My Lords, as set out in the register of interests, I declare shareholdings in Close Brothers, Hampden & Co and Ovington Investments—the last of which I have significant control over.
The financial services sector drives growth and generates millions of jobs in every corner of our country. It has secured our reputation as a dynamic and world-leading financial centre and it contributes vast sums to the public purse—money that has helped this Government support millions of individuals and business through the pandemic.
Now that we have left the European Union and begin our recovery from Covid-19, we commence a new chapter in the sector’s story. As the Chancellor set out in his wider vision for the UK’s financial services sector in November, we remain committed to ensuring that the UK maintains the highest regulatory standards and remains an open and dynamic global financial centre. This is even more important now that we have left the European Union. Having left, the UK must assume full responsibility for its financial services regulation. The Economic Secretary has assured the other place—as I can assure noble Lords—that this will be underpinned by an unwavering commitment to high-quality, agile and responsive regulation, with a focus on safe and stable markets.
There will inevitably be some areas where the UK will take an approach which better suits our markets. To capitalise on this opportunity, we will fundamentally review our financial services regulatory framework to ensure that it is fit for the future. A consultation on this is open as we speak. The Financial Services Bill should, therefore, be understood as a key part of a wider process—the important first step in taking back control of our financial services regulation. It does so in a way that delivers our international commitments, is consistent with the highest standards of regulation and provides certainty and clarity for this important sector.
The Bill has three overarching objectives: first, to enhance the UK’s world-leading prudential standards; secondly, to promote openness to international markets; and, thirdly, to maintain the effectiveness of the financial services regulatory framework and sound capital markets. I will briefly set out each of the Bill’s measures, and how they contribute to these objectives. Much of the content is highly technical. I will do my best to explain each measure, but we have provided detailed explanations of each measure in the Explanatory Notes.
The Bill intends to enhance the UK’s world-leading prudential standards and to protect financial stability. Clauses 1 and 2, together with Schedules 1 and 2, empower the Financial Conduct Authority—the FCA—to create a tailored prudential regime for investment firms. Investment firms are currently part of the same prudential regime as banks, even though they do not typically provide banking services and therefore do not pose the same risks to financial stability. This Bill will allow the FCA to set prudential requirements which are more appropriate for investment firms. The reforms are similar to changes being taken forward in the EU, which the UK strongly supported while we remained a member.
The UK’s financial services regulators have the technical expertise and market understanding necessary to set complex rules for firms. I thank the Delegated Powers and Regulatory Reform Committee for its work in scrutinising the Bill’s approach to the delegation of powers and welcome its conclusion that there was nothing necessary to draw to the attention of the House.
The regulators will also be guided by the statutory objectives established in the Financial Services and Markets Act. Their independence ensures that they will not be swayed by political considerations. This Bill introduces a new accountability framework. It will require the FCA to consider the most significant public policy issues relevant to the regime, including the UK’s international competitiveness, and publicly report on how consideration of these factors has affected its rules. In addition to the existing accountability mechanisms in the Financial Services and Markets Act, this will allow Parliament to scrutinise the work of the regulators.
This approach aligns with suggestions made by the EU Financial Affairs Sub-Committee to the Chancellor in March last year, when it recommended giving the UK’s regulatory regime more flexibility. However, I can reassure noble Lords that systemically important investment firms and all banks will remain subject to internationally agreed prudential standards, namely the Basel banking standards. Clauses 3 to 7, along with Schedules 3 and 4, will enable the prudential regulatory regime for these firms to be updated in line with the latest Basel standards, endorsed by the G20. This will build on the existing regime and increase the UK’s resilience to economic shocks, meeting our international commitments to protect the global financial system. In a similar way to the prudential regime for investment firms, responsibility for making the detailed firm-facing rules will be delegated, in this case to the Prudential Regulation Authority. This will also be subject to a new accountability framework.
As noble Lords will be aware, promoting financial stability goes wider than prudential regulation. The Libor benchmark is referenced in upwards of $400 trillion-worth of contracts across the financial system and beyond—from complex derivatives to household mortgages. I am sure that noble Lords will recall the Libor scandal of 2012, which saw many banks attempt to manipulate the Libor benchmark for their own gain. Since then, significant improvements have been made to the administration of the Libor benchmark by its administrator, and to the regulation of benchmarks in the UK. This is in part due to the important work of the Parliamentary Commission on Banking Standards, which includes a number of Members of this House.
The Financial Stability Board—the international body that monitors the health of global financial markets—has made it clear that the continued use of certain interest rate benchmarks such as Libor represents a potentially serious source of systemic risk. The decline of the inter-bank lending market has meant that Libor and other similar benchmarks are increasingly reliant on the judgments of panel banks, rather than on actual transactions. The FCA’s voluntary agreement with the Libor panel banks, requiring them to continue contributing to the benchmark, so preventing the premature collapse of Libor, will expire at the end of this year. After this point, there is a risk that Libor will become unrepresentative, which may cause disruption. Clauses 8 to 19, and Clause 21, along with Schedule 5, give the FCA the powers it needs to oversee the orderly wind-down of critical benchmarks—including Libor—thereby reducing significant risks to market stability. This includes powers to provide for the continuity of Libor for those contracts which are unable to transition away from it. Alongside this, clause 20 will extend the transitional period for benchmarks with non-UK administrators from the end of 2022 to the end of 2025.
I turn to the Bill’s second objective: to promote openness to overseas markets. Clauses 22 and 23, together with Schedules 6 to 8, establish a framework to provide and effectively maintain long-term market access between the UK and Gibraltar for financial services firms, now that we have both left the EU. This delivers on a ministerial commitment made to Gibraltar and recognises our special, historic relationship. The arrangements will preserve Gibraltar’s regulatory autonomy and enable it to choose where it wishes to access the UK market, on a basis of alignment and co-operation.
Clauses 24 to 26, together with Schedule 9, simplify the process under which overseas investment funds obtain permission to be marketed in the UK. These changes will supplement the current regime, which requires the FCA to assess every individual fund. The changes will introduce a system under which the Treasury can determine whether a specific category of funds from another country has equivalent regulatory standards to those in the UK. This means that funds in this group wishing to market in the UK can undergo a simpler process, due to the confidence provided by the equivalent regulatory standards of their home country. This will increase choice for UK investors and maintain the UK’s position as a centre of asset management. The current regime will remain in place for overseas funds located in countries which have not been found equivalent. Clause 27 and Schedule 10 amend markets in financial instruments regulations to update the equivalence provisions for investment firms based outside the UK.
The Bill’s third objective is to maintain the effectiveness of the financial services regulatory framework and sound capital markets. Clause 28 introduces a streamlined process for the FCA to remove an inactive firm’s authorisation and position on the public register. This will improve the accuracy of the register and reduce the risk of fraud. Clause 29 will make small changes to market abuse regulations to make the regime more effective while reducing some of the administrative burden on firms. Clause 30 raises the maximum sentence for criminal market abuse from seven to 10 years, bringing it into line with other economic crimes.
I would like to pause at Clauses 31 and 32, along with Schedule 12. These clauses were added by the Government by amendment in the other place.
It has recently become clear that some provisions in the Proceeds of Crime Act 2002 are creating challenges for some e-money institutions and payment institutions, such as Revolut, Worldpay and TransferWise. They currently need to submit a defence against money laundering request to the National Crime Agency to seek consent before proceeding with any transaction where there is suspicion of money laundering, however small. Standard banks do not have this administrative burden. In certain circumstances they are exempt from submitting a request for transactions under £250.
The £250 threshold exemption was originally introduced to allow those with frozen accounts to pay for their day-to-day living expenses. While the transactions may be under suspicion, these low-value reports provide little useful information for law enforcement, so processing them is not a good use of resources. E-money and payment institutions must submit a large number of these requests for low-value transactions. This is burdensome and, again, a poor use of law enforcement’s time and resources. This Bill therefore equalises the treatment of banks and payment and e-money institutions in this respect. Importantly, e-money and payment institutions will still be required to submit reports of suspicious activity to law enforcement.
Similarly, we have expanded the scope of account freezing and forfeiture powers in the Proceeds of Crime Act 2002 and the Anti-Terrorism, Crime and Security Act 2001 to include accounts held at payment and e-money institutions. This will ensure that law enforcement agencies are able to quickly and effectively freeze, and activate forfeiture of, the proceeds of crime and terrorist property when held in payment and e-money institution accounts; this mirrors their existing powers with banks.
Clause 33 will ensure the continuation of existing powers assigned to HMRC to access information on who really owns and benefits from overseas trusts with links to the UK. The Government are also taking proportionate and effective action elsewhere to prevent the misuse of these trusts, including recent changes expanding the requirement for non-UK trusts to register with the HMRC trust registration service.
The Bill underlines the Government’s commitment to helping people in debt rebuild their finances. Clause 34 gives the Government the full range of powers they need to effectively implement statutory debt repayment plans, part of the Government’s breathing space debt respite scheme. These changes will mean creditors can be compelled to accept different repayment terms. They will also allow for the administration of the scheme and repayment plans to be funded by a charging mechanism and will allow debts owed to the Government to be included in a statutory debt repayment plan. This will support the Government’s work to ensure that those in problem debt can make repayments to a manageable timetable.
Clause 35 relates to the Help to Save scheme, which supports those on low incomes to build up savings. Help to Save accounts have a four-year term, during which the Government pay a bonus of 50% on up to £50 of monthly savings. At the end of the four years, customers will be asked to provide instructions about where they want their savings transferred to. This clause gives the Government the power to introduce successor accounts for Help to Save customers who do not provide instructions in future, where this is necessary. For now, the Government propose to support these disengaged customers by transferring their savings into the same account where the bonus has been paid, reuniting these customers with their savings.
Clause 36 makes amendments to the packaged retail and insurance-based investment products regulation, known as the PRIIPS regulation. This EU regulation has been widely criticised for its potential to mislead consumers. The Bill will allow the FCA to clarify the scope of the regulation, addressing significant uncertainty that exists now, along with some other helpful changes.
Clause 37 finalises reforms to the European market infrastructure regulation, which the UK supported as a member state. Clause 38 confirms the legal effectiveness of the financial collateral arrangements regulations and makes associated amendments to the Banking Act 2009. Finally, Clause 39 will make the appointment of the chief executive of the Financial Conduct Authority subject to a fixed five-year term, able to be renewed once. This is in line with other high-profile roles in the financial services regulation field.
In summary, this Bill is a necessary and important step in ensuring that our financial services regulatory framework delivers for the UK now that we have left the European Union and the transition period is over. It forms part of a wider programme of regulatory reform that will be guided by what is right for the UK’s financial services industry. It will support economic prosperity across the country, ensure financial stability, market integrity and consumer protection. It will ensure that the UK remains a world-class financial centre. I beg to move.
My Lords, I thank the Minister for his remarks. I do not oppose the principle behind the Bill, because, like all noble Lords, no doubt, I recognise the need for post-Brexit stability in financial regulation. The Bill is a mass of detail and the Minister has gone to some lengths to go through it. I confess that it does remind me somewhat of a Christmas tree, with little packages all over the place, some of them no doubt previously stored in various government departments—particularly the Treasury —waiting for an appropriate legislative tree on which to hang them.
Leaving that aside, the Bill occurs, as the Minister said, at an important moment for the country’s economy and our financial services industry. As the Minister in the Commons said:
“Our financial services sector is critical to our national effort to recover from the impacts of Covid-19 and move towards a resilient, open and sustainable future for the UK economy.” [Official Report, Commons, 13/1/2; col. 357.]
I agree with that, but he stressed the pandemic and we all know that it is more than just a response to Covid. As the Minister said, the Bill is an essential part of the effort to improve the UK’s regulatory framework for financial services following the end of the Brexit transition period.
As regards our future post-Brexit development, only time will tell, but the early signs do not augur well. Only this month, we approved the post-Brexit trade and co-operation agreement, but, for financial services, this is basically a no-deal agreement. Within a few days of the agreement, £6 billion-worth of euro- denominated share trading shifted from London to European exchanges.
Of course, the express intention of the Government is to secure a memorandum of understanding on financial services by March, and the ambition for regulatory alignment where appropriate. We should have no illusions how difficult that might prove. Only this week, the noble Lord, Lord Hill, a former EU Financial Services Commissioner and a former Minister leading the Government’s review into the City, has confirmed what many of us have long known. He warned that Brussels is targeting London’s position as a global financial services centre and predicted that the EU will not grant British-based firms the highly prized access they are seeking to the European market. It was not in Brussels’ interests, he said, to allow London to continue to dominate the European financial market in the way it did before Brexit. He continued:
“Given that their strategy is to build up the EU, why on earth would they?”
Why, indeed? We should not be surprised then that, so far as we now know, Brussels has granted the UK time-limited equivalence on only two of the roughly 40 different financial areas where London is seeking market access. The EU has, of course, given no further indication on when it will take more equivalence decisions.
I am afraid that the way the Government approached the Brexit negotiations means that there is now no incentive for the EU to agree equivalence arrangements, because their absence means jobs and trading formerly done in London migrating to the EU. Why do I mention this? Herein lies the paradox: the Bill is part of a process aimed at increasing our competitive edge, including vis-à-vis the European Union, but in our present, post-Brexit circumstances any move by the UK to enhance the City’s competitive edge is likely to lessen the chances of progress on equivalence in the EU and the market access that comes with it.
There are, of course, aspects of the Bill that we welcome. I welcome the preliminary agreement between Gibraltar, the UK and Spain, which the Minister mentioned, and look forward to further detail following review by the European Commission. This is of importance to our whole financial sector, not least to our insurance industry.
I also welcome the moves that have been made to tighten up the fight against crime, money laundering and fraud, but equally I wonder, despite the passage of this legislation, how that struggle against criminality will have been affected by the loss of 400,000 records from our criminal database. That has been a disaster that will overrule many of the measures in this Bill.
There are some strange and disappointing omissions from the Bill. I will mention only one, but it is significant. The UK financial services sector has a key role to play in empowering the changes that we need to make to preserve the planet for future generations. But the Bill, which empowers the regulators in so many other ways, is totally silent on that critical issue. The Government say they want the UK to be the centre for green finance globally. Why then, in their first major piece of legislation on this sector since we left the EU, do they say nothing about instructing the regulators to make that a part of their objectives? I hope that the Minister can respond to this.
Of course, the private investment sector is making strong moves towards greater environmental investing, and there is growth in public demand for these products. But this cannot be done by the private sector alone. It will take both the private sector and the public sector working together and pulling in the same direction. I wish the Bill well in its intent, but I fear that it will fall far short of its aims.
My Lords, I shall focus my remarks chiefly on Clauses 3 and 5, and on Schedule 3. Before I do so, I should congratulate the Government on the speed with which they are addressing the matter of Gibraltar’s financial services industry. The Bill has 183 pages, and over 50 of them are devoted to Gibraltar.
With two important and welcome exceptions—debt respite and Help to Save—the rest of the Bill deals with technical and complex matters. In doing so, it raises profound questions about parliamentary scrutiny and the desirability of embodying an international competitive element in our financial services regimes.
Clauses 3 and 5 contain provisions to allow the PRA and the FCA effectively to make law by making rules without any parliamentary scrutiny. Clause 3 lists the provisions of the CRR that the Treasury may revoke by regulation. The list runs to 42 items, all of them significant. Clause 3(4) makes these revocations conditional on their being or having been adequately replaced by general rules made or to be made by the PRA, or to be replaced by nothing at all if the Treasury thinks that is okay. As things stand, it looks as though the Treasury is the sole judge of what may or may not be an adequate replacement. In any event, Parliament is bypassed. There is no provision for parliamentary scrutiny of these new rules, which have the force of law, but these rules can and will reshape critically important parts of our financial services regimes. Clause 5 takes the same lawmaking-by-rule approach to the regulation of credit institutions. Again, there will be no parliamentary scrutiny of these rules.
The Government have acknowledged the need for a discussion about the role of parliamentary scrutiny in the post-Brexit repatriation of powers previously exercised by the EU directly to our regulators without stopping en route at our Parliament. In March of last year, the EU Sub-Committee on financial services, of which I was chair, wrote to the Government about the issue, as the Minister has mentioned. In his response, the Economic Secretary to the Treasury noted that we had highlighted that
“delegating more powers to the financial regulators will require enhanced parliamentary oversight of their activities.”
There is now an open Treasury consultation on the future of financial services. The call for evidence in this consultation contains 17 key questions. Three of these relate to the issue of parliamentary scrutiny. They are: through what legislative mechanism should new financial regulations be made?; what role does Parliament have to play in influencing new financial services regulations?; how should new UK financial regulations be scrutinised? The consultation closes on 18 February. In practice, it means that the Bill will have left this House by the time the consultation results are available to us. In any case, HMT has indicated that the results will inform yet another consultation, later in 2021, in which the Government will set out a package of proposals. By that time, of course, the provisions in this Bill will have become law and there will no longer be an opportunity for real parliamentary scrutiny of the legally binding rules they will generate.
The Minister emphasised in his closing remarks on Report in the Commons that this Bill is
“just one part of the wider long-term strategy for financial services.”—[Official Report, Commons, 13/1/2021; col. 398.]
Given the narrow and technical scope of the current contents of this Bill, I was glad to hear that, and take it to mean that a second and more comprehensive financial services Bill is in prospect. But the fact is that, by the time we get round to that, the “making laws by rulemaking” procedure will have passed into law. Parliamentary scrutiny of the new rules as laws will have been avoided. We will want to return at later stages to the question of what we can do about this bypassing of Parliament in such critical areas.
I turn briefly to Schedule 3 and the insertion of new Part 9D into the already overloaded and much-amended FSMA 2000, and in particular to new subsection 1(b) of Clause 144C. This seemingly innocuous subsection could bring about radical change in our regulatory regimes. It introduces as a “have regard” in the PRA’s making of CRR rules the notion of international competitiveness for our regimes. This is a highly contested area and the idea has been opposed by many leading figures, including from the party opposite, as being likely to promote conflicts of interest. We will want to examine this in detail at later stages.
During the passage of the Bill through the Commons, there was some discussion of more directly consumer-facing measures. These included imposing a duty of care on the financial services industry and providing significantly more relief for those mortgage prisoners trapped by the Treasury’s dereliction and carelessness in selling on mortgage books to unregulated entities. We will want to return to these issues later in our consideration of the Bill.
We will also want to discuss extending the FCA’s perimeter to take in more of the SME lending market. This is particularly urgent given the terrible position that many SMEs find themselves in as a result of Brexit and Covid-19. We will also want to debate the issue of preserving access to cash in the Covid and post-Covid world. I look forward to the Minister’s reply and to our future debates.
My Lords, I draw attention to my directorship of OakNorth International and my membership of the international advisory board of Nomura, both of them banks.
It is a privilege to address your Lordships’ House for the first time. It may be only 100 yards from the other place, but it is a very different place. I am extremely grateful to the officers and staff of the House and to my supporters, my noble friends Lord Moynihan and Lord Barwell, for their welcome and assistance as I navigate the customs and practices—and indeed the corridors—of this place. I am delighted to be making this speech from the Government Benches, having momentarily mislaid the Conservative whip during the last few weeks of my 22-year career in the Commons.
The title of Lord Hammond of Runnymede may speak to the wider world of the ancient roots of our democracy and of the origins of the rule of law, but, for me, it will always recall the privilege of representing the people of Runnymede and Weybridge, sharing their problems, challenges and triumphs over more than two decades.
My Back-Bench career in the other place was short. The year 1997 was rather like the day after the battle of the Somme in the parliamentary Conservative Party. The general staff was in disarray, the officer corps decimated and new recruits like myself were being promoted in the field; thus began my 12-year apprenticeship on the Opposition Front Bench, before entering the Government in 2010, where I had the privilege to lead four great departments of state, each remarkable in its own different way.
I arrived at the Department for Transport with a single clear instruction: get HS2 built. As an immediate former shadow Chief Secretary, I approached this task with a degree of scepticism, but quickly became a convert to the potential of high-speed rail to change the facts of economic geography, as the original railway had changed Victorian England, and to play a key role in rebalancing the UK economy.
I moved on to defence in the dying days of the Libya campaign of 2011. The MoD is an extraordinary place, a military headquarters as well as a department of state. It is shaped by its unique blend of civilian and uniformed staff and the ethos of the Armed Forces that pervades it. It was an enormous privilege to work with it through a period of managed withdrawal from Afghanistan and majoring restructuring at home as we reconfigured the department and delivered a balanced Budget for the first time in a decade.
In July 2014, my next move was across the road to the grandeur of the FCO and by far the best office in Whitehall. I say to noble Lords that it is not for nothing that successive Foreign Secretaries have gone to extraordinary lengths to ensure that Prime Ministers do not enter that room. In two years as Foreign Secretary, I made 104 overseas visits to 78 countries, gaining an invaluable insight into how others see us and our contribution to their histories—for better or for worse, there are remarkably few in whose histories we have not played a role of some kind. What I learned is how much importance our many friends attach to the characteristics, structures and institutions that define our nation and of which we sometimes appear to be so careless.
