Report (1st Day)
My Lords, I shall call Members to speak in the order listed. Short questions for elucidation after the Minister’s response are discouraged. Any Member wishing to ask such a question must email the clerk. The groups are binding. A participant who might wish to press an amendment other than the lead amendment in a group to a Division must give notice in debate, or by emailing the clerk. Leave should be given to withdraw amendments. When putting the Question, I will collect voices in the Chamber only. If a Member taking part, remotely wants their voice accounted for if the Question is put, they must make this clear when speaking on the group.
1: Before Clause 1, insert the following new Clause—
“Duty of care for financial service providers
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) In section 1C, after subsection (2)(e) insert—“(ea) the general principle that firms should not profit from exploiting a consumer’s vulnerability, behavioural biases or constrained choices;”.(3) After section 137C insert—“137CA FCA general rules: duty of care (1) The power of the FCA to make general rules includes power to introduce a duty of care owed by authorised persons to consumers in carrying out regulated activities under this Act.(2) The FCA must make rules in accordance with subsection (1) which come into force no later than 6 April 2022.””Member’s explanatory statement
This new Clause would strengthen the FCA’s consumer protection objective and introduce requirements for the FCA to make rules for financial services firms that amount to a statutory duty of care.
My Lords, Amendment 1 is in my name and that of my noble friend Lord Eatwell. I thank the noble Lord, Lord Sharkey, and the noble Baroness, Lady Bennett of Manor Castle, for adding their cross-party support on this important issue and look forward to their contributions to the debate. I also thank the noble Baroness, Lady Penn, the Deputy Leader of the House, the noble Earl, Lord Howe, the noble Lord, Lord True, and their officials for making time to discuss this issue after Committee, which has helped us considerably and shed some light on the complex set of consultations that the FCA and the Treasury itself are conducting over the next few months, all of which are happening, of course, during the pandemic and at a time of significant change in duties and responsibilities in all quarters.
In his excellent speech in Committee, my noble friend Lord Eatwell set out the case for the introduction of a duty of consumer care to be placed on financial services providers, which he argued would strengthen the FCA’s consumer protection objective and introduce requirements to ensure that firms operating in the financial sector should not profit from exploiting a consumer’s vulnerability, behavioural biases or constrained choices. I can do little better than rehearse his main points again. Markets in financial products sold to individuals, households and small businesses are seriously inefficient, mainly because of asymmetric information, as the seller of the product typically knows much more about the risks involved in making a particular investment or other financial transaction than does the consumer.
Secondly, given that the FCA’s strategic objective is about promoting competition in the market, thereby improving consumer outcomes, it can either regulate each individual financial product to ensure that the consumer is probably informed, or it could adopt the principle enshrined in Amendment 1 and make general rules, including the power to introduce a duty of care owed by authorised persons to their consumers. The case for a duty of care for consumers was argued very strongly at the time the current regulatory structure was set up; indeed, I was present in many of those debates. But, absent primary legislation or changes to it, the FCA has, perforce, adopted the first option and attempted to deal with each consumer detriment issue as it arises. However, by its own admission, this has not gone very well. From its consultation entitled, Our Future Approach to Consumers in 2017, through to the feedback statement published in April 2019, the FCA has wrestled with the issue of duty of care and is still wrestling today, with a review scheduled to start, we understand, in May 2021.
My noble friend’s case was that the status quo is failing and a new approach is urgently required for two main reasons. First, new products are always coming on to the market, which means that the FCA is always playing catch-up to introduce new rules and has to take time for appropriate consultation and so on to deal with the new threats to consumers. The rush to get a handle on “buy now, pay later” products in this legislation speaks volumes about that approach. Secondly, financial products are now available with one click via the internet, with all that that implies about the failure of the conventional approaches of “know your customer” and the need for careful concern about going through the paperwork and understanding the terms and conditions of what you may be signing up to. In short, fintech, with all the benefits it can bring—well argued by the noble Lord, Lord Holmes— signals the end of the current FCA regulation as we know it. The case for a duty of care approach is unanswerable.
Amendment 1 provides the FCA with the means to end its failure to meet its consumer protection duty through dogged adherence to a failing competition objective. The enactment of the power to introduce a duty of care for consumers would rightly place responsibility for ensuring that markets function well firmly on the shoulders of those who have the information required to attain that goal. If the FCA has the power to introduce a duty of care for consumers, it could finally begin to live up to its strategic objective.
Far too many consumers are being treated inappropriately, whether by the mis-selling of products, by the denial of rights or by obstruction of responses to complaints and so on. If the Government wish to improve on the consumer protections previously enshrined in EU legislation, the introduction of a duty of care on consumers is a safe and sure way forward. It is a way to ensure that markets function well for the benefit of the consumer, as it should be.
I am sure that, in responding to this debate, the noble Baroness, Lady Penn, will try to persuade us that there is no need for this amendment, as future consultations to be carried out by the FCA and the Treasury will cover all these points in detail and so all will be well. Indeed, either or both of these exercises may require primary legislation—that is quite likely—and we will be back again in a few months’ time debating the same issues all over again, when the Treasury has decided on its responses to the consultations and brings forward legislation to implement another generation of regulatory frameworks. I put it to the Government that, while the wording of the amendment may not be perfect, the intent—particularly the wording of subsection (2),
“that firms should not be profiting from exploiting a consumer’s vulnerability, behavioural biases or constrained choices”—
is worth holding on to and action should be taken now. I give notice that, in the absence of a positive response today, I am minded to test the opinion of the House on the amendment. However, if the Minister is prepared to commit to bring this back at Third Reading, with an agreed wording, we could work with her to settle this issue. I beg to move.
It is a pleasure to follow the noble Lord, Lord Stevenson of Balmacara, and to support this amendment. The noble Lord has made a strong and compelling case for both parts of the amendment. The case for and against a duty of care was discussed extensively in Grand Committee and I do not propose to revisit the arguments in detail.
In his speech in Grand Committee, the noble Lord, Lord Davies of Brixton, made a simple but important point:
“The truth is that the industry has a systemic tendency to malfeasance.”—[Official Report, 22/2/21; col. GC 112.]
I listed in Committee some of the many serious instances of malfeasance over the last couple of decades—I am sure that they are familiar to us all—which amply demonstrate the truth of the observation made by the noble Lord, Lord Davies. There can be no doubt that the temptation to malfeasance and the opportunities for malfeasance grow, and are deeply rooted, in the huge inequality of arms. The noble Lord, Lord Eatwell, emphasised that in Committee, as the noble Lord, Lord Stevenson, has just noted. There can be no doubt either that the culture within parts of the financial services industry is, to say the least, not oriented to serving the best interests of consumers. John Lanchester has graphically described the industry as treating its customers as “an extractive resource”. All this is true in an industry that is highly regulated. This inevitably leads to the conclusion that the regulatory regime is obviously and severely deficient.
The FCA has consulted on the duty of care at least eight times in the last five years and is about to do so again, starting in May, apparently. It is not clear, given the Treasury’s current consultation on the FSFRF, why we need two consultations covering the same ground. I know that some respondents to the HMT consultation have already proposed a new duty of best interest or duty of care. There is no reason to suppose that this new, and much delayed, FCA consultation will come up with anything more than equivocation, fence-sitting or long grass, if its previous efforts are anything to go by. Last time round, the FCA found that most respondents considered levels of consumer harm to be high and that change was needed to protect consumers. None of the financial services respondents wanted a duty of care, but 92% of consumers did, in a popular survey commissioned by the FCA’s own consumer panel.
The industry resists a duty of care for obvious reasons of self-interest, sometimes presented as a concern that such a duty would increase costs ultimately to the consumer. This does not say much for our financial services’ belief in competition, nor does it acknowledge the fact that, for example, PPI was sold at a commission rate of 87% or that the industry has had to find the funds to pay over £50 billion in redress for PPI alone.
The Government have argued that a duty of care is not necessary because, to quote the noble Baroness, Lady Penn, they
“believe that the FCA already has the necessary powers to ensure that sufficient protections are in place for consumers, and has the will to act, without the need for a statutory duty of care”.—[Official Report, 22/2/21; col. GC 117.]
Not even the FCA agrees with the first bit of that. In evidence to our Liaison Committee last Tuesday, Sheldon Mills of the FCA was reported as agreeing that the concept of treating customers fairly needed more development if it was to protect them. He confirmed that the FCA would be consulting on options to deliver a higher level of consumer protection in markets. It would be hard to look at the disasters, catastrophes, rip-offs and assorted scams that litter our financial services landscape and justify those two ministerial assertions. Where is the evidence of sufficient protection? Where is the evidence of the will to act in any timely fashion?
If the Government really believe in sufficient protection and the will to act, how do they explain the FOS data? In 2019-20, the FOS dealt with 250,000 cases, one-third of which were judged in the consumer’s favour—evidence of ongoing, large-scale malfeasance. The figures are even worse when it comes to products aimed at the financially vulnerable: 89% for guarantor loans, 84% for doorstep loans and 78% for logbook loans. This does not show sufficient protection or a will to act; it shows a failure to sell the right products to the right people, to explain them properly or to handle complaints properly. Customers were surely right when they told the FCA consumer panel that the customer is not at the heart of business decisions.
FiSMA 2000 does not protect consumers adequately. The FCA is always playing catch-up. Malfeasance continues to grow and to take new forms. Redress is patchy, time-consuming and stressful. A duty of care would address these problems. That is what the FCA consumer panel recommended in its submission to the Treasury’s FSFRF review last month. A duty of care would provide a strong and clear incentive for real, lasting cultural change in our financial services industry. I hope that the Minister will be able to accept our amendment or commit to bringing an equivalent to us at Third Reading. If not, I hope that the noble Lord, Lord Stevenson, will press this amendment to a vote.
My Lords, I am pleased to speak to this amendment. I have worked in this industry for many years. The numerous scams, frauds and scandals that have plagued consumers are ongoing. It seems clear, as the noble Lord, Lord Sharkey, said, that the Financial Services and Markets Acts 2000 does not protect consumers. I thank the noble Lord, Lord Stevenson, for his clear explanation of why the amendment, in all its parts, is required.
A duty of care on providers to make sure that they are considering the interests of their customers would certainly help to address the asymmetry of information between the providers and the consumers. It might also assist customers in the manner that the products that are developed are offered. Too often, providers develop new products with new complexities that are clearly not user-friendly. The FCA requirements are that the risks and details of the products must be disclosed, but the disclosure documents are impenetrable to the ordinary person. Those working at the FCA and those working for the providers understand the language used—it is natural to them—but the vast majority of the public do not understand the specific product literature which the FCA has been relying on to offer this kind of protection. It is clearly not helping consumers to be faced with bamboozling jargon and many pages of legalese in the product descriptions and the terms and conditions.
The FCA consulted on this in 2017 and it released a statement in 2019, and other consultations have covered this as well. I congratulate the Government for having engaged on this issue, and my noble friends Lord True, Lady Penn and Lord Howe; I know they have all worked on this issue. But, from a practical perspective, and as someone who has worked in this industry, developed product for consumers and worked with consumers on the other side who have suffered detriment, I believe that the fears about competition are somewhat overdone. All firms, if they have a duty of care, will then have to look after customers, so the issue of competition should not really pose so much of an impediment. Markets currently function in the interests of providers rather than consumers, and regulators are reactive to problems rather than trying to pre-empt problems that have been highlighted and pointed out for two or three years before anything is actually done—by which time so many consumers have lost out.
Of course I believe that firms should not profit from exploiting the public’s lack of understanding and education when it comes to retail financial services. Successive Governments have talked about improving financial literacy, but they have not managed to achieve this. In practice, providers do not know their customers, the customers do not understand the product literature and, indeed, it seems that there is very often no requirement for the provider to even ask basic questions of the consumer before the consumer buys a particular product. There are countless examples of areas where just a basic question could have prevented a consumer buying an inappropriate product.
So I urge my noble friend on the Front Bench to take up the offer of the noble Lord, Lord Stevenson, and work with him and other interested Peers to come up with a form of words for Third Reading that can prevent a vote on this issue and can also help accelerate the important duty of care that is required. Waiting for a consultation later this year is simply not good enough when it comes to the kinds of scandals and scams that we know are going on day in and day out.
My Lords, it is a great pleasure to follow the noble Baroness, Lady Altmann, and her powerful plea, which I hope the Government will listen to. I also speak to Amendment 1 in the names of the noble Lords, Lord Stevenson of Balmacara, Lord Sharkey and Lord Eatwell, to which I was pleased to attach my name, as I did to a very similar amendment in Committee.
Any noble Lords who have read the Second Reading debate will note that I majored on a “duty of care” in my speech. I used what you might call an expanded definition of “duty of care” to suggest that it might not be too much to put on the face of the Bill a demand that the financial sector should not engage in reckless, fraudulent, corrupt, obviously damaging systemic behaviour, including shipping off tranches of cash into tax havens, deploying complex financial instruments that they clearly do not understand and handing over control of markets to automated systems without adequate controls—things that threaten the security of all of us. But while I believe that principle remains sound, the lawyers convinced me that, in narrow legal terms, “duty of care” could not be stretched that far.
What the amendment here clearly introduces is a duty of care to individual customers. As proposed new subsection (2)(ea) says, their
“vulnerability, behavioural biases or constrained choices”
should not be exploited. Once, perhaps, such a clause was not necessary. There was a not ideal, but certainly useful, constraining paternalism: your local bank manager would look after you, both in limiting borrowing and in making allowances for unexpected disasters, personal and business. That has long gone—as of course has, almost universally, the local bank manager and, all too often, the local bank branch—so we need the law to step in to protect people to constrain the behaviour of financial institutions. As noble Lord, Lord Sharkey, said, we are in a situation where malfeasance has just continued to grow, with technical developments being one cause of that and, as noble Baroness, Lady Altmann, said, scandals and fraud have plagued consumers.
So that is the institutional side of where we are, but we also have to think about the state that people and our society are in today and make the law fit for our modern times, for these are times of massive insecurity. The idea of saving, or of even making the incoming funds match the essential outgoings each month, was an impossible dream for millions of people even before the arrival of the SARS-CoV-2 virus.
No one can know when sudden illness might strike—this Bill has been championed by Macmillan Cancer Support, to whose work I give credit—or it could be a redundancy or a pandemic that strikes people unexpectedly. That is one side of vulnerability and care that financial institutions should acknowledge. As Macmillan highlights, almost one in three of those severely financially impacted by their cancer diagnosis had to take out a loan or credit card debt. That is a public health issue. What we have are institutions that have been making profit from customers, sometimes for decades, and they have a duty to act compassionately and fairly in such circumstances.
But I think we also need to pay a bit of attention to the elements of the proposed new clause referring to “behavioural biases” and “constrained choices”. The noble Lord, Lord Holmes of Richmond, has been a rather isolated champion in this Bill on issues around the use of artificial intelligence algorithms and issues such as their potential bias, but he has also highlighted the way in which financial companies now have a historically uniquely detailed understanding of customer behaviour and the chance to exploit that through complex, opaque mechanisms.
As the noble Lord, Lord Stevenson of Balmacara, said in introducing an amendment, there has always been asymmetrical access to information between financial sector companies and their clients, but this has been massively magnified by technology—something that is only likely to grow. To create an assumption that this inequality of arms should not be misused should, we hope, constrain the behaviour of the financial sector—or at least, if it does not do that, provide a potential route for redress should it occur. There are already many who have need to seek redress for the behaviour of financial sector companies. I spent time with some of them this morning at a meeting of the Transparency Task Force.
As noble Lord, Lord Stevenson, said, the Government are likely now to say “Wait”—but why? We know that there is already an existing massive problem and a huge risk. If the Government do not acknowledge the need to act now, I offer the Green group’s strong support for the intention of the noble Lord, Lord Stevenson, to test the view of the House.
The noble Lord, Lord McNicol of West Kilbride, has withdrawn from the debate, so I call the next speaker, the noble Baroness, Lady Tyler of Enfield.
My Lords, I am pleased to speak in support of Amendment 1. First, I must apologise to the House that I have been unable to participate in earlier stages of the Bill—a matter of real regret to me—but I have been following proceedings closely. I declare an interest as a member of the Financial Inclusion Commission and president of the Money Advice Trust.
I am very keen to support this amendment, which takes forward a very important recommendation from the report of the Financial Exclusion Select Committee, which I chaired, in 2017. That report recommended an expansion of the remit of the Financial Conduct Authority to include both a statutory duty to promote financial inclusion, and a statutory duty of care. In my view, the two are closely linked, but I will obviously focus now on this very important duty of care amendment.
At the Liaison Committee’s follow-up inquiry on financial exclusion, held only last week, powerful evidence was received from charities and others active in the sector that the commercial model only goes so far, and that legislation is required to put an obligation on banks and other financial service providers to provide appropriate services to customers and have proper regard to inclusion.
The regulatory principle at present that firms should treat customers fairly only, in my view, enshrines a weak duty to the consumer. This is further weakened by the principle in the Financial Services and Markets Act that consumers should take responsibility for their decisions. We have already heard examples today of how treating customers fairly does not remove conflicts of interest and or provide sufficient deterrents to firms from mis-selling products and services. Bluntly put, the consumer responsibility principle fails to take into account the imbalance in market power between firms and their customers. Overdraft charges are a good example. It was clear that these were disproportionately falling on more financially vulnerable customers, and banks could and should have known that and done something about it. They did not act by themselves so regulation was introduced. That is why I support a duty of care on firms to act in their customers’ best interests.
A similar duty already exists in other sectors—for example, for legal and medical professionals through the Solicitors Regulation Authority principles or the General Medical Council’s good practice guide, so there is clear precedent. A duty of care on all financial services providers would ensure that they took a much-needed proactive approach in their dealings with customers, acting in their best interests and reinforcing the principle that a firm cannot profit from consumers’ vulnerability, biases or constrained choices. Importantly, it would also incentivise providers to ensure that products and services are what is called fair by design, with inclusion built in from the start.
In 2019, the Treasury Select Committee concluded that it would support a legal obligation:
“While a legally enforceable duty might still require customers to take their own legal action to seek redress against a provider, its very existence would remind providers of their duty to act in their customers’ best interests at all times.”
That is the nub of the matter. I strongly support the amendment.
My Lords, it is a pleasure to take part in this debate on the first group of amendments on the first day of Report on the Financial Services Bill. I declare my interests as set out in the register.
I congratulate the noble Lord, Lord Stevenson of Balmacara, on tabling this amendment and on the way in which he introduced it. These arguments have been put since at least 2017, when we debated the Financial Guidance and Claims Bill. What has happened in the interim has merely strengthened those arguments on the need for a duty of care. During the last year, as in so many other areas of life, we have seen exactly why something in this space would assist. Now that we have the excellent vaccine rollout and inoculation programme, such a duty would put a capital “B” into the “build back better” approach. It would be a real example of “better”.
I will not rehearse the arguments that I made at Second Reading and in Committee. I want to take this opportunity again to thank Macmillan Cancer Support and congratulate it for everything that it continues to do in this area. According to the testimony of a cancer patient,
“I felt I was battling my bank as well as cancer.”
Will the Minister consider what can be done between Report and Third Reading? With the Easter break in between, there is time, so this is more than timely. Can she reassure noble Lords of the potential for movement on this specific point of a duty of care?
My Lords, I shall be very brief. I spoke on this issue at length in Committee. The Government may take note that every single speaker today from across the House has supported the concept of a duty of care and non-exploitation and has urged the Government to act.
In all the speeches, both before today and referenced again today, we have heard about this chain of malfeasance, whether it has been described as scandal or fraud or an abuse of customers. Clearly, the existing legislation does not work, or we would not have this kind of history with new scandals cropping up, sadly, on a regular basis. Like it or not, treating customers fairly is interpreted by both the industry and the regulator as exceedingly light touch, to be offset by the “caveat emptor” principle—the taking of personal responsibility—to which the noble Baroness, Lady Tyler, referred. This is unacceptable. This Government often say that they focus on outcomes. The outcomes have been unacceptable. Look at the outcomes and the chain of scandals. Here is the opportunity to act.
In response, the Minister might say that there are effective tools, such as the senior managers and certification regime. Anyone who has followed the progress of this Bill and the amendments through Committee will have heard how that has broken down. It has, in effect, become something of a busted flush. The Minister might say that scandals have been picked up very early because we have working whistleblowing channels. Again, from listening to the discussion throughout Committee stage, it is clear that this scheme is not working. The analysis in the Gloster report reinforces that.
We do not need a ninth consultation. Every time there is another major scandal, the FCA’s response is to have another consultation. In the end, there is something like a freckle of movement. This issue needs to be seized by the scruff of the neck and resolved before more people suffer injury. The regulator needs to be put on the front foot. By supporting this concept and this amendment or something equivalent to it, the regulator will finally be put on the front foot and the industry will recognise that it has been duly warned and must reconsider the way in which it behaves.
I hope that we shall hear from the Minister that we shall see an equivalent proposal at Third Reading because, if not, I will not hesitate to ask all my colleagues and every Member of your Lordships’ House to support any decision by the noble Lord, Lord Stevenson, to move this to a Division.
My Lords, during our debates on this Bill, we have referred several times to the success of principles-based regulation in this country. We have contrasted it with the more prescriptive regulatory structures introduced within the European Union. The idea of a duty of care is a prime example of principles-based regulation because it presents a principle from which particular actions can be derived. It is now very important, given the financial stresses created by the pandemic to which several noble Lords have referred in their contributions to this debate. This is but one example of the unexpected pressures in the financial system that arise on a regular basis, not least because of the fintech innovations referred to earlier which require a flexible, principles-based approach. The strength of this approach is that is encompasses financial innovation—the changes to which many noble Lords have referred.
I understand that later in the consideration of this Bill the Government will bring forward measures to regulate the “buy now, pay later” market. This would already have been encompassed in a duty of care. It would not have slipped through the gap. If there had been a general duty of care in place, consumers would have received some degree of protection already.
One of the striking things about the issue of a duty of care and the FCA rulebook is that a number of measures that amount to a duty of care exist in the rulebook already. There are “know your customer”, “treating customers fairly” and the consumer credit rules, which require assessment of creditworthiness. What is striking is that this specific list has gaps in it.
Many noble Lords referred to the examples of malfeasance; it is this structure that creates the environment for and encourages malfeasance. It encourages testing of boundaries and of gaps. If there were instead a broad principle it would significantly discourage that persistent, competitive drive to test the gaps that exist in the current list of consumer protection measures in the FCA rulebook.
It is not simply that the lack of a duty of care creates the inability to deal with malfeasance; it actually creates it by the structure it presents for a very competitive market. We all know that this particular structure—having a specific list of something in a legal document—always raises the question of what has been left out. That is exactly the case in the FCA rulebook. It lacks the firm foundation of principle.
In Grand Committee, the noble Baroness, Lady Penn, was quite right to argue in summing up that
“the FCA is already taking steps to ensure that financial services firms exercise due care and regard when offering products, services and advice to consumers.”
She was right that there is a list, but she was quite wrong to then argue that a statutory duty of care
“does not add to the FCA’s existing powers in this area.”—[Official Report, 22/2/21; col. GC 116.]
Of course it does. It must do, in one of the most dynamic industries in the United Kingdom, associated with innovation, change and competition. It is the very nature of successful principles-based regulation that actions should derive from general principles.
The FCA lacks this statutory declaration of general principle. This is why Macmillan Cancer Support’s campaign Banking on Change was necessary, and why it is so important to place a general principle of duty of care on the statute book. My noble friend Lord Stevenson has made a very specific offer to the Minister with respect to Third Reading. I strongly urge her to accept it.
My Lords, I am grateful to the noble Lords who have put forward this amendment, and I appreciate the strength of feeling that exists around this important issue. I also pay tribute to the arguments made in previous stages of this Bill, including in Grand Committee. Noble Lords have spoken passionately about the need to tackle issues of consumer harm that exist in the financial services industry, and I agree that it is essential that this issue is addressed effectively.
The Government are committed to ensuring that financial services consumers are protected and that steps are taken quickly to address issues when they are identified. The noble Lord, Lord Eatwell, argued for a principles-based approach to financial services regulation. That is what is contained in the FCA’s principles for business, which govern financial services firms’ treatment of their customers, as well as the specific requirements in the FCA’s handbook.
I hope noble Lords will not mind if I set out the principles of business, because that will help us in considering the amendment. The principles include:
“A firm must conduct its business with integrity … A firm must conduct its business with due skill, care, and diligence … A firm must pay due regard to the interests of its customers and treat them fairly … A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair, and not misleading … A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client … A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.”
These fundamental principles aim to protect consumers who often have less knowledge and expertise than the firms providing them services.
