market issue; and, secondly, disproportionately gold-plating future EU legislation when transposing it into UK law, which could be to the disadvantage of UK firms.
As I say, this will be a particularly difficult issue where EU regulations are being promoted which effectively do not cover any country but the UK because the practice is not carried out elsewhere in Europe. Other noble Lords will have had other briefings; there was one from the Council of Mortgage Lenders that mentions:
“The uncertainty that the FCA’s product intervention powers can have the potential for stifling innovation within the market. There are few details of how these powers might be used and under what circumstances. It is crucial, therefore, that a clear set of governing principles are developed”.
Therefore the four sub-paragraphs (a), (b), (c) and (d) of my Amendment 129ZA, which inserts a completely separate clause on Page 26, deal with the point made very ably by my noble friend, but do so in a slightly wider way.
My Lords, Amendment 128BG stands in my name and that of my noble friend Lord Sharkey, and I am delighted to hear that the noble Baroness, Lady Noakes, and the noble Lord, Lord McFall, are adding their names. Their names have not made it onto the Marshalled List, but it is very good to know that they actively support the amendment. I think that all of us would look at the wording in more detail, but it is, as are others, a probing amendment. The language was supplied by Which?, an organisation that I help, and it seems to me to be reasonably well drafted.
The PRA, as your Lordships will know, is the body which will authorise new banks. The track record of the regulator in authorising new banks in the United Kingdom is pitiful: one new banking licence in 100 years, for Metro Bank. Other banks which people may think of as new are organisations which have purchased an existing banking licence. It is a sharp contrast to virtually every other developed and, frankly, not-yet-developed country. We have seen consolidation in our high street banking services, not expansion and added competition.
The regulator, if spoken to, would argue that the reason so few licences have been issued, or only one, is that new investors are not coming forward with proposals for new banks.
I think that it would acknowledge that some have come forward, gone part of the way down the process and then reached such hurdles that they have essentially been required to withdraw. It is also true that most potential investors are discouraged before they begin. The Metro Bank case is publicly known; we know that it cost it between £25 million and £35 million to get through the approval process. That is not the regulatory capital; that is simply getting through the regulatory hurdles. That took about two and a half years. Anyone to whom I have spoken who would pick up the role of working with a potential investor has said that their advice today would be, “Do not even think about it. Find yourself an existing banking licence or give up the idea altogether”.
We have some new players in the industry. There is Virgin Money. The Co-op has picked up some Lloyds branches. All that is very good news and will add to competition on the high street. There is a new small bank in Cambridge, which has picked up the banking licence of the old pension bank in that area. I am not saying that there are no new players in the market. I just point out that they are appearing off the collapse of RBS and Lloyds, so this is a one-time only event; it is not a step change or a door opening to bringing new and effective players to provide competition.
I understand that, even without any assistance from the Bill, the PRA will reduce at least one barrier. In the past, the regulator has asked for a higher capital requirement from a new player than from existing players. I understand that that is likely to change, so that at least that playing field will be level.
We in this country are missing an entire layer of banking. We have spoken about this before in several debates. The small, local, community bank, frequently with social impact obligations as part of its core philosophy and mandate, often sponsored by a charity or supporting a social enterprise, plays a significant role in the economies of competitor countries. Germany has its savings bank structure; the Swiss their cantonal bank structure; the United States its community development banks. We all know that those small banks behave in a very different way from high street banks.
First, they are willing to work with vulnerable individuals in the community in a way that our major high street banks have no interest in doing—they provide basic bank accounts, but under duress and have no interest in such consumers. Because those small institutions are committed to a particular community and rise or fall with the success of that community, they are also committed to small businesses—both new start-ups and existing small businesses—within those communities and stick with them through thick and thin.
Looking at the German and US experience, savings banks, in the one case, and community banks in the other, increased their lending to small business during the recent financial crisis and period of austerity, because they knew their borrowers, they knew when management was capable, they understood the microclimate for a particular company. They could do the level of credit work that our major high street banks ceased to be able to do some time ago; they are largely sellers of commodity product, they are not real credit managers in the way that banks used to be.
We are missing that whole layer of banking. I argue that, for the sake of our communities and community growth, we need to rebuild that whole sector, but we cannot if we have a regulator so utterly resistant to any new entrants. For a small bank to serve a narrow community, perhaps within a single borough in London or a portion of, say, Liverpool or Sheffield, to set the hurdle that it must raise between £25 million and £35 million to get through the approval process means that it cannot even think about getting off the ground. We need an entirely different regime. Those are banks which are never going to put us at systemic risk.
I recognise that, to allow those new banks to come in, perhaps with a more modest banking licence, which would be a good way to do it, and certainly with lower capital levels, the regulator must accept that a number of banks will fail. We have a good example in the United States where these banks fail. Within seven days they are under new ownership and masterminded by the FDIC. This acts as the regulator to make sure that the depositor and the business book are protected. The shareholders may be wiped out, which is fair and appropriate, but the banks then revive in a new environment. From the depositor’s perspective there is no hiccup. That is an appropriate kind of failure regime.
I see no attempt in this legislation either to create the capacity or require the regulator to create it for a failure regime that can deal with that kind of small collapse and disaster, making sure that it has no broader impact. We have a resolution process in the Banking Act 2009, but it does not seem to be addressing this problem. To get the regulator to move and deal with this issue, we have to have a competition obligation that talks directly to the PRA and not simply to the FCA, which sits at the side and essentially has a market responsibility. Many noble Lords will have raised the issue, for example, of the pay-day lenders and spoken of their concern that pay-day lenders are moving into the small-business lending arena, with the most extraordinary kinds of interest rates.
These groups are moving in because there is a vacuum. As long as we leave it there we create the possibility for groups such as Wonga and others to come in and legitimately fill the vacuum in the market. We have no reason to complain unless we make sure that there is a mechanism in place to ensure that new, small institutions, designed to serve the market in an appropriate way with fair pricing, can come in and provide the necessary services.
In the past, I have raised this issue with the Government. I have often had the reply that the credit unions can do it. Can I point out to anyone who wishes to raise this argument that the credit unions, for which I have huge respect, cover something like 2% of the population? Even with great support from the DWP, as I know new money is on offer to them, they will be responsible only for a small percentage growth of the market. I hope they do it rapidly, but it is not going to solve the problem. They have restrictions on the interest rate that they can charge. They are not allowed to offer credit services to small businesses unless those services have already been rejected by one of the high-street banks. There are all kinds of constraints on what they can do and we need to recognise that this vacuum exists. We have to put pressure on the PRA to start taking the problem seriously, to recognise that it is looking not at a single sector, but at a sector with distinctive strands that must be regulated in a different way. After all, the purpose of the regulator is to make sure that this sector is fit for purpose for our economy. Unless we exert that pressure our chances of getting past today’s problems are going to be limited.
Again, I support Amendment 128BG and have great sympathy for the other amendments that have been discussed by the noble Baroness, Lady Noakes, and the noble Lord, Lord Hodgson.
My Lords, I support all three of these amendments. I declare an interest as a director and founder-member of Metro Bank.
Part of the total objective for the PRA of a safer banking system and banking stability is a need for more competition in the UK. One of the main sources of our problems has been a cartel. Whenever there are cartels bad habits tend to creep in. There is a history behind the cartel coming in, going back to Walter Bagehot in wanting to consolidate banks for safety, but there needs to be a balance. The PRA cannot achieve its major objectives without staunchly advocating greater competition and helping it to come about.
From my experience, it was agony going through a year and a half with the FSA getting the licence for Metro Bank. The sums of money that we had to spend were not quite as great as the noble Baroness reported but they were very substantial. The FSA kept changing its mind. The proposals for capital were out of all proportion to the risk of the bank. At the time, I wrote to the Minister reporting on the experience. Strangely, I do not think that there was ill intent by the FSA. It was very much about individuals wishing to protect their own position and not wanting to be attacked in some way in the media for having been too lenient on licensing a new operation. Memories go back to the early 1970s, when banking licences were given out too easily, and that was a major cause of the secondary banking crisis in 1974. However, it is absolutely right that a more competitive environment in banking should be a key factor which the PRA supports.
On international competitiveness, I have understood recently that the Government’s main objective is that they feel that this is somehow related to light-touch regulation that has got into trouble. I do not see that at all. It seems to me just silly for the UK to shoot itself in the foot with regard to an important industry that employs a lot of people, earns a lot of invisible earnings and so on. I would have thought that, in terms of regulating, it would be normal to consider the effect on international competitiveness. What was wrong with light-touch regulation—I remember it well—was the doctrine: “You don't need to regulate large institutions too much because they can look after themselves”. The weakness of that doctrine was that, if they got it wrong, as subsequently transpired, the problems for the whole system were that much greater. I think that was what was wrong and it has little or nothing to do with the competitiveness of the UK’s international banking services.
I do not accept at all the argument that a brief to keep watch on international competitiveness relates to inadequate or inappropriate regulation. Taking the point to absurdity, to ignore a debate about particular measures, which were clearly going to be highly damaging to the UK industry, would just be silly.
My Lords, my noble friend Lord Flight is, of course, completely correct in his assertion that the proposed new regulatory framework makes far too little mention of the need to preserve competitiveness of the marketplace, not just competitiveness from the point of view of the consumer but the very competitiveness of the marketplace for practitioners to participate in. For that reason, financial services companies from all over the world have come into London and that has helped to provide more consumer choice, and it will continue to do so in the future, as well as providing the Exchequer with a very large proportion of its annual revenue. It is a huge pity, as my noble friend has pointed out, that the Treasury mistakenly believes that preservation of international competitiveness implies approval of inappropriate or inadequate regulation.
All three amendments have some merit but of the three I tend to prefer the amendment proposed by my noble friend Lord Hodgson because it gives a duty to the PRA to have regard to competition. I would have preferred that the PRA had an objective to protect the competitiveness of the marketplace as well but I realise that there are some valid arguments against that. To have a duty—“duty” is a strong word—to have regard to competition is the preferred of the three amendments put forward. The points in my noble friend’s amendment are all to do with minimising adverse effects, or avoiding restrictions or unnecessary regulatory barriers to entry; they are all negatives rather than positives. I would prefer this issue to be expressed in a more positive manner. I have worked for a Japanese-owned financial institution; I am not sure whether this is a UK institution under proposed new paragraph (d) in my noble friend’s amendment. It is, of course, a UK-incorporated plc. Could my noble friend clarify what “UK institutions and companies” means? It is very important for London that the level playing field for all participants is preserved and I hope that the amendment refers to UK incorporated or UK resident financial institutions and companies.
My noble friend’s amendment also makes it very clear how necessary it is to have collaboration and co-operation between the PRA and the FCA. Proposed new paragraphs (b) and (c) impact on matters that are of great concern to the FCA. I hope that these matters will be properly covered in the memorandum of understanding to be drawn up between the PRA and the FCA.
My Lords, the most important issues to be addressed in this group of amendments are those around barriers to entry linked to resolvability. A sea change is needed and is coming. If the Committee bears with me, I will get to this issue, because it is at the heart of the concerns in this area, as identified in particular by my noble friends Lady Kramer and Lord Flight.
Let me start with Amendments 128BF and 128BG in the terms in which they are drafted. My noble friend Lady Noakes says that in some respects they go too far in terms of the duty to promote competition. However, I should do the amendments justice by speaking to them as drafted, although I accept that my noble friend put somewhat of a qualification around her amendment.
There are three reasons why the Government do not agree with the proposition in the amendments. First, all PRA-authorised firms will also be regulated by the FCA according to their objectives, and will therefore fall under the FCA’s objective to promote effective competition in the interests of consumers. To correct one point, it is also the case that authorisation has to be carried out by both the regulators. For those that are seeking a PRA authorisation, the PRA will lead, but others will be led by the FCA.
Secondly, the Government’s view—this goes to the heart of the new structure—is that the FSA simply has an impossible job in trying to balance so many competing objectives, which has led to its lack of institutional focus on prudential matters. In order to avoid repeating this mistake, we have decided that the PRA should have a single, general objective, supplemented by tailored, focused objectives, which are specific to particular regulated activities, such as the insurance objective set out in new Section 2C.
Thirdly, in addition to the strengthened power for the FCA to make referrals to the OFT included in Clause 40, the Bill provides for both PRA and FCA regulatory requirements and practices to be scrutinised by the competition authorities. This is set out in Chapter 4 of new Part 10A of FiSMA.
Amendment 129ZA seeks to impose a number of new factors to which the PRA must always have regard. On competition, the general duty to co-ordinate requires the FCA and the PRA to consult each other before taking steps that could harm each other’s objectives, including the FCA’s competition objective. This will ensure that the PRA understands where its decisions may harm competition and works with the FCA to minimise detriment to both authorities’ objectives.
On the regulatory barriers to entry and expansion— this comes to the heart of matters here—the intention, as set out in the White Paper on the Independent Commission on Banking published on 14 June, is for the Bank of England and the FSA to reduce barriers to entry under the PRA such that if regulated firms are “resolvable” without the use of public funds, the capital requirements will be lower than they otherwise would have been. The Bank of England and the FSA will publish the conclusions of their review this autumn and, where possible, have committed to introducing these changes in advance of the new regulatory structure.
I know that there is a degree of scepticism based on the past, but the Bank and the FSA have made these very important new statements. This is linked to the new resolution regime, which is why my noble friend is quite right to talk about that. The new regime is designed to achieve exactly what my noble friend Lady Kramer wants it to do. The PRA will put resolution at the centre of its regulatory framework, as the Bank and the FSA have made clear in their already-published approach document. One can look at a number of examples in the last three or four years of where the new approach to the special resolution regime is delivering things that were not there in the UK regime before. Southsea Mortgage and Investment Company, a bank that failed in June 2011, saw payout executed in under seven days, the Dunfermline Building Society business was split up and sold over a weekend in March 2009, and there was a full payout for depositors with London Scottish Bank in autumn 2008. These are things that we have not seen in the past and they are the basis on which the Bank and the FSA can state their confident intentions about a new approach to capital requirements on authorisation.
Turning to the avoidance of restriction on consumer choice, the Government’s view is that, in this new regulatory framework, the FCA is the appropriate regulator to promote competition and recognise and safeguard the protection of consumers. In a similar way to competition, the duty to co-ordinate will ensure that the PRA recognises the need to avoid consumer detriment and restriction to their choices.
On competitiveness, the last line of Amendment 129ZA would have a similar effect to that of Amendment 129, which we debated earlier. It seeks to impose a statutory duty on the PRA to have regard to ensuring that UK institutions and companies are not placed at a competitive disadvantage. We have already debated how the FCA should have regard to competitiveness issues and I have undertaken to consider, in advance of Report stage, whether a more explicit consideration of the wider economic impact of the actions of the regulators should be included in the Bill.
I am happy to make the same undertaking in respect of the PRA as I made in respect of the FCA, and look forward to returning to this on Report. All that said, I hope that my noble friend will feel able to withdraw her amendment.
I ask my noble friend one practical question. I entirely understand what he says about the competition objective of the FCA on page 17. In his argument, that is a reason why it should not be on the PRA. There is no way that the PRA, without its competition objective, can overrule the FCA: that is, there must always be a competition objective in all cases where the PRA cannot outgun the FCA. If there are any occasions where the PRA can outplay the FCA, then of course the competition objective falls away, if there is not one for the PRA. Reading this, it looks to me as though there is a danger that the PRA will be the established centre—the capital centre and so on—and the FCA will be, in some senses, implementing what has been decided as a strategic framework by the PRA. If I have got that wrong, I am delighted to be put right.
I do not think that my noble friend has got it quite right. However, I cannot hide from him the fact that we believe that, because it is right and goes to the heart of the flaws in the present tripartite arrangements, the PRA should have as its single objective the one that I have described. Therefore, the nub of his concern remains, and I cannot pretend that it is not there. All I can say is that we consciously want to have the architecture as I have described it. However, the mitigation—and I think it is an important one—is that the PRA must consult the FCA before taking any steps that could in any way harm the FCA’s objectives, including, in this case, the competition objective. I think it is a reasonable check on the PRA’s action, given the basic architecture which we think is important.