In July 2016, my final move was to No. 11. As the guardian of Britain’s economic and fiscal interests, it is hardly surprising that, whatever the political arguments, the Treasury saw Brexit primarily as a threat to the UK’s economic success story. With storm clouds gathering over the economy and uncertainty rife, I set myself a four-point plan: first, to complete the rebuilding of our public finances as a bulwark against the next crisis, little guessing that the next crisis would come so soon; secondly, to soften the economic blow of exiting the single market by securing a transition period, which is uncontroversial now but was a heretical notion in the Brexit-intoxicated days of autumn 2016; thirdly, to shift the balance of public spending, albeit gently, from consumption to investment as part of a plan to unlock the productivity riddle that has bedevilled the British economy since the Second World War; and, finally, to protect our vital financial services industry, which despite the Treasury’s sometimes expansive view of its role is actually the only sector for which it has direct responsibility. That brings me neatly to the Bill.
I strongly support all the objectives that the Government have set out for the Bill, making it an ideal vehicle for a maiden speech by someone who has so recently recovered the Whip. I want to take the opportunity to note the importance of financial services not just to London but to the whole UK economy—it provides 7% of our GDP, 11% of tax revenues and millions of jobs across the length and breadth of Britain—to plead, even at this late stage, for a greater focus on it in our ongoing discussions with the EU and to suggest the inclusion of a duty on our regulators to promote competitiveness as some other countries have done. I hope that it will be the first of many measures designed to reinforce the stability and competitiveness of UK financial services as they absorb the challenge of what, for them, is a no-deal Brexit and the inevitable, albeit gradual, loss of EU business.
I enjoyed every minute of my nine years in Cabinet and I learned much from the many extraordinary people I encountered on my journey. I hope that the experience that I have gained leading four great departments of state will qualify me to contribute to your Lordships’ debates over the years to come.
My Lords, I first draw attention to my interests as set out in the register and I congratulate my noble friend Lord Hammond of Runnymede on a maiden speech of great breadth and insight, which served to underline what a considerable asset he is going to be to these Benches in particular and to this House more widely. As my noble friend reminded us, he has served with distinction in a number of departments, culminating in his time as Chancellor of the Exchequer. How right he was to point out huge sectors of our economy, in particular financial services, where we are not in the business of finessing a new relationship with the European Union but are yet to ensure that there are any arrangements at all. When my noble friend speaks on economic matters, he does so with rare authority and I look forward to hearing much more from him.
There is one specific point that I would like to develop in my remarks today. The Financial Services and Markets Act 2000—FiSMA—set out four objectives for the Financial Services Authority, the FSA, as it then was: market confidence, public awareness, the protection of consumers and the reduction of financial crime. In addition, the FSA was required to have regard to a number of other factors, including efficiency, proportionality, innovation and
“the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom.”
The Financial Services Act 2012, in response to the 2008 banking crisis, removed that requirement because it was argued that it had served to dilute the robustness of regulation. This argument was founded on an entirely false dichotomy between effective regulation and international competitiveness, for the truth is that a robust, respected and proportionate regulatory regime is an intrinsic part of the UK’s competitive advantage in financial services. We now have the future regulatory framework review. In its phase 2 consultation paper, which I happen to have with me, the Government acknowledged this:
“A gap in the original FiSMA model is that, while it set high-level general objectives and principles, it did not provide for government and Parliament to set the policy approach for specific areas of financial services regulation.”
A partial move towards more activity-specific regulation is seemingly adumbrated in Schedule 3 to the Bill, which has been referred to by the noble Lord, Lord Sharkey. This would require the PRA, when considering capital requirements regulation, to have regard to
“the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities.”
A similar obligation is to be imposed on the FCA when making Part 9C rules in relation to internationally active investment firms. So competitiveness is edging slowly and surely back into the picture sector by sector and it is a process that I believe many of us want to see accelerate in the months ahead. I also hope that the Government will now come forward with a clear action plan to establish the UK not only as the world centre for broking—that is to say, the selling of insurance and reinsurance—but as the natural home for insurers and reinsurers.
I warmly welcome the Bill because it suggests a direction of travel that will deliver the high-quality, agile and responsive regulation that we need, putting the UK at the forefront of the world market in terms of competitiveness, consumer protection and innovation.
My Lords, I declare my interest as an ambassador and former president of the Money Advice Trust, the charity which runs National Debtline and Business Debtline. I, too, congratulate the noble Lord, Lord Hammond, on his excellent maiden speech, and look forward later on to the second maiden speech in this debate, from my noble friend Lady Shafik.
I comment first on Clause 34 in relation to the debt respite scheme and, in particular, statutory debt repayment plans. I am delighted that the first element of the debt respite scheme, Breathing Space, is coming into force on 4 May this year. This will give people in debt much needed protection while they seek debt advice. But it is vital now that the Government prioritise the introduction of the second element of the scheme, which is statutory debt repayment plans—SDRPs. They have never been more needed than now, in the wake of Covid-19, and I hope the Government will set out a clear timetable for their implementation.
After all, there is a great deal of agreement on their merits. They will ensure that people who are repaying their debts in full, but who need to do so in an affordable way over a manageable period, will receive binding, legal protection from creditor action and from having additional interest, fees and charges added to their debts. Crucially, public sector creditors—including local authorities and central government—are included in the scheme, and I commend the Government for taking this step. When the Government first consulted on introducing SDRPs in 2018, no one could have foreseen where we would be today, in 2021, facing the severe financial impact of a pandemic, but it is clear now that SDRPs can be a key part of helping households to recover from the financial impact of the outbreak.
I would like to illustrate with one very quick example. Imagine a couple, with two children—one of them furloughed, the other with their hours cut. They struggle to cover their bills and miss a few council tax payments. Being at home with the children more than usual means their energy bill is higher than expected, so arrears build up. They have a mortgage and some outstanding consumer credit debts too. Despite getting an initial payment break on these, this has now expired. Fast forward a few months and, promisingly, they have returned to work and their income has stabilised. They can afford to make some payments towards their debts every month, but not enough to meet their obligations in full. As a result, the council starts enforcement proceedings to recover the arrears, and the energy company wants paying too. This couple will be able to repay their debts in full, but they need time. They need an option to do so affordably without being chased for more than they can pay or having extra fees or charges added. This is exactly what a statutory debt repayment plan would offer them, and it would stop their temporary financial difficulty growing into a bigger debt problem.
Of course, it is understandable that some time will be needed to pass regulations and ensure the necessary infrastructure is in place to introduce these repayment plans, but I hope that the Minister can assure the House that this will be an absolute priority for the Treasury. I ask the Minister to ensure that the Government set out a firm timetable for introducing the new plans.
I turn very briefly now to another important issue that I hope the Government will consider as the Bill progresses through this House. The Bill considers future regulation and rightly highlights the importance of maintaining high consumer protection standards. One area of current concern is that of “imposter” or “clone” websites which pose as legitimate free debt advice charities. Of course, the National Debtline or StepChange actually are free debt advice charities, but these imposter websites can be highly convincing and can mean individuals end up thinking they are speaking to a free debt advice charity when they are not. They may end up in inappropriate debt solutions or being charged significant fees. Will the Government use the Bill to close the regulatory loophole that allows this to happen by bringing forward an amendment to bring the activity of introducing an individual to a debt advice or debt solution service within the FCA’s regulatory remit?
Given the financial impact of Covid-19, it is more important than ever that people are offered safe routes out of debt, and I hope the Government will continue to make this a priority, through this Bill and elsewhere.
My Lords, it is right to underline the importance of the financial services sector in our country and the huge contribution it makes. There are many laudable things in this Bill: the strengthening of money laundering regulations; encouraging saving; and the creation of parity between white collar crimes, such as market manipulation, and general fraud by extending the maximum sentence.
I was disappointed, however, to hear that the Commons amendment exploring the whole issue of ethical investment with reference to genocide did not make it into the Bill. I understand the Government’s reservation—they do not want to politicise the FCA. Nevertheless, I hope that “global Britain”, as laid out by the intentions of the Bill, will also be very much “ethical Britain” as we place ourselves in the world under the new freedoms that we have. I also note, with other noble Lords, the concern that there seems to be so little clarity on the question of parliamentary scrutiny. I am sure we will return to this as the Bill passes through your Lordships’ House. Of course, fundamental to this whole future is that the FCA is adequately resourced to fulfil its task.
I touch on just one major issue, which takes up a major part of the Bill: the Gibraltar authorisation regime. The issue of Gibraltar’s lower corporation tax rate of 10% was raised during the Commons Report stage as a significant issue, and it is one that warrants raising again. During his evidence session, the Minister said that corporation tax rate was not a factor in relocation to Gibraltar. While I recognise that relocation can be costly and that operating in London has many benefits not offered by Gibraltar, nevertheless there are significant tax advantages.
This has become all too clear in another area of work that I have raised repeatedly in your Lordships’ House—the issue of the tax avoidance of many companies, including gambling firms, which are a particular focus I have had. For example, in 2019, the Daily Mail revealed that 32Red, based in Gibraltar, paid just £812,000 in corporation tax over a 10-year period—an effective UK tax rate of 3%. William Hill, with its six subsidiaries in Gibraltar, is expected to pay 12% in corporation tax in 2020. Ladbrokes Coral is not required to disclose its tax rate, but one of its two licences to operate in the UK is registered in Gibraltar. While these relate particularly to a very focused area of my interests, of course this mechanism applies equally to financial firms.
These arrangements predate our departure from the EU and, given the likelihood that Gibraltar continues to be used in this matter, I am not placing the blame on this new Financial Services Bill. However, during the progress of this Bill, there will be an opportunity to examine again what the appropriate rules would be, particularly within the financial sector, to prevent Gibraltar being simply a place where firms and companies are reducing their tax bill. Will the UK Government commit to publishing an annual report assessing the consequences of the Gibraltar authorisation regime on tax receipts from the financial industry, as well as outlining how they intend to work with the Gibraltarian authorities to ensure there is a fair tax settlement for both territories?
My Lords, it is a great pleasure indeed to welcome my noble friend Lord Hammond of Runnymede to this House and to congratulate him on his excellent speech. Runnymede is, of course, a place where a bunch of irate barons got together, incensed by high levels of tax they were having to pay to fund the war with France. Disgruntled Peers, cross about the impact that relations with Europe were having on their nation—not much changes, does it?
I turn to the matter in hand and draw your Lordships’ attention to my entry in the register of interests. As has been said, the Bill arrives in this House at a key juncture for the UK’s financial services sector. In the post-Brexit world, it is more critical than ever that we keep our financial services competitive, as others have said, and remain a globally competitive financial centre. Some may think that the best way to do that is to ensure that our regulations remain, as far as possible, aligned to the EU’s. That approach overall would be unwise and unrealistic. It would be unwise because it is in our national interest to chart our own course for our financial services sector—a goose that lays so many of our golden eggs. The approach would be unrealistic because the EU wants to build up its own financial services and therefore, in the words of my noble friend Lord Hill, whom the noble Lord, Lord Reid, quoted a moment ago, the EU will not seek to do us any favours. We would soon find out that our interests and those of our EU friends would be at odds.
Instead, we need to have the confidence that comes from the City being—to quote Mark Carney—the EU’s investment banker and a global financial epicentre that existed well before the European Union was dreamt of. We need to look to a future that is green, a future that is digital and a future that is full of opportunities. We must strengthen our position in this new world. To achieve that, Ministers and regulators must focus on how our regulatory system can help to strengthen our competitiveness. As my noble friend Lord Hunt has just said, competitiveness was one of the regulator’s objectives but was removed after the financial crash and, as has been mentioned, the Government are now consulting on whether to reinsert competitiveness as an objective. It is a pity that that consultation is still underway, given its relevance to the Bill. I will be pressing the Minister on that point.
Of course—let me make this very clear—we should not forget the lessons that we learnt from 2008, nor should we race to the bottom in terms of regulations. Robust regulation is the bedrock of strong financial services but we must not get trapped in the past and regulate entirely via the rear-view mirror. Look overseas: regulators’ objectives have been adjusted since the financial crisis but without abandoning competitiveness altogether. Australia, Singapore, Hong Kong, Japan and Malaysia have competitiveness or growth as a regulatory objective or principle.
We need to look ahead and plan ahead. We must properly balance the need for stability with the need to be competitive so that the UK is innovative, dynamic and a great place to do business. I do not agree with the false choice contained in the Government’s consultation, which states that,
“a new competitiveness objective could distract from or dilute the key stability, market integrity and consumer protection objectives.”
We can and should strive to be both competitive and stable as a financial centre. Nor is the new so-called accountability framework sufficient. Requiring the PRA to consider the impact of its actions on competitiveness is no substitute for making competitiveness a core objective.
That brings me to the issue of accountability and scrutiny. Our regulators are getting more power and the Government are perfectly open about that. They have stated that they are,
“delegating a very substantial level of policy responsibility to the UK financial services regulators.”
If regulators are being given additional powers, there should surely be a commensurate increase in scrutiny. I therefore argue and agree with others that we need to look carefully at how regulators will be scrutinised by Parliament. Of course, getting the balance right is critical but we do not want Ministers or Parliament micromanaging regulators. There are questions as to whether enough is being done to hold unelected regulators to account.
That brings me back to where I began. The best way for Parliament to make regulators accountable is for elected MPs to set unelected regulators very clear objectives. At the moment, those objectives will not achieve our aim to strengthen our competitiveness. That needs to be addressed.
My Lords, I congratulate the noble Lord, Lord Hammond, on his maiden speech. I particularly welcome his entry to the House because I am also an unapologetic fan of spreadsheets. The Bill is necessary, of course, consequent on leaving the European Union. To a large extent, it is intended simply to replace what we had before but it provides the opportunity to go further, as we have been promised. I shall mention a couple of points that I hope we can pursue in more detail in Committee.
First, there is the Financial Conduct Authority. I do not have enough time at this stage to go into any detail but I want to put down a marker, that the FCA has failed too often in the past and simply has to do better in future. In the Bill, Clause 39 deals with the appointment of the chief executive. What is required here is clearer and greater accountability, and I would argue that Parliament has a crucial role there.
Secondly, Clause 34 relates to the debt respite scheme. I support debt respite, particularly given the situation in which we find ourselves, and I support the remarks of the noble Baroness, Lady Coussins. However, the proposals in the Bill totally lack ambition, given the scale of the problems we face. We need to understand that while debt has a personal impact, ruining lives and leading to much misery, it also affects us all by acting as a drag on the economy and the recovery that is so desperately needed.
There should be a modern debt jubilee—that is, a comprehensive package of debt cancellations targeted at the household sector. We need, in effect, a debt write-off for households, broadly along the lines established for the financial sector 12 years ago. We were told then that some banks were too big to fail because of the harm that it would cause to the economy. I argue that the failure of individuals because of debt means as much, or even greater, harm for us all.
That is not such a radical proposal. The ancient kings, under the Mosaic law, would announce debt forgiveness for their people so that they could start anew. Traditionally, that would be every 50 years, hence the jubilee. It is crucial to understand that those rulers were not being idealistic or kind in forgiving debts; in fact, they were being very practical. If the economic imbalance was not reset, there was a danger that their kingdom would fall. The main argument for such a scheme, therefore, is that in addition to relieving much individual misery it would provide a direct and targeted macroeconomic boost to the economy, exactly where it is needed. Relieving household debt would generate economic growth in the same way as a tax cut would, but it would be better targeted, allowing people to keep more of their income as pounds in their pockets. The money would flow into consumption, savings or investment, rather than into debt repayment.
There will, of course, be concern that cancelling any debts, even those debts long-abandoned by the lender, will punish the prudent and reward the profligate. That is to misunderstand how the credit system functions and how retail financial markets operate. It is hard to believe that a debt write-off will cause greater harm to those who are unaffected by indebtedness than it will benefit those who are already struggling. The beneficial effects will come to us all. Abolishing household debt, starting with the most pernicious and harmful, will generate gains that are generalised and distributed across the people of the UK as a whole.
As noble Lords will be aware, plans are already being made to celebrate one jubilee next year. Let us also plan a jubilee that will assist not just those among us who are the hardest pressed in our society but all of us. How far we can go towards such an objective in the context of the Bill, I hope we can explore in Committee.
My Lords, it is a pleasure to take part in this Second Reading. I declare my interests as set out in the register. It is greater pleasure to congratulate my noble friend Lord Hammond of Runnymede on his exquisite maiden speech. In it, I think the whole House heard that he is so much more than the misnomic “Spreadsheet Phil”. We have a real heavyweight in our midst, and I very much look forward to his future contributions on economic matters and so much more.
I would like to cover the areas of financial technology, or fintech, financial inclusion, or fininc, and the international perspective. Fintech is a great British success story, but we are slipping. The FCA sandbox was world-leading in its time and its great success demonstrated in how it has been copied around the world. Does the Minister agree that we need to update the sandbox to enable it to be available to all comers at all times rather than just those who are first in class? Does he agree that, in a sense, we need to industrialise the sandbox? Does he also agree that we need, for want of a better phrase, a growth box to address the scale-up challenge facing our fintechs? Does he have some early learnings from the City of London and FCA’s proof of concept around the digibox? It is early, I know, but there may be learnings that we can take into Committee and Report of this Bill.
Similarly, I would like to touch on crypto. The UK could be a world leader in crypto assets. Are we going to look to emulate MICA, do more than MICA or do something different? Similarly, we could be a world leader in setting the taxonomy for global crypto assets. Is that part of the plan? We have a fintech industry ripe for solving so many problems and driving so much economic growth. Does the Minister agree?
Another example is a central bank digital currency. If we looked at a hybrid model, we would be a world leader in rolling that out. If we do not, what about the challenge from Libra, now Diem, with the private sector potentially taking a huge influence over our macroeconomic policy? Look at what has happened with social media. If even a fraction of that happened with a digital currency, it would have not just an economic but a social impact—an impact on our very polity.
I turn to financial inclusion. Macmillan Cancer Support, which has done so much in this area, is pushing for a duty of care. I agree. Does the Minister? Similarly, with the SDRP regime, what is the timetable for bringing it into being? When we are looking at the breathing-space clauses, which are welcome, do they need further review against the backdrop of the Covid crisis? Similarly, can the Minister say whether bailiffs are being stopped from doorstepping people during this lockdown, as they were during the first one? It is not clear right now whether that is the case.
I turn to the international perspective, like other noble Lords I welcome the action in relation to Gibraltar. Will there be moves to enable Gibraltar to be part of a free-trade area with the UK?
When we look at the Basel framework, how does that work in terms of some of the international contexts? I would like to see a lot more British involvement in the continent of Africa, but African assets and investments are currently highly weighted from a risk perspective. Is that prudential or protectionist?
Does the Minister agree that when we look at technology and financial technology across the piece it would seem to make sense that we need a unit, a centre within government, maybe within the Treasury—for want of a better expression, a “fourth industrial revolution delivery unit”—to bring policy problems to private and public sector practical solutions?
In the Bill I believe we have the opportunity to reflect and consider what financial services are for. If they are for anything, they must be about enabling, empowering and unleashing individuals, institutions, innovations, neighbourhoods and nation states in a connected, interoperable and economic globe.
In the other place the Economic Secretary to the Treasury, the right honourable John Glen, called the Bill a “portfolio”—right enough. I hope noble Lords will be able to persuade the Minister during the passage of this Bill through your Lordships’ House that we can turn it into a portmanteau—a portmanteau to carry us, our economy and our society better through 2021 and well beyond.
My Lords, I declare my interest as co-chair of Peers for the Planet. My contribution today will focus on what is not in the Bill —namely, any reference to climate change considerations in relation to financial services and their regulation. First, I have a couple of more general points, and of course a welcome for the impressive and engaging maiden speech by the noble Lord, Lord Hammond of Runnymede.
I was very sympathetic to the points made by the noble Lord, Lord Sharkey, and others on the need for improving the arrangements for parliamentary scrutiny set out in the Bill. I shall be very interested to follow the arguments and discussions on competitiveness, particularly in the light of a powerful speech that I heard last week from David Miliband when he spoke about the sharp dividing line between cultures of accountability and cultures of impunity that apply not only to political systems but, as we have painfully learned, to financial systems as well.
I turn to my main point—a point that I was pleased was raised by the noble Lord, Lord Reid of Cardowan—which is the absence of any reference within the provisions of the Bill to climate change risk and the UK’s net-zero commitments. That the financial sector will be crucial for unlocking the private investment necessary for both green recovery and long-term economic security was made very clear by the Government in their 10-point plan for a green industrial revolution. Alok Sharma, then the BEIS Secretary of State, pledged:
“We will harness the international reputation of the UK’s world leading financial sector to encourage private investment into supporting innovation and manage climate financial risk.”
The Chancellor of the Exchequer wrote in his 9 November Statement of
“putting the full weight of private sector innovation, expertise and capital behind the critical global effort to tackle climate change and protect the environment.”
This strong rhetoric from the Government reflects what is happening in the financial sector in the UK and across the world. Only this week we have seen Black Rock adopt a climate alignment metric for its funds while many other financial institutions, from pension funds to banks, are announcing their commitments to net zero. However, to deliver systemic change at the speed required, we need increased action. Fine words and long-term aspirations will not be sufficient to tackle the scale of the challenge, and the Government need to take a lead in creating the environment and regulatory framework to encourage rapid progress.
The mismatch between rhetoric and activity can be seen across the sector. Lending to fossil fuels from 35 of the biggest banks continued to rise, up from $700 billion in 2018 to $736 billion in 2019. UK banks are currently the worst in Europe for high carbon lending. While the total value of assets held by financial institutions in the UK is around £20 billion, estimates put the value of global funds managed with explicit ESG criteria as, at most, 0.4%.
