Wednesday 10 March 2021
Financial Services Bill
Committee (6th Day)
My Lords, the hybrid Grand Committee will now begin. Some Members are here in person, respecting social distancing, others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear face coverings except when seated at their desks, to speak sitting down and to wipe down their desks, chairs and any other touch points before and after use. If the capacity of the Committee Room is exceeded, or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
I will call Members to speak in the order listed. During the debate on each group I will invite Members, including Members in the Grand Committee Room, to email the clerk if they wish to speak after the Minister, using the Grand Committee address. I will call Members to speak in order of request.
The groupings are binding. Leave should be given to withdraw amendments. When putting the question, I will collect voices in the Grand Committee Room only. I remind Members that Divisions cannot take place in Grand Committee. It takes unanimity to amend the Bill, so if a single voice says “Not Content” an amendment is negatived, and if a single voice says “Content” the clause stands part. If a Member taking part remotely wants their voice accounted for if the question is put, they must make this clear when speaking on a group.
99: After Clause 40, insert the following new Clause—
“Standard Variable Rates: cap on charges for mortgage prisoners
In section 137A of the Financial Services and Markets Act 2000 (the FCA’s general rules), at end insert—“(7) The FCA must make rules by virtue of subsection (1) in relation to introducing a cap on the interest rates charged to mortgage prisoners in relation to regulated mortgage contracts, with a view to securing an appropriate degree of protection for consumers.(8) In subsection (7) “mortgage prisoner” means a consumer who cannot switch to a different lender because of their characteristics and has a regulated mortgage contract with one of the following type of firms—(a) inactive lenders, or firms authorised for mortgage lending that are no longer lending; and(b) unregulated entities, or firms not authorised for mortgage lending.(9) The rules made by the FCA under subsection (7) must set the level of the cap on the Standard Variable Rate at a level no more than 2 percentage points above the Bank of England base rate. (10) In subsection (9) “Standard Variable Rate” means the variable rate of interest charged under the regulated mortgage contract after the end of any initial introductory deal.(11) The FCA must ensure any rules that it is required to make as a result of the amendment made by subsection (7) are made not later than 31 July 2021.””Member’s explanatory statement
This new Clause would require the FCA to introduce a cap on the Standard Variable Rates charged to consumers who cannot switch to a different lender because of their characteristics and who have a regulated mortgage contract with either an inactive lender or an unregulated entity.
My Lords, financial regulation has to ensure that consumers are well protected. It is with this principle in mind that I move the amendment in my name. I thank the noble Lords, Lord Sharkey and Lord Holmes of Richmond, for their support. We have also had an aperitif, in the sense that Amendment 127 in the name of the noble Lord has already been debated in an earlier group, although its main focus is aligned with the amendments in this group and I look forward to his comments.
The recent report of the UK Mortgage Prisoners group referred to by the noble Lord, Lord Holmes of Richmond, when he spoke on the earlier group of amendments, is graphic and shocking. It makes the case that the Government need to come forward promptly with a fair deal for the 250,000 or so mortgage prisoners who have been stuck for some 10 years paying higher interest rates than they needed to. The All-Party Parliamentary Group on Mortgage Prisoners has kept this issue alive, having been contacted by hundreds of mortgage prisoners who describe the worry and stress that comes from being trapped as they are. This is a shameful episode.
I am grateful to the Economic Secretary to the Treasury for meeting my noble friend Lord Tunnicliffe, myself and others last month. The Economic Secretary told us that he has a keen interest in settling this matter. He explained that there are difficulties including moral hazard, which means that it is not easy to sort. However, while the issue continues, considerable injustice is occurring. The Government may well be right to say that the SVRs currently paid by mortgage prisoners are only a little higher on average than the SVRs of other lenders but, particularly during the pandemic, small differences matter. In any case, the assertion that the Government make that the differences are rather minor does not ring true in the light of the report from the all-party group. Its case studies, which include nurses, teachers, members of the Armed Forces and small business people, suggest that, for all those who are trapped and struggling with the consequences of the Government’s decisions when money is tight and margins matter, these things need to be sorted.
Surely the true comparison is that if mortgage prisoners were with an active lender and of course up to date with their payments, they would have access to a range of products to transfer to, which would give them a lower fixed rate for their mortgages. In the other place when this issue was discussed, the savings available were said to be in the order of £5,000 a year. That is not an inconsiderable sum. Why are these people being singled out for this penalty?
The problem also seems to be the inability to access the best market-matching deals, compounded by the fact that the prison effect is reinforced by the inability to prevent mortgages being sold off to so-called vulture funds, which are often unregulated. This matter has been left unresolved for far too long. The inability to seek out new deals and to limit costs is causing stress, and in some cases has caused families to lose their homes. As the Government have been involved throughout this process, is it too much to ask them to explain what the plan is, and what the timetable for resolving the incarceration of these prisoners will be?
In its recent report, UK Mortgage Prisoners says that it has put the record straight on what it calls a “Government made scandal”. It is for the Government to defend themselves on that charge. UK Mortgage Prisoners complains that the Government have “effectively ignored the issue” and that, where the FCA has intervened, it has done so in a limited and ineffective manner. Its asks seem very simple: an immediate cap on SVRs for closed mortgages; introducing a tailored mortgage product for those affected; giving credit to prisoners who have for a decade or more made overpayments; stopping penalty charges for any excess arrears; and adjusting credit ratings going forward. Those are five simple steps for 250,000 people whose lives have quite simply been blighted.
My Lords, I declare an interest as co-chair of the APPG on Mortgage Prisoners. Mortgage prisoners exist almost entirely because the Treasury made a terrible mistake when it sold the first tranche of former Northern Rock and B&B mortgages to an unregulated American vulture fund called Cerberus. Cerberus is the name of the multi-headed dog that in Greek mythology sits at the entrance to the gates of hell. That is not an inappropriate name, in view of what happened next.
Three things are needed to rescue mortgage prisoners. The first is to reduce immediately to comparable market rates the SVRs that they pay. The second is to make sure that transfers to much less expensive fixed-rate deals are properly available to them. The third is to make sure that new classes of mortgage prisoners cannot be created in the future.
Amendment 99, moved by the noble Lord, Lord Stevenson, to which I have added my name, deals with the first of those things. My Amendments 116 and 117 deal with the second and third. Amendment 99, as he has so clearly and forcefully explained, would protect the thousands of mortgage prisoners stuck paying high standard variable rates. It would introduce a cap on the standard variable rates paid by customers of inactive lenders and unregulated entities. That would provide immediate relief for thousands of mortgage prisoners, and could give space for longer-term solutions to be found. It would help mortgage prisoners who took out loans with a fully FCA-regulated high-street bank which were then sold on to vulture funds.
Money-saving expert and consumer champion Martin Lewis supports this proposal, and on Monday he released a statement saying:
“While the government chose to bail out the banks in the financial crisis, it has never bailed out the banks’ customers who were victims of that collapse. Mortgage prisoners have been left paying obscene interest rates for over a decade through no fault of their own. They have been completely trapped in their mortgages and unable to escape the financial misery it causes … Coupled with the devastating impact of the pandemic on people’s finances, urgent action is needed to prevent the situation from becoming catastrophic. The independent LSE report I funded has a cogent argument as to why an SVR cap isn’t a balanced long-term solution. Yet in lieu of anything else, I believe for those on closed-book mortgages it is a good stopgap while other detailed solutions are worked up, and I’m very happy the All-Party Parliamentary Group on mortgage prisoners is pushing it. This would provide immediate emergency relief for those most at risk of financial ruin. No one should underestimate the threat to wellbeing and even lives if this doesn’t happen, and happen soon.”
The Government will no doubt say that some mortgage prisoners are already paying rates lower than 3.5%, so rates do not need to be capped. But those sold on by the Government to vulture funds like Cerberus are paying high rates. In the package sold by the Government containing more than 66,000 mortgage loans, 52% were paying rates between 4.5% and 5%, and 37% were paying rates of over 5%, when the mortgages were securitised.
The Government could have set strict conditions when selling the mortgages on the interest rates which could be charged. But when they sold £16 billion of mortgages to Tulip and Cerberus, they imposed only a 12-month restriction on increases to the standard variable rate. These have long since expired and the chief executive of Tulip Mortgages told the Treasury Select Committee that the firm now had
“complete discretion to set the interest rate policy.”
On the sale to Heliodor, the Government claimed that the organisation which bought the loans would be required to set their standard variable rates by reference to the SVR charged by a
“basket of 15 active lenders”.
But when you read the details of the securitisation agreements for the mortgage loans sold, you will find that, actually, the Government have required the SVR to be set only at the level of the third highest of the 15 active lenders. This is absolutely critical, as the third highest SVR is actually 4.49%. The lowest SVR among those 15 active lenders is 3.35%, and the average SVR weighted by market share is 3.72%.
The latest and final sale of the Treasury-held mortgages was announced in February. The book was sold to Davidson Kempner Partners and Citibank, with funding by PIMCO. The Government said that the SVR was going to be charged by reference, again, to a basket of 15 active lenders, but there are no details about how this will work in practice. If it reflects the practice in earlier sales, it will not actually provide any protection to customers. The Government will also say that the FCA has changed the affordability test to enable mortgage prisoners to switch to a different lender. But the progress has been very slow, with only a very small number of lenders willing to use these new flexibilities.
The cap on the SVR proposed by this amendment would provide immediate relief to mortgage prisoners who have been overpaying for the past 13 years. It would protect all mortgage prisoners, including those who are unable to switch. It would give time for other solutions to help mortgage prisoners to be developed. The SVR cap would apply only to mortgages owned by inactive lenders and unregulated entities. It would have no impact on active lenders competing to attract customers.
The cap is supported by the campaign group UK Mortgage Prisoners, as the noble Lord, Lord Stevenson, said. Members of the group have stated that this amendment is the difference between feeding their children and themselves or continuing to rely on food banks. The Government created the problem of mortgage prisoners and it is their moral responsibility to rescue them from the significant detriment that many still face. I urge the Government to accept the amendment in the name of the noble Lord, Lord Stevenson.
I now turn to Amendment 116, which would extend access to fixed interest rates to all mortgage prisoners, enabling them to gain control and certainty over their monthly mortgage payments. When the time came for the nationalised Northern Rock and B&B mortgages to be sold by the Government back to the private sector, they could have pursued an approach which ensured that these customers were in fact protected. They could have sold them to active lenders or secured a commitment from purchasers to offer these new customers new deals.
The risk to these customers was identified. In January 2016, the noble Lord, Lord McFall, wrote to the Treasury, UK Asset Resolution and the FCA to say that the customers affected by these sales should be protected, offered a fair deal and given access to fixed rates. UKAR responded that, by returning these mortgages to the private sector,
“the option to be offered new deals, extra lending and fixed rates should become available”.
But this requirement was not written into the contract when mortgages were sold to funds such as Cerberus, with the BBC reporting that UKAR is now claiming to have been “misled” by Cerberus.
A UKAR spokesman told BBC “Panorama” that Cerberus had the ability to lend to the former Northern Rock customers and that UKAR believed that it intended to do so. They said:
“The reply to Lord McFall sent on behalf of the UKAR board of directors was based on information presented to UKAR and the board had no reason to disbelieve this at that time.”
At the very best, this is evidence of catastrophic incompetence. At worst, it is evidence that UKAR heartlessly pursued profit over care for mortgage customers.
Consumer champion Martin Lewis lays responsibility for the treatment of mortgage prisoners squarely with the Government. He said that the Government
“have sold these loans to professional debt buyers who do not offer mortgages and left these people in these types of mortgages, which have been too expensive, crippled their finances and destroyed their wellbeing.”
The APPG has heard from hundreds of mortgage prisoners, including nurses, members of the Armed Forces and small business owners, all describing the frustration of taking out a mortgage with a high-street bank and being sold on to vulture funds which do not have to treat them fairly or offer them new deals. By contrast, in the wider mortgage market there have been recent improvements in the deals available to those with active lenders.
In 2018, lender trade bodies facilitated a voluntary agreement to offer these borrowers an alternative deal where they meet certain criteria. This means that any borrower in the active market can access a new fixed-rate deal if they are not in arrears and have a minimum of two years and £10,000 left on their mortgage. However, 250,000 mortgage prisoners with inactive lenders or unregulated firms were excluded from this, meaning that they are stuck on standard variable rates. There is nothing these customers can do to gain control over what, for many, is the largest part of their monthly expenditure.
Mortgage prisoners are worried about rates rising, and that this will come on top of recent increases in their monthly mortgage payments if they took a payment holiday. The FCA has claimed that mortgage prisoners who cannot switch are paying SVR interest rates that are only 0.4% a year higher than other customers with active lenders, but this comparison is completely misleading. It ignores the fact that those with active lenders can access new deals. Only around 10% of customers at active lenders are paying the SVR, and most that are typically switch to a new deal very quickly. More than three-quarters of consumers with active lenders switch to a new deal within six months of moving on to an SVR. If you take two customers, both paying an SVR of over 4% and both with a loan-to-value ratio of 75%, the one with the active lender could access a new deal at 1.8%. The mortgage prisoner is stuck on the SVR, costing them hundreds or thousands of pounds extra every year. These financial strains are having a massive effect on mortgage prisoners and their families.
Amendment 116 would extend the benefit of being able to access fixed rates to mortgage prisoners. It would not distort the market, but it would help ensure universal fair treatment and access to fixed rates for mortgage prisoners. Only inactive lenders exploiting their helpless and captive customer base would be affected. This amendment, and a cap on SVRs, would change the lives of thousands of mortgage prisoners and their families. Again, I urge the Government to acknowledge the moral responsibility for the continuing harm their careless and profit-driven mortgage sales have generated. I urge the Minister to accept Amendment 116.
Amendment 117 would set new conditions for the transfer of a regulated mortgage contract. The Government have now sold all the nationalised mortgage books from Northern Rock and Bradford and Bingley, but the underlying problems illustrated by these sales remain. A lender can choose to sell a mortgage book at any time, and the pandemic may cause more mortgage books to come up for sale. The lender can sell you on to anyone. It does not have to sell you on to an active lender or a high-street bank; it can sell you on to an unregulated entity or a vulture fund. This amendment would require a lender to obtain your consent if it was to sell your mortgage to an inactive lender or unregulated entity. When asking for your consent, it would have to give you clear information about the interest rates and policies which you would be offered. You would need to give your consent only if you were being sold on to an inactive lender or unregulated entity. If your mortgage was being transferred to an active lender which committed to offer you the same deals and interest rates as its existing customers, consent would not be required.
