Skip to main content

Financial Services and Markets Bill

Volume 828: debated on Wednesday 1 March 2023

Committee (6th Day)

Relevant document: 23rd Report from the Delegated Powers Committee

Amendment 160

Moved by

160: After Clause 50, insert the following new Clause—

“Office for Financial Regulatory AccountabilityCreation of an Office for Financial Regulatory Accountability

(1) The Treasury must, as soon as practicable after the end of the period of 12 months beginning with the day on which this Act is passed, by regulations make provision to create a body corporate called the Office for Financial Regulatory Accountability.(2) It is the duty of the Office to examine and report on the performance of the FCA and the PRA.(3) The Office must perform its duty objectively, transparently and impartially.(4) The functions of the Office are to be exercised on behalf of the Crown.(5) Regulations under subsection (1) are subject to the affirmative procedure.”Member’s explanatory statement

This amendment would require the Treasury to create an Office for Financial Regulatory Accountability, with duties to provide independent and impartial analysis to Parliament and the public of the financial regulators’ performance against their statutory objectives and regulatory principles.

My Lords, I once again declare my interest as an adviser to and shareholder in Banco Santander. It gives me great pleasure to open today’s proceedings. After several days of debate on this Bill, I get a sense that there is widespread agreement from all sides of the Committee on one point: the measures in this Bill to improve accountability and scrutiny are insufficient and must be strengthened. While the regulators are getting more powers, there is no commensurate increase in their scrutiny and accountability. That comes at a time when many of us were already concerned that that level of scrutiny is too low and the accountability too weak. The breadth of that concern is shown by the fact that there is cross-party support for this amendment. I thank those who put their names to it.

That said, as I have said before, in addressing our concerns we need to proceed with some care. We must get the balance right between accountability and independence and we need to avoid new forms of accountability and scrutiny, politicising the regulatory system and thereby creating uncertainty. With those caveats in mind, we need to do three things, all of which require amendments to this Bill. We need to improve the reporting by the regulators; improve parliamentary scrutiny; and—this is the purpose of these amendments, Amendments 160 to 166, to which I have put my name—improve the quality of scrutiny and accountability by providing independent and impartial assessment and analysis of two things.

First, we need an assessment of the FCA’s and PRA’s overall performance in meeting their statutory objectives and regulatory principles under FSMA 2000. Secondly, we need to provide analysis of the impact assessments for specific pieces of financial regulation so as to determine how those regulations are contributing to meeting the regulators’ objectives, also under FSMA 2000. That can be achieved, as the amendments set out, by creating an office for financial regulatory accountability, a specialist, independent, statutory advisory body, which would work to a charter set by the Government and laid before Parliament. To be clear, this is not a new concept. It has been proposed in various guises by others—and here I am thinking particularly of the noble Baroness, Lady Bowles, as well as the International Regulatory Strategy Group in the City of London and the London Market Group, with which I have worked on this proposal. While I accept full responsibility for any flaws in these amendments, I cannot take credit for the idea.

I shall not waste your Lordships’ time in giving a line-by-line description of each amendment, from Amendment 160 to Amendment 166, which set out the body’s role, its powers and duties and its membership and financing. I think, or rather I hope, that they all speak for themselves—and for that I am thankful for the work of the Delegated Powers and Regulatory Reform Committee, which set out precisely how these kinds of bodies should be set up and whose approach these amendments follow.

I am sure that the amendments could be improved and I would be delighted to discuss with any of your Lordships, on any side of the Committee—in particular, my noble friend the Minister—how we might do so. Rather than regurgitate what the amendments say, instead I shall address questions that may be in the minds of those who may be wary or sceptical of the need for this body.

First, is it not going to duplicate the work of the Treasury Select Committee? No, it will not. As we all know, parliamentary committees are there to hold regulators to account, not to provide the rigorous analysis needed to do so—nor do they have the capacity to do so, as we have discussed previously. Furthermore, few question whether the OBR duplicates the work of parliamentary committees; it provides analysis for Parliament and everyone else to use. The same applies here.

Secondly, will not this body duplicate the work of the cost-benefit analysis panels that the FCA and PRA will now be required to set up? No, it will draw on their work and analyse and interrogate it, but it will also take a wider view. Perhaps more important, this new body will be utterly independent of the regulators, not a body created by them—nor, for that matter, will it duplicate the work of the Regulatory Policy Committee, whose focus is on government departments.

Thirdly, what about cost: can we afford to set up this body? Of course, setting up a new body will carry cost, but I argue that this will be outweighed by its benefit. Let us not forget the enormous contribution that financial services make to our national coffers. They demand, if not deserve, special attention to ensure their regulation meets the objectives that Parliament has set.

Fourthly, will not this simply be a regulator of the regulator? No, as I have said, its role and purpose is one of analysis, to improve and inform scrutiny by and accountability to Parliament and others, period.

Finally, and most important, will this new body undermine the regulators’ independence? I argue—this is crucial—that it will do the reverse. If we have a source of independent analysis of their actions, we can have a debate about that based on fact. It should therefore strengthen the legitimacy of regulators which are fulfilling their objectives and acting in a proportionate and timely manner.

I cannot see any real objection to the overall concept. As I said, I am sure that the amendment can be improved and I look forward to hearing from others how that might be done. Given the wide support that it has, I very much hope that my noble friend the Minister will give it a supportive reply. Many of us want to avoid unnecessary confrontation with the Government on Report, not just on this point but on all the other proposals we have debated that would strengthen accountability and I stand ready to work with her and others to turn this idea into reality. I beg to move.

I am surprised that nobody else is rising to support this; I was hoping that everyone would. I certainly agree with just about everything that the noble Lord, Lord Bridges, said, but then again I agreed with just about everything that the noble Baronesses, Lady Bowles and Lady Noakes, the noble Lord, Lord Forsyth, and others said on 20 February, about all this. We are all agreed because we can all see the same problem. As has been suggested, the Bill confers huge new powers on the regulators, repatriated from the EU, without making any meaningful suggestions to make them more accountable when they exercise those powers. I will support any and all amendments that improve scrutiny and accountability until and unless the Government come forward with a meaningful proposal of their own. I will come to how they might go about that in a moment.

Our first job as a Committee must be to make sure that the Government grasp that we just cannot carry on as we are. I am not sure that Ministers and, in particular, the Treasury have fully grasped how inadequate the existing structure of accountability is. There are four major bodies that should be contributing and all of them, in their various ways, will be defective. There is the NAO, but we cannot rely on VFM studies alone; the Treasury is frequently conflicted in its relationship with both the regulators; nor can we rely on the boards of those bodies. In principle, there should be some rigorous internal challenge—and that achieves a lot in some regulators—but in practice the boards are all too easily captured by the senior executives and there is a massive problem of asymmetric information.

As the noble Lord, Lord Bridges, said, parliamentary Select Committees should be on the case, and frequently they are, but on the current resources available to them it is simply not reasonable to expect them fully to plug the gap, particularly given their range of other responsibilities —at least not in enough detail on a sustained basis to make the difference that I think most of the Committee thinks is necessary.

The clearest evidence that something needs to be done is the performance of the regulators themselves. Among the many criticisms of the financial regulators have been neglect of some of their objectives and duties, a box-ticking culture, excessive and unnecessary regulation stifling innovation—the “confetti before quality” problem—and inadequate ex post scrutiny of existing rules, without which a steady one-way ratchet develops right across the regulatory piece. A slow and legalistic approach is also a frequent complaint.

In defence of the financial regulators, for the most part they are in much better shape since the crash. That shook them to the core—indeed, one of them was split. Both the Bank and the FCA provide much better explanations for their actions and decisions than prior to the crash. No doubt some of the criticisms have been levelled unfairly, but not all of them.

In any case, we are not in a steady state. With new powers conferred by the Bill will come more of what has come to be known as the restless regulator syndrome. As the regulators identify new problems—real, imaginary or media fuelled—the risk must be of further inadequately considered additions to the rulebook. If the Government can be brought to agree that something needs to be done, one or more of at least three routes to forcing greater accountability are available.

First of all, and in principle the most attractive route for the Government, could be to try to pre-empt pressure from Parliament by creating their own much more rigorous scrutiny team at the heart of Whitehall, probably in the Cabinet Office. A body such as that could do some good work, but I am not convinced that it could fend off the vested interests that all too easily cluster around the sponsor departments at the moment and will no doubt cluster around such a group in the Cabinet Office over time.

A second approach has been set up by the noble Lord, Lord Bridges, today. It is the statutory independence of the body he proposes that makes it particularly attractive. Like the OBR, on which I think it is modelled, it has a reasonable chance of fending off those lobby groups. Therefore, I will certainly support his proposal if it is put to a vote.

But by far the most straightforward approach would be for Parliament to plug the accountability gap directly, as colleagues from all sides of the Committee have suggested, by creating its own specialist scrutiny committee. To be effective, a new committee would need support from a small group of specialists in financial regulation, much as the PAC is supported by audit specialists from the NAO, now a much larger group. This body would need only a small group, but it cannot hope to rely on the kind of very ad hoc tiny group, without institutional memory across Parliaments after elections, that Select Committees rely on at the moment.

Furthermore, in my view the committee—the Joint Committee, if some want that—would need to empower the specialists in a number of ways. Among the tools that should be considered are powers to see all people and papers, the authority to embed experienced and specialist staff into the Bank or the FCA where a particular concern has been identified, and the power to attend key decision-making committees to check out the quality of governance in regulators. In theory, all Select Committees have those powers already, but in practice, for various reasons, few use them fully. Those powers were all deployed to good effect by the Parliamentary Commission on Banking Standards without being disruptive to the work of regulators.

My main concern about this whole issue is that the Government will now listen carefully to what we have all said and murmur friendly noises but do nothing. The Minister told the Committee on 20 February that

“it is not for the Government to impose”—[Official Report, 20/2/23; col. GC 394.]

a scrutiny tool on Parliament. I understand where she is coming from but, as she well knows, that is not a strong line. If the Government come forward with a worked-up proposal for a new committee with adequate staff support—that is essential—and commit to supporting a change to Standing Orders to implement that reform, it will happen. If they did so, I for one would reconsider my support for statutory reform of scrutiny, and I think many others would too.

I think the Minister is listening—she certainly is now. I hope that her department and a couple of Treasury Ministers in the Commons listen to her and that she will tell us in a moment that she has been listening carefully and agrees to this amendment or to the lion’s share of what was said on 20 February.

My Lords, I have added my name to Amendment 160, the principal amendment in the name of the noble Lord, Lord Bridges, to show that there is support for him all round the Committee and to show the Government, too, that at some point the House of Lords is going to make its views known when it comes to voting on the Bill. It would be good to see the Government acknowledge that they are going to have to do something to strengthen the accountability of these arrangements.

My principal concern is about the integrity of Parliament and the more general issue of the accountability of so many of the regulators, public bodies and quangos that we have established, because I see them as an extension of the Executive, in many ways. They do functions which traditionally the Executive may themselves have done. We are talking about financial markets but a recent example of extraordinary behaviour is that of the Arts Council, in its perverse decision to try to destroy opera in this country by the abolition of English National Opera and the withdrawal of a huge grant from Welsh National Opera for touring, when the Arts Council’s mission is ostensibly that it is supposed to be encouraging the touring of such companies.

The Arts Council apparently did that because the then Culture Secretary, Nadine Dorries, said that she wanted more money to go out into the regions for levelling up. That was translated into the destruction of a centre of excellence which had been very committed to inclusivity. At that point, she denied that she had ever wanted ENO to do that, but the Arts Council remains unaccountable to Parliament for that action and Ministers say, “It is nothing to do with us”. We are left in a quagmire as to how to know, in the end, who was accountable for what seems, on the face of it, a crass decision.

My main experience is not in financial services but in the health service, which is awash with regulators, public bodies and quangos. I will name just three: NICE, NHS England and the Care Quality Commission. They have huge influence and power over the affairs of the National Health Service but it is very difficult to say that they are accountable to Parliament at all. If we seek to ask questions about their performance in questions or debates, or meetings with Ministers, we will be told, “That’s nothing to do with Ministers”.

When it comes to financial services, I am therefore at one with the noble Lord, Lord Bridges. It is surely in the interests of the United Kingdom, in any case, that our regulatory arrangements be seen to be of the first order. I agree with him when he talked about the balance. We want the regulators to be seen to be independent, and robustly so, because that adds to their credibility. We clearly want to avoid politicisation, because that would undermine the esteem in which they would be held nationally and internationally. However, we want them to be subject to not just proper scrutiny but accountability. So far, we have heard nothing from the Government to suggest that they understand that, or why the current arrangements will not be sufficient.

As the noble Lord said, this proposal will not duplicate the Treasury Select Committee. His point about the OBR was important, because the OBR has fulfilled an important function, but I do not think anyone has suggested that it has undermined the working of Parliament or any of its Select Committees; indeed, it has enhanced what they can do. I think he was making that point when he said that his amendments will not undermine the regulators’ independence. In many ways, I think they would enhance them. This is not going to cost much money compared to the benefit it would bring and, as he also said, it will not duplicate the work of the FCA and PRA.

There is an overwhelming case for supporting this measure, alongside the previous debate about the need for a much strengthened Select Committee to carry out work inside Parliament, as the noble Lord suggested. I very much hope that the Government will listen to what he has said.

My Lords, I have added my name to this amendment, which in my judgment is absolutely vital. On 8 February, I listened to the chairman of the City of London Corporation’s policy and resources committee; I will quote a couple of points that he made on that evening. He said:

“Faced with increasing global competition”

the UK needs

“a long-term sense of direction, a programme for government, regulators, and industry to act and sustain our global powerhouse status. As a country we need a renewed focus, to adjust our compass, to be the destination that incentivises investment, thrives with talent, and commands the competition. And we need ambition and focus to achieve these goals.”

He finished by saying that we need “the courage to change” in three areas. I will quote two, which are relevant to this amendment:

“Firstly, we need to reduce frictions. That means strengthening UK policy and regulation with an effective and coherent sustainable finance framework. Secondly, we need to nurture innovation. More creativity in the market will inspire better products, which will help attract capital, firms, and customers.”

The City wants confidence in scrutiny and the supervision of the regulator. I hope that my noble friend on the Front Bench will take note of the feelings of the City. I am sure that it would be more than happy to communicate directly with my noble friend and put some flesh on the summary that I have given.

My Lords, I, too, have added my name to the amendments in the name of the noble Lord, Lord Bridges. The noble Lord explained in detail the need for the amendments far better than I can, so I will be brief. I support the noble Lord’s every word but, rather than repeating what has been said, I will comment specifically on how this would complement rather than replace the parliamentary scrutiny that is also required.