One issue that I have raised to which I have never had an answer, no matter whom I have asked, is where the PRA is expected to move in terms of the cost of getting regulatory approval. The Minister made mention of the capital requirements—and there is a whole set of issues around that—but one does not even get to the capital requirements if one cannot get through an approval process without a phalanx of lawyers, accountants and submissions which frankly act as a complete barrier to any potential small and local banking institution. I do not understand where there is any commitment from the PRA to tackle that set of problems.
The fact that it has already started on the work which will lead to the document in the autumn and which goes to the most expensive element of getting authorised—namely, the amount of capital required—is a fundamentally important and good start. I do not pretend that that completes the business, but it tackles first the most expensive element: the cost of putting that capital aside. This is a start. It is not before time, but it is happening as we speak.
My Lords, I start by apologising to the noble Baroness, Lady Kramer, for having appropriated her amendment incorrectly in my opening remarks. I do not quite know when I made the mistake, but I made it quite early and perpetuated it. I latterly discovered that I did not quite like the drafting, and so was slightly disobliging about the amendment of the noble Baroness, which I thought was my own. With apologies to the whole Committee and particularly to the noble Baroness, Lady Kramer, I did not intend to add my name to her amendment. I would not have signed up to the precise wording but, as has come out in this debate, I think we are all speaking from the same territory.
That apart, I believe that there has been quite a lot of agreement among those who have spoken that the Government have not quite got this right. I am concerned that the Government keep saying that they will not repeat the mistake of giving conflicting objectives, which is alleged to have been one of the causes of the problems of the FSA, so this body has to have a single focus. However, I cannot see that a single focus is going to be good for the financial services industry or for the consumer, particularly where competition is just not in its lexicon. If it is not good for them I cannot see how it is good for the UK, so it seems to me to be bad policy.
The amendments that we have put forward today, in varying ways, have been trying to make it a slightly better policy by giving the PRA a broader remit. My noble friend the Minister said that he had undertaken to come back at Report to give a wider economic context, as he had already undertaken to do on the FCA. With respect, that does not meet the points that have come out from the debate today. I believe that there was quite a lot of agreement between my noble friends Lord Flight, Lord Trenchard and Lord Hodgson and I on the amendment tabled by my noble friend Lord Hodgson. When my noble friend the Minister thinks carefully about what to come back on Report with, I hope that he will look again at this issue. Expecting the FCA’s objectives to bear all the burden of reflecting competition in the way that the PRA operates is just bonkers. With that, I beg leave to withdraw the amendment.
Amendment 128BF withdrawn.
128BFA: Clause 5, page 24, line 31, leave out “UK financial system” and insert “financial markets in which UK financial institutions operate”
My Lords, this amendment and Amendment 128BFB seek to ask the Government to clarify their definitions of the scope of the markets in which UK financial institutions operate. We have already seen some very peculiar UK-centric views in proposed new Section 9C of the Bank of England Act 1998, which I hope we will see extensively modified on Report. In this clause, however, the Bill currently refers to having,
“any adverse effect on the stability of the UK financial system”.
This fails to recognise the global nature of UK banking, and that risks may arise anywhere in the world where UK financial institutions operate.
We want to ensure that the actions of UK financial institutions are such as to sustain the stability of the entire financial system in which they operate. Why? It is because destabilising actions in foreign markets may destabilise subsidiaries of UK financial institutions and, ultimately, the home institution. However, this could not be said to refer to the UK financial system. I will put it again: if in a foreign market a subsidiary is destabilised by actions here, that subsidiary ultimately destabilises an institution here—not the system but an institution. Can the noble Lord please explain how the current wording of the Bill deals with the fact that the balance sheets of UK financial institutions are typically written on a global scale?
My Lords, these amendments seek to give the PRA a global financial stability remit. Instead of the PRA looking at UK financial stability, the amendment would have it looking at the financial stability of every market around the world in which any PRA-authorised person operates. The PRA would have a new responsibility for the financial stability of many markets where it has no powers, no jurisdiction and no tools. I suggest that this is plainly an absurd position. Although cross-border co-operation is vital to ensure the effective supervision of international firms, it is ultimately for each country and its regulators to ensure its own financial stability, or a single currency bloc may decide that financial stability needs to be supervised ultimately on a currency bloc basis.
My Lords, I think that the noble Lord has misunderstood the amendment. If he inserts the amendment and looks at subsection (3)(a), it would refer to,
“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect”,
on markets in which PRA institutions operate. The noble Lord is suggesting that the PRA would not have jurisdiction, whereas the PRA does have jurisdiction over PRA-authorised persons.
I have read and reread these amendments and discussed them with officials on a number of occasions because I cannot believe that this was the effect that the noble Lord, Lord Eatwell, wanted. Actually, it is entirely the effect of his amendments to require that the PRA’s general objective is to be advanced by,
“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect on the stability of the”—
“financial markets in which UK financial institutions operate”.
They would have to regulate in a way that had regard to the financial stability of all these markets around the world, which does very directly get the PRA into the protection of financial markets way beyond its own control in the UK.
I will explain why I think the Bill adequately covers the noble Lord’s justifiable concern. What I have said so far in no way means that the PRA will ignore the stability of any financial market outside the UK that is relevant to PRA-authorised firms. The PRA will take an interest in the stability of any market that has a significant impact on the safety and soundness of one or more PRA-authorised persons. It will do this not in order to improve the stability of this market but to understand the potential or actual impact on regulated firms and to take steps so that this impact is minimised using all the powers available to it. I cannot identify anything in the Bill that limits the PRA or prevents it from taking account of all those factors. It is quite a different thing to put in wording, as suggested in these amendments, that would make the PRA in some way responsible for the effects on the stability of financial systems outside the UK. With that explanation and reassurance, I hope that the noble Lord will feel able to withdraw his amendment.
My Lords, it is very difficult to be reassured by a statement that the PRA would sit back quite happily and watch PRA firms take actions that would destabilise foreign markets. However, given that the Treasury seems to have no concern about PRA firms destabilising markets outside the UK, I beg leave to withdraw the amendment.
Amendment 128BFA withdrawn.
Amendment 128BFB not moved.
128BFC: Clause 5, page 24, line 34, at end insert—
“( ) seeking to minimise, as far as possible, the costs to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry”
The amendment seeks to add to the overall objectives of the PRA the requirement that it operates efficiently, seeking to minimise costs,
“to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry”.
It seems remarkable that the PRA has a series of objectives that it is required to pursue to the very best of its ability and with the application of all necessary resources, but there is no constraint on the utilisation of those resources. It seems to be able to pursue its objectives without any concerns for the costs to the public purse in these particular contexts. The amendment would provide a balance in the approach of the PRA, with the desirable objective of ensuring stability and, in doing so, minimising the costs both to the FSCS and the public purse.
My Lords, this amendment reflects a recommendation from the Joint Committee that a secondary general microprudential objective be given to the PRA. It seeks to specify a further means by which the PRA’s general objective should be achieved, by minimising the costs to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry. A similar amendment to this was tabled and debated in another place.
The Government acknowledge that there are some attractions to reframing the objective in terms of the prudential outcomes that the PRA will seek to achieve, as the Joint Committee suggested. However, specifying particular desired outcomes creates difficulties. For example, whether the failure of a firm results in a call on public funds will depend to an extent on the actions of the Government of the day—for example, in taking a decision to nationalise or recapitalise a failing institution. In some circumstances, the orderly failure of a firm followed by an FSCS payout may be the best way of protecting depositors and taxpayers while maintaining market discipline. The effect of specifying such outcomes could be to encourage the PRA to take a highly aggressive and expensive approach to supervision with an end goal of ensuring that, if a firm failed, its potential costs of failure to the FSCS and public funds would be zero or negligible. To ensure this outcome, the PRA would need to intervene extensively in a firm’s day-to-day affairs, undermining the responsibility of firms’ management for running their firm. Ultimately, in an extreme case, it could turn PRA supervisors into shadow directors.
To place such a duty on the regulator would be against the Government’s intention, endorsed by the Joint Committee and confirmed in new Section 2F inserted by the Bill, that the new regulatory regime should not be a zero-failure regime. The amendment would bias the PRA towards a zero-failure regime. On balance, the Government believe that it is better to frame the objective more broadly, requiring the PRA to focus on the safety and soundness of individual firms, so as to improve financial stability. This objective gives the PRA a clear mandate to intervene to address risk-taking by firms.
I hope I have been able to make clear to the Committee why I cannot accept this amendment, and why I ask the noble Lord to withdraw it.
The Minister has exposed some very interesting arguments here in the relationship between the degree of protection which should be provided to consumers and the public purse, balancing that against the degree of supervision of firms. The Government seem to want to err on the side of jeopardising the public purse a little rather than providing supervision that would protect the public purse. However, in the context I can see that a balance is being discussed here, and the Minister has made clear where the Government’s view of that balance lies. In that light, I beg leave to withdraw the amendment.
Amendment 128BFC withdrawn.
Amendment 128BG not moved.
128BH: Clause 5, page 25, line 14, leave out “those who are or may become”
My Lords, the focus of the insurance objective is rightly on policyholder protection. I do not really understand why the drafting includes those who “may become policyholders”. If they do become policyholders, they will surely be covered automatically. If they do not become policyholders, they will not be covered. I am not aware of any other area of financial services where there is any focus on future potential customers. I have a very simple question: why does this include those who “may become policyholders”? What is the logic, if any, behind this inclusion?
My Lords, I shall speak to Amendment 141 in my name. The PRA is the prudential regulator of the insurance companies. It has an insurance objective, which will include a requirement to contribute to securing an appropriate degree of protection for policyholders, understandably reflecting the correlation in the insurance sector between the management of risk and the consumer outcome, especially in with-profits policies. The PRA has no explicit consumer protection remit. The FCA does.
The Treasury has, as far as I can see, recognised the need for the PRA to seek advice from the FCA in achieving the balance between the interest of the policyholder and the prudential strength of the company when it comes to with-profits policies. While I understand that the responsibility for that balance should remain with the PRA, it is intended that these matters will be covered by a memorandum of understanding between the PRA and the FCA. However, that memorandum of understanding has to be compatible with the PRA’s view of how to advance its prudential objective. That is where I remain concerned, because this leaves the PRA with a very wide discretion as to what is an appropriate degree of protection for with-profits policyholders.
Unless I am misinterpreting the government amendment in this group, which I will have to wait to hear, the effect of that amendment is to strengthen or give even greater clarity to the fact that it is the PRA which holds the ultimate authority for determining that balance between the prudential strength of the company and the interest of the policyholder. Given that, I believe that it would be desirable if these matters were not left to a memorandum of understanding alone, but that the Bill should guide the approach of the PRA with respect to the regulation of with-profits policies by providing a set of principles which this amendment seeks to set out. Perhaps I may set out my reasons.
The PRA’s focus will be on the prudential regulation of firms, and the stability of the financial system. It will not have the culture to proactively protect consumers who hold with-profits policies, and yet the regulatory framework of with-profits policies has been subject to sustained criticism from the Treasury Select Committee, observers, academics—large numbers of people. However, with-profits policies are still a significant consumer issue. There are around 25 million policies, worth about £330 billion. These policies typically state that the policyholder will share in the profits from the fund, which are distributed to the policyholder in the form of bonuses. The policyholder’s contract normally states that they receive 90% of the profits from the fund, and the shareholders receive 10%.
However, this is where it becomes complex, because the directors of the insurance company enjoy significant discretion as to how profits are defined and distributed to policyholders. For example, the rules allow firms to use the funds to pay shareholders’ tax bills or to subsidise new business. I believe that to date the regulatory framework has failed to control the conflicts of interest that exist in with-profits funds. We now have a new regulatory regime for with-profits policies which must provide for the fair treatment of policyholders while properly considering the prudential position of insurance companies, which is the primary focus of the PRA. Therefore, the amendment simply seeks to guide the approach of the PRA when determining that balance between the two—the prudential position of the company and the fair treatment of the policyholder—because the responsibility to address that balance rests firmly with the PRA.
The principles set out in the amendment make it clear that the purpose of the with-profits fund is to provide guaranteed benefits and profits for policyholders. They also ensure that the regulator upholds the terms of the policyholder’s contract. As the purpose of the fund is to provide guaranteed benefits to policyholders, the insurer will be allowed to retain money in the fund to meet those guaranteed benefits while the PRA meets its prudential obligation. Furthermore, the insurer cannot manage the fund for its own benefits where this diverges from the purposes of the fund, and an insurer cannot exercise its discretion in running the fund to discriminate against policyholders or to not apply effective controls on conflicts of interest.
The nature of with-profits policies will always involve discretion. The PRA’s primary focus will be on financial stability and prudential regulation. That is why I think it would be beneficial if the PRA was guided in how to discharge its duty to ensure that the discretion applied was not to the disadvantage of policyholders.
My Lords, I trust that the first amendment in this group, moved by the noble Lord, Lord Flight, will not find favour in the Committee as it would substantially weaken the thinking, role and responsibility of the PRA.
First, it would exclude consideration of those currently excluded altogether from financial products, especially in insurance but also in banking. Unless the regulators take exclusion from financial products seriously, we will be failing in our duty to a large section of our community. Our regulators should act in the interests of the whole community, not just those who are already within the charmed circle.
Secondly, there may be issues of promotion and advertising of financial services or products—indeed, to the sophisticated as well as to the earlier group—which must be taken into consideration by the regulators.
Thirdly, it is now acknowledged, including by your Lordships’ House, that regulation should cover future as well as present consumers so that it can take account of changes in consumer needs, the environment and product development. This is the case with, for example, legal services. The Legal Services Act 2007 specifically adds in,
“those who are using (or are or may be contemplating using)”,
Amendment 141 in the name of my noble friend Lady Drake is clearly an essential addition to the Bill if those who have bought with-profits policies are to have any confidence in their outcome. The funds must be husbanded in their interests, the profits must be shared according to the policy’s rules, profits must be justly distributed and any discretion must be used fairly and equitably.
There is surely not a word about this amendment with which the Minister could argue. As John Kay wrote in his report this week:
“Financial intermediation depends on trust and confidence: the trust and confidence that savers who invest funds have in those they choose to manage these funds”.
Amendment 141 is part of recreating that trust and confidence, and we are happy to support it.
My Lords, let me first speak to government Amendment 140E. When considering the regulation of discretionary payments in with-profits business there is no easy split between prudential and conduct issues. The Bill deals with this by giving the PRA sole responsibility for issues relating to discretionary payments. The FCA remains responsible for all other conduct regulation. However, under the Bill as drafted, use of “includes” in new Section 3F(1) could be interpreted to suggest that the PRA is responsible for other elements of conduct regulation as well. This amendment simply clarifies the drafting, by removing the implication that the PRA could be responsible for other conduct issues.
I turn to the non-government amendments in this group. Amendment 128BH would remove the reference to those “who may become policyholders” from the PRA’s insurance objectives. However, I can assure my noble friend that the inclusion of this reference to future policyholders is both deliberate and important. It is there for completely different reasons from those advanced by the noble Baroness, Lady Hayter, with whom I agree in rejecting the amendment but for much narrower and more technical reasons related to the nature of a with-profits fund.
Let me give an example of what we are thinking about here. If one considers the scenario where the PRA is considering whether a with-profits insurer should be permitted to make a very large distribution to its policyholders, and if the PRA is only required to consider the interests of current policyholders, it might be inclined to allow the distribution. However, that might leave insufficient assets in the fund to ensure that policyholders coming into the fund—if it is operating on a going-concern basis—obtain fair and adequate payments from the fund.
I should reassure my noble friend that the reference to those becoming policyholders does not require the PRA to go out in some proactive way to protect those who have no current plan to take out a contract of insurance, but who might at some point decide to do so. The PRA is only obliged to provide an appropriate degree of protection and what is appropriate will depend on the facts of the case. In this case, it is the needs of a person who is about to sign on the dotted line for a with-profits policy who needs to be assured by the regulator that the fund to which they are about to subscribe is appropriately strong according to the rules. This provision allows for that.