The Bill needs to reflect the urgency of the task and set the direction of travel through the future regulatory framework for financial services. We have to create a framework that supports our climate goals and explicitly provides for climate risk to be assessed and factored into decisions. The wider consultation on the future framework to which the Minister and others have referred provides no justification for neglecting the opportunity to put the appropriate markers and measures down in the Bill when the Government’s green finance policy and ambition has been so clearly set out already.
We need a concerted and urgent focus on actively aligning investment with the objectives of the Paris Agreement, so it is extremely concerning that the Bill does not even include the first step of addressing climate risks by ensuring that they are taken into account by the regulator when discharging its duties in making new regulations. I look forward to working with other noble Lords on amendments that would rectify these omissions and send a clear signal of a direction of travel to the sector and regulators.
In the year that the UK hosts COP 26, we must be meticulous in ensuring that we lead by example in every aspect of government policy. Mark Carney, the Prime Minister’s financial adviser at COP 26, wrote in November:
“The objective for the private finance work for COP26 is simple: ensure that every professional financial decision takes climate change into account.”
We must ensure that the Bill underpins that objective.
My Lords, I declare my interests as set out in the register.
I have been in this House for five years, wondering what happens about our most important industry. Diligently commenting on unamendable statutory instruments, or having yet another debate about regulators’ failure, does not really cut it for parliamentary scrutiny. In a similar length of time, I negotiated the 40 complex sets of post-financial crisis legislation in the EU. I do not expect to do that again, but it is good to see a Bill, and it is attracting two substantial maiden contributors. The problem is that to keep up on Basel 3.1 and separate out investment firm prudential regulation, it runs ahead of the consultation that is still open, implementing the division of powers in isolation from whatever comes from the consultation, deliberately fixing the path.
It did not have to be this way. The SIs revoking provisions when regulators’ replacements have been drafted could instead contain those changes, but the truth is that the Government have decided the future. Regulators are indulged, Parliament ignored. The excuse is made that the division of powers is just returning to the original FiSMA 2000, despite that being out to consultation. Apart from it not turning out well then, and the prioritisation of industry consultation over Parliament, financial services were not without EU involvement in 2000. There was already EU banking and insurance legislation. The Financial Services Action Plan was laid out in 1999 and broadly completed by 2004, with co-ordinating financial supervisory bodies well established.
It is true that the UK was on its own with the FSA’s supervisory mistakes, and cheer-led the Basel blundering, but since the financial crisis, there is so much more detailed and complex legislation than there was in 2000, so much more EU, public and parliamentary consultation and scrutiny. The FiSMA 2012 amendments were done in that setting. Now the light is switched off, and we fall back on arrogant, secretive policy-making, which is no way to be world-leading in the modern age.
It is not transparent what UK regulators and the Treasury get up to in the international standards bodies. Supervisory-led bodies have not always got it right. They got Basel II wrong. We do not know but just hope that they have got it right now. They suffer from groupthink, and then regulators implement and mark their own homework. That is why there must be big, public conversations involving Parliament.
Some legislatures, such as the EU and the US, get to scrutinise and confirm alignment with international standards once they have debated them. In the EU, regulators are regularly reviewed and peer-reviewed. In the US, the US Government Accountability Office conducts an independent annual study of financial regulations and the federal agencies. In this Bill, the Government tie our hands and legs before the scrutiny race starts.
The Explanatory Memorandum says that accountability measures have been included, meaning the scant “matters to consider” provisions for when the regulators are making rules. These “have regard” lists are too short—there are other matters of policy to consider—and there is no measure of how the regulators are accountable, other than by their own explanations and a bit of shouting by us if it has all gone wrong and still more Gloster, Connaught or GRG reports turn up. Heaven knows how anyone thinks that skeleton primary legislation can give certainty for other major jurisdictions to find us equivalent, when substantive policy can be changed in the blink of a regulator’s eye. No wonder they say that they do not know what is planned. They never will.
It is not easy being a regulator, but things have been missed too often, even when newspapers and Parliament have drawn it to attention, so we need regular independent reviews, rather like a Section 166 inquiry on regulators, with oversight on follow-through. Statutory regulator’s consultations are for industry, and there is nothing in the Bill that marks a position for Parliament. There is no access to data for industry or Parliament to independently check or challenge fair basis of the rules.
The Bill separates different types of financial institutions that have previously been swept together under banking legislation. The regulators should be given a specific direction to do more of that for small and non-systemic banks and for different categories of insurance, especially captives and reinsurance, as Ireland has. That would be useful for partial equivalences, too. The FCA’s financial system integrity objective needs backing with failure-to-prevent offences. We need duties of care, better treatment of small businesses in commercial contracts and to make the regulator’s statutory panels transparent, independent and able to consult, not secretive, selective and steered. I do not agree that FiSMA 2000 is the right model. It is arcane, it failed then and it is still secretive and shallow now, diminishing the UK. I will try to make it better.
My Lords, I congratulate the noble Lord, Lord Hammond, on his excellent speech. I welcome him to the House and look forward to his wise words on many issues.
The Bill has many deficiencies. I have sufficient time to speak on only two matters. In the post-Brexit world, the UK needs to compete to attract business. A key requirement is to ensure that the UK is a clean place with robust regulators. However, the Bill does not do that. It should have been preceded by an independent public inquiry into the finance industry and its regulation.
Regulatory failures continue to make headlines. For example, Dame Elizabeth Gloster’s report on the collapse of London Capital and Finance found that the FCA’s supervision was “wholly deficient” and that its staff
“had not been trained sufficiently to analyse a firm’s financial information to detect indicators of fraud or other serious irregularity.”
The report concluded that the FCA failed to fulfil its statutory objectives. The FCA has also been criticised in a report on the collapse of the Connaught Income Fund, and the long-running saga of frauds at the Royal Bank of Scotland and HBOS are further evidence of the FCA’s failures.
Anyone tackling corrupt practices in the finance industry faces obstacles. In February 2017, the Thames Valley police and crime commissioner, Anthony Stansfeld, prosecuted six financiers, including a senior ex-HBOS banker. They were jailed for a total of 47 and a half years. After being shamed, the FCA in June 2019 fined Lloyds Bank £45.5 million. Thames Valley Police force spent £7 million on the prosecutions, but it has not really been compensated by the Government and thus the force has been disabled from mounting any further investigations.
The Conservative police and crime commissioner for Thames Valley has also sought to tackle other cases of financial frauds but has met political and regulatory opposition. On 8 February 2019, he told the London Evening Standard:
“I am convinced the cover-up goes right up to Cabinet level. And to the top of the City.”
That is a strong condemnation of the current regulatory arrangements. The recurring problem is that the regulators are too close to the industry and like to bat for the industry rather than protect people from malpractices. The Bill does not cleanse the finance industry or enhance protections for the people.
My second point relates to the Basel III framework which is implemented by the Bill and affects the calculation of minimum capital requirements and leverage ratios for banks. However, many of the problems highlighted by the 2007-08 crash remain unaddressed. The Government want banks to have more equity, but they have incentivised debt and high leverage, as the interest payments attract tax relief and enable banks to report higher returns to shareholders. Why have the Government not addressed this contradiction at the heart of the calculations of capital for banks?
Financial statements of regulated financial enterprises are based on international financial reporting standards—IFRSs, as they are commonly known. Their use was heavily criticised in the 2013 report by the Parliamentary Commission on Banking Standards. The IFRSs give management too much discretion and management has used that to massage financial statements, as was shown by Carillion, for example. The IFRSs have no clear concept of capital maintenance and therefore calculations of capital based upon accounting numbers are fundamentally flawed. On bank balance sheets, various transactions in historical costs, amortised costs, net realisable values, present values, fair values, market values and even internally generated numbers are all added up. The calculation does not yield any meaningful number for capital maintenance. Banks are currently neither maintaining money, nor real or physical capital, so why do the Government consider them to be a useful guide for regulators?
Neither the FCA nor the Prudential Regulation Authority sets accounting rules for financial enterprises, but they rely on whatever the Financial Reporting Council comes up with. They are storing trouble for the future. The bank financial statements are targeted at short-term shareholders, essentially speculators and capital markets. They do not tell the regulators anything about market interdependencies or systemic risks, all of which were the causes of the 2007-08 crash.
The UK regulators rely on external auditors, even though big accounting firms are unable to deliver honest and robust audits. All banks which crashed in the 2007-08 crash received unqualified audit reports. The Financial Reporting Council routinely laments that 25% to 50% of the audits conducted by the big four accounting firms are deficient. Yet, bizarrely, regulators rely upon auditors. Auditors owe a duty of care to the company but not to any regulator. Regulators do not have a statutory right of access to the auditors’ files or staff. That was one of the reasons why the Bank of England was unable to fully investigate audit failures at Barings, delivered by Deloitte and Coopers & Lybrand, a firm which is now part of PricewaterhouseCoopers. Yet no lessons have been learned. One must also ask whether the reliance on ex-post audits is wise in a world of instantaneous movement of money. Is it not time that the regulators took direct responsibility for auditing the financial statements of banks?
My Lords, I draw attention to my entries in the register of interests. I join in the congratulations to my noble friend Lord Hammond on an excellent maiden speech. I will focus on his remarks about the regulator’s promotion of financial industry competitiveness, a theme expanded on most eloquently by my noble friends Lord Bridges and Lord Hunt. In order to achieve that, the regulatory framework must be robust, but the regulator must be nimble, agile, appropriately resourced and with carefully defined powers. It also needs to be accountable, as many noble Lords have noted. I look forward to the results of the current consultation into the wider framework for regulation and note that it is due to close by the end of next month.
Much of the current Bill before us is welcome and I support it, but I wish to raise some questions ahead of the Financial Conduct Authority having yet more powers delegated to it. I note that in the debate in the other place, which has been referred to a number of times, this theme was explored with reference to parliamentary scrutiny. That is a valid concern, but my concern is also to do with the FCA’s enormous existing remit and whether that is now simply too big to manage.
I will cite a couple of examples of where I think that perhaps this is the case. First is MiFID II, the market in financial instruments directive. Part of this dealt with the unbundling of commissions paid for stock market research. The FCA was the architect of these rules, but the French regulator recently noted that they have “profoundly changed” the research landscape and that this has had a negative effect on the quality of research available on smaller companies and therefore, by implication, the capital allocated to those companies. In the UK, the independent and not-for-profit CFA Institute has made similar points. The FCA has said that there is no evidence of this, but both the French and Germans have now changed the rules to exempt smaller companies from this part of the directive. There is no equivalence there, and I cannot recall a previous incidence of a French regulator changing rules to allow less regulation than our own.
Another example is that, last week, two opposition Members of the other House published a letter criticising the FCA’s customer protection skills with regards to the handling of advice given to British Steel pension holders. They alleged that the FCA lacks “sufficient vision” to tackle issues facing consumers and urge the regulator to use the full strength of its powers of enforcement to tackle rogue advisers. I am not particularly familiar with this case, if I am honest, but a swift Google would suggest that they have a point.
However, on the subject of enforcement, the most famous insider trading case launched by the FCA took eight years, cost in the order of £20 million, involved at least 40 investigators who pored over vast amounts of data and in the end secured two of five convictions, confiscation orders of £1.7 million and the longest custodial sentence that was handed down was four and a half years. It has been argued that regulators are discouraged from starting this type of investigation, because of the difficulty of winning, but the FCA has publicly regarded this as a success. It was a partial success perhaps, but at what cost, particularly to those acquitted individuals whose lives were on hold for eight years?
Other investigations that the FCA has conducted into funds management firms suggest that poor product knowledge, excessively high staff turnover and poor handover continuity make relatively straightforward investigations, which are launched perfectly legitimately, run for much longer than they need to. This has a deleterious impact on staff morale and massively increases compliance costs. Large firms can bear those costs with relative ease, but what of the SMEs that the sector relies on for competition and innovation?
I am sure that the FCA will argue that I have cherry picked a few instances which show them in a less than optimal light—perhaps I have. But I could have drawn on a number of other examples, for example, the Gloster report published in December referred to by the noble Lord, Lord Sikka, or the Parker report, also published in December. They were much more complex cases, so I have not used them here. They did not require much effort to find. These examples illustrate only a small part of the FCA’s incredibly wide remit, but the skills and knowledge required to investigate and appropriately regulate each of these examples is discrete and detailed.
So it is hard to escape the conclusion that the FCA is trying to do too much with too little. Yet we are debating delegating additional powers—for example, handing over the power to manage the orderly wind-down of Libor, which, as the briefing documents note, is used to benchmark an eye-watering $400 trillion-worth of contracts. There is no room here at all for mistakes of any kind, although I should note that the FCA is consulting the industry widely on this.
Many in the City believe that the FCA has the appropriate powers but does not use them often enough. On 21 December last year, the Times noted:
“The Financial Conduct Authority has fined only ten wrongdoers this year, its lowest scalp rating since its creation in 2013. It has meted out only £183.6 million in penalties, its third lowest total fines tally.”
I am quite sure that Covid will be cited as one reason for this, but the police carried on policing. Can that be a valid excuse, or is this because of the vast complexity of its role? Here, on complexity, I cite a June 2019 IEA report that claimed:
“The amount of data being collected under MiFID II is now beyond the ability of the UK regulators to assess in any meaningful way.”
I do not believe that the nuts and bolts of regulation, including enforcement, should be subject to political interference, but I think we should ask whether the FCA’s current remit is too broad. Is there a case to be made for smaller and more specialist regulators, particularly as financial markets become ever more complex? I am also concerned that regulated firms lack effective rights of appeal against the FCA’s decisions. As the Government themselves have noted in the past, such rights—and I quote from a BEIS consultation—are
“central to ensuring robust decision-making and holding regulators to account in the interests of justice”.
We have seen the results of failed or inadequate regulation before and they are recent and raw, as the noble Lord, Lord Davies of Brixton, noted. Post Brexit we have an opportunity to design and implement a system that does all the things the Government want, all the things that the industry needs, and all the things that the country deserves. We should do it properly and urgently, not least because we know where the blame for failure will land.
My Lords, I start by congratulating the noble Lord, Lord Hammond of Runnymede, on his maiden speech today, and I look forward to the maiden speech of my noble friend Lady Shafik. I have a tenuous connection to both speakers today. I chaired the EU Financial Affairs Sub-Committee in the period when the noble Lord was Chancellor, providing him with the odd unhelpful report on the UK exit fee, or the dangers of losing passporting rights, for his late-night reading. I should alert him to the fact that four of us from that committee are speaking in this debate today. My noble friend Lady Shafik is the first female appointed as director of the London School of Economics, my alma mater, and a former deputy governor at the Bank of England, where I am a member of the Enforcement Decision Making Committee, an independent panel under the PRA. Given my interests declared vis-à-vis the PRA, I will keep my contributions on this Bill high level, and restricted to certain areas only.
In early 2018, the EU Financial Affairs Sub-Committee published a report on the future of financial services regulation and supervision post Brexit. I believe that this was the most comprehensive survey of the options available to the UK if—and at that point it was an if—the UK left the EU. On examining the provisions of this Bill, I am pleased to say that our analysis was pertinent, and several of our recommendations will now see the light of day as this legislation becomes law.
One of our considerations is indeed at the heart of this Bill—that of where powers and standard setting by EU bodies rightly reside now that the UK is responsible for its own regulation. We concluded that our regulators were well regarded internationally and, despite some concerns expressed by noble Lords today, which I accept, the United Kingdom’s financial services sector is still regarded as number two globally, having been replaced in the number one slot by New York. It is leagues ahead of any other continental centre. This is relevant not out of some nationalistic hubris but because the real jobs and revenue that it provides are really important across the country.
Until last year the UK’s regime derived its legislative base from EU law, but we found out that in reality those standards were actually framed upstream through the Financial Stability Board, Basel, IOSCO and other standards setters. It is at that level that we need to focus our energies now, confident that our technical expertise is highly valued, but we also need to build new relationships. I note that the five largest financial sectors behind New York and the City are in east Asia, and Zurich is the only one in the top 10 globally from continental Europe. So we have opportunities upstream in co-operating with those jurisdictions to establish fair and proportionate frameworks.
While I have confidence in our regulators, I want to add my voice to the need for accountability. Standards setting and underpinning legislation that is now passing to our regulators is highly technical, but that does not mean that parliamentary scrutiny is redundant. So I urge the Minister, through the usual channels, seriously to consider setting up a joint committee of both Houses to carry out ongoing scrutiny of the effectiveness of this type of legislation. The City, as I know, is not keen to be a low-tax, low-regulation haven for dodgy dealing; it wants to preserve its hard-earned recent reputation. Oversight by Parliament at a more technical level can only enhance this. So when the Minister tells us that further legislation will build on this omnibus Bill, I urge him to suggest to his political masters that there will inevitably be a democratic deficit unless we have a parliamentary mechanism to do the relevant scrutiny, not least of HMT, when the Treasury Select Committee in the other place simply cannot carry out that technical work.
My final point is about competitiveness. The post-Brexit UK will inevitably need to rethink its competitiveness as business investment becomes more challenging to attract. So I also urge the Minister to explain what reservations the Government have, if any, about establishing an international competitiveness duty for the regulators. We recommended this in our report, and I think that the Treasury can usefully incorporate it into its thinking on the future regulatory framework. I know that some see competitiveness as a race to the bottom. I ask them to think of one very current example: the pharmaceutical sector. Would anyone today, looking at our vaccination strategy and successes, think that having a state of the art and competitive pharmaceutical sector represents a race to the bottom—or is it a necessary tool in the global challenge to remain in the lead where we have the relevant skills?
I look forward to the detailed scrutiny that we will undertake on this Bill in the months ahead but, in the meantime, I look forward to hearing the Minister’s response.
My Lords, putting the contribution of the UK’s financial services in context, according to a City/PwC paper in January 2020 they contributed £75.5 billion in tax revenue in 2019, employing about 1.1 million people. Overall, I support the Bill’s measures, which bolster the consistent use of international standards. This is crucial to reducing the unnecessary fragmentation of markets that impacts on consumers. I agree with the delegation of responsibility for financial firm requirements to the regulators, subject to an enhanced accountability framework and necessary parliamentary scrutiny.
The three main objectives stated in the Bill are entirely sensible. The Bill also amends existing laws on financial services in the 17 separate areas grouped by these three stated objectives.
My only criticism of the second objective is that, while it promotes openness to EU and overseas financial firms that come here, no attempt was made in the Brexit negotiations to obtain passporting rights from the EU as a quid pro quo. The Government seem to have believed that these should only now be negotiated—alas, when we have no bargaining tools left in other areas. The EU seems in no hurry to assist us. Can the Minister explain the logic in this?
I welcome the new regulatory regime proposed for non-systematically important investment firms. The Government rightly state that the existing regime for these institutions can be disproportionate, inappropriate and impose unnecessary burdens. The Bill would rightly allow the Financial Conduct Authority to introduce a tailored regime for such companies. The Government say that the UK regime will be flexible and is intended to achieve similar outcomes to the reform in the EU in 2021 but
“tailored to the specificities of the UK market.”—[Official Report, Commons, Financial Services Bill Committee, 17/11/20; col. 59.]
I welcome the Bill’s implementation of Basel III standards on banking supervision. Some member firms will have been working towards implementing the EU’s capital regulatory requirements, CRR II. How may the UK diverge from CRR II?
I also support the framework to wind down the Libor benchmark, as outlined in the Bill. Will the Minister urge the FCA to publish further detail on its replacement as soon as possible?
Can the Minister clarify how the Treasury intends to make equivalence decisions under the framework for the new overseas fund regime? Will the Government publish a regular report on the progress and results of negotiations for obtaining equivalence for UK firms in EU countries? I strongly support maintaining the effectiveness of the financial services framework and sound capital markets in Clauses 8 to 17.
During the rest of my contribution, I will focus on the unfortunate statistic of the rise in complaints to the FCA and cite two examples of regulatory failure. According to an FTAdviser article of February 2020, the number of complaints about the City watchdog jumped by more than 50% in 2019, primarily due to concern about the regulator’s supervision of the industry. The main driver behind the hike was the sharp increase in the number of complaints relating to the FCA’s advisory role—namely, failure to act on information and to spot a problem. In the same month, the FCA was reprimanded by the complaints commissioner, Antony Townsend. He wrote to the FCA board expressing serious concerns, branding the current situation at the watchdog “totally unacceptable”. This followed a previous report in 2019, where the complaints commissioner highlighted a
“lack of effective prompt action”
by the financial regulator, in a number of cases where advisers and consumers reported concerns about a fund.
The two individual examples of regulatory failure on which I will focus are London Capital & Finance and Beaufort Securities. In December 2020 an independent investigation into the FCA’s handling of the LCF mini-bond scandal rebuked the regulator for “significant gaps and weaknesses” in its policies and practices. The review found that the City watchdog had failed to properly regulate the now collapsed company. It warned that its handling of information about the business from third parties was “wholly deficient” and an
“egregious example of the FCA’s failure to fulfil its statutory objectives”
in regulating the company. The mini-bond provider collapsed in May 2019, owing more than £230 million and putting the funds of some 14,000 bondholders at risk.