We have had a lot of discussion so far in Committee about the need for strengthened parliamentary scrutiny and accountability of the performance of the regulators, with an extraordinary level of agreement on all sides— I hope that the Minister listened to that. I strongly supported the idea of creating a bicameral committee specifically for that purpose, as proposed by the noble Baroness, Lady Noakes. Having an independent office for financial regulatory accountability would greatly assist such a committee in carrying out its work. We heard on a previous day in Committee from the noble Baroness, Lady Bowles, who is probably the expert in such matters, and from others about the enormous volume of work that scrutiny of the financial regulators will involve. That is one reason why we need a parliamentary committee focused solely on this subject. Having available independently prepared and, importantly, non-political analysis of both the performance of the regulators and the regulations themselves would make the work of the parliamentary scrutiny committee, or committees, that much more effective, enabling the focus to be on areas where shortcomings were identified, rather than wading through unmanageable volumes of information trying to find those areas.

I therefore make the point that the Minister should not be tempted to see these amendments as an alternative to the enhancements to parliamentary scrutiny that we have already discussed. Rather, she should understand that they are an important element within the three legs required for effective scrutiny and accountability, which the noble Lord, Lord Bridges, has previously explained as being reporting, independent analysis and parliamentary accountability. All three aspects should be embraced. These amendments cover the second, but please do not think that they would replace the others.

My Lords, I will speak briefly but strongly in support of this amendment and, in doing so, state my interest as the lead NED at the Treasury and as an adviser to a number of global and European financial businesses.

It is a pleasure to follow the noble Lord, Lord Vaux, because he made the point that I wanted to start with: we must not think of this as an alternative to parliamentary scrutiny. We all agree that we need much more thorough parliamentary scrutiny; this amendment would help Parliament to do its job. The point that the scrutiny is to be fact-based and analytical is key.

The proposal for the overall framework of scrutiny has an OFRA-sized hole, which this amendment would fill. It is rare to find an amendment where you cannot detect anyone who is going to lose from it, but I can see only an upside for all groups with this amendment. It would be good for the regulators, as we have heard, because it has the potential to detoxify the political debate. It would be good for the Government because it would provide a more stable, long-lasting framework. We need to get this right now because I do not know when next a Bill will come along that will enable us to look at this framework. We have been waiting for a long time, since 2016, so we need to get something that is stable and going to endure. As we have argued, it would be good for Parliament because it would aid its task of scrutiny and it would be good for the financial services sector, which is our most important contributor to tax revenue, because it would provide an analytical basis in which it could have confidence and trust. My noble friend Lord Bridges has presented the Minister with a gift horse and I very much hope that she will not look it in the mouth.

My Lords, I remind the Committee of my interests, including chairmanship of PIMFA, which represents financial advisers, and at Sancroft we advise a number of financial institutions on sustainability.

I merely want to say that one of the groups of people who will benefit considerably from this are those who are regulated. The fact is that we need to recover confidence in the regulator in two particular areas. The first is what I call the conflicts between regulators, for which there is really no way of unpicking them so that they can work more effectively. That is particularly true among many of the people with whom I deal almost every day.

The second reason why this is so important is that I do not believe that anyone should be unaccountable if they have a public position. I very much agree with the noble Lord opposite who talked about the terrible opera story. I just do not think regulators can do their job properly unless they look over their shoulder to the public as a whole, which is what we are talking about in this bit regarding accountability. As a Minister for 16 years, I know that one’s accountability to Parliament and the public was an essential part of doing the job properly. One had to say to one’s civil servants, “Look, we can’t do that because it really would make people feel that we were behaving in a way that was unacceptable to Parliament or to the public.”

That is the problem for the boards of these regulators, which seems to me to be one of the issues. As my noble friend Lord Bridges suggested, some say that the boards should deal with it. That is not possible unless a board is itself accountable to the public and, in that sense, to Parliament. I do not believe that you can expect the boards to do their job of saying to the regulator, “Look, I’m sorry, you really can’t do that”, or indeed, “You can and should do this”. I am not suggesting that it should always be “Don’t do it”; sometimes it should be “Do it”. Later on, for example, we will discuss the issue that in the City of London the regulator does not insist that a competent person says not only whether, for example, there are gas deposits but whether under the law of Britain those gas deposits will be able to be used, which is just as important. At the moment the regulator does not do that and there is no way of insisting that it should. I therefore strongly support what my noble friend Lord Bridges has said.

My Lords, this amendment is absolutely inspired. We had a debate earlier about the merits of parliamentary committees, and it was questioned whether they would have sufficient resource to do the work. I am very taken by what the noble Lord, Lord Tyrie, had to say. At the risk of embarrassing him, he was a very distinguished member of the Treasury Select Committee and did some fantastic work there. He comes from a background in the Civil Service and has experience inside government. Therefore, we should take very seriously what he had to say about the merits of this proposal.

I have one slight quibble with him. He suggested that this might be an alternative to parliamentary scrutiny. I may have misheard what he said, but I thought he implied that there was some degree of mutual exclusivity between the two—he is shaking his head; as usual, I was not listening carefully enough—whereas I see this as complementary, a point made by my noble friend Lord Hill.

I should declare my interest as chairman of Secure Trust Bank. I am regulated by both the PRA and the FCA. I have to say that, for the last nine years, it has proved to be a very illuminating experience, and every year it becomes less illuminating. I am being very careful about what I say about the regulators. I think it was my noble friend Lord Hill who said that this is an example of an amendment as a result of which no one will lose out. I am not sure that is true. The big four consultants might lose out, because we spend our lives spending vast amounts of money asking them: “What did the regulator mean by that?”

A body of this kind would independently ask the question, “What do you mean by that?”, in such a way that those of us who were regulated might find a bit unwise because the regulators have enormous power: at the stroke of a pen, they can require additional capital requirements for the banks. I have learned over the years that there is only one word that you need to know when dealing with a regulator: it begins with “kow” and ends in “tow”. It is really difficult to get any kind of dialogue that questions the decisions they might make. A recent example is the imposition of the consumer duty. We are all in favour of helping the consumer but working out what you need to do actually to comply with the consumer duty is not as simple a task as one might expect. If we had a body of this kind, it would be able to cut through a lot of that difficulty.

The noble Lord, Lord Hunt, put his finger on it. As far as I am aware, there is no one in this Committee—and I doubt whether there will be anyone in the House when this matter gets debated—who does not see the merits of increasing both parliamentary and independent accountability of what the regulators are doing. As a non-executive director, I take the view that the executive should always listen to the NEDs, so I say to my noble friend the Minister: as the senior NED in the Treasury has just said what a good idea this is, I would listen very carefully indeed to that.

The noble Lord, Lord Hunt, made a really important point when he talked about the NHS. I hope this does not sound too partisan, but I find it quite surprising, in the current crisis in which the NHS is engaged, that it is never the regulators, or even the highly paid officials, who are grilled mercilessly in the media because of a failure of the system; it is always the Ministers. The Ministers are not actually in charge; they set the general policy. In that early period when I first got into Parliament—my noble friend Lord Deben was, of course, grander than me—we tried to move from “the man in Whitehall knows best” and introduced private capital and privatisation. We thought that would end this, but over the years, the regulators have got more and more power and less and less accountability, and that is true in financial services.

I should shut up in a minute, but the one thing I find really quite frightening about this Bill is the huge additional power and responsibility being transferred to the regulators, and the lack of ability to actually see what they are doing, setting a timetable for it and at the same time avoiding the problems of political direction, which would be highly undesirable. This amendment brilliantly establishes this—just as my noble friend Lady Noakes pointed to the success of the security committee and the precedent there, the OBR is a precedent here, although not everyone agrees with the OBR and its forecasts are not always the most accurate, as I am delighted to say is the case now. None the less, it plays a valuable role and provides support to the Treasury Select Committee and the Economic Affairs Committee.

I have one final point about the noble Lord, Lord Tyrie, which I commend to those noble Lords who, like me, like reading evidence given to Select Committees of this House. I refer to the evidence he gave when we did our report on quantitative easing. Of course, this amendment has been proposed by the chairman of the Economic Affairs Committee. In his evidence, the noble Lord, Lord Tyrie, talked about the need to improve accountability and the methods of achieving it. We did not pursue that in our report, because we wanted to focus on the issue of quantitative easing, but it is well worth reading, very prescient and calls for exactly this kind of amendment.

I hope that my noble friend will embrace the amendment, listen to our NEDs and, at Report, prevent us having to table any more amendments by introducing a government amendment that we will joyously agree is exactly what is needed—and I can tell her for certain that she will be the toast of the City of London if she does that.

My Lords, until the noble Lord, Lord Hunt, led me to it, I had not realised the similarity between the Arts Council and the financial regulators in the City of London—but he is absolutely right. Both are manifestations of that growing and alarming phenomenon, the administrative state. These are bodies that set their own rules, mark their own homework, are largely unaccountable, often wayward and certainly unpredictable. The one weakness of this Bill, which in other respects is good, is that it creates even more freedom and power for the regulators to operate without accountability or predictability.

There are two ways in which to deal with this problem, which are compatible and probably both necessary. One is that to which the amendments proposed by the noble Lord, Lord Bridges, make a major contribution: bringing parliamentary accountability to bear. His amendments effectively arm Parliament to carry out that accountability. The other is to try to constrain the behaviour of the regulators within the disciplines of the common law, which is what my amendments here and elsewhere seek to do. I speak particularly to Amendments 169, 171, 173, 174 and 200. The changes in those amendments deal with the Upper Tribunal and the regulators; I shall go on to those which deal with the Financial Ombudsman Service.

At present, firms can take a challenge to a regulator’s decision to the Upper Tribunal. If a challenge is about a regulator’s enforcement decision, the UT decides the matter again on its merits. If the challenge is about a supervisory decision, the UT effectively carries out a judicial review. It may hear fresh evidence, but it merely decides whether or not the regulator’s decision was reasonable and, if it was unreasonable, refers it back to the regulator to take the decision afresh. These amendments would not change that role but, I hope, would constrain the way in which it was carried out.

Amendment 169 would simply give the Upper Tribunal the obligation to give consideration to the predictability and consistency in any case before it and to comply with those objectives when deciding a fresh enforcement decision, and it would empower the Upper Tribunal when making findings on a supervisory decision to help the regulator meet the predictability and consistency objective when reconsidering a case. It would also require the regulator to prove in each case that it had acted predictably and consistently on any issue referred to the Upper Tribunal.

Amendment 169 would also give firms that believed they had acted in good faith within what they knew of the meaning of the regulations laid down by the regulator the right to apply to the Upper Tribunal, if they were found to be in conflict with the regulator, within three days for a declaration of reasonableness. If the Upper Tribunal granted a declaration of reasonableness, the FCA or PRA could not pursue enforcement action against the firm.

There are comparatively few references to the Upper Tribunal. If the Upper Tribunal and the regulators achieve greater predictability and consistency, there are likely to be fewer still in future, which is a good thing. Moreover, those that do take place will themselves create case law, making the meaning of the regulations clearer and more predictable. However, because the volume of cases will be small, the amount of case law that will arise at the level of the Upper Tribunal will be small.

By contrast, a huge number of customers—SMEs and individuals—claim losses that they attribute to breaches of regulatory rules by firms providing financial services, and they do so to the Financial Ombudsman Service. In the most recent quarter, over 43,000 complaints were made to the FOS. At present, consumers, largely small businesses, can take a complaint free of charge to the ombudsman, which can decide whether a financial services company has treated them fairly and reasonably and require the finance company to pay compensation. The costs of the ombudsman service, whose budget for 2023-24 is £240 million, are met by a compulsory levy and some fees payable by financial institutions.

The advantages of this arrangement to the consumer are that there is no fee, there is no risk of having to pay the finance company’s costs if the complaint is not upheld, and the process is generally faster than a court case would be. However, there are disadvantages too: the Financial Ombudsman Service has the power to decide what is fair and reasonable without any obligation to be predictable and consistent before or afterwards, or to explain its reasoning, and it is

“free to make an award different from that which a court applying the law would make”.

Financial institutions that object to the ombudsman’s ruling can in theory appeal to the Upper Tribunal or seek judicial review, but if they did so they would have to prove that the Financial Ombudsman Service’s decision was so unfair or unreasonable that no right-minded person would ever have made a similar decision, so they stand little chance of success and few cases have been brought.

The ensemble of my amendments would respond to those weaknesses in a number of ways. First, earlier amendments would introduce the explicit objective of predictability and consistency, and any challenges to the regulators on those grounds would primarily be considered by the Upper Tribunal. The other amendments in this group would ensure that the internal review bodies within the FCA and PRA that consider enforcement decisions before they are finalised, known as the RDC and the EMDC, were fully independent, and would require them to apply similar tests. That should ensure that most cases would not need to be taken to the Upper Tribunal since concerns would have been addressed before the regulator made a final decision.

Secondly, the amendments would change the role of the ombudsman system into an adjudication system, and that is perhaps the most important element of this group. Instead of being empowered to reach decisions simply on its own subjective view of what was fair and reasonable, the financial adjudication service would be tasked with adjudicating on the basis of the law, including case law as it built up. That is modelled on the adjudication system in the scheme for the construction industry in the Housing Grants, Construction and Regeneration Act 1996. The idea of transferring the lessons there to the financial sector was suggested by Lord Dyson, a former Supreme Court Justice and Master of the Rolls, in a report by the APPG on Fair Business Banking in 2018, which also recommended the formation of the First-tier Tribunal. The adjudication system would remain free to consumer complainants, who would still have the benefits of the obligations on financial businesses to treat them fairly as in the FCA rules and legislation, such as the Consumer Rights Act 2015.

The third aspect is that the amendments create a new first-tier tribunal to which SMEs or financial businesses that wish to challenge an adjudication by the FAS would be able to go. In 2018 the Treasury Select Committee supported creating such a body, so I have the support of the noble Lord, Lord Tyrie. Rulings of this first-tier tribunal would produce case law, rather like the employment tribunal does, which would clarify what is fair and reasonable in concrete situations. Anyone who brings a case to the FTT and loses would not be liable for the other side’s costs unless they were vexatious litigants. If a financial firm wishes to appeal a decision by the FAS, it would be obliged to meet the complainant’s costs and the other conditions set by the FTT. There will continue to be a cap on the liability that can be awarded by the new financial adjudicator system or the FTT, which I propose should remain at the same level as applies at present to the ombudsman service, namely £350,000. If we introduce this system, a new body of law will ensure that legal certainly arises, particularly when taken in conjunction with the requirements for predictability and consistency already mentioned.

Why does all this matter? Because it will make the whole system more transparent, predictable and consistent without detracting from existing consumer rights. I hope that, over time, it would reduce the number of claims for adjudication from the very high present levels. At present it would mainly affect domestic consumers and financial providers, but it is more than likely that the internet will gradually open up consumer finance internationally, in which case Britain will be best placed to be home to the Google or Amazon of domestic finance in the future, just as we are for wholesale financial transactions, if we have a trusted, common-law based system, which these amendments would effectively introduce.