The FCA has recourse to disciplinary action, including public censure and financial penalties, against firms that breach these principles. These are not hypothetical powers. The FCA has a long history of imposing sanctions on firms that breach the principles. For example, in September 2019 the FCA imposed a penalty of almost £24 million on the Prudential Assurance Company after it breached the principles, including the principle that firms must pay due regard to customers’ interests and treat them fairly.
While the FCA’s principles set the standards of how firms should treat their customers and its enforcement powers allow it to ensure that these are met, it recognises that the level of harm in markets is still too high and is committed to identifying and addressing this. While the coronavirus pandemic has caused the FCA to delay the next stage of this work, it has remained a priority and the FCA has announced that it will publish a consultation in May. This consultation will explore how the FCA could strengthen and clarify firms’ duties to consumers in order to reduce consumer harm. Specifically, the FCA will review its principles and how it applies them in practice, and whether the way in which firms have responded to the principles is sufficient to ensure that consumers have the right protections and get the right outcomes. The FCA expects to announce the next steps following that consultation by the end of the year.
I should also emphasise that the FCA is undertaking extensive work more broadly to ensure that all consumers, including those who are vulnerable, are protected. In February, the FCA published guidance on how firms should treat vulnerable customers to ensure that they are compliant with their obligations under “treating customers fairly”.
I reassure the House that the Government recognise the strength of feeling and agree that it is critical to ensure that consumers are protected. The Government believe that the FCA already has the necessary powers and is acting to ensure that sufficient protections are in place for consumers without the need to impose a duty of care or expand the consumer protection objective. The noble Lord, Lord Sharkey, quoted FCA evidence to the Liaison Committee last week on the effectiveness of the “treating customers fairly” principle of business as a point contrary to this. However, this is exactly the subject of the FCA’s forthcoming consultation.
The noble Lord, Lord Stevenson, asked the Government to look specifically at the wording of proposed new subsection (2) of his amendment and consider how they could take that sentiment forward. To address a couple of those points, the FCA is undertaking extensive work to ensure that all consumers, including those who are vulnerable, are protected. One of the key areas of focus for the FCA’s 2020-21 business plan is to ensure that the most vulnerable are protected. As I said, the FCA has recently published new guidance on how firms can treat vulnerable customers fairly.
On ensuring that firms do not take advantage of behavioural biases, the FCA’s principles of business already include the principles that a firm must conduct its business with integrity and must pay due regard to the interests of customers and treat them fairly. The FCA recognises that behavioural biases and vulnerabilities can drive consumer harm. Therefore, in its 2018 publication Approach to Consumers, the FCA set out its expectation that
“all firms to frame decisions for customers based on real consumer behaviour and not to mislead them or exploit behavioural biases.”
In order to better understand this area, the FCA has undertaken extensive research to identify areas of concern. For example, a research paper published by the FCA in 2020 examines the use of online experiments to create behaviourally informed consumer policy. This has allowed the FCA to better account for how behavioural biases impact its work when introducing rules or remedies to protect consumers. This research has already been applied in numerous areas of FCA policy and has resulted in concrete action against firms which have exploited consumers’ biases and constrained choice. For example, in April 2020 the FCA introduced new rules on overdraft pricing which took into account the fact that complex charging structures and high charges had previously been used to take advantage of consumer bias. These rules include stopping firms charging higher prices for unarranged overdrafts than arranged overdrafts, and requiring banks to do more to identify customers who are showing signs of financial strain.
Let me directly address the accusation that the FCA prioritises its competition objective over consumer protection. The FCA has three operational objectives which have equal standing in legislation: to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers. I reassure noble Lords that the FCA balances these objectives evenly and applies them in concert to achieve the best outcome for consumers. In this sense, the three objectives are interconnected and all contribute to protecting consumers from harm. The FCA’s 2017 mission statement sets out more detail on how these three objectives are applied through decision-making frameworks. It does not believe that the consumer objective can be delivered through competition alone, nor that competition should be prioritised over consumer protection.
The Government will continue to work closely with the FCA to ensure that the concerns raised by this House can be addressed. However, I am afraid that I cannot commit to returning to this issue at Third Reading, so if the noble Lord, Lord Stevenson, wishes to test the will of the House, the time to do so is now. None the less, I hope he may reconsider and instead withdraw his amendment.
My Lords, thank you for a very good debate. It has been a fine example of the way in which Report brings together the arguments made in Committee and allows the House to come to a collective view about the issue in question.
In her customary way, the noble Baroness, Lady Penn, gave a full and considered response, and I thank her for that. She focused more on what she called the strength of feeling in the House and did not really engage with the strength of the argument. I hope that when she reflects on that, she may recognise that that is a bit of a weakness. The arguments are not to be ignored simply because they are expressed strongly. They are to be looked at seriously, because they are trying to attack a pernicious problem that is causing huge consumer detriment, as exemplified in the many speeches we have heard today, particularly from those who have worked in the industry for a number of years. The noble Baroness, Lady Altmann, and others gave examples that were redolent of the experience of trying to make the system work.
I think the Minister also accepted in her speech that the Government want regulatory structure to protect consumers and said that the level of harm was perhaps too high. In explaining how the FCA’s three objectives are expected to operate—which must be a logical mess, when you analyse them—she illustrated why my noble friend Lord Eatwell and others wish that we had a better, principle-based and less list-based structure for the way in which the regulators carry out their work. As the noble Lord, Lord Sharkey, put it—he could not have put it more simply—FiSMA does not protect consumers, malfeasance is flourishing and may even be encouraged by the current structure, and redress is patchy, lengthy and not really available to those who need it most.
The issue before the House, therefore, is whether the existing process and procedures, the existing wording which sets them out and the existing objectives, which are constraining what the FCA can and cannot do, are the best we can get to. The arguments that have been made, particularly the devastating figures from the ombudsman’s service, suggest that we are not in a good place on this. This was picked up by many speakers, including the noble Baronesses, Lady Tyler and Lady Kramer.
In the context of the need for better financial well-being as we recover from the pandemic and the chance to do things better, are we really saying that the best we can come up with is to wait for another consultation, which will probably just be another exercise in playing catch-up and result in a longer list of rules and requirements? Why do we not just set a very high tide mark for what we expect our regulators to do and, if the consultation proves the case, reduce the requirements where that is proportionate and appropriate?
I do not understand why the Minister felt unable to take the issue away, talk about it and come back at Third Reading. She challenged us to put our views to the House. I would therefore like to test the opinion of the House in this matter.
I shall now put the Question. We have heard a Member taking part remotely say that they wish to divide the House in support of this amendment, and I will take that into account. The Question is that Amendment 1 be agreed to.
We now move to the group consisting of Amendment 2. Anyone wishing to press this amendment to a Division must make that clear in debate.
2: After Clause 5, insert the following new Clause—
“Periodic independent review of regulators
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 1S (reviews) insert—“1SA Periodic independent review of regulators(1) The Treasury must appoint a group of at least three independent persons to conduct a periodic general review of the effectiveness of—(a) the Financial Conduct Authority,(b) the Prudential Regulation Authority, (c) the Bank of England in respect of its functions under Parts 1 and 5 of the Banking Act 2009 (bank resolution and payment systems) and Part 2 of the Financial Services Act 2012 (recognised clearing houses), and(d) the Payment Systems Regulator.(2) The general review must take place every two to three years and must include a review of—(a) internal operations and controls;(b) systems for responding to whistleblowers, parliamentary correspondence and reports, and public concerns;(c) regulatory perimeters;(d) the effectiveness of rules and the regulatory burden;(e) whether all statutory and public policy objectives have been met;(f) the operation and effectiveness of engagement practices before and during rule making;(g) the skills base of staff;(h) any other matter the independent persons consider relevant;(i) follow up from the previous review and any other intervening review under this Act;(j) any other matter requested by the Treasury or a relevant Committee of the House of Commons or House of Lords.(3) On completion of the review, the persons conducting it must make a written report to the Treasury—(a) setting out the result of the review, and(b) making such recommendations (if any) as the persons consider appropriate.(4) A copy of the report must be—(a) laid before Parliament, and(b) published in such manner as the Treasury considers appropriate.”(3) In section 1T (right to obtain documents and information) after “1S” insert “or 1SA”.”
My Lords, this amendment is an evolution of the amendment I tabled in Committee and called the “Skilled person review of the regulators”. I thank the noble Lord, Lord Sikka, for adding his name on Report.
Since Committee, I have received growing expressions of interest in the concept as an important process for improving financial services regulation—indeed, one that could be replicated for other systemic regulators. My purpose in tabling the amendment here is further exploration. I have reframed the amendment to be an independent person’s review via a new Section 1S(a) in FSMA that broadly follows the format and definitions already contained in Section 1S. Under the section, the Treasury can establish an independent person review of the FCA. However, it has not been deployed as a routine matter, but rather to deal ad hoc with specific instances, as have reviews under Section 77. My proposed new Section 1S(a) would provide for general review by at least three independent persons and would take place after every two to three years. That period has been chosen so that it can reflect when there are changes in appointments of the regulators. It also broadly reflects the two-year cycle envisaged in Australia for its financial regulator oversight board and the EU’s three-yearly reviews of the ESAs. Today, the ABI circulated a note supporting the idea, but it thinks that a longer period might be better, as indeed I first proposed.
I have also added to the list of regulators which are to be subject to the review to cover not only the PRA and the FCA, but the Bank of England for its other regulatory functions and the Payment Systems Regulator. I did that on the suggestion of UK Finance, which has also taken an interest in my amendment as potentially filling in a gap in accountability. It has argued in response to the Treasury’s framework review consultation that covering all banking and finance regulators is needed for a coherent and consistent approach to the whole sector while structural changes are breaking down the distinctions within it. I thought that a fair point and have included it as food for thought.
The list of issues for review are largely taken from the matters found to be at fault in the Gloster report, such as internal operations and controls, responding to whistleblowers, regulatory perimeter and the skills of staff. It also covers the effectiveness of rules and regulatory burdens, which it is important to study periodically as a check. But it is important to note that I do not propose some kind of routine second-guessing on rules as they are made, but more like an impact assessment after they have bedded in.
A long list may not be needed and could perhaps be left to the independent person to prioritise, but one other addition I have made is to follow up on any other intervening review. The amendment also provides a similar right to information and documents, as a Section 1S review would have, by adding proposed new Section 1S(a) to the existing provision in Section 1T of FSMA.
In the clauses that immediately precede this amendment, the PRA and FCA are each given the power to make all the policy and rules for financial services save for the broad public interest objectives and “have regard to” measures defined in FSMA. The way that that is done front-runs the conclusion of the future regulatory framework consultations, and I see two consequences. One, which is conceded in the Government’s consultation, is that Parliament will want to undertake additional scrutiny. We will deal with that in later amendments and it is urgent. A second consequence is that we are conferring a lot more power on our regulators, one of which has been the subject of a flow of negative findings. This amendment is not intended to address the first consequence or to diminish in any way the constitutional position of Parliament regarding scrutiny—far from it: it is meant to address the second consequence. It also replaces some of the scrutiny of the EU which included three-yearly reviews of the European supervisory authorities.
With the present ad hoc reviews being a failure, the regulator may or may not reform itself adequately; we just have to hope that it does. That is what Dame Elizabeth Gloster said to the Treasury Select Committee. She also said that she was not a management consultant who could implement those changes. Regrettably, I do not think that the Treasury Select Committee or other committees of Parliament are in that position either. No matter how frequently the regulators may produce reports on their activities or senior executives appear before committees, does Parliament have the capacity to do the type of inspection that is gained in an independent review? If it can, why do we keep needing to have ad hoc reviews?
The parliamentary system may work well for the scrutiny of rules against policy objectives and for pointing out where review into failure is needed, but it is harder for it to look systematically at what goes on in terms of operations and controls, the skills base of staff or how well change management has been brought about. For that, the word of the chair and the executives has to be taken. In all earnestness, I am sure that they believe that they have done a good job and will not say otherwise, but in business, the value of outside eyes is well known, and the regulators also use that in supervision. That is where there is a gap that regular, independent reviews can fill. If the basic concept is accepted, it could indeed be done in other ways, but what is needed is the will to review for quality control and not just after a fault is known.
Before I finish, and because this is the first amendment on Report that deals with oversight arrangements, I will reference briefly, as others may, that since Committee we have had letters from the regulators that lay out broadly how they see accountability at present. The content is somewhat disappointing, given that the debates and suggestions made in Parliament have hardly been secret. I would say that it is unbalanced for the Government and the regulators to grab front-running positions in which constitutional power is removed from Parliament, for that is what removing this layer of statutory instrument does, and not pledge simultaneously to restore equivalent constitutional rights.
Although financial regulation, supervisory processes and oversight have been worked through on previous occasions, they do not yet work or are not yet being worked so as to keep things up to scratch. Having regular, independent reviews can fill that gap and have a place within the future regulatory framework. I beg to move.
My Lords, the issue I want to highlight, as I did at earlier stages, is how to make regulators more accountable, given the well-established phenomenon of regulatory capture. Regulatory capture is where an industry regulator like the FCA and the other bodies mentioned in the amendment comes to be dominated by the industry that it is charged with regulating. The result is that the agency, which is meant to act in the public interest, works instead in ways that benefit the industry.
I do not think that there is any doubt that this happens, and the question is: what do we do about it? The important point to understand is that this does not happen because of inadequate, ineffective or corrupt individuals—rather, it happens because it is systemic. It is an institutional rather than an individual problem. There are various reasons for why it happens. First, a regulated industry has a keen and immediate interest in influencing the regulator, whereas customers are less motivated. They have normal lives to lead and they engage with the industry only for brief periods. However, participants in the industry are there all the time. Secondly, industries tend to devote large budgets to influencing the regulator, which inevitably has an impact. Lastly, there is the aspect of the whole industry community. People tend to move from the regulator to the industry and back to the regulator. That is bound to have some impact on the personal relationships that are established.
There is therefore no question that the phenomenon exists. How bad it gets and what we do about it is what we need to address. The first step is to acknowledge the problem and to recognise and address the challenge. The next step is to make the regulators as accountable as possible, which poses the question: who regulates the regulators? There are many ways to do that but we have before us in Amendment 2 a proposal for a periodic, independent review of the regulators.
What I have in mind is something akin to a school inspection, which does not happen because a school has demonstrated problems but is just part and parcel of a regular process that focuses the minds of all those involved. At the moment, regulating the regulators is effectively left to the Government whenever they care to turn their minds to the issue. The problem is that Governments have many other things to think about and the result is that addressing the problem tends to happen only after it has arisen. The public become aware that there is some deficiency in the regulator and therefore action has to be taken. How much better it would be to pose questions as to how the system can be improved before we encounter the problems. That happens only under a regular, independent review, as proposed under the terms of the amendment.
My Lords, this is the first time that I have spoken on the Bill on Report and I draw the attention of the House to my interests as set out in the register—in particular, shares that I hold in listed financial services companies.
I have considerable sympathy for the amendment because the financial regulators are not very accountable. At the moment, there are set-piece appearances before the Treasury Select Committee in the other place and occasional appearances before committees of your Lordships’ House but these do not amount to a systematic and comprehensive examination. The Government often rely on the fact that annual reports are laid before Parliament but the annual reports of regulators get no more attention paid to them than the annual reports of companies. With rare exceptions, they provide few insights of value. By their very nature, annual reports accentuate the positive and shy away from the negative.
The problem of the accountability of regulators is not confined to financial services regulators. I could say much the same about Ofcom, Ofgem and other regulators, but we cannot solve the problems of the world in this Bill. The accountability of the PRA and the FCA is covered in the future regulatory framework, the consultation that has recently been completed. We discussed this a little on our first day in Committee and I hope that my noble friend the Minister will provide some information on the next steps when he responds to the amendment. The consultation closed over a month ago and the Treasury must have some idea on what it will be doing next and when.
If the outcome of that review, so far as accountability is concerned, is a well-developed form of parliamentary scrutiny, either jointly between both Houses of Parliament or within each House, the need for an independent review clause such as that contained in Amendment 2 would recede. Parliamentary committees can look at issues in depth but only if they are properly focused and well resourced. On that basis, the noble Baroness, Lady Bowles of Berkhamsted, might want to await the legislation implementing the outcome of that review rather than tackle the issue in this legislation, because action could be set in a broader, more holistic context regarding how the regulators will operate overall in due course.
If the noble Baroness, Lady Bowles, wishes to pursue her amendment—I thought I heard her say that it was more of a probing amendment for today—it would be wise to look again at its drafting because it calls for one review covering four regulators, but they are all different in what they do and how they do it. I am not convinced that there would be sufficient focus if one review tried to cover all the regulators—the two major ones and the two smaller units with regulatory responsibilities, one in the Bank of England and the other being the Payment Systems Regulator in the FCA.
In addition, I, like the ABI, wonder whether a review every two or three years is too frequent for the kind of in-depth review that the noble Baroness, Lady Bowles, has in mind. A rolling series of reviews, perhaps carried out over five years but concentrating on individual regulators, would provide more information of value to those seeking to hold them to account. However, the noble Baroness, Lady Bowles, has the right ideas in the amendment, although it may not be right for this Bill.
My Lords, it is a great pleasure to support Amendment 2. Throughout the earlier stages of the Bill, a number of noble Lords have drawn attention to the failures of financial regulators. Essentially, it was argued that they are captured by the finance industry and therefore advance its interests. They are too slow to protect people from malpractices. Over the years, numerous financial products have been fraudulently sold, including pensions, endowment mortgages, precipice bonds, split capital investment trusts, interest rate swaps, payment protection insurance and much more. The names of the products change from the aforementioned to mini-bonds and supply chain finance, but the basic problems are still the same and the regulators have failed to secure positive change in the culture of financial services enterprises.
During debates, Ministers have emphasised the tax contribution of the finance industry but have been silent on the costs imposed by that industry on society. Scholarly research shows that between 1995 and 2015 the oversized and scandal-ridden finance industry made a negative contribution of £4,500 billion to the UK economy, equivalent to around £67,500 for every woman, man and child in the UK. Of the £4,500 billion, £2,700 billion is accounted for by misallocation, whereby resources, skills and investments are diverted away from productive non-financial activities to the financial sector. The other £1,800 billion arises from the 2007-08 banking crisis that ushered in never-ending austerity. The economy and most people are yet to recover from that. That £4,500 billion is a massive cost and we simply cannot afford it. The status quo is not tenable and it is too expensive. The cost of the financial curse for the UK cannot be reduced by carrying on the regulatory business as usual, which is what the Government seemed to indicate in Committee.
Our regulators need to be effective and proactive but they seem to neglect their duty to the people. This is well documented in the reports on London Capital & Finance and the Connaught Income Fund. The FCA knew that mini-bonds were a problem but was slow to act at London Capital & Finance, and the same pattern has now been repeated at Blackmore Bond. The FCA does not welcome public scrutiny. Just look at the excuses it concocted to conceal the report on frauds at HBOS. The saga is still not resolved and same goes for frauds at RBS.
It is well documented that thousands of people are trapped in the £3.7 billion collapse of Woodford Investment Management. The Woodford Equity Income Fund was first authorised by the FCA in 2014. In 2015, the FCA was informed about the fund’s precarious existence as it was investing excessively in unlisted securities that affected its liquidity, but the FCA ignored the information until at least 2017.
The Woodford empire was able to manufacture compliance with the FCA rules by treating investments in securities partially listed on the Guernsey stock exchange as liquid. The Guernsey stock market is incredibly thin and many of the securities held by Woodford had no trade at all for quite some time, yet they were still treated as liquid. Over the last three years of its life, four of the firms in which Woodford invested issued preference shares in Guernsey, although there was no trade in those shares. This simple trick of having securities listed on an obscure stock exchange enabled Woodford to classify them as liquid, rather than illiquid, and to flatter its balance sheet and manufacture compliance with the FCA and the PRA rules. They took no action. The FCA and the PRA continued to manage by numbers and did not drill down to see what these numbers represented. We still await an independent inquiry into the FCA’s handling of the Woodford collapse.
Too many corrupt practices also fall between regulatory stools. The noble Baroness, Lady Bowles of Berkhamsted, mentioned a number of regulators. I have counted at least 41 regulators—maybe there are more—connected with the world of finance. That is simply too many and must be looked at too. Nevertheless, matters continue to fall between the stools. There is considerable evidence that banks have forged customers’ signatures. The FCA has done nothing. Perhaps this is a job for the National Economic Crime Centre, which has done nothing about these cases either. The NECC was launched in October 2018 and is yet to prosecute a single case. In September 2020, the FCA failed to secure its first criminal conviction, a case against Konstantin Vishnyak, a former banker at Russia’s VTB Bank, for alleged destruction of records relating to insider dealings.
It may be evident that our regulators are not properly equipped and probably do not have enough financial resources. This is a good reason to have the review proposed in this amendment. The FCA has levied a few fines for misconduct, but no company or board of directors is held responsible. The biggest losers from this inactivity are the ordinary people who thought that regulators were there to protect them. There is a total failure by our regulators to take robust action.
It is often said that those who do not learn from history are doomed to repeat it, and so it is with our financial regulators. For years, the problem of supply chain finance, also known as reverse factoring, has been highlighted. It was highlighted again by the collapse of Carillion. I declare an interest, as I was an adviser to the Work and Pensions Committee during its investigation of Carillion. Supply chain finance, or reverse factoring, is a popular method of finance because there is little transparency about it. This source of finance is mostly classified as “trade payables” or “other payables” rather than debt. This understates leverage and hence the financial risk of a business. The FCA was required to ensure that Carillion did not provide misleading information to investors and the markets, but it was asleep and not alert to financial engineering at all. The other side of the equation is in the balance sheet of the banks providing this source of finance; the FCA and the PRA do not appear to appreciate the impact of supply chain finance on the balance sheets of banks.
The parliamentary report on Carillion drew attention to the dangers of supply chain finance, but that did not spur the Government into action. There was no urgency by the FCA or the PRA either, long used to managing regulation by numbers. Were they aware of the impact of reverse factoring on the balance sheet of Greensill Capital and other banks? They needed to examine the business model of Greensill Capital, but did they? The stress and capital adequacy tests cannot be just number-crunching exercises. The Greensill episode draws attention to the qualitative aspects of financial risks, which again seem to have been ignored.
Almost every week there is another financial scandal; I have just mentioned two or three in passing. They are man-made and the outcome of failed institutional structures and the absence of effective democratic oversight. Scandals can be checked and require a new approach to regulation, as was ably argued by the noble Baroness, Lady Bowles of Berkhamsted. This amendment seeks to guide the FCA, the PRA and other regulators through external reviews. The focus is on their conduct and whether they are fit for the purpose of meeting their statutory duties, or whether those duties are adequate for protecting the people. The review would focus upon all kinds of resources which the regulators need. It would be laid before Parliament and become a key mechanism for building trust in regulatory bodies to ensure that they carry out their main mission, which, above all, should be to protect people from malpractice.
My Lords, my noble friend Lady Bowles has already indicated that she does not intend to call a Division on this amendment, which I think is right. However, this is probably one of the most important amendments that we have discussed under the umbrella of the Bill. It opens up a new area to consider: how we make our regulators accountable and whether the committee system and traditional structures of Parliament can do the whole job or whether support is needed from some additional bodies. What the noble Lord, Lord Davies, called an outside pair of eyes on this issue could be extremely useful to Parliament by bringing a particular expertise. There could be periodic reviews, looking, for example, not at the decisions made by the regulator but at its capacity and mode of operation—those core issues which determine whether a regulator is effective. The noble Lord compared it to a visit from Ofsted, which is probably a little light-touch and simple but it takes the conversation in the right direction.
I have a strong suspicion that three or four years from now, we will be back to this discussion and looking much at an independent arrangement to look at our various regulators in order to provide information when appropriate to Parliament, so that it can get on with the areas of scrutiny in which it has most capacity, which is to ensure that the rules fit with the mandate that Parliament has given it in primary legislation. This is an extremely important area with some very interesting thinking.
I hope that the Treasury takes note. It would be lovely if it was picked up in the financial framework review, but that might be hoping for too much. That review has gone on a very limited and very traditional route. It would be good to challenge it with some new thinking, and to open its process to break through and work out how effective accountability can be put in place. This affects our fundamental economy and the capacity of a Government to deliver on public services, so the consequences are significant. Real attention paid to this area would be exceedingly welcome.
I will not pick up the other scrutiny issues because we will deal with those on the second day on Report. I will discuss some of the letters we have had from the regulators then. However, I want to put down a marker that this is an area and a thought process that must be taken seriously. I hope that the Government see that as an opportunity.