Amendment 141 would require the PRA to regulate with-profits funds on the basis that the fund should be managed for the purpose of distributing profits to policyholders, as opposed to any other purpose. This is an important issue and I welcome the opportunity to set out broadly how with-profits will be regulated under the new system. It might be worth just pointing out to the noble Baroness, Lady Drake, that new Section 3F—the “With-profits insurance policies” section on page 31 of the Bill—makes it quite clear that the PRA must secure an appropriate degree of protection for policyholders. That is very clear. It is different from the looser wording, to which she referred, about the insurance objective “contributing” to securing protection. It is clear that the language in new Section 3F for with-profits is stronger than in new Section 2C on the insurance objective. That is an important background to the consideration of this amendment, and a point to which the noble Baroness drew attention.
When regulating a with-profits firm, the regulator is concerned with ensuring that the firm recognises a proper balance between the different interests in the fund. These interests include one that is highlighted in this amendment—the interests of with-profits policyholders to the distribution of profits made by the fund. However, there are other legitimate interests in a with-profits fund. They include the interests of the members of the insurer in the case, for example, of a mutual. In a proprietary firm, the shareholders also have an interest in the profits to be distributed. There are also considerations to be balanced between different types of policyholder. I do not suggest for a minute that the noble Baroness seeks to disapply all these other interests in the with-profits fund. Maybe she does—no, I see that she does not. I am glad about that as we would be fundamentally rewriting the law. That would be the effect of the amendment.
I am grateful to the noble Baroness for bringing up this issue. I must say that a balance needs to be struck between the interests of current policyholders, who will be keen to see all available funds distributed, if they are distributed to them, and the interests of future policyholders, which we have discussed, who will pay the price of excessive generosity to previous generations of policyholders. There is also the overriding concern to ensure that the fund remains solvent and able to make distributions.
As I said, under the Bill, the PRA is required to secure an appropriate degree of protection for with-profits policyholders in new Section 3F, and it will have to take all of these factors into account. Although the factors to be taken into consideration are complex, in essence the objective of regulation remains the same for with-profits as for any other type of business. The objective fundamentally is to ensure the firm’s safety and soundness, while ensuring its proper conduct, including the fair treatment of consumers. In asking the Committee in due course to support the Government’s amendment, I ask my noble friend Lord Flight to withdraw his amendment.
There is an issue that I am not sure the Minister has addressed. The PRA will be focused on prudential regulation, so its approach on how discretion should be applied on with-profits policies could be influenced by a preoccupation with the prudential responsibility, and through that focus may become unfair in how it has balanced the consumer’s interests.
I thank the Minister for answering what in essence was a question. In my view, with-profits policies have been and continue to be useful instruments for the man in the street, and I now understand the reason for the phrasing as it is. I beg leave to withdraw the amendment.
Amendment 128BH withdrawn.
128BHA: Clause 5, page 25, leave out lines 18 to 35
My Lords, this is a probing amendment seeking clarification of the role of “the specified objective”, as it is called in the Bill. An aspect of regulation that is important is that it should be transparent and predictable. The characterisation of the specified objective is neither. Indeed, the boundaries of regulation now seem to be rather arbitrary in the sense that the Treasury can regularly, perhaps, introduce specified objectives and change the boundaries of PRA activities. This cannot but have a dampening effect on financial innovation, because financial innovation depends upon some notion of predictability. Innovation has, as a result of the crisis, a rather bad name at the moment, but there have of course been entirely beneficial innovations over the years, and regulators stifle innovation at their peril.
Of course, the problem is how to secure good innovation while discouraging bad innovation. This is where clear objectives come in, and clarity and transparency are important. This section, I am afraid, seems notably unclear in that the boundaries of regulation would not be predictable. Having such a degree of unpredictability is bound to have a dampening effect.
I understand that any order under this section will require parliamentary approval under new Section 22A, but it is not at all clear how changes will acquire a sense of being anything other than arbitrary, since no concept of consultation with those institutions which would be affected is referred to. Could the Minister please explain?
My Lords, the noble Lord, Lord Eatwell, raises an important point here that we want to on one hand future-proof the Bill, and on the other hand make sure that the future ring-fence around regulated activities—the regulatory perimeter—is not widened on a whim. It is not an easy line to draw. If it required primary legislation—not that the noble Lord was suggesting that—to extend the PRA’s objectives to bring other activities within the regulatory perimeter, that would be a complicated 12-to-18 month process that would not allow for a timely response.
The situation that I generally envisage is one where the FPC would ask for the regulatory perimeter to be widened. That, I suggest, is sensible and necessary future-proofing that enables the authorities to react to changes in financial markets and financial risks in a pragmatic way, whether it is to allow for innovation, or for any other reason. To give a couple of examples which could come up where the FPC could recommend such an extension of the perimeter, it might relate to some or all shadow banking activities or to peer-to-peer platforms or activities, which we have discussed fairly regularly.
I am looking to see whether my noble friend Lord Lucas is here, or some of my other noble friends—the noble Baroness, Lady Kramer, and the noble Lord, Lord Sharkey, among them—because at some point activities like this could well be recommended by the FPC to the Treasury to be brought within the regulatory perimeter. The Treasury would then make an order to make these activities PRA-regulated ones, and if necessary apply additional objectives to these activities.
I assure the noble Lord that in this context, in accordance with convention and Cabinet Office guidance, the Treasury, as the relevant department, would of course conduct the consultation in the normal form at that point. I hope that explains why this part of the Bill is drafted in the way that it is, and that there are protections in there.
My Lords, that was very interesting because the FPC has not been mentioned at all and it is suddenly being prayed in aid in support of this section. I remain puzzled as to why the Government are willing to risk the Bill appearing to be so restrictive by not including some notion of general consultation. Of course, if the FPC were involved there would be consultation issues around which the FPC itself is hedged. But changes could appear on a whim, as the noble Lord himself put it. I would not expect the Treasury to behave on a whim, but it might appear that way to the industry.
I am sorry, but I am pretty sure that I did not say that the Treasury would do anything on a whim: far from it. I would not like the record to say that. Of course the Treasury would not do something on a whim. I would expect recommendations to come from the FPC, which, as the noble Lord said, has its consultation procedures. It does not need a reference in the Bill to say that if the Treasury makes recommendations or an order under this clause nothing else needs to be said. Of course the Treasury will follow the normal consultation processes applicable to this form of order.
One should hope so too. One would have hoped that new Section 22A and other relevant sections, perhaps to be added, would recognise that fact. However, having had an interesting discussion of responsibilities and whims, I beg leave to withdraw the amendment.
Amendment 128BHA withdrawn.
128BJ: Clause 5, page 25, line 35, at end insert—
(1) The PRA must—
(a) determine its strategy in relation to its objectives, and(b) from time to time review, and if necessary revise, the strategy.(2) Before determining or revising its strategy, the PRA must consult the Bank of England about a draft of the strategy or of the revisions.
(3) The PRA must determine its strategy within 12 months of the coming into force of this section.
(4) The PRA must carry out and complete a review of its strategy before the end of each relevant period.
(5) The relevant period is 12 months beginning with the date on which the previous review was completed, except that in the case of the first review the relevant period is the period of 12 months beginning with the date on which the strategy was determined under subsection (3).
(6) The PRA must publish its strategy.
(7) If the strategy is revised the PRA must publish the revised strategy.
(8) Publication under subsection (6) or (7) is to be in such manner as the PRA thinks fit.”
My Lords, I will speak to the government amendments in this group. Amendment 128BJ specifies that the PRA board must set and publish the strategy in relation to its objectives, having consulted the Bank of England. It must review the strategy annually. The Government have come to the view that it would be helpful to define more clearly in the legislation how the relationship between the PRA and the rest of the Bank group will work in practice.
The amendment makes it clear that the PRA board will set the PRA’s strategy and will be accountable for the success or failure of that strategy. It also requires the PRA board to consult the Bank about the strategy. That will help to ensure that the PRA’s supervisory approach is co-ordinated with the wider financial stability strategy of the Bank. The PRA must publish its strategy. That will help to ensure that Parliament, the financial services industry and the wider public are clear about the PRA’s direction of travel and priorities. That will assist with calling the PRA to account for the way that it carries out its regulatory and supervisory responsibilities.
Government Amendment 147A makes it clear that the PRA may not delegate responsibility for setting the strategy, which is clearly appropriate. Government Amendment 147B makes express that the Bank should approve the PRA’s budget. In practice, the PRA board will draw up the budget, looking at the strategic priorities for the year ahead, and propose this to the Bank. If variations to the budget are required during the course of the year, that will also require the approval of the Bank. This arrangement will ensure that the PRA must account fully for any budgetary increases. Of course, its expenditure will also be audited by the National Audit Office under the provisions already in the Bill. This will provide strong accountability for costs incurred—costs which, as noble Lords have pointed out during previous debates, are ultimately borne by industry.
It would be appropriate if I respond to the other amendments in this group when the noble Lords who tabled them have spoken to them, so, for the moment, I beg to move.
My Lords, I rise to speak to Amendment 144K, which is intended to ensure that the non-executive members of the PRA board have relevant experience and expertise. In particular, the board should have the benefit of members who have expertise in the sectors regulated by the PRA.
As others have already said, the insurance industry has been something of an orphaned relative. Indeed, I think that the Governor of the Bank of England is on record as saying that the arrangements do not entirely match his wishes. I believe that the Government’s intention is that this should be the case. It is clearly desirable, however, that the PRA should have appropriate representatives from that industry with the right experience, and, indeed, they should be equipped to contribute if the life industry balance sheets get into a position where there needs to be a temporary suspension of the rules, should equity markets plunge dangerously.
My Lords, I rise briefly to support Amendment 144K, in the name of my noble friend Lord Flight, and even more briefly to support Amendment 144L, in my name, which covers some of the same ground but is more focused on the need for the PRA board to have non-executive members with relevant experience and expertise in the insurance sector. I am sure that neither of these amendments should be at all controversial. It would be very hard to argue that the PRA non-executive members need not have among them people of experience and expertise across the regulated sectors, but I think that it would be wrong to argue that this provision is not needed in the Bill. There is no reason for this to be left simply to the discretion of the Bank and the PRA and every reason why they should have an obligation to act in the way that both amendments suggest.
Amendment 144L in my name focuses on insurance because I am concerned that the PRA—as a subsidiary of the Bank, and with a special financial stability purpose and a number of Bank officials on the board—will be much more explicitly focused on the banks. It is also true, I think, that the Bank of England has no history of regulating insurance. The FSA currently does this, in succession, I think, to the DTI. In order to make sure that the PRA also effectively and properly focuses on the insurance sector it seems right that it should have, among its non-executive members, people with the appropriate experience and expertise in that sector. That is what my amendment and the amendment of my noble friend propose.
My Lords, I support Amendments 144K and 144L, which are driving in the same direction, particularly in relation to insurance. Insurance companies have been the orphans: they have been tossed around Whitehall with the DTI and the Treasury; then they went to the FSA, where they were not the most important part of the FSA’s responsibilities; and now they know that they are being taken, rather grudgingly, into the Bank of England. They are worried that the particular features of their industry will not be given due weight, so the appearance of somebody with the requisite experience at board level is a minimum requirement. Because of the degree of concern in the industry, I do not think that it is enough simply to say, “Well, the Bank will do the right thing”—as I am sure the Minister is going to tell us in a minute. It is right that the Bill should reflect the concerns that exist in the industry.
My Lords, it is for the Minister to respond to those arguments for the specific interests regarding representation on the PRA, and I will be very interested in his response. The concern of the opposition amendments in this group is of a rather more general nature with regard to governance, which, as the principal rule by which it is all going to operate, is of the greatest significance.
Amendment 139B would ensure that each regulator must act in a way which follows principles of good governance, including having regard to the UK corporate governance code. I hope that the Minister will find no difficulty at all in accepting that broad principle on which the regulator should operate. Our two other amendments, Amendments 144M and 146A, are rather more specific.
Amendment 144M extends the principles to which the Bank must have regard when making public appointments to the PRA. The Bill states that it must have regard to general principles. We want them spelt out more specifically; that is why we have proposed the insertion of the words, “merit, fairness and openness”, in front of “good practice”, to give specific illustration of what we mean by good practice in this area.
Amendment 146A is a minor addition but an important public safeguard with regard to remuneration. No one in this House can ignore that remuneration at any level in financial services is an issue of great public concern and therefore will certainly be of concern with regard to the governing body of the PRA. At present, the PRA must pay its members,
“such remuneration as may be determined by the Bank”.
We want to add,
“with the approval of the Treasury”,
so that we have the necessary public safeguards on this issue.
I thank noble Lords for introducing their amendments. Let me go through them. Amendment 139B would make explicit that both the PRA and the FCA should have specific regard to the UK Corporate Governance Code. That is an important point. The code is the benchmark for good governance. The Bill makes clear that both the PRA and the FCA will be required to have regard to such principles of good corporate governance as it is reasonable to apply to them. That includes principles from the UK Corporate Governance Code. The Government fully expect the regulators to comply with the relevant principles of that code.
However, generally accepted principles change over time—it is worth noting that just two years ago the UK Corporate Governance Code was called the combined code. I hope that noble Lords will accept that it would not be appropriate to put an explicit reference in the Bill to a specific document which may change from time to time, or the name of which may change completely.
Amendment 144K would require that the Bank must be satisfied that the non-executive members of the PRA board have relevant experience in the sectors that the PRA will regulate, including banking and insurance. Amendment 144L would require that the Bank must be satisfied that the PRA board must include members with insurance expertise. I thank my noble friends for raising this issue, which is also important. The Bank and the FSA have been clear that they understand that the nature of insurers’ business models exposes them to a different set of risks than banks, and that therefore the regulation of insurance requires a different approach.
I can categorically confirm to the Committee that the Government and the Bank are clear that the PRA board will have members with the necessary expertise in each of the sectors that the PRA regulates, including insurance. It will also be important for the PRA board to have expertise in investment banking, building societies and credit unions, for example.
My noble friend Lord Sharkey said that insurance expertise on boards should not be left to the discretion of the Bank. He is right; it will not be; the Treasury will approve the appointment of PRA non-executives. I hope that noble Lords will therefore accept that it is unnecessary to make such detailed provision in the Bill.
Amendment 144M would make explicit that appointments to the PRA board must take place in accordance with the principles of merit, fairness and openness. Of course the Government agree with the intention behind the amendment. Paragraph 10 of Schedule 1ZB already requires that the appointments to the PRA board should take place in line with,
“generally accepted principles of good practice relating to the making of public appointments”.
The clearest articulation of those principles is the Code of Practice for Ministerial Appointments to Public Bodies, published by the Commissioner for Public Appointments. The aim of that code is,
“to ensure that public appointments processes are fair, open and transparent, command public confidence and result in appointments which are made on merit”.
Although some of the principles in the code are relevant only to ministerial appointments, some have wider application. Merit, fairness and openness clearly fall into that category.
Amendment 146A would require that the Treasury approve remuneration of the PRA board. Let me respond to this amendment in the context of the Government’s approach to the FCA and the various policy committees of the Bank. The Treasury has no role in relation to the setting of remuneration for the FSA board, nor will it have any such role in relation to the FCA board. This is as it should be. The FSA is, and the FCA and the PRA will be, independent of government. The Treasury has no role in the setting of the remuneration of external members of the MPC because the Bank is separate from government. The Bank determines how much it needs to pay to get the right people, while still ensuring value for money.
Similar considerations apply to the PRA board. The Bank will need to assure the quality of the leadership of the PRA, so it must be able to determine the remuneration of the PRA externals in the same way as it determines the remuneration of other parts of the Bank group. The Bank and the PRA operate separately from the Treasury and they account separately to Parliament. Parliament has a key interest in whether the PRA is delivering value for money, which is why the PRA falls within the remit of the National Audit Office.
I hope that I have persuaded noble Lords to accept the government amendments and not to press their own in this group.
My Lords, could I clarify with the Minister what he said about the composition of the PRA board? I think he said that the Government were clear that there would be a member with insurance expertise. Did he mean any member, or a non-executive member? There only has to be a majority of non-executive members. I think that my noble friend said that, under that formulation, he believes that that could be met by having an executive member with insurance expertise. The drive of the amendments that we have been discussing was that there should be a non-executive member in an oversight role on the PRA board, bringing in insurance expertise.