The main highlights of the review were that, first, investors had not received enough protection from the regulatory regime, and, secondly, LCF had not been adequately supervised by the FCA. Most importantly, the review stated that the root causes of the FCA’s failure to regulate LCF were “significant gaps and weaknesses” in the policies and practices it implemented to analyse the business activities of regulated firms. It had allowed LCF to use its authorised status to promote
“risky, and potentially fraudulent, non-regulated investment products to unsophisticated retail investors”.
Although the regulator’s financial promotions team had raised concerns about LCF’s financial promotions on six occasions, the breaches did not result in a referral to the supervision or enforcement divisions. Lastly, the report said:
“FCA staff who reviewed materials submitted by LCF had not been trained sufficiently to analyse a firm’s financial information to detect indicators of fraud or other serious irregularity … Neither did the FCA appreciate the significance of an ever-growing number of red flags, which were indicative of serious irregularities in LCF’s business. This occurred at a time when LCF’s unregulated bond business was growing at a rapid pace and substantial funds were being invested by Bondholders.”
I do not have time to go through the case of Beaufort Securities with which there were many of the same problems, though in a number of cases, investors got their money back. Overall, I welcome the Bill.
My Lords, I declare an interest as a former chair of StepChange Debt Charity.
I congratulate the noble Lord, Lord Hammond of Runnymede, on his maiden speech. In your Lordships’ House we do a good line in former Chancellors of the Exchequer; in normal times, when the House is sitting on a regular basis, there is almost a full Bench of them. He joins an exalted group, and I am sure he will quickly make his mark, even among that competition.
I will focus on Parts 6 and 7. I echo the noble Baroness, Lady Coussins, and the noble Lords, Lord Davies and Lord Holmes, in welcoming these proposals. I want also to raise the specific issue of high-cost credit, which the Government should stamp out.
Clause 34 amends Sections 6 and 7 of the FGC Act. I participated in the debates on that Act a few years ago. We welcome the clause, which will, as the noble Baroness, Lady Coussins, said, compel creditors—including all public sector creditors—to accept amended repayment terms, provide for a charging mechanism for debt advice, and underpin the instruction of the Statutory Debt Repayment Plan. But the Bill is short on detail. We hope to take this further in Committee. We assume and hope that the scheme will be modelled on the successful Scottish scheme.
More details will be needed in Committee about the timetable. Debt respite, which is being introduced in May, and debt repayment should go together. How are the powers to be framed and what role will Parliament have? What will be the arrangements for creditor agreements and the veto, if any, on the quantum of payments? Should there be a wider reform of debt collection practices, particularly the use of bailiffs by local government? The noble Lord, Lord Holmes of Richmond, raised this.
Clause 35 deals with successor accounts to Help to Save and inserts a new clause into the Savings (Government Contributions) Act 2017. This will provide regulation-making powers in respect of orphan funds or where no instructions have been provided to the director of savings. Although the Government sensibly propose to take powers for this eventuality, there are currently no plans to implement them. Why not? What circumstances would trigger action? We can return to this in Committee.
My other area of interest is in repealing the Victorian bills of sale legislation, which permits an egregious area of high-cost credit to continue and flourish. For those who are not aware of them, bills of sale are a way that individuals can use goods they already own as security for loans while retaining possession of them. The use of bills of sale has grown from fewer than 3,000 in 2001 to more than 30,000 in 2016. The numbers have dropped recently, but are probably in the order of 15,000 a year. They are mainly used for what are called “logbook loans”, where a borrower grants security over their vehicle. Borrowers may continue to use their vehicle while they keep up the repayments but, if they default, the vehicle can be repossessed without the protections that apply to hire purchase transactions and very few consumer credit concerns.
Bills of sale are currently governed by two Victorian statutes, the Bills of Sale Acts of 1878 and 1882. This legislation is archaic and wholly unsuited to the 21st century. In September 2014, HM Treasury asked the Law Commission to review the bills of sale legislation and to make recommendations for reform. A consultation paper was issued and a report was published in September 2016. In February 2017, the Government asked the Law Commission to draft legislation to implement its recommendations. These plans have now been shelved. Lenders and consumer groups agree that the law is in urgent need of reform. The current law creates hardship for borrowers and private purchasers. It imposes unnecessary burdens on lenders and restricts access to finance for unincorporated businesses and high net worth individuals.
The great majority of bills are issued for logbook loans, often taken out by borrowers who have difficulty in accessing other forms of credit. These borrowers are particularly vulnerable to inadequacies in the existing law. To make this clearer: the current APR in a recent advertisement for a car logbook loan was 450%.
The Law Commission says that the statutory form for a bill of sale, as set out in the 1882 Act, confuses borrowers rather than helps them to understand the consequences. The bills of sale Act provides only minimal protection to borrowers, and their goods can be repossessed if they default. The FCA has rules about this and logbook lenders must have policies to deal with default, but lenders differ radically in their approach to repossession. There have been complaints that some lenders use threats of repossession to demand unreasonable and unaffordable sums.
This is an area that should be cleaned up. Action should be taken. A simple way would be simply to repeal the Acts that I have mentioned and I will bring forward amendments in Committee to do that.
My Lords, I, too, congratulate my noble friend Lord Hammond of Runnymede on an excellent maiden speech. I refer noble Lords to my entry in the register.
The EU-UK Trade and Cooperation Agreement, which came into force on 1 January this year, is a free-trade agreement that does not facilitate the same access to the EU single market, for the UK’s financial services, as that which was available pre-Brexit. The EU passporting regime is founded on a 20-year history and there are nine different passports that cover financial services, from core banking services such as lending and deposit taking, through to asset management and more. Each passport is embedded in a particular EU directive or regulation, establishing the basic rules for that activity.
Your Lordships will be fully aware that, from 1 January, the passporting regime was no longer available to UK-based financial services firms. Consequently, the extent to which UK firms can continue to provide services to customers in the EEA or EU will depend on local law and local regulators’ expectations or a grant of equivalence from the European Commission. Conversely, EEA-based firms must now either have a UK-based operation, be able to rely on an exemption or exclusion or be acting in accordance with one of the UK’s temporary regimes in order to undertake regulated activity in the UK.
The removal of the passporting regime, together with the uncertainty duly generated, has resulted in financial firms operating in the UK relocating around 7,500 employees and more than £1.2 trillion-worth of assets from the UK to the EU. Over 40 financial firms have announced plans to make local hires for existing or newly created roles in Europe, equating to over 2,850 additional new jobs. There are alternatives to passporting, but they are complex and I do not have sufficient time available today to visit them in this debate. The European Commission can grant equivalence to a third country if it seems that the laws of that country have the same intention and produce more or less the same outcomes as the laws of the EU. However, the Commission can also unilaterally withdraw equivalence, should the situation change, within 30 days. It is my understanding that, in order to prevent the Commission from withdrawing equivalence at short notice on the grounds that the UK rules diverge materially from those of the EU, the UK is seeking a form of enhanced equivalence whereby both parties would regularly update each other on new regulations. Given that financial services were specifically excluded from the TCA, what efforts are the Government making to ensure that passporting rights—and, in the absence of those, equivalence rights—and access to the EU for the UK financial services industry are secured? Further, depending on the outcome of the discussions between the UK and the EU regarding equivalence, what additional measures are the Government proposing to take to support the UK financial services industry and reinforce its competitive advantage?
I am aware that the sector has a number of specific concerns, which include the temporary permissions regime and the capital markets union, with further concerns held by the UK funds industry and the UK insurance industry. My understanding is that, in November last, my right honourable friend the Chancellor announced that the UK proposed to recognise the equivalent status of EU financial services laws in a number of key areas, including those that I have just mentioned. By granting equivalence to EEA-member states in three of those areas, the UK acknowledged that insurers and reinsurers, established in the EEA, have the same capital and governance requirements as UK firms. This gesture of good will from the Government has, I believe, not yet been reciprocated by the European Commission, which has yet to take any action whatsoever towards granting similar rights. Are we surprised? Nothing changes.
This is a complex and substantial Bill, which aims to improve the UK regulatory framework for financial services following the end of the Brexit transition period and I support it. Doubtless it will receive much scrutiny during the stages to come, but we must remember that the other place gave it its support and we, too, should give it a fair wind.
My Lords, it is a great honour to make my maiden speech today and I begin by thanking your Lordships and the staff of the House, who have been so welcoming. I am particularly grateful to my sponsors: the noble Lord, Lord O’Donnell—Gus O’Donnell—who was both my mentor and manager in the Civil Service, and the noble Lord, Lord Stern—Nick Stern—who was my teacher and is now my colleague at the London School of Economics and Political Science. It has been a strange time to join this great House, but my induction has proceeded very capably through digital means and I thank Black Rod, the Garter and the noble and learned Lord, Lord Judge, for their guidance.
I was born in Alexandria in Egypt, although my connection to the UK began with my grandfather, who came on a scholarship to do his undergraduate and doctorate degrees at Imperial College in the 1920s. My father was born and raised in Notting Hill, before it was fashionable, and the family eventually returned to Egypt, where my grandfather retained a love of croquet and lawn bowling well into his 90s. My maternal grandfather studied in France and my mother was sent to a French Catholic school by her forward-thinking Muslim mother, who believed that everyone should learn about other people’s religions. I wish that they could all be here today.
My family’s prospects changed radically with the nationalisations in Egypt in the 1960s, when we lost most of our property and went from being well-off to being immigrants in the United States, where my father had studied. For my father, who had a PhD in Chemistry and little else, education was the only path to success. His mantra was, “They can take everything away from you except your education.” Those experiences —seeing how people’s fortunes could rise and fall because of economic shocks and the importance of education for social mobility—instilled in me a deep curiosity about the architecture of opportunity in a society. That curiosity led me to a career in economics that spanned the World Bank, the UK Department for International Development, the International Monetary Fund, the Bank of England and the London School of Economics.
While I spent 18 years in universities, most of my career has been in the trenches of policy-making in some of the poorest countries in the world and some of the richest. I have worked with politicians from across the political spectrum. In the UK I was a permanent secretary under both the Labour Government and the coalition between the Conservatives and the Liberal Democrats. In my years at the World Bank, DfID and the IMF, I travelled to over 100 countries, working with politicians of every imaginable political stripe. I saw clearly the benefits of sharing experience across countries.
I have had jobs that are primarily about making good things happen—lifting people out of poverty at the World Bank and DfID and spreading education at LSE. I have also had jobs that are primarily about preventing bad things from happening—fighting international financial crises at the IMF and maintaining monetary and financial stability at the Bank of England. Making good things happen is often more fun and one’s colleagues tend to be more optimistic. Organisations that prevent bad things tend to be populated by people whose job is to worry and look for risks, but their work is vital because, as the pandemic has shown us, bad events can swiftly destroy decades of progress.
These experiences are why I have chosen the Financial Services Bill for my maiden speech. It is first and foremost intended to prevent bad things from happening, as well as to create opportunities for new good things. It is the first important step in defining a distinct UK regulatory framework after leaving the EU and restoring the regulatory philosophy embedded in the Financial Services and Markets Act 2000, with improvements based on the lessons from the 2008 financial crisis. That philosophy is based on legislation setting out the policy objectives and operationally independent expert regulators translating that into technical regulation and supervision.
It is reassuring that the Government remain committed to the highest standards of regulation to avoid future bad events. Robust standards are essential for the stability and fairness which make our financial markets attractive to global investors and ensure consumers are protected. Chasing competitive advantage through lower regulatory standards and financial services is a chimera.
At the IMF, we used to describe the UK’s financial sector as a global public good because of its systemic importance to the world economy. The success of the UK’s regulatory framework has far-reaching consequences, and maintaining active engagement in global standard-setting, such as through the Basel Committee and the Financial Stability Board, is the best way of remaining the most global financial centre in the world. For example, when I was at the Bank of England it worked with central banks around the world to shape the first global standard for the foreign exchange market—the largest financial market in the world with a turnover of $6.6 trillion every day, over 40% of which occurs in London.
There is a huge opportunity, as many noble Lords have said today, for the UK to set global standards on green finance, from mandatory disclosure and the development of green investment products to defining regulatory approaches to climate-related stress-testing, which will be done for the first time this year. The return of full independence in setting the regulatory framework for financial services to the UK also provides an opportunity to rethink the framework for accountability and scrutiny in a system that relies heavily on experts. I have to confess, I like experts. I know Members of this House fall comfortably into that category, and the expertise in this House adds enormous value to the legislative process. But as the noble Lord, Lord King, has said, experts must resist the pressure for an illusion of certainty. It is best to listen to many views and subject expert judgment to challenge.
I hope that I can add my voice to the well-informed and lively debates in this House and bring an especially global perspective to our deliberations. Hopefully, we can prevent many bad things happening as well as enable many good things to progress. I look forward to working with all of your Lordships in the future.
My Lords, it is a privilege to be the first to congratulate the noble Baroness, Lady Shafik, on her charming and hugely impressive maiden speech. This debate shows the House is fortunate to have the addition of not one but two real heavyweights to our number. I am sure I speak for the whole House when I welcome the noble Baroness and say that we look forward to her continuing to contribute her extensive expertise and experience—national and international—to the work of our House.
This is a large Bill and, in view of the significance of the financial services sector in the UK, a very important one. I declare my interests as set out in the register and as a former member of your Lordships’ EU Financial Affairs Sub-Committee—one who worked under the splendid leadership of the noble Baroness, Lady Falkner of Margravine.
Like the noble Lord, Lord Sharpe of Epsom, I want to direct my remarks to the part of the Bill relating to the regulation of investment firms, in particular, the EU markets in financial instruments directive, popularly known as MiFID. The current directive, MiFID II, came into force in the United Kingdom on 3 January 2018. Its provisions have been widely criticised, not only in the UK but throughout the EU, as excessively burdensome and not sufficiently distinguishing between market operators on grounds of size or function. Now the UK is responsible for its own regulation, which is welcome, but using the powers to be conferred by this Bill the Financial Conduct Authority will be able to introduce a more tailored approach under the title of an “investment firms prudential regime”. It is also welcome that the FCA has already circulated a discussion paper inviting comments on its approach.
One area in which MiFID II produced unforeseen adverse consequences—at least, unforeseen by its proponents, for it was foreseen by others—was the treatment of investment houses’ research costs. It was an aim of MiFID II to prevent the financing of research services from trading commissions, because it was believed that this would remove an incentive to unnecessary churning of investments as a means of providing funds for research. This was a laudable objective, but it was predicted during consultation on the directive that a complete ban on the commission-sharing regime would cause fund managers to cut their spending on research and benefit competitors outside the EU, who were not subject to similar restriction. It would also discourage new businesses seeking to establish themselves in the market. This has, indeed, been the result.
An alternative suggestion was that the aim of greater transparency could be achieved by disclosing to clients in advance fixed, budgeted amounts for research. This was adopted in MiFID but not considered sufficient in itself; further onerous reporting was required. This is but one example of the competitive burdens imposed by MiFID II. It is to be hoped that they will be mitigated in the UK’s new investment firms prudential regime, so as to combine transparency about costs with removing disadvantages suffered by UK firms in comparison with competitors in the United States and the Far East.
The FCA’s consultation on the new regime coincides with two other developments that are currently under way. One is the discussions being conducted with the EU, and due to be completed by April, about a new framework for equivalence between the UK and EU following Brexit. The second is that, like the UK, the EU is itself reviewing and preparing modifications to its regulatory regimes, covering not only MiFID but other matters covered by the Bill, such as the capital requirements directive implementing Basel III and the anti-money laundering directive. The UK’s discussions with the EU about equivalence are taking place on ground that is shifting beneath our feet. Such developments in regulation in the UK and the EU will, and inevitably should, continue as financial markets continue to develop.
If anything were needed to persuade both sides in the present UK-EU negotiations that it is in our mutual interest to work in close consultation with each other, it is a report last week that in the absence of UK trading platforms for derivatives being given EU market access, business in euro-denominated interest rate swaps fell sharply in London during the first fortnight in January. At the same time, it has doubled not in the EU financial hubs, where it also fell, but in New York. It is to be hoped that the EU can be persuaded that a restrictive approach to the UK is contrary to not only the UK’s interests but its own.
The United Kingdom has long been a leader in international financial regulation, as shown by our pivotal role in the 2007 financial crisis and its aftermath. We must see to it that this Bill and its implementation continues to allow that leadership, not only in the UK’s interests but, as the noble Baroness, Lady Shafik, said, in the world’s.
My Lords, I add my congratulations to the noble Lord, Lord Hammond of Runnymede, and the noble Baroness, Lady Shafik, on their excellent maiden speeches. I agree with my noble friend Lord Sikka and other noble Lords who have pointed out that the Bill does not go far enough to secure proper governance, financial integrity and measures against corruption. The current state of the law is a blot on the finance industry in the United Kingdom, which has seen outrageous criminal conduct on a massive scale go unpunished and sometimes uninvestigated. I am speaking of money laundering, fraud, false accounting and the like. I have in mind the collapse of BCCI, the Libor scandal, HSBC’s money laundering and other cases referred to by noble Lords. The case for a public inquiry into the finance industry is now incontrovertible.
A particular problem has been the current state of UK corporate liability law, the “directing mind” test, which effectively puts large companies and financial institutions beyond the reach of criminal prosecutors for many economic crimes other than bribery and tax evasion. The charities Finance Innovation Lab and Spotlight on Corruption have highlighted this in briefings, and I am grateful for their elucidation of the problem and their proposed solution.
This is a rule of law issue. An amendment to the Bill is needed to make it a criminal offence to facilitate an economic crime or to fail to take reasonable, necessary steps to prevent an economic crime. Individuals should be personally liable, and so should corporate entities in a sufficient relationship with a guilty individual to found vicarious liability under the ordinary principles of the common law. This would be a straightforward yet vital step to bring fraud, money laundering and false accounting into line with bribery and tax evasion. It would bring the UK into line with equivalent laws which exist and are used, sometimes with spectacular results, in the United States and the EU. Given the well-reported increase in fraud cases during the current pandemic, this is an urgent matter.
By the same token, since Brexit and the failure to secure any deal in relation to financial services, the need to restore the reputation of the finance industry and highlight its effective regulation by passing such an amendment is particularly pressing. It is understood that the Law Commission is currently reviewing corporate crime, but this Bill presents an unmissable opportunity now to create such an offence, and I hope the Minister will be able to tell us an amendment on these lines will be introduced.
My Lords, I congratulate the noble Lord, Lord Hammond of Runnymede, and the noble Baroness, Lady Shafik, on their excellent maiden speeches. I look forward to the important contributions they will both undoubtedly make to the House.
On Monday 9 November last, the Chancellor made a Statement to the House of Commons in which he set out the Government’s vision for financial services. He pledged, as the noble Baroness, Lady Hayman, reminded us, to put
“the full weight of private sector innovation … behind the critical global effort to tackle climate change and protect the environment.”—[Official Report, Commons, 9/11/20; col. 621.]
Just two hours later, his colleague, the Economic Secretary to the Treasury, John Glen, got to his feet to introduce the Second Reading of this Bill. In his opening speech, which lasted over 25 minutes, he did not refer to the climate and ecological emergency once. He made no mention of green finance, climate risk disclosure or the critical role the financial services industry will have to play if we are seriously to tackle climate change.
The omission of any reference to climate change, replicated by the Minister this afternoon, was not the result of an oversight on the Economic Secretary’s part. Far from it; it was simply a logical consequence of the fact that the Bill does absolutely nothing to address the climate emergency we face. The Economic Secretary had a number of answers for this failure when he got around to the matter in Committee. First, he argued that these issues were not relevant for discussion, as they were not directly related to the Bill—a strange and circular argument, as their absence from the Bill was precisely the complaint he was addressing. Secondly, he argued that the regulators were making progress on climate-related issues and we should let them get on with it. Finally, he said:
“The Bill grants the Treasury a power to specify further matters in the accountability framework at a later date, which could be used to add a requirement to explicitly have regard to green issues in the prudential framework, if appropriate … I can assure the Committee that the Treasury will carefully consider a green ‘have regard’ in the future.”—[Official Report, Commons, 24/11/20; col. 157.]
Essentially, he was telling Parliament, “It’s not for you to worry your little heads about these things, and to ensure that you don’t have to, the Bill will take the powers away from Parliament in this regard and vest them in the Treasury and the regulators, who know best.”
We on the Liberal Democrat Benches do not think that they know best. History does not cause us to put much faith in the willingness of the Treasury, or of unaccountable regulators, to act. Nor does it give us any faith in their ability to determine the appropriateness, or otherwise, of action on such critical matters for our planet. We agree with the Chancellor that financial services have a key role to play in tackling climate change, but we believe that it is for Parliament to determine that role. Accordingly, we will bring amendments forward in Committee to ensure that the Bill does exactly that. They will do this, first, by requiring the Prudential Regulation Authority to have regard to climate-related financial risk when setting capital adequacy requirements and, secondly, by ensuring that credit-rating agencies have to take climate risk into account in setting credit ratings. Thirdly, they would bring forward the date when the recommendations of the task force on climate-related disclosure will be mandatory from 2025 to 2023.
We will also seek amendments to ensure that, in setting general rules, the FCA has regard to the climate-related financial risks to which FCA investment firms are exposed and that the FCA, in setting Part 9C rules, and the PRA, in setting capital requirement regulation rules, have regard to the UK’s domestic and international climate obligations. I look forward to working on these issues with the noble Baroness, Lady Hayman, and other members of Peers for the Planet, the excellent organisation which she chairs.