My Lords, I was tempted to start my speech with the famous quotation from Juvenal, “Who guards the guardians?”. But, given the strictures by the Leader of another place against speaking in foreign languages—although he was referring to Welsh—I will instead begin with a different quotation, from the late Lord Keynes. In the introduction to The General Theory of Employment, Interest and Money, he says:
“It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics.”
Well, we have certainly had many examples of regulators believing foolish things. The sorry history of the regulatory response to the role of credit derivatives in the expansion of credit in the run-up to the financial crisis of 2007 to 2009 is a clear example of the folly of thinking alone. Hence, a periodic review of the thinking of regulators—whether the prudential regulator or the conduct of business regulator—would certainly be worthwhile; it would be a useful challenge to groupthink.
However, this particular aspect is not best achieved by three independent persons, because there would be a grave temptation to appoint three expert regulators—just the sort of people who would think in the same way. However, they would, no doubt, come up with recommendations that deal with the operational objectives in this amendment, so I see the review activity as falling into two parts: the operational assessment; and the core policy issues, about which I would have less confidence in the approach of the three independent persons. Peer reviews are all very well, but I assure you that any academic economist will tell you that they not only tend to embody the status quo but often stifle innovation and can perpetuate error.
That is why I and others in the House have argued that the intention of the amendment with respect to policy would be best met by a parliamentary scrutiny committee. It is the nature of parliamentarians to be sceptical, to pose without embarrassment the naive question, to entertain the views of mavericks and free-thinkers, and to relate the performance of any organisation to its statutory objectives—after all, they are responsible for the statutes. So we have two tasks before us: a review, as proposed in the amendment, which would be a valuable check and assessment of operational matters; and the review of policy and thinking, which could be the regular component of the work programme of a scrutiny committee.
But first, of course, we need the acknowledgement from Her Majesty’s Government that they would support the foundation of such a scrutiny committee, giving it appropriate powers to work with the regulators in an effective and constructive manner and to commission regular reviews of policy issues of the sort sought by the noble Baroness, Lady Bowles. We will discuss this matter later; so much hangs on the issue of the general scrutiny of the activities of regulators, voiced by Members on all sides of the House, that we will certainly return to this matter later in consideration of the Bill.
My Lords, as the noble Baroness, Lady Bowles, has helpfully explained, the amendment seeks to introduce a statutory obligation for the Treasury to launch an independent review of the financial services regulators every two or three years, and sets out the topics that such a review would need to cover.
I will begin by saying that I absolutely understand where the noble Baroness is coming from in tabling the amendment; indeed, having yesterday reread the two very eloquent speeches she made on the subject in Grand Committee, and having listened today to the noble Lord, Lord Davies of Brixton, my mind, like that of the noble Lord, Lord Eatwell, also turned to the Roman poet Juvenal’s famous question. The noble Baroness is concerned about the need for oversight of those who oversee, and I entirely appreciate her reasons for wanting reassurance on that issue. However, where she and I differ is over her contention—express or implicit—that there is currently a deficiency of mechanisms to provide meaningful oversight of the regulators and to ensure that they are working effectively. I set out a number of these mechanisms in Grand Committee; they include tools both for examining detailed operational or policy matters and for scrutinising more general, overarching issues. This I think was part of the distinction made by the noble Lord, Lord Eatwell.
As noble Lords will be aware, the Government appointed Nikhil Rathi as the FCA’s CEO in October 2020 and fully support the ongoing transformation programme that he is leading. This programme will support the FCA’s transition to being a data-led regulator, capable of taking action quickly and effectively to reduce harm to consumers and markets. More generally, on an ongoing basis, the Economic Secretary to the Treasury frequently meets the CEOs of the FCA and PRA to discuss both policy and operational matters, while of course recognising the independence of those regulators.
This is in addition to the FCA being subject to full audit by the National Audit Office, which has the associated ability to launch value-for-money studies on the FCA. The NAO has published a number of reports examining the work of the FCA, the PRA, the Payment Systems Regulator and the Bank of England. Importantly, there are also effective mechanisms for scrutiny of the UK’s regulators by international experts. The International Monetary Fund’s financial sector assessment programme, in which the UK participates, sees teams of experts assess, among other things, a country’s regulatory framework, the quality of its supervision of the financial sector and the ability of regulators to respond to systemic stress. The findings of these substantial assessments are published by the IMF and provide a highly detailed, independent review of the UK’s regulatory system—which I am concerned that this amendment would risk duplicating. The last assessment was completed in 2016, and another one is currently under way.
On the specific points proposed in the amendment that such a report should include, I reassure the noble Baroness that such information is already available, through both statutory and non-statutory mechanisms. The regulatory perimeter is discussed in an annual dedicated meeting between the Economic Secretary to the Treasury and the FCA chief executive, which I believe demonstrates the Government’s existing capacity to analyse complex regulatory policy issues such as this on an ongoing basis. More broadly, the FCA is required to consult before making changes, including changes to its fee structure or its rules. It is also required to maintain four statutory panels to represent the interests of practitioners and consumers and must consider representations from those panels throughout the policy development process. It must also publish responses to any representations received from the panels.
Regarding whistleblowers, the FCA and PRA already have strong protections in place. They have established rules, first, to ensure that all employees are encouraged to blow the whistle where they suspect misconduct and, secondly, to ensure that the employees can be confident that their concerns will be considered and that there will be no personal repercussions. The Government are confident that the protections already available to whistleblowers in the UK financial services sector are appropriate and proportionate.
In addition to these mechanisms to scrutinise and oversee of the effectiveness of the regulators, the Treasury has powers under Section 77 of the Financial Services Act to require the FCA to conduct an investigation into particular events where this is merited. The recent independent review by Dame Elizabeth Gloster into the FCA’s regulation and supervision of London Capital & Finance is one such example. In response to concerns about the FCA’s regulation of LCF, Dame Elizabeth’s report takes an appropriately forensic approach, considering the full range of relevant factors and identifying nine recommendations for the FCA. The FCA’s response to that review details the significant steps that it has taken and is continuing to take to transform the organisation. These steps include a substantial investment in technology and skills to further enhance the FCA’s operational effectiveness. The FCA has committed to reporting publicly on the progress of this transformation until Dame Elizabeth’s recommendations have been substantially implemented.
We will return to the important issue of parliamentary scrutiny and accountability in later debates and I went into some detail on this in my remarks on the amendment in Committee, so I hope that my noble friend Lady Noakes will forgive me if I just briefly touch on some of the mechanisms currently available to Parliament. As my noble friend reminded us, the regulators must account for their performance in annual reports to Parliament, explaining how the regulator has discharged its functions in relation to its statutory objectives and how operational objectives have been advanced. The Treasury Select Committee has the opportunity to conduct pre-commencement hearings with the FCA CEO and chair and senior appointees to the Bank, including the governor and deputy governors and members of Bank committees. It also regularly holds hearings with these and other senior Bank and FCA officials.
As noble Lords will know, the wider issues around scrutiny and accountability are under the spotlight in the future regulatory framework review. My noble friend Lady Noakes asked me for an update on that. Briefly, the Treasury received 120 responses to our consultation on the future regulatory framework. We are considering these carefully and will publish a more detailed consultation later this year. As my noble friend suggests, the Government consider this to be the appropriate place to consider any changes to the existing arrangements for scrutiny and oversight of the regulators.
Given all that I have said, I contend that the requirement proposed by this amendment to hold such wide-ranging reviews every two or three years would place a significant time and cost burden on the regulators. I equally contend that this would be disproportionate, given the mechanisms and processes that already exist to hold the regulators to account and ensure that relevant information is in the public domain. I hope that the noble Baroness, on reflection, will agree with that assessment. Skilled oversight can take a number of forms, as she rightly observed in Grand Committee. I listed those that I think are key, not the least of which, as I mentioned, is the added degree of transparency, to which the new CEO of the FCA has committed himself in response to the Gloster report. In the light of all that I have said, I hope that the noble Baroness will feel sufficiently comfortable to withdraw her amendment.
My Lords, I have received no requests to speak after the Minister, so we will go straight back to the noble Baroness, Lady Bowles.
My Lords, for the purposes of Report, I must remind the House of my interests in the register, which I omitted to do when I first spoke today.
I thank all noble Lords who have spoken in this interesting debate. The noble Lord, Lord Davies, reminded us of the effects of regulatory capture and the way in which that is just something that is endemic within the system, not least because of the overwhelming volume of meetings that take place and contacts that are made with the industries, both in policy terms and as they are regulated. As my noble friend Lady Kramer observed, he drew a slight parallel with Ofsted—there is a point that somebody from outside has to come in. I agree with the noble Lord, Lord Davies, that at the moment this does not seem to be something to which the Government are turning their minds often enough, because otherwise we would not keep having to have reviews about failure.
I thank the noble Baroness, Lady Noakes, for thinking that I got the right ideas. Some of my drafting might have been a bit adrift; I meant that each regulator had its own review and certainly the concept of a rolling review was what I would have had in mind. I agree with her that set pieces make it difficult to get into the systematic operational review that lies at the heart of my amendment, even if I, perhaps accidentally, strayed too widely. I also agree that annual reports concentrate on the good. Responses to the report and parliamentary engagement with the report are, in fact, intended to be via the Treasury, but that indirect link is not satisfactory as far as Parliament is concerned.
The noble Lord, Lord Sikka, reminded us of the cost of failures in regulations. He asked whether, because of the history and where we are at, it can be business as usual. We have had examples of the FCA making excuses for slowness and failures. As the Minister said, there is a new CEO, whom I know extremely well. He made some good points when he appeared before the Treasury Select Committee about having brought in some outside people to bolster the system, using exactly what I said is the understood way of doing things in business: you need outside eyes. He has done his best in that sense by bringing some fresh blood into the FCA.
When it comes to parliamentary reports, as the noble Lord, Lord Sikka, reminded us, the one about Carillion, for example, did not trigger action. If they do not trigger action, something is missing. My noble friend Lady Kramer explained exactly where I think we are. I am testing the water and exploring; I am asking whether our traditional roles are sufficient. We will have a little time to see. Like my noble friend, I think that we will be back here in due course. The noble Lord, Lord Eatwell, put his finger on the distinctions between operational and policy and what would belong with Parliament and what would belong with independent review. That is a useful distinction, which, going forward with these ideas, I can take to heart.
The Minister again said that there is plenty of opportunity for reviews to be done. The point is that they are not being done; they are only being done in default. They are not being done in a systematic way that is quality controlled. I do not disagree that there might be, within legislation, sufficient scope to do some that are more like quality control. If the Minister is saying, “Well, right, we will have a look to see whether that can be done,” I might agree. At the moment, however, there is a hole. The Minister says that it might be expensive but, as the noble Lord, Lord Sikka, pointed out, it is very expensive on the industry that has to cough up compensation if needed and if it comes from the central compensation funds. When things go wrong, it is expensive and probably more expensive than if one had done the proper quality-control monitoring.
The IMF and the Basel reviews are not UK-based reviews and are not debated in the public forum within the UK. They are also reviews done by regulators of regulators, which is absolutely one of the things that I am trying to get away from. Again, I agree with the noble Lord, Lord Eatwell: yes, they have to be skilled people but, no, they jolly well should not be regulators or recent regulators, and maybe not even former regulators, because otherwise you do not get away from the groupthink. I am sorry, but IMF and Basel are part of the groupthink.
Finally, I am interested that there were 120 to 121 responses; there have been another six if you take today’s discussions into account as responding to the future financial structure. I admit that I have been introducing an idea that I have sprung on your Lordships, having put it in my own response to the FRF review. Now that I have aired it, more people are interested—not just in this House but within industry. It is not urgent because a periodic review would be, even by my estimation, two or three years away when the new powers have been operational for a while and embedded in, and indeed, new parliamentary scrutiny embedded in.
In that spirit, I may return with this idea in another Bill, maybe after having consulted other noble Lords who have shown an interest. For now, I beg leave to withdraw my amendment.
Amendment 2 withdrawn.
We now come to the group beginning with Amendment 3. Anyone wishing to press this or anything else in this group to a Division must make that clear in the debate.
3: After Clause 5, insert the following new Clause—
“Review of capital adequacy requirements risk weights
(1) Within six months of the day on which this Act is passed the Prudential Regulation Authority must complete a review of the risk weighting applied to investments in—(a) existing fossil fuel exploitation and production, and(b) new fossil fuel exploration, exploitation and production.(2) In conducting this review, the Prudential Regulation Authority must have regard to—(a) the need to prevent the misallocation of investment to global warming accelerating activities as a result of artificially low risk weights; (b) the full implications of climate change for the risk of investments including physical climate risks, transitional climate risks and climate liability risks;(c) the likelihood of assets becoming wholly or partially stranded before the end of their normal exploitation cycle;(d) the impact of global warming accelerating activities on financial stability, in particular as a result of climate change related disruption of the economy; and(e) the advice of the Climate Change Committee.(3) The Treasury must lay before Parliament the outcome of this review within one month of the completion of the review.”Member’s explanatory statement
The purpose of this amendment is to place a requirement on the PRA to review the adequacy of risk weights applied to fossil fuel exposures in capital requirements having regard to the implications of climate change.
My Lords, I declare my interest as the chairman of the advisory committee of Weber Shandwick UK. Amendment 3 is in my name and the names of the noble Baronesses, Lady Hayman, Lady Jones of Whitchurch and Lady Altmann. I thank all the organisations who provided me with briefing, in particular Finance Watch for its helpful advice and recommendations.
Before I speak to Amendment 3, I also want to express support for other amendments in this group, particularly Amendments 22 and 23 in the name of the noble Baroness, Lady Hayman, which deal respectively with climate risk reporting and the appointment of a senior FCA manager responsible for climate change. I have been pleased to put my name to both.
In Committee we had an excellent and productive debate about the impact of climate risk on the financial system and the wider economy. I am grateful to the Minister for his careful consideration of the arguments, and to noble friends and colleagues across the House for the excellent cross-party co-operation we have achieved on these issues. I thank the Minister for listening to the arguments on the need for the FCA and PRA to have regard to the UK’s 2050 net zero obligations and for introducing government amendments to achieve this end. That is a great step forward.
If we are effectively to respond to the existential threat climate change poses to our financial system—indeed, to our whole human society—finance will be critical in allocating the huge amounts of capital required to decarbonise the global economy. Today, however, finance is the principal enabler of climate change by financing the global warming-accelerating activities of the fossil fuel industries at an artificially low cost as a result of the inadequate pricing of climate risk within the financial system.
As long as capital adequacy risk weights are inconsistently applied within the capital requirement rules so that fossil fuel activities are under-risked, capital will flow towards them because the equity that has to be held on the bank’s balance sheet will be less than it should be and the return on equity consequently better than it should be. As a result, capital which could be better employed in the new technologies we will need to counter climate change will continue to be misallocated to the old industries that drive it.
Amendment 3 attempts to address this problem by requiring the PRA to complete a review of capital adequacy risk weightings in relation to existing and new fossil fuel investments within six months of the Bill being passed. That review would aim to ensure that risk weights for fossil fuel investments adequately take into account the impact of global warming-accelerating activities on financial stability, in particular as a result of climate change-related disruption to the economy.
This amendment is an attempt to meet the concerns of the Minister over my more direct amendment in Committee, which called for specific risk weights to be applied to fossil fuel investments in line with the existing capital adequacy rules of the capital requirement regulations, or CRR. The amendment in Committee required the application of a 150% risk weight to existing fossil fuel investment, in line with Article 128 of the CRR. That requires such a risk weight to be applied to
“items associated with particular high risk”,
for example, hedge funds or investments in immovable property.
It is clearly hard to argue that fossil fuel investments are less risky than either immovable property or hedge funds investments, given the likelihood of fossil fuel assets becoming partially or wholly stranded. The logic of CRR is, therefore, that such investments must be included under Article 128. That they are not indicates that the regulatory system is struggling to respond to the complex and interrelated risks posed by climate change to the financial system.
The original amendment also proposed that, for new fossil exploration and production, the risk weight should be applied such that investment in these activities would have to be backed by 100% equity on the lender’s balance sheet. Such a risk weight is merited by the fact that new fossil fuel investments are likely to become entirely stranded and that exploitation of new fossil fuel investments would push us far beyond the level of two degrees of warming that the Intergovernmental Panel on Climate Change warns us would have enormous and unpredictable consequences for human society, not to mention the banks and the financial system as a whole. It is right in those circumstances that the resulting loss of capital should be effectively ring-fenced so that the problem is confined to the bank equity holders and not allowed to spread to depositors and the wider financial system—adding a financial crisis to a climate crisis.
It is fair to say that the Minister and a minority of other Peers were resistant to the direct approach to risk weights I proposed. The Minister was concerned, as was the noble Baroness, Lady Noakes, that we were seeking to use prudential regulation to achieve policy objectives that they felt were better pursued elsewhere. The noble Baroness stressed that the system of prudential regulation should be about the
“risk to the capital of the banks and the resilience of the financial system as whole.”—[Official Report, 1/3/21; col. GC 244.]
To this, I can say only that I agree; that is the precise purpose of the amendments that my noble friends and colleagues across the House and I have been pursuing.
Last week, the deputy governor for prudential regulation and CEO of the PRA Sam Woods stated in a speech to the Association of British Insurers that
“it is a fundamental pillar of the prudential regime that it be risk-based: disregarding the risk in individual investments is a recipe for an under-capitalized financial system that would not be a robust or sustainable source of investment.”
I agree with the deputy governor, just as I agree with the Minister. My only difficulty is that the disregarding of risk in individual investments, which the deputy governor warns us against, is exactly what is happening in respect of fossil fuel investment because prudential regulation has not worked out how to adequately assess the impacts of climate change on the financial system.
The scale of the problem was highlighted by Mark Carney in his “Breaking the Tragedy of the Horizon” speech some years ago. He said:
“Take, for example, the IPCC’s estimate of a carbon budget that would likely limit global temperature rises to 2 degrees above pre-industrial levels. That budget amounts to between 1/5th and 1/3rd world’s proven reserves of oil, gas and coal. If that estimate is even approximately correct it would render the vast majority of reserves “stranded”—oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics. The exposure of UK investors, including insurance companies, to these shifts is potentially huge.”
Is anyone seriously suggesting that these risks are currently being properly taken into account in the capital adequacy risk weights? If they were, it is inconceivable that existing fossil fuel investments would not be ranked under Article 128 of CRR as items associated with particular high risk. Of course, investments in new fossil fuel exploitation pose not only micro-prudential risks to banks arising from stranded assets, but the huge macro-prudential risks due to the acceleration of climate change which they will cause.
The Minister sought to assure us in the debate in Committee that the regulators have these matters under control. He prayed in aid, as did the noble Baroness, Lady Noakes, the climate scenario tests that the Bank will be conducting later in the year. These are no doubt worthwhile exercises and it is good to see that the Bank is setting the international pace. But these scenario tests will not fix the issue.
Although the Governor of the Bank implicitly recognises the role that capital adequacy requirements need to play in addressing climate-associated risks when he says that supervisory expectations will require firms to assess how climate risks could impact their businesses and to review whether additional capital needs to be held against this, he also states that, in relation to climate scenario tests, the Bank will not use them to size firms’ capital buffers. The reason the Bank is reluctant to do so is the difficulty of using such tests to measure hard-to-quantify future risk. So we have a dangerous scenario when regulators say that they cannot act until they can adequately measure risk, and on the other hand that the risk is too difficult to measure. The route through this is to apply the existing capital adequacy risk weights in an internally consistent manner, as proposed by the amendment that we put at Committee.
Although I stand by that position because I believe it is the only logically coherent and feasible way of dealing with risk in respect of fossil fuel activities, I have listened to the Minister’s arguments and those of the noble Baroness, and consequently I have put forward this revised amendment to require the PRA instead to conduct a review of the issue of risk weights and climate change and report back to the House. This will provide an opportunity to consider carefully the issues raised and also to inform the debate on risk weights at international level. I hope the Minister will see merit in this proposal.
I made it clear in Committee, and I stress again on Report, that neither my amendment then, nor the revised version before your Lordships today, is driven by any animus against the fossil fuel industries—quite the contrary. I have a huge respect for the people working in those industries and a huge determination that there should be a just transition for those employees as we decarbonise our economy. We will be able to achieve that much more easily if the financial system shepherds an orderly transition away from fossil fuel industries through the appropriate application of risk in the system.
I understand the reluctance of the Government to intervene in prudential regulation, but Ministers cannot abdicate responsibility. They must not cling to the idea that the technicians have got this under control, because it is an illusion—and it is an illusion that will have disastrous consequences if it is not corrected. When the system of prudential regulation is so evidently failing in its primary task of managing and controlling risk in the financial system, at least in respect of climate risks, there is an obligation to act. So I am hopeful that, having listened to the arguments during the debate, the Minister will accept the case for the review and provide sufficient assurance that this will be taken forward in a timely manner. However, if he is not able to do so, I give notice of my intention to test the opinion of the House. I beg to move.
My Lords, I remind the House of my interests as co-chair of Peers for the Planet. I have Amendments 22 and 23 in this group and will speak also to the government amendments and Amendment 44, from the noble Baroness, Lady Bennett. I have added my name to Amendment 3, to which the noble Lord, Lord Oates, has just spoken so powerfully.
Before I speak to any of the amendments, I will thank colleagues, the noble Lord, Lord Oates, and the noble Baronesses, Lady Jones, Lady Altmann and Lady Bennett, who have added their names to my amendments. I thank very particularly the Minister and his team for their very approachable actions in relation to discussions since Committee. They have been engaged in a sensitive and constructive way, and the noble Earl, as we have come to expect, has always been extremely courteous, endlessly patient and generous with his time. I think we have made real progress because of that.
Amendment 3 was very clearly and, as I say, forcefully introduced by the noble Lord, Lord Oates, on the review of capital adequacy risk weighting. The recent report of the climate change committee’s advisory group on finance, The Road to Net-Zero Finance, made clear the need to,
“shift the mindset from managing climate risks to aligning finance with net-zero”
“make real economy policies investable to attract capital”.
One key way to achieve this would be to address the issue of capital risk weightings by recognising the extremely high risk of investments in new and existing fossil fuel extraction becoming stranded. We do not currently recognise this in the system in the way we attach capital risk weightings and, as a result, financial institutions continue to invest trillions in fossil fuels: $2.7 trillion since the Paris agreement. This amendment asks that a review of fossil fuel risk weightings be carried out in order to consider the full implications of climate change and how it could affect the overall stability of the financial system.
The noble Lord, Lord Oates, has made changes to the amendment, taking into account, as he said, the criticisms and arguments made in Committee. The situation is urgent. I fear that we do not have the time to allow the market to adjust by itself without government action. Only last week the Met Office announced that CO2 levels had exceeded 417 parts per million—more than 50% above pre-industrial levels. This is due mainly to fossil fuel burning. So I hope that the Minister will indicate the Government’s recognition of the importance of this issue, and their commitment to looking very carefully at what is a fundamental underpinning that is necessary to the transition to a sustainable financial and economic future.
On the government amendments, I repeat my gratitude for the Minister’s approach, and very much welcome the amendments that he has tabled. These measures will ensure that the regulators must have regard to climate change targets when making new regulations. I would be grateful if the Minister could confirm that the provisions will be in place in time for the important changes relating to the Basel 3.1 standards. I hope, too, that the Minister will be able to respond positively to Amendment 44, tabled by the noble Baroness, Lady Bennett, which would add UK biodiversity commitments to the have-regard provisions. I recognise that there are difficulties with metrics in this area, but it is an extremely important issue, so I wonder whether the Minister could comment on whether nature-related financial risks could be added to these TCFD obligations.
These are very significant amendments which will ensure that the Bill is no longer, as it was when it came from another place, silent on climate change. But there is a great deal more to be done to ensure that climate change is embedded across discussions and decision-making at a systemic level within our financial services industry.
That is what my Amendment 22 attempts to do—to make sure that we have systemic reporting on climate change and proper scrutiny of that reporting, and that climate change is taken properly into account when consulting on changes to prudential regimes. It would provide a scrutiny and reporting framework to ensure that the FCA reports regularly on how it has evaluated systemic exposure to climate-related financial risks, and that that is scrutinised by Parliament. As the noble Lord, Lord Oates, said, the Bank of England’s climate stress test exercise for some key institutions is valuable, but we really need further, and systemic, reporting to be planned for the future.
The European Central Bank is undertaking an economic stress test to gauge the impact of climate change on 4 million companies and 2,000 banks over 30 years. The preliminary results have identified climate change as
“a major source of systemic risk, particularly for banks with portfolios concentrated in certain economic sectors”.
The vice-president of the ECB also commented:
“These results underline the crucial and urgent need to transition to a greener economy … to limit the long-run disruption to our economies, businesses and livelihoods”.