The Government have claimed in the past that this would have a negative impact on financial stability. This is simply not the case. Under this amendment, the Bank of England and the PRA would still be able to use their powers under the special resolution regime to enable the transfer of mortgages from failing banks. They would not need the consent of customers when they used their resolution powers.
The Government have now also shown, at the very end of their sales of these mortgages, that they support applying covenants when mortgages are sold on. The latest sale of £4.9 billion of mortgages announced last week by the Government contained a requirement that the legal title of the mortgages must not be sold on to an unregulated firm. The Government have stipulated that these protections must be replicated in any future sale of the £4.9 billion of loans—meaning that they will apply to these customers until they have repaid their mortgages, no matter where the mortgages end up.
We welcome the Government’s inclusion of these requirements, although it is much too little and much too late. The Government should have applied this provision in their earlier sales of mortgages to unregulated firms such as Cerberus or Tulip Mortgages. Everyone needs the same protection from mortgages being sold to unregulated entities. This amendment would put the customer back in control. It would require consumers to give their consent before their mortgage was sold on to an inactive lender or an unregulated firm. It would extend to the full market the protections the Government have shown that they support.
The Economic Secretary to the Treasury has said that he is committed to helping borrowers with inactive lenders and that he “remains open” to “considering practical solutions”. The Chancellor told Martin Lewis after the Budget that he would keep working on the issue and was committed to finding a workable solution. Amendments 99, 116 and 117 are three practical solutions which we hope that he will consider. We very much hope that the Chancellor and the Economic Secretary will recognise their continuing moral obligation. We hope that they will support these three proposals and take action now to ensure that all mortgage prisoners are finally set free.
My Lords, Amendments 99 and 116 deal with the difficult area of mortgage prisoners. Both amendments seek to go beyond what has already been achieved for mortgage prisoners by the relaxation of affordability rules by the FCA.
I have much sympathy for mortgage prisoners, but we should not lose sight of the fact that these borrowers do not have sufficient financial credentials to qualify for new mortgage lending under current regulatory rules and hence cannot remortgage. They are a hangover from the period when lending criteria were much less strict than they are now and include interest-only borrowers who lack a credible way of repaying capital.
We should be wary of going beyond what the FCA has already done. In particular, making the FCA specify maximum interest rates is an unwarranted market intervention. The FCA is best placed to judge whether any further solutions can be found for these problem borrowers. We should not try to solve the problems of a relatively small number of people with blunderbuss legislation.
My main reason for speaking on this group is Amendment 117, which is fundamentally misconceived. My noble friend Lord True, when he spoke to the large group of amendments headed by Amendment 79 on our previous Committee day, talked about the importance of the securitisation market for mortgage providers. Securitisation ensures that lenders can carry on originating new debt by freeing up capital and liquidity. This is especially important in the mortgage market.
Amendment 117, which requires written consent for every mortgage sold, is not practical. It is likely to mean that lenders will be shut out of the securitisation market. Mortgages are not sold individually: they are parcelled up into books. Requiring consent will make this very much harder to do and will significantly add to the costs of the procedure. Anyone who has tried to get responses from individual account holders where there is no incentive for the account holder to respond will tell you that this is mission impossible.
Mortgage securitisation is a normal balance sheet financing strategy for both retail and commercial lenders. Making it more difficult or expensive for mortgages will have consequences for consumers, whether by restricting the availability of credit or increasing its cost, or both. I cannot support any of the amendments in this group.
My Lords, I will not detain the Committee long. I would not normally be seen near a finance Bill, largely because I do not have and do not ever expect to have any finance to bother me. Nor would I presume to discuss mortgage payments, since I do not have and never will have a mortgage to worry about. However, what I do have is some experience of people in all kinds of situations, good and bad, from the cradle to the grave.
It was a conversation with someone whom I knew well that made me aware of the truly dreadful situation that we are debating and that they found themselves in. Here was someone who was in a bad—a very bad —situation: they and 250,000 others. My noble friend Lord Stevenson of Balmacara and the noble Lord, Lord Sharkey, have done us a great service in highlighting the plight of these people and have worked out a reasonable way to help them. I am happy to leave the heavy lifting on the matter to them and, no doubt, other Members of the Committee who will chip in on the same side of the argument. They have made a compelling case in detail and with passion, all of which will help to disguise the extent of my own ignorance.
I simply must express my bewilderment at the way, when this subject was debated in the House of Commons, no less a person than the Economic Secretary to the Treasury gave voice to some rather misleading statements. He said, for example, that “mortgage prisoners” were paying a mere 0.4% higher than average mortgages. That figure has been mentioned more than once and is simply not true, according to the picture that I have seen painted in reliable reports from various quarters. He also suggested that when the mortgages in question were sold to “vulture funds” and other non-regulated bodies, the borrowers retained all the same conditions stipulated in their original agreements. From the conversation that I had and other cases that I have subsequently read about, that just is not the case.
The Government seem to have treated mortgage prisoners as cash cows, a means of paying down Treasury debt, after the decision to rescue the banks after the crisis of 2008. On the day that conversation arose, I thought that it would be a friendly interchange on the streets of my home town, with perhaps a mention of the unexpected good fortune of the Welsh rugby team—but it actually opened a can of worms. The person I was speaking to is considered to be a “problem borrower”, one of the people referred to by the noble Baroness, Lady Noakes. But my friend is a problem borrower largely because of the depredation of resources due to the fact that she has been paying mortgages over the odds for 10 years now. Even someone whose only qualification for speaking in this debate is an O-level in economics found himself smelling a rat as he spotted an egregious injustice being done to mortgage prisoners.
The amendments seek to correct this situation. They are balanced and sensible. Martin Lewis, who was quoted more than once by the noble Lord, Lord Sharkey, and is a true expert in this field, writes this:
“Mortgage prisoners are the forgotten victims of the 2008 financial crash. The Government at the time chose to bail out the banks, but unfairly—immorally—hundreds of thousands of their victims were left without adequate help, trapped in their mortgages and the financial misery caused by it.”
No wonder they are problem borrowers. He continued:
“And they have been forgotten ever since.”
The Bill and the amendments give us an opportunity to unforget them, to make good on past failures, and to bring justice to a situation yearning for it. The Minister is a decent and fair man but will of course be bound by the usual conventions in a debate of this kind. It would be good to hear him promise to go back to his department to try to find a way of bringing a little hope and cheer to those who suffer in this way.
My Lords, it is a pleasure to take part in the debate on this first group of amendments. In doing so, I declare my interests as set out in the register. I congratulate the noble Lord, Lord Stevenson, on the manner in which he introduced the amendment. I also thank him for giving a wave to my Amendment 127 on this subject, which found itself a prisoner in a different group of amendments but was very much to the purpose of this group. Simply put, it would prohibit any more individuals becoming mortgage prisoners in this way.
I support Amendment 99; I have put my name to it; I think it offers a solution to this problem. This entire debate could be summed up simply as: when Cerberus showed its teeth, where was our financial watchdog? We know that there was no role that the FCA could play on this issue; it is not within its powers or rules as currently set out. One wonders why, having rescued the Rock, which was the correct thing to do across all FS at the time of the crash, we would then imprison so many of those customers and betray them in a somewhat opaque fashion compared to the reality of how they have found themselves in their current position.
This seems eminently resolvable if the Government truly stand by, which I believe they do, a levelling-up agenda—an agenda of opportunity, possibility and enablement. A simple amendment to resolve the issue of mortgage prisoners would fit well within that. If my Amendment 127, Amendment 99 in the name of the noble Lord, Lord Stevenson, or the other amendments in this group do not do the trick, will the Government consider bringing forward an amendment of their own on Report to enable everybody who finds themselves in this situation to have the freedoms and the flexibilities enjoyed by so many others who simply have the financial product of a mortgage? If not, why not?
My Lords, I have taken a vow to try to be brief in all my responses today, recognising the time pressures of the day. I also listened carefully to my noble friend Lord Sharkey and the noble Lord, Lord Stevenson, and I am not sure that the case could be better made.
However, I must follow the noble Lord, Lord Griffiths of Burry Port, in picking up an issue raised by the noble Baroness, Lady Noakes, who described mortgage prisoners essentially as problem debtors. These are people the overwhelming majority of whom would not have any problem with their debt if they had been allowed to take advantage of the changes in interest rates and mortgage terms that have been available much more widely. The case to act for their protection is simply overwhelming. If we had not had the financial crash and they had remained with regulated lenders, the vast majority of them would not be facing any issue. They would have had their mortgages restructured to lower rates and they would not be facing stresses and strains today.
I have been sent information from a significant number of people who find themselves to be mortgage prisoners and, frankly, the stories are often heart-breaking. I heard this morning from someone who is desperately ill in hospital, but the stress of the financial challenges that he faces makes every day far worse and far more difficult to deal with. To me, it is inhuman that action is not taken. The Government recognise that action must be taken, given the circumstances and the stress that so many people face and the corners that they have been pinned into. Surely such action should be taken now and not be kicked down the road yet again.
My Lords, the case for reform in this area has been overwhelmingly made by my noble friends Lord Stevenson and Lord Griffiths, the noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer. I wish not to delay the Committee any longer, but simply to advise that the Labour Front Bench supports my noble friend Lord Stevenson’s amendment and the generality of those proposed by the noble Lord, Lord Sharkey.
My Lords, I acknowledge that the Government have a great deal of sympathy for borrowers who are unable to switch their mortgage, and we are committed to finding practical ways to help them. That is why we have been working closely with the FCA, and I will set out the action that it has taken.
In 2019, the FCA introduced a modified affordability assessment, which allows active mortgage lenders to waive the normal affordability checks for borrowers with inactive lenders who meet certain criteria—for example, not being in arrears and not wishing to borrow more. As a result of this, inactive lenders have been contacting borrowers who have had difficulty with switching, setting out new options that may be available for them on the active market. I am pleased that a number of lenders, including Halifax, NatWest and Santander, have already come forward with options specifically for these borrowers.
More widely, we have taken steps to support those unable to make mortgage payments during the pandemic. Payment holidays have provided vital support for consumers, including those with inactive lenders, with over 2.75 million mortgage holidays granted since March 2020.
However, policy should be based on clear evidence. The FCA’s analysis found that customers with inactive lenders paid, on average, just 0.4% more than customers in the active market with similar characteristics. There has been comment in Committee on that figure. The FCA’s analysis also found that, of the 250,000 borrowers with inactive lenders, half were in a position to switch to a new mortgage even before any action from the Government. That illustrates one aspect of the diversity of this group.
On the 0.4%, I am aware that there are other estimates out there, including in a recent report, which has been referred to, published by the UK Mortgage Prisoners action group on 8 March, just a few days ago. Treasury officials have reviewed this analysis and noted that these figures seem to be based on surveys with small sample sizes. The comparisons are often inappropriate—for example, contrasting rates that many borrowers with active lenders would not even be offered. I hope that noble Lords will appreciate that this is a complex topic. We are, as I have said, committed to finding practical ways to help.
Amendment 99 seeks to cap standard variable rate mortgages for some customers. Data from the FCA suggest that the majority of borrowers with inactive lenders pay less than 3.5% interest. As I have already said, compared to those with similar lending characteristics, consumers with inactive lenders pay on average only 0.4% more than those with an active lender. This was also backed by the London School of Economics recent report on mortgage prisoners, noting that it does not recommend capping standard variable rates at a low rate. Capping mortgages with inactive lenders could have an impact on their financial stability, as it would restrict lenders’ ability to vary rates in line with market conditions. That would also be unfair to borrowers in the active lending sector, particularly those in arrears, who are paying a higher standard variable rate.
Amendment 116 seeks to provide new fixed interest rate deals for certain mortgage customers with inactive lenders. I have already set out the FCA’s work in introducing a modified affordability assessment and that a number of active lenders—household names—have come forward with offers. The FCA estimates that up to 55,000 borrowers could be eligible to benefit from the new modified affordability assessments. The Government will continue to monitor the situation and hope to see even more options available over the coming months. Enabling people to switch into the active market is the best way to help consumers secure new deals, and that is what we have been doing.
Amendment 117 would require active lenders to seek a borrower’s permission before transferring their regulated mortgage contract to an inactive lender. There are already a number of protections in place for borrowers, meaning that their mortgage cannot be sold on to an unregulated servicer and their terms and conditions cannot change as a result of the sale, so the benefit of explicitly seeking permission from the borrower is unlikely to help them any further.
It is required that all loans within the UK must be administered by a regulated entity, meaning that all customers will be able to benefit from consumer protections —for example, access to the FOS. The terms and conditions of a loan do not change upon sale, meaning that consumers will be treated in line with their original agreement even if their loan was sold to an unregulated entity.
As my noble friend Lady Noakes pointed out, the amendment would also risk disrupting the residential mortgage-backed securities market as it may prevent the effective securitisation of mortgages, where beneficial ownership of a portfolio of mortgages is transferred to a special purpose vehicle. Securitisation is a common way for active lenders to fund themselves, and disrupting the securitisation market would likely have a negative impact on the availability and cost of mortgage credit in the United Kingdom. For those reasons, I ask that the amendment be withdrawn.
My Lords, I thank those who have contributed to this debate for the various points they have raised. The noble Lord, Lord Griffiths, has it right: this is a complex and detailed issue and it delves down way beyond most people’s experience of how markets of this type operate. In those circumstances, we have a difficult choice as a Committee on how one might want to take this forward.
On the one hand, my noble friend Lord Griffiths is right that the end of the story is what is happening on the ground to people who have ended up in this situation through no fault of their own but as a result of government action. The Government therefore have to explain to the people of this country why, having created this problem, they do not feel that they have more than just a moral responsibility to see it resolved. On the other hand, I take absolutely the Minister’s point that, it being a complex issue and the Government having seen some action already happening, they remain committed to what he called finding a practical plan forward; I hold on to that. However, the complexity and the fact that this affects a relatively small number of people—although 250,000 people is not a small number in my terms—do not mean that we should simply allow the market to find the right balance between the commercial pressures of offering loans and the ability to service those loans and make a profit out of them from those who have limited resource. There is no doubt at all that, having said all that, there is obviously a pandemic issue as well.