My Lords, I declare my interest as a director of two investment companies, as stated in the register.

I too congratulate my noble friend Lord Bridges and his supporters on their most interesting proposal to set up an independent office for financial regulatory accountability. The Bill as drafted does not secure sufficient change in the way the regulators carry out their duties and the speed with which they will work to simplify and improve the rulebook. In particular, I welcome the provision in Amendment 162’s proposed new subsection (2): that the office “must prioritise” analysis of regulations that reduce competition, negatively affect competitiveness and add compliance costs. In other words, the office will be bound to identify regulations such as the myriad anti-competitive and cumbersome regulations adopted by the ESAs in recent years.

I support my noble friend’s amendment and believe it would augment but not replace the work of an FSRC, such as my noble friend Lady Noakes and I proposed in Amendment 86. As such, it would mitigate further the regulators’ lack of accountability to government following the transfer of significant rule-making powers. This is most likely to be a good thing, although alone it does not do enough to improve the deficit in accountability to Parliament.

I would like my noble friend Lord Bridges to tell the Committee whether he envisages the office working alongside a Joint Committee such as the FSRC and whether he would consider amending his Amendment 165 to replace the Treasury Committee of another place with a suitable Joint Committee. I agree entirely with what the noble Lords, Lord Hunt and Lord Vaux, said about the need for a new Joint Committee.

Along with my noble friends Lord Sandhurst and Lord Roborough, I have put my name to Amendments 169 to 174, so eloquently proposed by my noble friend Lord Lilley. In common with my noble friend, I am not a lawyer; I am a banker. I was proud to work in the City of London when I joined Kleinwort Benson as a management trainee in 1973 because, by and large, the City was an honest place and its leading firms were well regarded. We knew the importance of the old maxim, “My word is my bond.” The banks did not maintain vast compliance and legal departments. During my banking career, I have seen the relative size of these departments increase massively as a proportion of total staff. This itself has had a negative effect on the culture of our leading firms, reducing the emphasis on innovation and business development and increasing the number and influence of those employed in compliance and legal, and of the interlocutors with the regulators.

We believed that Brexit would enable us to return to our simpler, less cumbersome, common law-based regulatory system. These proposals will enable this and encourage agility and precision in the drafting of rules. The regulators operated in this way after the Financial Services and Markets Act 1986, and this is how the FSA was empowered to act under FSMA 2000. But by then, the EU acquis on financial services was beginning its period of rapid expansion, so most of the rules since then have actually been made at statutory level by the EU. FSMA 2000 already accepts that judicial review is an inadequate safeguard against unduly harsh decisions by the regulators, and it gives the final say on enforcement decisions to the Upper Tribunal. These proposals would ensure that the regulators act predictably and consistently. They would ensure that they are no longer above the law—now even more important, as a result of their greater rule-making powers.

I believe that the opportunity costs of the current regulatory system are too high. Legitimate financial business, such as providing new products for consumers, is not being done because of regulatory uncertainty. These amendments would ensure that the wording of the rules is more thoughtfully drafted than it was under EU regulation and would reduce compliance costs. The rules would be based on common law methodology. The wording would be applied to facts on the basis of their natural and ordinary meaning. The renamed financial adjudication service would reach decisions not only on its own subjective opinion but on the basis of the growing body of case law deriving from decisions of the new first-tier tribunal.

Does my noble friend the Minister understand just how important it is that the Bill be made a lot more radical in changing the way our regulators operate? As drafted, nothing much will change. There was no point in Brexit if we continue to apply a bureaucratic, overly cautious and cumbersome regulatory system. These proposals would take us down the right road as a significant step to ensuring the City’s future and reversing the recent decline of some of our most important institutions, such as the London Stock Exchange.

My Lords, I have not spoken before in this Committee, but as one of the surviving members of the Parliamentary Commission on Banking Standards, I want to address an instance where an amendment directly challenges one of the proposals that was incorporated following the commission’s report. Earlier in proceedings—on day three, I think—the noble Lord, Lord Tyrie, addressed Amendment 46, which introduced the concepts of predictability and consistency. He asked, “Who could possibly object?”, and went so far as to describe them as “motherhood and apple pie”. On examination, these principles, particularly predictability, can be seen to be simply duplicating the existing provisions of administrative law, but also as introducing provisions that could limit the scope of the regulator to address new and previously unforeseen problems.

A similar problem arises with Amendment 174 in this group. How could one possibly object to acting

“reasonably and in good faith”

as a defence against sanction under the senior manager conduct regime, the SMCR—the principal sanction being disqualification from practising? By way of a bit of background, the PCBS spent a great deal of time on structural issues—bank break-up, ring-fencing, capital adequacy, liquidity adequacy and so on—but it also attached a great deal of importance to conduct issues, hence the creation of what was then called the senior person conduct regime and is now the senior manager conduct regime.

Is there evidence that this regime has proved oppressive and needs to be relaxed? Quite the contrary, in my view. There have been very few cases, although it has only been fully in force since 2018. Following the 2008-10 financial crisis, Mr Peter Cummings of HBOS is the only senior person to have been seriously sanctioned. One can debate whether that verdict was fair or unfair, but it is undeniable that it is unfair that he should be the only person sanctioned of the big players in those events. I do not think the case for further easing has been made out; more effective application is needed.

The introduction of a defence of acting

“reasonably and in good faith”

would, in my view, be a serious weakening of the regime. Very few people who made serious errors—which were costly to their customers, their own companies or the economy at large—set out intentionally to do harm. The thinking behind this amendment is that it is unfair to sanction people who claim that they did not intend to do harm, even if their actions were genuinely harmful. The protection of consumers is not achieved if those who mis-sell financial products or take what prove to be excessive risks are immune from regulatory action if they can show that they did not intend to do so.

Once again, these amendments look superficially desirable, but they would weaken the SMCR and could cause a lot of damage. The normal pattern in Committee is that an amendment is proposed and others stand up to support it. I want to do the opposite: I urge the Minister to stand firm in rejecting Amendment 174. In any case, I wonder whether the right way to change the underlying philosophy of regulation and the balance between the regulator, the common law and the courts should be to set out a comprehensive proposal, rather than through the accumulation of a disparate set of amendments in this Bill.

My Lords, I speak in support of Amendments 169 to 174 and 200. These have been proposed forcefully by my noble friend Lord Lilley and are, I suggest, worthy of acceptance.

I speak from the perspective of a lawyer. First, I suggest that three adjustments are needed to the decision-making and supervision of regulators to drive predictability and consistency in rule-making. Amendment 200 would make the regulators’ enforcement committees more independent in their decision-making. This should reduce the number of firms that bring unnecessary challenges to regulatory decisions in the Upper Tribunal.

Secondly, Amendment 173 gives the existing Financial Regulators Complaints Commissioner power to order the correction of regulators’ errors. Currently, the FRCC can find that regulators have acted unlawfully, but the regulators are free to ignore that finding. In fact, the FCA has ignored the FRCC’s only such finding. So, the overarching oversight of the FRCC is toothless; it will, if our amendment is accepted, have some teeth.

Thirdly, we propose a set of adjustments to the supervision of regulators by our judiciary in the Upper Tribunal and courts. Currently, challenges by financial institutions to supervisory decisions in the Upper Tribunal are rare, and rarely successful. That is because the tribunal is reluctant to interfere with regulatory decision-making and lacks a framework within which to consider regulators’ decisions. Judicial review is even rarer. To succeed, firms have to prove that the decision was not just wrong, but unreasonable.

The problem is that because it is so difficult to overturn a decision, firms rarely go to the Upper Tribunal or seek judicial review, so there is no body of jurisprudence by which financial companies can set their practices consistently. The lack of predictability therefore means that firms have to build compliance programmes based in part on guesswork as to how the regulator may react when applying its rulebook in the future. This is particularly so when considering the vaguely drafted rules known as principles.

Principles include concepts such as a vague new duty to

“act to deliver good outcomes to retail customers”.

It is hard to argue with some of these principles in the abstract but financial markets are complex. To apply such ideas to specific factual situations without a body of case law can be contentious. It is hard to challenge the assertions of the regulators as to how their rules are to be applied, and I suggest this must have a chilling effect on competition.

A lack of predictability and consistency in the application of rules means that costs are driven up and choice for customers, including consumers, is reduced. These amendments would make three changes to the Upper Tribunal’s jurisdiction. First, Amendment 169 adjusts the duties of the Upper Tribunal to ensure that challenges from firms to regulatory decisions will produce proper case law of value to the industry, and indeed to regulators when looking forward. The regulator would now have to satisfy the tribunal that it has acted predictability and consistently, such that a properly advised firm could alter its conduct in advance to avoid any breach. Such a firm would also then be in a position to build a robust and sensible compliance programme around what regulators actually require—not, as now, what they may require later. Ultimately, that must be the right way forward. Regulators must pay deference to reasonable judgments made by firms in good faith.

Amendment 174 would grant firms a new right of relief from enforcement where the Upper Tribunal concludes that the firm acted reasonably and in good faith. Decisions to that effect would yield valuable case law: predictability would follow. It is not enough that someone acted in good faith; they must have acted reasonably, and to judge that you would look at what the rules say. This would not allow ignorant people to just walk away and say, “I acted in good faith”.

Further, Amendment 171 expands the existing power of the Upper Tribunal to set aside rules made by the FCA for redress to customers. The tribunal may now, under our provisions, set aside any rule of a regulator which it concludes is unlawful. To fully realise the objective of predictability and consistency, changes are needed to how the system handles claims by customers against firms for breach of regulations.

The intention and effect of this group of amendments is to ensure predictability and, with it, fairness for all parties. Consumers must and will be protected. Amendment 172, as we have heard, creates an adjudication scheme in place of the ombudsman scheme. Being adjudication, that would lead to efficient and predictable outcomes. The context is important. I remind the Committee that these amendments would give effect to amendments to which I spoke on 1 February: Amendments 46, 54, 57, 64 and 82. If accepted, they would of course insert a new predictability and consistency objective for the FCA and PRA, and then a duty on those bodies to act in accordance with that objective. Together, they would impose a duty on both bodies to further those objectives when making regulatory rules.

Amendment 85 would oblige the FCA and PRA to apply common-law techniques of interpretation to regulation. They are to be interpreted in the same way as would the courts. That is critical for promoting predictability and consistency: everyone would be speaking the same language.

I remind your Lordships that, first, the ombudsman can at present award as much as £375,000. We do not suggest any diminution of this. Secondly, the Financial Ombudsman Service currently decides a dispute on the basis of what is “fair and reasonable” but is under no obligation to be predictable or consistent, nor to base its reasoning on legal principles. Indeed, the ombudsman is

“free to make an award different from that which a court applying the law would make.”

This results in obscure and unpredictable outcomes. Appeals are difficult because they are by way of judicial review.

Amendment 172, the substantive one, would replace the Financial Ombudsman Service with an adjudication scheme. This is modelled on the hugely successful adjudication system for construction disputes, which has operated for 25 years in that field. A dissatisfied consumer would go first to the financial adjudication scheme and get a swift, lawyer-free adjudication on paper. That process is similar to the ombudsman service: the adjudicator would enjoy the same inquisitorial powers as the ombudsman to ensure a consumer without a lawyer receives due protection against a legally represented firm. In proposed new subsection (4), there is a bias in favour of it being lawyer-free: the process is to start within seven days of the complaint being made to the service and to finish in 56 days; there will be no messing about. The important distinction is that decisions of the FAS would have to follow the law, regulations and the regulators’ rulebooks. It would have to adhere to the decisions of appellate tribunals, including, ultimately, the Upper Tribunal, so any adjudicator would have to apply the rules consistently across the board.

Amendment 170 would grant a consumer who is unhappy with the outcome he received from the adjudication service a new right to bring his case before a First-tier Tribunal for decision for an award of up to the same value: £375,000. However, experience in the construction sector has shown that 90% of parties accept the adjudicator’s decision, so the FTT should not be overwhelmed by its case load.

Under Amendment 172 there is also provision for a financial firm aggrieved by the award to apply for a decision from the FTT, but it could do so only if the FTT, having looked at it, gave permission. In giving permission, the FTT could impose terms. Those could include that the firm pays the consumer’s costs of the appeal and, importantly, that even if it decided the case differently—in other words, less favourably—from the consumer, the consumer would none the less keep the financial award. So, although it may say, “You got this wrong” in some respect, it could award the same amount of money and the consumer would not be worse off. If the consumer declined to defend the appeal, a consumer body could be brought in to put the consumer’s side of the argument. That would produce better precedent.

The firms, generally, should not find such conditions unacceptable, since, for them, what will matter is not simply the financial award but getting a clear precedent for the future. That is important if there are a whole lot of similar claims waiting in the chain behind. If successful, the firm would then benefit from the decision, wherever the point in issue affects other cases in the pipeline and all future business, as it would have a ruling in favour binding on all other customers. Either way, the firm would know where it stands going forward.

By ensuring that the regulators’ rules are applied with consistency, predictability and fairness, the decisions would benefit the financial markets as a whole and, ultimately, consumers. FTTs would operate like employment tribunals. In the last year for which there are figures, 2019-20, almost half the claimants in employment tribunals had no or only pro bono legal representation, yet their decisions are universally accepted as fair and there is no reason to believe that they will not operate in the same way in the financial court.

Finally, through Amendment 169 either party will be entitled to appeal the FTT’s decision to the Upper Tribunal to argue that there has been a straightforward error of law, as with an appeal to the Court of Appeal. Further, Amendment 169 imposes the important duty on the Upper Tribunal, when hearing appeals from the tribunal, to consider whether a firm acted in accord with the new predictability and consistency objective that we seek to introduce and to find in favour of a firm so acting. That is practical implementation.

All adjudication service decisions and FTTs will have to comply with the principles and interpretation laid down by the Upper Tribunal and higher courts. They will always have to give reasons. That is important —if you have to give reasons, you have to think about what you are going to say. Decisions at FTT level will also be reported and available on the web; that is what happens with employment tribunals before they go to the Employment Appeal Tribunal. A later FTT will ordinarily follow a previous FTT decision, unless, of course, it is persuaded that the law set out previously was wrong.

The effect of all this would be that most claimants would go first to the adjudication service, just as if they were going to the ombudsman service. Their treatment should be quicker—no slower than ombudsman service decisions, which often take 18 months. It would not cost the consumer anything—it would be paid for by a levy on the industry, like the ombudsman service—but it would produce consistent decision-making. In the longer run, that should mean fewer disputes and be better for all concerned.