The UK regulators have a key role to play in ensuring that a long-term systemic approach to assessing the reporting on climate risk is adopted. That is why my amendment calls for a review of the regulators’ objectives, with a view to including consideration of net zero targets within their remit.
The Budget Statement indicated that the Financial Stability Committee and the MPC would take those risks into account within their remit, and I hope that that will be extended, both to the FCA and the PRA. It would be helpful if the Minister could tell us when the next PRA/FCA remit letters will be published. However, they alone, even if changed, will not be sufficient to address the challenges of climate change, so will the Minister commit to setting out the strategy and road map for how the sector will achieve that?
Mark Carney recently said that climate change will be
“the equivalent of a coronavirus crisis every year from the middle of this century, and every year, not just a one-off event. So it is an issue that needs to be addressed now.”
The amendment sets out ways in which the direction of travel for regulators to drive the systemic change we need could be achieved. I hope that the Minister will be able to respond positively to it.
Finally, my Amendment 23 mirrors the other in almost every detail—although again, I listened to the noble Baroness, Lady Noakes, and made some changes in it as regards board level appointments. It deals with the important point that would help to drive the shift in mindset that we need. Financial regulators require financial institutions, under the senior managers regime, to appoint a senior manager responsible for identifying and managing financial risk from climate change, and reporting on it.
In discussion with the Minister, I suggested that even if we did not include this in the Bill, it would be helpful for the regulators themselves to take that step. So I was pleased when, in the letters that were referred to earlier, the chief executive of the FCA set out his recruitment of an executive sponsor for climate-related risks. That is extremely welcome news, and in the context of the other comment that was made on the previous amendment—that it should go wider than climate—I recognise that the FCA remit would include all the ESG standards. That too is welcome, and I thank the Minister and the FCA for all their work in this area.
Throughout the passage of the Bill and in many other fora, the Government have made it clear in their rhetoric that they understand the overwhelming importance of climate risk. These amendments would lay the foundation of turning those words into action, and I hope that the Minister will be able to respond positively to them.
My Lords, it is a great pleasure to follow the noble Baroness, Lady Hayman, who is taking such a brilliant lead on these issues in your Lordships’ House. I thank her for her concentration on the biodiversity crisis as well as the climate emergency. Reflecting on her comments, I too hope that this is the last time it will be up to this House to add the missing element of climate to a financial Bill. Maybe for biodiversity we can proceed even faster. I too welcome the news about the FCA appointments—although putting that into the Bill, as Amendment 23 would do, would be better, because it would provide a statutory guarantee that such an appointment would continue.
I shall speak to Amendments 3, 22, 23 and 44. Amendment 44 is in my name, and Amendment 3 is in the name of the noble Lord, Lord Oates, and others. Amendments 22 and 23, to which I have attached my name, are in the name of the noble Baroness, Lady Hayman. I shall speak to Amendments 3, 22 and 23 together.
I had cause this morning to reflect back on the work of your Lordships’ house, by a similarly small and dedicated band, on the Medicines and Medical Devices Bill. At that team’s heart was the noble Baroness, Lady Cumberlege, author of the recent review often referred to by her name, but actually entitled First Do No Harm. Would that we could see the financial sector adopting that principle. Instead, it continues to pump funds into destroying the planet at breakneck speed.
An independent report by a coalition of NGOs, out this morning, shows that the world’s biggest 60 banks have provided $3.8 trillion-worth of financing for fossil fuel companies since the Paris climate deal in 2015. In our home sector, UK bank Barclays provides the most fossil fuel financing of all European banks—and the finance provided in 2020 was more than in 2016 or 2017.
The report notes that a commitment to be net zero by 2050 has been made by 17 of the 60 banks, but the report describes the pledges as “dangerously weak, half-baked, or vague”. It is clear that self-regulation—however much the Government may be wedded ideologically to the idea—has not worked. And we are in an emergency: we cannot wait.
Johan Frijns, at BankTrack, part of the coalition behind the report, says:
“there exists no pathway towards this laudable goal”—
“that does not require dealing with bank finance for the fossil fuel industry right here and now.”
These amendments do not go that far, but they least set us on the right track—a track to transparency that does not require little-funded NGOs to dig well-buried data out of dark corners.
None the less, as others have noted, we have made some progress since Committee stage, and I welcome the government amendments in this group, which reverse the Government’s claim, made to me in Committee, that we did not need a reference to the climate emergency in the Bill. This will be, I believe, after the Pension Schemes Act, the second financial Bill to start to acknowledge the truth of doughnut economics—that the economy, and all human life, has to live within planetary limits.
That brings me to my Amendment 44, which addresses biodiversity. It is an addition to the government amendment requiring the FCA to “have regard to” the carbon target for 2050 when making Part 9C rules. My amendment simply adds another “with regard to”—in this case to the UK commitments under the UN Convention on Biological Diversity.
I referred to planetary limits. We are not yet focused nearly enough on the fact that the atmospheric carbon dioxide levels, at 417 parts per million today, is only one way in which we are outside the doughnut of sustainability. There is also the collapse of the natural world, as the globe’s Governments have acknowledged with the Convention on Biological Diversity, to which the UK is of course a signatory.
At the moment I am not planning to push this amendment to a vote, despite the extreme urgency in this nation that is at the bottom of global biodiversity rankings, in a world in which none of the globally agreed targets on biodiversity is set to be delivered in 2030. The obvious point to do that would be after we have a UK target, and I am sure the Minister is well aware of the broadly backed NGO-driven push to include a 2030 nature target in the Environment Bill. That would provide an ideal element to include in financial regulation.
What is finance doing to biodiversity? That is not an area that has been well enough discussed. We do not have the kind of detailed reports of the type I referred to earlier on the climate emergency—at least, not that I am aware of. However, if we think about the level of destructive economic activity overall, it is not hard to think of examples, including the operation of industrial-scale agricultural monoculture, deforestation and trashing of soils and the production of destructive agrichemicals and fertilisers, which also have massive carbon implications.
Then there is the financing of fast fashion and the production of artificial fibres, plastics that will choke our seas and fill our rubbish systems. Giant factory ships are vacuuming up sea life and heavy trawlers are trashing the seabed, with massive carbon implications also. Financing any of these and many more economic activities is doing massive harm. As with climate, as the Government have acknowledged to at least a limited degree, regulation is essential.
We are slowly making progress, but the stress has to be on “slow”—it is not nearly fast enough. Amendment 3, proposed by the noble Lord, Lord Oates, would be a further step forward. It is needed to improve the immediate response. If it is pushed to the vote, I can promise the backing of the Green group, should the Minister not acknowledge the force of the noble Lord’s arguments.
My Lords, I am delighted to follow the noble Baroness and to contribute to this debate. I very much welcome the amendments in the name of the Minister, my noble friend Lord Howe, in this group, particularly Amendments 43, 46 and 47 onwards, requiring the FCA to have regard to the carbon target for 2050 when making part 9C rules, as set out.
I always listen to what the noble Lord, Lord Oates, says—we entered the House on the same day and are of the same vintage, so to speak—but I welcome the fact that the Government recognise the risks arising from climate change. The Minister addressed the issue of stranded assets, an issue on which I share his concern, and the transition plan out of them. I think that was addressed in Committee in so far as my noble friend said then that
“the point of the Bill is to support a flexible regulatory system that can respond to changing circumstances and developments as they arise.”— [Official Report, 1/3/21; col. 258GC.]
The noble Baroness, Lady Bennett, spoke about those technologies and forms of energy that can do harm. I am personally concerned that in Amendments 3, 22, 23 and 44, spoken to so eloquently by the noble Baronesses, Lady Hayman and Baroness Bennett, the focus is still very much on moving at the earliest possible opportunity and timetable away from fossil fuels. What worries me increasingly is our fixation on renewables, which on the face of it seem to be performing extremely well both onshore and offshore.
We on the EU Environment Sub-Committee have just completed our last piece of work, looking at the ecology of the North Sea. It is apparent from the evidence that we took that there is a lack of research on the impact of renewable energy offshore facilities on North Sea ecology, particularly marine life—dolphins, porpoises and whales—bird life and the whole sea biodiversity. A plea was made that the cumulative impact should be considered and that we should assess and value all the natural capital, not just the ability to create wind but what we are losing. In particular, it was put to us that we should consider the impact of these renewables, particularly offshore wind, on other users, such as, as in this case, fisheries and shipping.
Mention has also been made of the work going on in the Basel framework. I hope the Minister will give us an update on that. I am concerned that some of the amendments here, particularly Amendment 3, but others as well, may pre-empt and not have regard to the international work that will help us to understand how climate risk should be considered through the Basel framework and working with our international partners.
I pay very close regard to what those such as Mark Carney and the current deputy governor of the Bank of England say, but equally I was struck by the remarks of the noble Lord, Lord King of Lothbury, in the debate on the Budget Statement, where he expressed concern about the new remit requiring the Bank of England to
“reflect the importance of environmental sustainability and the transition to net zero”.—[Official Report, 12/3/21; col 1914.]
In the context of the Financial Services Bill we are seeking, as I understand it, to have a flexible regulatory system, as my noble friend explained, that will be able to respond to circumstances as they develop. I imagine that it is the role of the Government rather than the regulators to set the policy, but I stand to be corrected by my noble friend.
I welcome the opportunity to have this debate. When it comes to net zero, climate change and environmental sustainability, obviously there will be a move away from fossil fuels, but no one has yet explained to me how we are going to attempt to fulfil all our energy requirements in what will be virtually all electricity supplied to the market.
With those few remarks, I look forward to the Minister bringing together all the themes of this debate.
My Lords, it is a pleasure to follow the noble Baroness, Lady McIntosh. I thank the Minister for some movement on this issue. His courtesy throughout has been an example to all of us. I thank him for his correspondence on the issues that I raised in Committee, some of which I will return to later in my contribution.
I congratulate the noble Lords who moved amendments on climate risk in Committee, without which we would not be where we are today. The amendments were cogently argued and evidently persuasive, if only partially so, which is why a number of them have been brought back, albeit slightly amended, on Report.
I support Amendment 3 in the name of my noble friend Lord Oates and the noble Baronesses, Lady Altmann, Lady Hayman and Lady Jones of Whitchurch. It makes a strong case, with support from across your Lordships’ House, for a PRA review of the risk weighting applied to investments in existing and new fossil fuel exploration, exploitation and production. Amendment 22, in the name of the noble Baroness, Lady Hayman, seeks to embed evaluation of climate-related financial risks, and consideration of the impact of such risks on the stability of the UK financial system, in the modus operandi of the FCA and the PRA. Amendment 23, also in the name of the noble Baroness, Lady Hayman, provides for the appointment of a senior manager within the FCA with responsibility for climate change—and movement on this by the regulator, as she outlined in her earlier contribution, is welcome. Amendment 44, in the name of the noble Baroness, Lady Bennett, makes huge sense in the context of the recent Dasgupta review. I hope that the Minister will give it sympathetic consideration.
I need say no more about the content of these amendments, as I would only be repeating the excellent contributions of those who tabled them. Suffice to say that, if adopted, all three would send the right policy signals that the Government mean what they say when they speak of a climate emergency. Those signals are sorely needed because the signals presently being received by investors and, indeed, by all sectors of society, are confusing and misleading. We have a Government leading on ending the use of coal for power generation—the Powering Past Coal Alliance—who then toy with the idea of granting a licence to a new deep coal mine in Cumbria. The Government announced in December last year that they would end UK support for fossil-fuel projects overseas. Will the Minister say whether UK Export Finance’s support for the controversial east African crude oil pipeline—EACOP—which extends from Uganda to Tanzania, will be a done deal before the new March deadline just announced?
Just today, we have a garbled press release on supporting vulnerable communities in the north-east and Scotland, which will be affected by the transition away from fossil fuels. This is justified in the press release by an unexplained decrease in emissions by the oil and gas sector. These communities deserve better. In the same press release, we are told that this decrease in emissions will be achieved by a new regime to hand out new licences to explore for and exploit as yet undiscovered fields. I am confused. Can the Minister shed some light?
Is the Minister also able to shed any light on whether the Government will bring forward legislation to align the Oil and Gas Authority’s remit to our net-zero target, thus drawing a line under the current policy of maximising economic revenue, or MER? That might serve to remove some of the confusion. How can new licences be justified when extraction of the oil and gas in our existing fields will take us over our share of emissions under the Paris agreement? Surely the Government, in a climate emergency which they themselves declared, are not relying on reducing emissions via carbon capture, usage and storage, a technology which is unproven at scale?
Meanwhile, back in the real world, the NASA website tells us that 2020 was the hottest year since records began, while the World Meteorological Organization states that 2011-20 was the warmest decade on record. The warmest six years have all been since 2015—2016, 2019 and 2020 being the top three. The World Meteorological Organization’s secretary-general, Professor Taalas, said:
“It is remarkable that temperatures in 2020 were virtually on a par with 2016, when we saw one of the strongest El Niño warming events on record. This is a clear indication that the global signal from human-induced climate change is now as powerful as the force of nature.”
That is a chilling thought.
I will end with one last thought: temperature is just one of the indicators of climate change. The others are greenhouse gas concentrations, ocean heat content, ocean pH, global mean sea level, glacial mass, sea ice extent and extreme events. All are moving in the wrong direction. I hope that the Minister will be able to give a satisfactory commitment that climate risk in the financial sector will be satisfactorily legislated for. In the absence of such assurances, I will support amendments on the issue that are put to a Division.
My Lords, the noble Lord, Lord Oates, and the noble Baroness, Lady Hayman, eloquently introduced Amendment 3. There was much discussion on this matter in Committee but I still consider that such a review would place too heavy a burden, and a disproportionate one at that, on the PRA. I thank my noble friend the Minister for the diligent manner in which he has responded to noble Lords’ concerns about raising the importance of climate-change issues in the list of factors to which our regulators must have regard in making rules.
The Government’s credentials as global leaders in the movement away from reliance on fossil fuels are well established and will, I hope, be further enhanced by the G7 meetings and the COP 26 conference later this year. However, this should be kept in perspective and balanced against the need for economic recovery and the needs of industry. There is no point in pricing what remains of our steel industry out of the market if the result would be an increase in imports from countries which have not adopted energy policies as green as ours, especially if the impact on global emissions is negligible.
When I first read my noble friend Earl Howe’s amendments I was puzzled, because it seemed that he was giving with one hand and taking away with the other. I look forward to his clarification of how Amendments 43, 46, 47 and 49 net off against each other.
I am loath to saddle the regulators with increased obligations which go beyond the practices that they have already adopted. The letter from Sam Woods makes it clear that climate change is already an important consideration in the PRA’s supervision and regulation of banks and insurers, under its existing statutory objectives. Similarly, the letter from Nikhil Rathi makes it clear that the FCA is committed to helping market participants manage the risks in moving to a low-carbon economy and supports the commitment to match, at least, the ambition of the EU sustainable finance action plan in the UK. Since the FCA has already decided to recruit a director with specific responsibility for ESG matters, I do not think that Amendment 23, in the name of the noble Baroness, Lady Hayman, is necessary. The remit of the senior manager whom she suggests should be appointed would clash with that of the new director who is already in the process of being recruited.
Amendment 22, in the name of the noble Baroness, Lady Hayman, also goes too far and is too prescriptive. My noble friend the Minister was right when he said to the Committee, on 24 February, that
“it is important that we act carefully and rationally, consult appropriately with interested parties and therefore make progress in the right way.”
He was also right in stating that
“the changes the Bill enables serve to implement a number of vital reforms following the financial crisis. These reforms reinforce the safety and soundness of the UK financial system.”—[Official Report, 24/2/21; col. GC 224.]
Surely we should not amend the Bill in any way that might prevent us giving effect to updated prudential rules. I also agree that there is no evidence that greener means prudentially safer, at least not yet. Therefore, it is not clear that a regulator, whose primary objective is the safety and soundness of financial institutions, should be burdened with disproportionate climate obligations now, especially at a time when it is essential to maintain and enhance the competitiveness and attractiveness of the UK’s financial markets. With regard to individual regulators’ objectives and rule-making powers on climate change-related risks, the ABI recommends the need for holistic debate across stakeholders before adding new objectives to the remit of regulators, given the need to balance the various priorities. I believe that my noble friend’s amendments strike the right balance, and I will support them.
While I agree with the noble Baroness, Lady Bennett of Manor Castle, that biodiversity is important, I believe she wants to go a step too far in her Amendment 44 in adding this to the FCA’s “have regard to.” There are countless other policies that could be added, but too many will muddy the waters and distract the FCA from its efficient operation in performing its core duties and objectives.
My Lords, these amendments, and this Bill, are crucial to the future of the United Kingdom. We have heard repeatedly in the arguments deployed of an interaction. There is the need for financial services to be successful and effective because they play such an important part in ensuring the well-being on which the rest of our society depends. That is beyond question. However, we know that they have implications, socially and beyond, for which they need regulation, and this has been well spelled out.
I shall focus on Amendments 3, 22, 23 and 44 in particular. Fossil fuels inevitably have considerable and extensive risks for the climate. There can be no argument about that. They have great implications in terms of climate change, and I am glad to see that Amendment 3 is grappling with this.
Amendment 22 deals with the point I have just made in that climate change poses risks to financial services. Therefore, it is essential to have the right arrangements in place to ensure that those risks are, if not eliminated, minimised.
Amendment 23 makes the point I have often felt strongly about in legislation: it is sometimes crucial to have a specific person carrying a specific responsibility for bringing together the various threads in the policy for which we are aiming and ensure their delivery. It is a good amendment.
I do not share the rather dismissive approach of the noble Viscount, Lord Trenchard, to Amendment 44. My view is that the noble Baroness, Lady Bennett of Manor Castle, deserves considerable commendation for having tabled this amendment. We have happily joined these UN conventions, and our diplomats have usually played a large part in bringing them about, but we sometimes lack the discipline to follow through with what they require of us. At this point in our consideration of the Bill, it is appropriate to talk about the convention and the undertakings we have thereby committed ourselves to on biodiversity. On that issue, I find myself dismayed by the position of the noble Viscount, Lord Trenchard, because we are surrounded by a major crisis. The biodiversity of the world is in danger of collapse, and the consequences have direct implications for the survival of humanity itself. There is urgency about this situation.
In conclusion, I simply make this point: I said that we wanted the financial services sector to be successful and effective, because we recognise its indispensability, but we also must recognise that on climate change, we are long past the age of rhetorical language and theoretical commitment. We have to demonstrate that we have the leverage and the arrangements in place to ensure delivery; if we do not ensure delivery on the measures we want to see to protect the climate, we will be party to a cruise towards catastrophe for the global community. It is vital to have these disciplines, and these amendments spell out how we can bring those disciplines to bear.
My Lords, I shall speak mainly to Amendments 3 and 23 in this group.
On Amendment 3, I should say I am not generally in favour of littering legislation with reviews, though I confess to having tabled a few amendments of that nature myself in the past. More substantively, I think this particular amendment as drafted is a waste of time.
I can predict the outcome of the review if this amendment is passed. The PRA will find that banks do not hold any significant “investments”—the wording used in the amendment—in fossil fuel assets, whether linked to existing exploitation and production or to new exploration. So all the things mentioned in proposed subsection (2) of the amendment will be irrelevant.
Risk weighting applies to the assets that banks hold. Banks’ assets will largely be loans of various kinds. Banks do not normally invest in physical assets used by other companies, nor do they invest in shares in the companies that own the assets. Banking is fundamentally about lending and not investing.
The noble Lord, Lord Oates, cited the recent speech by the deputy governor talking about prudential regulation being risk-based, which indeed it is, but he failed to understand that he was talking to insurers at the time. They do have investments. This is a fundamental difference between banks and insurers—they have completely different balance sheets.
As I said in Committee, most borrowing by oil and gas companies will be generic—for example, by way of bond issuance or commercial paper—and by one of the companies in a group. It will not be hypothecated to individual assets or groups of assets. Money is fungible and cannot be linked to any specific use. Bank balance sheets might have some leasing arrangements that might be caught by this amendment, but my main point is that the amendment is fundamentally aimed at the wrong target and, therefore, amounts to not much more than virtue signalling.
There is a case for looking holistically at how climate-related financial risk should be reflected in banks’ capital requirements, as amendments in this group in the name of my noble friend the Minister may achieve in due course. The Bank of England and the PRA are already alert to this and have an extensive programme of work to explore the issues, including the exploratory stress test built around climate change, which will take place this year and which was referred to by the noble Lord, Lord Oates. I do not think that my noble friend the Minister’s amendments in this group are necessary, but they certainly do no harm in that context.
The noble Lords proposing Amendment 3 also need to understand that this is not an immediate issue for the prudential capital measurement of banks. Noble Lords might themselves see climate change as an emergency, but there is no emergency embedded in banks’ balance sheets. Corporate lending is short to medium-term in nature, and it would be very surprising if the Bank of England or other global regulators saw a need for significant near-term adjustments to capital. Even Mark Carney—the high priest in this area—has not suggested that.
The other amendment that I wish to speak to in this group is Amendment 23, which would require the FCA to appoint a senior manager with responsibility for climate change. This is certainly an improvement on the amendment that I criticised in Committee, which would have required a full member of the FCA’s board to be appointed, but I believe that the amendment is still imperfect because it refers to that person having “responsibility for climate change”. It is not at all clear that “responsibility for climate change” could have any meaning, as it is not related to any of the general duties or objectives of the FCA as set out in FiSMA.
In 2019, the PRA introduced a requirement for banks and insurers to allocate climate change responsibilities to one or more of the senior management functions, and that has to be included in their formal statements of responsibilities. The PRA framed that as responsibility for
“identifying and managing financial risks from climate change”.
This is a more understandable format than “responsibility for climate change”, but that kind of format clearly cannot be lifted and shifted directly into the FCA environment without further tailoring about what the FCA is actually expected to do.
It is a mystery to me why the proposers of the amendment have singled out the FCA, rather than the PRA, as requiring a senior manager to be appointed. While both are involved in the current work on the impact of climate change, the PRA has been more in the lead on this. It was the PRA, not the FCA, that specified the need for a senior manager to exist in the structures of regulated bodies. The PRA has already nominated one of its executive directors to oversee
“the Bank of England’s work enhancing the financial system’s resilience to climate change.”
The noble Baroness, Lady Hayman, noted that there is a new appointment at a slightly lower level at the FCA, although I think there is less clarity about what that person will actually be doing on climate change.
I am not convinced that anything is actually required in statute, given that both bodies have moved towards identifying individuals with responsibilities in this area, but if the proposers of the amendment wish to take it forward they should look much more carefully at how it is drafted.
My Lords, it is a pleasure to follow my noble friend Lady Noakes. In essence, since we are on Report on a Financial Services Bill, these amendments can, I hope, be rightly summed up as, “What point profit if no planet to spend it on?” But, as the term “global warming” clearly sets out, it is collectively a global issue, not a national one. In this context, I give more than a nod towards our involvement with the whole Basel process and the letter from Mr Sam Woods on this issue.
I support the amendments tabled by my noble friend the Minister. They strike the right balance on the need for transition—not in any sense slow or fast, but a transition—to get to where we need to get to across financial services and the wider economy. As noble Lords commented, there is no benefit—quite the opposite—in taking an approach to a particular industry in a particular region of United Kingdom only to have a more catastrophic climate impact by having to shore up resource from other parts of the globe.
In short, the PRA has a role to play, as do all elements in the financial services sector. More can probably be done on the use of new technologies and the measurement of how funds and various assets are performing in this sense. That is certainly in our grasp; it is not a matter for this group of amendments, but it could well provide much of the solution, and certainly the clarity and accountability that would come through in the course of business.
I fundamentally agree with my noble friend Lady Noakes’s commentary on how large corporates go about their funding—[Connection lost.]
We appear to have lost contact with the noble Lord, Lord Holmes. Perhaps we should move on to the next contributor, the noble Baroness, Lady Altmann.
My Lords, I have added my name to Amendment 3, moved so excellently by the noble Lord, Lord Oates. I congratulate him on his work on the issues relevant to this group of amendments.
I also commend my noble friend the Minister and his department for listening to the concerns expressed in Committee and for laying his own amendments to the Bill, which previously made no mention of climate change at all. I believe that the Government are committed to making a real difference on climate change and environmental issues, and have recognised the dangers that our precious planet faces due to climate change and biodiversity risks, as the noble Baroness, Lady Bennett, mentioned and as is in her amendment. I welcome the Government’s Amendments 43, 46, 47 and 49, and hope that the issue of climate risk will continue to move up the agenda in financial services.