Where does that leave us? I take hope from the fact that the Minister said that there is work on the way to try to take this forward. I recognise that it is a complex issue—indeed, I said so in my opening remarks. However, he must accept that the arguments made by myself but made in much more detail and with a much wider range of evidence by the noble Lord, Lord Sharkey, supported by the noble Lord, Lord Holmes of Richmond, suggest that this is more than just a complicated problem which needs to be bottomed out by working with the market. We need convincing that there is work going on that will result in a workable solution of benefit to those affected by this within a reasonable timescale, otherwise we will come back on Report with a better-drafted amendment—perhaps covering some of the points made by the noble Baroness, Lady Noakes, but not all of them—in a way that makes it clear that the Government cannot continue to let this settle itself. It has to be taken forward in policy terms otherwise too much damage will be caused. In the meantime, I beg leave to withdraw the amendment.
Amendment 99 withdrawn.
Amendments 100 to 102 not moved.
103: After Clause 40, insert the following new Clause—
(1) Regulations made under this Act, and under any regulation-making powers inserted by this Act into any other Act, may not come into force until the Secretary of State has laid an impact assessment of each regulation before each House of Parliament.(2) Rules made by the FCA or the PRA under rule-making powers given to the FCA or the PRA by this Act, and under any rule-making powers inserted by this Act into any other Act, must be published on the website of the FCA or PRA (as appropriate) at least 30 days before they are due to take effect, together with an impact assessment of the rules.(3) In this section, “impact assessment” means an analysis of the costs and benefits of the proposed change, compared to the existing position and other options considered, including the expected impact on UK businesses and the UK economy.”
My Lords, I rise to speak to my Amendments 103 on impact assessments and 104 on reporting. I have been like a long-playing record on the importance of cost-benefit analysis of legislation, regulations and new rules in the form of an impact assessment. I return to the charge today with renewed vigour, as we are transferring very substantial powers from Brussels to Britain. I know that the process of preparing a cost benefit and the sunlight of transparency help enormously in avoiding difficulties and disasters. By the way, I thank my noble friend the Minister for producing an impact assessment on this Bill—always one of the most useful Bill documents, even if in this case it is shortish on numbers.
Amendment 103 is in two parts. First, it requires the Secretary of State—in this case, usually Treasury Ministers—to lay an impact assessment of each SI or regulation that they make before it comes into force. I know from my time as a Minister that having to put my own name to such an impact assessment made me look much more effectively at any instrument I was signing and thus avoid cock-ups—which do unfortunately happen from time to time, even in the Treasury! Secondly, as so much of EU power is being transferred to the FCA and PRA, it requires them to publish their proposed new rules on their respective websites for public scrutiny and to add an impact assessment of the rules. By impact assessment I mean an analysis of the costs and benefits of the proposed change, compared with the existing position and other policy options, including the expected impact on UK businesses and the economy. All I seek is a simple way of ensuring that the authors of new rules always consider the economic impact of their proposals in the interests of good government.
So far, so good. But—and I accept it is a big but —in part these provisions seem to be required already by the Financial Services and Markets Act 2000, as subsequently amended. I have been through the relevant explanations and websites and am still not completely sure whether that is the case. Perhaps the Minister can kindly explain the position and give us some encouraging words as to the present and future position on this important matter. If my proposed provision is genuinely unnecessary, I am of course happy to withdraw it.
Amendment 104 follows on from Amendment 103. However, it is distinct and could be adopted alone. It requires the Secretary of State to publish an annual report on the impact of measures taken by the FCA, the PRA or the Government to regulate financial services with a particular focus on small business, innovation and competitiveness. While there has been a great deal of excellent discussion in this Committee on holding financial service operators to account and improving enforcement, we can lose sight of the value of smaller operators, including those based outside London. Moreover, innovation can bring huge value to consumers—online banking, easy money transfer overseas and share trading on mobile phones are good examples—and our strained economy will benefit from the competitiveness and attractiveness of the UK’s financial sector.
I know from my experience in the intellectual property area, which I hope that the noble Lord, Lord Stevenson of Balmacara, will remember as well, how valuable an annual report of this type can be in focusing staff attention. Writing the report is a complement to the usual in-tray—the focus on risk and the avoidance of banana skins that exercises public servants, sometimes to the detriment of more strategic thinking. I look forward to hearing from my noble friend the Minister on how we might best take some of these matters forward. I believe that they could encourage the intelligent scrutiny of new rules and their early dissemination and publication, and that a strategic look once a year will help the sector to stay ahead in the new world. I beg to move.
My Lords, for the purposes of today’s debates I again remind Grand Committee of my financial services interests as in the register.
I have signed Amendments 103 and 104 and agree with the noble Baroness, Lady Neville-Rolfe, so I will not repeat what has already been said. It is a subject that the noble Baroness pursues with diligence, and it is right to do so, even if at times—at least as far as I am concerned—the scope and content of impact assessments are a little disappointing. The amendment relates to the final impact assessments as rules are coming into effect, although, of course, to be useful, impact assessments are needed at each stage. Indeed, if proportionality is to be properly taken into account, that is surely a prerequisite for the regulator.
But returning again to the FiSMA theme, where much of the proportionality, flexibility—call it what you will—will be done on an institution-by-institution basis, so the rules will enable that but not demonstrate how it is to be carried out, I am not sure how that will be properly assessed in an impact assessment based only on the rules. Therefore, it will also be important to be able to capture what actually happens after the rules have come into operation. That might be by way of a retrospective impact assessment after a period of time, and would seem to be another matter that Parliament will need to investigate.
Included in that, it should be relevant to capture the effects of frequency of rule change, which is presently greatly emphasised by regulators and the Government as part of the reasoning behind the Bill, yet somehow I doubt that rule churning was what industry felt it was signing up for by supporting FiSMA. It will be important to understand the scale and nature of that rule tweaking. Amendment 104 gets in part to that with the Government producing a report, but perhaps it should be part of the annual report or an annual impact assessment from the regulators, so that it can be further queried and those regulated can be interviewed by the relevant parliamentary committee. So perhaps the Minister can confirm how this frequency of tweaking will be tracked, what is the Government’s planned part in it and would they support Amendment 104 in particular as part of the way to do that?
My Lords, I declare again my interests as stated in the register in respect of financial services companies. I am delighted to support Amendments 103 and 104 in the name of my noble friend Lady Neville-Rolfe. My noble friend is a champion of impact assessments and she speaks from experience. The impact of many financial services regulations on smaller firms has been very damaging. I mention just two examples. The unbundling provisions contained within the MiFID II directive, requiring asset management companies to pay separately for research, have been disastrous in their effect on smaller companies with interesting strategies, which have either been forced out of business or forced into mergers where their innovative strategies have not been taken forward. The effects have been less choice for customers and less coverage as a result of the significant reduction in the number of securities analysts, particularly those covering smaller and growth companies.
The effects were predictable, but ESMA ploughed ahead and the FCA acquiesced. It is small comfort now that ESMA itself realises that the unbundling provisions were a mistake, and may move to make changes, but much damage has been done. An impact assessment, such as recommended by my noble friend, would have avoided this.
I also mention the alternative investment fund managers directive. When I worked in Brussels as director-general of the European Fund and Asset Management Association —EFAMA—my French and German colleagues said that they did not think that the EU should move to regulate alternative funds; that was London’s market, and largely London’s alone. Furthermore, it was of interest only to professional investors, who did not need protection from investment risks. They thought that it would be wrong for the EU to try to regulate it. However, three years later, Michel Barnier, as Commissioner for the Internal Market, moved to introduce the AIFMD. Again we were overruled and reluctantly went along with it. An impact assessment might have encouraged the FSA to fight harder against it than it did.
For the reasons so well explained by my noble friend, I support her amendments and look forward to hearing the Minister’s reply.
My Lords, I am pleased to be part of this debate, which is narrow in some senses but has the capacity to reach quite widely. It is narrow in the sense that it has been framed through Amendments 103 and 104, which I broadly support, about the need to try and get more of an impact assessment model into the way in which we review the changes that may come through as a result of the return to the UK of powers previously exercised at EU level. It also raises much wider issues, which I will come to before I end my short contribution to this debate.
I am sure that the case made by the noble Baroness, Lady Neville-Rolfe, is about good government. Better regulation was always part of the argument she used when she was a Minister. I well remember the discussions we had across the Dispatch Box about intellectual property, in both primary and subsequently secondary legislation. The material on this was much enhanced by the good work done by her civil servants in bringing forward some of the issues raised and trying to give them a quantitative—not just qualitative—feel when the debates were organised. A lot of the work that they do on better regulation does not get properly recognised, and this is a good opportunity to pay tribute to it. As an example, I particularly enjoyed the annual work that I was often asked to do in relation to the setting of the national minimum wage, now the national living wage. It was always accompanied by a formidable document, created mainly I think by the Low Pay Commission but endorsed by civil servants. It went into every conceivable aspect of the way in which the setting of a minimum threshold for wages would, or could, affect the labour market, with particular reference to women and other low-paid groups in society. It was always a red-letter day in my diary when I saw that coming up; I knew that I was going to be given a very meaty topic to research, read up on and debate. I enjoyed the debates that we had on that.
While I say yes to the thrust of what is being said here, and recognise the benefits that will come from good impact assessments, properly debated, particularly in relation to the regulatory framework in the Bill, I wonder whether there is a slight irony here. The substance of what the noble Baroness is saying in her amendment is that better scrutiny of proposals brought forward for legislation—and, of course, for secondary legislation —would happen if there were better impact assessments. I say in passing, and in reverse order, that a secondary instrument is very much a creature of the primary legislation that has preceded it. It is not uncommon to find in SI impact assessments binary choices, usually not very helpful in detailed essence. The proposition set up in the impact assessment is often, “What would happen if this legislation did not go through?” and then “What will happen when it does go through?” In other words, if there is a change in regulations, you impact; no change and you impact the change. You do not get a range of options.
That range probably ought to come in the primary legislation discussion, but very often, of course, there is the tyranny of the Bill—which is my term for the way in which Ministers often defend, beyond the point of any reasonable, rational position, the wording of the Bills they are presenting, simply because they have been told by their civil servants, “Ah, Minister, if you give way on this point, your credibility will be shredded, you’ll never be able to stand up in the House and defend any Bill, you can’t let even this comma be changed to a full stop; please don’t even go down that route.” I exaggerate slightly to make the point, but I see from the grins around the table from those who have been Ministers that this is not an uncommon experience. The tyranny of the Bill, and the inability to model it for what could happen if you flexed it slightly, is often a restriction on good debate and scrutiny.
In fact, the most likely option for further work in this area would probably come with pre-legislative scrutiny, which has gone out of fashion recently but I hope will come back. We know for certain that we will get the online standards Bill for pre-legislative scrutiny. I would like to play a part in that, and declare my interest. That would be the point at which some modelling of the impacts of what would happen on various ranges of options might be allowable, and would not be subject to the constraints that I have been talking about in how legislation gets nailed down too quickly and the chances for changing and discussing it are very limited. However, I am wittering on about a pet topic and I should not do that when we are short of time for the Bill and the Committee needs to progress.
I will also say in passing that it is easy to criticise the Government for the work they do, but I am absolutely at one with the noble Baroness, Lady Neville-Rolfe, in saying that we need good, intelligent impact assessments, and I welcome her idea in Amendment 104 of an annual report on the work done in relation to financial regulation, because, taken piece by piece, it is sometimes a bit difficult to get the hang of it. The requirement to do an annual report on all the changes that have gone through and to have to evaluate whether they have been successful or not would give value, and I support her in that.
This has been an interesting debate; I am glad the noble Baroness has raised the issue and I hope that the Minister will make a good response that will give hope for some movement in this area.
My Lords, as many Members of the Committee have already noted, my noble friend Lady Neville-Rolfe is well known in your Lordships’ House for her pursuit of impact assessments and is a stern critic of government departments that hide behind the exact wording of Cabinet Office guidance. Recently, many of us have joined her in being appalled by the complete lack of impact statements published to support the Government’s coronavirus policies, involving—I remind the Committee—the greatest ever peacetime infringement of civil liberties. The Department of Health and Social Care used the flimsy excuse that the Cabinet Office does not require impact assessments for policies intended to have a temporary effect.
I am particularly interested in my noble friend’s Amendment 104, which requires an annual report to Parliament. I am not wholly in favour of annual reports, because they can degenerate into boiler plate and have a very short-term horizon; I prefer the concept of periodic reports that can look at impacts over a longer time span. However, whether such reviews are annual or less frequent, I suggest to my noble friend that the report could also usefully concentrate on the quality of consultation carried out by the regulators, and that would include the quality of impact statements.
Consultations by the PRA and the FCA often feel like not much more than going through the motions. They are not alone in the public sector in seeming to exaggerate the benefits and underestimate the costs. HMRC, for example, is a particular case in point, having been criticised more than once by the Economic Affairs Committee of your Lordships’ House for the use of cost assumptions that seem to bear little relationship to reality. Similarly, the PRA’s consultation on ring-fencing rules was widely regarded as a massive underestimate of the cost of compliance, as was borne out by subsequent cost experience. A superficial impact assessment, or one that overstates the benefits or systematically underestimates the costs, is worse than useless and can lead to poor policy-making. It would be wise to ensure that the regulator’s performance in this regard is kept under review.
My Lords, in many of the groups of amendments to the Bill we have discussed the issue of accountability, and it has been a very important discussion. However, we have also discussed the necessity to have proper evidence and information to make that accountability worthwhile, valid and effective. These amendments follow exactly that direction.
One of the pleas that I will put in is that an impact assessment should be studied and then reviewed. The noble Lord, Lord Tunnicliffe, is not speaking in this group of amendments but I can think of numerous occasions when he has spoken on a financial services Bill and pointed out that the information in the assessment did not seem to answer any of the obvious questions that a sensible person would ask in order to understand the regulations involved. I would join him in that. We seem to have narrow definitions of what an impact assessment is, and it seems to me that it should do what it says on the tin. It ought actually to assess the impact in a way that is meaningful to the regulation or piece of legislation in front of us.
This push for evidence and information, and quality in both, is an important thrust of the conversations and debates that we have had around the Bill. I very much hope that Ministers take that on board, because this is starting a pressure that will not go away. In fact, for the Government, if they want to produce the highest-quality legislation possible, the discussion created by developing a high-quality impact assessment will lead in the end to far better legislation.