My Lords, I categorically confirmed to the Committee that the Government and the Bank are clear that the PRA board will have members with the necessary expertise in each of the sectors that the PRA regulates, including insurance. I did not specify, in answer to my noble friend’s question, but I will write to her if I may.
Amendment 128BJ agreed.
Amendments 129 and 129ZA not moved.
129ZB: Clause 5, page 27, line 6, at end insert “and consumers”
I will also speak briefly to Amendments 129ZC and 130ZA in this group.
All these amendments address the PRA’s general duty to consult. As the Bill stands the PRA must consult PRA-authorised persons or, where appropriate, persons appearing to the PRA to represent the interests of such persons. This consultation is to be on the extent to which the PRA’s general policies and practices are consistent with its general duties under new Sections 2B and 2G. These general duties include, for example,
“contributing to the securing of an appropriate degree of protection for those who are or may become”,
insurance policyholders. This is a very wide if not universal category, as the noble Lord, Lord Flight, has pointed out. They also include a duty to have regard to the regulatory principles in new Section 3B, which include,
“the general principle that consumers should take responsibility for their decisions”.
In both these cases it is clear that the PRA will need to know what consumers want and need; what their experience is and has been; and, particularly when it comes to the caveat emptor clause, what information consumers need to be able properly to take responsibility for their decisions.
These three amendments simply add “consumers” and “the Consumer Panel” to the list of groups that the PRA must consult or whose representations it must consider. Quite apart from the obvious justice of consulting those who may buy the end products, consulting consumers can also have the beneficial effect of preventing the PRA being totally isolated from the real world and the real consequences of their actions. We can all see from recent events the danger of any part of our financial system, regulatory or otherwise, losing contact with what is actually happening or what people are actually experiencing.
These are simple and clear amendments with a simple and clear purpose. I hope that the Minister will give them sympathetic consideration. I beg to move.
My Lords, I have Amendment 129A in this group and it concerns practitioner panels. With the leave of the Committee, and at the request of my noble friend Lord Northbrook, I shall also speak to his Amendment 130ZZZA and to Amendment 130ZAA in this group. When a Marshalled List has to resort to using the letters “ZZZA” there is something wrong.
My amendments concern consultation with practitioner panels. A number of amendments in this group concern consultation with consumers and the noble Lord, Lord Sharkey, has just spoken to his amendments. I am sceptical about the role of consumers in relation to consultation on prudential regulation. I shall be interested to hear what my noble friend has to say in response, but I shall concentrate on practitioners.
Of course it is very good that the Bill contains a requirement for the PRA to consult in new Section 2K. However, the Bill merely enables—it does not require—the PRA to set up practitioner panels. That is in stark contrast to the existing requirement on the FSA to set up practitioner panels and the very detailed requirements in new Sections 1N to 1Q for the FCA to set up various kinds of panels as part of its consultation arrangements. My Amendment 129A would require the PRA to set up one or more practitioner panels as part of its consultation arrangements.
My noble friend Lord Northbrook’s Amendment 130ZZZA mandates a single practitioner panel, and it goes a little further than my amendment by setting out what it should do—namely, it should be a regular forum for policy debate for the PRA and also consider the cumulative regulatory impact of the FCA and the PRA; that is, it should not merely be reacting to specific concentration exercises by the PRA but should also be involved, on a more in-tune basis, as a conduit for practitioner views. That harks back to the concept of dialogue that we talked about earlier when we spoke of consultation in relation to the FCA.
There ought to be clear advantages for continuing with practitioner panels for the PRA as well as for the FCA. The panels have been a well understood and welcome part of the FSA’s interaction with the financial community, certainly from the perspective of the industry. I believe that they are generally regarded as having worked well.
These amendments are supported by the Financial Services Practitioner Panel. Its chairman, Mr Joe Garner, has written to me to say that his panel very much hopes that this Bill will be amended so that the practitioner panel will be able to continue to help the PRA in future as well as the FCA. He sees its role as making a positive contribution to regulation. I have also heard from several industry bodies and other bodies which also support the continuation of practitioner panels.
I have very great respect for the work done by the pre-legislative scrutiny committee on this Bill, but I believe that it was wrong to reject the practitioner panels as involving regulatory capture. I believe that that misunderstands the nature of the quite detailed and technical nature of the work that is carried on by the panels. The FSA did a lot of things wrong, but I do not believe that one of them was being captured by its practitioner panel. Amendment 130ZAA in the name of my noble friend Lord Northbrook seeks to put that beyond doubt by specifically providing that the PRA is not accountable to practitioners if it rejects their recommendations.
The issue of practitioner panels might be less important if there were confidence that the PRA’s approach to consultation would be carried out well. Unfortunately that has got off to a bad start, with considerable concern about the draft of the PRA’s approach to consultation which was recently issued by the FSA and the Bank of England. As I noted at Second Reading, there has been considerable dismay at the dismissive and patronising language used. If the document which is on the Treasury’s website is representative of the kind of thinking which would permeate the PRA, I believe that it is a problem in the making. I could list the problems with the published PRA guidance at consultation but I am conscious of time today. However, I am happy to give the Minister the litany of problems identified with the draft to date. These problems are serious from the perspective of those who are expected to be consulted.
Even if the shadow PRA had pretended that it really embraced consultation, I do not believe that it would have removed the need to set up in legislation a definite structure of consultation, such as the existing practitioner panel arrangements. However, the evident lack of enthusiasm on the part of the Bank of England and the PRA rather strengthens the case for recognising in this Bill the need to have practitioner panels.
My Lords, I support the noble Baroness’s amendment and will also speak to my own Amendment 129B, which goes slightly further. As well as calling for practitioner panels, my amendment argues that there should be PRA consumer panels,
“and where appropriate consumers falling within the scope of the insurance objective”.
It is a mistake to leave the decision as to whether to have panels simply to the PRA, rather than being a requirement in the Bill. This is a fair point; it is appropriate to provide proper safeguards for regulated persons and for consumers. Although it is at a slight tangent, the Treasury Select Committee has made valid points about the tendency to too much arbitrariness on the part of the Bank of England, and the structure. I can see no reason why appropriate panels should not be provided for.
Further—the noble Baroness also raised this point—where the PRA disagrees with the representations made to it by such panels, as under the FSA, I cannot see why it should not be required to have the courtesy to explain why that is the case.
My Lords, in a way these amendments ask for quite simple things. First, the PRA must have arrangements in place to consult consumers or their representatives and report annually on these arrangements. Secondly, the PRA should consider any representations from the FCA’s practitioner or consumer panels. Thirdly, practitioner representatives should similarly be hardwired into the PRA’s working practices. We welcome Amendment 130ZAA in the name of the noble Lord, Lord Northbrook. It is key to have practitioners involved, but for their expertise, not as representatives. On our side we are content that no new panels need to be created either for practitioners or for consumers, provided that the PRA is committed to enter into dialogue with the FCA panels and respond to other relevant submissions.
However, the need for the amendments in our name and that of the noble Lord, Lord Sharkey, are more important perhaps, given the paper released on Monday. I do not know whether that is the same one referred to by the noble Baroness, Lady Noakes, but I think not. This one is entitled The PRA’s Approach to Consultation. This is a slightly different concern from the one she has, but to have a whole paper on consultation in which the word “consumers” is not mentioned seems a particularly alarming reflection of its approach.
The probing amendment in our name—Amendment 130ZZB, which proposes an annual report of the arrangements, rather than the content, of consultation activities—now becomes rather more of a real than a probing amendment. We have grave doubts as to how a paper on the PRA’s consultation could omit any reference to consumers, concentrating only on regulated firms. That is not even-handed or very sensible.
In response to the query from the noble Baroness, Lady Noakes, I will just say why consumers do have an interest in the role of the PRA. This is not of course simply about the prudential issues but about some of those raised by my noble friend Lady Drake earlier. Consumers have many interests in issues that are the responsibility of the PRA, particularly, as the noble Baroness mentioned, with-profits policies but also leveraged ratios and even bank charging policy, about which we have heard things from the putative head of the PRA. It would be strange for the PRA not to hear input from consumer representatives on these matters and simply for it to respond to the panel when it takes a different view. Unless the Bill is amended as suggested, consumers will be excluded from the PRA’s decisions on prudential matters. The PRA will lead on regulation of with-profits policies, but there is no requirement on it to consider representations from anyone representing the consumer interest on that. There are a number of issues relating to with-profits policies, orphan estates and others, which they do have an interest in.
My noble friend Lady Drake talked earlier about £330 billion, I think, being under management in with-profits funds. That is 25 million policyholders, and it is essential that the interests of these policyholders are properly considered, which can only be achieved by working with consumer groups and not simply seeking the views from the FCA. It is the same issue with mortgages, where prudential requirements can have huge implications for consumers. Decisions about the stability of the market potentially restrict the availability of mortgages to a large number of people who, up until that moment, had been servicing their mortgages without any problem. It is vital that the application of any prudential controls treats all customers fairly. The existing consumer panel has been involved in the regulation of insurance and prudential issues in relation to the mortgage market review, and I understand that its advice has been acknowledged as particularly valuable. All we are asking is that consumers get a hearing, which does not seem too much to ask, but also that the expertise of practitioners similarly gets an appropriate hearing.
I support the amendments proposed by my noble friend Lady Hayter and the noble Baroness, Lady Noakes. Both consumer panels and practitioner panels are extremely important and it is very difficult to see an argument against them, particularly because the PRA will be regulating insurance companies. I declare at this point that my own background includes being a non-executive director of a couple of smaller insurance companies in the 1990s. The accounts and concepts are difficult, but such firms are of enormous importance to the economy and to everything that matters to us. Pensions, whole-life policies and insurance in general are important to us all, and it seems quite irrational not to have a consumer panel and, indeed, a practitioner panel, which should include people who really know about insurance policies. It could be the next disaster waiting to happen in financial services, simply because people do not know very much about insurance companies. Their accounts and the way they are managed are quite difficult to understand. For that reason, I support both amendments.
My Lords, this is a big group to do justice to, but I will make a start with Amendments 129ZB and 129ZC, which would require the PRA to make and maintain arrangements for consulting consumers as well as practitioners. I agree that consumers have a key interest in the outcome of the PRA’s decisions. In particular, consumers will be one of the beneficiaries of a safer and more stable financial system. However, the PRA will not focus on consumer protection as an end in itself—that will be the job of the FCA. In its regulation of insurance outside the special arrangements for regulation of with-profits business, the PRA will deliver its policyholder protection mandate through effective prudential regulation. Of course, consumers will be able to respond to public consultations on rules and to the PRA’s annual consultation following publication of its annual report. However, the main way in which the consumer interest is represented will be through the FCA. The FCA will provide the PRA with advice and expertise wherever consumer interests need to be taken into account. The draft MOU that has been published by the Bank and the FSA makes clear that such consultation will take place at an early stage.
Amendments 130ZC and 130ZZC would require the PRA to make and maintain arrangements for consulting consumers, and to consider representations made to it by the FCA consumer panel and practitioner panels. On the first element of this, as I have explained, where the PRA needs input on an issue of consumer protection, this will be provided by the FCA. I therefore do not think it necessary to require the PRA to consult consumers or their representatives directly. However, just because the FCA will advise the PRA on consumer issues, that does not mean that the FCA panels should be tasked with a formal role to advise both authorities.
Under the Bill, the FCA panels rightly focus on issues of concern to the FCA and will not have the expertise or mandate to examine the PRA’s approach. The PRA and the FCA will develop different approaches to regulation, consistent with their different objectives and the fact that the PRA will be regulating a much smaller number of firms. The panels are free to make representations when the PRA consults on rules, or indeed at any other time. However, I do not think that it would be right to require the PRA to give special attention to representations made by bodies designed and maintained for the purpose of advising the FCA on its work.
Amendment 130ZA would require the PRA to consider representations from the FCA’s consumer panel. The Government value the work of the panel and its important contribution to the development of consumer protection policy. However, as I have explained, the Government’s view is that it should continue to play this role through engagement with the FCA rather than the PRA.
Amendment 141A would require the PRA to make and maintain effective arrangements for consulting the consumer panel, consumers, or their representatives in relation to the PRA’s responsibility for with-profits insurance policies. The Government acknowledge that there are particular issues around with-profits regulation, balancing questions around the fairness of with-profits policies with the effect of making payments from with-profits funds on the safety and soundness of the firm. The PRA will have to consider these carefully and put in place appropriate arrangements for consulting others with relevant expertise, and is specifically required to seek the FCA’s advice in discharging its sole responsibility for with-profits regulation to ensure that it is taking account of the FCA’s consumer protection expertise. In giving its advice, the FCA is of course at liberty to consult consumer protection experts and panels as it sees fit. Taking all this into account, the Government do not think that a separate consumer panel for with-profits regulation is either needed or proportionate.
I now turn to the amendments in the group that would require the PRA to maintain consultative panels. Amendment 129A would require that the PRA’s arrangements for consulting practitioners under new Section 2K must include the establishment and maintenance of one or more panels. The Government agree that in order to carry out effective regulation, the PRA will have to consult industry in order to gather information, expertise, and outside perspectives on its work. That is why new Section 2K puts the PRA under a high level requirement to consult. However, the Government remain of the view that the PRA should have discretion as to how it goes about this consultation.
Given the PRA’s greater focus on firm-specific prudential decisions, a standing panel might not be the most effective way of ensuring a productive dialogue with industry. I should be clear that the future management team of the PRA have made clear that it does not envisage that maintaining a panel would be the most effective way of gaining the information that it needs to deliver judgment-led prudential regulation. The PRA will also have a much smaller community of regulated firms than the FSA, or indeed the FCA, and so may wish to tailor consultation exercises on individual rules or measures more precisely to the firms most affected by them. A single, industry-wide panel is not ideally suited to this kind of consultation.
My Lords, can the Minister explain in a little more detail why the FCA is not allowed any discretion about whether it has panels but the PRA does have discretion? Is it just because it is the Bank of England, and the Bank is saying that it has to have discretion?
No, my Lords, of course it is not because it is the Bank of England and it says that it has to have discretion. This is government legislation and the Government are presenting a Bill that we believe is appropriate to the new financial architecture. Of course we consult the Bank of England, the FSA and all sorts of other people. We have also had the input of the Joint Committee. My noble friend is quite right to challenge me on this but I am quite clear on it. As I have tried to explain, it is understandable but simplistic of people to read across that there are panels now that would like to continue to be engaged with both new regulators. I can understand where the panels come from and why, as I have explained, since consumers have a considerable interest in the decisions taken by both bodies, consumers superficially may say, “Actually, we would like to be engaged directly with both”.
If the noble Baroness will allow me a moment, the PRA is a very different animal. We risk, in some of this discussion, slipping into a frame of mind of thinking that the FCA and the PRA are somehow going to be two peas popping out of the same sort of pod. They will be very different regulatory and supervisory bodies with very different mandates and very different numbers of firms that they are regulating. It would be quite wrong to have a one-size-fits-all approach to consultation in these circumstances.
But consumers are not asking for this superficially. It is their money that is being looked after and overseen by bits of the PRA, and they make a very serious request. As I said, we are relaxed about it not being a specific panel, but the existing panels should have a right to be heard. It is simply not enough to depend on the FCA, whose chief executive comes from the industry—as does its new chair, with 27 years in banking and enormous experience. However, they do not represent the consumer interest.
Finally, my fear is that if there is no right to be heard, consumers, and maybe practitioners as well, will retreat to the other way of getting a hearing: to go to the press. One of the great things about the consumer panels is that you very rarely hear about them because they have a back-door entrance. They can go in and have early dialogue. Deny them that and I am afraid that we will revert to the other way, which is an open dialogue through the press.
I understand all that and I know very well that the consumer panel in which the noble Baroness played an important part has had and continues to have an extremely important role. It is not as if the PRA will not be consulting consumers and the public; it must consult publicly on draft rules, for example, and that would involve consulting not just practitioners. Generally, however, the FCA will be the expert on consumer issues and it is right that it should be the primary channel to focus the PRA’s approach.
I repeat that the PRA will be a supervisor with a much more firm-specific, prudential decision-making focus—as opposed to the FSA and the FCA, which will have a much broader rules-based approach. We are talking about very different animals. Indeed, it is worth recognising that, if we are talking on the practitioner side, the FSA tends not to consult the current practitioner panel on firm-specific prudential decisions any more than I would expect the PRA would or should. The dynamic is very different. Therefore, for the reasons that I have given and will continue to give in going through the rest of these amendments, and for the reasons that my noble friend Lord Flight put very clearly in relation to consumers, I believe that what we have put in the Bill is right.