I have enormous respect for my noble friend Lady Noakes and her experience in banking. She makes relevant distinctions between assets held by insurance companies, regulated by the FCA, which hold investments directly in fossil fuel or environmentally damaging firms and activities, whereas banks’ main assets are loans rather than more direct investments. Their balance sheets, as she noted, have some leasing, but, should the worst predictions of climate catastrophe materialise in a shorter timeframe than currently anticipated, there could be unexpected defaults on a number of the loans on the loan books, which also needs to be considered, I would hope, in terms of risk weightings.
In Committee, I supported the noble Lord, Lord Oates, in seeking to update the existing capital risk weightings to reflect climate change risk. Having listened carefully to the Committee’s arguments, he has taken care to adjust his amendment for Report. As we have all discussed in this group, climate change is now recognised widely as posing a significant risk to the entire global financial system and, in fact, to our expected and hoped-for way of life. Current central bank policy risks reinforcing a carbon lock-in through a systemic bias to fossil fuel investments—indeed, insurance arrangements and pension funds also have significant investments in this area. I believe we need a twin-track approach that both reports on and quantifies climate-related financial risks and, at the same time, amends prudential risk tools to reflect the risk of loss or stranding in relation to fossil fuel investments or, indeed, loan books.
Such an approach would reflect the urgency of the challenge we face and, as Andrew Bailey said in a speech last year:
“Investments that look safe on a backward look may be existentially risky given climate risks.”
The Minister’s response in Committee was that the proposed amendments would require the PRA to set punitively high risk weights against exposure to existing and new fossil fuel production and exploitation, and that these risk weights would, in effect, make it more expensive to finance such activities and thereby make them less attractive. Loans would be more expensive, potentially, to companies involved in this area. Is this not the very point that we should be seeking to achieve—to reflect the risks of carbon-intensive investments quantitatively, through higher risk weightings, and potentially through the issuing of loans to such companies?
Amendment 3 recognises the Government’s concerns and now proposes only that the PRA carry out a review of the current risk weightings applied to existing and new fossil fuel activities. In this regard, such a review may indeed confirm what my noble friend Lady Noakes suggested would be the outcome but, without such a review, I feel that we will not necessarily be taking this sufficiently seriously. I hope my noble friend can agree that this is a reasonable and prudent way to recognise the urgency of the climate change challenges we face, and that it would provide evidence to inform any necessary future changes to existing prudential rules around capital weightings, should that be found to be required.
In addition, two reports have just been published highlighting the systemic nature of climate risks. The LSE’s Grantham Research Institute report—I declare an interest as a visiting professor—Net-Zero Central Banking stated:
“Central banks and supervisors will need to take a systemic perspective, addressing both micro- and macroprudential risks over a much longer time horizon than they do now, and work to ensure that financial flows become aligned with net-zero.”
Policy Exchange’s report Capital Shift recently stated:
“Whereas international banking codes require banks to include emerging risks such as cybersecurity in capital adequacy compliance … climate change barely features.”
“Central banks and supervisors should introduce higher capital charges for assets at greater risk from climate and nature-related financial risks.”
I hope my noble friend the Minister can provide assurances that an urgent review of this vital area is possible and will be considered.
I speak briefly in support of the aims of Amendment 22 in the name of the noble Baroness, Lady Hayman, on climate-related financial risk reporting. I commend her for her work in this area and declare a further interest as a member of the Peers for the Planet group, which she so ably leads. Amendment 22 would require adjustments to reflect the systemic risk in the whole financial system. I hope my noble friend will commit to a future consultation, at least, on the FCA and PRA objectives having regard to net zero targets.
Finally, I have added my name to Amendment 23, also in the name of the noble Baroness, Lady Hayman, whose work on environmental protection has been so powerful. I congratulate the new chief executive of the FCA, Nikhil Rathi, on the latest announcement that he is recruiting a senior role focused specifically on environmental and other ESG matters, so I suspect that this amendment may no longer be required.
My Lords, we have not as yet been able to restore contact with the noble Lord, Lord Holmes of Richmond. Should he reappear before the Minister speaks, I will try to call him, but for the time being he is not with us, so I call the noble Baroness, Lady Kramer.
My Lords, I will follow my practice of trying to be brief and selective on Report. We have had absolutely brilliant speeches and I do not intend to repeat them.
Perhaps I can start by being helpful to the noble Baroness, Lady Noakes, and I speak as a fairly weather-worn commercial banker who dealt extensively with loans and risk. She will understand, therefore, that the PRA, as the regulator, in dealing with capital adequacy issues, looks at the loans that sit as assets on the bank’s books, but of course it does not stop there. It looks through that to the operational activities—to the activities and investment of the company to which the loan is made. That is why the terminology “investment” pins exactly what this amendment is intended to do, which is to make sure that the PRA does that look-through to investment. I do not think that any member of the PRA would have the slightest difficulty in understanding what this amendment is guiding them to carry out. They would see that it has genuine precision in it. I do not have a problem with the wording; the wording says what it should, it says what it means and it says what the PRA would understand and follow through.
Very briefly, I thank the Minister for the two “have regard” amendments that he has embedded in this group. To “have regard” to the climate change target of 2050 is a step forward, but we have to recognise that it is very light-touch and will not scare the horses. The noble Baroness, Lady Noakes, captured that rather well when she said that the two “have regard” amendments will do no harm. I do not think they change the landscape, but they give a little hint of a change in direction and I welcome that change in direction.
Like others, I am very frustrated that we have a PRA that is going to do stress tests to test the sufficiency of banks’ capital buffers to deal with the financial instability caused by climate change, but then seems to have taken almost the equivalent of a vow of passivity and will not then follow through and implement the consequential adjustments to capital adequacy ratios that would come from that exploration and examination of the buffers. I really do not understand going through the process and then saying, “But we will not learn from or implement the consequences of that work”.
I sometimes think, as I listen to the speeches, that there is a sense that this requirement to look at capital adequacy ratios is somehow novel or revolutionary. I sit on the Economic Affairs Committee and last week, we were privileged to hear from the noble Lord, Lord Turner of Ecchinswell. I hope I have pronounced that correctly. We were looking at quantitative easing issues and therefore it was a discussion of central banks, but the issue of climate change came up. I thought what he said was quite helpful in understanding how normalised the approach of challenging this issue through capital adequacy ratios is now becoming. He said that any role of central banks in relation to climate change is very much secondary to the fiscal and regulatory authorities—the same issue that I think was raised with reference to quotes from the noble Lord, Lord King—but that is an important statement. It is secondary to the fiscal and regulatory authorities because, of course, the relevant regulatory authority is the PRA. He went on to give an illustration by referring to coal:
“If banks go on lending to coal companies, they may end up with stranded assets on which they will make a loss. That will be bad for their capital ratio. I think that it is reasonable for the PRA to set higher capital ratios for anybody who is still lending to coal.”
I do not want to suggest that he was willing to go further than coal, but he was using it as an illustration. I think most of this House would very happily accept that that language needs to be extended across the full range of fossil fuels, certainly in requiring the PRA to do a review. So, I wanted to underscore that this is a normalised approach; this is where we will go, and where we will end up. Given that we have described climate change, absolutely correctly, as an emergency, a delay in getting to that appropriate application of capital adequacy is really serious.
I wanted to pick up the point made by the noble Baroness, Lady Noakes—that most loans are short or medium term. They are, but they are supporting longer-term projects. Of course, the duration of financing the project itself—the project they enable, the project they empower, the project they drive—has a much longer-term application. So, the fact that the loan itself is short term does not mean that it can be set aside as though it had no longer-term implications. It is merely the first step in an ongoing process, and once the process is started it is almost impossible to stop. Loans might be short term because people think they might get better terms and conditions or pricing in the future. The short-term issue is not applicable here; the urgency issue is.
We know that we face an emergency and that how we act in the future will have to be more draconian and dramatic, and have far greater collateral damage, than if we act early. It is crucial that the issues raised in Amendment 3—getting in place the plan, pattern and process for using capital adequacy ratios to tackle the financial instability that will come from allowing climate change-related activities to continue and grow—be dealt with now, and rapidly. If the Government do not recognise what we have been describing here and commit to this review of the whole issue of capital adequacy and climate change, I very much hope that my noble friend Lord Oates will press his amendment. The message is absolutely critical.
My Lords, I am grateful to the noble Lord, Lord Oates, for leading this debate this afternoon, and to all noble Lords who have spoken. We had a detailed debate in Committee on the need for the regulators to take a more systematic and urgent approach to their climate change obligations. I do not intend to repeat the general arguments, not least because the Minister accepted the need to embed our climate change goals in the financial services sector. The point of difference remained, how deep and how fast. Since that time, we have had a useful meeting with the Minister and we were pleased to hear that he had accepted our arguments concerning the need for the regulators to have regard to the Climate Change Act. The Government’s amendments, tabled today, reflect that concession and we consider this to be a considerable step forward. I thank him for his work in making that happen.
Since then, the Minister has also facilitated the sending of two letters from the PRA and FCA setting out their work on sustainable finance, to which a number of noble Lords have referred. It is useful to have their current commitments restated in this way and we are pleased that they have engaged with us on the subject. It is also helpful that they have set their work in an international context, as we know that we cannot solve this issue alone. However, I would say to the regulators, and indeed to the Treasury, that what is lacking in these letters is the urgency and reprioritisation that the climate change emergency demands. As we discussed in Committee, many individual financial institutions are already ahead of the game and are implementing dynamic green initiatives. We have heard great speeches from the Chancellor and others on the importance of the issue, but why are the regulators not being more ambitious, to ensure that everybody meets the standard of the best? As a result, today we have tabled further amendments to spell out in more detail how systemic finance-related climate risks should be embedded in the policy agenda going forward.
I have added my name to Amendment 3 in the name of the noble Lord, Lord Oates. It addresses the need for the PRA to review the risk weighting applied to investments in existing and new fossil fuel exploitation and production. The noble Lord has explained the case for that amendment extremely well today. We agree that the current regime does not adequately reflect the high-risk exposure of such investments. Clearly, institutions with over-exposure to carbon-intensive investments are not acting prudentially and their capital requirements should reflect this. As we discussed before, as the policy agenda moves rapidly away from fossil fuels and towards renewables, there is a considerable risk of the assets being stranded. The capital adequacy requirements need to reflect this risk more accurately.
The Minister will know that the Basel Committee conducted a survey of regulators in April of last year to stocktake their supervisory initiatives on climate change financial risk. This seems to run counter to the point that the noble Baroness, Lady Noakes, was making—I listened carefully to what she was saying about the comparative responsibilities of regulators and banks—because the Bank of England and the PRA were both respondents to the survey. In fact, only six out of the 27 replies factored the mitigation of climate-related risk in to their prudential capital requirements so far, but there was some criticism in the conclusions of the survey as a result of that. So, were the UK regulators in the good minority or the bad majority in the outcome of that survey, and are their responses to it in the public domain? Does he also accept that, without the necessary adjustments made in Amendment 3, investments will continue to focus disproportionately on outdated oil and gas activities that run counter not only to investments but to the interests of the UK economy as a whole? This point was well illustrated by the noble Baroness, Lady Sheehan. This is why we would particularly welcome the involvement of the Climate Change Committee, in order to provide the wider perspective of the longer-term UK interests, rather than the narrow short-term interests on which investment decisions are too often made. I therefore hope that the Minister will be able to give us the assurances we seek in this regard.
I have also added my name to Amendment 22, in the name of the noble Baroness, Lady Hayman, for which she made a very powerful case. We believe it essential that the Government set out how they will actively ensure that climate change considerations are reflected in the regulators’ statutory objectives. This amendment would provide a framework for systematically assessing and reporting on climate change financial risk. It would ensure that all government guidance is linked in order to provide a coherent and entire picture on managing climate change—an improvement on the current piecemeal reporting structure. I therefore hope that the Minister will be able to give us the assurances we seek on this issue. It would also be helpful if he could spell out what future formal reporting mechanisms would be put in place to achieve this.
Moving on to Amendment 23, at Committee and again today, the noble Baroness, Lady Hayman, has made a compelling case that the FCA needs a senior executive to oversee and deliver the climate change agenda. Like her, we were pleased to see in the FCA’s letter that a dedicated director of environmental and social governance standards is being recruited to lead on this work. We welcome this appointment and believe it represents a real step forward.
With Amendment 44, the noble Baroness, Lady Bennett, has once again made the important point that action on climate change and biodiversity need to go hand in hand. As my noble friend Lord Judd said, we all too easily join UN international conventions on issues such as these, but we lack the discipline to follow them through at a UK level. It often feels that biodiversity is the poor relation of climate change, but we know that urgent action on both issues is essential if we are to have a thriving, sustainable planet in the longer term. I agree with the noble Baroness, Lady McIntosh, that we should aspire to a future in which all natural capital is valued in its proper place. This is an issue that we will continue to pursue.
We very much welcome the inclusion of government Amendments 43, 47 and 49 in this Bill. While this was the right thing to do, I do not doubt that the Minister had to do some persuading with his Treasury colleagues and we thank him for that. These amendments represent another step in creating a cross-departmental approach to tackling climate change and, in due course, meeting our net-zero targets. I look forward to the Minister’s response to our amendments today and to hearing the specific reassurances we seek in order to move forward more fully with a credible package of actions to deliver our climate change obligations.
My Lords, I shall not detain the House for long at this stage. I fear I got cut off just as I was extolling the virtues of how new technologies could help in this endeavour. I support the amendments in the name of my noble friend the Minister and look forward to his explanation of them.
My Lords, let me begin by saying that I have listened carefully to the debate today, as well as the important contributions made in earlier debates on this Bill. As a result of those earlier debates and subsequent discussions held with a number of your Lordships, the Government have tabled the four amendments included in this group, which I shall speak to in a moment. Before I do, I want to leave the House in no doubt as to the context in which we are now operating.
In November, my right honourable friend the Chancellor set out a vision for the financial services sector to put the full weight of private sector innovation, expertise and capital behind the critical global effort to tackle climate change and protect the environment. That is why the Government are taking a number of actions, such as making climate-related financial disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023, and issuing our first-ever green gilt later this year. At Budget this month, we augmented the Government’s economic objectives and the remit of the Monetary Policy Committee and Financial Policy Committee to support environmental sustainability and the transition to net zero. We also established the UK infrastructure bank with a mandate that includes tackling climate change. The Government have ambitious plans to ensure that the financial services sector as a whole plays its role in supporting our climate change commitments. However, we heard loud and clear the strong views from members of this House that they wanted to see that ambition reflected in this Bill.
Amendments 43 and 47 in my name will require the PRA and the FCA to consider the 2050 carbon target in relation to the Climate Change Act 2008 when making prudential rules under the accountability framework set out in this Bill. The Government are showing, very publicly, how the financial services sector and our regulators can take a lead role in delivering on our climate commitments. They are also showing the rest of the world that the UK is taking a cross-sector approach. I have greatly welcomed the way in which noble Lords have engaged with me on this issue. We have picked the 2050 carbon target, as it benefits from being both legally defined and substantively focused. This makes it clear to both regulators exactly what they must have regard to in making their rules and how they can be held to account.
As I explained in earlier debates, the Government and the regulators are committed to implementing the first wave of Basel reforms and the initial introduction of the investment firms prudential regime on 1 January 2022. These reforms are important for our international standing as a country that upholds its international commitments, for financial stability, and for our competitiveness relative to the EU. As I said in Committee, there is a great deal of work happening at the moment at the international standard-setting level to determine exactly how climate change should be factored into prudential policy globally. This is why Amendments 46 and 49 delay the application of mandatory climate change considerations to 1 January 2022. This will ensure there is sufficient time for this work to progress, and that there is no unnecessary and impractical delay in implementing these vital regimes. Otherwise, we would be in the unfortunate position where the regulators would have to reopen or restart their consultations.
When and how will the amendments bite, if not on the first wave of Basel and the IFPR? I can assure noble Lords, particularly the noble Baroness, Lady Hayman, that the PRA will still need to make rules to implement substantive reforms contained in Basel 3.1, which will be implemented in 2023. These rules will be within the scope of the amendments in my name. I fully expect the regulators to use the powers again in future to update their rules—for example, to take account of new international standards or developments in the market. I hope the House will agree that these amendments strike the right balance between acting quickly on climate change and taking swift action to reform our prudential regimes which aims to prevent a future crisis. I therefore see this as a significant action which very visibly demonstrates the Government’s commitment to furthering this important agenda.
The Government are also acting to ensure that the regulators take account of our climate commitments more broadly. At Budget, the Treasury published remit letters for the Monetary Policy Committee and the Financial Policy Committee, requiring both these committees to consider the Government’s commitments on climate change. Today, I can confirm that the Chancellor has set new remits for the FCA and the PRA that will also require them to consider these commitments across the whole of their remit. As has been mentioned in this debate, the CEOs of the PRA and the FCA have both written to me to set out the significant amount of work they have under way. I will provide some further details on this in a moment. They have also demonstrated their clear commitment to acting to address climate change. I have placed copies of their letters in the Library and in the Royal Gallery.
Lastly, and importantly, there is the future regulatory framework review. This is the means by which the Government are exploring how the regulators focus more broadly on important public policy issues, such as climate. I hope this meets one of the concerns expressed by the noble Baroness, Lady Hayman. I can add to it because, as part of that review, the Government recently consulted on a proposal to allow Parliament and Ministers to specify new regulatory principles for specific areas of activity—for example, setting out how the regulators must consider sustainability or green issues when making rules. The Government are considering the responses to the consultation ahead of a second consultation later this year, and recognise the need to address this crucial issue across the whole regulatory framework. I hope I have shown that the Government understand the issue, that we are taking the appropriate actions and that the regulators are ready and willing to support such actions.
I now turn to the other amendments in this group, though not in numerical order. I begin with Amendment 44, which would amend one of my own amendments. Amendment 44 would require the FCA also to take into consideration the UK’s commitments under the UN convention on biodiversity when making rules to implement the investment firms prudential regime.
This Government are committed to being the first to leave the natural environment in a better state than they found it, with our long-term agenda laid out in the 25-year environment plan. As the Dasgupta review highlights, and as the noble Baroness recognises, the global financial system will play a critical role in enhancing our stock of natural assets and encourage sustainable consumption and production activities. We will reflect on the conclusions and recommendations of the Dasgupta review and consider the most appropriate way to take them forward. However, unlike the 2050 carbon target in the Climate Change Act 2008, which my own amendment targets, the commitments under the UN convention are extensive, varied and more challenging to deliver through financial services regulation. Work on how the financial sector can support our transition towards net zero is more developed than work on how the sector can support biodiversity goals.
However, work to develop our understanding is under way. For example, just last year we saw the launch of the Task Force on Nature-related Financial Disclosures. This task force will provide a framework for businesses to assess, manage and report on their dependencies and impacts on nature. This will support the appraisal of nature-related risk and will continue to realign incentives which support our biodiversity goals.
The Convention on Biological Diversity—COP 15—will also be an important milestone for international action on biodiversity. We will work with countries to agree long-term, realistic, measurable and fit-for-purpose targets to set nature on the path to recovery. Nature will also feature as one of five policy themes for COP 26, which has been agreed by the Prime Minister. The nature campaign is focused on catalysing action to protect and restore the natural habitats and ecosystems on which our climate, air, water and way of life depend, which includes increasing the volume of finance for nature-based solutions. I listened with interest to the remarks of the noble Lord, Lord Judd, in that context.
Amendment 3 would place a legal obligation on the PRA to review the risk weights applied to certain fossil fuel exposures and thereby the amount of capital held against them. The purpose of risk weighting is to preserve the safety and soundness of our financial system and to prevent banks failing as a result of not covering themselves appropriately against the risks they are taking. I was grateful for the remarks of my noble friend Lady Noakes on these issues.
In its letter to me, the PRA recognises the threat posed by climate change to the UK economy and the financial system and sets out the steps it is taking to mitigate this threat. This includes setting out specific and detailed supervisory expectations for both banks and insurers on their approach to managing financial risks from climate change. The PRA has also written to firms setting out its expectations that firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021.
The noble Lord, Lord Oates, questioned why a lower risk rating should be applied to fossil fuel funding than some other asset classes. As I am sure he is aware, the risk weighting of assets is decided internationally through a set of agreed standards set by the Basel Committee on Banking Supervision, and this is based on analysis of how risk is transmitted and how it can be quantified. These post-crisis reforms have also been endorsed by the G20 and ensure that risk weights are applied consistently across the globe. The flexible approach taken in the Bill ensures that, where considerations around the risk weighting of assets change, the PRA can respond to developing circumstances as they arise.
We must not act with undue haste, but rather with appropriate speed. In 2020, the Network for Greening the Financial System, a group of central banks and supervisors, found insufficient evidence of a measurable difference in the risk posed by brown and green asset classes, so further work is needed. The Basel committee task force on climate-related financial risks is seeking to understand how climate risk is transmitted, measured and assessed. This task force plans to complete this fundamental research by the middle of this year. Building on this analytical work, and to address a question asked by the noble Baroness, Lady Hayman, the task force will consider the extent to which climate-related financial risks are incorporated into the existing Basel framework and identify effective supervisory practices to mitigate such risks.
So the review that noble Lords wish to see is already under way, and we will see more on this in the autumn. I hope the noble Lord, Lord Oates, will agree that this review demonstrates that the Basel committee, of which the PRA is a member, is already considering climate risks in the financial system, and that this will persuade him not to press his amendment.
In this context, perhaps I could quickly respond to the noble Baroness, Lady Sheehan, who made a number of points relating to the funding of overseas projects by UK Export Finance. I should be happy to write to her on this, further to our previous correspondence on the subject.
Amendment 22 is broader, as it would require the regulators regularly to review the exposure to climate-related financial risks and the impact on financial stability. The PRA’s existing obligations under the Financial Services and Markets Act already require it to consider risks to the safety and soundness of financial institutions, and this includes climate risks in the same way as any other risks. The PRA will be undertaking further climate-related stress tests in June, to ensure that the financial system remains resilient to those risks. I shall answer as best I can the question of the noble Baroness, Lady Kramer, on those stress tests, on which I do not have up-to-date details—I am sorry.
Our green finance strategy commits the Government to improving the understanding throughout the financial system of climate risk and environmental impact. I have already said that the Government have committed to implementing the requirements of the task force on climate-related financial disclosures in the UK, with a significant portion of mandatory requirements in place by 2023, and all relevant firms reporting in line with the requirements by 2025. This requires firms to investigate, report and manage the climate risks that they face. The UK is the first country to take such a step and, incidentally, we are a long way ahead of the EU in doing so. The Bank of England reported publicly on its own climate risk exposure in June 2020. The Government’s approach in this area can be seen as systemic, to pick up the word used by the noble Baroness, Lady Hayman.
Amendment 22 would also require Her Majesty’s Treasury to review how the FCA and the PRA’s objectives “have regard” to the Climate Change Act 2008. My amendments ensure that the regulators will consider this when implementing their prudential regimes, and the remit letters set by the Chancellor also require this.
I turn now to Amendment 23, which aims to require the FCA to appoint a senior manager with responsibility for climate change. I am happy to confirm that, in his letter to me, the CEO of the FCA has committed to recruiting a dedicated director of environment, social and governance standards. The director will report directly to the CEO of the FCA and will have responsibility for its ambitious work programme in this area. So I am happy to confirm that it is not necessary to set out this requirement in legislation.
I hope that what I have said has demonstrated that the Government have listened to the arguments and, through the amendments tabled in my name, have responded tangibly to them, and are also substantively on the same page, as are those the noble Lords who rightly feel passionately about these issues. Therefore, against that background, I commend my amendments to the House and in turn ask noble Lords not to press theirs.
My Lords, I thank all noble Lords who have taken part in this interesting and engaging debate and I give particular thanks to the noble Baronesses, Lady Hayman, Lady Jones of Whitchurch, and Lady Altmann, for signing Amendment 3, and to my noble friend Lady Kramer, as well as to the noble Baroness, Lady Bennett. I am also grateful to the Minister for his engagement at all times.
I am sorry if the wording of the amendment caused any confusion to the noble Baroness, Lady Noakes, but I hope that the clear explanation made by my noble friend Lady Kramer has lifted it. I do not have anything to add to that, except to say that I have no doubt that the PRA will understand very clearly what it is being asked to do. The noble Viscount, Lord Trenchard, said that he felt that a review would be disproportionate. I am not sure what he is measuring the proportions against but, if anything, the amendment seems to be a disproportionately modest response to a desperately urgent issue that will impact on us all.
I am pleased that the Minister and the FCA have reacted to a number of the amendments, in particular Amendment 23 tabled by the noble Baroness, Lady Hayman, on the senior manager of the FCA, and obviously I welcome the movement on the Government’s “have-regard” amendments.