My Lords, my initial reaction to the amendment of the noble Baroness, Lady Neville-Rolfe, was to puzzle over exactly what sort of impact assessment she had in mind. Was she perhaps thinking of the famous remark by the noble Lord, Lord Turner, that the banking sector in the UK does much that is not socially useful? After all, the ultimate rationale for regulatory activity is the enhancement of the common good—the goal of good government.
However, this debate has clarified the issue before us, which is that an effective impact assessment requires not just thorough analysis but a definition of an objective or, perhaps, objectives. The lack of clear objectives is the key weakness of Amendment 103. Amendment 104, therefore, is much stronger in that it lays out a number of objectives against which an impact assessment might be calibrated. The key to resolving the dilemma—I apologise for sounding a bit like a broken record—is to take the parliamentary role referred to in Amendment 103 and combine it with the sense of Amendment 104. An effective parliamentary process and, dare I say, a parliamentary committee, could define the objectives to be addressed in any impact assessment of the type referred to in Amendment 103—“We want to know the impact of this regulation on problem x, y or z”—and then seek annual reviews focusing on matters that are deemed to be important at any given time, thereby avoiding the template issue referred to by the noble Baroness, Lady Noakes.
That is what is missing from the amendment—a means of making the impact assessment an effective means of acquiring information and an insight into the thinking of regulators, which can then be scrutinised in a coherent and consistent manner.
My Lords, as my noble friend Lady Neville-Rolfe has explained, these amendments bring us to the question of how we report on the impact that regulation has on firms. Every noble Lord who has spoken today has referred to the value of impact assessments for Parliament and the Government in particular, and I do not dissent from that general proposition. My noble friend Lord Trenchard in particular spoke about the value of measuring the burden imposed by certain EU rules when we were an EU member. I hope that it is of comfort to him if I remind him that the Chancellor has said that decisions about financial services regulation after the end of the transition period—we have of course now passed through it—would be based on what was right for the UK, taking account of what is necessary to ensure financial stability, market integrity and consumer protection.
Amendment 103 would require the Government to lay impact assessments for each of the regulations made under the Bill. It would also require the PRA and the FCA to publish any rules made using the powers in the Bill in draft, alongside an impact assessment. I do not believe that the amendment is necessary, as the Government and the regulators are already committed to identifying and publishing the expected impacts of subsequent rules and regulations made under the Bill.
The Government have of course published an impact assessment alongside the Bill. In line with the guidance set out in the Government’s Better Regulation Framework, the impact assessment sets out HM Treasury’s current understanding of the costs and benefits of the measures. Where appropriate, further details will be set out in the impact assessments that will accompany the secondary legislation made under the Bill. I remind my noble friend Lady Neville-Rolfe that the regulators are required by FSMA 2000, with some very limited exceptions, to undertake a cost-benefit analysis for proposed new rules, and to publish those alongside their draft rules as part of their consultation. The PRA and FCA have already published their first consultations on the draft rules that they intend to make in relation to the prudential measures in the Bill, and they include comprehensive cost-benefit analyses.
Amendment 104 would require the Secretary of State to report on the impact on business that measures taken by the regulators and the Government to regulate financial services may have, and particularly to report on the impact on small businesses, innovation and competitiveness. We have spoken at length in this Committee about competitiveness, and I hope that I have demonstrated how importantly the Government take this issue. Additionally, my noble friend Lady Penn recently wrote to my noble friend Lady Neville-Rolfe about how the Government support smaller financial services firms.
I am sure that my noble friend Lady Neville-Rolfe does not need to hear me say that the Government are committed to ensuring that the financial services sector supports competition and innovation, allowing new firms to compete and grow. Of course, both the FCA and the PRA have a statutory objective to promote effective competition.
In earlier debates, we have talked about the new accountability frameworks that the Bill puts in place for the prudential measures. Those require the PRA and the FCA to have regard to UK competitiveness, among other things, when making rules to implement Basel or the investment firms prudential regime. They are required to report on how having regard to that has affected their proposed rules. The FCA and PRA are of course already required to prepare annual reports, which are laid before Parliament for scrutiny. These reports cover the extent to which the regulators’ objectives, which include promoting effective competition, have been advanced, and how they have considered existing regulatory principles in discharging their objectives.
On this basis, I hope that my noble friend Lady Neville-Rolfe agrees that I have said enough to make her feel comfortable in withdrawing her amendment.
I have received one request so far to speak after the Minister. I call the noble Baroness, Lady Bowles of Berkhamsted.
I am sorry to intervene again, but I feel I must correct what the noble Viscount, Lord Trenchard, said—or at least remind him that the unbundling of the analysts’ report was an invention of the FSA that the UK then sold to the EU, and now the EU is blamed for what the UK did through the EU. There are many other examples of that, although I can confirm that AIFMD was definitely not one of those. It would be nice if sometimes the Minister could intervene to at least have the record straight.
My Lords, I thank all noble Lords who have taken part in this debate, and I thank the noble Baroness, Lady Bowles of Berkhamsted, for her thoughts and for raising the ante to talk about a slightly more dynamic form of impact assessment.
I thank my noble friend Lord Trenchard for the very example that is now the subject of debate. I think the point that he was making, which I would support, is that impact assessments can reduce the perverse effects of such measures. We know—it is a matter of record, I think—that the number of analysts, especially small analysts, has gone down as a result of the MiFID legislation. An impact assessment on how it was enforced, whether its origin was in the brain of the UK or of the EU, could have been helpful. Of course, that is what my amendment is all about.
I was glad to have the support of the noble Lord, Lord Stevenson, for working up a decent impact assessment model. I share his tribute to public servants, having been one a long time ago, and the work of bodies that produce evidence for things, such as the Low Pay Commission and social trends, and the MPC in our own sector of financial services. Better scrutiny would take place with better impact assessment. It is why, regarding proposed new subsection (3) which Amendment 103 would insert, I talked about both the existing position and other options, because I agree with the noble Lord that it is much better if you can look at several options when developing difficult policies. I agree that pre-legislative scrutiny can sometimes be very useful.
My noble friend Lady Noakes reminded us, rightly, of the lack of impact assessment on the various Covid measures. I thank her particularly for the suggestion that the quality of consultation by the FCA, the PRA or the Government and of impact assessment should be added to any review.
I was glad to hear noble Lords build on what an impact assessment system should look like, including the noble Baroness, Lady Kramer—I echo her concerns about accountability—and the noble Lord, Lord Eatwell. There is a feeling that it is important to have a decent system.
My noble friend the Deputy Leader explained, as I had already anticipated in my own remarks, that a system does exist: both for government regulation and regulation by the two regulators, and for cost-benefit analysis to be produced. What I am not clear about is whether that is fit for purpose. It is very difficult to find out what the requirements are and to read all the various bits of paper. This is why I tabled the amendment, so that we could have an intelligent debate. Even if noble Lords do not want to go along with Amendment 103, we should make an effort, with the dissemination of the Bill, to ensure that the requirements are better understood.
That means that Amendment 104 is perhaps more important, because it asks that we review regularly what is being done in the way of cost-benefit and impact assessment, and how the objectives set out are achieved. I suggested some objectives in Amendment 104; others will no doubt be concerned about other objectives of the regulators. As we have said on earlier amendments, competition is not really the same as competitiveness. I was also keen to throw in small business—for reasons that my noble friend knows very well—and innovation, because of their value.
With this Bill, we need to satisfy ourselves that the new framework satisfactorily replaces, indeed, improves on, what went before. I take the point—the Chancellor is right—that we now have the chance to do the right thing in the UK, and to do it better than was done under the auspices of the EU. I may come back to this on Report, because a simple well-understood system of impact assessment, and of annual review in some form, would boost scrutiny and transparency, which has been a key theme of the Bill, as well as the governance of our largest and most important economic sector. I beg leave to withdraw the amendment.
Amendment 103 withdrawn.
Amendments 104 to 106 not moved.
107: After Clause 40, insert the following new Clause—
“FCA duty to make a statement about ministerial directions on investigations
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 1T (right to obtain documents and information) insert—“1U Duty to make a statement about ministerial directions on investigationsWhere a Minister directs, comments on, or intervenes with an FCA investigation into wrongdoing or malpractice by a company, the FCA must make a public statement about the nature of any such intervention.””
My Lords, Amendment 107 seeks transparency about ministerial interventions in regulatory investigations, by requiring the FCA to make a statement. I am grateful to the noble Baroness, Lady Bennett of Manor Castle, for her support. Currently, ministerial interventions are made in secret, and neither Parliament nor the people are able to call Ministers to account. Ministers intervene to stymie investigations, and the trail is often carefully concealed. Some years later, a few interventions do become visible.
Consider the case of HSBC, a bank supervised by UK regulators, implicated in global money laundering and protected by UK Ministers and regulators. In July 2012, the US Senate Permanent Subcommittee on Investigations published a report entitled U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History, which documented the fact that, despite evidence, HSBC staff knowingly laundered money for criminals and engaged in sanctions-busting.
In December 2012, HSBC was fined $1.9 billion by the US authorities—the biggest fine at that time. The US Department of Justice said that HSBC permitted
“narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries, and to facilitate hundreds of millions more in transactions with sanctioned countries”.
It added that HSBC had
“accepted responsibility for its criminal conduct and that of its employees.”
However, HSBC was not prosecuted, and instead entered into a deferred prosecution agreement until 2017. The levying of the largest ever fine on a UK bank and admission of “criminal conduct” did not prompt an investigation of HSBC’s practices in the UK. Did the bank engage in similar practices here?
In March 2013, the US House of Representatives Committee on Financial Services began a review of the US Department of Justice’s decision not to prosecute HSBC or any of its employees or executives for criminal activities. The committee’s July 2016 report, Too Big to Jail, showed that the Governor of the Bank of England, the chief executive of the Financial Services Authority and Chancellor George Osborne intervened to protect HSBC. The report contained a two-page letter, dated 10 September 2012, from the Chancellor to Ben Bernanke, chairman of the US Federal Reserve. It urged the US to go easy on HSBC, as it was too big to fail. The US report reproduced some correspondence showing the determination of the UK Government and regulators to protect a bank that had, by its own admission, engaged in “criminal conduct”.
The FSA, Bank of England and Chancellor also urged the US to go easy on Standard Chartered Bank, which was fined $670 million for money laundering, sanctions busting and falsification of records. Its deception was aided by Deloitte. The US Treasury court documents referred to the bank as a “rogue institution”. No statement was made at that time to the UK Parliament to explain regulatory silence or the Chancellor’s interventions. How do we improve banking regulation or hold anyone to account for nefarious practices when Ministers and regulators collude to protect wrongdoers?
I shall return to some questions after my next illustration. It relates to the July 1991 closure of the Bank of Credit and Commerce International. It was the site of the biggest banking fraud of the 20th century. BCCI was supervised by the Bank of England and was closed only after investigations in the US. The UK closure was followed by a few prosecutions and some parliamentary committee hearings. However, unlike previous bank collapses in the 1970s and 1980s, or even subsequent ones such as Barings in the 1990s, there has been no independent forensic investigation and key documents continue to be suppressed to this day.
On 19 July 1991, the Government appointed Lord Justice Bingham to examine some aspects of the Bank of England’s supervision of BCCI. The Prime Minister John Major told Parliament:
“The conclusions of the inquiry will be made public.”—[Official Report, Commons, 22/7/1991; col. 755.]
The Bingham report was published on 22 October 1992 and was highly critical of the Bank of England’s failures. However, it was published without the supporting appendices containing extracts from a document codenamed the “Sandstorm report”, which provided information about some of the frauds and named some of the parties involved in them.
Meanwhile, the US Senate Foreign Affairs Committee investigated BCCI frauds and, in December 1992, published a report titled The BCCI Affair, which said that
“BCCI’s British auditors, Abu Dhabi owners, and British regulators, had now become BCCI’s partners, not in crime, but in cover-up.”
The US Senate committee secured a censored version of the Sandstorm report from the Federal Reserve, which had obtained it from the Bank of England. The committee also secured an uncensored version and said that it
“revealed criminality on an even wider scale than that set forth in the censored version.”
The committee also had access to CIA files on BCCI, which have been made public. Despite this, the Sandstorm report remains suppressed in the UK.
Some time later, a US academic and I began research into some puzzling aspects of the BCCI episode. My co-author visited the US Congress Library and found the censored version of the Sandstorm report. On 3 January 2006, I used freedom of information legislation to request a full copy of the Sandstorm report. The Treasury refused, and the Information Commissioner agreed with the Treasury. To cut a long story short, I pursued the matter. Five and a half years later, on 11 July 2011, three judges in the case of Professor Prem Sikka v Information Commissioner and HM Treasury unanimously ordered the Treasury to release the full version of the Sandstorm report to me. The judges said:
“In our view there is considerable public interest in the public seeing the whole of the Sandstorm Report so that it can be seen, not just what happened, but what role was played by the governments, institutions and individuals who were involved with an organisation guilty of what the authors of the Sandstorm Report … described as ‘an enormous and complex web of fictitious transactions in what is probably one of the most complex deceptions in banking history’”.
At paragraph 42 of the judgment, the judges rebuked the Treasury for shielding the identity of
“the architects of a group-wide programme of fraud and concealment”.
By comparing the version of the Sandstorm report given to me by the Government with the censored version found in the US Library of Congress, one can get some idea of the parties being protected by the UK Government and regulators. These include individuals thought to be linked to al-Qaeda, Saudi intelligence, the royal families of Abu Dhabi and other countries in the Middle East, as well as arms dealers, smugglers, fraudsters, convicted criminals, BCCI senior personnel and politicians. The Government even fought to shield the identity of some criminals who had died in the intervening years. Words such as “Grand Cayman”, “Bahrain”, “Turks and Caicos”, “North American Finance and Investment”, “Arab Livestock Company”, “Saudi National Commerce Bank” and “Royal Bank of Scotland” had also been concealed by the UK Government.
Since the 2011 court judgment, there have been a number of requests in Parliament to place the Sandstorm report in the parliamentary Libraries. The Government have refused. I asked a Written Question and on 2 November 2020 the Government replied:
“There are currently no plans to publish an unredacted version of the report by Lord Justice Bingham into the Supervision of the Bank of Credit and Commerce International.”