There are a lot of these decisions: 300,000 are resolved every year. Even if their number is halved, they will still be the principal source of regulatory jurisprudence. This would be helpful not only in the retail context but to the market as a whole when considering the meaning of many of the same regulator rules, including the vaguely drafted principles. The case law would be of enormous value in helping firms comply with their obligations. When the Upper Tribunal decides a vertical challenge to regulatory action, it would draw on and have the benefit of the lower tribunal decisions with a breadth of experience, just as the Employment Appeal Tribunal does. Once the system kicks off, it should operate as it does in construction and employment disputes. I suggest that people looking back will ask how we ever did it any other way.

Amendment 173 strengthens the role of the complaints commissioner, who already operates under Section 84 of the FSA 2012. This would clarify the standards to govern senior managers, who would be enabled to see a declaration from the First-tier Tribunal that they acted in good faith and reasonably. I emphasise “reasonably”.

Finally, Amendments 171 and 174 deal with the regulations made and firms’ right to challenge them. Amendment 171 would entitle an authorised person or a firm to apply to the Upper Tribunal, in which a judge would sit with experienced specialists, as in the Employment Appeal Tribunal. The Upper Tribunal would be responsible for dealing with appeals against decisions made by certain lower tribunals and organisations. It would make authoritative decisions, applying the law to the facts. It would be invaluable to lay down a principled approach to achieve consistency, predictability and fairness. Lower tribunals would be obliged to follow its rulings. Amendment 174 would provide protection against charges of misconduct, and I stress that they must have acted “reasonably”, not just in good faith.

My Lords, I declare my interests as a shareholder in an FCA-regulated asset management company, and as having been regulated as an employee for 30 years in financial services, including five years as a senior manager.

I have put my name to my noble friend Lord Lilley’s amendments. While they follow on from the amendments adding the requirement for predictability and consistency that were discussed on day two of Committee, to some extent they also stand alone. I also support my noble friend Lord Bridges’ amendments and indeed any proposal for effective oversight and scrutiny of regulatory performance.

Previous amendments would ensure accountability to Parliament and the wider world. These amendments would add accountability to how the rules were implemented in relation to those directly impacted by regulatory decisions. The amendments would give courts and tribunals a greater role in financial regulation to help enhance the predictability of how the rules and the even vaguer principles were being enforced, as well as a clearer progression through more junior legal jurisdictions, which in turn should limit the number of cases that make it to the Upper Tribunal and the courts. That would allow the desired outcomes to be delivered at lower cost and with less delay.

The issue I mentioned on day two of Committee was that the application of rules and principles often happens in the shadows, and the actions taken can appear inconsistent with the rules and principles that we in the industry have all followed. In turn, those decisions can cause permanent damage to businesses and careers before any current review process is available. The amendments tabled by my noble friends give the prospect of clear precedent for how rules are interpreted and enforced, with speedy and efficient recourse to clear appeals procedures where necessary.

The noble Baroness, Lady Bowles, mentioned on day two of Committee that the City used to have unlimited liability, causing people to take a little more care and consider whether they were doing harm. The application of rules and principles within the core objectives of the regulator is not that difficult for experienced practitioners, as my noble friend Lord Trenchard mentioned earlier, and is central to the performance on which they are judged. However, the regulators had already introduced policies that were not obviously within their core objectives, such as on environmental factors, diversity and conduct at work, where enforcement and supervisory actions have become unpredictable. The Bill now introduces a secondary objective.

Sitting suspended for a Division in the House.

The Bill introduces secondary objectives unrelated to the core objectives. Should that unlimited liability also be extended to these? Will the regulator be determining acceptable travel policies for business? Which financial markets are priorities for growth and competitiveness? What will be the enforcement process if individuals or companies disregard these? How can the regulated have confidence in the application of these objectives without some kind of body of precedent and rapid appeals process? The regulators themselves will benefit from a clear body of case precedents when making decisions. I urge the Minister to give serious consideration to the importance of rapid and practical accountability of the regulator for its actions to those it regulates, if London is to remain a financial hub where the global community wants to base its investments, businesses and careers.

My Lords, I regret that I was not able to take part at Second Reading as I was working in the United States. I hope I have the indulgence of the Committee to make some comments on this set of amendments. As someone who has chaired a major regulator, I found the representation of the principles and approach to regulation as “vague” a rather chilling remark.

What we have seen with the amendments of the noble Lord, Lilley, and those who have supported them, is an attempt significantly to change the entire philosophy on which the regulatory system has so successfully developed in this country. That philosophy has been based on principles-based regulations. Those principles are not vague, as has been asserted; they are determined by Parliament. The rules have then been developed on the basis of serving an industry which is dynamic and continuously changing, unlike the building industry, many of whose practices have not changed since Tudor England.

The fact that the regulatory system can adapt to a rapidly changing industry has been a source of considerable strength within our regulatory system. If we are to introduce an entirely different legal approach, that has to be argued out. There should be a Green Paper, a White Paper and a proper Bill saying that the regulatory approach in this country is going to be fundamentally changed. That is what I fear: the amendments of the noble Lord, Lord Lilley, would effectively introduce a wedge of change that would fit very uncomfortably with the current structure.

On the other hand, I support the amendments proposed by the noble Lord, Lord Bridges, and particularly commend the remarks of the noble Lords, Lord Hill and Lord Forsyth. They argued that although this new accountability device—this new entity—would deal with, let us say, the technical side of regulatory issues, we still need a parliamentary committee to deal with the political side because regulation is both highly technical and has an essential political core. That is why we need both components. Therefore, I strongly support the amendments of the noble Lord, Lord Bridges, and the views put forward by the noble Lords, Lord Hill and Lord Forsyth, on the need for the dual structure to ensure a proper level of both technical and political accountability.

First, I declare my interest as in the register. I am deeply concerned about this second set of amendments; they could have a profound impact on and consequences for the SMR, the ombudsman’s service and the RDC in particular, and I shall go through each in turn. I strongly agree with what has just been said about the nature of regulation and the risks of moving at such pace to a wholly different approach, bearing in mind for how many decades this system has been in place and has become understood and accepted—at some cost, by the way, and, therefore, changing it is itself something whose costs we need to bear in mind.

On the question of predictability, consistency and unintended consequences, in response to an earlier amendment I cited abuse of cryptocurrency technology, which might be made more difficult for the regulator to adapt to if it has to show that what it has done was predictable on the basis of existing law. That could be spread betting or, to take a topical example of 15 years ago, asset-backed securities. I am extremely nervous about including this without substantial consultation, which should be preceded by a detailed explanation of what is intended. We have not had any of that, and it is certainly not suitable to be put in this Bill.

Although I have not said very much so far on the Bill, I fear I will speak at some length on these three areas, which in my view are crucial to providing fairness and making sure that we are better prepared for the next financial crash that will inevitably come.

As I read Amendment 169, it would create a defence before the Upper Tribunal, and possibly a complete defence if a person could show that they had acted reasonably and in good faith. That might sound quite reasonable in itself—more apple pie—but a defence of reasonableness and good faith would mean that if an individual did not know about a problem, he could not be held responsible for it. That would be goodbye to the SMR, at least, as an effective regulatory tool. It strikes me as likely to reintroduce all the gateways to unacceptable risk and risk taking that the SMR was designed to expunge.

In considering the merits of this amendment, we need to remind ourselves why the system existed in the beginning. It was created because top bankers claimed ignorance of major risks on the balance sheet after the crash. They hid behind a veil of collective board ignorance. In that, they found a helping hand in the SMR’s predecessor, the approved persons regime, which had degenerated into a box-ticking, back-covering exercise that was far too broad in scope and operated primarily as a gateway to many very high-risk activities. It created the appearance of protection from prudential risk, which sat comfortably in the filing cabinets of firms and regulators, but the reality of none. As each new risk was added to the balance sheet, the responsibility for challenging it had often become perfunctory. While virtually unproven, of course, the foreknowledge of bankers and their lawyers of the twin defences of ignorance and collective responsibility under the old rules almost certainly contributed to unacceptable risk taking. The deterrent effect of possibly being held responsible for the addition of a risk, even a substantial prudential risk, scarcely existed.

The SMR was designed to address those weaknesses head on. As the Parliamentary Commission on Banking Standards’ final report put it, the SMR

“must ensure that the key responsibilities within banks are assigned to specific individuals … The purposes of this change are: first, to encourage greater clarity of responsibilities and improved corporate governance within banks; second, to establish beyond doubt individual responsibility”

to enable the regulator to improve remedies or to take enforcement action. The report continues:

“responsibility that is too thinly diffused can be too readily disowned: a buck that does not stop with an individual stops nowhere.”

So the SMR created a direct line of responsibility for each type of risk at board level. Its explicit purpose was to improve the conduct and performance of directors by encouraging challenge and a sense of ownership of risks at board level. The SMR was targeted at improving governance as well. In designing it, the commission had very much in mind the spectacular shortcomings of the RBS and HBOS boards, the latter of which it had examined in some depth and published a report about.

It is reasonable to ask whether the SMR is doing its job properly. The noble Lord, Lord Turnbull, suggested that it may not be doing it well enough and may not be strong enough. The early assessment of it—there has already been quite a major assessment by the PRA—is favourable, and almost everyone involved in it, on all sides, thinks it should be kept. It has only just been introduced; it has been fully operational only since the beginning of 2019. One indication that it is on the right track is that its core principle, individual responsibility, is being extended throughout the regulation of the financial services industry at home, and it is increasingly being emulated in other jurisdictions, including free-market beacons such as Singapore.

These are only indications of the performance of the SMR, and it is probably capable of improvement. It certainly needs continuous reassessment against its core purposes. Also, the SMR, like all regulatory frameworks, will be subject to attrition, as most rules are, particularly where vested interests are in operation.

Rather than introduce major changes now to the SMR, as would Amendment 169, a better approach is probably to wait a few more years and then subject both the SMR and certification to a thorough independent review and consultation. One thing is clear: Amendment 169 is not merely a tweak but represents a fundamental change, and it may, whether inadvertently or not, drive a coach and horses through a central plank of post-crash reform.

These amendments would have big effects elsewhere as well. Perhaps I could take the example, of the ombudsman service, which looks very concerning. As I understand the amendment—I am happy to be intervened on if I have not got this right—applicants must bring and pay for a case, the decision on any claim will be made public and any decision should create a precedent for all further ombudsman cases. If so, the effect is likely to be to squeeze out small claimants, forcing firms to defend decisions brought by individual claimants on which they might otherwise have settled. They would be concerned that precedents could be created if they do not defend cases, and the precedents would then generate a mounting cost. A further effect would be to favour the well-heeled individual client over those who cannot fight a case.

The heart of the proposal in Amendment 172, as I understand it, is to require the ombudsman service to rely exclusively on case law and precedent. If so, over time it would transform the Financial Ombudsman Service into a court system and would kill it off as we know it. I have not heard much by way of support for such a step. Perhaps a major shake-up of the FOS is needed, but before we deliver that we need to be confident that we have a problem to begin with, and to do that we need to bear in mind the primary purpose of an ombudsman service: to provide cheap and effective redress to the smaller victims of detriment, who do not normally have recourse to the courts. As a result, of course, there will always be an element of rough justice about some cases, and I saw that as a senior independent director of a publicly quoted company—a wealth management business—for many years. I saw a good number of such cases. I also saw such cases as an MP, so I am very aware of the problems created by the ombudsman service and its imperfections.

In addition to giving the small man access to redress, the existence of a reasonably well-functioning service provides at least three other very important benefits. It acts as a deterrent against poor conduct and poor product creation in firms. It greatly encourages quick and informal settlements; I have seen that for myself many times. It creates higher levels of trust among the mass of retail consumers and small businesses. With greater trust comes, in the end, more economic activity and welfare.

Of course, the FOS, as it is called, gets a good going over from time to time, often by consumer groups, and perhaps the practitioners should speak up more and the practitioner panel should be more active in explaining the weaknesses of the FOS. This amendment is not an improvement to the FOS and, in any case, if major reform is to be seriously considered, we need a full consultation, as I said earlier.

There is one area where I half agree with the gravamen of the amendments proposed by the noble Lord, Lord Lilley. Amendment 200 would almost certainly change the character of the Regulatory Decisions Committee, and quite a lot. If the noble Lord thinks that the RDC could benefit from some improvement—I am not sure that he put his case in that way—I would like to make two points. First, I strongly agree with him but, secondly, I am not sure that his amendment is the right way forward to tackle its problems. Let me try to explain those two issues.

As it stands, the RDC is well short of ideal, but it is important to have in mind why we have it. The RDC exists because the reputational effect of it being shown that a firm or an individual is being investigated, or is the subject of a warning notice, can often be terminal for the firm. It exists to try to address the problem that even the very early stages of enforcement by the FCA can empower the regulator to the position of being a judge, jury and executioner. Arbitrary justice is not far away in such circumstances, and that is not good enough. The purpose of the RDC is to separate the investigative and decision-making functions of the FCA. The practical effect of creating it is therefore that, before commencing any enforcement action, the FCA’s enforcement team has to get its case past the RDC. So a second pair of eyes is brought to the case.

The RDC can and does bring investigations to a halt; I have seen that for myself too. The fact that it can do so probably improves the conduct of the enforcers. In particular, the RDC can act as a deterrent against overzealous enforcement and investigation. Of course, enforcers are only human: once they get going on a case and get their teeth into a person or firm, they all too easily conclude, “That person must be guilty”, and they are reluctant to let go. That is why it is particularly important to have a second pair of eyes on the case; there is plenty of evidence to support the view that such misconduct by the enforcement team can take place.

I implied at the beginning that the RDC might be a force for good, but is it good enough as it stands? In my view, we need to do something about it. For a start, the RDC sits down the corridor from the rest of the FCA’s decision-makers. Office geography matters. Even if the whole of the FCA behaves impeccably, firms will always suspect that some whispers have penetrated the Chinese wall that is supposed to separate the RDC from the enforcement division. Confidence in outcomes among firms will be the casualty. In any case, perhaps there are whispers. I have some regulatory experience and have seen a few such whispers taking place.

Quite apart from the Chinese wall problem with the FCA, there is a second problem. The case for re-examining the way it operates has been made all the more pressing by the recent decision of the FCA—I think it was a couple of years ago—which was slipped into an appendix to one of its annual reports, to focus the RDC’s work on complex, large enforcement cases. I suspect that was as an expenditure-saving measure. The losers of this will be smaller firms with simpler cases, which in practice will now be almost entirely at the mercy of the enforcement teams. Perhaps that is where the FCA will look to boost its success rates: smaller firms tend to settle more quickly than the big ones.

I am also particularly concerned that the FCA has—or seems to have—brought to an end the hitherto more or less automatic right to oral representation of most people who would have ended up in front of the RDC, except, it says, in exceptional cases. Again, it is presumably an expenditure-saving measure. But these small firms can no longer put their case if it is considered simple—and the decision on whether it is a simple or complex case is not even in their hands.