I believe that we are at Amendment 129A. There is no more that I can usefully say on that amendment, so I will move on to Amendment 129B, which would require that the PRA’s consultation arrangements should include industry panels and, where appropriate, a panel representing insurance policyholders. I should start by being clear that where the PRA consults on issues with particular impact on insurers, the Government agree that it should ensure that it engages with insurers in order to understand their views. Such consultation might be done as part of its general consultation under new Section 2K or through consultation on specific rules. Regarding consultation with insurance policyholders, as I have said, where consumer interests are engaged, the PRA will be provided with advice and expertise by the FCA. The Government do not expect it to be necessary for the PRA to make specific arrangements for consulting policyholders any more than other consumers.
Amendment 130ZZZA would require the PRA, as part of its consultation arrangements under new Section 2K, to establish a panel for policy debate with senior representatives of firms and to consider the cumulative impact of regulation by the PRA and the FCA. Policy debates about regulation take place in many forums—for example, between regulatory authorities at the European level, in the FSB and at the IMF, and of course in your Lordships’ House. However, I do not think that it would be right for the PRA to be engaged in policy debate with those that it regulates. Regulated persons are free to make representations to the regulator. There are mechanisms for this is in the Bill. However, to enshrine in legislation the idea that firms should enter into a policy debate with the regulator is contrary to the concept of judgment-led regulation. The PRA will listen to firms but it will form a view based on its own regulatory objectives and priorities, not on the commercial objectives and priorities of firms.
On the second element of the amendment, I agree that the PRA should consider cumulative regulatory burden. It will do this as a matter of course when it considers proportionality under the general duty to co-ordinate. There are already numerous opportunities for industry to comment on the effectiveness of co-ordination. In particular, the PRA and the FCA are required to include in their annual reports an account of how they have complied with the general duty to co-ordinate. Industry and the general public will be able to make representations, for example, at the annual general meeting of the FCA, and as part of the PRA’s annual consultation on the effectiveness of its strategy.
Amendment 129ZD would amend new Section 2K to require that:
“When carrying out a consultation, the PRA”,
“have regard to the desirability of ensuring a broad representation of practitioners and consumers”.
I have some sympathy with the sentiment. I agree that, in order for the PRA to regulate effectively, it will need to consult widely. For example, if it is considering putting in place a new framework for the purposes of supervising credit unions, I would expect it to form a comprehensive view of the sector by talking to credit unions, large and small, based in different parts of the United Kingdom. Where appropriate, I would also expect it to talk to academic experts and other interested parties. However, I do not think that this needs to be underpinned with a specific provision in legislation. The PRA will need to consult effectively if it is to deliver its statutory objectives, and it will be held to account by Parliament for doing so. New Section 2K already requires the PRA to consult the full range of PRA-authorised persons and not just those who are practitioners.
Amendment 130ZZA would provide that the arrangements for consulting PRA-authorised persons may include consultation with persons with specialist knowledge of PRA-regulated activities. Again, I agree entirely with the sentiment. As the Government have made clear, the PRA will consult expert individuals when developing policy. It need not rely solely on industry experts, but also those in academia and other experts. At present, new Section 2K makes express reference to consultation with industry because industry will be directly affected by regulation. It is appropriate to recognise that fact in the Bill, while making it clear that the PRA may decide how to engage with them. But consulting industry is different from consulting “persons with specialist knowledge”. The PRA may of course consult such individuals, whether as part of a public consultation or for a specific purpose, if it will help it to better deliver its objectives. It might also wish to consult all sorts of other categories of person—for example, international organisations such as the FSB and Basel committee. It seems unnecessary to include that level of prescription in the Bill.
Amendment 130ZAA would clarify that the PRA is not to be deemed to be accountable to those firms that it regulates. I am glad that my noble friend has raised this point, as it is an important one. The Government and the Bank of England have been absolutely clear that the PRA should not be seen as accountable to those it regulates. We agree. Firms are accountable to the regulator, and the regulator is accountable to Parliament. However, the lines of accountability are clear in the Bill, and it is not clear what such a declarative statement would add.
Finally, Amendment 130ZZB would require the PRA to report annually on its consultation activities. The Government fully agree with this intention, and indeed the PRA is already required to so do as part of its annual report by new Schedule 1ZB, in paragraph 18(1)(c) on page 186.
I come back to the fundamental point. We have considered carefully the separate consultation requirements for the two regulatory authorities. I understand all the concerns, some of which I hope I have been able satisfactorily to address. But others have consciously been left on the table, reflecting the very different nature of the beast, which the PRA will be as a focused regulator with its small community and one very clear objective. On the basis of that rather long canter through the group of amendments, I ask my noble friend to withdraw his amendment.
Before the noble Lord, Lord Sharkey, decides what to do with his amendment, I would like to come back to a couple of points raised by the Minister. I do not believe that he has given a rationale yet for why the PRA has a free-for-all in this. I believe that the Government should be concerned about the PRA’s potential attitude to consultation. The Minister said that the PRA was not going to set up consultation panels—that has been clear—because it did not need them to gain the information that it needed. The Government seem not to get the concept that the panel is about a form of dialogue, feeding back concerns as well as responding to specific questions.
I skimmed over the quality of the consultation paper. I do not know whether it is the same one as that of the noble Baroness, Lady Hayter. I have had mine for several weeks. I did not discuss earlier the kind of problems that there are; there is no commitment to a minimum period of consultation, to proactive consultation, to consulting on the exercise of national discretions on the implementation of EU policy or to decent implementation periods. I could go on. There is a very serious concern about the attitude to consultation in the PRA, which would be partially resolved if there were a more definite requirement in the Act not simply generically to consult but to make sure that groups were consulted. I have to say to the noble Baronesses, Lady Hayter and Lady Cohen, that I think that I am persuaded that consumers, too, should be formally recognised within that structure. I hope that the Minister, even if the noble Lord, Lord Sharkey, lets him off this afternoon, takes this away and looks at it again over the summer, because I do not believe that the Government have got it right.
Of course, I note what my noble friend says. She is always very clear and direct. I absolutely refute that the PRA has anything approaching a free-for-all. I have explained the many general and specific requirements it has to consult on, whether they are individual rules or setting things out on an annual basis and so on. Earlier on, I think she promised to send me a letter setting out some of the concerns, which she has just summarised, on the recent consultation. I will be very happy to receive that, and the Treasury will of course look at it as well.
My experience in commercial life has left me with a deep respect for the wisdom of consumers, and a deep conviction that consumer groups, properly constituted and properly consulted, are a source of sound guidance, and a vital way of making sure that decisions are properly grounded in current experience, views and expectations. Critically, this wisdom and this learning is always best delivered directly and not through an intermediary. I continue to think that the Government are mistaken in excluding consumers from direct consultation with the PRA, and I think it is unwise to rely on second-hand unmediated input. I suspect, given the comments around the Chamber this evening, that this is an area we might well return to on Report. In the mean time, I beg leave to withdraw.
Amendment 129ZB withdrawn.
Amendments 129ZC to 130AA not moved.
130B: Clause 5, page 28, line 38, at end insert “, and so as to minimise the burden and cost of compliance borne by persons subject to their principles and rules”
My Lords, I address Amendments 130B and 144B. I am not entirely clear why these have been grouped together as they cover very different territories.
Amendment 130B reverts to points which I endeavoured to stress much earlier on in the process of this Bill: at the end of the day it is the consumer who pays the costs of regulation; the new twin-peak arrangements are likely to be inherently more expensive because they double up in certain areas; there is no shared overhead cost and there is not that much in the legislation which is at least there as a discipline to keep costs of compliance to a minimum. Amendment 130B seeks simply to write into the Bill that the PRA and FCA should use their resources efficiently and economically towards minimising the cost and burden of compliance on individuals.
Amendment 144B is in very different territory. The Bill provides for the FCA to have product intervention powers, which in the main I accept is a sensible proposal, because without those intervention powers time drags on before faulty products get addressed. In the mean time, consumers get hurt. However, it seems to me that everyone should be learning from that process. Therefore the amendment provides that the FCA should report annually on the use of these powers and on how it has complied with its statement of policy, including an evaluation of the outcomes of the regulatory actions and whatever intervention powers have been used.
My Lords, I have Amendments 131, 132, 133, 134 and 135 in this group. I certainly support Amendment 130B moved by my noble friend Lord Flight but my amendments go rather further and are rather more prescriptive in their approach. They relate to the attitude, approach and culture of the regulator, which we have been discussing. There has been a lot of hollow laughter about culture in the banking system, which I understand, but the financial services industry covers much more than the banks—it covers the IFA community, the insurance community and Lloyds. I think that in recent years the regulator has moved from a reasonably open, even-handed relationship with its regulated firms to one of much greater risk aversion. Of course, I understand that safeguarding client money and avoiding financial crime are very important indeed, but the regulator seems to have forgotten many chunks of the introduction to FiSMA, which sets out other objectives, requirements and issues that it has to consider in carrying out its regulation. Nowhere has this shift in culture been seen more than in the relationships with the smaller and medium-sized firms. Very often these are firms where innovation and some of the most exciting developments are taking place.
Specifically, I should like to draw to the Minister’s attention three or four things which I hope we can agree are being practised in an undesirable way at present and which are regulatory commercial approaches that henceforward we should try to avoid in the structure.
The first is Section 166 inquiries—the expert person investigations. These were designed to be used rarely but there are now 840 outstanding. A rough estimate of the cost of a Section 166 inquiry in professional fees for the regulated firm is £100,000, although it could be £200,000. Therefore, we are talking of between £84 million and £150 million of costs, and that is without the cost in terms of the management time spent providing the information needed for the professional firm carrying out the inquiry on behalf of the FSA.
This is sub-contracting regulation. There is really no restraint at all on the FSA in undertaking these inquiries. Such an investigation costs it nothing; it simply has to engage a professional firm to carry it out and away it goes. That is without the Section 404 thematic reviews, and without TC4, which are the run-off requirements when a firm is closing down. Of course, closing down a firm requires some very difficult judgments to be made about what you will be able to realise from the assets, the time over which you will be able to realise them and the consequent costs incurred during that period. If you make a series of extremely negative and conservative estimates, then of course you can put a firm in a very difficult position and make it almost impossible for it to carry on.
Last but not least is the position of the SIF—significant influence function—committee. I should like to give a real-life example of this, which I want to use to underpin the detail of my amendments. I have recently resigned as the chairman of a regulated firm. In April 2011 we took on from another regulated firm a new finance director, who came with good references. In July, he was told by the SIF committee that he was not able to take up the role of finance director. I went to the FSA and asked why. It said it could not tell me as there was an investigation and it was confidential. I asked the FSA if it could tell him what he had done. It said it could not do that either as it was confidential. That was June or July 2011. He is still waiting to hear the outcome a year later. He cannot find out what he has been accused of and is in a Kafkaesque situation. This is the sort of culture and risk-averse nature of the situation we now find ourselves in. My amendments are designed to prevent this being carried over into the new structure.
In the regulatory principles to be applied by both regulators in new Section 3B on page 28, I seek to add “operational rules” after “burden or restriction” because it is the unofficial stuff that can be made extremely expensive and difficult. It should cover firms as well as people. In particular, in Amendment 134, after “proportionate” I want to add “reasonable and fair”.
I have just given in some detail—and I apologise for going back to it—the example of the SIF committee. I can see how the regulator could argue that, if you have a person who has been involved in a firm which is under investigation, preventing him operating might be proportionate but to hold him in limbo for 13 months cannot be reasonable or fair. It offends the principles of natural justice.
I hope very much that my noble friend, when he comes to wind up and reply to this important set of amendments, can give me some assurance as to how we are going to make sure that the culture going forward is more even-handed and better than it has been over the past couple of years. It is absolutely vital that the future regulatory architecture enables financial services firms to play an effective role in the economy. To enable this role to be fulfilled, the regulatory regime needs to take an approach that considers whether interventions are proportionate, reasonable or fair.
My set of amendments would address a number of concerns. There would be assessment of business-specific risks—for example, the insurance sector presents very different risks from those of banks and has a very different business model. If the regulators are required to consider whether their approach is reasonable and fair, they should ensure that consideration is given to whether it is appropriate to apply regulations drafted with banks in mind to other industries in the financial services sector, including insurance. Then there is the question of the culture. My noble friend has said many times that the Government wish to avoid the stability of the grave. A requirement to have regard to what is reasonable and fair will help to ensure the regulators take a more measured approach. For example, the PRA has signalled a desire to make greater used of skilled persons and external auditors in its approach to supervision. While you have to recognise that these are important regulatory tools, it is imperative that they are used appropriately and in relation to those firms which represent a significant risk to the PRA’s objectives. This set of amendments is designed to help these considerations.
My Lords, I have Amendments 144A and 147C in this group. They are in the name of the noble Lord, Lord McFall, and myself. I want to start by saying that I support what my noble friends Lord Flight and Lord Hodgson have said in respect of their amendments.
My amendments are much more modest. They just deal with Schedule 3, which sets up new Schedules 1ZA and 1ZB to FiSMA, which deal with the much more routine aspects of the FCA and the PRA. These little amendments simply add one requirement to the list of things that the FCA and the PRA have to include in their annual reports to the Treasury. That requirement is to include an analysis of the costs and benefits arising from regulation for which the bodies are responsible. It is important that this report is then laid before Parliament so the issue is kept visible.
These amendments come from the Treasury Select Committee’s first report of this Session, as do others in my name and that of the noble Lord, Lord McFall. The Treasury Select Committee has received a lot of evidence from the financial services sector about the rising cost of regulation—I have mentioned that once already this afternoon. I know that in particular the non-bank parts of the financial services sector feel that they are paying a price that cannot be justified by reference to the risks related to their own activities, which is why the issue of costs and benefits is particularly important.
The Treasury Select Committee recognised that the Government have shifted their position considerably during the development of the Bill, but it remained concerned that there would not be significant improvement over what it describes as “current inadequate practice” in the regulator. If the current regulator is inadequate in relation to the current regulatory structure, it would be doubly so in the context of the new powers and the new focus under the Bill. There are lots of ways of dealing with this problem, and the approach of my amendments is a very minimalist one of simply including costs and benefits in the annual report. The amendments are no more prescriptive than that. I am sure that my noble friend will say in a moment that there is no need for a statutory requirement because the new bodies will be encouraged to be mindful of regulatory burdens, but what is not stated in statute is often forgotten. That is why we need some more recognition of the issue in this Bill—probably going beyond my modest amendments.
My apologies to my noble friend Lady Kramer. I am thinking ahead and getting too far ahead in my own mind.
Amendments 144C, 144D, 144E, 147D and 147E refer to Schedule 3 and are very much in the area of the annual duties of the FCA and the PRA to make public their actions over the previous year. Apart from producing annual accounts, three methods of accountability are mentioned in Schedule 3. There is the annual report, which is the responsibility of both the FCA and the PRA; there is a public annual meeting for the conduct authority, but not for the PRA; and there is a consultation process for the PRA on the annual report that is followed by a further report by the PRA on that consultation. It seems to me that all three processes are not only admirable but essential for the full accountability of these important and key organisations both to the industry and the public.
My amendments would put the same responsibilities on both those organisations so that the FCA will also have a consultation process on its report, and a report on that, and the PRA would also have an annual public meeting. I note with interest the Minister’s remarks about one size not necessarily fitting both these organisations because they are very different. Clearly their responsibilities, actions and how they work are different but, in terms of their responsibilities to the broader industry and to the public, their responsibilities are very similar. That is why I think it is important that, as in my amendment, the Prudential Regulation Authority should have an annual public meeting. Again, the reasons seem to me to be pretty straightforward. Although the PRA has a relatively limited clientele compared with the FCA, its work, as we have seen through the financial crises of the past few years, is very relevant to the remainder of the financial services industry, customers of those institutions and to all taxpayers, who at the end of the day, if the regulators of those major institutions have been ineffective, carry the can for the cost of that regulation not working. For those reasons the very admirable process of annual accountability should be reflected in both organisations. On that basis I hope that the Minister will look favourably on these amendments.