So, after nearly 30 years the Sandstorm report is sitting in nearly 1,300 US libraries but it is still a state secret here. Governments have gone to considerable lengths to protect the wrongdoers.
I have cited examples of ministerial interventions from different time periods to show that a culture of cover-up is deeply institutionalised. Ministerial cover-ups have only emboldened banks. Last September, we learned of the FinCEN files, which showed that HSBC allowed fraudsters to transfer millions of dollars around the world even after it had learned of their scams. In relation to the ongoing saga of the RBS and HBOS frauds, the Thames Valley police and crime commissioner publicly stated:
“I am convinced the cover-up goes right up to Cabinet level.”
Some no doubt will remind me that we have the best regulation in the world—but best for whom? There is a huge difference between regulation on the books and regulation in practice. A commonsensical understanding is that financial regulatory mechanisms exist to protect the interests of investors and depositors, but that cannot be done without investigation and a purge of corrupt practices. Anything less harms people, industry markets and possibilities of democracy. By shielding wrongdoers, Governments may appease some, but what of the people’s right to know? How can Ministers and regulators be called to account when Governments and regulators protect wrongdoers? How can a good system of regulation be developed under such circumstances?
Governments claim to adhere to seven principles of public life, which include accountability, openness, honesty and integrity. In the absence of disclosures about ministerial interventions, such claims will continue to have little substance. My amendment would strengthen democracy by requiring regulators to make disclosures about ministerial interventions. I beg to move, and I hope that this Committee will support this call for transparency.
My Lords, as the amendment suggests, I think it is necessary to know when there have been interventions and why. I do not say that from a wish to create political opportunity to complain—in fact, rather the opposite. When matters are transparent, there is generally less to complain about and more understanding. If there is a wish to keep everything private, that in itself is a problem. The amendment does not ask for chapter and verse on everything, just the nature of the intervention.
I recall the instances of HSBC and Standard Chartered. I was aware of them at the time, not from any information from the Government but because the size of US fines and the impact that it had on European banks were spoken about in Brussels. It is fair to say that there were concerns from other European countries. I do not think that the UK was the first to write. The financial stability point on fines for things that we also thought were pretty shocking was openly discussed in Brussels, including in my committee. Indeed, I recall having conversations around financial stability implications with the president of the ECB and with the Fed and US Treasury, although I do not think that one needs to advise people like Ben Bernanke about the relative sizes of UK banks and the UK economy and the problems that that will create; you would get pretty short shrift in return.
It is actually quite humiliating either to make or know about such interventions or to sit there while people say to you, “I’ve had a letter from your Minister.” I certainly felt humiliated about the need for such information by my country and humiliated by the behaviour of important financial institutions from my country. A normal response would be to try to make sure that it does not happen again, and I fear that progress has not been as good as it should have been. Maybe one reason for that, I now realise, was that there was no such discussion about these occurrences in the UK in the same way as there was in Brussels, which I find quite shocking. But too big to fail should not mean too big to jail. We have been around that debate already, in the sense of needing fairly to prevent offences, the construction of large companies, which create organised irresponsibility, and the FCA failing us at a critical moment in the SMCR, so it has been undermined.
To get back to the point about disclosure—yes, it should be shared, and any humiliation should be shared, so that those responsible at the time get more heat and there is greater resolve to make corrections. Everything is all so much more diluted and dismissible when it is looked at only as history.
My Lords, I thank the noble Lord, Lord Sikka, for tabling the amendment, to which I was delighted to attach my name. It is a great pleasure to follow the noble Baroness, Lady Bowles of Berkhamsted, and I welcome her support.
I do not think I need to add to the noble Lord’s detailed, forensic presentation of the clear, obvious and systemic problem: that Ministers intervene to end or direct investigations into fraud, corruption and malpractice. As he clearly documented, they do that on what appears to be a semi-regular basis. This amendment seeks to stop that, or at least make it illegal. Noble Lords might argue that it should not be; I certainly look forward to examining any contributions that seek to do that.
We have an institutional culture of cover-up, as the noble Lord said. We cannot be sure that every case has been exposed—indeed, it would be very surprising if they had been—despite the often extraordinary efforts of investigative journalists and academics such as the noble Lord. We are most likely seeing the tip of an iceberg. That what has been done emerges only later, dragged into the light of day despite considerable resistance, is of considerable detriment to public and international trust in both the financial sector and the British Government, as the noble Baroness, Lady Bowles, just highlighted.
The most useful contribution that I can make to this debate is to the politics and the sociology—and I mean politics with a small “p” for, as the noble Lord demonstrated, this behaviour is not contained to Governments of any particular political hue. He said that ministerial coverups had emboldened banks. Behaviour that tolerates, supports and enables dishonest and corrupt practices encourages the spread of those practices. If there are indeed only a few rotten apples, which I am sure many from the financial sector will claim, the rot will spread if they remain in the barrel. Those people will still be in place in institutions—in many cases, in very senior places within those institutions —and be sharing, passing down and directing others to continue their practices, approaches and morals. I have an agricultural sciences degree; I can promise you that the rot will spread through the barrel.
We are now without the protective umbrella of EU regulation and what was once seen as a force independent of one particular financial centre that enforced some degree of cleanliness among all of them—albeit that the UK had an inordinate, often baleful influence on attempts to tighten regulation and prevent fraud and corruption. With the UK making its own rules, the behaviour of both the UK Government and the UK financial sector will come under greater scrutiny.
The EU is—not coincidentally after the UK’s departure—looking in the coming years to significantly tighten regulations on tackling fraud and corruption, on stopping tax dodging, on preventing greenwashing and on reining in the inordinate economic power of the internet giants. What happens in the UK will be weighed against that, which is why tightening up this Bill with this measure and others is crucial. What we need is not a more “competitive” financial sector but an upgraded one, one that is honest, straightforward and trustworthy.
There is also the politics in the broadest sense: the issue of how the Government are regarded, which is a long-running, serious issue for the UK. The place of politicians at the bottom of trustworthiness rankings is a source of jokes and bitterness but a serious and significant problem for our body politic. It has to be tackled. This amendment, a legal commitment to honesty and transparency, would be a significant step.
We are seen, from many sides of politics, to have a Government of the few, a Government for the money, a Government for the City of London, to the detriment of the country. This has to change if we are as a country to go forward.
I shall finish with a quote. The
“trend toward globalized corruption has been enabled in crucial part by regulatory asymmetries among key international economic actors and a lack of resources and political will in law enforcement.”
That comes not from the Tax Justice Network or Transparency International. It comes from a foreword to a report from the Center for American Progress entitled Turning the Tide on Dirty Money, signed by Senator Robert Menendez, chairman of the US Senate Foreign Relations Committee, Tom Tugendhat MP, chairman of the UK Foreign Affairs Committee and David McAllister MEP, chairman of the EU Parliamentary Committee on Foreign Affairs. The authors say that corruption
“threatens the resilience and cohesion of democratic governments around the globe and undermines the relationship between the state and its citizens.”
That is not a source I am likely to be quoting often, but it reflects a growing global understanding across the political spectrum—a fact that the noble Lords who in this Committee keep assuring us that everything is fine, clean, transparent and honest in the financial sector might like to reflect on. It reflects what a few of us in this Committee—the noble Lord, Lord Sikka, the noble Baroness, Lady Bowles, the noble Lord, Lord Davies of Brixton, the right reverend Prelate the Bishop of St Albans, and occasional other contributors—have been saying: an upgraded financial sector with tighter controls and stronger enforcement are crucial to the security of all our futures.
The amendment would be a modest but important step forward. I do not necessarily expect acceptance from the Government today—although one can always live in hope—but I hope that they will at least go away and think seriously about this and other upgrading measures proposed in this Committee.
I call the next speaker, the Lord Bishop of St Albans, but I cannot hear anything. I wonder whether he might be on mute.
My Lords, I apologise; I am so sorry.
I am glad to speak in support of Amendment 107 in the names of the noble Lord, Lord Sikka, and the noble Baroness, Lady Bennett of Manor Castle. Throughout the course of this debate, there have been a number of comments on the current functioning of the FCA, the scope of its remit and whether it is properly undertaking its duties.
As the noble Lord, Lord Sikka, pointed out, there have been occasions when financial misconduct has not been fully disclosed, and it is worrying that this may have been due to interventions from those within government. As we establish our new position in the world following Brexit and seek to build on our financial services sector, it is vital that we are known for our honesty and transparency throughout the world. Our future will depend on this. So surely the amendment is entirely uncontroversial. The FCA is meant to be an independent regulator, not a direct arm of the Government. Hence, if Ministers have sought to intervene in any sort of FCA work or investigation, it should be a matter of transparency and disclosed.
Recently, the FCA dropped its investigation into Lookers, arguing it had instead made its concerns clear relating to the
“historic culture, systems and controls”
of the group. Why the investigation was not carried out to the full remains unclear—certainly to me, despite trying to find out. I imagine that many, including me, find the FCA’s answer unsatisfactory. It does not give us the assurances that we would hope an independent regulator would give.
Some commentators have noted that the dropping of this investigation seemed to coincide rather conveniently with the FCA’s new rules relating to car finance, brought in at the end of January 2021. Yet even these changes fell short of a mis-sell, which would undoubtedly have cost the providers of finance billions—strongly hinted at by the FCA’s 2019 report into car finance.
How the FCA came to its decision was in-house, even if it was sometimes perplexing to those of us outside. Nevertheless, in this instance, for example—and in many others—what we do not know is whether there has been any direct ministerial intervention to steer the FCA into any specific course of action. Many people would like reassurances that any intervention should be made in the interests of all and for the common good, particularly in customers’ best interests.
The amendment, in shining a light on what happens behind the FCA’s closed doors, would be a valuable addition to the Financial Services Bill. It would help in a mission that I know many in this House share to create a more transparent, robust and, dare I even say, moral financial system that in the long run will benefit all of us. I hope that the Government will look closely at either the amendment or something similar as we return to the matter later during the passage of the Bill through your Lordships’ House.
My Lords, I need to spend more time, frankly, trying to understand the amendment. I would be genuinely shocked if Ministers interfered with an investigation of any of the regulators—certainly the FCA, the body at the centre of the amendment. I am not sufficiently familiar, I confess, with the Ministerial Code, but if the code does not make that clear, it would seem absolutely necessary that it does.
I perfectly understand concerns about the effectiveness of the FCA as a regulator in dealing with wrongful behaviour. It needs to be much more aggressive and transparent. We have talked earlier in Grand Committee about the HBOS Reading fraud scandal. The FCA was finally pressured into commissioning a report from Promontory, then did not publish it—only a summary that did not reflect in any significant way the actual conclusions of the report. That was extremely disturbing. We have also talked about the FCA’s actions under the senior managers and certification regime against Jes Staley, chief executive of Barclays—
My Lords, there is a Division, so we shall adjourn for five minutes and reconvene thereafter.
Sitting suspended for a Division in the House.
I was in the middle of saying that we need the FCA to be much more aggressive and transparent in its pursuit of wrongdoing within the financial services industry. I gave the example of what I considered to be real weakness in the way that it handled the HBOS Reading fraud and in its treatment of Jes Staley, chief executive of Barclays. As we discussed earlier, he was fined by the PRA and FCA, under the senior managers and certification regime, something in excess of £600,000 for, among other things, hiring private detectives to try to hunt down the identity of an internal whistleblower.
I note that it was the US authorities—one of the New York regulators, I think—that fined Barclays $15 million for the same behaviour, not the UK authorities. Some Members of your Lordships’ House may be aware that the US regulators visit the UK—I have certainly met with the CFTC when they have been doing this—in order to get the message over to bankers here that, if they come across any wrongdoing that potentially has an impact on the United States, as well as informing the UK regulators they should also make immediate contact with US regulators, who start from a position that they will be far more aggressive in hunting down wrongdoing.
I am afraid that the reputation of the UK for hunting down wrongdoers is not good. I wish we did not see ourselves in that position. That is one of the reasons why I am hopeful for an office of the whistle- blower. If there is any suspicion that a Minister had intervened inappropriately, it is through a whistleblower that that information would be exposed. We need an absolute safe haven for such a whistleblower to make contact, in order for that exposure to happen. Again, I look forward to hearing from the Minister how the Ministerial Code impacts on a situation such as this. If it does not, or is ineffective, the answer seems to me to be: strengthen the Ministerial Code.
My Lords, my noble friend Lord Sikka has made a powerful case for greater transparency in regulatory matters. I think it is clear to everybody that nothing undermines confidence in the regulatory system so much as the sort of cases to which my noble friend referred. What is often evident is that these matters eventually come out, and so the traditional rule that the cover-up is worse than the original transgression exerts itself once again.
The Government have made a virtue of transparency and openness in several aspects of the regulatory system. Not least, for example, we have discussed in this Committee the case of beneficial ownership, and we heard the noble Baroness, Lady Penn, make the argument for transparency of the beneficial ownership record of Companies House as a great virtue at an earlier stage of our considerations. Surely that commitment to transparency should be quite general, covering all regulatory matters, and not limited just to selected parts of the regulatory system.
My Lords, Amendment 107 would require the FCA to make a public statement on the nature of any intervention a Minister may make into an FCA investigation into an individual firm.
The current legislative framework established the FCA as an independent, non-governmental body responsible for regulating and supervising the financial services industry. I listened with great care to the noble Lord, Lord Sikka but, with respect to him, and without belittling the value of lessons from history, the examples of investigations that he cited are ones that are unrelated to investigations carried out by the Financial Conduct Authority. That is a key point because, although the Treasury sets the legal framework for the regulation of financial services, it has strictly limited powers in relation to the FCA.
The Treasury is the FCA’s sponsor in government but, in view of the regulator’s independence, it is not appropriate for the Treasury or Ministers to seek to intervene in individual cases. In particular, the Treasury has no general power of direction over the FCA. I will write to the noble Baroness, Lady Kramer, on the content of the Ministerial Code, but I am not aware of any loopholes in the code that would permit the kind of conduct that has been talked about.
We are talking here about an independent organisation. The independence of the FCA is vital to its role. Its credibility, authority and value to consumers would be undermined if it were possible for the Government to intervene in its decision-making. I realise that the noble Baroness, Lady Bennett, has some mistrust of Government Ministers, but I hope that that fact is of at least some reassurance to her.