I welcome the lead that the Government have taken in setting the net-zero target. I applaud the Treasury for moving on the TCFD recommendations, so far as they have gone, and for their positive words on green finance. However, the awful truth is that action in every respect of our response to the climate emergency is glacially and catastrophically slow. We are way off line to meet the Climate Change Act’s original 80% reduction target, let alone the revised net-zero one. There is a time when the talk of distant targets for which none of us will be held accountable has to end and the activity and action to meet them has to start. That time is now. The climate crisis is not something that might happen in some distant future if we do not get our act together. It is happening right now. Just ask those on the front line of the crisis; ask the people of the small island states who live with the prospect of being literally wiped off the map. Ask the farmers facing ever more erratic weather patterns and deteriorating soil conditions in Africa or South Asia. Ask householders in the UK who are becoming ever more susceptible to flood risk; ask the firefighters in California or New South Wales.
As we speak, the world is on course for three degrees of warming. The devastation that would cause is beyond contemplation. We know the threat that we face, and what we have to do to mitigate it, but that does not guarantee that we will do it. A global pandemic was number one on the Cabinet Office’s risk register. We knew it would happen one day, yet it seemed so far off that, when it suddenly arrived, we met it almost completely unprepared. We cannot afford to do the same with climate change. So I urge the Government to use this Bill to start, however modestly, to match their fine rhetoric with action and to ensure that the financial services industry is able to play its full part in combating climate change.
My Lords, I begin by drawing attention to my interests in the register. The House has heard two outstanding maiden speeches today. I doubt the House of Lords has seen the introduction of two individuals with such extraordinarily wide qualifications for many years, and we certainly welcome them very much.
The Government have told us that one objective of the Bill concerning financial services is to promote openness between the United Kingdom and internal markets. Obviously that is a laudable notion, which is important to the UK because our financial services are in many ways the golden nugget of the UK economy. I want to ask the Minister to give us an assessment of how such an aim is achievable and to report on progress over the past few years, and particularly recently, on achieving that greater openness. To what extent since Brexit are other countries also showing preparedness to negotiate towards that goal?
For a start, I cannot imagine that the European Union will resist the temptation to shift some of the pre-eminence of the City of London to Paris and Frankfurt. That point was made by the noble Lord, Lord Reid, and my noble friend Lord Bridges. So far as the EU is concerned, it will be a case of holding on to what we have got and trying to avoid the power of the City and British financial services ebbing away to the continent. However, that is not the main point that I want to raise.
I am concerned at the prospect of opening up the financial markets between the United Kingdom, the United States and others. Some years ago, when the European Union was negotiating the TTIP agreement with the United States, I went on a Select Committee visit to Washington as part of our inquiry into the progress of the TTIP negotiations. Of course, reflecting on the strength of the City and the United Kingdom’s powerful financial services sector, one of Britain’s main aims, while we were still members of the EU, was to enhance the prospects of the pre-eminence of the City within those negotiations with the United States. Indeed, one of our principal aims was to open up the financial sector between the US and the EU, as it was then. Now, after Brexit, that must obviously continue to be a major aim of the UK but all of us who went on that delegation to Washington, some years ago now, were seriously shocked, when meeting the United States Treasury at that time, to be told in the firmest possible way that there was no way at all that the United States was prepared to open up the financial services sector within the confines of the TTIP negotiations. In strident, almost offensive terms, we were told to forget it.
That is very concerning for the future. I have heard no evidence since then that the attitude of the United States has softened so far as financial services are concerned. I have two questions to the Minister, which I hope he will refer to in his wind-up; if he cannot do so, perhaps he will be good enough to write to me. First, has there been any softening in the attitude of the United States to protect its financial services sector and open it up to the UK or others? Secondly, does he see any prospect of fulfilling the Government’s aim of opening up these markets, especially within the United States?
My Lords, I pay a real and sincere tribute to the two maiden speakers, the noble Lord, Lord Hammond of Runnymede, and the noble Baroness, Lady Shafik. I found their speeches really useful and interesting, and they will make major contributions to the House in the future.
I shall be brief but I want to say a few words about three items. The first concerns Clause 34, on the debt respite scheme. This is much welcomed and we can leave the detail for Committee. It was useful to hear the Minister confirm that priority debts include council tax arrears, energy arrears and benefit overpayments—in other words, broadly speaking, public sector government debts.
Such debts can be a nightmare for people and get worse when, with the best of intentions, attempts are made to repay and are then frustrated because the odd creditor or two believes that more should be repaid quicker. I certainly had experience of that when I advised constituents in the 1970s and 1980s. I got their debt sorted out, but then either a creditor that I did not know about or one of the existing creditors decided that they wanted to speed things up. The Money Advice Trust has provided a really useful and supportive brief on Clause 34.
We now have Covid in play, which, by common consent, has affected poorer families financially more than others, besides the million self-employed people who have not received any help from the Government, many of whom will have taken on debts. Will such debts be covered by Clause 34?
An affordable timeframe is the one element that can give people hope, so this clause is a very big incentive for people to enter into agreements to repay debts in full and not simply ignore them, letting them build up and hoping that something will turn up. It can prevent an escalation of the problem, which of course is a worse nightmare. The key, according to the Money Advice Trust, is the timetable. The mental pressure on people with debts is enormous. Having a timetable which is affordable is key. My question is whether this is a priority for the Treasury, as it is needed as soon as possible.
Secondly, I would like to touch on the issue of economic crime. The Bill—I wrote my speech before my noble friend Lord Reid spoke—appears to be a parliamentary Christmas tree, on which we can hang new bits of legislation. The one I would cite is that regarding the prevention of economic crime. Spotlight on Corruption has made it clear that there is problem. The rules for holding large companies and financial institutions to account for economic crime are unfair and ineffective, and they undermine good corporate governance.
Prosecutors have requested that laws on fraud, false accounting and money laundering be strengthened in line with the laws on bribery and tax evasion. The Commons Treasury Select Committee is in favour of that, and over 70% of those responding to a consultation —last year, I think, or the year before—said that current rules inhibit holding companies to account. It is also in line with previous Conservative Party manifestos, and I am sure, although I have not gone back to check the text today, that it is consistent with the seminal speech that David Cameron made on the issue. I will leave it there, as it is a detail for Committee.
In a way, my final point follows what the right reverend Prelate the Bishop of St Albans said. I have never favoured Gibraltar becoming a brass-plate economy. It is true that we more or less passed it over to Spain after Brexit, so it might well now be a bigger income generator. I have no interest to declare—I had two private holidays there in 1977 and 1979 as a gesture of solidarity when the Spanish closed the border—but the fact is that there are some serious issues to debate given the amount of the Bill that relates to Gibraltar and the fact that it is becoming a bigger brass-plate economy than it has been in the past. This will need further exploration in Committee.
My Lords, I declare my interests as stated in the register. I too congratulate my noble friend Lord Hammond of Runnymede on his excellent and entertaining maiden speech, and the noble Baroness, Lady Shafik, on her most inspirational one. I thank my noble friend the Minister for introducing this important Bill, which will help to ensure that the City of London remains the pre-eminent global financial centre. For more than 100 years the City has rightly enjoyed a reputation as the safest centre in the world in which to conduct financial business, and the old maxim “My word is my bond” continues to reflect the high level of trust accorded to financial firms operating in this country.
Many commentators have lamented the fact that the financial services chapters of the trade and co-operation agreement with the EU are thin. This partly reflects the fact that the EU’s single market in financial services is only partially developed, although in recent years the European Commission has made progress in its drive to harmonise financial regulation across the bloc.
We have certainly influenced the development and formulation of this regulation, but we have had to work within the EU’s Napoleonic-style framework. We therefore have cumbersome and bureaucratic rulebooks, which explains why the fastest-growing departments of banks and other regulated companies have been compliance and legal departments, rather than those devoted to innovation and the development of new products, and those that actually conduct business and earn revenues.
Sometimes we have been overruled by excessively cautious Commission technocrats and by the European regulators, especially since the pendulum swung too far towards tighter regulation after the financial markets crash of 2008. I shall give just two examples of this: first, the whole of the AIFMD, which is disproportionate and expensive for many smaller asset management companies, driving some offshore and forcing others to merge or discontinue operations. The second example is Solvency II, which prescribes excessive capital requirements for UK insurers. The Treasury has said that it intends to change the rules to make them less prescriptive and less complex, and to increase the ability of regulators to apply supervisory judgment. Can the Minister confirm that this Bill will enable that to happen?
Miles Celic, of TheCityUK, told the EU Services Sub-Committee, on which I am privileged to serve under the excellent chairmanship of the noble Baroness, Lady Donaghy, that negotiations on post-Brexit financial services arrangements are being driven by political concerns rather than regulatory or legal issues, and that equivalence is becoming increasingly politicised. Does the Minister expect that the MoU will be completed by the end of March, and does he expect the EU to have made any further equivalence assessments by that time?
I am not surprised that the EU is unwilling to grant equivalence decisions in many areas, because we have rightly made it clear that we intend to diverge from the EU model. I would encourage the Government to be bold and to develop a plan to move in an orderly manner to a completely different regulatory system, based on principles rather than prescriptive statutory regulations.
I was privileged to serve on the Joint Committee on Financial Services and Markets, chaired by the noble Lord, Lord Burns, in 1999. We had much discussion on whether the FSA should have a competitiveness objective. It was ultimately decided that the need to minimise adverse effects on competition should be supported merely by a principle, listed fifth out of five. The PRA today has a secondary competition objective, which is subordinate to its two primary objectives—to promote the safety and soundness of the firms it regulates, and to protect holders of insurance policies.
The FCA has been charged, since 2015, as the third of three operational objectives, with the promotion of effective competition in the interests of consumers. Does my noble friend think that the promotion of competitiveness of financial markets is too low down the priority list? Ultimately, as Adam Smith argued, the invisible hand of competition, and the eradication of anti-competitive behaviour, will surely accord with consumers’ best interests.
The Treasury’s phase 2 consultation paper on the future regulatory framework review suggests that the Government are responding positively to powerful evidence from the coalface, but I question any acceptance of the argument that an excessive concern for competitiveness contributed to the financial crisis. I believe that both regulators should have a clear, unqualified objective to promote the international competitiveness of financial markets. This should be an important part of the Government’s agenda for global Britain. The Minister told your Lordships that the Bill has three objectives, but none of them is competitiveness. Does he not agree that the Bill’s second objective, which is described as
“openness between the UK and international markets”,
should be “the competitiveness of the UK’s international markets”? My noble friend Lord Hill of Oareford’s review of the Stock Exchange’s listing rules should also help in this regard.
Clause 36 is especially welcome in handing the damaging PRIIPs regulation and the troublesome KIDs to the regulators. They should also deal with the corresponding parts of MiFID II. I greatly welcome the direction of travel of the future regulatory framework. It is, however, necessary to make arrangements for the proper accountability to Parliament of the regulators before they start to exercise their new powers. Can the Minister tell the House how the Government intend that that should be done? I look forward to other noble Lords’ contributions and to my noble friend’s reply.
My Lords, I join other noble Lords in congratulating both the noble Lord, Lord Hammond, and the noble Baroness, Lady Shafik, on their maiden speeches. The noble Lord, Lord Hammond, showed the insight and intelligence that has characterised his approach to the challenges of the past few years. I particularly welcome the noble Baroness, Lady Shafik, to our House and fondly remember working with her when she was Permanent Secretary at DfID and deputy managing director of IMF and I was chair of the International Development Committee. I look forward to hearing more from her in the future. I am sure her contributions will always be well received.
There is no doubt that as a member of the EU the UK provided the leadership in financial services regulation because of the leading role of the City of London, which was the main capital and euro exchange market for the EU and beyond. But how UK financial services will fare from now is debated. It is argued, I suggest with justification, that the concentration of expertise, innovation and flexibility that characterises UK financial services will ensure that it continues to play a leading role. However, it will be challenging, for how will it maintain its pre-eminence if EU business ebbs away? That means servicing the EU financial services market from the UK and enabling firms and individuals located outside the UK to access its services through the UK.
Scale and expertise have been key factors in the UK’s pre-eminence but, as many people have observed, other centres will seek to pick up business from London, and the scale of New York may enable it to consolidate top spot. I have no doubt that the larger players in the sector will look after themselves, and that will not necessarily be to the benefit of UK plc. It has been said that the feared exit of jobs has not happened on any scale—to which the answer has to be, “Yet”. Without equivalence in key sectors, businesses and jobs will migrate—not that thousands of UK-based personnel will necessarily leave, but jobs that would have been created here will be created in other EU centres, such as Dublin, Amsterdam, Frankfurt, Paris and Malta. It will take time and the key question is, during that time, how will the UK develop to maintain its world-leading role and will the Bill help or hinder that process?
Having served in former times on the House of Commons Treasury Select Committee, and until recently on the House’s Financial Services Sub-Committee, I am well aware of the importance of effective financial regulation and scrutiny. The light-touch approach of the Labour Government contributed directly to the financial crash of 2008 and the blurred separation, or lack of it, between retail and investment banking brought the economy to its knees and threatened the savings of millions. Let us hope that the Bill does not open the door to too light a touch or to cavalier regulation to promote competition and attract business.
Financial regulation is a matter of balance. If it is too tight, it may stifle innovation, but if it is too loose, it may lead to financial disaster and reputational destruction. In the EU, we not only had the benefit of the scrutiny committee of the UK Parliament, but the substantial resources of the European Parliament, in which British MPs played a key role, not least my noble friend Lady Bowles of Berkhamsted. So what assurance can the Minister give that under this Bill regulation will be transparent and subject to effective scrutiny? Will the Government support the creation of a dedicated financial services committee with the resources to staff it effectively? If they do not, any financial failings in future will lie squarely at the Government’s door.
Speaking as I do on Scottish affairs for the Liberal Democrats, I remind the House of the importance of the financial services sector to the economy in Scotland. It is valued at £13 billion—or 9.4% of Scotland’s gross value added—employing between 150,000 and 160,000 people in more than 2,000 businesses. Particularly, it accounts for 24% of UK jobs in life assurance and 13% of all UK banking jobs. While Edinburgh has the greatest concentration, Glasgow, Aberdeen and Perth also record substantial employment in this sector.
Scottish Financial Enterprise, which represents the sector, is bullish about the future, claiming that Scotland is a sought-after location for delivering financial services. Without Brexit, there would certainly seem no reason why the sector should not continue to grow, as much of it delivers cost effectively and reputationally to the domestic market. However, Betsy Williamson, the chief executive specialist recruiter for the sector’s Core-Asset Consulting, says recruitment to the sector has dropped and that key jobs are being relocated or created outside of the UK. Aberdeen Standard has opened an office in Dublin and transferred £17 billion of assets there, and no doubt others are considering or doing the same. Today’s FT shows how many goods-based businesses are struggling with red tape and either deciding to abandon exporting to the EU as uneconomic or planning to transfer some of their activities to the EU.
Financial services are evaluating what is going to happen to them. Some have already moved, and others will. If we get this wrong, the trickle could become a flood. So even if you were bullish about the UK’s prospects, we are going to have to run harder to replace the revenue and jobs that are leaving and then try to grow new opportunities. Will there be enough scope for new businesses to replace these jobs and then add net growth? Will this Bill help or hinder? Will our regulation be lighter or tighter than the EU? Either way, will it be transparent enough and subject to adequate scrutiny to maintain resilience and confidence in the system? A lot is riding on this Bill. When people say it is technical, they mean that most people do not understand it, and that is exactly when things can go wrong.
My Lords, first I congratulate my noble friend Lord Hammond of Runnymede on his brilliant maiden speech. I look forward very much to his future contributions to our debates. I am delighted that he has joined us and can bring us his tremendous expertise as a brilliant addition to your Lordships’ House—as indeed is the noble Baroness, Lady Shafik. I would also like to welcome her, particularly as a colleague from the London School of Economics, where I am currently visiting professor in practice and emeritus governor. We have been privileged to hear two such excellent maiden speeches this afternoon.
Like so many others, I warmly welcome the trade and co-operation agreement reached for goods a few weeks ago as we left the transition period. But this Bill is of significant importance for our economy, as no deal was agreed for financial services—which accounts for such a significant part of our economy. I appreciate the Government’s stated intention to secure a memorandum of understanding on financial services with the EU by, I believe, March 2021, and I ask my noble friend how this is progressing. Have any decisions been reached about areas in which it will be considered appropriate to retain regulatory alignment? What negotiations are ongoing with stakeholders in connection with this? I also believe that the Treasury has recently launched a review of Solvency II, so I ask my noble friend when this review and the wider review of financial services will publish findings and conclusions.
I am particularly interested in the potential for reforms of Solvency II rules, which could pose an attractive opportunity for UK firms which provide long-term savings, investment products and insurances to free them from the straitjacket imposed by Solvency II. It was always rather less appropriate for UK firms than for those on the continent, which has a much more bond-oriented traditional financial culture, rather than the UK approach, which has always more readily embraced and understood the benefits of equity investment, early stage in venture capital firms, and other diversified asset classes with higher expected return potential, and can have greater impact on supporting or boosting economic growth.
Freeing these financial firms to invest more in green assets, infrastructure and low-carbon housing projects will help, as we are aiming to move towards a net-zero economy. I support the words of the noble Baroness, Lady Cousins, and the noble Lord, Lord Reid, that financial services regulations and risk assessments should take account of environmental risks and means of mitigation.
Clearly, the Treasury would like to move towards a more principles-based approach from a rules-based approach. But, as other noble Lords have said, this opens many new challenges and risks. Could my noble friend, in support of the words of my noble friend Lord Sharpe, say what analysis has been done to assess whether our regulators are equipped to cope with the significant transfer of power this Bill’s measures would involve?
My noble friend, in his excellent introduction to this Bill, stated that the Government believe that regulators have the technical expertise and market understanding necessary to exercise the new powers and will be guided by the FSMA financial objectives. The noble Baroness, Lady Bowles, explained the serious shortcomings of the FSMA, and I share her concerns.
In addition, it has long seemed to me that the FCA has either insufficient powers or insufficient capacity to protect consumers against poor practice and products or services that have too often proved damaging to customers, who find themselves without protection and, in certain cases, without recourse to compensation. I urge the Government, for the future of financial services and consumer confidence in this industry, to require greater emphasis on proactive regulation, which anticipates problems, rather than try to clear up failures after the event.
Could my noble friend explain to the House whether he believes regulators will have enhanced accountability to Parliament, as called for by the noble Lord, Lord Sharkey, the noble Baroness, Lady Hayman, and others? To what extent does he believe they will have greater scrutiny to help legislators to assess whether financial services operate as safely as possible?
Of course, the aims of supporting financial providers, financial stability or firm competitiveness are important, as set out in this Bill. However, I have particular concerns about consumer protection, which is so directly important to ordinary individuals and families across the population. I echo the words of the noble Baroness, Lady Coussins, that we should take the opportunity to help those stuck with unmanageable debt, particularly in light of the Covid pandemic. I support the debt respite scheme rollout and continuation, as well as calls for this Bill to include measures that will impose far more effective controls on high-cost credit promotions. I was interested in the comments of the noble Lord, Lord Stevenson, about bills of sale. I also support the aims of the help to save initiative.
Finally, I add my voice to those calling for much greater emphasis on green issues in financial services regulation and for proper parliamentary scrutiny of this critical issue to protect our planet and mitigate the impacts of climate change.
My Lords, I congratulate my noble friend Lord Hammond of Runnymede and the noble Baroness, Lady Shafik, on their excellent maiden speeches. I look forward to their future contributions in your Lordships’ House.
For the last nine years, I have largely sat on the sidelines on financial services legislation, as I was on the board of a major bank. Now liberated from that, I am enjoying putting my financial services legislation anorak back on. I remind the House of my financial interests, as declared in the register.
The Government have described this Bill as a portfolio Bill, which is a fancy name for what is not much more than a motley collection of topics that have little in common apart from fitting under a financial services umbrella. This Bill certainly gives us no strategic insights into the future of financial services. That said, I broadly welcome this Bill, as it deals with a number of items in a sensible, pragmatic way.
Financial services legislation is very complex. Since FiSMA was enacted over 20 years ago, there have been numerous revisions, some of which, such as the Financial Services Act 2012, were significant. Huge amounts of EU law have been imported and we can expect more changes as we embark upon our post-Brexit life. We are getting close to consolidation being essential if our financial services legislation is to be accessible. Can the Minister say whether the Government accept the need for consolidation?
My principal reservation about this Bill concerns the considerable new rule-making powers that are being conferred on the PRA and the FCA, and I agree with much of what other noble Lords have already said on this. I find it a bit odd that the Government have chosen to go down this route ahead of the outcome of the consultation on the future regulatory framework review, which is still open. This looks like another example of the Treasury mind being closed to challenge through consultation. We are somewhat used to this, but familiarity does not make it acceptable.