My Lords, I have little to add to this debate. I will keep my remarks very brief, but they are remarks of some cheer. I never thought that I would from this Dispatch Box congratulate the noble Lord, Lord Flight, on an amendment, but I very much approve of his Amendment 130B, and the precision with which he spoke, as well as the noble Baroness, Lady Noakes, who has made such a contribution to our proceedings today.
My Lords, I fear that again this is going to be relatively long one in which I will not be able to satisfy all my noble friends. I hope that my arguments will speak for themselves, but I have a suspicion that I might not quite be able to do it. Let me give it a go, because this is a series of important amendments.
Amendment 130B would add to the efficiency principle to which both regulators will be required to have regard when carrying out their general functions. The efficiency principle ensures that the regulators should have regard to using their resources in the most efficient and economic way. This is the principle in FiSMA at the moment, but we are going further. We have made the accounts of the FCA and the PRA subject to audit by the National Audit Office and provided that the NAO will be able to carry out value-for-money studies into the new regulators, as we discussed earlier today. This ensures an important line of accountability for the regulators to Parliament, through the Public Accounts Committee, in how they use public money.
If the regulators are required to consider minimising burdens on firms without any counterbalancing provision, they may be distracted from pursuing their focused objectives, particularly if one considers that minimising burdens on firms could be used as a rationale for inappropriate regulatory forbearance. Instead, the proportionality principle ensures that costs of individual regulation are balanced against the pursuit of regulatory objectives that will benefit the whole financial system and its consumers, by requiring the regulators to consider whether the burdens imposed on firms will be proportionate to the benefits brought about by that imposition.
Amendments 131 to 135, in the name of my noble friend Lord Hodgson of Astley Abbotts, look to amend the proportionality principle to which both regulators will be required to have regard when carrying out their general functions.
Given the importance of the proportionality principle to the new structure, I am very glad to have the opportunity to discuss it further via this series of amendments. Amendments 131 and 135 would add to the proportionality principle a requirement on the regulators to consider whether an operational rule or operational requirement is proportionate to the benefits which result from that rule.
I can assure my noble friend that the existing reference to a burden or restriction already includes burdens or restrictions which relate to operational matters. So when the regulators make rules or impose requirements which require firms to alter the manner in which they operate their business, they will be required to have regard to the proportionality principle.
In fact, my honourable friend, the Financial Secretary to the Treasury, tabled amendments to the Bill on Report in another place to ensure that the regulators will have to demonstrate how they have considered such matters when making rules.
Specifically, they will have to set out in the compatibility statements that they are required to publish when consulting on new rules, how they consider the proposals to be consistent with the principles of regulation in new Section 3B, including the proportionality principle. Amendments 131 and 135 pick up the important point that much of it comes in the operational matters but that it is picked up, and specifically that the requirements of the Bill were extended in another place, which makes Amendments 131 and 135—and Amendment 132, which is consequential—unnecessary.
Similarly, Amendment 133 seeks to add “firm” to the proportionality principle, so that the regulators will have to consider the burdens and restrictions placed on firms, adding to the current wording which uses the term “persons”. We may have touched on that before, but again, for the avoidance of doubt, if we have not mentioned that in Committee, I would like assure my noble friend that “person” is defined in the Interpretation Act 1978 as including,
“a body of persons corporate or unincorporate”.
Thus “person” includes individuals and other forms of legal person such as companies, partnerships and unincorporated association. So Amendment 133 is unnecessary.
Finally, Amendment 134 would add the words “reasonable and fair” to the proportionality principle. I agree that the regulators should be both reasonable and fair in the way that they pursue their objectives. I understand my noble friend’s concerns. He has taken us through a number of examples where he feels that the current regime is operating unfairly. I will certainly not detain the Committee by giving the other side of the case in each of those examples, but there is one. Part of what we are doing will work right through the structure only if there are changes of attitudes in lots of ways in which people go about their business.
I appreciate the argument that the best way of making people change their attitudes is to include certain things in the Bill. However, I know that the FSA and the PRA are reading these debates carefully and understand the spotlight that they are under. All these exhortations to them to do what, in this case, is my noble friend’s direction of travel, which I fully appreciate, are being listened to carefully. But the provision itself in Amendment 134 is unnecessary. The regulators have a duty under public law to act reasonably and can be challenged in the Upper Tribunal or by way of judicial review if they fail to discharge that duty, which would be broadly the case if the requirement were on the face of the Bill. The regulators are already under a duty to comply with the rules of natural justice—in other words to follow procedures and processes which are fair.
Amendments 144A and 147C would require the regulators to set out the costs and benefits of the regulation for which they are responsible in their annual reports. The regulators are already required to include in their annual reports a significant amount of information about how they have adopted a proportionate approach to delivering their objectives for the FCA, in new Schedule 1ZA(10) and for the PRA Schedule 1ZB(18). They must set out how they have complied with the regulatory principles, including the proportionality principle.
The financial services regulators are being brought within the statutory remit of the NAO, which I have said before, which will be able to carry out its own value-for-money studies. It would be excessive to add to this an annual requirement for the regulators to conduct their own cost-benefit analysis of the entirety of their regulatory activity.
Amendments 147D and 147E would require the PRA to hold an annual general meeting, as is required for the FCA. Amendments 144C to 144E would require the FCA to put in place arrangements to consult on its annual report, as is required for the PRA.
The Bill provides for the PRA and FCA to take different approaches to annual consultation on the effectiveness of their regulatory approach, and I welcome this opportunity to explain why that is the case. The provisions for an annual meeting under FiSMA provide a useful opportunity for stakeholders to make high-level comments on the FSA’s strategy and approach. Like the FSA, the FCA will supervise the conduct of all financial services firms. Given the wide range of issues under consideration, and the large number of firms, it is useful to have a single annual forum where stakeholders can voice their views. But as I said in discussing the last group, the PRA will be looking in much greater detail at a much smaller number of firms, and will be focused on complex issues of prudential risk. Given the PRA’s narrow focus and the complexity of the prudential issues it will tackle, a written consultation will be a more effective way of obtaining input from industry about how it has performed against its objectives. This will enable firms, consumer groups and others to put in detailed submissions addressing the PRA’s prudential approach in a level of detail that they would not be able to do in an annual meeting.
These are alternative, rather than complementary, mechanisms—horses for courses—and it does not seem necessary to subject both regulators to both mechanisms, and in doing so create additional cost.
My Lords, I understand that argument about the PRA and a public meeting, but it seems to me that all of us that are in public bodies, in politics or whatever, know that there is nothing that makes you feel more accountable than knowing that you have to face an audience face to face once a year and people can turn up and ask you live questions. That is why corporate annual general meetings are not perfect, but at least they can be effective in that way and be quite focusing for the board of that company, or, in this case the members of the prudential regulation authority. It seems to me that since prudential regulation is so important to the financial health of the country, it would be a good thing for that reason.
I well understand my noble friend’s argument. It is, of course, far from the case that the PRA and the Bank of England will be able to hide from direct questioning of what they do because I am sure that they will be in front of the Treasury Committee much more frequently than annually, under the full spotlight of television cameras and so on. It is not like a normal corporate situation in which the board may be able to hide away from that sort of scrutiny except annually. There will be very regular public challenge, principally through the Treasury Committee, and I can only repeat that it would have been the simple, easy answer to just put both requirements on both the successor bodies, but I come back to the underlying point: we must remember that we are creating two bodies that have to be, in very many respects, different from what we have with the FSA at the moment. If it is merely shifting the chairs around, we need not be spending the many hours that we are spending over the Bill.
Well, that is why we are not merely shifting the chairs around; there will be a very fundamentally better structure in place for all sorts of reasons that we have debated, but as a consequence of that, some of the easy solutions of “one size fits both regulators” is not the right way to go and in this case it is essentially a disproportionate imposition of the public meeting on the PRA, for the reasons I have given.
Amendment 144B seeks to require the FCA to account in its annual report for how often the FCA used the product intervention power in Section 137C and financial promotions power in Section 137P, what the outcome of each intervention was, and how the FCA complied with the statement of policy concerning the temporary product intervention rules in Section 137N. Both powers are very important, but they are also a departure from the current regime and therefore it is important that the regulator accounts for how it uses them. As such, I fully agree with the sentiment behind this amendment, but I reassure my noble friend that it is not necessary. Paragraph 10 (1)(a) of Schedule 3 requires the FCA to report on the discharge of its functions and the FCA’s general functions include making and policing of the rules. The Government therefore fully expect the regulator to account, in this area, for how it has used these powers.
I think that I have dealt with all the amendments in the group.
I return momentarily to Amendments 131 to 135. I am extremely grateful for the Minister’s comments and the comfort that he gave on operational rules and the exchangability of “person” or “firm” under the Interpretation Act 1978, of which I was not aware. On the point about “reasonable and fair”, I think that he said the firm could always take the regulator to the Upper Tribunal. That is not an answer at all. No firm, particularly not a small one, will want to take the regulator to the Upper Tribunal. That is only in theory an answer. There is no way that any firm will want to go through the risks—in publicity, time and reputational damage—to ensure that the regulator has been reasonable and fair. I am not asking my noble friend to come back on this; I understand his point; but his officials should not think that that is an answer, because it is not a practical answer in the real world.
My Lords, I appreciate that the processes of challenge, whether it is by the Upper Tribunal or under the rules of natural justice, are very much back stops and expensive and difficult for firms. That does not mean that large firms have not challenged the FSA and in some cases been successful over the years. I am not sure that it would be any cheaper and easier if such requirements were written into the Bill.
It just remains for me to ask my noble friend Lord Flight to withdraw his amendment.
I thank my noble friend for his response. With regard to my Amendment 130B, I hope that, by the time we get to the end of the process, he may have some more effective thoughts as to how to ensure that costs are managed economically. I observe that, since the FiSMA, a great deal of forest wood has been cut down, a great deal has been added and little achieved for the consumer as a result. It is a difficult nut to crack, but, in the mean time, I beg leave to withdraw the amendment.
Amendment 130B withdrawn.
Amendments 131 to 138B not moved.
138C: Clause 5, page 29, line 15, at end insert—
“(g) the need to ensure that each regulator employs staff with the necessary knowledge, experience and expertise of the sectors that they regulate, and of policy making at the European level.”
My Lords, Amendment 138C proposes a new paragraph (g) to the regulatory principles referred to in new Section 3B. It would ensure that,
“each regulator employs staff with the necessary knowledge, experience and expertise of the sectors that they regulate, and of policy making at the European level”.
The FSA has had issues in retaining quality staff in recent years, and recruitment will remain one of the biggest challenges facing the new regulatory bodies. A failure to address the issue of experience and expertise will undermine the introduction of the new regulatory framework—in particular, the proposed move towards a more judgment-based supervisory approach. The amendment is intended to probe the Government on how they and the regulators plan to address those staffing challenges.
I argue that there should be a commitment that the regulators will ensure that they recruit and retain staff with the necessary knowledge, experience and expertise to apply the regulatory regime in an appropriate and proportionate manner. It will be particularly important that the staff have a balance of sector expertise reflecting the range of industries that they cover, and that appropriate expertise is present at all levels and in all functions. Without proper staffing the regulators will be unable to make sound judgments about the strategies, plans and actions taken by individual firms. They will also struggle to understand the potential impact that regulations and supervisory actions taken against individual firms might have on the financial system as a whole.
Staff employed by the new regulatory bodies will also need to acquire skills and expertise to aid their interaction with the new European supervisory authorities. The ESAs will drive more of the regulatory agenda in future and it is essential that the new authorities play an increasingly influential role in the early stages of development and throughout the process governing the agreement of new regulation. To succeed in this area staff will need the necessary negotiating and influencing skills and require a high level of awareness of the political processes at a European level. We touched on this point during our debate on Amendment 96A, moved by the noble Baroness, Lady Hayter of Kentish Town, at our meeting on 10 July.
I have already referred in slightly unflattering terms to the significant influence of the function committee that authorises individuals on a case-by-case basis before they can take up their roles. A major part of the interview with the SIF committee is taken up with questions designed to discover if the interviewee has the necessary knowledge, expertise and experience. If this test is to be applied to those who run the financial services industry, it should surely also be applied to those who regulate it. I beg to move.
My Lords, I am somewhat surprised to find myself agreeing with the noble Lord, Lord Hodgson of Astley Abbotts. I have been involved in a lot of reorganisations and all too often people do not think about the human content of the organisation, the size of the jobs that they are creating and the extent to which a reasonable human being can do them—whether even an unreasonable human being can be found to fill those roles.
At first sight it is a matter of motherhood and apple pie. To try to get a feel for this Bill and speaking particularly about the PRA, I searched the internet and came across a splendid document by the Bank of England and the FSA, published in May 2011. It is called The Bank of England, Prudential Regulation Authority: Our Approach to Banking Supervision. It is written as a narrative and really it is a gripping one. All that the Minister says about the PRA is that it is going to be focused. It is going to be much more than focused. It is going to be based on a judgment-based supervision, and I quote from paragraph 15 of this document:
“The PRA’s proposed approach has, at its centre, supervisors making judgements, when needed, about current and future risks to an institution’s safety and soundness and about the action it should take to address these risks. It is recognised that this will mean that, at times, the supervisor’s judgement will be at variance with that of the institution. Furthermore, there will be occasions when events will show that the supervisor’s judgement, in hindsight, was wrong. This is inherent in a forward-looking system”.
This is a very significant intervention. Later the document describes the proactive intervention and at stage 3 points out where,
“significant threats to a firm’s financial safety or soundness may have been identified”.
“The PRA may require any of the following actions: a change to management and/or composition of the board; limits on capital distribution; restrictions on existing or planned business activities; a limit on balance sheet growth and/or stricter leverage limits; and setting tighter liquidity guidelines and/or capital requirements”.
I am sorry that the noble Lord, Lord Sassoon, is not with us at the moment, but he said that the PRA will not become a shadow director. It is pretty clear that I do not understand what a shadow director is, but this is a significant level of intervention. Then you look at the role. A lot of the time, the people in this role will be doing base-level supervision. Let us hope that we have some financial tranquillity. We are now looking for people who will be capable of taking that level of intervention at pretty short notice, interfering in major institutions’ affairs, and having effects which, it is admitted, could be wrong decisions. That will have to be done with enormous care by people of very high quality.
I am pleased that the amendment brings Europe into play. In front of us we have a very complex set of organisational changes. It is not clear how it will fit with Europe. There will almost certainly be a number of jarring edges. We need people in this organisation who are capable of overcoming the ambiguities and smoothing the path of the relationship with Europe.
I am sure that the Minister will say that this is not the sort of thing that should be on the face of the Bill. If I were in his place, I know that my brief would say that. Nevertheless, it is for the Minister to assure us that processes will be in place, particularly in the PRA, given the intention to use these powers, which already exist, in such a significant way to meet these very serious challenges.
My Lords, the noble Lord, Lord Tunnicliffe, reminded me that this morning I carried out my annual clearing out of documents to be binned or not to be retained. One of those that I reviewed was the document to which he has just referred, the Bank’s announcement in relation to how it would manage the PRA. That document did not go into the bin; it was saved for another day. However, it reminded me of the importance of the issue.
My noble friend Lord Hodgson referred to the number of staff who have left the FSA over the past year and a half. It is a very significant number of people at many levels, and often very senior people. The organisation is trying to live up to this new judgment-led supervisory approach and to cope with major organisational change, as the FSA is split into two organisations. My question to my noble friend on the Front Bench is: what confidence do the Government have that new regulatory organisations will have the staff? I am sure he will say, as the noble Lord, Lord Tunnicliffe, anticipated, that this amendment is not necessary. That may be so, but it is important to know from the Minister whether the Government believe that these organisations are ready for the responsibilities that they are to take on.