That is not to say that the FCA is not accountable for its actions when investigating potential wrongdoing or malpractice by firms because, equally, the noble Baroness, Lady Bennett, should be reassured that the FCA is governed by the framework of duties set out in legislation by Parliament. It would be unlawful for it to act outside this framework in order to further vested interests. The decisions of the FCA can be subject to judicial review and, under legislation, the FCA must maintain arrangements for the investigation of complaints.
In the event of a significant failure to secure an appropriate degree of protection for consumers, where those events might not have occurred but for a serious failure in the regulatory system, Section 73 of the Financial Services Act 2012 imposes a duty on the FCA to investigate. Situations can arise in which the Government determine that it is appropriate to intervene. In such situations, the relevant legislation—Section 77 of FSMA —provides a mechanism for the Treasury to direct the FCA to conduct an investigation where it suspects that there may have been regulatory failure.
Under Section 77, the Treasury can require the regulators to conduct an investigation into relevant events where the Treasury considers there to be a public interest. In addition, Section 77 investigations can consider aspects outside the regulatory system as established by FSMA, allowing a comprehensive review to be undertaken in the public interest. However, it is important to note that a Minister cannot use a Section 77 direction to do anything else at all, or to stop the FCA doing anything else.
The most recent example of Section 77 in action was in relation to the regulation of London Capital & Finance, when the Economic Secretary to the Treasury laid a direction before Parliament on 23 May 2019, and formally directed the FCA to launch an independent investigation. The direction was public and transparent, as we would always expect to be the case. The report was laid before Parliament on 17 December 2020.
I hope that this has clarified the legal underpinning of the FCA’s independence, and the very limited powers that Ministers and the Treasury have in this area. I hope that what I have said has reassured the noble Lord that appropriate legislation is in place, and that he is content to withdraw his amendment.
I am grateful to all noble Lords for their contributions, but somewhat disappointed by the Minister’s response. The examples I gave—if I had time, I could add another dozen—all inevitably relate to the past, when, despite government efforts, things have come to public attention. At no point have Ministers ever volunteered information or made statements that they have stymied investigations.
In the parliamentary debate on the Banking Act 1987, which formally made the Bank of England the supervisor of banks, Ministers claimed that the Bank would be an independent regulator. Then we discovered that there was a whole process of cover-up—the BCCI case, for example. When the Bank of England ceased to be an independent regulator, the next one, the Financial Services Authority, came in. Again, it was claimed that that was independent. Well, under ministerial pressure, it did not intervene. It did not investigate HSBC’s misdemeanours in the UK, and indeed it was a party to cover-up in the US. The US House of Representatives committee report contains some correspondence showing how the Bank of England, the FSA and the Chancellor were pressuring the officials there to go easy on HSBC. The idea that somehow the FCA is some brand new version of independence which we ought to believe simply neglects what has happened in the past, and that is not really very helpful. Of course, Ministers can allay all public fears by simply saying, “Yes, we will embrace independence.” What is wrong with that?
I have visited the US on many occasions. I have met many academics, regulators and businesspeople, and I always ask them two questions when I deliver a seminar or after a meeting. The first question I ask is, “If you could commit financial crime, where would you like to commit it?” The response is always, “The US, because there is a lot of money to be made.” The next question I ask is, “If you are caught, where would you like to be prosecuted?” At that point, laughter sets in and they all say, “The UK.” Indeed, this country has become kind of a standing joke in regulatory circles. If I were referring to any other country and explaining how Ministers and regulators have colluded to protect organisations which, by their own admission, engage in criminal conduct, many Members of the House would say, “Well, that country is corrupt” or “It is a banana republic”. But I find it surprising that the ministerial response is basically “Well, we are good, and we don’t really need to take account of any of these events.” That is really the tip of a corrosive iceberg, because this corruption goes very deep.
I have asked Ministers a number of times to comment on the public statement of Anthony Stansfeld—the Thames Valley police and crime commissioner—that there is a “cover-up” at Cabinet level of the HBOS and RBS frauds. It is interesting that no Minister has denied it, and no Minister has confirmed it. I have quoted a statement from a very senior law enforcement officer—what could be a greater indictment of the UK’s regulation?
Finally, could the Minister please tell us why the Sandstorm report, which is sitting in 1,300 US libraries, is still a state secret in this country after 30 years? I do not know if it is appropriate for him to reply but I would not be opposed to that.
Does the Minister wish to respond?
Can I confirm with the noble Lord, Lord Sikka, that he does not wish to press his amendment?
Amendment 107 withdrawn.
108: After Clause 40, insert the following new Clause—
“Duty to take account of impacts on sustainable good work
(1) When undertaking duties and using powers under the Financial Services and Markets Act 2000, the FCA must take into account—(a) the impacts or potential impacts on sustainable good work in the United Kingdom as a consequence of the provision of financial services with particular regard to the evaluation of—(i) net gains in total employment;(ii) quality of work available;(iii) terms and conditions of work available;(iv) opportunities for training and reskilling;(b) the desirability of providing financial services and investment supporting the creation of sustainable good work across the United Kingdom; and(c) the desirability of advancing the international reputation of the United Kingdom for promoting inclusive and sustainable economic growth and decent work for all pursuant to the United Nationals Sustainable Development Goals.(2) The FCA must publish guidance to organisations providing financial services about fulfilment of the requirements specified in subsection (1)(a)(i) to (iv).(3) In this Act, “good work” means work which provides and promotes—(a) fair pay;(b) fair conditions;(c) equality and freedom from discrimination;(d) dignity;(e) autonomy of workers;(f) physical and mental wellbeing; (g) access to institutions and people who can represent workers’ interests;(h) participation of workers in determining and improving working conditions;(i) access to facilities for career guidance and training.”
My Lords, I move Amendment 108 and speak to Amendments 109, 110 and 122, which, collectively, take us into a fresh policy area. I thank the noble Lord, Lord Knight of Weymouth, and the noble Baroness, Lady Bowles of Berkhamsted, for their support. Support is always welcome and cross-party support is doubly so when, as I say, we enter a new policy area.
I draw the attention of the Committee to my entry in the register of interests, which shows that I am the chairman of the Founder Circle of the Institute for the Future of Work. It is the research that I have seen undertaken by the IFOW that provides much of the background to and reasons for my tabling these amendments.
It is widely argued that there is a high and perhaps growing level of dissatisfaction with how our system of government operates—or perhaps some would say how it fails to deliver a fair distribution of economic and other advances. The result has been a series of what one might call “uprisings” against what is seen by many as the conventional establishment view; the Brexit vote in the UK and the election of President Trump in the US are but two examples. Although both those events are behind us, there will surely be aftershocks that will shape our society over the next decade or so.
Members of your Lordships’ House and this Committee will all have their individual views on the relative importance of the different causes of this general dissatisfaction, but it is becoming clear that the nature of modern employment, too often disembodied and with employees treated primarily as factors of production, is an important factor. The Government have rightly emphasised their success in job creation and are to be congratulated on their efforts, but it is important at the same time to remember that the definition of employment by the Office for National Statistics is one hour or more of paid employment a week—just one hour. So if you are a young person on a zero-hours contract or a member of a minority community locked into a low-pay, low-prospect job, or if you are aged over 50 and finding it difficult to get any job at all, it is perhaps not surprising that you do not have unbridled enthusiasm for the present system.
In addition, many argue that the world stands at an important juncture. It is not just a question of what permanent changes to our working lives will have been caused by the pandemic; it is, no less importantly, about the impact on employment of the fourth industrial revolution, artificial intelligence and robotics, leading to the phenomenal increase in computing power that brings previously unbelievable developments, such as driverless cars, within reach.
Industrial psychologists tell us that people go to work for three broad reasons. The first is money, and we should not be precious about that—but it is not just about money, although, disappointingly, many appear to think that that is all that matters. Indeed, the debate in the House of Commons in Committee on this Bill, at column 163 on 24 November last year, focused essentially only on this one aspect. But a second important strand is what is known as self-actualisation: “Am I in a job that enables me to develop to my full potential? Do I have access to career development and opportunities for training?” That theme is about “me” as a person. The third reason why we go to work is about “we”: “Do I work in a pleasant atmosphere with fellow human beings to whom I relate? Am I proud of where I work? Does the job I do perform a useful service for our society?” It is to move the discussion on from the important but too often narrow and rather predictable debate about remuneration levels to discuss the “me” and “we” factors of employment that I have tabled these amendments.
The pandemic has sharply reminded us of the value and impact of work on society—that many of the people in our society with the highest levels of insecurity, often suffering poor pay and with poor-quality work, are those most responsible for its functioning. They have kept society and the economy going during the pandemic. The pandemic has also reminded us of the role of companies as social institutions. Government support has changed the pact between corporation and society, which may call for a higher level of responsibility and scrutiny. Research, including The Good Work Monitor report from the Institute for the Future of Work, has made it clear that the availability of good work is an important determinant of health and social outcomes; it is even a determinant of diseases, depression and suicide. Further, good work builds resilience, prosperity and personal well-being.
Some Members of the Committee may be asking why these amendments, worthy though they may be in themselves, should form part of a Financial Services Bill. Where good work is not made available, it places an increased strain on government finances. The externalities of bad work include higher social security payments, a greater burden on the NHS, restrictions on social mobility, and the perpetuation of inequalities. The financial services sector is a strategically important part of the UK economy, responsible for the employment of up to 2.2 million people. It will, therefore, play a critical role in financing the country’s recovery from the Covid crisis.
As my noble friend the Minister has repeatedly reminded us, this Bill is the first part of a wholesale rethink of financial regulation, and an opportunity for the Government to employ strategic regulation to steer the sector towards greater consideration of the importance of good work. If regulators are required to consider good work, those offering financial services will also need to, and ultimately there will be a trickle-down effect to society as a whole. Put simply, it is in every investor’s interest to ensure that we address any underlying dissatisfactions about modern employment, since failure to do so will result in a society increasingly at unease with itself, with all the consequent impacts on economic performance, and so on our prosperity.
Broadly speaking, there are currently few legal instruments for encouraging or protecting good work through the investment process, beyond the provisions about the minimum wage and modern slavery. So, just as Mark Carney has suggested that the most effective way to tackle the challenges of climate change is through the investment process, I argue that the same is true of the creation of good work. By anchoring good work principles in our financial regulatory structure, the country has the opportunity, with our post-Brexit freedoms, to become a world leader in a policy area that will surely assume ever-increasing importance in the years ahead.
I turn briefly to my four amendments. Amendment 108 has three purposes: first to require the FCA to take into account the impact of sustainable work as a consequence of the provision of financial services, and to do so by reference not only to gains in employment but to the quality and conditions of the work, as well as opportunities for reskilling and retraining. Secondly, it requires the FCA to do this in a way that builds the international reputation of the UK for encouraging economic growth in line with the United Nations sustainable development goals. Thirdly, the FCA should provide guidance to the financial sector on how to fulfil these requirements.
Amendment 109 imposes a duty on regulated organisations to explain how they have complied with the guidance issued by the FCA, and to do so within 12 months of such guidance being published. Amendment 110 proposes that there should be a member of the governing body of the FCA with responsibility for promoting good work. Without such an appointment, there must be a danger that this policy area will be overlooked. Finally, Amendment 122 requires the regulator to take into account the impact of employee share schemes. This aspect is of a piece with the plan to foster good work generally. Indeed, the FCA’s chief executive himself has endorsed research which shows the link between share schemes and the fostering of a sense of ownership and involvement.
To conclude, this will be a long journey, but one which we need to set out on without delay, and all those who believe that our present system, for all its inadequacies and imperfections, provides the best hope for our society as a whole, should be joining in. I beg to move.
My Lords, I am happy to put my name to and support Amendments 108 to 110. I pay tribute to the noble Lord, Lord Hodgson, for introducing the amendments.
From President Biden, to the OECD, to the UK Government, everyone around the world wants to “build back better”. The amendment is squarely in that vein. As we all start to see a path out of this pandemic, the economic consequences loom ever larger. The same people most likely to have lost their lives due to Covid are now losing their livelihoods. In this country, our challenge of rebuilding also must address our new life outside the European Union. We must account for the threats and opportunities of new trading arrangements and a new regulatory environment, and the Bill is a part of that. I see opportunities here to move to more intelligent regulation of the financial sector as we move into this new reality.
The financial sector is a strategically important part of the UK economy, as the Committee knows, employing up to 2.2 million people. The sector will play a critical role in financing the country’s recovery from the Covid-19 crisis. There is therefore an opportunity for the Government to deploy strategic regulation to steer the sector towards a greater consideration of the importance of good work.
As has been said, these amendments would ensure that financial regulators understand and give due weight to the importance of creating sustainable good work across the United Kingdom. The amendments have been designed to build on the great work of the Institute for the Future of Work, which was established following the Future of Work Commission, of which I was a member. We found that good work builds resilience, prosperity and well-being. I commend the institute’s Good Work Charter and Good Work Monitor to the Committee; as the noble Lord, Lord Hodgson, said, it found that the availability of good work is an important determinant of health and social outcomes. This is reinforced by the findings of the Carnegie Trust. Conversely, when good work is not available it places a strain on government finances through the higher cost of health and welfare services, and depleted tax revenues.
On Budget day last week, those of us on the National Plan for Sport and Recreation Committee, whose meeting I am missing at the moment and to which I send my apologies, were lucky enough to hear from the Deputy Prime Minister of New Zealand, Grant Robertson. He is currently the Finance Minister and the Sports and Recreation Minister for his country. I was struck by what he said when he launched New Zealand’s first “well-being Budget” in 2019:
“In the election that led to the formation of this Government, New Zealanders were asking a core question: If we have declared success because we have a relatively high rate of GDP growth, why are the things that we value going backwards like child wellbeing, a warm, dry home for all, mental health services or rivers and lakes that we can swim in?”
He went on to say that the Treasury should be responsible for,
“measuring and focussing on what New Zealanders value—the health of our people and our environment, the strengths of our communities and the prosperity of our nation.”
I argue to the Committee that we need a similar mindset shift. We need to start by accepting that not all that we value can be measured by EBITDA, a balance sheet or shareholder value. Then we need to think about what we value and how to incentivise and regulate for that.