More substantively, the Government have made a good case for the rules to be set by the people with the best technical knowledge, but they have not, I am afraid, made a case for the quality or quantity of accountability alongside that. In particular, I am unpersuaded that adding a list of “have regards” against which the PRA or FCA must report when they consult on rules amounts to a significant addition to the accountability framework. The House will know that I have been steadfast in my commitment to our exit from the EU, but it was never my understanding that taking back control of our laws would mean less parliamentary control and oversight than before. The Bill proposes to hand significant rule-making powers to the PRA and the FCA without any noticeable Parliamentary oversight. Ad hoc scrutiny through the existing committees in both Houses is no substitute for regular and structured parliamentary involvement. I hope that the Government will engage with those of us who want to find a practical solution to this accountability deficit.
Before leaving this topic, I would say that we need to look carefully at the new “have regards” when we get to Committee. I share the exciting vision of the future prospects for financial services that my right honourable friend the Chancellor of the Exchequer outlined in his November statement, but I do not see that fully reflected in the Bill. Like many noble Lords who have spoken today, I believe that international competitiveness needs to be firmly embedded into our regulatory arrangements and the statutes that govern that. I particularly welcome my noble friend Lord Hammond’s enthusiasm for this, which goes a long way, I have to say, towards offsetting his lack of enthusiasm for Brexit in his former life.
Finally, on tough legacy contracts that use Libor, I completely support the powers in Clauses 14 and 15 that allow the FCA to make arrangements for legacy contracts. It is good that the Government have accepted the very real practical issues involved in dealing with a relatively small number of debt instruments. There are, however, two outstanding issues relating to continuity of contract and safe harbour. I know the Treasury is well aware of these issues. I will save arguing the detail of them until we get to Committee, but I expect to table amendments aimed at giving the UK equivalent protections to those being drafted for the US market.
Financial services are a major part of our economy and we must allow this sector to flourish now that we are unshackled from the EU. Strong regulation will remain essential but we need all players, regulators and industry alike, to build the UK as the undisputed leading global financial centre. I hope that the House will remember that as we scrutinise the Bill through its remaining stages.
My Lords, I congratulate the noble Lord, Lord Hammond, and the noble Baroness, Lady Shafik, on two of the most enjoyable maiden speeches that I have heard. I look forward to their future contributions in the House.
My contribution to today’s debate will very much reflect the views of the noble Baroness, Lady Hayman, my noble friend Lord Oates and a couple of other noble Lords who have mentioned climate change. Just yesterday we heard of an ingenious global survey carried out by a UN agency, the UNDP, to gauge opinion from around the world on climate change. The findings were really quite fascinating. The first thing to note is that by placing polls in mobile gaming networks the UNDP was able to get over 500,000 youngsters under 18 to take part. They are the ones who will have to live with the consequences of our action—or indeed inaction—today, and therefore their voices and opinions must be heard, especially by us here in the UK, who, at this crucial juncture of make-or-break climate policy, hold the leadership of the biggest opportunity, in COP 26, to steer the global tanker towards a clearer, greener horizon.
In this biggest-ever climate poll, almost two-thirds of the over 1.2 million people surveyed worldwide said that climate change is a global emergency and urged our leaders to greater action to address the crisis in all sectors. For instance, in eight of the 10 surveyed countries with the highest emissions from the power sector, the majority backed more renewable energy; in four of the five countries with the highest emissions from land use change, the majority supported conserving forests and land; and nine out of 10 of the countries with the most urbanised populations backed more use of clean electric cars and buses and bicycles.
Britain, as it reshapes its investment and legislative landscape post Brexit, in the same year in which it hosts the seminal COP 26 climate summit, must embrace its mantle of climate leadership. Therefore every Act of Parliament dated 2021 must acknowledge somewhere within its makeup that we recognise the importance of our actions today for the generations that will follow us. Environmental, social and governance—ESG— considerations must be pervasive through all Bills, especially the one that underpins our economic and financial well-being and stability and which will define the big future investment decisions that will affect us all for decades to come.
The sad fact is that, despite an ever-increasing number of commitments from banks and other financial sector actors to align their activities with the Paris agreement, recent research has found that, for example, lending to fossil-fuel-linked investments by 35 of the biggest global banks continues to rise: $736 billion in 2019, up from $700 billion the year before. The movement is in the wrong direction.
Part of the reason why financial institutions are not moving fast enough to help to prevent catastrophic climate change is that regulators and policy-making departments do not sufficiently consider climate and environmental impacts. For example, in the Treasury’s impact assessment for the Bill before us today, greenhouse gas impacts are listed as “not applicable” even though significant changes to how investment funds behave, the centrepiece of the Bill, are bound to have such impacts. That is unacceptable.
I will be lending my support to amendments working towards ensuring that regulations and financial sector policy-makers take climate change, our natural capital and the UK’s international commitments on these issues into account when setting regulations and making policy. Of course a stronger indication of government policy intent towards meeting their net-zero target would be the imposition of a green capital requirement, a move that I would welcome, as I would a requirement for the Government to review the impact of the Bill on meeting the Paris agreement commitments. I look forward to seeing those amendments.
My Lords, this is a lengthy Bill, and although in some respects it is politically uncontroversial, there are many points of technical detail that the House will want to scrutinise closely. I can think of no better people to assist in our deliberations on the Bill than the two maiden speakers. My noble friend Lord Hammond of Runnymede made a superb speech. I hope that, having briefly sipped from the glass of independence in 2019 after nine years in the Cabinet, he will not lose the habit of free thinking, even though he has retaken the Conservative Party Whip. The noble Baroness, Lady Shafik, also made her maiden speech today. Her contribution to the study and practice of economics in a whole host of financial and academic institutions is inspiring, so I look forward to learning a good deal from her, as well as from my noble friend, in the future.
I am intervening in this debate to highlight a matter that is not in the Bill, but it ought to be. It is a subject that the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Rooker, have touched on, and I gather that my noble friend Lord Hodgson of Astley Abbots may also speak about; namely, the need to expand the criminal law concept of failure to prevent crime, not least corporate financial crime. I have been thinking about the law on financial crime since the 2008 financial crash. I was the shadow Attorney-General for two years before the coalition Government came into office, and then the Solicitor-General in government. I developed the deferred prosecution agreement, or DPA regime. It was enacted through the Crime and Courts Act 2013. It is a regime that pragmatically and justly deals with corporate financial crime under the supervision of the courts. I will not go into the detail of the system now but, if I may say so, it works. I declare an interest not only as the Minister who introduced the system into this jurisdiction, but also as a practising barrister who, now long out of Government, appears in DPA cases.
DPAs are not, however, the end of the story. Financial crime is often thought of as the crime that does no real harm: no one gets killed, no bones are broken and there is no blood on the carpet. Equally, corporate offending is sometimes hard to visualise. But corporate crime and financial crime both cause great harm to people, to communities, to the economy and to our national reputation as a safe place to do business. Both are all too common and need to be investigated and dealt with effectively by the public authorities here and abroad. Financial crime is often, by the very nature of modern financial services, both international in its scope and committed electronically through corporate structures, albeit with a human mind and will behind it.
I hope, with other noble Lords, to expand on this theme in Committee, but for present purposes I shall say only this: Section 7 of the Bribery Act 2010 creates a corporate offence of failing to prevent bribery. It has been deployed successfully on several occasions and provides a model which can and should be replicated in other areas of financial crime. Furthermore, the Criminal Finances Act 2017 introduced corporate criminal offences of failure to prevent criminal facilitation of tax evasion. I suggest we should by this Bill expand the failure to prevent regime to cover at least some of the 50 or so financial or economic crimes that are available to be dealt with by DPAs listed in Schedule 17 to the Crime and Courts Act 2013.
Finally, we must reform the law relating to corporate criminal liability. The noble Lord, Lord Hendy, is right and I profoundly agree with him. I have been writing and speaking about the need to do this for years. The concept of the directing mind and will as the basis for corporate criminal liability, which the Americans abandoned before the First World War, worked for the small family businesses of the 19th century, but is now long outdated. Today, companies can operate in many different countries with national, regional and global boards and with hundreds of thousands of employees engaging in multi-jurisdictional trade in goods and services. Locating the directing mind and will of these vast conglomerates is difficult, if not impossible, and the current law does not reflect the reality of modern business life. It is an affront to common sense and justice. As in the United States, we need to introduce vicarious liability into our corporate criminal law.
My Lords, first, I apologise for being slightly late when the noble Lord had started presenting the Bill. It is my good luck to be able to congratulate the noble Lord, Lord Hammond. I briefly knew him when he was a Foreign Office Minister, and he gave me a very nice breakfast the day we unveiled the statue of Mahatma Gandhi in Parliament Square. I do remember that. Of course, I also congratulate the noble Baroness, Lady Shafik, who is director of the London School of Economics. As I am an emeritus professor, she is my boss, so I welcome her.
I was also, as the noble Baroness, Lady Falkner of Margravine, said, a member of the EU Financial Affairs Sub-Committee, and I have been through some of this in an earlier phase. I remember saying to some City witnesses that the City should not think it is popular in the country. When push comes to shove, the Government will go for fishermen, not the City. I said fishermen, but there are others to which that would apply. And I think the Government did go for the fishermen, not the City, because the City is not popular in the country.
We may say proud things about the City, but what has struck me—I state this observation—is that in the Bill, we have missed the chance, as many other noble Lords have said, to tighten up regulatory structures in the City. I was alarmed when I saw how much power the FCA is going to have. The FCA is not a very efficient regulatory institution.
Many noble Lords have mentioned the LCF case, and I think what had happened at LCF was known, and it was a scandal because lots of ordinary people were deprived by that scheme. I am sorry to say this, but even when it was known that this had happened, the head of the FCA was promoted. I know he was printing money for the Government, but I still think it does not look good, especially if we are going to establish a global reputation. If we are going to be competitive in the world, we must have a much better reputation for our regulatory institutions than we have.
I have been in your Lordships’ House for a long time. We started with the Baring Brothers, the BCCI and all sorts of other scandals, and we do slip up. Now we are on our own and we have to compete globally, we will have to really tighten up and not be smug about it. I hope this Bill gets amended or something else happens to get a better regulatory structure, better rules for the FCA, better accountability to Parliament and proper punishment for people failing on the job.
My Lords, I am afraid the wonders of modern technology are such that I am confined to a landline today, but that has not prevented me hearing two distinguished maiden speeches from my noble friend Lord Hammond of Runnymede and the noble Baroness, Lady Shafik, and I congratulate both of them. I also add my congratulations to the Minister on his explanation that this Bill was the first step in creating a regulatory framework designed to reinforce the UK’s position as a leading world financial centre and enable the UK to take advantage of our post-Brexit freedom of action.
In addition, as the Association of British Insurers pointed out in its briefing on the Bill, it also provides a good foundation for positive future co-operation with our European neighbours. As such, it has my enthusiastic support, but as the noble Lord, Lord Reid of Cardowan, pointed out in his speech, it is a Christmas tree Bill, and there are, inevitably, some decorations about which I am less enthusiastic, and there is at least one decoration that seems to be missing from the tree altogether.
Before I go any further, I draw the House’s attention to my entry in the register of interests, in particular that I chair a company that is regulated by the FCA. My foremost point concerns the culture we are trying to create with this Bill. What do I mean by culture? When the regulators, the FCA and others come to see you in the firm, they are very interested in what the culture of the firm is and what the prevailing attitudes of the senior management are; for example, the balance being struck between innovation and conservatism, the level of acceptance of financial and operational risk, the treatment of staff and so on. Up to now, a large measure of this culture has been dictated by the institutions of the EU. This, of course, will no longer be the case. I ask my noble friend: who is going to be responsible for establishing this future culture? How do the Government plan to assess the culture? How, if at all, would they plan to achieve changes to that culture? Last, but by no means least, as many other noble Lords have remarked, what role will Parliament have in that process? At first glance, there seems to be a considerable democratic deficit, as many noble Lords have said.
A good part of the Bill is devoted to improvements in the tightening up of the regulatory regime. Having participated in the proceedings on the Sanctions and Anti-Money Laundering Act 2018, I understand and support such changes, particularly where they reflect changes in business practice and business behaviour. However, all these measures come with a cost. That cost is borne not by the Government or by financial institutions but by the consumers, clients and investors. There is a need, as we introduce new regulations to deal with new circumstances, to step back and see what old regulations can be amended, or be dispensed with completely as being no longer effective.
As we sail into this brave new world, an important issue will be the extent to which the Government are able to obtain reciprocity or equivalence from the EU. It will be a matter of great interest to Parliament, this House, and indeed the country as a whole. I chair the Secondary Legislation Scrutiny Committee. When the committee considered the various interim regulations for the financial services sector, it was far from clear what, if any, reciprocity had been achieved. I was asked by the committee to write to the Minister John Glen about this, and I am afraid that his response, dated 7 January, which I invite my noble friend to read, was hardly a model of clarity. The Government declined to accept new Clause 8 in the other place, which required the Government to report on equivalence. If this is still the Government’s considered position, they will need to do better than Mr Glen’s letter.
I turn finally to a decoration that I think is missing from the tree altogether. I served as a member of the post-legislative scrutiny committee on the Bribery Act. Our investigation revealed a number of concerns. The first was the difference in treatment of smaller companies as opposed to larger companies as a consequence of the application of the directing mind principle—this was referred to by the noble Lord, Lord Hendy, and my noble and learned friend Lord Garnier. The second concern was the often inordinate time taken over investigations, and, finally, the strange position that the failure to prevent offences applied only to bribery and tax cases and not to corporate crime generally.
I am aware that, in the other place, the Government declined to accept a widening amendment, but I think that the noble Lord, Lord Rooker, the noble Baroness, Lady Bowles, my noble and learned friend Lord Garnier and I will wish to explore this anomaly and return to this question in Committee.
To conclude, this is an exciting time for this country and for our financial services sector. Getting the right foundations in place quickly will be of critical importance, which is why this Bill has my support in principle.
My Lords, I join the House in universally welcoming our two outstanding maiden speakers. Given that the noble Lord, Lord Hammond of Runnymede, discovered a long-hidden rebellious streak in the other place, and that his title has links to the Magna Carta, I hope that we will be seeing even more rebellion on the Benches opposite with his arrival. I also welcome the noble Baroness, Lady Shafik, who is clearly a powerful new voice on our Cross Benches. I was very glad to hear her mention green finance. I hope we will be hearing a lot more from her on that, as we just powerfully heard about those issues from the noble Baroness, Lady Sheehan. I will, as you might expect, be backing many of the amendments to which the noble Baroness, Lady Sheehan, referred.
However, on the Bill, I must begin by thanking Macmillan Cancer Support for its extremely useful briefing. I shall take its conclusions and extend them far more broadly than it ventured to do. Macmillan calls for an amendment to the Bill requiring organisations to have a statutory duty of care for customers. The charity suggests that that is the best way to ensure that financial service providers take a pre-emptive approach to ensure that they act in the best interests of their customers.
As you might expect, Macmillan focuses on the financial difficulties of people with cancer but also notes that the Financial Conduct Authority concludes that one in two people will become financially vulnerable at some point in their lives. I suggest that, in a complex and fast-changing world, overloaded with pressures on time and attention, with so many people stressed by the struggle for mere survival and the fear of rampant insecurity, the sensible approach would be for everyone to be treated as vulnerable and to acknowledge that our whole society is acutely vulnerable. If we created a system that works for the most vulnerable, it would be one that will work securely, resiliently and safely for everyone.
We know that our current system is not working for many at an individual level. Just look at the practical and topical example of the disastrous performance of the insurance sector when it came to business interruption insurance for small businesses in relation to Covid-19. The financial sector is utterly failing at a structural level to meet the collective needs of our whole society, acutely vulnerable as the Covid-19 pandemic has shown us to be. A system that works best for everyone would involve a financial sector that it a utility: a provision of essential services for the real economy—the economy that feeds us, builds our shelter, clothes us and provides the other essentials of life.
Instead, following decades of financialisation of everything from the care sector to the so-called water industry, we have a financial sector as parasite, sucking funds out of the real economy—all too often to tax havens—and loading essential provisions and services with unsustainable debt. If noble Lords think that I am being radical here, I invite them to read the extensive coverage in the Financial Times of the impact of financial engineering on the water companies.
We are more than a dozen years on from the 2008 financial crash, when the cash machines nearly stopped working. In the age of Covid-19, we are surely more aware now of the need for resilience and stability in this age of shocks. Yet I note that an Oxford University Faculty of Law conference held in 2018 on financial regulation concluded:
“We are safer, but not as safe as we should and could be.”
And that was just the thinking in the financial sector’s own terms.
I listened carefully to the Minister’s typically detailed and careful introduction and heard quite a bit about limiting risk. However, I did not hear the words “climate” or “nature” once. But we know that we need a financial sector that does not continue to fund the trashing of the planet and societies, supply funds to fossil fuel operations that are destroying the planet, pour money into the destruction of the rainforest, stuff the oceans with plastic or spread poverty and inequality through funding sweatshops and outright slave labour.
On 25 January, the US Federal Reserve and the European Central Bank simultaneously said that they would make climate considerations a central part of finance, the importance of which the noble Baroness, Lady Hayman, highlighted. It appears that we are not world-leading but world-trailing, yet again.
We are, of course, world-leading in dirty money, as explained earlier in considerable forensic detail by the noble Lord, Sikka. The issue was also mentioned by a number of Members of the House in an earlier question session on our relationship with Russia. We are a major global centre of corruption. The City is an Augean stables and the Bill is clearly sparing in its distribution of shovels. I give the House notice that I intend to support a proposed amendment to create a new corporate criminal offence for companies or bodies regulated by the FCA of failing to prevent economic crime. I also look forward to working with the noble Lord, Lord Hendy, on the issues of liability that he raised.
In summary, we obviously need a Financial Services Act, but the Bill is nothing like what we need. We are seeing increasing numbers of communities around the world understand that the model of economy, society and finance needed is one that allows us to live within the doughnut, as the saying goes—in the essential space that respects planetary limits while meeting human needs, thereby ensuring that everyone is treated with respect and given dignity, as defined by the economist Kate Raworth in her book Doughnut Economics. We need a Financial Services Act that sets out how our financial sector can meet the need to do that—a very differently structured sector that takes care of all our needs, instead of risking our security and future. We are in an emergency state in 2021. Your Lordships’ House has a responsibility to act to transform our planet-trashing, poverty-creating financial sector, as the other place has very clearly failed to do.
My Lords, I refer your Lordships to my registered interests and extend a very warm welcome to my noble friend Lord Hammond of Runnymede. I have sat through many of his speeches, including the famous one in which he described why “Spreadsheet Phil” is inappropriate, but this was exemplary. His maiden speech and that of the noble Baroness, Lady Shafik, were excellent.
The final EU withdrawal agreement was a success, but, as has been discussed in this House and elsewhere, it was light on financial services. Mark Carney, the former Governor of the Bank of England, said this time last year that the City of London must not be a “rule-taker” after Brexit, effectively outsourcing the regulation and supervision of our global financial centre. Therefore, while adopting the EU rulebook in the first instance has delivered much-needed continuity and stability, we must now think about what comes next. That must surely be an approach that sees the UK continue to set global standards in prudential regulation and consumer protection, without losing sight of our broader objectives of innovation and competition.
There are three initiatives worthy of mention that can reinforce the initial steps taken in the Bill. The first is the future regulatory framework review. The Government’s response to this will give us the clearest indication yet of the vision for financial services post Brexit. I note the stress placed on equivalence of outcome. This should give us more room for interpretation, and indeed the opportunity to revisit many areas of law which were effectively gold-plated into UK law when we were EU members.
The second is the productive finance review. This concerns the means to unlock more capital to increase productive capacity in the real economy. I mention it here because it should also look at the impact of regulation on institutional capital flows into key areas such as infrastructure and technology. EU directives IORP and Solvency II limit such capital flows with prohibitive capital charges and should be looked at immediately. There is £6 trillion in UK private pensions alone that could be unlocked for more productive purposes.
The third is the Kalifa review into UK fintech. The Chancellor and my noble friend Lord Gadhia recently spoke of the need to see a second big bang in the City. Fintech is a key part of that. I hope the review proposes reforms as transformational as the first big bang was for the City.
Turning to the specifics of the Bill, there are commendable measures that will advance the competitiveness of financial services within our current regulatory envelope. Asset management remains our most globally significant subsector. Therefore, the measures to update the regime for third-country investment firms is to be commended. Similarly, introducing a more proportionate prudential approach to regulating investment firms will lower their costs of doing business, and better reflect underlying risk. On the other side of the coin, there are important measures on supervision and consumer protection. In particular, I commend the review that former FCA director Chris Woolard is leading on “buy now, pay later” lenders, where there is mounting evidence of bad debt, mis-selling and very bad practice. However, on FCA enforcement, there is a balance to be struck, and this Bill is, I am afraid, another opportunity missed to strike that balance. I am referring to the FSCS levy, FCA enforcement and the endless ex-post powers of the Financial Ombudsman Service.
The FSCS levy is due to soar by a third, to over £1 billion, with one of the reasons given being the cost of compensating SIPP consumers. However, there is mounting evidence that the FOS has been overreaching itself in its decisions against those very same SIPP providers. For example, many SIPP providers provide execution-only services on behalf of a client—the clue in the phrase “self-invested”—and yet claims of mis-selling are upheld, even where no financial advice is proffered and no advisory permissions are even held.