My Lords, my noble friend’s Amendment 138C would make the FCA and the PRA consider whether their staff are appropriately experienced and endowed with the requisite level of expertise and knowledge to carry out their general functions. That would be inserted into the list of principles of regulation to which both regulators will be required to have regard. Of course, we agree that it is absolutely critical that the new regulators employ the right staff—staff who have the necessary skills and experience to use their informed judgment will be the defining factor in the success of the new regulatory system. Likewise, we agree with the Joint Committee’s assertion that the PRA and FCA will need to attract staff with the appropriate approach and experience. As my noble friend suggests, it is important that staffing decisions are made by the regulators themselves. Specifically, they should be empowered to consider whether they are appropriately staffed in order to meet their statutory objectives.
In that regard, the FSA paper setting out its vision for the FCA’s approach to regulation, published in June 2011, highlighted the importance that the FCA will place on such matters. It says that,
“the FCA will need to retain and attract professional and dedicated staff, equipped with the skills and knowledge to tackle the difficult issues ahead. It will need to be a dynamic and learning organisation, committed to developing individuals within a career that includes management and specialist paths. It will put a premium on flexibility and team-working where resources are allocated flexibly across the organisation”.
There is a similar commitment in the PRA approach to the banking document:
“The PRA will maintain its own in-house specialists including staff with particular expertise in risk management and risk modelling”.
I also understand my noble friend’s concerns about the requisite experience of the European policy-making process. Indeed, engagement with international regulatory bodies will be crucial for the regulators. I confirm, therefore, that I would absolutely expect the regulators both to employ staff with the requisite knowledge of European policy-making and to provide comprehensive training for staff who work in areas where knowledge of this is desirable. However, again, these will rightly be operational matters for the regulators.
My noble friend Lady Noakes asked whether the Government have confidence in the ability of the regulators to find the necessary staff. Yes, we do: we will draw on the best of the staff of the FSA and of the bank cadres and I am confident that, with focused objectives, they will quickly develop deeper expertise in their areas.
My Lords, I cannot answer that here and now, but I will write to my noble friend on that point.
Meanwhile, I assure my noble friend Lord Hodgson that while staffing is not a matter for the Bill—as the noble Lord, Lord Tunnicliffe, suggested—we regard it as absolutely key for the regulators themselves to consider. On this understanding, I ask him to withdraw his amendment.
I am grateful to my noble friends Lord De Mauley and Lady Noakes and to the noble Lord, Lord Tunnicliffe, for their support. Inevitably, we get down a bit to motherhood and apple pie on these things. However, I say to my noble friend on the Front Bench that the reputation of the regulators will be made quite early on, because the firms will say, “Are these bodies with whom we can have a sensible, grown-up, informed, well judged set of discussions, or have they sent boys to do men’s jobs?”. If they send boys to do men’s jobs, the relationship will never recover, because the regulated firms will not feel that the regulators have the capacity, ability or knowledge to be able to make the informed judgments that this Bill expects of them. I will withdraw the amendment; however, my noble friend must emphasise to the regulators that this will be a once-in-a-lifetime opportunity. If they get it wrong, their reputation will be damaged from the start.
Amendment 138C withdrawn.
Amendments 139 to 139B not moved.
140: Clause 5, page 29, line 42, at end insert—
“(d) that the exercise of their functions in relation to persons regulated by both the PRA and the FCA is coordinated with a view to avoiding the making of duplicative requests and the imposition of inconsistent requirements on such persons.”
My Lords, Amendment 140 and Amendments 140B, 140C and 140D are really about the same territory of the co-operation and collaboration between the PRA and the FCA. Amendment 140 is very concerned to focus on the actual, practical dealing with firms in everyday business; it seeks to avoid the making of,
“duplicate requests and the imposition of inconsistent requirements on such persons”.
Those in the industry will be moving from regulation by one body; virtually everyone regulated by the PRA will be regulated by the FCA as well. There is an inevitable tendency for duplication. As we will come to later on, some of that is not necessary. This amendment calls for an addition to Clause 5, which puts in the Bill the objective of avoiding such duplication.
Amendments 140, 140B, 140C and 140D are essentially about the memorandums of co-operation between the two bodies. With regard to Amendment 140B, there are certain exemptions which could significantly limit the territories in which co-operation is required. The amendment seeks to require that additional guidance be given which makes clear the extent to which these exemptions must be used to disapply the duty to co-operate.
Amendment 140C relates to the MoU, which is required to be reviewed regularly and published. However, there is no requirement in the Bill for the PRA and FCA to consult on the changes from year to year and this amendment provides that such consultation should take place. New Section 3E(8)(b) allows technical or operational issues relating to co-operation between the two authorities to be left out of the MoU, but I cannot see any particularly good reason why this is so. Again, this could have a material impact on firms, where important things end up being omitted. Amendment 140D redrafts new subsections here so that they only cover items where publication would be against the public interest, and removes the references to technical and operational issues as being able to be left out.
I have added my name to Amendment 140, moved by my noble friend Lord Flight. I underline the importance of co-ordination and think some means of measuring the effectiveness of the co-ordination mechanisms and processes between the FCA and the PRA should be established. Some annual review would bring significant benefits, and changes could then be incorporated in the MoU that exists between the two bodies, and would help control costs.
As I am sure other noble Lords have, I have had briefings from London First and the Council of Mortgage Lenders stressing the importance of this co-ordination and the need for these two bodies to work closely together. One swallow does not make a summer, but a very large firm rang me up to say that their chief executive was having to have a get-to-know-you session with the FCA and the PRA, talking about the generality of the firm, but they refused to co-ordinate the meeting. The FCA said, “Come down here and we will see you one time but then come down a second time to see the PRA”. He is going to have to make two visits to these organisations. It is a swallow and a cost, but also denotes an attitude, which is the very attitude that I think has to some extent poisoned the present relationships. In order to work in a cost-effective and business-friendly way, the regulators have got to understand that these firms have to operate and cannot just be at the beck and call of the regulator. They have commercial lives to live and the chief executives of these big companies are busy men. It is not beyond the wit of man, and common politeness, for the regulators to be able to agree a common diary approach for what is a getting-to-know-you arrangement, not an inquiry about something relating to their own particular functions. I very much underline what my noble friend’s amendment says. There is an awful lot of work to do if we are not to set off down the wrong road in this very sensitive and potentially extremely costly area.
My Lords, I will speak to Amendment 140A, which is in this group. It is slightly different but we did not seek to have it regrouped, just in the interest of time. Amendment 140A would establish in the Bill that the PRA and FCA are considered equal in status. We have a letter from the noble Lord, Lord Sassoon, dated 18 June, which indicates that it is the Government’s intention to have parity of status, but I would defy anyone to read the Bill and come away with that particular conclusion. In the Bill, as your Lordships will be aware, the PRA has the right to veto certain of the FCA’s regulatory actions. I have no problem with that—it can be right and proper—but it reads over very quickly into a sense that the PRA is the superior body. The PRA is also part of the Bank of England family, a very powerful family. The FCA stands outside of that, which is right and proper. However, it creates the issue about the balance between those two regulators, particularly since the Governor of the Bank of England chairs the PRA as well as the FPC and the MPC. The FCA therefore stands in a different relationship to the governor and has a very different role. The governor is a very important individual in the international community in terms of public recognition and public standing.
Building a little on the comments just made about culture and behaviour by the noble Lord, Lord Hodgson, we must recognise that within departments there tends to be a sort of default behaviour to live in a silo. It is very difficult to persuade organisations to co-ordinate effectively with each other, and to have the kind of respect that goes with parity. Although there is a memorandum of understanding, a great deal of judgment is involved in that memorandum in terms of deciding when it is appropriate to share information, to consult and to co-ordinate. It depends a great deal upon attitude. I have been in at least two meetings with members who were a fairly broad representation of the financial services sector when it has been evident that the assumption of the sector is that the PRA is the lead institution and the tough guy, and that the FCA plays a somewhat secondary role.
This is of particular concern because of the range of financial services sectors that the FCA will regulate. It comprises 27,000 firms contributing £63 billion in tax revenues, providing over 2 million jobs, two-thirds of which are outside London. We must be very careful that it is not regarded as second class in its role. The London Stock Exchange is particularly concerned about this issue because of the role that the FCA must play in Europe. As your Lordships know, it has the seat of ESMA, which is highly significant. The UK market accounts for between 60% and 80% of EU securities trading but has only 8% of the vote on ESMA. Therefore, the status, standing and significance of the FCA will matter enormously in those European discussions which affect the City, the financial services industry, and the international world of finance more generally.
This amendment seeks to, in a sense, make it clear in the Bill that the FCA does not have second-class status and that it is equal in its standing with the PRA. It seeks to make sure that that then gets embedded into the culture of how these regulators relate to each other and co-ordinate with each other, and that the FCA has standing in international eyes, and is recognised by international regulators as the body they can appropriately talk to, and not as a body that they must go around in order to speak to the genuine powerhouses.
My Lords, I rise to speak to Amendments 140A, 140BA, 140DA, 143C and 144JA. Amendments 140AA to 140DA appear to be, to use the words of the noble Lord, Lord Flight, in the same territory as those amendments that he was proposing and which have also been supported by the noble Lord, Lord Hodgson. Therefore, I do not think that we need to say much more except that we support them. We hope that our points will also be taken into account—they are relatively self-explanatory. We look forward to hearing the Minister’s response.
Amendments 143C and 144JA, raised in the other place, are intended to probe the practical aspects of co-ordination behind the FCA and the PRA on the ground—for example, across the membership of the boards. Schedule 3 on page 177 makes provision for the Bank’s deputy governor for prudential regulation to be on the FCA board. However, paragraph 6 states that:
“The Bank’s Deputy Governor … must not take part in any discussion by or decision of the FCA which relates to (a) the exercise of the FCA’s functions in relation to a particular person, or (b) a decision not to exercise those functions”.
Similarly, new Schedule 1ZB(5) states that:
“The chief executive of the FCA must not take part in any discussion by or decision of the PRA which relates to”—
I do not need to quote it further, it is very similar. There we have two deputy governors, supposedly sitting on these two boards to aid the co-ordination of these two bodies and to have cross-membership, and yet there is a provision that gags those two individuals and prevents them getting involved in discussions in certain areas. There may be a rational reason for this but it beats me as to what might be.
There is a further point. Paragraph 5 on page 177 of the Bill states;
“The validity of any act of the FCA is not affected”,
if there is a vacancy in the office of deputy governor, or if there is
“a defect in the appointment of a person”,
to those boards. However, if a deputy governor happens to stray in discussions into areas that relate to a particular person or to a decision on exercising a function, might there not be a serious risk that on judicial review—for example, a third party could challenge the validity of any act of the FCA—should it be discovered that the deputy governor had uttered a phrase or misspoken in a particular way about a particular person or issue?
One must be concerned about enshrining restrictions on the things that board members can and cannot utter so that they cannot take part in a decision. How would that be implemented? Would they have to leave the room when one of these topics came up? Would every single decision of the FCA and the PRA have to be separated into generic and operational questions? It would surely not be right to fetter internal discussions in this way. If it is right to put them on the boards of both organisations, it must be right to let them discuss everything that comes up on those boards. I look forward to hearing the Minister’s response to these points.
I support the amendment in the name of the noble Baroness, Lady Kramer, and particularly her remarks about the importance of the status of the FCA in relationship to European negotiations. I remind the House that I am a non-executive director of the London Stock Exchange and that until 2010 I also chaired the sub-committee of the European Union Committee that is concerned entirely with difficult negotiations on wholesale finance. It is extremely difficult, particularly in the present climate of financial panic in Europe, to make progress—nay, even to hold our own—in negotiations with fellow European countries. The FCA must, as a very minimum, be seen to be of equal status to the PRA. I cannot emphasise how important this is. Over there in Europe, they have got used to having the FSA and they will be totally puzzled as to who is important unless it is made clear in the Bill.
My Lords, these amendments have in common that they concern the relationship between the PRA and FCA and mechanisms for co-ordination between the two. Amendment 140A would insert a declarative provision that the PRA and FCA are considered equal in status. I agree with the sentiment. The PRA and FCA have very different remits: the PRA for prudential regulation and the FCA for conduct regulation. These are equally important. The Bill gives the PRA and FCA the necessary powers to deliver their objectives. Within their area of competence and expertise, each will have discretion as to how they exercise those powers to achieve their objectives.
Clearly there are differences between the regulators, in structure as well as in their objectives. Indeed, some of them could be construed as making the PRA appear to be the junior partner—for instance, it is the subsidiary of the Bank while the FCA is a wholly separate body. However, nothing in this arrangement should be taken to imply that one is superior to the other. My noble friend Lady Kramer, echoed by the noble Baroness, Lady Cohen, emphasised the importance of the FCA’s equality of status, particularly in the international context. The fact that the FCA will attend ESMA underlines that it will be the UK’s pre-eminent markets regulator.
Amendment 140 would require the PRA and FCA to co-ordinate their actions in relation to dual-regulated persons to ensure that they avoid duplicative requests and do not impose inconsistent requirements. Co-ordination is indeed a key point—one that has been emphasised by both industry and consumer representatives. The Government have considered this carefully. The general duty to co-ordinate is designed to address exactly the points that the amendment raises.
Subsection (1)(c) of new Section 3D specifies that one of the three purposes of co-ordination is to allow the regulators to use their resources in the most efficient and economic way, and to act in a proportionate manner. An efficient and proportionate approach will require the regulators to minimise duplicative requests wherever possible and avoid inconsistent requirements. This is supported by the new power for the Comptroller and Auditor-General to conduct value-for-money reviews of the financial services regulators and to report back to Parliament. The NAO will of course be able to look into co-ordination between the PRA and the FCA. I hope that noble Lords can agree with me that these mechanisms, already described in the Bill, are sufficient and that we do not need further provision to support them.
Amendment 140B would require the FCA and the PRA to publish guidance explaining the circumstances where the duty to co-ordinate does not apply. I agree that it is important to have clarity about this. The MoU will set out how the regulators will comply with the duty as a whole, including the limitations on the duty established in subsection (2).
Amendment 140AA would modify the general duty to co-ordinate to make it explicit that an objective of co-ordination is to minimise “unnecessary additional expenses” that might arise as a result of the separated administration of the PRA and the FCA, and to,
“maximise any common administrative savings”.
The Government agree that, where possible, costs arising from duplication of effort should be avoided. That is why the duty to co-ordinate requires the regulators to co-ordinate so as to act in a proportionate manner. This will include, for example, co-ordinating their information gathering in a way that will minimise costs. The regulators will be scrutinised by the NAO to ensure that they are delivering value for money. However, if the Bill were amended in the way suggested, I fear that it could be a distraction. There is a risk in requiring the PRA and the FCA to focus too much of their attention on co-ordinating at the expense of focusing on delivering their own separate regulatory objectives. The Government’s view is that this amendment goes too far in that direction.
Amendment 140DA would require that the co-ordination MoU between the PRA and the FCA contains an estimate of the additional annual costs when compared with the estimated costs of the administration of the FSA. I reiterate the point that the Financial Secretary to the Treasury made in another place: a core purpose of these reforms is to reduce the frequency and severity of future financial crises. This will require much tougher and more effective regulation. As we acknowledged in the impact assessment published alongside the draft Bill, there may be additional costs as a result of the separated administration of the PRA and the FCA. However, these costs pale into insignificance when compared with the cost to the economy of the recent financial crisis.
Amendment 140D would remove the provision stating that the MoU between the PRA and the FCA need not include technical or operational matters that do not affect the public. The MoU must set out enough detail to make clear the standards against which the regulators can be held to account, and to enable the public and regulated firms to see the principles and agreements that are driving the regulators’ approach to co-ordination. However, as I am sure noble Lords will accept, it is important that it does not become simply an impenetrable technical manual. The purpose of this is provision is to make clear that it need not include a great deal of detail that is of no interest to Parliament or the public. I think that is a suitable test of the kind of material that need not be set out in the MoU.
Amendment 140BA would require the regulators to include in their MoU provisions about how they would co-ordinate their activities,
“in relation to the promotion of high standards of stewardship by institutional investors”.
The FCA will be the regulator of the conduct of all asset managers, including their conduct in looking after institutional investments. The PRA will take a regulatory interest in asset managers if they also have permission to carry on PRA-regulated activities; but even in those cases the PRA will not be responsible for regulating their conduct as asset managers. It is not clear what activities in relation to stewardship the PRA and the FCA would need to co-ordinate or why they should be specifically required to provide for that co-ordination in the MoU. The MoU will, of course, already cover any necessary co-ordination in relation to PRA-regulated firms that also happen to be asset managers.