I have worked in the public, voluntary and private sectors. I run my own business, have started co-ops and charities, and worked at chief officer level for private equity-owned businesses. My current commercial clients include a US B corp, and one heavily financed by US venture capital. In my range of work, I too often see an increasing values imbalance the more that the enterprise is engaged with financial services businesses. Good business balances shareholder value with customer value, staff value and societal value. Too often, values are sacrificed for shareholder value. If one thinks only of the value of financial services in financial measures such as share price, one is missing the rounded value of the sector. This is like thinking that all the value of a school is in test scores, or all the value of a job candidate is in their qualifications. A growing number of investors do not see business in that way. Between 2016 and 2018, the proportion of UK investors integrating environmental, social and governance guidelines into their investment decisions grew by 76%. Up to $2 trillion of UK assets are now managed according to those ESG principles.
These amendments are clearly not anti-business or anti-growth; they go with the grain of where business is going. They are also with the grain of new approaches to government regulation. Traditionally, we have regulated to prevent bad practice by a minority—that might be in relation to the minimum wage, fraud or some environmental protections. These are hard-won in this House. I campaigned for years to give parents the right to bereavement leave if one of their children died. I was delighted we finally got there last year with Jack’s law.
However, this traditional approach to regulation is rigid, as the real world is moving and changing at a pace that legislation cannot keep up with. That is why the Government are now proposing in their online harms policy a “duty of care” to be imposed on technology companies. This flexible approach is to be applauded and is echoed in these amendments. This approach of going beyond minimum standards also allows us to calibrate what the good, positive criteria for the “S” look like in ESG investment—ESG standing for environmental, social and governance. So far, ESG matrices have been focused on the “E” and the “G”; the pandemic points to the “S”, to the social, and the dimensions of good work should help find materiality around that. It could also offer bite and focus in the basis for standardised reporting, addressing some criticisms increasingly pitched at that ESG investment.
I therefore commend these amendments. They are good for business and good for people, and they reflect the postcode realities that the job of building back better should not rely exclusively on government action. Good work builds prosperity, resilience and well-being, and it is one of the best and most effective ways to align human, social, economic and environmental interests. It should be embedded into the post-Budget recovery plan’s vision and the very architecture of decision-making across government and the regulators. Businesses want to play their part, and these amendments will help to move things in the right direction. I hope that the Minister will give them proper consideration between now and Report.
My Lords, I have signed these amendments from the noble Lord, Lord Hodgson, and I agree with what he and the noble Lord, Lord Knight, have said. I am aware that the noble Lord, Lord Hodgson, has a long record of engagement in these matters, because from time to time I discover that I am following in his footsteps. The “good work” amendments recognise that we need structural changes in how companies operate to ensure that they provide good work in the face of technological and societal changes. With the financial services sector both supporting all businesses and being our largest industry, it has a special, strategic leadership role to play, and ways that this can be brought about are contained in Amendments 108, 109 and 110. This would be in line with the principles of Section 3B(1)(c) of FSMA, which states that there is role for ensuring
“the desirability of sustainable growth in the economy of the United Kingdom in the medium or long term”.
In my book, sustainable growth must encompass technological and societal changes as well as the environment, but I fear there is a long way to go to live up to that.
In the interests of time, I shall concentrate on Amendment 122. There has been all-party support for employee share ownership in all its forms for a long time. Such schemes provide rewards and motivations in ways that wages cannot. At its best, an employee share plan will also give employees a say in how a business is run and can help to achieve many of the aims of the Good Work Charter, such as dignity, fair rewards, participation and learning.
Employee share ownership and employee ownership have many positive effects, and I want to highlight research on how well employee-owned companies deal with financial adversity.
Research published by the Cass Business School after the 2008 financial crisis established that employee-owned companies create jobs faster than non-employee-owned counterparts and withstood the recession better as it deepened. They recruited when non-employee-owned companies were laying off staff, and had motivation where others found it hard to motivate staff.
More recently, I chaired an inquiry into the effects of employee ownership and the report, entitled Ownership Dividend, found evidence that showed that employee-owned businesses performed better, were more resilient and more rooted in local economies—hence why the term “ownership dividend” was coined. Therefore, as has been said, such companies have a strong part to play in the UK’s plans to build back better and restart the economy.
Amendment 122 suggests an emphasis on analysing impact of sustainable growth provided by employees share schemes. As I mentioned previously, it should already be covered in the principles, but the urgency around “sustainable” in all its forms does not seem to be present. Therefore, I commend Amendment 122, as well as the good work amendment.
My Lords, I will speak briefly to Amendments 108, 109 and 110 in the names of the noble Lords, Lord Hodgson Ashley Abbotts and Lord Knight of Weymouth. I broadly agree with everything they said.
The noble Lord, Lord Hodgson, in his introduction, referred to the level of dissatisfaction in our society: the threats from poverty, inequality and insecurity. I would say that these amendments are digging here into some of the depth of the problems that I referred to in my speech on a previous group and seek to provide some remedies. As he was speaking, I thought of meeting an USDAW representative in Sheffield referring to one of her members who had just come to her to seek a voucher for a food bank. The member was not, as you would expect as an USDAW member, unemployed; in fact, that member had seven jobs, but they were all zero-hours contract jobs and that particular week they had not delivered enough money for that person to feed themselves and their family.
However, it is important that we do not just focus—the noble Lord, Lord Hodgson, did not—on those who are in desperate poverty and inequality, as awful as that is. As he was speaking, I could not help but think of what the late, great David Graeber called—here I may be about to use what is unparliamentary language here, but it is a direct quote—“bullshit jobs”. The noble Lord referred to people’s desire to get meaning, to feel that what they are doing, how they are using their time and talents, is worthwhile and contributing to society. Indeed, a failure to acknowledge and understand that—a focus purely on the pounds, shillings and pence—is at the root of a lot of our problems: the financialisation, to which the noble Lord, Lord Knight, referred, of our entire economy—not just the financial parts but the real economy, the care economy, the public service economy.
The noble Lord, Lord Knight, referred to managing things in a different way. I point again to New Zealand’s living standards framework, that guides its Treasury—based on a system not that dissimilar to our own—where they judge the quality of work, people’s security, the quality of the environment and the economy all together and seek to manage them to a stable, secure, decent whole.
These are important amendments and crucial principles, so I wanted to speak briefly in favour of them.
My Lords, it is a pleasure to speak to this group of amendments. In doing so, I declare my interests as set out in the register. I shall speak particularly to Amendment 122. It is evident that employee share ownership is a positive force within our economy, and speaks so much to the current Covid environment and what kind of economic sector, work and business basis we can have to our economy as we built out of Covid.
It is no surprise that Sir Nicholas Goodisson, after taking the London Stock Exchange through the big bang and seeing some of the early privatisations, then moved on to a role heading up the Wider Share Ownership Council. He saw the benefits and the positive impact that it had for people to have a stake in something, and there could be no better example of that than employees having a stake—a share—in the company for which they work on a daily basis.
I believe we will see more innovative models of employee ownership coming through. The EOT, for example, is still very much in its embryonic phase but it is a very positive concept and construct. There will be further developments in this area and I believe Amendment 122 sets out the case very well that when employees have a share, a stake and a say in the business for which they work, it benefits all concerned.
My Lords, first, I have to correct an error I made in the last group of amendments. I referred to the HBOS Reading scandal when I was talking about the Promontory report, and of course I should have been talking about the RBS GRG scandal; I am afraid I got my scandals wrong. My apologies for that—there really are too many to choose from. I hope that one day I find there are no choices; that would be a very good situation to be in.
I find this group of amendments wonderfully refreshing and a very important change of direction. Amendments 108, 109 and 110 in the name of the noble Lord, Lord Hodgson, build on the concepts that we already have in the UK Stewardship Code but take that further. In many ways, one can see a relationship with the duty of care amendments that we talked about earlier in this debate. That duty of care was focused on customers but in many ways that is now extending that perspective to employees. I find that exciting and worthwhile.
I and my colleagues in the Liberal Democrats have long talked about the need for a very different social contract between employers and the workforce. Very often that workforce may not be an official workforce in the formal sense; it may be people who are self-employed and working freelance but who in effect are working very closely with an organisation. The whole of that workforce needs a very different social contract as we go forward into a different era.
I think we both have different standards about how we treat each other and different expectations. However, we are also about to go into a period of transition to the digital age. That will be disruptive. It creates real issues for a large swathe of people and we cannot passively step back and look at a group of people just as collateral damage as we make that transition. The obligations to the workforce have become far more significant than they might have been in a fairly steady and static era when everything was expected and was not changing very significantly.
I have long been a fan of what is loosely called triple bottom line accounting—and have probably talked about it too often in this House—whereby issues such as the environment and the social impact along with the financial impact are measured when we look at both individual accounts and when we look globally at a nation’s accounts. We had earlier amendments around the issue of well-being, which are well related to all that.
I was excited to hear the example of New Zealand that the noble Lord, Lord Knight, detailed to a fairly significant degree. Nearly 20 years ago I spoke to a conference in Auckland around these issues as New Zealand was making its decision to revisit the way in which it managed its national accounts and looked at corporate accounts. I notice that very often, when we look at an English-speaking country with close ties to the UK, we find it much easier to absorb the examples and to treat them in a sense as a pilot from which we can learn. I therefore hope very much that the principles in these amendments will be enhanced.
Like the noble Lord, Lord Hodgson, and my noble friend Lady Bowles, I am a great believer in employee share schemes. There is always a downside to be aware of. If something goes wrong in a company, you want to make sure that employees have also built other pension resources, have diversification and all those kinds of opportunities. A principle that is held as very important for senior management ought to be extended down throughout the employee base. Where you have ownership, you have a voice, and having a voice is important both in empowering people in their everyday life as a workforce and in making sure that they drive the direction of the company they are working for. We all know that the old-fashioned view that all that matters is the shareholder is essentially part of the past, and I very much welcome all these amendments as part of the future.
My Lords, the noble Lord, Lord Hodgson, has tabled a number of interesting amendments relating to the quality of work, as well as on the topic of employee share schemes. As I am sure the Minister will mention, the latter topic is the subject of a call for evidence issued alongside last week’s Budget. However, as that exercise only covers the operation of one specific scheme, I do hope that we will hear about the Government’s wider plans to promote employee ownership and employee share ownership. With an eye to the next group, I suspect that many fintech start-ups would be interested in taking up such options to help attract the talent they need.
In studying the first three amendments in this group, I was reminded of a remark I made at Second Reading, where I praised the financial services sector for the many well-paid and relatively secure jobs it provides, not just in the City of London but across the whole of the United Kingdom. While I stand by that generalisation, I must acknowledge that, as in any other sector, exceptions do exist. For example, as tranche after tranche of local bank branches reduce their opening hours or close their doors for good, we cannot possibly pretend that the job security of those workers is as high as it was, say, two decades ago. While working practices are rapidly changing across the financial services sector, certain strands of it retain a reputation for featuring long, unsociable hours or a cut-throat working environment that many would struggle with.
The proposals put forward by the noble Lord, Lord Hodgson, are intriguing. The amendments raise several questions about access to talent and the treatment of it. As we have said on a number of occasions, we very much hope that the sector will go from strength to strength, bringing a steady stream of quality new jobs. The noble Lord is right to probe the Government on how they will create the ecosystem that makes this hope a reality. However, these considerations are not unique to financial services. As the economy recovers from Covid-19, we will want to see gains in employment across the board. If we are to build back better, as the Government claim they want to do, we will need to ensure that workers have good terms and conditions, as well as opportunities to undertake training or reskilling.
Therefore, for me the real question raised by these amendments is when we can expect to see the long-awaited employment Bill. The 2019 Conservative manifesto made a range of commitments on employment rights, and the last Queen’s Speech promised legislation to enact them. Regrettably, despite a longer than normal parliamentary Session, we have yet to see any concrete proposals. So, while the Minister may not be responsible for the forthcoming legislation, I hope that, during his response to these amendments, we will get a firm commitment that the employment Bill will appear soon.
My Lords, I am grateful to my noble friend Lord Hodgson for directing the Committee’s attention to a set of issues that lie at the heart of the agenda for workers’ rights and social justice in the workplace. Let me begin by saying to him that the Government are committed to making the UK the best place in the world to work, and I found myself in considerable sympathy with a great deal of what he said about the connection between employee well-being, high-quality work and national prosperity.
The Government certainly have a role in furthering those ends, and I hope that my noble friend will agree that we have already made good progress in bringing forward measures that support our flexible labour market, while also ensuring the protection of workers’ rights, such as: banning the use of exclusivity clauses in zero-hours contracts; extending the right to a written statement of core terms of employment to all workers; closing a loophole whereby agency workers are employed on cheaper rates than permanent workers; introducing a right for agency workers to receive a key facts page when signing to a company; and quadrupling the maximum fine for employers who treat their workers badly.
The Government are committed to bringing forward measures to establish an employment framework that is fit for purpose and keeps pace with the needs of modern work practices, in due course. We are also committed to building back better from Covid-19. Alongside the Budget, we published our wider economic plan for significant investment in skills, infrastructure and innovation, in Build Back Better: Our Plan for Growth.
During the pandemic we have taken unprecedented action to protect jobs, most notably through the coronavirus job retention scheme—one of the most generous such schemes in the world. And from April 2021, the national living wage will increase by 2.2%, from £8.72 to £8.91, and will be extended to 23 and 24 year-olds for the first time. Taken together, these increases are likely to benefit around 2 million workers.
I fully appreciate that if we are to build back better, progress should be measured by more than just dry economic trends. However, most people would agree that a large part of human and civic well-being lies in people’s livelihoods, and I remind the Committee that in last week’s Budget the Chancellor set out his plan to protect the jobs and livelihoods of the British people.
Amendments 108, 109, and 110 would essentially require the FCA to have regard to “sustainable good work” when conducting their functions, and to embed this principle in the financial system as a whole. Financial services firms would then be required to apply the principle in all their activities, including investment decisions.
The FCA is responsible for a large number of firms and has been given three operational objectives: to protect consumers; to protect and enhance the integrity of the UK financial system; and to promote competition. So I am afraid I do not believe that the FCA is the right body for this function, given its current role, particularly as the issues go far beyond the subject of financial services.
Amendment 122 would require the FCA and the PRA to consider the impact of employee share schemes on sustainable economic growth. The Government want to support hard-working people to share in the success of the businesses for which they work. To encourage this, we offer several tax-advantaged employee share schemes. These provide a range of tax benefits to participating employees and businesses. We keep all employee share schemes under review, to ensure that they remain effective in these ways.