I reiterate my thanks to the Minister for his engagement during this process, although I am disappointed that he has not been able to provide the reassurance I had hoped for that risk weights would be properly addressed. He said that we had to move not with undue haste but with due speed—but I am not sure that we are doing either.
I am afraid that I do not accept that the issues are covered sufficiently by the existing work that he has taken the trouble to set out, not least because the approach being followed does not take into account sufficiently the specific issues set out for the review in my amendment, in particular the climate-related disruption of the economy. It is very important that this review should take place and that the PRA can use it to look properly into these issues. As I said in my opening speech, it should feed into discussions at international level. It is very important that it is looked at in terms of the remit of my amendment. So, on that basis, I would like to test the opinion of the House.
Amendment 3 disagreed.
4: After Clause 15, insert the following new Clause—
“Continuity of contract
If the FCA exercises one or more of the powers under Article 23D of the Benchmarks Regulation in respect of a benchmark, any reference to or description of that benchmark in a contract, security or instrument must be, with effect from the date of such exercise, interpreted as a reference to or description of the benchmark as modified by the FCA under its powers under Article 23D.”Member’s explanatory statement
This amendment would ensure that if the FCA revised a benchmark under Article 23D (inserted by Clause 15) there would be continuity of contract by replacing references to the earlier benchmark with the revised one.
My Lords, in moving Amendment 4, I shall speak to the other two amendments in this group in my name. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Eatwell, for adding their names to Amendment 6.
I spoke at length in Committee about the problems of tough legacy contracts, and I shall not repeat all of that. To summarise, when Libor ceases to be available at the end of this year there will be a number of contracts which reference Libor but which have not been renegotiated to substitute an alternative rate. We do not know exactly how many contracts are involved, but it is thought to be a significant number. It is not a niche problem; it arises in both the capital market and retail markets and in many different kinds of contract. While sustained efforts by financial services providers have reduced the scale of the problem, it cannot be fully resolved for various reasons, and I think that that has been accepted by all parties.
The Bill helpfully provides for the FCA to ensure that what is known as synthetic Libor will be available for use in those contracts which have not been renegotiated, but two problems remain. First, while the FCA has made synthetic Libor available for use, the FCA cannot change the contracts itself; it requires separate provision in law. Amendment 4 would provide for continuity of contract so that any contract, loan or security referencing Libor will be taken to reference synthetic Libor instead. Secondly, even if references to Libor are regarded as meaning synthetic Libor, there remains a risk of litigation if one or more parties object to the substitution of synthetic Libor and believes that some other fallback is more appropriate. Amendment 5 says that no claim or cause of action can arise due to the use of synthetic Libor. This is a safe harbour provision.
I recognise that the exact drafting of continuity of contract and safe harbour is not straightforward, though I emphasise that my amendments have been drafted with the help of lawyers who are specialists in capital markets, and that they mirror the draft legislation which has been drawn up for New York law by the Alternative Reference Rates Committee. Nevertheless, I have also tabled Amendment 6, which takes a slightly different approach by giving the Treasury the power to make regulations dealing with contract continuity and/ or safe harbour. It does not require the Treasury to do either or both of those things but offers a straightforward method of dealing with the problem in secondary legislation if, for some reason, the Government feel unable to legislate directly at this stage.
I tabled Amendments 4 and 5 in Committee and was met with the expected response that the Government had recently issued a consultation on contract continuity and safe harbour, and that the consultation period had not concluded. The Government would decide what to do once they had considered the consultation responses. The consultation has now concluded, so it is time for the Government to decide what to do. As I understand it, there were only a relatively small number of responses to the consultation, and they are overwhelmingly in favour of proceeding with continuity of contract and safe harbour. I hope that my noble friend the Minster will confirm that.
I had hoped that the Government would table amendments of their own on Report, but life is full of disappointments. The clock is counting down to 31 December this year and those areas of the financial services market which are impacted by tough legacy contracts desperately need some certainty about the way forward. I therefore call on the Government to either accept one of my amendment variants—Amendments 4 and 5 or, alternatively, Amendment 6—or commit to bringing their own amendment forward at Third Reading. If the opportunity of this Bill is missed, it is by no means clear whether there will be a later opportunity in time for the cessation of Libor, which is only nine months from now. I hope that the Government will want to avoid creating a long period of uncertainty and will not let this Bill pass into law without fully dealing with tough legacy contracts. I beg to move.
My Lords, I apologise for forgetting to declare my interest as a director of two financial services regulated companies.
I support Amendments 4, 5 and 6, ably moved by my noble friend Lady Noakes, whose long experience and mastery of the detail of financial markets and regulation is an invaluable asset to your Lordships’ House. As far as Amendments 4 and 5 are concerned, she presented the arguments very well in Committee and today. I was also impressed by the arguments deployed by the noble Lord, Lord Eatwell, who quoted the FCA’s view that in cases where parties to contracts referencing Libor cannot reach agreement on how those contracts would operate in the event of Libor’s cessation, discontinuation could cause uncertainty, litigation, or loss of value because contracts no longer function as intended.
The Minister recognised that we must reduce contracts referencing Libor as much as possible by the end of this year. Given the vast number of outstanding contracts, clearly that will not be possible, and rightly the Government have initiated a consultation process on this subject. However, does he not agree that the risk of uncertainty and litigation is significant and that there is unlikely to be a better opportunity to legislate in time to mitigate such risks than that which this Bill provides?
In Amendment 6, my noble friend Lady Noakes, supported by the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Eatwell, has offered an alternative method of mitigating these risks. As a rule, I do not like the trend towards taking excessive Henry VIII powers, which greatly reduce the transparency and accountability of the Government. However, if my noble friend the Minister cannot accept Amendments 4 and 5, the alternative—Amendment 6—would in that case be acceptable as being much better than the situation that will otherwise quite possibly evolve with great damage to market integrity and much expensive litigation.
I hope that the Minister has thought more about these issues since our last debate and I look forward to hearing how her thinking has evolved to meet the very sensible points that my noble friend’s amendments would address.
My Lords, in Committee, I supported the amendments of the noble Baroness, Lady Noakes, as something that had to be done. It seemed to be a reasonable, if simple, concept that a flawed benchmark reference in a contract, if changed to a closely corresponding but not flawed benchmark—a change required by the regulator—should not give rise to litigation, not least because the contracts should still largely perform as originally intended.
Some contracts may have had termination clauses in the event of no benchmark, which could give rise to premature terminations and winners and losers. However, this is not really a no-benchmark situation. While not everyone has sympathy with banks and industry should they be the losers, this is not a matter on which they would be at fault. I am sure that everyone would have sympathy if consumers were losers but what if it goes the other way and banks want to pursue consumers if they are the winners? I am sure that that would be seen as unacceptable.
This is not mis-selling but, as far as contracts are concerned, it is a blameless matter and it seems to me that continuity is the closest to honouring original intents. If there were a way in which to make simple compensatory adjustments, we would not be facing these problems. I therefore still feel that something has to be done and doing the same as the US also seems to be good in terms of the UK’s reputation for giving certainty to markets.
However, the noble Baroness, Lady Noakes, has now come up with a third amendment, Amendment 6, which empowers the Treasury to address matters further down the track and gives more flexibility in what may be determined. It is a bit of kicking the can down the road and a bit of Henry VIII, but one hopes that it will encourage more solutions to be found. I have therefore added my name to that amendment and hope that at least, if the Minister cannot accept the other amendments, it can be accepted as a way forward.
My Lords, I am delighted to speak to this group of amendments and declare my interests as set out in the register.
I congratulate my noble friend Lady Noakes not just on the eloquence that she demonstrated in introducing these three amendments but on the quality of their drafting. As an ex-City solicitor, I look on that with awe. I also congratulate my noble friend on offering options. We had a thorough and in-depth debate in Committee on these issues. My noble friend has done the House a great service in bringing a buffet approach for the Government to consider. If they are not partial to Amendments 4 or 5, Amendment 6 will work just as satisfactorily.
These amendments need to be seriously considered. For the want of certainty and for ensuring that litigation does not result if we do nothing, I ask my noble friend the Minister on Amendments 4, 5 or 6, as I have in the past and will do on forthcoming amendments: if not this Financial Services Bill, which financial services Bill? If not now, when?
My Lords, I declare my interests as set out in the register. I support these amendments, which have been so well explained by my noble friend Lady Noakes. In Grand Committee, the Minister accepted that there were concerns that a residual risk of disruption and potential litigation would remain even once the FCA had exercised its powers under the Bill. This is really important, given the amount of money and the number of contracts at stake, and the timescale of the changes in the benchmark at the end of 2021.
My noble friend the Minister said that the Government would prefer to wait for the results of the consultation, but these are not new issues. The Treasury and regulators have been aware of them for many months. The argument was made that the reason for waiting for the consultation is that there might be areas where there was legitimate reason for civil litigation and that those legitimate legal claims might be blocked. I am not persuaded that there are legitimate legal claims where the benchmark is being replaced with a synthetic benchmark at the direction of the regulator. There has to be a change and I cannot think of situations where those claims might be appropriate and fair. I would welcome it if the Minister can explain where those concerns come from and what situations might be blocked unfairly by these amendments.
Other than that, we should move to deal with these concerns now, as noble Lords have said. If the Minister does not like the specificity of Amendments 4 and 5, I would certainly be prepared to accept Amendment 6. I hope my noble friend the Minister will come back at Third Reading with government amendments to address these issues. If she does not feel able to do that and my noble friend Lady Noakes were to bring back her amendments at Third Reading, I would be compelled to support her.
My Lords, I am grateful to the noble Baroness, Lady Noakes, for bringing forward these amendments. I have to confess that I am not keen on Amendment 5 because it seems that it would create an opportunity for various institutions to use the change in the benchmark in a way that would be abusive to a customer, who would then have no redress.
Amendment 5 goes too far, but Amendment 6 makes perfect sense to me. Frankly, I find it extraordinary to think that the Government have not seized it and put “government” in front of it. We will face tough legacy contracts and there needs to be a sensible and appropriate way to deal with them. Amendment 6 captures that exactly as it should. I hope very much that the noble Baroness, Lady Noakes, will get a positive reply on Amendment 6 from the Government, otherwise there will be litigation and a mess, and I am not sure that that helps anybody.
My Lords, we should all be grateful to the noble Baroness, Lady Noakes, for her persistence in this vital area. She is quite right that the clock is ticking: with nine months to go, we really need to do something about this issue; to do otherwise would be irresponsible.
Amendment 4 is valuable in defining continuity of contract, but there remains a problem that it does not and cannot solve: if the foundation of a contract is changed, its value can change. That leads on to Amendment 5. Here, I regret to say that I differ with the noble Baroness, Lady Noakes, and with the noble Baroness, Lady Bowles. It is surely the responsibility of Parliament in this case primarily to protect the retail investor, as it is the retail investor who is not the professional, who typically does not have the same information as the professional and who is likely to be more financially vulnerable, not least because retail investment is dominated by pension savings. I therefore conclude that the provision of a safe harbour is inappropriate in this case and would be looking instead for some mechanism of reconciliation rather than prevention of claim.
However, I am delighted to express my support for Amendment 6—which is not surprising as my name is on it. Here the noble Baroness, Lady Noakes, has actually saved the Government from considerable embarrassment by presenting an amendment which succinctly encapsulates, without being prescriptive, the issues the FCA must address in facing the difficulties created by the replacement of Libor: continuity of contract and reconciling the damages. Unlike Amendments 4 and 5, Amendment 6 incorporates those. I express strong support for Amendment 6 and recommend it wholeheartedly to the Government. In terms of the buffet approach, it is the healthy option.
Noble Lords will remember from previous stages that the Bill provides the FCA with the powers to manage an orderly wind-down of a critical benchmark such as the Libor benchmark.
In 2015, the Financial Stability Board recommended a transition away from certain interest rate benchmarks, including Libor, to alternative rates based on active and liquid underlying markets. In 2017, the FCA secured agreement from the panel banks that contribute to Libor that they would continue submissions until the end of 2021, providing time for firms to move away from use of the Libor wherever possible.
However, it has been clear for some time that there will be certain “tough legacy” contracts that will be unable to transition away from Libor in time. It is for the benefit of these contracts that the Bill grants the FCA the power under Article 23D of the Benchmarks Regulation to direct a change in how a benchmark is calculated, so that the benchmark can continue for a limited time after banks stop providing their contributions. The Bill therefore represents a critical step in providing for a smooth transition away from Libor, mitigating the risk of the financial instability and market disruption that could be caused by a disorderly transition or end to Libor. It has been widely welcomed by the financial services industry and internationally.
The proposed amendments seek to supplement the Bill’s provisions, reducing further the scope for uncertainty, contractual disputes or litigation between parties over the reference to a benchmark within a contract where the FCA has directed a change in the methodology on which the benchmark is calculated. Amendment 4 seeks to provide for contract continuity where the FCA uses its Article 23D power to impose a change in the methodology of a critical benchmark, providing that parties must interpret references to that benchmark in their contracts as references to the revised benchmark. Amendment 5 seeks to reduce the scope for litigation where the FCA has exercised its Article 23D power on a critical benchmark, providing a safe harbour for the use of that benchmark.
As stated in Committee and in the other place, the Government are committed to ensuring that an appropriate framework is in place for the orderly wind-down of Libor. We take this matter very seriously. As my noble friend Lady Noakes noted, the Government’s consultation on this issue has only recently closed, on 15 March. The consultation responses have underscored that there are complex and wide-ranging policy and legal considerations that must be fully understood before taking any further action on this issue. That range of considerations and views has been illustrated by the range of views expressed in this evening’s debate, but my noble friend Lady Noakes is correct to say that the industry has indicated, including through its responses to the consultation, that it is supportive of the approach set by the Government in the consultation.
While I am sympathetic to the objective that these amendments seek to support—an orderly wind-down of the Libor benchmark—they raise complex issues that our consultation was designed to explore further. For example, Amendment 5 would provide wide legal protection to parties using the revised benchmark against all forms of claims or causes of legal action associated with the exercise of the FCA’s power in Article 23D(2) of the regulation. I have not been convinced that such wide-ranging legal protection is appropriate, and it could have serious and significant unintended consequences.
It would also provide legal protections for such consequential changes that are,
“in the opinion of any party to such contract, security or instrument, reasonably necessary”.
I am concerned that this does not remove the potential for dispute but instead risks introducing an element of uncertainty as parties dispute what is or is not a “reasonably necessary” change. It is therefore at risk of causing the sorts of disputes surrounding the wind-down of a benchmark which a safe harbour amendment seeks to avoid. I raise these points simply to illustrate the complexity of the issues, as I appreciate that my noble friend is seeking to ensure that they have been fully thought through and addressed as appropriate.
Amendment 6 may seem to solve those problems by seeking to give the Treasury powers to make regulations providing for contract continuity and safe harbour through secondary legislation, having had more time to consider these matters. The Government are of the view that, if legislation were needed to address this, it should be in the form of primary legislation. Further legislation providing for safe harbour, as proposed by these amendments, while consistent with the provisions already in the Bill, may be considered by some parties to represent a significant intervention in the contractual rights of parties using critical benchmarks. Primary legislation would therefore be preferable, to provide all parties with an appropriate level of transparency. Crucially, given the volume and value of contracts impacted, making such a provision in secondary legislation would carry a risk of legal challenge to the Government’s exercise of their powers. Any such challenge could bring further uncertainty and disruption, which is precisely what these amendments are seeking to mitigate.
However, I reiterate that the Government take the issues raised by my noble friend and others in this debate very seriously and will consider carefully the full range of issues raised through the consultation responses before deciding on an appropriate next step. I am afraid to say to my noble friend Lord Blackwell and others that I do not think that this will be in time for Third Reading, and nor can I, at this stage, point my noble friend Lord Holmes to a subsequent specific Bill in future. What I can say is that the Economic Secretary to the Treasury is fully apprised of the need quickly to ensure clarity on this important issue. He has been leading on this matter for the Government, and has agreed to meet my noble friend Lady Noakes and update the House as appropriate, as soon as he is in a position to provide a substantive update on the outcome of the consultation. On that basis, although my noble friend will perhaps not be happy to withdraw her amendment, I nevertheless ask if she would consider doing so.
My Lords, I thank all noble Lords who have spoken in this short debate. I even include my noble friend the Minister, although she will know that much of what she said was very disappointing—not only to noble Lords who have taken part in this debate but to the financial services industry, which was hoping for a more definitive outcome.
Letting the opportunity for legislating in this Bill go by, even if only by way of a regulation-making power, is a major loss. I am struggling to understand how the Treasury could have got itself into this position. The need to deal with tough legacy contracts is most certainly not a new issue. The fact that both contract continuity and safe-harbour provisions were an issue for the financial services sector has been known for more than a year. In the US, there is already draft legislation for New York law, and even the EU has brought forward a partial solution. But the Treasury seems like a rabbit staring into the headlights, too frightened to move. This does not auger well for the UK’s ability to build and maintain our financial services sector as world-leading, which I thought was one of the aims of my right honourable friend the Chancellor of the Exchequer.
We cannot blame the suffocating bureaucracy of the EU any more if our financial services sector is held back or harmed. Taking back control requires that the Government take responsibility for their role in making the UK a good place for financial services firms. Their inability to deal with the issue of tough legacy Libor contracts in the Bill is not a good look.
The Government and, in particular, the Treasury need to take a long, hard look at themselves and work out if they are yet up to the task of supporting this sector, which is so important to the UK as a whole. Their ability to act at pace and decisively is important; I do not yet detect that they are showing those characteristics. Having said that, I was grateful that my noble friend confirmed that the Government remained committed to a framework for an orderly transition from Libor next year, and that they are taking this seriously and will find a way forward. She did not, however, indicate what timeframe it would be decided in. She ought to be aware that the financial services sector is watching and expects the Government to take this forward.
I am grateful for the opportunity to discuss progress with the Economic Secretary in due course, but discussion with me is not the most important thing. I think it is telling Parliament what is to be done, when and how it is to be done, and telling the financial services sector, which needs certainty for the way forward. It is with considerable regret that I beg leave to withdraw my amendment.
Amendment 4 withdrawn.
Amendments 5 and 6 not moved.
We now move, after my error, to the group consisting of Amendment 7. Anyone wishing to press this amendment to a Division must make that clear in debate. The right reverend Prelate the Bishop of St Albans has withdrawn, so I call on the noble Lord, Lord Sikka, who has added his name to the amendment, to move it.
Clause 22: Regulated activities and Gibraltar
7: Clause 22, page 28, line 23, at end insert—
“32B Gibraltar-based persons: reporting requirements(1) A Gibraltar-based person carrying on an activity approved under Schedule 2A, or which has permission by virtue of relevant Gibraltar provision to carry on an activity, in the United Kingdom must be registered under section 1046 of the Companies Act 2006.(2) A company of the type referred to in subsection (1) is to be regulated in respect of activities that it undertakes in the United Kingdom by a relevant person as defined by the Financial Services and Markets Act 2000.(3) A reference to a relevant Gibraltar provision is to be read with section 23 of the Financial Services Act 2021.”Member’s explanatory statement
This amendment would require any Gibraltar-based person carrying on activities in the UK to file their accounts at Companies House and to be regulated in the UK with regard to their UK activities.
My Lords, the right reverend Prelate the Bishop of St Albans sends his apologies. Due to unforeseen circumstances, he is unable to speak to Amendment 7. At very short notice, he has asked me to speak for him.
Amendment 7, in the name of the right reverend Prelate the Bishop of St Albans, the noble Baroness, Lady Bennett of Manor Castle, and myself, would require companies operating under the Gibraltar authorisation regime, or GAR, to be registered and to file their accounts in the UK at Companies House. It would also ensure that GAR companies are regulated in respect of their UK activities, in accordance with UK regulations.
I beg your Lordships’ indulgence. In order to minimise any disservice to the right reverend Prelate, my speech will be in two parts. First, I will relay what the right reverend Prelate would have said. Secondly, I will briefly add my own comments.
In the words of the right reverend Prelate the Bishop of St Albans: I have placed this amendment because I did not feel that my concerns about Gibraltar were adequately satisfied in Committee when I tabled a similar amendment. I will be frank: I got the impression that because Gibraltar was an associated territory, there was a reluctance to ensure that it could not be used by companies to reduce their tax obligations. I understand that the Gibraltar authorisation regime allows for continuity of the financial services that existed when we were a member of the EU. But this should not discount the fact that a single market in financial services is being created here. Gibraltar is not necessarily a serial, global tax haven. According to the Tax Justice Network, Gibraltar ranks 30th in the corporate tax haven index, whereas the UK is ranked 13th. In no way do I want this to be an attack on the territory of Gibraltar, particularly having highlighted that the UK is ranked as a worse tax haven.
This amendment attempts to speak to a specific UK-Gibraltar issue on tax avoidance. The current relationship allows a Gibraltar-based company to operate, conduct its business and receive what would be taxable income in the UK, but then to pay corporation tax in Gibraltar. There is a corporation tax disparity between the UK and Gibraltar. Our corporation tax is 19% whereas Gibraltar’s is 10%.
During his evidence session to the Commons Committee, the Minister from Gibraltar said that the corporation tax rate was not a factor in companies relocating to Gibraltar. No doubt the Mediterranean climate and lifestyle make it a very attractive place to reside, but I would not presume that the warm climate is responsible for 20% of the UK’s private insurance market being underwritten from Gibraltar, despite the territory holding not even 0.1% of the UK’s population.
Financial services are one of Gibraltar’s primary industries, hence the tabling of this amendment. One might assume that greater transparency would apply to the finance and other sectors, ideally through stricter and more thorough reporting standards between Gibraltar and the UK. It is common practice in many industries for transactions placed in the UK to be processed via servers in Gibraltar—a technicality that allows what is, in reality, taxable income in the UK to be taxed in Gibraltar.
Obtaining evidence on the cost of the system to the UK Treasury is difficult. However, we have reliable data for the online gaming and gambling sector. Research and private investigations have shown that some of the UK’s major gambling firms actually pay corporation tax in the UK of between 3% and 13% by either headquartering in Gibraltar or using subsidiaries based there. We know of this only because the size of these firms brought them under journalistic scrutiny. If these practices were well documented for one sector, it would be illogical if other sectors did not follow the same incentives. After all, the purpose of reducing corporation tax is only one major reason for relocation to Gibraltar.
This amendment does not deal with the issue of taxation. In fact, even if the Government adopted the amendment, these practices would still continue. It would ensure that companies operating under the GAR regime abide by the Companies Act 2006, which mandates foreign countries to register and file accounts at Companies House.
I believe that the continuation of access to the UK financial market by permitted Gibraltar-based persons ought to be contingent on effective information exchange and reporting transparency requirements between the two jurisdictions. The Treasury and the UK public have an interest in knowing the extent of financial business conducted in the UK by firms based in Gibraltar and the potential loss of corporation tax brought about by this arrangement.
Certainly, the GAR is a rather one-sided agreement, giving Gibraltar-based companies access to 65 million potential customers, whereas, in return, the UK gains access to only 30,000 potential Gibraltar customers. Leaning on the emotional, cultural and historic reasons for this agreement should not hide the fact that the agreement is of great financial benefit to Gibraltar as a territory, whereas it is not clear how this benefits ordinary UK citizens.
Since it is plausible that this arrangement may be a financial loss to the UK in terms of corporation tax, UK citizens and Her Majesty’s Treasury, as a minimum, deserve transparency and an equal reporting requirement between UK companies operating in the UK and those operating under GAR.
That concludes the statement from the right reverend Prelate. I will add a few words of my own. It is fairly conventional that the Government compartmentalises a number of Bills. Some are labelled financial services Bills, some relate to taxation, some relate to competition and some to other matters. But the effects are often interrelated. Changes in one place affect another, and therefore we should be asking questions about the cumulative effects. This is one such Bill and occasion.
We are constantly told by the Chancellor that the Government wish to tax companies where their customers are and where their sales and profits are made. Then the financial services Bill comes along and authorises Gibraltar-based companies to make sales to customers in the UK and generate profits in the UK, but to book profits in Gibraltar and thereby dodge UK corporation tax. The Government have with this Bill destroyed the entire basis of their policy for taxing digital companies. The profits from the sale of financial services in the UK will definitely be shifted out of the UK through concocted royalty and management fees, interest payments, transfer-pricing gains and related party transactions. Of course, the profits will ultimately not be physically located in Gibraltar. They will be spirited away by corporations and their controllers to unknown locations.