In any case, I am concerned that the RDC team will have to rely, as I understand it, on the enforcement team for the legal advice it uses. In such circumstances, is the RDC—the second pair of eyes—fully independent in conducting its business any more? It took me some time to understand the press release that sets out the new operation of the RDC. If noble Lords looked at it, they would conclude that something is quite seriously amiss.

The FCA’s intention in all these changes is to try to reduce the logjam that currently exists at the door of the RDC, but the effect may be just to increase the logjam at the door of the Upper Tribunal, where those supposedly smaller, simpler cases will now be forced to go—and at huge extra expense.

If I am right that these two problems—the recent reforms of the FCA and the Chinese wall problem—are the RDC’s two main shortcomings, I am pretty sure that the amendment from the noble Lord, Lord Lilley, does not provide an answer. In any case, I cannot tell whether it is intended under his amendment that the RDC would develop into a fully fledged independent court, whose decisions would become subject to conventional court appeal, or whether the RDC is to remain a public body whose decisions are subject to judicial review. I think it is the latter but am not sure. Either way, the amendment as it stands will create a new tribunal-type layer in the FCA—great for lawyers and some firms, mainly larger ones, but not so good for smaller firms that can ill afford access to expensive legal advice, and very bad news for customers who pay for all this one way or another.

On the Parliamentary Commission on Banking Standards, the noble Lord, Lord Turnbull, and I, among others, examined this very issue. We proposed that the RDC’s autonomy should be entrenched in statute, but this proposal might also trigger unintended consequences that could defeat the original purpose of creating the RDC. I will not go into them now but, if I get time between now and Report, I might set them out.

In the meantime, my only remaining question is to ask whether the Minister accepts that the RDC has some concerning shortcomings. If so, it would be much easier for us all. Perhaps the Minister can take this problem away, ask for an independent assessment of the RDC’s performance and then publish the results. If that does not take place, perhaps it could be an early project for the scrutiny body proposed by the noble Lord, Lord Bridges, which could do a thorough report on the job and advise on how to improve the RDC’s performance.

My Lords, much of what we have just heard would be very much supported by the group of people with whom I work. We do not want to reduce the protection of either group of which we are speaking, particularly small people asking for redress.

The ombudsman service needs reform; there is no doubt about that. We really have to discuss putting some stakes in the ground about not blaming people for things they would never have thought of at that point because we now think of them. I am afraid that my noble friend Lord Lilley’s amendments do not help us in that direction. In other words, all the issues I would want to raise about the ombudsman are not covered by these amendments. Similarly, it is true about the protection of people from the effect of investigation, even when that investigation turns out not to be justified.

I finish by reminding the Committee of the original discussion we had. We need a system that people see to be fair and is shown to work effectively for small as well as big people. I do not think these amendments will help this, but I hope we will be able to have changes. I do not think that you should accept any changes just because you want changes, and I submit that these are the wrong changes.

My Lords, I am speaking later than I would have in the debate, due to the absence of my noble friend Lady Kramer. The Committee will be pleased to know that I shall not try to say everything that I would have said, as well as everything that she would have said.

It is well known from the previous FSMA that I support independent review. I had an earlier amendment to this Bill suggesting the use of the NAO, to which the noble Lord, Lord Bridges, referred. I am pleased to support his amendments, which I have put my name to and which lay out a much more thorough range of new provisions. At this stage, I should probably remind the Committee of my interests in the register, in that I am a director of the London Stock Exchange, as I am going to talk about my regulator.

The UK would not be alone in having independent review of financial regulations as part of its accountability. That was one outcome of the review of the financial crisis in Australia. I have been around this argument many times, and today it has already been eloquently explained by the noble Lord, Lord Bridges, so I pose instead the question: what happens without an independent review? One thing that is certain is that there will be complaints about regulations and, by and large, the regulators will defend their work. Parliament’s committees will try to scrutinise, but that is a public process—or it has been called the political process. They are well adapted to do the kind of inquiry that they do and often get into the nub of the matter. But as we have found out in the Industry and Regulators Committee, it is difficult to get industry to state in public what its issues are with the regulators. As I have pointed out with amendments and speeches on previous days, the Government do not give any legislative status to the parliamentary reports, so there is scrutiny but no consequence, which is not accountability.

Additionally, within intensively supervised frameworks, such as that which exists, probably uniquely, in the financial services sector, there is genuine concern on the industry side about regulators’ retaliation or suspicion if they complain. I acknowledge that the heads of the regulators have said that this would not happen, and would be wrong, but that does not allay concerns or whispers about this most crucial of relationships between industry and its regulators, where every word is guarded. There are also genuine concerns that explanations require public disclosure about investigations or other difficulties that firms may have faced in compliance, which they would rather not put in the public domain—for example, out of commercial confidentiality about future plans and not for reasons of bad behaviour.

Industry will therefore instead bend the ear of government through many of the private channels that it has, whether through the Treasury or at Cabinet level—for example, as it has about international competitiveness. The Government may choose to act, as they have in that instance. Meanwhile, the public channels remain uninformed or unconvinced, because—and I refer again to the experience of the Industry and Regulators Committee—we were given evidence of only operational inefficiency and not of rules that caused any lack of competitiveness. How is public trust to be maintained under these circumstances? How is there to be the legitimacy that has been spoken about? How are reviews to get through the confidentiality concerns in a way that the public trusts?

The Minister has sat tight on review in all the previous debates on this Bill and the previous one, saying that the Government have given themselves powers to satisfy those requirements—powers to ask the regulator to review its rules. I do not object to that, but it hardly has any independence or new eyes. There are powers to seek independent reviews but as we know from experience, because those powers have been around for a while, such reviews have not been used quickly or frequently. They tend to follow a sequence of disasters, as the Gloster review did, and not to be done in any checking or anticipatory way. I understand why that is, because government must keep a certain distance and look for some systemic concern rather than one-off causes, but that distance leaves a gap.

Of course, there are powers to intervene by way of directions, which need to be used with care if the independence of regulators and international respect for them are to be maintained. None of those powers satisfactorily address how there should be checking in a way that permits private submissions but remains free of it looking as if government either is interfering too much and getting too cosy with industry, which is what it will look like if the Government use their powers to intervene as much as might be needed, or never acts until there has been substantial damage, when it really is too late.

I would also be interested if the Minister would inform the Committee of the level of resources and number of personnel that the Treasury is able to put behind its own monitoring, and whether it is free from reliance on industry and consultancy involvement. It is no good if it is just sent back to the same people, who will give the same information as comes in through the private channels anyway. How is that meant to be independent? I hope the Minister will take account of the fact that calls for independent review, as well as enhanced parliamentary scrutiny, come from all sides of the House and need to be addressed. There should be some serious conversations before we get to Report.

I will briefly say a few things about the amendments put forward by the noble Lord, Lord Lilley but I agree entirely with the noble Lord, Lord Tyrie. It would be a dreadful shame if one of the major achievements of this Parliament after the last financial crisis were watered down or, even worse, set aside. I fear that, as has been explained, that could well be the case. When the noble Lord, Lord Lilley, introduced his previous amendments, I said that I am not totally against a libertarian approach—one where you have to take care, and if you get it wrong then you are for the high jump—but that is not what is presented here. This proposal would make it extremely difficult for the regulators. It does not fit with the kind of regulatory system we have, with its underfunded regulators. It is a way to make it easy to set aside what the regulators have done. Given what I just explained about the relationship that firms have with their regulators—one of the reasons why, regrettably, they will shy away from legal action—it will not necessarily overturn that.

I do not agree with the predictability and consistency objective, for the reasons that others have explained: we want agility and change, and have to adapt to circumstance. If something comes to court, surely it could remain that a judge ultimately applies it, but that would be in the light of circumstances and an acknowledgement that circumstances change and regulation necessarily proceeds.

Likewise on a good-faith defence and reasonableness, my take on the senior managers regime is that the whole point is to make individuals be proactive, rather than just coasting along in what has been a comfortable way of life—how things have always been done. It has meant they have to engage their brain, think about it and update in the light of circumstances. Just saying, “There was a set of rules and I complied”, is not meant to be enough; you have to take account of what is going on.

Is there not a conflict here to some extent between people on the one hand talking about wanting principles-led regulations and, on the other, talking about that being vague? There are complaints that there are too many rules, yet it is industry compliance departments that are first off the blocks saying, “Where are the rules? Give us the rules! I want to know where to put my tick”, so I am not sure which section of the market this proposal is supposed to serve.

It would be an extraordinary change of regulatory approach, as the noble Lord, Lord Eatwell, has said. I welcome the fact that the noble Lord, Lord Lilley, has shown us how to put a Bill within a Bill; that is certainly a ruse I might avail myself of in due course. To be honest, that suits the amendments by the noble Lord, Lord Bridges, very well; we can get them in and make them votable on Report, and I am all for that.

I strongly support the amendments by the noble Lord, Lord Bridges, and I hope the Minister will take note of that. For all the intent—because I am sure there is some good intent behind the amendments by the noble Lord, Lord Lilley—I just do not see that they work. I do not see that something applied to the construction industry, which is pretty static, is at all applicable to an intensively, minutely supervised industry such as financial services—and anyway, we got Grenfell.

My Lords, the most important thing to have come out of this debate, which is now in its fifth or sixth day—frankly, I have lost count—is that the regulatory environment lacks sufficient parliamentary scrutiny; there is enormous consensus about that idea. We have heard several solutions. At least three groups have touched on this issue, and I hope this is the last group to do so. I will go as far as saying that it is an interesting idea. I say that in the sense that I am representing His Majesty’s loyal Opposition, and at the moment we have some concerns about resource consumption, et cetera.

However, if we take all the ideas together, I am convinced that they can be moulded into an important step forward in involving Parliament, and involving sufficient resource to make that involvement effective. We should set about trying to do that. The noble Lord, Lord Turnbull, said this more elegantly than I will, but if you toss a bunch of amendments together and hope that they are internally consistent and capable of execution, you are kidding yourself. I fear that that is where we are at the moment. If we were to vote on all the amendments we have had over the last five days or so, that would not work.

What should happen now—it will be interesting to see whether it does, and I shall do all I can to encourage it—is that cross-party discussions take place, focused on taking the best ideas and putting them together in a way that will work and will have support. This has to be a coalition that is irresistible in the parliamentary process, and that is possible. When you look at that lot over there, this lot here and us, that is a hell of a force for the Government to try to ignore, so I hope we can find ways of bringing us together. I hope the Minister will want to join in that process at some point and will want to see whether we can achieve a consensus with the Government. I strongly advise her today not to close off options. Options have to be open to try to move into this area.

There seems to be a secondary area, which I will loosely call the Lilley area, about legal involvement. I clearly do not understand enough of what this is about; I suspect a lot of people do not. There is confusion and, from what I have heard experts say, it is a dangerous confusion. We should stick to that central issue of parliamentary scrutiny, properly supported to be effective—and the time has come.

Some of us slogged through a Bill, about a year and a half or two years ago—I am losing track of time—where we worked quite hard on this and made very little progress, as we got rid of all the EU rules and then put all the stuff in the hands of the regulators. Many of us felt uncomfortable that there was not more scrutiny, but we did not really come up with a solution. Clearly, we are in a solution-rich environment now; the trick is to bring it together into a solution that will work, and it must be done now. This is the last legislative opportunity, in my view, that we will see for some time, so I hope that cross-party discussions take place and that we can take a real step forward for the industry and for democracy.

My Lords, I thank my noble friends Lord Bridges of Headley and Lord Lilley for tabling these amendments, and for their contributions to this discussion.

I will speak first to Amendments 160 to 166, tabled by my noble friend Lord Bridges. The Government agree, and have been clear, that more responsibility for the regulators should be balanced with clear accountability, appropriate democratic input and transparent oversight. The proposed creation of a new regulatory body to oversee the regulators—a so-called regulator of the regulators, although I know that my noble friend set out why he thought that term did not apply—raises further questions about how the accountability structures for the various regulatory bodies would operate. The Government would need to carefully consider how to ensure clear accountability to both government and Parliament under such a model.

The noble Lord, Lord Hunt, talked—it feels a long time ago—about the need for greater clarity on where accountability lies in this system. I am not sure whether it is clear that the addition of a further body to the system would provide greater clarity on where accountability lies.

How does the OBR undermine accountability? Surely it just provides independent analysis and assessment, and I see no problem there.

I believe that is sometimes subject to debate. What I was saying to noble Lords is that it raises questions in this area that we need to consider. If I look back to the creation of the OBR, it was in the Conservative manifesto at the 2010 election; indeed, it was set up in shadow form in 2009. It was first established not in statute and operated without statute after 2010. The provisions for its establishment in statute were then brought forward in a Bill, where there was sufficient time to consider those questions.

I am not saying definitively one way or another, but it raises questions that we would need to consider more carefully about who this body is accountable to and the interactions with parliamentary accountability that we have discussed today; the need for clarity on accountability, raised by the noble Lord, Lord Hunt; and, for example, the remarks by the noble Baroness, Lady Bowles, on the role that the body could have in filling the space that allows industry to make private submissions to the new body, rather than public submissions as happened through Select Committees, and how that marries with the provisions in the amendments on the need for this body to operate transparently.

These are questions that are raised in considering how such a body would operate in this landscape. There is the potential that it could duplicate or dilute the roles within the regulatory framework of government and Parliament to scrutinise and hold the regulators to account.

There is a problem in the approach that the Minister is taking. She is suggesting that the body proposed by the noble Lord, Lord Bridges, will add to the accountability structure. I have added my name to the amendment and, as I see it, the body is there to support those who wish to hold the two regulators to account. It is not there to add to the architecture of accountability but to aid Parliament and others to hold them properly to account. There is a distinction.

Whether it is there to aid others in the accountability structure or is an accountability body itself is a further question, but its proposed role raises questions about, for example, how transparently it operates, as the noble Baroness, Lady Bowles, touched on, and other such considerations. I merely said to my noble friend who raised this point that the establishment of the OBR happened in a Bill of its own after a manifesto commitment, and that it had been up and running for some time before it was put into statute. It is not unreasonable to say that considerations need to be made when we think about this issue.

There are certainly considerations, but surely one of them is that we have an opportunity to make the change in this Bill, and we will not have another opportunity for a very long time. The Minister is proposing that we do not do it, frankly. Therefore, let us do it in this Bill, because it is the one opportunity that we have.