Frankly, this has the appearance of a racket. Blessed by the FCA, the FOS adjudicates, the FSCS is jacked up accordingly, the FS industry is forced to pay, driving some literally to bankruptcy, and the money flows seamlessly back to the FCA. It is a system with no accountability before the law, and no right of appeal. In short, it is unjust, and at a time when the broader powers of the FCA are being debated. Will the Minister consent to revisiting this important issue? It is a shame that the Bill does not seek to rebalance the relationship between the FCA and FOS and bring some common sense into how FOS operates.
Members of this House might recall that I have been banging on about FOS for some time, and I have had the pleasure of meeting the City Minister to discuss it. Well, something fell into my lap this summer. I received an unsolicited credit card from a company called NewDay. I had not asked for a credit card. A day or so later, a neighbour spotted someone rummaging in my outdoor letter box. It was a scam. Someone had ordered a card in my name and was seeking to retrieve the PIN subsequently sent in the post. A simple remedy would be to require credit card recipients to confirm that they had ordered one before it is sent to them. I suggested that to the company; it refused, so I complained to the FOS and it took six months for the FOS to tell me it could not fix the issue as the FCA handbook, which, as we know, governs FOS, states that as I was not yet a customer, I was not an eligible complainant under the FCA dispute resolution—rule 2.7.2, if you are interested—so it would take it no further and, as a result, others will now get scammed in this way.
That shows a dramatic shortage of common sense. Does the Minister agree that it is not clear that FOS is fit for purpose, and that the Bill provides us with an opportunity to ensure that FOS and the FCA do the job Parliament had envisaged, or to let us change the way FOS and the FCA operate?
My Lords, I take this opportunity to congratulate the two new Members of your Lordships’ House, the noble Lord, Lord Hammond of Runnymede, and the noble Baroness, Lady Shafik, on their excellent and thought-provoking maiden speeches.
Undoubtedly, the financial services sector is important to the City of London and to the UK. It is very much the engine that drives our economy. In the post-Brexit situation—I hasten to add that I did not favour or want Brexit—we need economic and financial stability and a strong means of financial regulation. That must be accompanied by consumer protection. I note that the Bill contains a new regulatory regime for investment firms, and thus provides the Financial Conduct Authority with additional powers to set rules for such firms, while also containing measures to make the FCA much more accountable.
One area I want to concentrate on—other noble Lords have referred to it this evening—is economic crime. We have all heard stories about individuals who have been fleeced by investment companies that were not properly registered, and therefore could not get the money they invested returned to them when problems occurred. Will the Minister and his colleagues bring forward amendments containing retrospective powers to help such individuals and ensure that such effective financial scams, otherwise known as economic crime, cannot happen in the future? I shall also refer to two other issues about protecting individuals, in relation to credit services and our environment.
I have been advised about some individuals in the UK who have invested money—pension funds—in Dolphin Trust, now known as the German Property Group. This organisation had its UK office in Hanover. It was an unregulated property investment scheme. Apparently, this company was supposed to use investors’ money to revamp derelict buildings in Germany into apartment blocks. Then, after several years, investors would receive their money back with a hefty interest rate. They were told to invest in this company and that it was safe to do so because their money was aligned to a certain property so they would not lose out. I have talked to one family who did this and they have lost everything. There are over 1,300 individuals, throughout the UK, owed in excess of £165 million. Problems emerged when they found out that the properties did not exist, and the company was not even registered.
Will the Minister indicate whether the new regulatory regime for investment firms will prevent such actions happening? I doubt that it will. Will the new legislation have retrospective powers to ensure that companies such as the German Property Group are held legally and financially accountable to their investors for the malfeasances that have occurred? What protections can be offered by the FCA under the new provisions in terms of capital levels, liquidity, risk management processes and governance arrangements?
Other areas addressed in the other place included the need to ensure that buy now, pay later credit services are brought into the scope of the Financial Conduct Authority to protect people from spending more than they can afford. Many people in this net take out further debt to repay the initial credit. What legislative consumer protection can be afforded to these individuals? Will the Minister bring forward amendments in your Lordships’ House to that effect?
I am of the firm belief that the Financial Conduct Authority should have regard to the UK’s target of reaching net zero greenhouse gas emissions by 2050, particularly in the year when the UK will chair COP 26. This would help to support the overarching goal of a green economy and financial sector. I note that the Minister in the other place stated that climate change is an issue to which the regulator should have regard. What, therefore, is the Government’s exact position and what is their timeframe for bringing forward legislative change in this regard? Will they do it now, through amendments? If not, I know that other noble Lords will do so, and I will support them.
My Lords, as well as adding my congratulations on the two excellent maiden speeches, it is customary to start by declaring my interests. Since I retired as chairman of Lloyds Banking Group at the beginning of the year, I am pleased to say that, for the first time in many years, I can address the House with no active interests other than as an ordinary shareholder. With that freedom, I welcome all the measures in the Bill, but I will comment on two that are particularly important.
First, it is essential to help provide more certainty on Libor contracts at this stage. In his opening remarks, my noble friend gave mortgages as an example. While I welcome the measures in the Bill, do the Government believe that the measures that enable the FCA to replace Libor in benchmark contracts are sufficient to apply to mortgages and commercial loans? Might my noble friend also consider some kind of safe harbour for banks if they suffer litigation from clients as a result of FCA instructions?
Secondly, I welcome the enabling legislation for the Statutory Debt Repayment Plan scheme, but note that, in developing the regulations later this year, it will be important to ensure that all the customer’s debts can be looked at holistically, and that the proposed plan is offered to customers only where it is the right and best solution for their particular needs.
More broadly, as the Minister made clear, many of the measures in the Bill are to establish UK-based regulations to replace those previously enacted through the European Union. I welcome the principle the Bill establishes that, unlike EU regulations, the UK should keep the primary legislation limited to the overall framework for regulation, with the Treasury providing necessary secondary legislation, with the regulators then given freedom to apply that in proportionate and flexible rules.
As the noble Lord, Lord Butler, pointed out in respect of MiFID, experience has shown that attempting to legislate in detail on the regulation of financial services can create unintended anomalies that the regulators are then powerless to address. It also inhibits their freedom to shape rules to reflect varied industry circumstances, or to adapt to market innovation, and those companies that seek to innovate. So, I also welcome the Government’s ongoing review and consultation on the future regulatory framework, which is looking at going much further in transferring responsibility for detailed rule-making back to the PRA and FCA.
While there will be debate on the initial measures covered in the Bill, the point I want to focus on, like other noble Lords, is what is missing from it on the effective governance of the regulators in exercising those increased powers. I recognise these are matters that have been subject to consultation, but they are nevertheless germane to many of the delegated powers in this current legislation. As I said, I believe it is right to give the PRA and FCA the responsibility and powers to make, adapt and apply regulations to promote the stability of our financial markets and protect the interests of consumers within the framework of laws passed by Parliament. Between them they have the expertise to do that and, as with the Bank of England, we should expect them to undertake their role with an objective independence—independent, that is, of short-term political pressures.
I welcome the fact that this Bill also introduces, for the first time, the obligation on the FCA and PRA to consider the international standing of the UK investment and credit institutions in making their rules. Like my noble friends Lord Hunt and Lord Bridges, I believe that, post Brexit, it should be part of their formal objectives to promote a healthy UK industry that can compete successfully on the global stage. To do that, there may also need to be a greater requirement for them to ensure that the two regulators have complementary rule-making and supervision without, at this stage, seeking to recreate the single FCA.
In delegating those powers to the FCA and PRA, Parliament needs to ensure that there is an effective way to scrutinise their work and hold them to account for their actions. I do not believe that the Treasury Select Committee, while it has an important and critical role, is the right or adequate forum to provide that detailed and apolitical oversight. By contrast, having served in the past on a Joint Committee on rewriting tax laws, I believe that Joint Committees of both Houses can bring greater experience and expertise to bear in a more considered and less political environment.
So, I join the noble Baroness, Lady Falkner, in proposing, as a complement to this Bill, that Parliament establishes a new purpose-built Joint Committee that I would call the financial services regulatory oversight committee. It would be supported by appropriate technical experts whose role would be to provide detailed scrutiny of new regulations—I stress not to give ex ante approval, but simply to review them after the event. The committee could also take evidence from those in the industry on the implementation of financial regulations and any concerns that raised. If necessary, the committee could then have the power to propose statutory instruments to Parliament where amendments were required.
The Bill may or may not be the right place to introduce provision for this kind of oversight. I recognise that the Government’s consultation has only just closed, but I would welcome any early thoughts my noble friend can give on how the Government see this oversight issue being addressed and what their timetable is for doing so. I look forward to the Minister’s response.
My Lords, I very much welcome this Bill. As the chair of the cross-industry Enforcement Law Review Group, I will concentrate very much on Clause 34, which I and many others welcome. I anticipate that there will be a number of amendments trying to get to the bottom of exactly how the Government see it operating, and I should be enormously grateful if the Minister could circulate to me the current draft of the regulations, so that we shall be talking to each other off the same hymn sheet, as it were, in Committee.
I very much encourage the Government to bring forward these regulations swiftly, and I encourage the Opposition to support the Government. There will be an obvious need for them as we come out of Covid, and I do not believe that, given the state of the debt advice industry, there is any quick perfectibility on offer. It would be far better to get something up and running, to review it pretty swiftly—perhaps after six months—and to produce a better version then and a better version a year or two after that. This is something that the industry will learn to work with, and we should aim at the start not for perfection but for something practical and effective.
I welcome the Bill and congratulate my noble friend on bringing it forward. I add my warm congratulations to my noble friend Lord Hammond of Runnymede. Being elected on the same day, I am glad to see another from the class of 1997 joining our Benches. I also give a very warm welcome to the noble Baroness, Lady Shafik, and I look forward to hearing both their contributions going forward.
I support all the objectives of this Bill, and I entirely endorse the contributions that the financial sector makes to the UK economy, not just in London but also Leeds and Edinburgh in particular. I will focus on some aspects in the current Bill that I would like to see strengthened as well as aspects that are not in it, which I hope to pursue in Committee.
I warmly welcome Clause 35 and the “Successor accounts for Help-to-Save savers”. Like the noble Baroness, Lady Bennett of Manor Castle, I have sympathy with the request and briefing from Macmillan, calling for support for cancer patients, who are a most vulnerable group in a particular time of need. When undergoing both diagnosis and subsequent treatment, they often enter a period where their financial circumstances are severely compromised. I believe that the FCA’s contention that the current principles are adequate needs to be qualified, and therefore I have some sympathy with the call for a statutory duty of care in this regard. I would very much welcome my noble friend’s response to that particular call.
I also hope that this Bill and its provisions will give the opportunity to review how the regulations, which came into force in 2012, on short selling are currently working. I believe that that is a particularly distasteful and immoral practice, and my noble friend may prefer to pursue this through international and global means. Therefore, I would be very interested to hear what discussions he and his colleagues at the Treasury have had within the context of the OECD and other international organisations. However, I believe that this would be a good opportunity to go back and revisit these regulations and see how they are operating. At worst, they can be very damaging to the economy and employment, leading to many people losing their businesses and livelihoods.
I turn to the question of green financing and the opportunity that this would give, in the context of the Bill, to benchmark all stocks against green credentials. For me, a particularly welcome recent move has been the ban on fracking in the United States.
I will quote the words of Mark Carney, who said when he launched his Green Horizon summit in November last year:
“Private finance will play a critical role in funding the initiatives and innovations of the private sector and helping companies realign their business models for net zero.”
I believe that the COP 26 climate change summit, which the UK is hosting in Glasgow in November, will be an ideal opportunity to ensure that the UK is at the forefront of green finance. I hope that, as the Bill before us today passes through its legislative stages, it will give us an opportunity to show that London, Edinburgh, Leeds and other financial centres in the UK are at the heart of green financing. I support the Bill and look forward to its passage through this House.
My Lords, I congratulate my noble friends Lord Hammond of Runnymede and Lady Shafik on their maiden speeches. Their choice of debate is especially appropriate, and the quality of their contributions demonstrates how much they will enrich your Lordships’ House. I look forward to their future active participation.
I turn to our main topic. I welcome this omnibus Financial Services Bill in the spirit in which it is intended: as an entrée to the main course that will follow once the Government have consulted on the future regulatory framework. We should therefore calibrate our expectations of the Bill accordingly and not attempt to boil the ocean. Instead we should keep our powder dry to tackle the more fundamental issue of the accountability framework between the Government, regulators and Parliament, with a potential role for an independent body, which I will come on to.
First, some personal context. I started my own career in financial services 30 years ago this year at a City merchant bank in the aftermath of the big bang. I have therefore seen my fair share of trials and tribulations over three decades. During this period the City—and financial services more broadly—has constantly reinvented itself, sometimes by choice and more often through necessity. So, if I bring a bias to this debate, it is as someone who has seen the financial services sector overcome its challenges to not just survive but thrive.
Apart perhaps from our life sciences sector, there are not many globally significant industries where the UK plays such a world-leading role. An effective regulatory framework is clearly one of the key ingredients to sustain this position. The financial crisis and now Brexit have forced us to re-evaluate the regulatory architecture in quick succession. The onshoring of powers from the EU has triggered an inevitable debate between those who would like to see the UK take full advantage of its new-found freedoms to simplify and reduce the burden of regulation and those who fear that we might embark on a race to the bottom, to the detriment of consumers and society. That debate is illusory. However much some of us might dream of radically streamlining regulation, we are simply not destined for a bonfire of rules. To quote Treasury Minister John Glen, speaking in the other place during its Second Reading debate,
“we have no intention of needlessly, ideologically or recklessly diverging from EU legislation. Instead, we will maintain existing regulations where they make sense for the financial services industry in this country.”—[Official Report, Commons, 9/11/20; col. 669.]
It is not surprising to hear that strong statement, since the UK has played an active role in shaping much of the EU legislation. It is therefore increasingly unbelievable for the EU to maintain that it is seeking assurances about our future intentions before making an equivalence decision. We should recognise that the equivalence process is being used as a political lever, not a technical determination. I therefore agree with Andrew Bailey’s sentiments, expressed in recent evidence to the Treasury Select Committee, that we should not hold our breath for a quick decision and should treat trade equivalence as a bonus if and when it comes.
We should also recognise that the EU is unusual in drawing up such detailed rules and incorporating them into legislation. This is not the norm around the world. Other jurisdictions rely more heavily on the expertise of independent regulators to translate legislative objectives into detailed rulebooks. Delegating responsibility for technical areas of financial regulation is necessary, but also brings important accountability and scrutiny issues.
This subject requires more than a six-minute speaking slot, so I shall make three brief points. First, we need to be strategic in the scope of powers we delegate and the risk of concentration—what Sir Paul Tucker, in his excellent and thoughtful book Unelected Power, calls an “over mighty citizen”. Another of his observations is the importance of having a clear objective that can be monitored. He warns against having three or four objectives in statute that are ranked equally and are vague, which is relevant to the new “have regard” clauses incorporated in the Bill. While I would hope we can manage primary and secondary objectives, we should consider this input from a respected former front-line practitioner.
Secondly, while we decide upon the new architecture, the show must go on and Parliament needs to have a role in the process. I suggest a relatively simple fix: the next set of remit letters from the Chancellor to the PRA and FCA should be published in draft form and offered for consultation and debate in both Houses, either in the Chamber or through Select Committees. It could also make sense to look at a Joint Committee of both Houses, drawing on the considerable expertise available across Parliament.
Thirdly, we need a more permanent body to help the Executive and Parliament scrutinise and streamline regulation more systematically. I suggest we look at creating an independent office for financial regulation, which draws on the examples of both the Office for Budget Responsibility and the Office of Tax Simplification and whose remit is a hybrid of the two. It would report annually on whether the statutory objectives of the financial regulators have been met and systematically review regulation to propose how it could be simplified. A continuous series of incremental improvements appear more feasible than a one-time reform package. The cumulative impact could be significant over time, and more enduring.
In conclusion, we must now deal with the world as it is, not as we would like it to be. If we can be as fleet of foot in financial regulation as we have been in vaccine procurement, then I am confident that the financial services sector can remain a strategic national asset, supporting jobs and prosperity. This Bill provides a start on that journey.
My Lords, this is one of the key Bills of this Parliament. Thankfully it is in the hands of a team who we all respect, as does the country at large. I too welcome our two new colleagues, my noble friend Lord Hammond and the noble Baroness, Lady Shafik, and look forward to hearing them again.
Just by way of background, I have chaired two quoted companies and have chaired the Tunbridge Wells Equitable Friendly Society. I am a firm believer in mutuality and successfully piloted through the Private Member’s Bill that became the Mutuals’ Deferred Shares Act 2015. I also spent 12 years on the Public Accounts Committee in the other place.
Other speakers have covered a huge spectrum this afternoon and this evening, so I just want to mention, in the macro, three issues as regards the City. First, coming from the Public Accounts Committee, I think that scrutiny of regulation is absolutely vital. I have listened to a number of noble colleagues—my noble friend Lord Blackwell, in particular— and I agree on the need for a Joint Committee. I will not say any more than that; it seems to me absolutely fundamental.
Secondly, economic crime is an increasing market—if I may use that phrase. Thankfully, we have the City of London Corporation which has its own police authority; it is the national lead for economic crime and supports calls by industry bodies for increased funding to fight economic crime. Over a third of all crime is economic or cyber, but only 2% of total police resources are allocated to policing this type of crime. Frankly, we need to look at this very closely and find some increased resources.
Finally, on the macro side, I was talking to the remembrancer in the City, and the City of London Corporation is an enthusiastic supporter of the greening of the economy. The City of London Corporation supports work by the Green Finance Institute including, for example, the plan to launch the UK’s first sovereign green bond; work to identify and remove investment barriers to wide-scale decarbonisation of the UK’s heating; and work on the development of a market for financing net-zero carbon properties. As I said, colleagues have mentioned a great many other things about the City.
I also want to look at one macro challenge that I have known about for years: payday loans. Every family in the UK needs access to credit. Historically, the average working-class family has used what is called home-collected credit. This is not new; it has been used across the UK for well over a century. I first came across it in the 1960s, when I was a councillor and alderman in the London Borough of Islington, and more recently in Northampton. A customer takes out a small short-term cash loan and the repayments are collected by the company agents who visit the customer at home each week. One single charge for the credit covers everything: the interest, the home-collection service, the cost of bad debts, company overheads and so on. There are no additional or penalty charges. If a customer cannot pay, the term of the loan is simply extended and the customer does not pay a penny more. It is 100% flexible and forgiving. However, home-collected credit is now under threat and, if that threat materialises, society will lose something very important.
If that happens, it will simply be because we have regulatory indifference. The authorities—the FCA and the FOS—are currently flouting their statutory remit to decide each case on its own merits. Historically, the regulator had a sound understanding of the product and how it worked in harmony with the budgeting cycles of these customers. Customers who use this methodology borrow only three or four times a year to cover the usual family expenses—at Christmas, Easter, back-to-school times or whatever. Now, the FCA sees this annual pattern as problematic—as re-lending, rather than sensible budgeting. In doing so, it fails to differentiate between payday lending, which is extremely harmful, and home-collected credit, which is not. The FCA and Financial Ombudsman Service are targeting the exact same re-lending patterns on affordability grounds, and their judgments act as a magnet to dubious claims management companies, which are just piling in.
When we reach Committee, we need to look very long and hard at this area. We, as legislators, need to hold the FCA and the FOS to account, because millions of working-class consumers up and down the country will be badly affected if this system of home-collected credit, which has been running for decades—for over a century, as I said earlier—comes to an end. It works well and it must be protected. Somehow or other, we have to sort out the terrible payday lending organisations.
We have had a long day and I know that we are looking forward to hearing the Minister wind up.
My Lords, I declare my interests as set out in the register. I join in the very warm welcome extended to the noble Lord, Lord Hammond of Runnymede, and the noble Baroness, Lady Shafik, who introduced themselves so powerfully in their maiden speeches.
This Bill may look technical, but it deals with a number of crucial issues, including the stability of our financial institutions. The Bill incorporates Basel III by using skeleton clauses that lay out policy at a very high and general level. It then eliminates secondary legislation and hands to the PRA the power to develop policy through its use of rules. It gives the regulators almost unlimited rein to craft rules that could be at the weak end of international standards, or the strong end, without parliamentary interference. The PRA faces no meaningful accountability, only delayed and minimal transparency, and an occasional review by a Select Committee.
The Financial Conduct Authority expects to follow the same template for the activities it regulates, as it makes clear in the financial regulatory framework review now in consultation. I join others in being shocked that this Bill does not wait for that consultation to be completed, but I think it indicates that the Government have already made up their mind. The PRA will later this year expand the scope of this template to cover its remaining activities. This is not delegated powers; it is the permanent removal of Parliament’s powers in the area of financial regulation. It is not just temporary; it is permanent. Let me quote from the framework review, which states that
“this approach will result in greater policy responsibility and discretion for UK regulators than has existed at any time since the early operation of FSMA following its introduction 20 years ago.”
FSMA 2000 is the regime that underpinned the culture—the noble Lord, Lord Hodgson of Astley Abbotts, reminded us of the importance of culture—and the naive regulation that led to the 2008 collapse, failed us over Libor and failed us for years over PPI. I could go on with other examples, but quite a few noble Lords have already done so very usefully. I hope that the Minister will look back and examine their speeches.