Amendment 140C would require the PRA and the FCA to consult publicly on any proposed changes after their annual review of the MoU. It is essential that industry has the opportunity to make representations about the contents of the MoU and the way in which the regulators comply with it. The draft MoU has been published, and the Bank and the FSA have invited comments. The Bill makes provision to ensure that industry and others can make further representations. The FCA and the PRA are required to include an account of how they have complied with the duty to co-ordinate in their annual reports. After publication, they are required to consult publicly on the effectiveness of their strategy. The FCA will do this by holding an annual public meeting, while the PRA will use a written consultation arrangement. Respondents to those consultations will have ample opportunity to comment not just on the content of the MoU itself, but also on the way in which the regulators have put it into practice.
Amendments 143C and 144JA would remove the provisions of paragraph 6 of Schedule 1ZA and paragraph 5 of Schedule 1ZB, which make it clear that chief executives are not to take part in firm-specific decisions taken by each other’s boards. The reason for these provisions is that the purpose of cross-membership is to ensure effective strategic co-operation—for example, on the development of policy and rules. The CEOs will participate in discussions around the legislative functions which are reserved to the boards, such as setting policy and making rules. Cross-board membership at CEO level will be useful in supporting this and ensuring that it takes place in an appropriate way.
At the level of firm-specific operational decisions, the PRA and FCA must have clearly defined and separate roles. This could be undermined if the CEOs were seen to be involved in firm-specific decisions taken by the other.
With these explanations, I hope that my noble friend will withdraw his amendment.
My Lords, empires will be empires. The comments of my noble friend Lord Hodgson were pertinent; the early signs of co-ordination and co-operation are not particularly encouraging and, when I have encountered members of the PRA team, they have given the impression that they think that it is the superior body. The Government might keep an eye on this territory before the Bill is finally enacted because I do not think that what is in it is strong enough to counter those natural tendencies. I beg leave to withdraw the amendment.
Amendment 140 withdrawn.
Amendments 140A to 140DA not moved.
140E: Clause 5, page 31, line 30, leave out from “responsibility” to end of line 32 and insert “for measures designed, in relation to with-profits policies, for the purpose in subsection (2) belongs to the PRA rather than the FCA.”
Amendment 140E agreed.
Amendments 141 and 141A not moved.
142: Clause 5, page 37, line 16, leave out from “with” to “that” in line 18 and insert—
“(a) a local weights and measures authority in England, Wales or Scotland, or(b) the Department of Enterprise, Trade and Investment in Northern Ireland,for the provision by the authority or department to the FCA of services which relate to activities to which this subsection applies.(5A) Subsection (5) applies to activities”
Amendment 142 agreed.
Amendment 143 not moved.
143ZA: Clause 5, page 38, line 7, at end insert “particularly to those members of the public on lower incomes”
In moving the amendment, I shall speak also to Amendments 143ZB to 143ZD as well as Amendment 144EA. This group of amendments relate to the consumer advice functions of the FCA, currently delivered through the Money Advice Service, and the separate responsibility that the MAS has for co-ordinating debt advice. I declare my interest as a chair of the Consumer Credit Counselling Service, the country’s leading debt advice charity, which has helped more than 1.3 million people in the last few years to deal with their unmanageable debts.
I start by asking the Minister if he can confirm the Government’s intention to retain the status quo in this area in so far as the body known as the Money Advice Service is concerned. MAS has responsibility for delivering money advice to members of the public as part of its consumer education function and has recently assumed responsibility for co-ordinating debt advice, which is currently delivered by a number of charitable bodies, including Citizens Advice, the Money Advice Trust and the Consumer Credit Counselling Service.
As your Lordships’ House will be aware, although the Bill continues the FSA’s current responsibilities regarding these functions to the FCA, new Section 3R in Clause 5 confirms that a consumer financial education body undertakes this function on behalf of the FSA at present and it is intended in this section of the Bill that the body corporate, originally established by the FSA under Section 6A of FiSMA, will continue to deliver these services for the FCA. So the Bill assumes that the MAS will continue.
I invite the Minister to clarify the situation, because rumours have begun to circulate, following the hearings held recently by the Treasury Select Committee on the Money Advice Service. These were fairly rumbustious sessions, and for long parts of them the committee was focusing on what it clearly saw as an unsatisfactory situation regarding the FSA’s current responsibilities for the MAS, its business plans and its operations. I gather that it would not surprise many observers if the Government intended to bring forward amendments on this topic. I will not repeat the rumours that have reached me, but the stories authoritatively report a range of decisions including the abolition of the MAS, to giving it its own statutory position within the Bill. I would be happy to give way to the Minister if he would like to clarify what the position is at this point. He does not wish to do so now so I shall continue.
These amendments seek to clarify the role of the Money Advice Service in respect of its money advice services, to ensure that it focuses with laser-like intensity on the needs of members of the public on low incomes and to ensure that it provides,
“targeted, proactive and easily accessible advice to those encountering economic disadvantage, financial exclusion or financial exploitation”.
In respect of the co-ordination of debt advice, the amendments seek to make sure that this means that the MAS will be explicitly focused on promoting the work of registered charities such as the MAT, CCCS and the citizens advice bureaux, so that people struggling with debt are made much more aware of the excellent free, independent and impartial support that is available to them.
There is one point which I hope the Minister will be able to help me with when he replies. While the MAS is a direct provider of money advice, it is not the Government's intention that the MAS should become a direct provider or regulator of debt advice, in direct competition with and duplicating the work of these long-established registered charities. He will recall that in the other place, the Treasury Minister, Mr Mark Hoban, said:
“The role of MAS is to commission free debt advice, not … to provide [it].”—[Official Report, Commons, Financial Services Bill Committee, 6/3/12; col. 345.]
That having been said, there is an issue here which it would be good to recognise—about whether it is credible to view money advice and debt advice as separate activities. We in our charity certainly take the view that when people come to us with debt problems, our priority is obviously to get them to repay their debts in as short a time as is possible, without jeopardising their basic needs and livelihood; and we are not into debt forgiveness.
However, another of our functions is to use the process that they are going through to educate them about how to deal better with credit in the future. In that sense, I have sympathy with those who argue that money advice and debt advice are two sides of the same coin, if you will excuse the pun. However, that may be an issue for the future. For the moment I am anxious to ensure that the Government are not seeking to complicate the debt advice space. There is a need for co-ordination, a reduction of duplication, and for all concerned to bear down on costs, as well as increase throughput. However, there is no need for additional direct provision of services by the Government. The registered charity sector can and will deliver a brilliant service here.
Recent research by the Financial Inclusion Centre has shown that there are 6.2 million households in the UK that are financially vulnerable. Half of those are already behind with debt repayments or face insolvency action; 3 million are living so close to the edge that they do not know how they would cope if there were to be even a small increase in their regular household bills. That is why the MAS needs to focus on those members of the public who are on lower incomes, and to target advice to those encountering economic disadvantage, financial exclusion or exploitation.
Around half of our debt advice clients have struggled on their own for more than a year before seeking help and many feel ashamed of their financial problems. When people do summon up the courage to ask for help, they need advice about the best remedies for them, and we would argue that they should seek free advice. Around 400,000 people in the UK are thought to be on commercially provided debt management plans, which cost them £250 million in fees every year. We estimate that for a typical debt of £23,000, a client of a debt management company pays more than £4,000 in fees to that company. Clients of charitable providers by contrast only pay back what they owe, and the time taken to get free of their debts is about 18 months less than with a commercial provider.
That is why we suggest in this group of amendments that a key function for the Money Advice Service must be to get financially vulnerable consumers to seek help earlier from charities such as National Debtline, Citizens Advice and CCCS by promoting free debt advice. The public interest here, surely, is to encourage people with debt problems to recognise the free debt advice sector as the best place to go for rehabilitation. Raising the profile of the free debt advice sector is necessary if we are to counter the aggressive advertising of fee-charging debt management companies which seems to be everywhere. However, this is difficult for the charitable sector to do under its own steam, as its charitable funding should really be used to deliver direct charitable benefit. In December last year, the chief executive of the Money Advice Service said that he wanted to build the profile of the free debt advice sector so that ultimately, everybody in need of debt help sees the free debt advice sector as the “better option for them”. I welcome that approach and beg to move.
My Lords, I want to comment on Amendment 143ZE. I have great respect for the CCCS and the work that it does, but there is also at least one commercial player—I am thinking of Payplan—which, I understand, provides free debt advice on a basis very similar to that of the CCCS, and in fact Citizens Advice frequently refers people to it to deal with debt management. Like the CCCS, it gets its funding from the creditor and not by turning to the individual who is in debt.
Although I entirely agree with all the statements that have been made about those—perhaps not all but certainly many—who advertise and often provide a very unsatisfactory and highly questionable service to individuals who are in debt, leaving them in a worse situation than when they started, I am slightly cautious about the suggestion that only the charitable sector can provide free debt advice. We need all the players we can get in this business and, provided they do it in the appropriate way, we should surely encourage all of them.
I question why the companies that seek to have the debts repaid to them should not be more influential in this process. My understanding is that they would far rather work with those who provide free debt advice than those who muddy the waters by essentially taking the fee-paying attitude and offering and delivering a less satisfactory solution for everybody involved.
My Lords, this group of amendments relates to the Money Advice Service and to charities involved in the provision of debt services. Amendments 143ZC, 143ZD, 143ZE all relate to the role of the MAS in the provision and co-ordination of debt advice.
Before I address the amendments, it may be helpful if I explain the MAS’s role in this area, which is to offer free and impartial information and advice on money matters to help people to manage their money better and to plan ahead. Through taking charge of their finances, fewer consumers should fall into unmanageable levels of debt. However, those consumers who do find themselves with high levels of debt will continue to need specialist debt advice.
The MAS, with its consumer financial education remit and national reach, is well placed to take a role in the co-ordination and provision of debt advice as part of its existing service. The Bill therefore includes provision to clarify that the MAS consumer education function extends to assisting members of the public with the management of debt and to working with other organisations to improve the availability, quality and consistency of debt services. However, the MAS does not directly deliver debt advice services itself, as the noble Lord, Lord Stevenson, said; rather, it delivers funding to providers of debt advice services, such as Citizens Advice, and it helps members of the public to access high-quality debt advice services.
Amendment 143ZC seeks to replace the existing requirement at new Section 3R(4)(f) under Clause 5 for the MAS’s consumer financial education function to include,
“assisting members of the public with the management of debt”,
with a requirement to include,
“providing high quality information about, and promoting awareness of, registered charities which provide debt services”.
I reassure the noble Lord, Lord Stevenson, that the Government are committed to the continued existence of the MAS and that there is no intention that the MAS should displace existing funding streams or existing services. The MAS intends to work with a large cross-section of the advice and creditor sectors to keep them up to date with its plans. I also reassure noble Lords that the MAS already signposts to other organisations which provide debt advice services and it will continue to be able to do this.
There are a number of amendments in this group and I have copious notes which address all of them. From the speech that the noble Lord made, I sense that I have dealt with his key points. If he wants me to go on, I shall be very happy to do so. However, if he is happy with that assurance, I hope that I can ask him to withdraw his amendment.
I am not quite sure what I did agree to—I was nodding so hard and trying to get across the message that I slightly lost what the noble Lord said. I would like to read Hansard as I might want to get into correspondence with him, but we were seeking clarification that MAS would continue to be part of the Government’s plans and they were not intending to change its formal position in statute, according to the rumours that were circulating. If that is the case then that is very good. The Minister was also going to confirm that it would continue to operate as a provider of direct services on financial education advice for people, which he has done, but that its role in debt advice was very clearly that of co-ordinating and funding, not of delivering a service which would be otiose and, in any case, a duplication. I am very grateful for that.
There is a longer conversation to be had on Payplan. This is not the time to have it but one has to bear in mind that we are talking about people who are entering debt management plans. That is quite a small proportion of the total needs people have for debt advice. It is true that the funding mechanism looks quite similar to Payplan but it is not the same as a donation given to support the work of charities such as Citizens Advice which, as we all know, do such a huge job across a whole range of activities. The commercial aspects of Payplan bear against that ability to operate. That is why we were so keen in these amendments to reinforce the suggestion that the publicly funded MAS—soon to be funded by levy but still operating in a very public space—should focus very closely on the free advice from the charitable bodies and not try to build up, for some faux competition idea, another group of bodies that could be taking money from people who are already distressed financially and therefore would not be in a position to operate.
I think that we are on the same page. Perhaps we might exchange pages later to find out. I beg leave to withdraw the amendment.
Amendment 143ZA withdrawn.
Amendments 143ZB to 143ZE not moved.
Clause 5, as amended, agreed.
Schedule 3 : Financial Conduct Authority and Prudential Regulation Authority: Schedules to be substituted as Schedules 1ZA and 1ZB to FSMA 2000
143A: Schedule 3, page 175, line 30, after first “functions” insert “, in relation to the FCA,”
Amendment 143A agreed.
Amendments 143B and 143C not moved.
144: Schedule 3, page 178, line 9, at end insert—
“Publication of record of meetings of governing body9A (1) The FCA must publish a record of each meeting of its governing body—
(a) before the end of the period of 6 weeks beginning with the day of the meeting, or(b) if no meeting of the governing body is subsequently held during that period, before the end of the period of 2 weeks beginning with the day of the next meeting.(2) The record must specify any decision taken at the meeting (including decisions to take no action) and must set out, in relation to each decision, a summary of the deliberations of the governing body.
(3) Sub-paragraphs (1) and (2) do not require the publication of information whose publication within the time required by sub-paragraph (1) would in the opinion of the governing body be against the public interest.
(4) Publication under this section is to be in such manner as the FCA thinks fit.”
Amendment 144 agreed.
Amendments 144A to 144EA not moved.
Amendments 144F to 144J
144F: Schedule 3, page 182, line 11, after “Act” insert “or any of the other Acts mentioned in section 1A(6)”
144G: Schedule 3, page 182, line 27, at end insert—
“(3A) Neither section 1A(6)(d) nor the definition of “functions” in paragraph 1 applies for the purposes of sub-paragraph (2).”
144H: Schedule 3, page 183, line 16, leave out from “as,” to end of line 18 and insert “a member, officer or member of staff of the FCA;”
144J: Schedule 3, page 183, line 33, leave out “or a member of its governing body”
Amendments 144F to 144J agreed.
Amendments 144JA to 144M not moved.
Amendments 145 and 146
145: Schedule 3, page 185, line 43, after “by” insert “the Oversight Committee of”
146: Schedule 3, page 185, line 45, leave out “the Bank” and insert “that Committee”
Amendments 145 and 146 agreed.
Amendment 146A not moved.
Amendments 147 to 147B
147: Schedule 3, page 186, leave out lines 1 to 4
147A: Schedule 3, page 186, line 9, after “functions” insert “or its functions under section 2DA (strategy)”
147B: Schedule 3, page 186, line 25, at end insert—
“Budget17A (1) The PRA must, for each of its financial years, adopt an annual budget which has been approved by the Bank.
(2) The budget must be adopted before the start of the financial year to which it relates, except that the first budget must be adopted as soon as reasonably practicable after the coming into force of this paragraph.
(3) The PRA may, with the approval of the Bank, vary the budget for a financial year at any time after its adoption.
(4) The PRA must publish each budget, and each variation of a budget, in such manner as the PRA thinks fit.”
Amendments 147 to 147B agreed.
Amendments 147C to 147E not moved.
Amendments 147F to 147J
147F: Schedule 3, page 190, line 6, after “Act” insert “or any of the other Acts mentioned in section 2A(6)”
147G: Schedule 3, page 190, line 22, at end insert—
“(3A) Neither section 2A(6)(d) nor the definition of “functions” in paragraph 1 applies for the purposes of sub-paragraph (2).”
147H: Schedule 3, page 191, line 8, leave out from “as,” to end of line 10 and insert “a member, officer or member of staff of the PRA;”
147J: Schedule 3, page 191, line 25, leave out “or a member of its governing body”
Amendments 147F to 147J agreed.
Schedule 3, as amended, agreed.
House adjourned at 7.50 pm.