My Lords, I would never want to speculate as to future parliamentary timetables. My noble friend Lord Naseby talked about the importance of listening to those who are impacted by the provisions of the Bill. He spoke about the City, and we have heard various points of view in that respect. I would add consumers into that mix, too. I say to noble Lords that the Government have consulted extensively on the approach we are taking in the Bill, and we have received a number of responses on this specific issue in both future regulatory framework review consultations that took place. Although I absolutely recognise that a small number of respondents were supportive of further consideration of such a body, the vast majority were focused on how existing mechanisms for accountability to Parliament and government and engagement with stakeholders could be strengthened. The Government therefore decided, in response to those consultations, against creating a new body, and focused on ensuring that the mechanisms for Parliament and government to scrutinise the regulators are effective.

Will the Minister clarify what the questions were in the consultation? My recollection was that it was relatively open. Obviously, at that stage, industry was focused on its very important relationship with government—one cannot overestimate the importance of that—and it answered questions saying that it was happy with parliamentary scrutiny, but I have no recollection of there being a suggestion as to whether there should be another body that enabled any kind of regular review. Since that time, industry bodies have said that it would be a good idea, so it seems a bit inconsistent to claim that the consultation cleared the way to say that none was required.

My Lords, I was simply pointing out that this Bill is the result of two rounds of consultation. The Government are criticised for bringing forward proposals without sufficient consultation. I note the noble Baroness’s points but, even in the context of those questions, there were bodies that put forward the kinds of ideas that we are discussing today. However, in the balance of responses to that consultation, they were not the dominant voice or viewpoint from the range of different people who responded to us.

It is important to recognise the process of consultation that has been undergone in the preparation of the Bill. The noble Baroness is right that this is not a static world and things move on, but we have to undergo consultations before we reach legislation. I would say that is the correct sequencing of our approach in this regard.

After those consultations, we focused our efforts on improving the mechanisms by which Parliament and government can scrutinise the regulators. We have discussed some of them before in this Committee: the notification to the Treasury Select Committee of consultations; the reply to representations by any parliamentary committees; a new power for the Treasury to direct regulators to review rules; a new statutory cost-benefit analysis panel; and a new government power in Clause 37 of this Bill to direct the regulators to publish more information, including on performance, where that is necessary for the scrutiny of their duties.

My Lords, in my day, although it may have changed, when the Government issued a consultation document, it was basically to get agreement to what they wanted to do. In the case of the OBR, I remember the then Chancellor, George Osborne, arguing that the OBR was necessary in order that people could see that the Government were being honest and were subject to some kind of scrutiny, and that it would provide independent information that would enable Parliament and others to take a view.

I am trying to put this delicately, but my noble friend’s argument seems to be that the Treasury set out a consultation and reached an agreement so it is in the Bill. But the view that is coming out very clearly is that, for Parliament or anyone else to effectively hold the Treasury and the regulators to account, it is necessary to have an independent source of information. My noble friend is just reading out what we already know is in the Bill, but there is pretty well universal acceptance that that does not actually provide for sufficient accountability. Could she deal with that point? Why on earth would she be against something that would enable more transparency and more effective scrutiny?

I am afraid I am going to have to disagree with my noble friend’s point about consultation. I have spent too long in this Chamber, even in a limited time, being on the receiving end of scrutiny from noble Lords about the lack of consultation. The proposals in the Bill have gone through two rounds of public consultation. My noble friend may not see the value in public consultation, but that is not something that has been fed back to me in my dealings in other policy areas.

Forgive me, but I did not say anything of the sort. Of course I can see the value in consultation. What I do not see the value in is consultation that then concludes that the Government should do what they wanted to do in the first place.

That is not what I am saying. One of the things that I was referring to with regard to the powers in the Bill was an amendment tabled in the Commons stages to try to respond to further questions about how we can facilitate accountability. I think I have been clear to all noble Lords in this Committee that that is a question that the Government will continue to consider and to engage with noble Lords on, whether it is about strengthening parliamentary accountability or other measures that help to provide the information and resources that people need to do that work. The Government will continue to reflect on those points.

I am sorry to interrupt, but I find it slightly strange that the Minister is saying the Government will continue to interact with us. All that that interaction has been so far is “No”.

In Committee, we are discussing the different proposals that have come from noble Lords to solve these problems. I am trying to set out where the Government have previously considered these questions and the thinking behind our approach in the Bill, demonstrating that where we have been able to, for example in the introduction of Clause 37, we have made amendments to the Bill further to take into account some of these issues. When it comes to the specific proposals we are talking about, it is right that I set out that this has been considered by the Government, including through public consultation.

I was not going to speak on this group in order to have a speedier debate, but I completely failed in that aim, so I think I am allowed to say something now. Can my noble friend explain to what extent these two consultations actually address the issues that have been raised by the amendments of my noble friend Lord Bridges? From memory, neither of the consultations examined the idea of having some kind of independent scrutiny of the regulators; they merely proceeded on the basis of what the Government wanted to do and did not seek to analyse the benefits of an alternative solution.

That is a similar question to that of the noble Baroness, Lady Bowles, and it is probably because I did not answer it satisfactorily that it has come up again. Noble Lords are right that there was not a question on those specific proposals in those consultations. I endeavour to point out, however, that does not prevent the respondents to those consultations, where they believe it to be a good idea, to use them to put forward their support for such an approach. Perhaps I could write to noble Lords specifically on the areas within both those consultations that touched on accountability measures.

To be absolutely clear and just to put it on the record, therefore, the proposal in my amendment has not been consulted on? Is that correct?

It would be best to set out in writing for noble Lords the specific areas of the consultation that sought to address the issues we are discussing today. As I have said, in response to those consultations, certain respondents put forward proposals in this area, so it is not right to say that it was not a topic for consultation. However, as my noble friend wants clarity on the record, I think that would be best delivered in writing.

Perhaps I could intervene on this important point. In the first consultation, there were some respondents—I confess, I was one of them—who put forward notions of there being independent scrutiny. There were possibly some other organisations, I do not know, of the kind that come forward with policy ideas. But I suggest that the majority of respondents tended to be from the industry, and it is not usual for industry to invent new ideas in their responses to consultations. I asked some of the industry bodies about this at the time, and that was the response I got. They said that they thought that, as I had led the way, they might want to pick it up in later consultation—but by the time you get to round two, it is much more concentrated on what will be in the Bill and “Do you agree with this?” It does not say “And, by the way, what have we left out that might have been a good idea?” Industry does not spend its time and risk putting in responses about that kind of thing.

I should be very interested to hear the analysis of the type and numbers of people who responded. Frankly, we have to rely on what we are told. Once upon a time, you used to know who had responded and could judge, and if the weight of the responses came from industry, I am not surprised that there was nothing in there. If the weight of the responses from the non-industry part had some good ideas, perhaps the Minister could tell us.

As I have said, I will set out further detail on the consultation process in writing. It is worth just noting that this question was also considered by Parliament through the Treasury Select Committee in its report The Future Framework for Regulation of Financial Services, which said that

“The creation of a new independent body to assess whether regulators were fulfilling their statutory objectives would not remove the responsibility of this Committee to hold the regulators to account, and it would also add a further body to the financial services regulatory regime which we would need to scrutinise.”

Can the Minister explain whether that constitutes opposition? I had a cup of tea with the chairman of the Treasury Select Committee only the day before yesterday to try to establish exactly that. She is fully supportive of the idea—we ought to get that on the record—although I should also say that she had not specifically consulted her committee on it.

The Minister must see that the Government are probably going to lose a vote on this at Report. Would she be prepared to sit down with a group of us to see whether we can work up some sort of proposal that she might be prepared to accept? To make that meeting effective, in the meantime, would she be prepared to ask her officials, on a contingency basis and without any commitment at all on her part, to write down on the back of an envelope—a long envelope, I admit—what it is that might conceivably, in certain circumstances, be acceptable to the Government?

My Lords, I believe that I have already made the offer to noble Lords to meet to discuss the issue of accountability, both parliamentary accountability and the proposals such as those put forward in the amendments today. That still stands. I am afraid that I cannot—

I apologise for interrupting. The Minister is quite right that she has made that offer. We were grateful for it, but it is of fairly limited use if there is no recognition on the part of the Government that there is a gap here in terms of parliamentary accountability and scrutiny. She has not actually said yet that she recognises that there is a gap. I have to say that she should look around her: it is pretty clear that it is there.

What I have tried to say to noble Lords is that, in bringing forward the proposals in this Bill, we absolutely recognise that, with the increased responsibilities that go to the regulator, we need to ensure that there is proper accountability and scrutiny. We have put forward the proposals in the Bill to attempt to do that.

Sitting suspended for a Division in the House.

I did not finish the note I was writing to myself to try to draw the debate on my noble friend’s group of amendments to a close for now. In response to the noble Lord, Lord Vaux, I was setting out that the Government believe there needs to be clear and greater accountability for the regulators, given the greater powers they are taking on. We have set out our approach to this in the Bill. When it went through the House of Commons, we demonstrated our openness to finding new and improved ways to strengthen our approach.

Where the Government have considered and consulted on some of the options the Committee is discussing today—or bodies such as the existing Select Committees of this or the other House have considered those options—it is right to draw this Committee’s attention to the feedback we have had in those consultations or through those Select Committee processes. As I have said to noble Lords on numerous occasions, we will listen carefully to the various debates we have had, reflect on what has been discussed and meet and engage with noble Lords, who have clearly expressed their concerns on this matter, to see what further progress can be made.

I turn to my noble friend Lord Lilley’s Amendments 169 to 174. On Amendment 169, I believe I set out the Government’s position on a predictability and consistency objective in earlier debates. While the Government agree that predictability and consistency are important components of an effective regulatory regime, we do not think they are appropriate objectives for the regulators. Similarly, the Government consider that such objectives do not need to be applied to the Upper Tribunal’s decision-making.

Amendment 171 seeks to enable the Upper Tribunal to quash all rules made by the regulators. The Government consider that the regulatory framework, including through enhancements in the Bill, provides multiple opportunities and avenues for challenge and review of the rules, both before and after they are made. For example, Clause 27 introduces a new power for the Treasury to require the regulators to review their rules when it is in the public interest. I also note that the courts already have a role within the existing framework, where necessary, as decisions of the regulators are subject to judicial review.

Amendments 170 and 172 both concern the routes of redress available to consumers. The Financial Ombudsman Service already plays a valuable role in providing consumers with a swift and effective means of resolving disputes with financial services firms.

Amendment 170 would enable those currently eligible to bring claims to the FOS—consumers and most SMEs—to bring actions against firms for breaches of regulator rules in a new financial services chamber within the First-tier Tribunal. These actions could be brought even where the FOS had made a final decision. The FOS and the Business Banking Resolution Service already provide a cost-free alternative to the courts for consumers and 99% of SMEs. Going to court can be expensive for the parties involved and delay redress. It would likely be more expensive for consumers and SMEs to bring civil actions in the First-tier Tribunal than through the existing redress process.

I turn to Amendment 172. Establishing a new body with a different remit would take up resource from industry, government and the regulators and slow down redress for consumers without a clear need for this change. The key difference between the proposed new body and the FOS is that the new body would not be able to consider what was fair and reasonable in all the circumstances of a case when taking a decision. This consideration enables the FOS to take into account wider factors relevant to the case, such as regulator guidance and industry codes of practice at the time. This is in addition to the requirement in FSMA for the FOS to consider relevant law and regulator rules, and it enables it to tailor its decision to the particular circumstances of a case and ensure a fair and reasonable outcome for all parties.

The FOS’s ability to consider issues of fairness and reasonableness beyond a strict application of the law and regulator rules is consistent with its role as an informal alternative to the courts. FOS decisions can be, and have been, judicially reviewed by parties who are not satisfied with the reasons provided by the FOS for the decision.

With respect to Amendment 173, the Government consider that the current position of the commissioner’s recommendations being non-binding achieves an appropriate balance between ensuring regulatory independence and accountability. Where the regulators do not comply with these recommendations, they must explain their reasons to both the commissioner and the complainant and what steps they are taking to address their concerns. The commissioner also lays an annual report before Parliament which includes its analysis of how the regulators have responded to its recommendations, ensuring that the process is transparent.

On Amendment 174, the Government do not believe that the case has been made to support a change to the threshold under which senior managers may be found liable in their supervision of authorised persons. This would represent a weakening of the existing requirement that the senior manager has failed to take reasonable steps to prevent the contravention by the authorised person occurring.

The proposed amendment also seeks to enable parties that are potentially subject to the misconduct provisions at Sections 66A and 66B of FSMA to avoid liability where they have acted reasonably and in good faith, as determined by the Upper Tribunal, as proposed under Amendment 169. I have already set out the reasons why the Government do not agree with Amendment 169. For the same reasons, the Government do not think this amendment necessary.

Finally, on Amendment 200, the FCA’s Regulatory Decisions Committee and the PRA’s Enforcement Decision Making Committee take contested enforcement decisions on behalf of the FCA and the PRA respectively. To ensure that such decisions are taken independently, both committees already operate separately from the rest of the FCA and the PRA. The Government are satisfied that the existing arrangements provide the degree of independence necessary to ensure that decisions are taken fairly. However, the noble Lord, Lord Tyrie, raised important issues in relation to enforcement decisions and the need for firms to know that these decisions are being taken fairly and objectively. I will carefully consider his remarks on this matter.

To conclude, the noble Lord, Lord Eatwell, set out why the nature of the changes proposed by my noble friend Lord Lilley would need significant consultation and discussion rather than being appropriate as an amendment to the Bill. While I will of course engage with my noble friends and all noble Peers ahead of Report on the issue of regulators’ accountability to this House, we need to reflect on the need for measures to receive sufficient consideration and consultation in order to be added to the Bill. I close by emphasising my offer to noble Lords to continue to engage in and discuss the issues of accountability that we have heard in this Committee session and others.

I have set out why the Government have concerns and that we should have further conversations to explore the issues that have been raised. I believe that is neither a “yes” nor a “no”.

My Lords, I will conclude this two and a half hour debate on just the first group and my amendment. I am delighted and thankful to noble Lords on all sides of the House who have supported it. The amendment is mine; the concept belongs to others. I am extremely grateful to my noble friend the Minister for offering to engage. However, I question the word “further”; I have not had any engagement and, so far, all I have heard is three things.

The first is that the Government believe that the measures in the Bill are sufficient. I think there is unanimous support, on both sides of the Committee, that, as far as accountability and scrutiny go, the measures are insufficient and need to be improved. The second is that the Minister is actually against the measures in my amendment today and the third is that they have been consulted on, whereas we have established from the earlier interventions that the specific amendment I propose, with this concept, has not been consulted on and that it was up to others to come up with that. In my view, that is not a consultation.

The Committee has stressed just how important this issue is, not just by the fact that we have been debating it for two and a half hours but because of what my noble friend Lord Hill and others said about the importance of ensuring that our regulators are truly accountable. The noble Lord, Lord Eatwell, made this point extremely well, as does my noble friend Lord Hill in an article in the Financial Times which was published just this afternoon. My noble friend says that

“what regulators decide directly affects our ability to compete and grow”

and that it follows that getting a regulatory framework right

“is central to our national wellbeing”.