I am shocked on three grounds. The first is the general contempt for Parliament. We so often today see the pattern of skeleton Bills with policy then enacted through statutory instruments. However, this is even more cynical: a skeleton Bill with policy then set by the regulator in its rulebook. There is not even a semblance of accountability. This is not designed for flexibility, because we have plenty of fast-track procedures; it is deliberately designed to ensure that no effective oversight or challenge can be made by Parliament.
Secondly, we are at a critical time following Brexit, as my noble friend Lord Bruce of Bennachie and others reminded us. There is no way that the EU is going to grant anything but limited and temporary equivalence to financial services if they are only governed by rules in a regulator’s rulebook and can be changed without any parliamentary process. Indeed, I suspect the United States—I am thinking particularly of Janet Yellen—will be nervous of any equivalence rulings in the absence of any significant legislative underpinning. My noble friend Lady Bowles and the noble Baroness, Lady Altmann, raised real issues that remain unanswered and I hope that the Minister will address them.
Lastly, I am shocked because although I respect the integrity and intelligence of our regulators and recognise that they have more substantive powers than in 2008, I am still certain that this is not enough to discipline a sector where arrogance and greed have such a history of motivating bad behaviour. I sat on the Parliamentary Commission on Banking Standards for nearly two years. Senior managers who are respected figures, many with gongs and widely recognised, had rushed for short-term, false profits to boost their huge bonuses, and boards of directors were intimidated into silence over reckless behaviour. The regulators failed to speak out, obsessed with regulatory perimeters and constrained by a deep deference to the big institutions. That deference remains, and today the noble Lords, Lord Sikka, Lord Northbrook and Lord Desai, have given us some very powerful examples, which again I hope the Minister will examine.
The regulators also lack the resources to take on the industry, and I think it was the noble Lord, Lord Sharpe of Epsom, who took us through some examples of that. The reports from the Parliamentary Commission on Banking Standards and the legislation that followed changed the landscape, but many of us on the commission feared that the powerful financial institutions would bide patiently and, as memories of the 2008 crash faded, would carefully—we guessed in our conversations that it would take 10 years—persuade the Government to unwind the constraints that prevented the high-risk gambling and the crafting of loopholes to increase both power and bonuses. This Bill tells us that we guessed that timing pretty right, and I would remind the noble Lord, Lord Blackwell, who advised after-the-event oversight but not before-the-event oversight, that that approach pretty nearly destroyed the economy of this country.
It is an irony that the Bill deals with the final end of Libor and the other IBORs, abused in one of the biggest stains on the reputation of the UK’s financial services sector and its regulators. If we want an example of deference in the Treasury and in the regulators, we should listen to these words in the Explanatory Notes to this Bill. The reason that the notes give for ending Libor and similar benchmarks is:
“in response to cases of attempted manipulation of IBORs”.
Attempted? Fake submissions were made by the major banks in London every day for at least a decade, and probably two, in order to get a Libor benchmark that would boost the bonuses of traders and senior managers. Every day for those one or two decades, more than $400 trillion in outstanding loans across the globe were corruptly priced. The knowledge among regulators was evident, partly because the banks in their arrogance made no attempt to hide it, but also because the Bank of England got in on the act, asking banks to manipulate their Libor submissions for the more public-spirited purpose of hiding the depth of the 2008 crash. The scale of the corruption was so large and pervasive that it cannot be unravelled.
I have two other quick comments on the contents of the Bill. Many in the financial services industry have pressed for an international competitiveness requirement for the regulators, and there is in the Bill a “have regard” for both the PRA and the FCA, at least for certain sectors. We heard about that again today from the noble Lords, Lord Hunt of Kings Heath and Lord Bridges of Headley, and others. The industry says constantly that it does not seek a reduction or dilution in regulatory standards, but I—and, I suspect, many others—am going to take some convincing that this competitiveness provision is not doing just that, and driving standards down.
Secondly, the clauses on statutory debt repayment plans and the debt respite scheme are good, but they fail to include a clear implementation timetable. I support those actions, but please may we have the timetable? With Covid, it is now exceedingly urgent.
The Bill is also noteworthy for everything that it does not include. This House will need to remedy that. I have quite a long list, but today the hour is late, and I shall mention only two. The first is a duty of care by financial institutions to all customers. My noble friend Lord Sharkey, the right reverend Prelate the Bishop of St Albans, the noble Baronesses, Lady Bennett of Manor Castle and Lady McIntosh of Pickering, and others, highlighted that need.
The second—although it is not second in terms of priority—is action to motivate and incentivise the financial services sector to support our goals on climate change. My noble friends Lord Oates and Lady Sheehan and the noble Baronesses, Lady Hayman and Lady Bennett of Manor Castle, all spoke about that, and so did many others. It is crucial that those additions be made to the Bill. There are also other priorities, such as financial inclusion, but I will not go through that list now.
If there has been one message in this debate, which the Minister must now address, I can cite what was said by the noble Baroness, Lady Noakes. She and I do not often see eye to eye on an issue, but she talked about the accountability deficit. If regulators are to be given such untrammelled powers as the Bill anticipates, will the Minister tell us now how they are to be held accountable to Parliament? He has heard the words of so many in this House, from all Benches and all political persuasions, who have made it clear that accountability is required.
My Lords, I begin by thanking the Minister and his officials for their early engagement on this legislation, which is both wide-ranging and highly technical. I very much hope that this spirit of co-operation will continue throughout the Bill.
In recent times, our consideration of financial services matters has been restricted mainly to a raft of EU exit statutory instruments. As joyous as those debates were, this Bill provides a welcome shift in focus. It is a rare opportunity to review and revise the sector’s regulatory architecture, to ensure it is fit for purpose in the post-Brexit world.
As others have noted, financial services make a significant contribution to the UK economy in several respects: economic output, contribution to the Exchequer and the provision of skilled jobs. Despite recent capital movements to places such as Frankfurt, London remains one of the main global hubs of financial activity. The Chancellor has spoken of his wish to make London the world’s pre-eminent financial centre and, through our consideration of this Bill, we will be passing judgment on whether—and how—that ambition can be achieved.
While we often speak of London or the City, it is important to remember that financial services firms employ hundreds of thousands of staff across the country. Banking, insurance and other financial services have a significant impact—mostly positive, but sometimes negative—on the lives of consumers in every corner of the UK. A further task of ours is to make sure that this legislation works for them, as well as the firms themselves.
We may be more than a decade on from the global financial crisis, but this debate has highlighted that the events of that time remain at the forefront of our minds. Given the severe economic and social costs that came out of past regulatory failure, that is only right. It speaks to the points that I have just raised, that is, the importance of ensuring an appropriate balance between flexibility and responsibility.
Central to achieving this balance is the topic of oversight and scrutiny. As far as I can see, and as other noble Lords have observed, this Bill is severely lacking. Several fundamental regulatory changes are proposed in the Bill, yet, in many cases, there is no scope for formal parliamentary scrutiny. The Treasury has not always availed itself of the opportunity to attach scrutiny procedures to existing processes that could benefit from them.
I am sure that the Minister will assure us that the parliamentarians will be able to feed into and keep abreast of consultations and other policy exercises. To avoid any doubt, we clearly would not wish to unduly impinge on the independence of the Financial Conduct Authority, the Prudential Regulation Authority and other key actors. However, half of the delegated powers in this Bill go directly to regulators, and not even one of those has a formal parliamentary process attached to it.
I would not go so far as saying these proposals amount to deregulation, but I do believe that there is an absence of proper oversight and scrutiny mechanisms could lead us down a dangerous road in the future. As my noble friend Lord Eatwell, who will join us during later stages of the Bill, notes, the language used in the Bill’s supporting documents is, in places, worryingly reminiscent of the early 2000s.
It seems to me that, at the very least, regulators should be required to engage meaningfully with Parliament as a matter of course. It means more than periodically publishing reports or giving evidence to committees after important policy changes have been enacted. In the other place, arguments were put forward that Parliament should have a role in approving new rules before they take effect. I am sure we will explore this further.
Given the level of interest in this topic, I hope we can work collaboratively across your Lordships’ House to ensure improvements are made. In an ideal world, the Minister would work with us. However, if the Government remain unconvinced of our arguments, we reserve the right to ask MPs to think again. After all, we were told time and again that leaving the EU would see power returned to Parliament. Let us ensure the promise is upheld.
I am sure there are many of us who were hoping never to utter the word “Brexit” ever again. However, this Bill is inherently linked with the outcomes of the Brexit process. Therefore, as we progress to Committee, we will need to examine forensically the gap between the Government’s many commitments on financial services and the suboptimal reality the sector faces. Even if the Government seal a memorandum of understanding in March, access to EU markets will be well below what they have been. Why has the Prime Minister fallen so far short of his promises?
I am conscious that noble Lords are eager to hear from the Minister, so I will be brief in outlining other areas of concern. We expect important debates on the shift from LIBOR to SONIA and all that entails. Several noble Lords mentioned additional steps that could help to tackle money laundering and other forms of financial crime. It is important that we get this right. As I have mentioned, we need to ensure that consumers are properly protected from unscrupulous practices. On this last point, we will seek to table amendments that require proper regulation of the “buy now pay later” firms which appear to have grown exponentially during the Covid-19 pandemic. A review is under way in this area, but Labour believes that more urgency is required, especially if we are to avoid a repeat of the social problems that resulted from the past behaviour of certain payday lenders.
We look forward to working with colleagues on all Benches to hold the Chancellor to his word on greening finance. The Government have made a range of broader commitments, domestic and global, on climate change and it is vital that our legislation reflects the urgency of the situation.
This has been a very good debate, graced by two excellent maiden speeches. I congratulate the noble Lord, Lord Hammond of Runnymede, and the noble Baroness, Lady Shafik, on their excellent contributions. It has been both a good debate and a surprising one. There has been a remarkable level of consensus running through the discussions, and I believe that that consensus means that the Bill is going to be much amended before it is sent back to the other place. I particularly think that the whole issue of accountability and scrutiny of the regulation-making powers is crucial and has to be further considered. I think the noble Baroness, Lady Noakes, got it right—it is not often I agree with her—and the words “accountability deficit” are crucial.
I recommend that the Minister ponders carefully what he hears in the subsequent days of debate in Committee. The best way forward will almost certainly be through negotiated agreement to reintroduce a satisfactory level of accountability and scrutiny.
My Lords, I thank noble Lords for their help in the thorough scrutiny of this Bill, both in this Chamber today and outside it. First, I offer my congratulations to my noble friend Lord Hammond of Runnymede, both on his speech and on the timing of his arrival at the beginning of this important piece of legislation. I also congratulate the noble Baroness, Lady Shafik, whom I have had the pleasure of meeting on one occasion. I know she will bring great wisdom to this House.
As I have said, this Bill represents the first step in a wider programme of reform and work to deliver the ambitious vision for financial services that the Chancellor set out in November. My noble friends Lord Hammond, Lord Hunt and Lord Bridges, among others raised the issue of how to appropriately balance the UK’s competitiveness as a global financial centre with the need to ensure the safety and soundness of the market. It cannot be a race to the bottom, and I take the point of the noble Baroness, Lady Kramer, that we cannot be a first-class global financial centre if we try to race to the bottom, bearing in mind her comments about Janet Yellen. We need to show to the rest of the world that this will be a soundly regulated environment.
As the Chancellor stressed in his November speech, the Government are committed to maintaining and enhancing the UK’s position as a global hub for finance. We will continue to consider appropriate ways to further this ambition in the way we approach this legislation. This is demonstrated by the inclusion of a duty on the regulators, when making the prudential rules covered by the Bill, to have regard to the likely effect on the UK’s competitiveness.
The noble Lords, Lord Oates and Lord Naseby, and the noble Baronesses, Lady Hayman, Lady Sheehan, Lady McIntosh, Lady Ritchie and Lady Bennett, underlined the important role that the financial services sector must play in our efforts to tackle climate change and its impact. To reassure noble Lords, green finance will remain integral to financial services legislation in the UK. The Chancellor made a number of green commitments in his November speech. The noble Lord, Lord Reid, noted that net zero was not explicitly addressed in the Bill, but this Government can show a substantial track record in tackling carbon in our economy. I believe that we are one of the fastest reducers of carbon emissions of any G7 country. The regulators already consider climate change as a risk to the economy, including through climate change stress tests, which assess the impact of climate-related risks on the UK’s financial system.
My noble friends Lord Holmes and Lord Leigh of Hurley spoke on the importance of fintech. The UK is building on its existing strengths as a leading global destination to start, grow and invest in fintech. We will shortly have Ron Kalifa’s report on this important issue and I am sure that this House will debate it further once the report is available.
Constraints on time mean that I may not be able to address all the issues raised in detail, but I will write to any noble Lord to whom I am not able to respond today. I start with the first objective: to enhance the UK’s world-leading prudential standards and protect financial stability. It would be remiss of me not to acknowledge the strong views across the whole House on the issue of regulatory oversight and the delegation of powers to regulators. It will be the Government’s job over the next few weeks to try to reassure this House that we have got the right balance. We have heard much on this from the noble Baronesses, Lady Kramer, Lady Noakes, Lady Altmann and Lady Bowles, the noble Viscount, Lord Trenchard, the noble Lords, Lord Sharkey, Lord Blackwell, Lord Tunnicliffe, Lord Desai and Lord Sharpe, and the right reverend Prelate the Bishop of St Albans—quite a wide spectrum.
I do not, however, accept the suggestion that anything in the Bill undermines Parliament’s role in relation to financial services regulation. The Financial Services and Markets Act 2000 creates the existing UK model for financial services legislation. It sets the objectives for the PRA and FCA and confers broad rule-making powers to give them the tools that they need to meet those objectives. It also specifies the mechanisms for Parliament to scrutinise the regulators’ success in meeting the objectives that are set for them. Through the FSMA, Parliament therefore establishes the appropriate architecture to guarantee that our financial services sector is well regulated. Parliament entrusts the detailed rule-making needed to deliver this to the UK’s independent and expert regulators. Our role is to give them the right objectives to ensure that they prioritise the safety and soundness of our financial system.
While the original FSMA model is 20 years old, following the financial crisis there was a thorough review of our approach to financial services legislation. We made significant changes to the regulatory architecture, splitting responsibility for prudential and conduct regulation and establishing a Financial Policy Committee with a remit to identify, monitor and take action to address systemic risks to the UK’s financial system. We also made regulatory changes, such as ring-fencing retail parts of banks from their investment and international banking activities. However, there was no change to the principle that independent and expert regulators are best placed to make detailed rules, albeit with the appropriate parliamentary scrutiny. The International Monetary Fund, the OECD and wider academic literature consider the FSMA model to be world leading. The Government likewise continue to believe that it forms the appropriate basis for our financial services regulation. However, they also recognise that it is important to balance the regulator’s role as a rule-maker with a greater level of democratic oversight and accountability.
The approach that the Bill seeks to take in relation to prudential measures builds on our respected FSMA model of regulation. We are consulting on the broader approach to regulation. This will close shortly on 19 February. However, it is necessary to act now on these elements of prudential regulation to ensure that we keep pace with international developments. In relation to these specific measures, having considered the issue, the other place reached the view that the Bill gets the balance right.
The approach taken here will ensure that our regime has the agility and flexibility needed to respond quickly and effectively to emerging challenges. There is a balance to be struck between the level of detail put down in legislation and regulators’ ability to respond to a changing environment. We are seeking to help UK firms seize new opportunities safely and responsibly. The accountability framework we have written into the Bill provides appropriate strategic policy input and democratic oversight from the Government and Parliament in these specific areas. Through this accountability framework and related provisions, Parliament will set the policy framework within which the regulators operate. For example, it will require the PRA to have regard to the effect of the Basel rules on the provision of finance to the real economy. The Bill places obligations on the regulators to report on how the matters specified in the Bill have influenced the rules that they make. Various mechanisms are available to Parliament for further scrutiny—for example, calling the regulators to appear before the relevant committees. As my honourable friend the Economic Secretary said in the other place, the make-up of these committees is primarily a matter for Parliament, and not the Government, to determine.
I hope these points have addressed some of the issues and concerns raised by my noble friends Lord Naseby and Lord Blackwell. I look forward to discussing this further in Committee, with my other government colleagues, to see what assurance we can provide for noble Lords that we have the right approach.
My noble friends Lord Northbrook and Lord Blackwell asked about the FCA’s use of Libor powers. The FCA published a consultation on 18 November, on the use of its power to provide for the continuity of Libor after panel banks withdraw their contributions. The Bill will mean that the FCA is required to publish, and have regard to, statements of policy when exercising its power to change the methodology of a benchmark. Industry respondents have noted that our legislation marks an important step in the wind down of Libor, but we also recognise their suggestions that it may be beneficial to provide additional legal protections to limit the potential for litigation associated with the application of a synthetic Libor. In Committee in the other place, my honourable friend the Economic Secretary stated that the Treasury was committed to looking into the issue further and providing industry with the reassurance that it needs.
The Bill’s second objective is to promote openness between the UK and international markets. The noble Lord, Lord Butler, spoke about the markets in financial instruments directive and the investment firm prudential regime measures. I can confirm that the FCA has already published its first consultation on the details of this regime. I will write to the noble Lord further on his wider questions, which extend beyond the Bill specifically. Likewise, I will respond to the question of the noble Lord, Lord Jopling, about our relationship with the USA, in writing. I reiterate the point I made at the beginning: we have a common interest in having a regulatory framework that is attractive to large markets such as the United States. Similarly, I will write to the right reverend Prelate the Bishop of St Albans on his questions surrounding the access to Gibraltar.
The noble Earl, Lord Shrewsbury, the noble Lords, Lord Reid, Lord Gadhia, Lord Northbrook, Lord Holmes and Lord Hodgson, and the noble Baroness, Lady Altmann, spoke of equivalence, in our new relationship with the EU. In November, the Chancellor announced as many equivalence decisions as we could for the EU and EEA member states, in favour of openness and it made sense to do so. Equivalence is an autonomous, unilateral mechanism, and our preference has always been for a full set of mutual decisions for both the UK and the EU. We remain open for further discussions with the EU on the decisions. The UK and the EU have agreed to structured regulatory co-operation for financial service based on a shared commitment to preserve financial stability, market integrity and the protection of investors and consumers. A memorandum of understanding will be agreed in discussion between the EU and the UK in March, to establish a framework for this co-operation. However, I accept the realpolitik of the situation and that, as many noble Lords have said today, we must not put all our hopes in that particular expectation. We need to use our new-found independence to create a regime that can have a successful relationship with the EU, but if it is not prepared to reciprocate, we need to move on to deal with that.
I will say a little bit more to the noble Baroness, Lady Kramer, on delegated powers. Several other jurisdictions largely use regulator rules to regulate financial services; indeed, the EU is the outlier in this regard. This means that the EU is used to assessing regulator rules and practice as part of its equivalence assessments. There is no reason why it would not be able to assess the UK in the same way, if the will is there. There is no suggestion that the US would not accept this as a proper and responsible regulation.
I say to my noble friend Lord Leigh of Hurley that the Government are continuing to work together with the Financial Services Compensation Scheme, the PRA and the FCA on the issues he outlined. I will ask officials to write to him specifically on the example he gave about the scam to which he was subjected, and this strange anomaly about the regulator not being able to deal with it because he was not actually a customer. That deserves a detailed response.
The Bill’s third and final objective is to support the maintenance of an effective financial services regulatory framework and sound capital markets. I greatly appreciate the efforts of colleagues on the opposite Benches, particularly the noble Lord, Lord Tunnicliffe, in engaging with the Bill. The noble Lord, Lord Stevenson, and my noble friend Lady Altmann spoke about bills of sale and logbook loans. I am grateful to them for raising the issue. I will write to my noble friend Lord Naseby on the issues he raised regarding home-collected credit and the perhaps mistaken conflation with payday lending.
I restate my commitment, and that of all my government colleagues, to work constructively with the noble Lord, Lord Tunnicliffe. I have found him to be a very constructive interlocutor and I want to try to maintain that dialogue over the next few weeks.
From economic crime to buy now, pay later, which the noble Baroness, Lady Ritchie, raised, it is important to stress that the Government are firmly committed to protecting consumers. Chris Woolard, the former interim CEO of the FCA, is undertaking a review of the unsecured credit market, including buy now, pay later. This report is due shortly. If it concludes that regulation is necessary, we are ready to take quick and proportionate action to implement it.
I can assure my noble friends Lord Jopling and Lord Naseby, my noble and learned friend Lord Garnier, the noble Lords, Lord Hendy and Lord Rooker, and the noble Baronesses, Lady Ritchie and Lady Bennett of Manor Castle, that the Government are committed to making the UK a hostile place for illicit finance. The UK is internationally recognised as having some of the strongest controls worldwide for tackling money laundering and terrorist financing. In 2019 the Government published the landmark economic crime plan, which brought together the Government, law enforcement and the private sector in closer co-operation than ever before, to deliver a whole-system response to economic crime.
I listened intently to the comments of the noble Lords, Lord Rooker and Lord Davies, and the noble Baroness, Lady Coussins, regarding the statutory debt repayment scheme measure. I confirm that implementing this scheme remains a key priority of this Government. We will consult of draft regulations as soon as possible after the Financial Services Bill receives Royal Assent.
Now that we have left the EU, this comprehensive package of measures represents the UK assuming responsibility for making its own laws in this area. The Financial Services Bill is a first step towards achieving that goal. I beg to move.
Bill read a second time and committed to a Grand Committee.