The interaction between the UK financial services regime and the Gibraltar tax regime will definitely create unfair competition, as financial services companies located in Gibraltar will pay a lower effective rate of tax than their competitors in the UK. The UK Government are providing unfair state aid to Gibraltar companies. Indeed, on 19 December 2018 many of the tax advantages showered on Gibraltar companies were classified as unfair state aid by the European Commission. The UK Government have failed so far to adequately respond to that decision, and on 19 March 2021 the European Commission referred
“the United Kingdom to the Court of Justice of the European Union for failing to fully recover illegal State aid of up to around €100 million, granted as a tax exemption for passive interest and royalties in Gibraltar”.
I hope the Minister will tell us how the provisions of the present Bill and their impact on tax avoidance affect state aid. What is the impact of the same on the Trade and Cooperation Agreement between the EU and the UK, which requires
“both sides to be transparent about the subsidies they grant and to establish or maintain an independent body with an appropriate role in their respective subsidy systems”?
I very much hope the Minister will tell us about the impact of the Bill on the UK’s international obligations.
I thank noble Lords for their indulgence. On behalf of the right reverend Prelate the Bishop of St Albans, I beg to move.
My Lords, it is a great pleasure to follow the noble Lord, Lord Sikka, who has presented the amendment so clearly and effectively, while I also regret the absence of the right reverend Prelate the Bishop of St Albans, who has been doing such sterling work in focusing on the practical real-world impacts of the Bill on people’s lives and welfare, to which, as we have discussed in other groups, a lack of effective regulation in the financial sector has done such damage.
In Committee, during a debate on a similar amendment, the noble Lord, Lord Rooker, referred to brass-plate economies and the damage that they do to societies if they become dominant. Indeed, much of our debate in Committee focused on the well-being of the people of Gibraltar. I have no objection to that; indeed, I welcome it. I wish them well in their difficult post-Brexit position, which they were put into despite 96% of them voting in 2016 to remain in the EU. However, we have to ask why 20% of the UK insurance sector and a large amount of our out-of-control, seriously damaging gambling sector is going through Gibraltar’s servers, with very little benefit to the people of the UK. I doubt whether ending it will make any great difference to the people of Gibraltar either; as the noble Lord, Lord Sikka, has just outlined—and he is one of your Lordships’ House’s experts in this area—very little of that money is likely to be seen in Gibraltar in any meaningful sense.
I note that the Minister said in Committee:
“This proposal cannot be supported by the Government because it does not reflect Gibraltar’s autonomy”,
but I am not sure that I understand that. If we are talking about regulating activities in the UK, which is what the amendment is explicitly about, surely that is a matter of sovereignty—the issue to which the Government are so attached. Perhaps the Minister can explain that further in his answer.
In Committee, the noble Lord, Lord True, said:
“The Government were satisfied that the Gibraltar authorisation regime is rigorous”,—[Official Report, 1/3/21; col. GC 308.]
but we have to ask why so much business is whizzing through Gibraltar, at least in electronic form, for no obvious reason.
The noble Lord, Lord Sikka, pointed out in Committee that Gibraltar has a population of around 33,000 but more than 60,000 registered companies, nearly two for every person living on the Rock. We know that Gibraltar as a society must need people to fulfil many roles, from childcare to garbage collection, food preparation and, probably now much more than before, customs officials. The regulators of those 60,000 companies must be kept very busy keeping a tight and careful eye on their activities. Perhaps the reason is simply the comparative corporation tax rates. As the right reverend Prelate intended to say, our corporation tax rate is 19% whereas Gibraltar’s is 10%. Of course, the Government promise that our corporation tax rates will rise to become somewhat closer to international norms—if not just yet—so the disparity and the potential attraction are likely only to increase.
I referred in Committee to the Tax Justice Network estimate that the Gibraltarian arrangements inflict costs of $4 billion on other nations, predominantly the UK. That figure could grow significantly with tax rises, so I would argue that the case for this amendment has become even stronger, and I remain, with many others, doubtful about the level of transparency and scrutiny.
Ultimately, this amendment is about activities in the UK. It is not about Gibraltar at all. It is about transparency, honesty and ensuring that profits made in the UK are properly taxed in the UK.
My Lords, I am cautious about any further disruption for Gibraltar post Brexit. The challenge that Gibraltarians face is going to be an exceedingly difficult one and, since the UK put Gibraltar into that situation, we ought to be sympathetic and supportive.
I understand the motives of the right reverend Prelate the Bishop of St Albans and others to increase transparency, but we are talking about what is best described as legal tax avoidance, not tax evasion. I hear nothing but widespread respect for the Gibraltarian tax authorities and the way they manage the business that falls under their supervision.
This is a dangerous time to deny another party equivalence when we ourselves are seeking equivalence from the European Union. I would point out, as others have done, that we have rather a low corporate tax rate at the moment. It is due to rise in the future, but we will still be at the low end of the G7. At the moment, we are exceedingly low compared to most of our EU competitors. We have also granted equivalence to the EU, and that includes locations such as Luxembourg and Ireland, which have low corporate taxes much more akin to those of Gibraltar.
So I do not think we have a major problem here. I am always glad to see an opportunity for transparency but, in this case, we are not looking at shutting down criminal activities, which is the area where I would like to see us work very hard on transparency. I think we need to be responsible to the people of Gibraltar, who sit in a position that is not of their choosing.
My Lords, the measures in this Bill that refer to Gibraltar essentially create a single financial market, and an essential component of a single financial market should be a single registry standard. So I want to ask the Government about their approach to this. When they decided to promote the measures in the Bill in support of Gibraltar, did Her Majesty’s Treasury conduct a review of the Gibraltar registry, and could the Minister tell us the result of that review? For example, could he tell us whether the Gibraltar registry is as transparent as that of Companies House?
Noble Lords will be well aware, after Committee, that my opinion of the Companies House registry is pretty low, in particular regarding its inability to provide a verified register of beneficial ownership, which is at the foundation of the right reverend Prelate’s concern with tax issues. So could the Minister assure us that the Gibraltar registry has a verified register of beneficial ownership, as well as being transparent?
My Lords, I certainly regret, along with others, that the right reverend Prelate was unable to be here to speak to his amendment, but we fully understand the reasons for that. Obviously, the House has great respect for his expertise in these financial matters. We are grateful to the noble Lord, Lord Sikka, for delivering aspects of his speech.
In response to the noble Lord, Lord Sikka, who raised an issue relating to state aid, I should say for the record that the issue he raised is a legacy state aid issue, relating entirely to the period when the UK was a member of the European Union. The Government of Gibraltar have already recovered some of the aid and continue to work to recover the outstanding aid, in compliance with the European Commission’s decision to bring this case to a satisfactory conclusion as fast as possible.
As we have discussed before, the financial services industry plays an important role in Gibraltar’s economy. Gibraltar-based firms have made extensive use of the existing market access arrangements between the UK and Gibraltar. As the noble Baroness, Lady Kramer, mentioned, following the UK and Gibraltar leaving the EU, the Bill will establish a new legal and institutional framework that provides for mutual market access and aligns standards in financial services between both jurisdictions. This will enable Gibraltar-based firms to operate in the UK, provided that certain conditions are met, that law and practice are aligned and that co-operation between the various authorities is in place. In this way, the regime respects Gibraltar’s regulatory autonomy while ensuring the high standards of supervision and consumer protection that UK customers expect.
The right reverend Prelate’s amendment would require any Gibraltar-based financial services firms—the Bill relates to financial services—carrying on an approved activity in the UK to register with Companies House and file accounts there. The amendment also seeks to set up UK regulators as the supervisors for Gibraltar-based firms. I am afraid that this proposal cannot be supported by the Government, because it does not respect Gibraltar’s autonomy; indeed, it goes against the very grain of the intention of the GAR.
The first part of the amendment is intended to require Gibraltar-based firms to provide information related to profits and taxes. I must stress, as I have before, that, as an overseas territory, Gibraltar is fiscally autonomous and has the right to set its own policy to support its economy, within international standards, and to determine its own tax rates. The scope of the GAR is focused on enabling continued access to the UK market for Gibraltarian firms, based on aligned law and practice. It does not extend to taxation. The Government of Gibraltar are committed to putting in place reciprocal arrangements for UK firms accessing the Gibraltar market. I am sure that we would not contemplate this extending to the UK’s tax regime.
Gibraltar is already committed to meeting international standards on illicit finance, tax transparency and anti-money laundering, including those set by the OECD and the Financial Action Task Force. The noble Lord, Lord Eatwell, referred to beneficial ownership and registry issues. Gibraltar shares confidential information on company beneficial ownership and tax information with UK law enforcement bodies in real time and has agreed to introduce publicly accessible registers of company beneficial ownership.
On the second point of the amendment, it would not be appropriate to designate UK regulators as the supervisors of Gibraltar-based firms, and it is not necessary. The purpose of the GAR is to enable firms from Gibraltar to operate in the UK financial services market. It would not be a cross-border regime if we asked such firms to register here and require that they were supervised by our regulators. That would not facilitate cross-border trade with our friends in Gibraltar. It would, in effect, be pushing their businesses to move here and would impinge on Gibraltar’s autonomy by extending UK authorities’ powers into its jurisdiction. Again, this is something the UK would not contemplate in reverse.
Cross-border activity must, of course, be done in accordance with the standards expected in the UK market. That is why the GAR requires that, before there is any market access, Parliament must first pass secondary legislation, through the affirmative procedure, in which the Treasury can designate activities as approved only where there is sufficient alignment of law and practice between our two jurisdictions, and where there is sufficient co-operation between the UK and Gibraltarian authorities. Further, the Bill will grant powers to the UK regulators that can be used if it is necessary to ensure effective supervision and address issues that arise, for example in a situation that requires urgent action or where the UK regulator’s view is that problems have not been adequately dealt with by the Gibraltarian authorities.
The Government are confident that the GAR provides the safeguards needed to ensure financial stability and that our consumers will be protected by the high standards that they expect, but in a way that respects Gibraltar’s independence. I therefore ask that the right reverend Prelate should withdraw his amendment.
I thank all the contributors to this debate, which has been very informative and helpful. Given that roughly 25% of UK motor insurance is written from Gibraltar, it is clear that large amounts of profit made in the UK are being booked in Gibraltar and that the public purse here is being deprived of large amounts of tax revenue.
Of course, we might take the view that Gibraltar has been hit hard by Brexit and therefore deserves some support, but, as I pointed out, the beneficiaries of those profits are not necessarily people in Gibraltar but are actually corporations using Gibraltar to extract revenue from the UK. The ultimate destination of those profits is not really known because there is no transparency at all. Whether somebody is engaging in tax evasion or tax avoidance, the effect on the UK public purse is the same: the loss of revenue.
We still need greater transparency but at the moment, we do not have it. I hope that, when we have a public form of country-by-country reporting, perhaps that will provide some form of transparency, but at the moment the Government are not committed to that.
Nevertheless, I thank everybody for their contributions to the debate, and with the permission of the House and on behalf of the right reverend Prelate the Bishop of St Albans, I beg leave to withdraw this amendment.
Amendment 7 withdrawn.
8: Clause 34, page 40, line 14, leave out subsection (2)
Member’s explanatory statement
This amendment and the Minister’s amendments at page 40, lines 16 and 31 make drafting changes in connection with the Minister’s first amendment at page 47, line 34.
My Lords, I will speak also to the other amendments in this group. The Sewel convention states that normally, the UK Parliament will legislate in areas that are devolved only with the permission of the relevant legislature, obtained through the legislative consent Motion process.
In recent weeks, despite the best efforts of Ministers and officials from HM Treasury and the Northern Ireland Executive, it has become clear that the legislative consent Motions for relevant parts of the Bill would not be completed before Report in this House. It is therefore necessary to ensure that certain elements of the Bill do not apply in Northern Ireland, in line with the Sewel convention.
I assure the House that the great majority of the Bill will have effect in Northern Ireland, as financial services is a reserved matter. However, it is necessary for Northern Ireland to be removed from the relevant parts of the Statutory Debt Repayment Plan and account freezing and forfeiture measures in Clause 34 and Schedule 12, with connected changes to Clause 44 on extent and Clause 45 on commencement in addition.
These are technical amendments which the Government have tabled to avoid legislating without consent. Our understanding is that the absence of a consent Motion is due to current timing constraints rather than any concern about the substance of the measures. Legislative consent was not denied—the process was simply not completed.
Amendments 50 and 51 will amend Schedule 12 so that certain provisions in that schedule will have different effects in Northern Ireland from those in England and Wales and Scotland. Amendments 38, 40, 41 and 42 amend Clauses 44 and 45 to help give effect to the changes to Schedule 12. The amendments retain the status quo in Northern Ireland regarding the Proceeds of Crime Act 2002, and the changes which Schedule 12 makes to that Act will have effect only in England, Wales and Scotland. It is important to be clear that these amendments will not affect Schedule 12 as it relates to the Anti-terrorism, Crime and Security Act 2001. Anti-terrorism is an excepted matter and the changes which Schedule 12 makes to that Act will have effect across the UK.
Amendments 8, 9, 10, 13 and 39 prevent most of the changes made in Clause 34 extending to Northern Ireland. These are the provisions relating to the Statutory Debt Repayment Plan measure.
Clause 34(4), which provides an express power to bind the Crown, will continue to apply to Northern Ireland. This is done so as not to disturb the position on Crown application that the Government consider originally applied in the Financial Guidance and Claims Act 2018 in relation to Northern Ireland.
I would like to reassure noble Lords that Northern Ireland will still be able to make its own legislation providing for a debt respite scheme of its own design, including similar provisions to those in Clause 34, if these are desired. UK Government officials will of course continue to work closely with and support their opposite numbers on the design and implementation of a debt respite scheme for Northern Ireland if this is pursued.
I urge the House to accept these amendments, which are necessary to avoid legislating for Northern Ireland without the appropriate consent. I beg to move.
I am grateful to the House for allowing me to speak at this point. I put in a request, but it got omitted. The Deputy Speaker has expressed the situation well.
The substance of the issues raised by the noble Earl in his introduction are incontestable. We respect the devolution settlement and we need to make sure that everything we do is in accordance with that. He slightly misspoke in the sense that the Sewel convention now has statutory force, rather than being just a convention. Indeed, it is often now called the Sewel principle. When we were dealing with matters arising from the internal market Bill, which came to your Lordships’ House about six months ago, that was certainly the way in which we addressed this issue.
I understand the logic behind the Government’s current position and their concern that they should not take steps which would in any sense mitigate the Sewel principle, as discussed. However, I was left a little confused by the noble Earl’s remarks, despite the usual clarity with which he expressed himself.
As I understood it, the debt respite scheme was being progressed under regulations made under the Financial Guidance and Claims Act 2018, to which he referred. It therefore seems a little odd that we are still concerned that that might not go ahead or that, if it did, it would do so under regulations made in Northern Ireland rather than those which will apply in England and Wales. From memory, this will be in place from May 2021, which is not very far away. I would be grateful if the noble Earl could be a little clearer about that when he comes to respond, or perhaps he could write to me and we could discuss this. The issue is where that authority will vest going forward. Will it relate to the UK financial guidance Act or to local legislation put through by the Northern Ireland Assembly? Matters may arise regarding how that is decided, but I would like to know the answer.
The other question is how we make progress in relation to the statutory debt repayment plans. The issue here is again whether the necessary legislative consent order would have come through, when it has not, in relation to that. If that is the case, perhaps the Minister will confirm whether that is happening. If it is not happening, is not the situation a little different this time? Because, as we are going to discuss in the next group, we are now being told that the timeframe for the delivery of the SDRP is going to be the end of 2024, which is, after all, three and a bit years away. It seems unlikely that there will still be a problem if we are waiting for the Northern Ireland Assembly to consider that: we should be able to get through that in three and a half years’ time.
I would be grateful if the Minister would let us know a bit more about the Government’s plans and again, it that is not in his notes, he can write to me and we can discuss it offline.
My Lords, the minute I saw this group of amendments, I knew they were above my pay grade. I am in awe of the understanding of the noble Lords, Lord True and Lord Stevenson of Balmacara. I forwarded all the amendments to those of my colleagues who deal specifically with Northern Ireland, and I think they travelled over to Northern Ireland, as well, for review there. The message I got back was that the timing—I will not repeat the word that followed—problem, let us say, was not a problem.
My Lords, I thank the Minister for introducing these amendments and for the explanation that was shared ahead of this debate. We will not oppose them today, as it is right that changes should not be made without legislative consent. It is, however, very troubling that these provisions will go forward without Northern Ireland’s inclusion. and that time has not been offered to allow the Northern Ireland Executive to pass a consent Motion. It is my understanding that there were also difficulties on timing for a legislative consent Motion during the passage of the Medicines and Medical Devices Bill. It cannot become a habit for this Government to carve Northern Ireland out of legislation at the last minute or treat legislative consent as an afterthought. What conversations were had with the Northern Ireland Executive on the problem of timing? Were any measures considered to allow them extra time as needed?
Have the Government identified ways to prevent this happening again? On the substantive issues, the result is that the Bill will be passed without offering the same powers and protections for communities and law enforcement in Northern Ireland as in other areas of the UK. This is of particular concern for the statutory debt repayment plans at a time when the impact of the Covid pandemic has placed extreme stress on people’s personal finances.
Finally, what options are the Government considering, with the Northern Ireland Executive, to ensure that Northern Ireland is given an opportunity to enact these provisions and that communities in Northern Ireland are able to benefit from the planned support on debt and personal finance?
My Lords, I thank noble Lords for their remarks, and I stress again that UK government officials will of course continue to work closely with and support their opposite numbers in Northern Ireland. I hope that the noble Lord, Lord Tunnicliffe, will accept that that is as far as I can go as regards our support for our Northern Ireland colleagues, because the ball is very much in their court as to how they wish to proceed and when. As and when they decide to proceed, they will of course get full co-operation from the UK Government.
I would like to touch on a question that the noble Lord, Lord Tunnicliffe, asked me relating to the Medicines and Medical Devices Bill. That also gave rise to an issue over a legislative consent Motion from Northern Ireland. The context for securing legislative consent for the Medicines and Medical Devices Act 2021—as it now is—was quite distinct from that for this Bill. Northern Ireland Executive Ministers were asked to consider promoting a supplementary legislative consent Motion on a second occasion as a result of amendments added to the Medicines and Medical Devices Bill during its House of Lords Committee stage. The Northern Ireland Assembly had sufficient time to consider and pass a supplementary LCM before the Bill’s Report stage in the second House—in this case, the Lords. Report is considered to be the last substantive amending stage of a Bill in the House of Lords and, consequently, the last opportunity for the Government to avoid legislating for Northern Ireland had consent been denied or not achieved in time.
Unfortunately for this Bill, it has not been possible to secure legislative consent in time, in spite of the efforts of our officials and those in the Northern Ireland Executive. The noble Lord, Lord Tunnicliffe, asked whether we can prevent this situation happening again. I respectfully say to him that it really is not within the control of the Government here to influence the order of business and the work conducted by the Northern Ireland Executive. It is largely in their domain, but I hope my earlier reassurances will have been helpful on this topic.
The background to this, to come to his earlier point and the issues raised by the noble Lord, Lord Stevenson, is that breathing space regulations, which are the second half of the SDRP measures, that come into force on 4 May this year, do not apply in Northern Ireland, largely due to there being no sitting Assembly during the policy formulation and drafting of regulations. As I have said, we have been advised by officials in Northern Ireland that it will not be possible to pass the LCM agreeing that Parliament should legislate on their behalf until mid- to late April, which is too late for the Lords’ Report stage. The amendment carves out Northern Ireland from Clause 34 as I have described, with the exception of Clause 34(4). The Government understand that the relevant departments in Northern Ireland intend to take forward their own legislation for a debt respite scheme in due course.
I am afraid that the noble Lord, Lord Stevenson, has the better of me in his detailed questions. I will need to write to him, if he will forgive my not answering him now, on where the precise authority vests in relation to a Northern Ireland debt respite scheme, and indeed how the Government’s plan for the debt respite scheme will pan out prior to the end of 2024.
Amendment 8 agreed.
Amendments 9 and 10 agreed.
11: Clause 34, page 40, line 30, at end insert—
“(4B) The regulations may also include the following as part of the scheme—(a) provision to ensure that debt advisers that are responsible for the delivery of debt advice in support of a plan for the repayment of some, or all, of an individual’s debts have been properly authorised by the FCA;(b) provision to ensure that when an individual is deemed suitable to enter into a plan for the repayment of some or all of their outstanding debts, the organisation holding funds on behalf of the individual and making the agreed repayments to creditors must be a charity or other not-for-profit organisation properly authorised by the FCA;(c) provision to ensure that the aggregate provision payable in respect of the costs of operating the repayment plan, other repayment plans, the debt respite scheme and the wider debt advice services being provided meets the reasonable annual costs of the organisations involved; (d) provision that the debts that are dealt with under a plan for repayment include those owed to Her Majesty’s Government and those owed to other UK public bodies and service providers;(e) provision that when an individual has entered into a plan for the repayment of some or all of their outstanding debts, they will receive protection from any warrant or action from bailiffs appointed by a UK court.”Member’s explanatory statement
This amendment allows further probing of the Government's plans to establish the Statutory Debt Management Scheme.
My Lords, I declare an interest as a former chair of StepChange, the debt charity. Amendment 11 has exactly the same wording as the amendment to Clause 34 that I moved in Committee. The purpose is to give the Government a further opportunity to set out in more detail their plans for the introduction of the statutory debt management plans in England and Wales—not, sadly, in Northern Ireland, yet—to complement that which is already working as a very successful scheme in Scotland. We are getting there by patchwork, even if we are unable to do so from top down, as we might wish.
I am very grateful to the Minister and officials for facilitating discussions about the detailed SDMP proposals, and for his very full letter of yesterday, which sets out the Government’s position very clearly. It is a very good letter to have, and we got a lot of reassurance from it.
I also touch on Amendment 12 in the names of the noble Baroness, Lady Bennett of Manor Castle, and the right reverend Prelate the Bishop of St Albans, which introduces an interesting and important aspect of debt management plans—a bit of detail, in fact. It is about the concept of negotiated debt settlements on behalf of debtors, which are already part of the current debt management plan process in operation in Scotland, and in England in an informal way—not statutorily backed. A realistic quantum for the outstanding debt is clearly a key metric when plans have been drawn up for what should constitute an affordable repayment schedule, so it makes sense to both sides if the final figures reduce the outstanding debt in as short a time as possible. I look forward to hearing further from the noble Baroness and the right reverend Prelate, if he is able to join us, about how they see this working in practice. I think they are probably more suited to regulatory action than statutory action in the Bill, but we will wait to see how the case comes out when it is argued.
Yesterday’s letter from the noble Lord, Lord True, is extremely helpful, and I thank him for it. In it, he explains that secondary legislation will spell out matters of detailed policy and implementation for the SDRP and confirms that, as these will be introduced by the affirmative resolution procedure, Parliament will be given adequate opportunity to debate and scrutinise the regulations. I welcome that. In Committee, my main concern was timing, and the letter says that the Treasury intends to consult on the draft regulations as soon as possible after the Bill receives Royal Assent. We will keep an eye out for them and hope that it will not be too late after Royal Assent comes through.
On implementation, the letter makes it clear that, understandably, there needs to be time for IT changes and preparing the scheme guidance. It suggests that 18 months would give adequate time for stakeholders to prepare after regulations have been laid. I have no reason to question that timing but, given that the letter goes on to suggest that the SDRP may not actually be in use until the end of 2024, it seems to me that we are talking about a delay of perhaps three and a half years once work has started. I wonder whether the Government might want to look at that timetable again. We need to get this right, clearly, and time must be given for that, but Ministers are aware that the SDMP is complementary to the debt relief scheme, which we were just talking about in relation to Northern Ireland, which is due to operate on a much tighter timetable—to be introduced, I think the Minister said, in early May. To be honest, I do not think I would be alone if I said that the Minister’s hope, as expressed in his letter, that this timetable reassures noble Lords that the Government’s work will proceed at pace is not altogether convincing. Perhaps the Minister will respond at the end of the debate.
The letter also contains some very helpful reassurance on other policy matters. Debtors are to be protected from most creditor enforcement during an SDRP, including enforcement by bailiffs. That is a great relief to hear. We will come back to that in a later amendment. It might be helpful if the Government could clarify what creditor enforcement would not be protected under an SDRP. That would be useful to have on record. The letter confirms that the widest range of personal and business debt should be eligible for inclusion in an SDRP. It is good to have that confirmation and to know that, in particular, that includes local government as well as Crown debts. Again, it is useful to have that clarification on the record.
Only those with appropriate authorisations from the FCA will be able to offer SDRPs, unless they are a local authority that offers money advice and is therefore exempt from FCA authorisation. Again, that clarification is helpful and welcome. Debt advice providers will not be able to charge a fee to debtors for accessing an SDRP. Again, that clarification is extremely welcome.