He then says that we risk creating

“a new system of unaccountable British regulation”.

I repeat: unaccountable British regulation, and that is despite the measures that my noble friend says are in the Bill to increase accountability and scrutiny. I think we agree that they are completely insufficient.

As the noble Lords, Lord Eatwell and Lord Tyrie, said, this is not a question of just one or another of the little things that we have debated over the last few weeks on the Bill. A package needs to be brought together and it should address three points. One is improving the data that the regulators themselves provide. The second is arming Parliament with independent analysis, and I do not buy for a moment what my noble friend says about it undermining the independence of regulators. It is about arming Parliament and others with independent analysis of what the regulators are up to. The third is improving parliamentary accountability and scrutiny; my noble friend Lord Trenchard and others have made this point, as my noble friend Lady Noakes did in a previous session. These three things hang together.

I am delighted that my noble friend the Minister is willing to meet us, but I very much hope that she comes there with an open mind and a constructive attitude, not just a sense of no. I will obviously not press this amendment to a vote now but I can absolutely assure her that if the outcome of those conversations is not one that meets the challenge at hand, I will have absolutely no hesitation in pressing this to a vote at Report.

Amendment 160 withdrawn.

Amendments 161 to 167 not moved.

Amendment 168

Moved by

168: After Clause 50, insert the following new Clause—

“PRA dutiesReview of capital adequacy requirements risk weights and solvency capital requirements

(1) Within six months of the day on which this Act is passed the PRA must complete a review of the risk weighting and capital requirements applied to loans, guarantees or investment via shares or securities in—(a) group undertakings engaged in existing fossil fuel exploitation and production,(b) group undertakings carrying out new fossil fuel exploration, exploitation and production, and(c) group undertakings otherwise at significant risk from the low carbon transition, including but not limited to those engaged in fossil fuel-based power generation, agriculture, automotive engineering, aviation and heavy industry.(2) In conducting this review, the PRA must have regard to—(a) the full implications of climate change for the risk of investments including physical climate risks, transitional climate risks and climate liability risks,(b) the likelihood of assets becoming wholly or partially stranded before the end of their normal cycle,(c) the impact of climate change and climate change-related disruption on financial stability, and(d) the advice of the Climate Change Committee.(3) The Treasury must lay before Parliament the outcome of this review within one month of its completion.”Member’s explanatory statement

This amendment requires the PRA to complete a review of the risk weighting and capital requirements of banks and insurers in relation to firms engaged in financing fossil fuel exploration, exploitation and production alongside other climate-risk exposed sectors, taking account of the climate risk on those investments and on financial stability, the likelihood of the assets becoming stranded, and the advice of the climate change committee.

My Lords, moving on to a different set of topics, Amendment 168 is in my name, and I am grateful to the noble Baronesses, Lady Sheehan and Lady Drake, for lending their support. This is the only amendment in the group which has my name on it but I am broadly supportive of many of the others in it, as they seek to address a broad range of questions relating to how risk is taken into account in financial services regulation, with a specific focus on climate risk, as in my amendment.

Amendment 168 is about the risk weighting of assets for the purposes of capital adequacy requirements, in the case of banks, and solvency capital requirements, in the case of insurers. It is not a terribly prescriptive amendment. It would require the PRA to complete a review of these matters in relation to loans, guarantees or investment in firms engaged in new and existing

“fossil fuel exploration, exploitation and production”

and other sectors which are particularly exposed to low-carbon transition and climate risks

“including but not limited to those engaged in fossil fuel-based power generation, agriculture, automotive engineering, aviation and heavy industry”.

Proposed new subsection (2) sets out a number of matters to which the PRA should have regard, including the different types of climate risk and the risks to both individual stranded assets and wider macroeconomic financial stability. It also requires it to take advice from the Climate Change Committee. I have referred to loans, guarantees and investments in relation to the group undertakings to capture particular climate risks in the wider groups of firms. A loan to a firm engaged in clean technologies is still exposed to financial risk if it is a wholly owned subsidiary of a firm which is significantly exposed to low-carbon transition, or if the firm itself owns firms which are.

To be clear, I am seeing this through the lens of financial risks to firms. I have noted that Sam Woods, the chief executive of the PRA, has said that the organisation should not seek to pursue a climate policy in stealth mode or on the quiet, as a second Government, unless government gives it that duty. He says that the PRA and Bank of England remits are currently to pursue financial stability and accordingly to manage climate risk, which has the potential—I go so far as to say the likelihood—to constitute a huge risk to financial stability. I agree with him, but I do not believe that, for the management of these risks, the tools that the bank has deployed to date are sufficient; in fact, they include methodological issues that are disastrously understating the financial risks.

Before I turn to that issue, I should address one other point. During the passage of the Financial Services Act 2021, an amendment in relation to capital risk requirements was tabled by the noble Lord, Lord Oates. In response, some Peers said that there was no emergency embedded in banks’ balance sheets, as corporate lending in short to medium-term in nature. However, I need to emphasise that significant impairments are possible in both the short and medium-term.

This is not only as a result of more unpredictable and extreme weather—more particularly, it is as a consequence of technological and societal change. Global investment in low-carbon technology has increased by 20% a year in the past five years alone, and has now overtaken global fossil fuel investment. There is a whole economy change under way. It is not about a few companies and discrete sectors that have failed to take into account incremental improvements but about whole sectors exposed to broad-based technological change, increasing the rates of company failure, and the rapid shrinking of some industries, accompanied by the expansion of others. Banks and insurers that have not taken account of such changes face much higher impairments and, given the systemic risks of allowing them to fail, socialised public bailouts. It is right that the PRA should assess that these risks are being adequately managed and that the banks and insurers participate in supporting that review. It is about investing a little now to avoid spending a lot further down the road.

How are these risks being managed? Currently, through the climate biennial exploratory scenario, or CBES. In this exercise, the PRA offers up sample temperature rise scenarios and underlying assumptions of the implications for different assets, and firms plug in their portfolios to get the impairment data out as a result. This all feels safe and precise, but the climate is something that cannot be predicted specifically in those ways with any degree of accuracy. It is about the extent and nature of the risks that must be taken into account. This whole streamlined, reassuring and seemingly precise approach is hopelessly wrong in the face of climate risk.

A paper by the noble Lord, Lord Stern, of this House highlights that the methodologies employed by such climate risk models rest on flawed foundations, with huge error bars and unknown unknowns. Critical methodological problems have led to perverse outcomes, such as the suggestion that a 3 degree temperature rise, global average, offers the optimal balance of benefits and costs. That is more or less what we get from CBES. Where temperature rises are limited to under 2 degrees or rise to more than 3.3 degrees, the drag on company profits is predicted to be at around 10% to 15% on average. I have no idea how any model could reach that conclusion that had any bearing with what is actually happening to our physical climate.

Let us remember that the economy and the financial markets are a wholly owned subsidiary of our natural environment, and we are now in a destabilised climatic environment. This same 3 degree rise, which is the global consensus, involves steep drops in food production, dire water shortages, a sharp increase in urban heat waves, forced migration and mass extinction events. An increasing body of literature sets out why the models do not work. The former chief economist of ING Group in a Policy Exchange publication concludes that central bank scenarios have so far been based on assumptions and models that ignore or downplay crucial evidence of climate risks—notably the rising frequency of extreme weather events and critical triggers, tipping points and interdependencies between the climate, the economy, politics, finance and technology.

That is true for the CBES model. The underlying assumptions in the CBES paper highlight minimal economic impact from inaction on climate change over the next 25 years and a reduction in GDP growth of only 0.12% in 2050—another ludicrously precise number, given all the future uncertainties that lie ahead of us. That is very poorly aligned with the scientific consensus. Other academics have identified dangerous underlying assumptions in the functions that feed into those used by CBES, including that 90% of GDP will be unaffected by climate change because it happens indoors, and using the relationship between temperature and GDP today as a proxy for the impact of global warming over time, ignoring any possibility of cascading climate feedbacks and tipping points.

Tipping points can be both negative in terms of climate impacts and positive in terms of the rapid adoption of solutions by society and the changes that will bring. Indeed, in the next couple of months we expect to see the publication of major new academic research carried out by the UK Centre for Greening Finance and Investment, which finds that 55% of industry participants agreed that there are sources of climatic financial risk that are not fully represented in the CBES and that could represent a material financial risk over just the next 10 years.

In summary, the existing models are not up to the job. They systematically underestimate costs related to both transition and physical risk, which results in exposing our financial system, and therefore our economy, to risk. The models need to factor in cascading tipping points. There needs to be much more of an immediate short-term focus, including considerations of abrupt changes resulting from technological, social and political trends, including wider economic disruption. Where costs cannot be quantified, they should not be set aside; rather, efforts should be made to understand and account for them, and to be clear about the error bars that are inherent in all this modelling based on historical information.

The Bank of England’s work to date has been welcome but not sufficient. The review proposed by my amendment does not seek to be prescriptive about the Bank’s conclusions; it says only that it should do the work drawing on a wider range of expertise, including from our own Climate Change Committee, and make that work public and open to consultation and input from experts. We in the UK are fortunate that we have many experts on this topic. We should harness them and make our system of modelling the best it can be, while being honest about its limitations.

The UK Government would not be an outlier in considering this matter. The European Parliament has recently tasked the European Banking Authority with assessing by the end of next year whether and how capital reserve requirements should be adjusted to take climate risk into account. A recent CCC report recommended that the Bank of England should examine how capital requirements for banks should be adjusted based on assessed climate risks, and recommended that financial regulators in the UK should collaborate with international counterparts to establish a cost-of-capital observatory for physical risks.

I will gladly provide references to the papers that I have mentioned if that would be helpful. I do not intend to press this amendment today, but I ask the Minister to confirm that she has taken on board the increasing financial sector consensus that the climate biennial exploratory scenarios are in need of reform, and that she will ask the PRA to report publicly on this. With that, I beg to move.

My Lords, I shall speak to Amendment 199 tabled by the noble Lord, Lord Randall, who unfortunately is absent today, which is supported by the noble Baroness, Lady Sheehan, the noble Lord, Lord Tunnicliffe, and me.

This amendment would simply extend the same due diligence system that has already been introduced for large companies under Schedule 17 to the Environment Act, which looks at products in terms of deforestation, to UK financial institutions. The purpose of such due diligence is to prevent British banks knowingly financing deals that lead to deforestation worldwide. Sir Ian Cheshire, the former chair of Barclays and head of the Global Resource Initiative task force, has already written to the Minister saying that our regulations should now ensure that financial institutions do not directly or indirectly fund or support deforestation linked to forest commodities.

Between 90% and 99% of all deforestation is driven by agriculture, chiefly to produce soy, beef and palm oil—the big commodities—but on the whole that clearance is completely unnecessary to produce the food we eat. New research from the Stockholm Environment Institute shows that a vast proportion of all deforestation is speculative and does not in fact lead to any agricultural production. Sadly, corruption, fraud and labour abuses are the norm in the global agriculture sector. At least 69% of forest clearance for agricultural purposes between 2013 and 2019 is considered to have been illegal. Our existing regulations are practically an open invitation to banks to launder the proceeds and profits of forest crime.

Evidence from the charity Global Witness shows that, in the five-year period between the Paris COP and our own Glasgow COP, British banks and financiers made deals worth $16.6 billion, with just 20 agribusinesses implicated in these transactions. WWF calculates that the UK financial sector faces up to £200 billion in risk exposure to Brazilian beef and soy supply chains and Indonesian palm oil supply chains alone. This clearly exposes the UK economy as a whole and individual financial institutions to significant material risk. Globally, agribusinesses are expected to lose an average of 7% in value by 2030 due to unpriced nature and climate risk, with some companies losing up to 26% of their value.

Bringing an end to deforestation is one of our most imminent climate targets. At COP 27, the UN high-level working group on net zero made clear that this means an end to the financing of all deforestation. We do not need to do it; we should not do it any more. Fortunately for the Government and the Minister, Schedule 17 to the Environment Act has laid the necessary foundations by reducing the import market in the UK for commodities grown on illegally deforested land from places such as the Amazon. Under that Act, businesses will need to conduct due diligence to ensure that they have no deforestation anywhere in their supply chains. All this amendment would do is ensure that the already available information travels one step further to the banks and finance institutions.

I know that the Minister will reply that this is all in hand because of something called the Taskforce on Nature-related Financial Disclosure, TNFD, but this is yet another voluntary reporting scheme designed to help companies identify how biodiversity loss threatens their profitability. We must wake up to the fact that just identifying it is not the same as reducing it. Indeed, a lack of data is not at all the problem. Satellite technology enables real-time monitoring, and images can be mapped against suppliers’ farms. We have already accepted that such due diligence is made possible by passing the Environment Act.

If charities such as Global Witness can do it, so can the banks. The TNFD is shaping up to be the

“next frontier in corporate greenwashing”

unless we pass an amendment such as this one. Voluntary schemes have already tried and failed to deliver on similar objectives. The Soft Commodities Compact signed by British banks failed, and so has the New York Declaration on Forests. Financial institutions signed up to the Glasgow Financial Alliance for Net Zero, spearheaded by our Government, but they have barely decreased their deforestation investments since signing up to that scheme at COP 26. Many members have in fact increased their exposure to notorious deforesters in that time.

We cannot waste any more time with more voluntary initiatives if we are to meet the 2025 deadline for ending deforestation. We have a plan and a blueprint, with mandatory due diligence at the core. Without this reform to our financial regulations, there may well be no forests left to save and the British public will be left holding the bill for this unnecessary race to the bottom.

My Lords, with this group we return to the issues of how this legislation can support the ambition of the now Prime Minister—then Chancellor—to be the leading net-zero financial centre.

In this group I have Amendments 201 and 235 to 237, and I am grateful for the support of the noble Baronesses, Lady Sheehan, Lady Wheatcroft, Lady Northover, Lady Drake and Lady Altmann, on those amendments. It is not a monstrous regiment; I think it is a rather impressive regiment of women who will put forward amendments in this group. We have already heard from the noble Baroness, Lady Worthington; I very much support her words and the argument just made by the noble Baroness, Lady Boycott.

Investment in deforestation will undermine financial firms’ transition plans and sustainability impact reporting. It needs to be underpinned by real action. Bringing mandatory due diligence into law is supported by the Government’s own expert body, the GRI task force, and the UN Secretary-General at COP 27. It is not sufficient that UK firms stop importing deforestation risk commodities, as the Environment Act requires; UK financial firms must stop funding them too. This amendment would achieve that.