Finally, the letter covers the wider question of funding for the SDRP. I will not go into the detail here but I want to make it clear that we welcome the paragraph of reassurance that funding will be provided separately for free debt advice, which will go a long way towards reassuring those institutions that have used the fair-share funding formula to invest heavily in fintech and telephone services, which allows them to scale up the debt advice available free at point of use. Particularly during the pandemic, that is welcome news and the rock on which the plans for the debt respite scheme and SDRPs rest.
I and others in the debate would be happy to continue discussions on these issues with the Minister in due course, as he suggested in his letter. However, we wanted to put on record that we welcome what he said and the willingness of Ministers to engage. I look forward to further discussions with them in due course. I beg to move.
My Lords, the next speaker is the noble Baroness, Lady Bennett. The speaker after her, the noble Baroness, Lady Morgan, has withdrawn, so the speaker after the noble Baroness, Lady Bennett, will be the noble Lord, Lord Davies.
My Lords, it is a pleasure to follow the noble Lord, Lord Stevenson of Balmacara, and I offer my thanks for his support for the concept of Amendment 12, to which I shall speak. It appears in my name and is kindly supported by the noble Lord, Lord Sikka, and the right reverend Prelate the Bishop of St Albans.
Amendment 12 seeks to secure a discounting of debt for people entering proposed statutory debt repayment plans—something that the noble Lord, Lord Stevenson, noted has already occurred in Scotland. I set out in Committee that that is a large group of people with incomes above those eligible for debt relief orders, but with assets and income generally below those covered by voluntary agreements on bankruptcy. All those other agreements operate in ways that can result in debt being cleared in a relatively short period, much shorter than those to be covered by statutory debt repayment plans. I will not repeat all that detail again.
However, this amendment represents a development of an amendment presented in Committee to secure a fair debt write-down in respect of debts sold on the secondary market. For that initial amendment and this amended one, I pay tribute to the large amount of work done by the Centre for Responsible Credit, from which noble Lords will have received a briefing. While a strong argument exists to support this proposal, entirely legitimate concerns were raised in the debate that the impact of such a move on the operation of the secondary market would need to be properly considered. The noble Lord, Lord True, also raised a concern about the need for equitable treatment of debtors in the scheme. Taking those concerns on board, this new amendment, rather than being prescriptive, is permissive in nature and seeks to ensure that discounts on debt are secured, where appropriate, with the full agreement of creditors.
Amendment 12 recognises that many creditors listed on debt repayment plans, regardless of whether the debt originated with them or they bought it on the secondary market, will often prefer to receive a lump sum as full and final payment as opposed to low levels of instalments spread out over many years. As a result, many creditors already offer a significant discount on the total level of debt if a lump-sum settlement can be made. While the StepChange debt charity has a dedicated team to provide advice to debtors concerning possible full and final settlements, not all debt management plan providers do so. There arises a potential conflict of interest, as SDRP providers are likely to be reimbursed on a percentage basis of the total debt collected. Securing discounts for big debtors would reduce their revenues.
This amendment would therefore ensure that the Government are provided with a power to instruct SDRP providers, where appropriate, to enter into debt settlement negotiations on behalf of debtors entering the scheme. Hopefully this is not needed, but it is important that such a power exists.
In addition, it ought to be possible for SDRP providers to go further. With appropriate funding and regulation, business models could be encouraged that would allow SDRP providers to themselves buy out, and therefore discount, debts registered on their plans. For example, in recent months we have seen instances of debt of £10,000 being discounted by as much as 40% in return for full and final settlement. Enabling such debts to be bought out and subsequently collected by SDRP providers would mean the debtor would have to repay only £6,900, even after taking into account a 15% fee for the provider. It should be possible to achieve a result that is beneficial to creditor and debtor alike. I stress that building this negotiated settlement approach into the SDRP is likely to be welcomed by creditors, who in many cases are already prepared to discount heavily for lump sums in full and final settlement.
It is not my intention to push this amendment to a vote at this stage, but I seek a commitment from the Minister to continue to explore and work on this issue. I hope he can commit to a meeting between the department and interested noble Lords to see how we can take this forward, possibly in regulation.
My Lords, I speak in support of Amendments 11 and 12. I do not intend to delay us particularly long at this time of night, but I want to take the opportunity to pursue an issue.
My involvement in the Financial Services Bill has been a learning experience for me, as a new Member, in the way in which we are able to progress issues through the course of a Bill and the opportunities arising at different stages to make points and develop what it is possible to achieve, as opposed to what we would like in a perfect world. I have made plain my support for a more fundamental debt jubilee, but that is clearly a discussion—a fight—for another day. The amendments before us today clearly provide a useful step forward—a small step, but one that is still worth while.
I want to say a word on behalf of the debtors, those people who have taken on debts for all sorts of reasons—some good, some bad. You cannot just look at the debtors in this situation and say, “That is where the problem arose.” Quite clearly, bad debts are part of the business plan of people who lend money. We have learnt to an extent during these debates that there are issues in how you develop a plan so that, when debts are discounted, it is not just commercial organisations that benefit and there is also the opportunity for those who have unwisely or mistakenly taken on debts to gain some advantage from the discounting of debts. That is really what we are trying to work towards here.
I support these amendments and hope the Government will be able to take on board the issues raised. The underlying issue—this is the point I have pursued before—is that there is a public interest in dealing with debt and relieving people of the debts they have taken on; it does not help just the individuals concerned. Lowering the level of debt and removing onerous debts help us all generally, and particularly at the moment when we are looking for an economic revival. I hope the Government take on board the ideas behind these amendments and work towards a scheme that helps not just the debtors but all of us.
The next speaker after the noble Lord, Lord Holmes, will be the noble Baroness, Lady McIntosh of Pickering.
It is a pleasure to speak to this group of amendments, and I declare my interests as set out in the register. I congratulate the noble Lord, Lord Stevenson, on the way in which he introduced this group, and on all the work that he has done in this area, not least with StepChange. More than a step change, he has done more than many marathons around this subject. Not just your Lordships’ House, but the nation, is in his debt for the work he has done on debt.
I also thank the Minister for his engagement throughout the Bill. I know that he is completely committed to this area, and I congratulate him on the engagement and the time he has spent with me and other noble Lords. It is safe to say that this is an issue that will run longer than this Bill. As with so many other issues, Covid puts a new lens on debt, and enables more people to understand that it is not necessarily just for others. Potentially, with a slight twist of circumstance, we are but a heartbeat, or a breath, away from being in tough financial straits. I congratulate the noble Lord, Lord Stevenson, and I look forward to hearing the response from the Minister.
My Lords, like my noble friend Lord Holmes, who I am delighted to follow, I am grateful to the noble Lord, Lord Stevenson, and the noble Baroness, Lady Bennett, for giving us the opportunity, with what I consider to be probing amendments, to explore in more detail how the statutory debt management plans will work. I must say to my noble friend the Minister that I am deeply uneasy, because there is very little detail in the Bill about how these provisions will work.
I am a Scot by birth, and a non-practising member of the Faculty of Advocates. Noble Lords will recall that I started my legal career as a humble Bar apprentice, working in a rather Dickensian attic along Heriot Row in Edinburgh, looking at debt collection as part of my role.
I am grateful to the Centre for Responsible Credit for its impressive briefing. What concerns me is a lack of urgency on the part of the Government. According to the Financial Conduct Authority, the pandemic has negatively impacted the finances of 20 million people. Problems are, I understand, concentrated among the self-employed, who obviously have been particularly hard hit, especially those who became self-employed in the year before the lockdown restrictions came into effect. Also heavily impacted are those on incomes of less than £15,000 a year, and BAME communities. The FCA estimates that just under one in five adults is overindebted, with 8.5 million potentially needing debt advice. According to the previous National Audit Office methodology, we can, sadly, expect the knock-on impacts of overindebtedness, such as increased mental health problems and unemployment, to cost the taxpayer in the region of £9 billion a year.
I shall ask my noble friend a question about what we could do, rather than playing for time and our not seeing any detail, with no scheme in place beforehand. As the noble Lord, Lord Stevenson, said in moving his Amendment 11 so effectively, the scheme will not be in place in England until 2024. The question must be: if there is a tried and tested scheme in Scotland, which is working, could we not therefore adapt that scheme to operate in England in the next two years? That would be a great help, and would go to the heart of how we in the United Kingdom approach the issue of debt.
Amendment 12, too, has much to commend it, and I very much look forward to hearing what my noble friend will say in summing up this little debate.
My Lords, I support Amendment 11 in the name of the noble Lord, Lord Stevenson of Balmacara, and I remind the House of my interest as an ambassador and former president of the Money Advice Trust.
Although Clause 34 may be seen as a relatively small part of the Bill, we have had a great deal of discussion on it during the passage of the Bill—a sign of how important SDRPs are. Throughout the process, I and other noble Lords have been keen to secure clarity over the timetable for introducing SDRPs.
I thank the Minister for his positive and constructive engagement on this issue and for meeting me and the noble Baroness, Lady Morgan, to discuss the timings for the introduction of SDRPs. Like the noble Lord, Lord Stevenson, I am also grateful to the Minister for his letter yesterday, which provided further clarity on this timetable.
In Committee, the Government did not accept my amendment to include a specific date by which SDRPs should be implemented. I was pleased nevertheless to hear the Minister confirm that the complex and detailed process to prepare for implementation seemed to be entirely compatible with the end date I was proposing—albeit pretty tightly.
So I hope the Minister will be able to confirm that on the record this evening, by specifying the various stages of the Treasury’s intended timetable for laying the regulations and reassuring the House that SDRPs are genuinely intended to have a commencement date before May 2024. I look forward to the Minister’s reply.
My Lords, I join in congratulating the noble Lord, Lord Stevenson of Balmacara, on his amendments in Committee and again here on Report. He has clearly found a mechanism for engaging very fruitfully with the Government, and therefore we all have the benefit of a letter that lays out some of the important and significant elements of statutory debt repayment plans; for that, I am grateful.
I join with the noble Baroness, Lady McIntosh, in being rather perturbed—I think the noble Lord, Lord Stevenson, was as well—that the implementation date is 2024. I think that the noble Lord, Lord Stevenson, said that it was towards the end of 2024. I advise the Government not then to use terms such as “at pace”, which they use extensively in the Financial Services Bill—usually to argue that there is no time for a statutory instrument to be approved by Parliament, which takes a matter of weeks.
I am rather troubled and it suggests that the Government might want to think of some kind of stopgap to deal with the very significant number of people who will find themselves with debt problems as we come to the end of furlough. People will find that they have been moved into permanent redundancy and that other jobs are hard to obtain, and a lot of young people coming out of university courses will not find the usual opportunities.
We are going to go through a very rough period where quite a number of people will find themselves loaded down with private debt, not because they have behaved inappropriately in any way but because the way events have hit them. They will need some additional support and rescue, rather than just the schemes that are in place. The SDRPs would almost certainly have been ideal for many of them. So I hope the Government will look at the events that are going to force a lot of people into a very difficult position.
Amendment 12, tabled by the noble Baroness, Lady Bennett, would do what I think Amendment 55 in Committee was intended to do. This time I think it would do it. It is designed to enhance opportunities for people who have signed up to SDRPs to pay off their debts early at a discount. It will need some structure and engagement from social enterprise groups and perhaps even the Government providing some measure of support, because seed funding will be needed to get a scheme such as this off the ground. I hope that the Government will think some of that through. It seems the kind of scheme that would enable people to get back into the financial mainstream more quickly, which is surely something we want to achieve. Again, the need for that will be more acute because of the extraordinary number of people who will find themselves in debt as a consequence of Covid. I do not think it actually requires legislation, so I am glad that the noble Baroness, Lady Bennett, will choose not to move it.
These two amendments highlight the need for some serious thinking on how the Government can best support people who will come out of Covid and find themselves in fairly difficult circumstances. When we work with people who have debt problems, a fundamental issue usually has to be dealt with that has led them into that corner. Sometimes it is to do with lifestyle choices, but very often it might be mental health issues or family breakdown. The group who will find themselves in problems because of the impact of Covid do not fall into that category. Therefore, with a proper helping hand at the right time, they could quickly and easily be returned to a position where they are no longer financially excluded or in financial difficulties. That is absolutely necessary if we are to see the recovery that we all hope for. I hope the Government will look at these amendments and continue to build on them, rather than consider them concluded because Report has passed.
My Lords, we welcome the re-tabling of Amendment 11 by my noble friend Lord Stevenson, which provides the Minister with an opportunity to give more detail on the intention behind the Government’s introduction of the statutory debt management scheme. We are grateful to the Minister and his officials for the various meetings that have taken place in recent weeks. We hope that, even once the Bill has passed, there will be opportunities for further cross-party dialogue on issues relating to personal debt, financial resilience and so on.
There was a lively debate on this issue in Grand Committee, and various amendments were tabled by colleagues from across the Committee. Despite the number of amendments, almost all noble Lords were united in saying that the Government must get on with introducing the scheme. Amendment 12 from the noble Baroness, Lady Bennett, co-signed by the right reverend Prelate the Bishop of St Albans, deals with some slightly broader issues relating to problem debt. We hope that the Minister can provide a full response to those points, either now or in writing.
Looking at these amendments and the next group on BNPL and financial exclusion, I am struck by just how important it is to adopt a more holistic approach to personal finance, as proposed by my noble friend Lord Stevenson in his previous amendment on the concept of financial well-being. Helping people with debt has to be important. I have trouble understanding how people cope with that situation. It is the role of the state to provide structures to allow people to take on their debt problems in a managed way. I look forward to the Minister’s response to my noble friend’s amendment.
My Lords, I am grateful for the opportunity to respond to the debate. I genuinely thank all noble Lords who spoke in Committee and who have spoken today and, indeed, those with whom I have had the privilege of meeting and discussing these matters of engagement. All the discussions have been useful, and the Government have certainly listened to them. I hope that in my letter which I have placed in the Library of the House and my remarks this evening, I will be able to assure noble Lords that that is the position.
What I have found most pleasing is a sense of unanimity, which is rare in this House, that we are on the right track as regards seeking a scheme of this kind. The SDRP is a new solution for those who are in problem debt. It will provide a revised, long-term agreement between the debtor and creditors. Debtors will be protected from most credit enforcement action and from certain interests and charges on debts in the plan. Following the Committee stage and the valuable discussions I have referred to, I wrote to the noble Lord, Lord Stevenson of Balmacara, the noble Baroness, Lady Coussins, and my noble friend Lord Lucas with further details. The noble Lord, Lord Stevenson, referred to aspects of that letter. However, the Library of your Lordships’ House is not open to everyone, particularly at this time. Given its importance to today’s debate, I hope that your Lordships will indulge me if I take some time to place on public record some of the key commitments set out in it because they are commitments which have been made on behalf of the Government. I also want to ensure that all noble Lords understand the timings the Government are working to.
I spoke in Committee in response to the noble Baroness, Lady Kramer, about the range of support being given by the Government to people at this difficult time, and she is quite right to refer to those difficulties. In the meantime, as we work on the SDRP, the Government are pushing ahead with the implementation of a breathing space scheme that will come into force on 4 May this year. Other voluntary and statutory debt solutions will continue to be available to debtors to consider in the meantime.
I return to the process which has been of interest to many noble Lords. The Treasury is currently drafting regulations for the SDRP and intends to consult on them as soon as possible after the Financial Services Bill receives Royal Assent. As well as preparing the regulations, the Treasury will also need to work with the Insolvency Service and others to implement new IT systems and develop scheme guidance to aid stakeholders in implementing the policy. It is also important, obviously, to give stakeholders adequate time to prepare so that the regime can be implemented properly. Given that, I can confirm that the Government expect the SDRP to be implemented in 2024. In order to achieve that, they will aim to lay the necessary regulations by the end of 2022.
I am sorry that the noble Lord, Lord Stevenson of Balmacara, is disappointed at the specifics of my letter on the timing and, indeed, that has been alluded to by others. However, I will repeat that it is the Government’s clear aim and intent, as the noble Baroness, Lady Coussins, was kind enough to say, to operate on that timetable with the most appropriate dispatch.
As to why the SDRP regulations might not be able to be laid until the end of 2022, the reality is that the Treasury is currently working on their drafting. I have explained that this is a complex undertaking and will require input from stakeholders both inside and outside the Government to finalise before a consultation on regulations can be published. That consultation will in turn need to give a reasonable length of time—we are often criticised for providing insufficient time for consultation—for stakeholders and members of the public to reflect and respond. We must allow sufficient time beyond that to consider the responses properly. Those views, as appropriate, will need to be reflected in the draft regulations before they are laid. The timetable will also need to accommodate the necessary clearances within Government and Parliament for publications and legislation. However, I know that noble Lords on all sides of the House, including on these Benches, wish for the SDRP to be progressed in a timely manner. The Government have certainly understood the strength of feeling among noble Lords on this matter.
I know that the noble Lord, Lord Stevenson of Balmacara, wished also to further understand some of the details of the regime; as he has made clear, that is what his probing Amendment 11 seeks to explore. So I repeat on the public record that the details of the SDRP regime will be set out in affirmative secondary legislation, so Parliament will be able to consider the exact details close to the time. I also reassure noble Lords that Section 7 of the Financial Guidance and Claims Act 2018, as amended by Clause 34 of the Bill, will contain powers to allow the Government to include such features in the SDRP as suggested in the amendment. However, in response to the noble Lord, Lord Stevenson, I will set out further detail on how the Government expect the regime to function.
First, on the question of who can offer an SDRP, it is envisaged that only debt advice providers with appropriate authorisation from the FCA will be able to do so. That is unless, as the noble Lord, Lord Stevenson, said, it is a local authority that offers money advice and is exempt from FCA authorisation. Debt advice providers will not be able to charge a fee to debtors for accessing an SDRP, which is the same approach the Government have taken in the Breathing Space scheme.
Secondly, on the question of funding, we expect that the administration costs of the SDRP will be funded by deducting 10% from debtors’ monthly repayments, of which 8% will be provided to the debt advice provider, 1% to the Insolvency Service, and a further 1% to the payment distributor. This proposed 10% fee is expected to be sufficient to cover the costs of administering the SDRP by the parties involved, while also providing fairness to creditors, but the Government will of course keep this under review.
Thirdly, on the question of debts to the Crown, our consultation response sets out that the widest range of personal and business debts should be eligible, including financial services debt, household bills, and debts owed to local and central government. I was asked by the noble Baroness, Lady Coussins, about enforcement action. Details of what kinds of enforcement action will be prohibited in an SDRP will be set out in regulations, which will be consulted on. In the Breathing Space scheme, types of enforcement action are set out in regulations. The list is not exhaustive, but it specifically sets out the actions that are prohibited during a breathing space, including, for example, obtaining a warrant, starting legal proceedings, and selling or taking control of a debtor’s goods.
Finally, on protecting people from the actions of bailiffs, we will have an opportunity to discuss this later on Report, but debtors are expected to be protected from most creditor enforcement action during an SDRP, including action by enforcement agents such as bailiffs. I hope that setting these points on the record will satisfy the House and the noble Lord, Lord Stevenson of Balmacara, and that he will be able to withdraw his amendment.
Amendment 12 would provide that regulations establishing the SDRP may include a provision that would mean debts could be repaid in a single transaction, and possibly reduced by agreement with creditors. Again, I take this opportunity to remind noble Lords that, as a repayment plan, the SDRP is intended to support the repayment of debts in full over a period of time that is reasonable and that appropriately reflects the debtor’s circumstances and ability to pay. It is intended to help individuals who do not have the financial means to pay off their debts in a single transaction.
The SDRP necessarily balances the interests of debtors and creditors and aims to maximise returns to creditors while supporting people struggling with problem debt. Were the debt value to be reduced, as suggested by the amendment, this could have a disproportionate effect on creditors. Other statutory debt solutions, such as debt relief orders, offer debt relief to people for whom repayment is not a realistic prospect. The average plan is expected to last around seven years. How much a debtor can afford to repay every month will be determined by the debt adviser, and the Government’s 2019 consultation proposed that they would use a standard financial statement, which is an industry-wide method of calculating income and expenditure.
This amendment could also allow the regulations to create a situation where the debt adviser would take on liability for the debtor’s debts by making a one-off payment to the creditor on their behalf and then clawing this back from the debtor during the course of the SDRP. Such an arrangement would change the policy intent of the SDRP and impose significant financial liabilities on the debt advice provided; many of these organisations are not-for-profit or, indeed, charitable organisations.
I understand the purpose behind the amendment of the noble Baroness, Lady Bennett, but we believe that the approach that I have set out today on the SDRP is the right approach. I must tell the noble Baroness that we will not be able to accept her amendment either now or at Third Reading. Her Majesty’s Government, however, will of course be open to conversations with all interested parties as work on the scheme goes forward. I hope that our openness in the course of this Bill is an earnest of that. So it is for these reasons that I ask that the amendment be withdrawn.
My Lords, I thank all those who have participated in this short debate. It was unfortunate that, because of timing and other pressures, we have lost the contributions from the noble Baroness, Lady Morgan of Cotes, and indeed from the right reverend Prelate the Bishop of St Albans, both of whom had interesting points that they wanted to make. Despite that, we have touched just about every issue that needed to be looked at. Indeed, we have gone a bit further. I am very pleased that the debate has taken place, even though we have just passed our closing time.
I will take a few minutes to wind up by touching on a couple of points. Of course, I am deeply embarrassed by the idea that this initiative is all my responsibility and that I should get all the credit for it. That is certainly not the case. This has been a team effort by many groups and bodies, many of which were referred to by the Minister in his remarks. We should give credit to the not-for-profit and charitable bodies that have been working tirelessly over many years to get unmanageable debt sorted out in our society, for all the reasons that the noble Lord, Lord Davies of Brixton, said. It is a cost to the public good. We did a calculation when I was at StepChange which suggested it was probably costing about £9 billion a year. I was interested that the noble Baroness, Lady McIntosh, also came up with a figure very close to that.
It is important that we have a mature and sensible debate about debt: how it happens, how it arises, and how it gets resolved. The great thing about today, and what I take away from it, is that we are able to do that in your Lordships’ House in a way that reflects the very best of our ability to contribute to these debates, and also with a listening Government who are prepared to take it back and see if there is a way in which legislation and regulation can be adjusted. If we can understand a little bit more about why debt happens and what people want to do about it, I think we will all benefit.
My experience at StepChange was rather unexpected. When I first went there, I thought it would be largely a collection of feckless people who had got themselves into overspending and debt. In fact, the truth was that our median client was probably in their 50s, had led a blameless life and done everything to make sure that their outgoings and income matched and that there was not a debt problem for them. They had done the best for themselves and for their families, and it was always, as someone said in the debate, an unexpected issue: somebody had got ill, somebody had lost their job unexpectedly, or there was some other crisis that occurred that tipped them over into a situation for which—and this was a message that came over time and time again—they really did not have the tools in their own personal skillset to be able to deal with. They did not understand the financial system very well, they could not understand where they could get help from, there was a confusing number of people who were trying to make money out of the problems that they were in, and they struggled.
It was only because of StepChange, Money Advice Trust, Citizens Advice, Christians Against Poverty and others who have done fantastic work over the years that we have got ourselves to a point where we can see a way forward on this. This legislation will help tremendously. There is no doubt about that at all. I am very grateful to the Government for having listened, having thought through the issues, and come forward with sensible plans, even though like others I regret the timescale that we are on. Nevertheless, I am sure we can get it right.
The Minister echoed a lot of the good will and support around the House that I have been reaching out to. But if he thinks this is the end of the line, he has another thing coming. I have a long list of things that I would still like to get done, things that have got away so far but which I shall try to ensure I do before I stop. If we get people off unmanageable debt and back into society, they often have terrible problems getting a credit rating. We must attack that. Even getting a credit card after you have been through a debt process is very difficult. A whole series of issues could come under the process that we talked about on an earlier amendment regarding financial well-being. We could look at that, with advantage, to build on where we are today.
If we can, as the noble Baroness, Lady McIntosh, said, have a sensible discussion about who is affected, why it happens and how we can do best by them, we will all benefit. With that, I again thank noble Lords for their contributions and beg leave to withdraw this amendment.
Amendment 11 withdrawn.
Amendment 12 not moved.
13: Clause 34, page 40, line 31, leave out “subsection (5)” and insert “section 7(5) of that Act”
Member’s explanatory statement
See the explanatory statement for the Minister's amendment at page 40, line 14.
Amendment 13 agreed.
Consideration on Report adjourned.
House adjourned at 8.41 pm.