I have also added my name to Amendment 233, in the name of the noble Baroness, Lady Wheatcroft, on sustainability disclosure requirements. I will leave it to her to explain the amendment in detail but, fundamentally, there is little dispute over the importance of sustainable disclosure requirements, but equally little progress being made, and the legal basis for those requirements is unsure. Those issues would be addressed by this amendment, and I support it.

I turn to my Amendments 201 and 237, which relate to fiduciary duties and would require the Secretary of State for Work and Pensions and the FCA to publish guidance—to which occupational pension schemes and FCA-regulated firms must have regard—considering the long-term consequences of decisions and the impacts of their investments on society, climate and nature. This reflects duties applicable to companies under the Companies Act, but those provisions apply to financial services companies only in relation to their shareholders, not their clients, and they do not apply to pension funds at all. I very much welcome the work to date of the DWP and FCA on fiduciary duty. However, research by the Principles for Responsible Investment, a UN-founded body with 3,000 signatories and $100 trillion in assets, found that investor understanding of their duties was discouraging them from pursuing—or even considering—positive sustainability impacts, and recommended further guidance from the UK Government and regulators. Similarly, a study by the UK Sustainable Investment and Finance Association reported that

“We continue to see a common lack of understanding within financial services on the extent to which ESG”—

Environmental Social and Governance—

“factors form part of investors’ fiduciary duties. This area needs urgent clarification for finance to reach net-zero.”

UKSIF also recommended that guidance that both risks and impacts should be considered a core component of fiduciary duties.

My amendments do not overturn existing fiduciary responsibility. They would merely result in guidance on how impacts and long-term matters are considered when acting in investors’ financial interests. They are not prescriptive about the content of the guidance, which would not be legally binding. The Government have made much of their desire for more productive investment by the financial sector, but confusion about fiduciary duty has been raised as a key barrier. This amendment could help to end that confusion.

Amendment 235 on green taxonomy relates to commitments dating back to 2019 and reiterated in October 2021 to at least match the ambition of the key objectives in the EU’s sustainable finance action plans. They follow through on the commitments made for the Treasury to publish the taxonomy and for the FCA and government departments to make the necessary changes to implement it.

I must say that the Government’s approach to taxonomy is somewhat confusing. The Green Technical Advisory Group—or GTAG—was established in June 2021 and delivered advice to the Treasury in October 2022. The Minister reconfirmed a commitment to the taxonomy in the House of Lords in November. However, this was followed in December 2022 by a Statement seeming to back away from producing a green taxonomy, describing it as a “complex, technical exercise”. Although the noble Baroness, Lady Penn, stated in Committee on 30 January:

“The Government are committed to implementing a green taxonomy as part of their sustainable finance agenda”—[Official Report, 30/1/23; col. GC 170.],

I fear that what the Government have in mind is a voluntary model, which would be fragmented and incomplete, rather than robust and comprehensive. I should be grateful for clarity and reassurance from the Minister.

The delay is frustrating for the many parts of the industry that have directly and indirectly assisted the development of a green taxonomy. More than a dozen other jurisdictions have brought forward their own green taxonomies, seemingly without insuperable difficulties. The Government need to restate a clear timeline for implementation. The Skidmore review agreed, and proposed a “transition taxonomy”. This amendment makes provision for that.

A GTAG report only last week said:

“With the US and EU—the two biggest markets that UK investors currently deploy capital into—raising the stakes with a massive green subsidy and pro-green business regulatory push, the UK will need to significantly raise its own game to attract capital seeking net zero opportunities and secure its role as the world’s leading net zero financial centre … With the race to secure green investment on—and more than 30 taxonomies in development globally—the time to act is now.”

I hope the Minister will agree.

Finally, my Amendment 236 on net-zero transition plans requires the FCA, the PRA and Ministers to make rules and regulations requiring production of net-zero plans by the end of 2023. Transition plans were announced by the then Chancellor at COP 26. The now PM set out the UK’s

“responsibility to lead the way”.

A new transition plan task force was established and reported in November last year. However, there has again been silence from the Government. As with the taxonomy and SDR, there was no reference to transition plans in the Edinburgh reforms announcement.

The key constituents of the transition plan are set out in proposed new subsection (4) in the amendment and closely follow the recommendations of the task force. It is especially important that companies bring forward transition plans before they list on UK markets, as that is their chief opportunity to raise capital to expand their business. Both the Climate Change Committee and the Skidmore review also set out the case for transition plans and called for them to be made mandatory.

All these amendments are modest and proportionate. With clarity on fiduciary duty, a functioning taxonomy, sustainable finance disclosures and transition plans, the UK has the opportunity to meet the ambitions set out at COP 26, and I hope the Minister will be able to respond positively.

My Lords, this group of amendments has already been spoken to by several eloquent speakers. I support the amendments in this group, but I shall speak particularly to Amendments 233 and 235 to 237, to which I put my name. The common thread in them is encouraging financial institutions to be serious about their intention of helping the country meet its net-zero target. If the Government are serious about that target, they will surely see the merit in these amendments.

Financial institutions may understand that the long-term health of countries, their economies and their businesses requires a focus on net zero, but short-term considerations such as this year’s profit all too often influence their decisions. Hence, in 2021, the 44 largest members of the Net-Zero Banking Alliance, a group that includes Barclays, HSBC, Lloyds, Nationwide and NatWest, provided $143.6 billion in lending and underwriting for the 75 companies doing the most to expand oil and gas. Principles sometimes come too expensive for these institutions to follow. If those organisations are to be discouraged from such behaviour, in their own long-term interests as well as ours, it will be by forcing them to make firm environmental commitments and to publicly report on them.

It seems that the Government have shared this view. According to a report in the Financial Times last May:

“Ministers made a last-minute decision to withdraw plans to force big UK companies and asset managers to disclose their environmental impact”.

They decided to drop that from the Queen’s Speech at the last moment. The sustainability disclosure requirements were apparently seen as being at odds with the Government’s deregulatory strategy. There is plenty of deregulation rhetoric around at the moment, but those of us who were in the Chamber yesterday for the agonising discussion of the Retained EU Law (Revocation and Reform) Bill might feel that the strategy was far from evident.

These amendments are intended to provide help to the Government as they seek to implement their net-zero strategy. Amendment 233 would do for financial organisations what the Government have been planning for business generally. It would require the financial regulators—the FCA and the PRA—and Ministers to make regulations by the end of this year requiring sustainability disclosures for listed firms, fund managers, personal pension providers, banks, insurers and pension schemes.

In addressing this amendment, perhaps the Minister will confirm that this complies with the Government’s thinking in the wake of COP 26, when the transition plan task force was set to work to look at how large companies and financial firms should be required to report on how they are managing the transition to net zero. If the Minister accepts that, will she explain why this Bill should not contain this amendment?

Amendment 236 further details requirements. Amendment 237 complements Amendment 201. It refers to pension schemes and requires trustees to have regard to the long-term effects of their investment decisions. Pensions are all about the long term, so they should have regard to the long-term effects of their decisions, not the short-term effect on the bottom line for the fund manager who is interested in his bonus that year. A little legislation to help them on their way to doing the right thing seems a good idea.

The aim of Amendment 235 in the name of the noble Baroness, Lady Hayman, is, essentially, to provide that help to institutions in making these crucial decisions. A green taxonomy—long discussed—needs measurable criteria and this amendment would require the Treasury to provide a framework for that. As the Minister said, the Government are—apparently—committed to implementing the green taxonomy. This amendment, like the others in the group, seeks only to encourage the Government to demonstrate their commitment with the sense of urgency that is now required.

My Lords, I wish to speak extremely briefly to support my noble friend Lady Boycott—I am sorry, I did not see the noble Baroness, Lady Sheehan.

My Lords, it is a pleasure to follow the noble Baroness, Lady Wheatcroft. I am sorry that I kept bobbing up and down while she was speaking.

This is an essential group of amendments, several of which I have added my name to. They are important because billions to trillions of pounds will be invested over the near to medium term into an economy that is transforming with increasing rapidity into a low-carbon one. It is clear that climate risk is financial risk: returns on investments and the ability to pay back loans are exposed to the risks of rising temperatures, as evidenced by recent catastrophic climatic events, and action taken by policymakers to transition to a low-carbon economy, such as the US Inflation Reduction Act.

Businesses, big and small alike, are poised to pull the start trigger on investments but are held back in the UK by lack of clarity about the Government’s intentions. The Government have made the right noises but not followed through, leaving doubt and uncertainty in their wake. The situation is urgent. The US Inflation Reduction Act is a game-changer, and the EU will follow suit. Green investment is the future. Our businesses know that but are hesitating to commit, waiting for a clear signal from the Government that they are 100% behind the green revolution. Currently, the messages are rather mixed. 

For the sake of the debate’s flow, I will address the amendments to which I have added my name before addressing my Amendment 232. I start with Amendment 168, in the name of the noble Baroness, Lady Worthington. Climate risk is not specifically factored into either the regulatory capital risk requirements for banks or the solvency requirements for insurers. I support Amendment 168 and have added my name to it. I have pursued the theme of stranded assets for several years. I am concerned that the taxpayer is not left to pick up the cost, for example, of decommissioning oil and gas platforms in the North Sea abandoned after profits have been creamed off. How much better it would be if the Government clearly laid out a framework, via their regulator, that the risks in financing fossil fuel exploration, exploitation and production, as well as other climate risk-exposed sectors, must be taken into account prior to investment decisions being made.

I move on swiftly to Amendment 199 on deforestation. After fossil fuels, deforestation is—as the noble Baroness, Lady Boycott, pointed out—the second-largest contributor to global warming. It is responsible for 12% of all global greenhouse gas emissions. Scientists tell us that, to stand any chance of limiting global temperature rise to 1.5 degrees centigrade, commodity-driven deforestation must be ended by 2025.

What happens to rainforests matters to us all. In fact, although thousands of miles away, the UK has a large deforestation footprint. It is for this reason that, in July 2021, I and noble Peers from across the House tabled amendments on the issue to the Environment Bill, now the Environment Act 2021. I was pleased to see the noble Baroness, Lady Meacher, poised to add her contribution to this. I commend the Government for the action that they have already taken on this issue. Schedule 17 to the Environment Act was the first time that forest risk commodities have been addressed in legislation.

As already mentioned by the noble Baroness, Lady Boycott, Sir Ian Cheshire, the former chair of Barclays and head of the Government’s own Global Resource Initiative task force, tells us in an open letter dated 23 January and addressed to the Minister, the noble Baroness, Lady Penn; Andrew Griffith, the Economic Secretary to the Treasury; and all Members of the House of Lords:

“Under forthcoming secondary regulations, large companies will be required to establish a due diligence system to assess and mitigate the risk of importing commodities grown on illegally deforested land, reporting annually on their progress”.

When the Minister comes to reply, can she tell us when we may expect to see these regulations?

Sir Ian goes on to say that

“while this is an important step, regulating supply chains alone is not enough”.

It is therefore recommended that

“the Government should make it illegal for financial institutions to invest in or lend to supply chain companies that are unable to demonstrate forest risk commodities have been produced in compliance with ‘local laws’ (i.e. legally)”.

This amendment, which I strongly support, sets out to fill the gaps identified by Sir Ian Cheshire. He makes a compelling case that it is surely far better to require banks to conduct due diligence on their lending and interventions at the start of the process when the initial finance is provided. It occurs to me that Sir Ian’s letter is addressed to all Peers. I wonder whether it would be appropriate for the Minister to make arrangements to place that letter in the Library, where it can be viewed by all noble Lords.

Amendment 201 was ably and knowledgably introduced by the noble Baroness, Lady Hayman. I am going to add very little except to say that I have added my name to it and support it for the reasons laid out in the remarks at the start of my contribution.

Amendment 236 on the net zero transition plans, in the names of the noble Baronesses, Lady Hayman and Lady Wheatcroft, would require the FCA and PRA and Ministers as appropriate to make rules and regulations on net zero transition plans in relation to the sectors that fall under their jurisdiction. That is long overdue, and I hope the Minister will address the issue of when we will finally have sight of them. Businesses need them urgently, as highlighted in the Skidmore review, Mission Zero, so that they have the confidence that a level playing field brings.

I am hearing noises off. Should I stop or continue?

Thank you. I come to Amendment 232 in my name on green savings bonds. My reason for tabling this amendment is to draw attention to the success of the National Savings and Investments green savings bonds, which are an important part of the green finance landscape. Really it is a pat on the back for the Government—much-needed, maybe —so the Minister should view this as an opportunity for the Government to congratulate themselves. For me, it is an opportunity to ask them what more they can do to raise awareness of these bonds and promote them more aggressively. After all, the Climate Change Committee identified public engagement and behaviour change as major elements in the success of measures to keep the planet in a fit state for future generations, but many people complain that knowing what to do for the best is confusing. These bonds represent a safe way of putting their money to work for the benefit of all our futures.

Here is the background. The NS&I’s new green savings bonds became available from 22 October 2021, introduced by the then Chancellor, Rishi Sunak. They pay a fixed rate of interest over a three-year fixed term, and the current rate is 4.2%. The minimum deposit is £100 and the maximum is £100,000 per person. NS&I’s savings accounts are long-standing, recognisable and safe. They are hugely popular with UK savers, not least because investments are totally safe, being 100% backed by the Treasury. There is not the usual limit of £85,000 that there is with providers covered by the Financial Services Compensation Scheme. Many savers want to make green and ethical investment choices. Work by the Cambridge Institute for Sustainability Leadership found that the median saver would prefer a sustainable fund, even if they have to sacrifice up to 2.5% returns.

Money saved with NS&I’s green savings bonds is used to fund six types of green projects: making transport cleaner; switching to renewable energy; improving energy efficiency; pollution prevention and control; protecting living and natural resources; and adapting to climate change. These projects are publicised and clearly audited for climate and nature benefits. Another benefit is that raising funds through NS&I can actually give greater financial stability than raising funds on the financial markets. During the meltdown in borrowing costs following the botched “fiscal event” in September last year, investors in NS&I did not dump their bonds because they could not do so; there was no panic in NS&I’s offices in Blackpool, Glasgow, Birkenhead and Durham—please note, none in the south-east—because the bonds are not transferable. Further, when a larger amount of a Government’s debt is held by their citizens, it is less prone to volatility. There is lots to like about the products. There are few cash-based green savings products in the market, especially ones with such a high level of transparency about their use of proceeds.

My amendment is intended to put in the public domain at regular intervals the contribution made by the NS&I’s green bonds and the like towards UK green financing and the consequent reduction in targeted greenhouse gas emissions. It is worded in such a way as not to make proposals over the amount of government borrowing or how they should raise taxes, only to seek information on how the Government are raising funds for green investment. It would be helpful if the Minister could say how much has been raised through the Government’s green bonds to date, how much is forecast to be raised annually in future and what the Government’s ambition is for their future, including in relation to the promotion of these products.

Committee adjourned at 8.21 pm.