However, once again I do not believe that the UK’s financial services regulators are best placed to carry any changes forward. It is important that they remain focused on their core objectives. Giving them a diffuse set of objectives could undermine focus on consumer protection, financial stability and the sound functioning of financial markets. The body best placed to keep employee share schemes under review is the Government, and we see no need to impose this additional condition on the FCA and the PRA. So, while I am the first to acknowledge the importance of the matters that my noble friend has raised in this debate, I hope he will understand why I do not think it appropriate to amend the Bill in the way that he proposes.
My Lords, I am exceptionally grateful to everybody who has taken part in this debate, including the noble Lord, Lord Knight of Weymouth, who was the first to raise the concept of building back better, which was later picked up by everybody, including my noble friend the Minister.
I am grateful to the noble Baroness, Lady Bowles, who always brings a degree of detailed and forensic expertise to these areas. Of course, I am well aware of her work with the employee share ownership association, as I am of the work of my noble friend Lord Holmes of Richmond on employee ownership trusts, which are critical. I share the interest of the noble Lord, Lord Tunnicliffe, in finding out the results of the consultation that is under way in this general area. It is not often that I find myself supported by the noble Baroness, Lady Bennett of Manor Castle, but I am glad to have her along for the ride. The noble Baroness, Lady Kramer, was certainly right to remind us all how fast everything is changing and that we need to make sure that we are not trying to tackle yesterday’s problems and failing to tackle tomorrow’s.
I am not surprised that my noble friend the Minister could not accept these amendments. He rightly emphasised the work that the Government have done both in employment generally and as a result of the pandemic. If he had accepted the amendments, I probably would have fainted with surprise and been unable to reply to the debate. However, this issue is not going to go away. The weakness of our present regulatory system is that it merely catches and tries to prosecute the bad. In this part of the century, given all the challenges we face, the system should be doing more than that; it should be encouraging the good. This is an area where good could be encouraged, and that would have a huge trickle- down effect on our society as a whole.
Perhaps I may leave noble Lords with a quote from Robert Kennedy, who said that GDP measures
“everything … except that which makes life worthwhile”.
I beg leave to withdraw the amendment.
Amendment 108 withdrawn.
Amendments 109 to 111 not moved.
We now come to the group beginning with Amendment 112.
112: After Clause 40, insert the following new Clause—
“Designated artificial intelligence officer
(1) The Secretary of State must by regulations made by statutory instrument provide that companies operating in the financial services sector who use artificial intelligence (“AI”) must have a designated AI officer.(2) The AI officer under subsection (1) has responsibility for ensuring the—(a) safe,(b) fair,(c) unbiased, and(d) non-discriminatory,use of AI.(3) The AI officer under subsection (1) also has responsibility to ensure that data used in any AI technology is unbiased.”
My Lords, in moving Amendment 112 I shall speak also to the following 10 amendments in the group, through to Amendment 136E, which is also in my name. I declare my interests as set out in the register and thank other noble Lords who have signed up to speak.
There are 11 amendments in the group and I should like to begin by making some broad comments about the overall theme. The group’s headline is fintech, financial technology, which covers a number of areas in and around that subject and demonstrates the connectivity between all the elements of 4IR, the fourth industrial revolution, including new technologies, and how they interact with one another in the context of financial services. They include AI—artificial intelligence —DLT or distributed ledger technology and blockchain, just to mention some that I will be coming on to discuss as we reach the amendments.
The Government have had a good story to tell on fintech since 2010—and indeed before: the Blair Administration were very positive around the UK’s opportunity and the potential that we have in this area of fintech. Perhaps the best example to date is the FCA’s sandbox, the measure of its success being its replication in more than 50 jurisdictions around the world. It was ground-breaking in its time; certainly, we find ourselves now, if not at a crossroads, certainly at a point where we need to consider everything across the fintech landscape and truly reflect on whether we are doing enough, or anywhere near enough, to ensure that the benefits are maximised for individuals, companies, all corporate entities and the UK as a whole.
Fintech is pervasive; it cuts across all sectors. In previous debates in Committee we ran through several incredibly important groups around financial inclusion. To flip that coin, financial exclusion has dogged the UK for decades, blighting lives, ruining opportunities and putting potential down. Fintech has a new lens to offer on the whole question of financial inclusion, not least in giving us the ability to reimagine and reconsider credit scoring in real time. I would put it to the Committee that, if we had had fully understood and deeply deployed fintech and indeed allied regtech throughout our financial services sector, we might have had a different set of circumstances in 2008-09.
The questions around fintech go to the questions of competitiveness. Brexit and Covid have put the country in a particular situation, and there could be no better opportunity or more pressing time to consider all the underpins and accelerators that exist across the fintech landscape. Fintech is the future, but it is the future now. There is no greater example than the fintech strategic review, to which I will come in more detail.
Before I move to the amendments, I have one final point to really drive home. The start-ups, scale-ups and sales of fintechs are going to be not just an element of financial services—they will be our financial services sector, and it is a competition. China understands that and has a particular approach, and the EU understands it and has one; we also need to understand it. In many ways, the debate gets somewhat caricatured by people who potentially see our approach being “Singapore-on-Thames”. Personally, I think that is extraordinarily disingenuous and disrespectful to Singapore, which operates an incredibly impressive financial services market. If correctly deployed and understood, fintech will transform financial services in the UK and will have standards and rules shot right through, not holding back but enabling and drawing into investments international interests and companies.
On the crypto element of this, we see Facebook’s Libra, now Diem, and we see the activities of the People’s Bank of China. What is the Government’s view on these two approaches? Do we want to find ourselves as crypto takers or, potentially, collaborative crypto makers—makers of the standards and, through that, makers of the markets?
I shall take the amendments in logical rather than numeric order and begin with Amendment 112. In it, I seek to probe the potential utility of having an AI officer in financial services businesses that use and deploy AI. We have seen the well-established concept of the anti-money laundering officer, or AMLO, and quite right too. We similarly see chief data, digital and information officers coming on to the scene. Considering the pervasive nature of AI and the fact that it could be extraordinarily positive or, potentially, precarious, would the Government consider looking into the AIO role within FS organisations?
AI is already deeply embedded in FS. The whole of our financial selves could very soon be at the will of AI. We need to ensure that it is safe, unbiased and non-discriminatory. One example—not from FS, but to make the point—is an AI soap dispenser in the United States that was trained just using data from Caucasian hands. The soap dispenser then would dispense soap only to hands which fitted the data on which it had been trained: horrific, extraordinary, shocking—but it happened. That is dispensing soap; what about when we are talking about people’s livelihoods or the financial selves of all of us?
I move to Amendment 118, which builds on this and seeks to probe the whole nature of the deployment of ethical AI. I believe that in the UK we have a competitive advantage in such deployment which is tied to our underpinning standards and the rule of law. This is set out in greater detail in the report of the Lords AI Select Committee, which I was lucky enough to serve on. We set out five rules for the deployment and understanding of ethical AI. Again, this would not hold business back; it would actually be a competitive advantage. To this end, I ask my noble friend whether the Government would consider changing, extending or expanding the role of the Centre for Data Ethics and Innovation. It is an excellent creation, and the fact that it combines innovation and ethics in its title is quite right. But is there a potential role where the CDEI takes on some regulatory functions rather than just advisory ones? Similarly, I ask my noble friend the Minister what the Government’s view is on XAI—explainable AI—and the pros and cons of having that concept deployed throughout our financial services sector.
Moving to Amendment 115 on distributed digital ID, I have been in enough debates in your Lordships’ House to understand all of the issues around ID, how it soon falls into potentially being seen as ID cards on one side and all of the issues around freedom, trust and privacy. But the reality is, we need to really grapple with, deploy and deliver a distributed digital ID system, not just as individuals but as corporate entities and as a nation. There have been what can probably be best described as a number of false starts when it comes to digital ID, but this is such an underpin to so much of the potential which fintech can deliver, and it is vital that we start to move at pace on it. It is as important to corporate entities as individuals and is not just about security—important though that is—and privacy. It can and would be a driver of growth. It is critical that it is built on a distributed, not centralising, model. I ask my noble friend, in terms of the work I think is going on within DCMS right now, what approach is being considered around this distributed model.
I have an example of how digital ID—and, indeed, ID—right now is sub-optimal. The first question should always be, “What do you want? You asked for my date of birth, but do you want my date of birth, do you need my date of birth, or do you just need to know that I am over 18? Do you just need to know that I am over 18 in a certain circumstance for a certain period?” Similarly, asking for an address or a utility bill is almost quaint in its antiquity, as if somehow to gain a utility service you have gone through some sophisticated KYC process.
Just this morning, while I was preparing for this debate, I received an email saying that there had been a problem with the renewal of my driving licence, and I needed to give various credentials that were set out. Noble Lords who know me will know, for obvious reasons, that this was clearly a scam. They will be delighted to know that I do not have a driving licence, nor do I drive, but, in so many ways, this simple, single example demonstrates many of the shortcomings and difficulties that we currently face without having a distributed digital ID.
My amendment suggests that the digital ID needs to be scalable; it needs to be flexible so that it can evolve—when and if quantum computing comes in, there will be a need to rehash all the keys for identity through quantum rather than current means. Crucially, it needs to be inclusive, not just in respect of all the protected characteristics but inclusive in its broadest, brightest, brilliant sense.
Finally, the Government would be advised to undertake a large piece of public engagement around digital ID. For understandable reasons, there is extraordinary fear and uncertainty about the concept. That is not unfounded; if it is got wrong, it goes badly wrong. We need to get the public engagement right, as was the case with Lady Warnock’s commission on fertility treatment —at first blush, nothing could be seen as more alien than test-tube babies, but it became incredibly well understood and popular through that public engagement. If we get that engagement right with distributed ID, I believe that there will be similar support for it across the nation. Does my noble friend the Minister agree?
On Amendment 119, on digital operational resilience, does my noble friend believe that the Government and the regulators currently have the grip that they would want across the FS sector to understand what the consequences are without the level of digital operational resilience which is required? Will she also comment on potential standards that could be drawn out in this area of DOR?
On Amendment 128, on transaction reporting requirements under MiFID and EMIR, will my noble friend comment on the existing operational burdens currently evident as a result of these requirements and whether the Government would consider looking at transaction ledgers, potentially built on a blockchain, to ease such burdens? As I have said since writing my 2017 report, Distributed Ledger Technologies for Public Good, I would never claim that DLT is the silver bullet; I would not even say that is necessarily a silver bullet, but I would say that it is surely worth a shot.
On Amendment 130, mandating a regime for open finance, noble Lords will be aware of the large success that open banking has been. We need urgently to extend this into open finance. It could cover various areas, not least mortgages and insurance, across the whole FS sector. Currently, we have what I can best describe as PSD 2 suboptimalities. What is the plan to amend PSD 2, not least in relation to an open finance regime? If the plan is not to use this current Financial Services Bill, then which Bill? If we truly had an open finance regime, we as individuals could have our data in our hands—we decide, we choose. If we do it, it will be a boon for fintech, a boon for individuals and a boon for the UK.
Amendment 133 looks at financial market infrastructure and the potential use of distributed ledger technology—DLT. Again, would my noble friend the Minister agree that there is a real opportunity to experiment and to play, to see what can be achieved through having DLT-enabled FMI? Would she further agree that a potential sandbox at the Bank of England could be of use in this area, as well as potentially with the work on central bank digital currency and other elements which come under the Bank of England’s remit?
Amendment 136B is on the report on the fintech strategic review. Ron Kalifa’s review is a fine piece of work. It had excellent chapter heads, and hundreds across the sector helped. It is packed full of detail and realistic, achievable and doable recommendations. Many of the recommendations do not require primary legislation or regulation. Does my noble friend the Minister agree that the Government should crack on with delivering those that do not? For those that do, I ask her: what is the plan? In many ways, this goes to a number of issues that have been discussed in previous groups. An elephant has been wandering around our Grand Committee, and it is the question: if not this Financial Services Bill, then which financial services Bill? If not now, when?
On Amendment 136D, on a scale-up review, does my noble friend the Minister agree that this is an opportune moment to look at this area? It has been a problem in the UK for decades. It should have been addressed decades ago and now, with Covid and Brexit, the time must be right to bring a report to Parliament which sets out the barriers, looks at all the issues around patient capital, and identifies all the gaps and the issues to scale up. There are some good examples to look at from other jurisdictions, not least the approach in Germany, and to consider all the issues around place-based growth. Does my noble friend the Minister agree that the comments in the fintech strategic review on scale-up and the need for a scale box to build on the sandbox also make sense, also tied to the fintech clusters around the country? Would she further agree that this ties into what was mentioned in the previous group of amendments: building back better and the whole levelling-up agenda?
Amendment 136E is on the modernisation of UK law to allow FMI to process digital instruments. Again, it would seem opportune to look at how we can transform our markets and bring in all the powers, with many of which we have a competitive advantage within the UK. In the previous group I mentioned the big bang in the City in the mid-1980s. If we get all these fintech changes right, we truly could have big bang 2—I do not even need to mention that it will be 2.0—for the benefit of the entire UK, not just the square mile.
Will the Minister comment on the dematerialisation of securities? Does she agree that we need to move at least at the same pace as the EU? Similar to my earlier comments, whether we like it or not this is a race, and we have the opportunity to compete and be successful in that race. Similarly, will she comment on digital opportunities with the settlement finality directive and how we could transform our approach there, and indeed the trading of tokenised securities—again, looking at how blockchain could underpin that? Lastly, what could be done in terms of post-trade processes?
Finally—I put it in this order for a reason—I come to Amendment 125 on a UK centre for applied innovation in financial services. I propose a centre at the centre, to make all this whole. I have been pushing this idea since 2015 and it is great to see that the concept of a centre is also in Ron Kalifa’s fintech strategic review. I envisage that, in such a centre, public policy issues could meet private sector solutions and academia. In an environment away from other approaches, verticals and silos, we could come up with solutions. Will the Minister comment on whether a report to Parliament on such a centre would be a good idea at this time? I believe that we need such a centre to drive across government if we are to achieve not only all the elements in the FSR, but all the potential benefits from fintech and all the new technologies from the fourth industrial revolution.
I have been involved on two occasions when cross-Whitehall working has truly come to life, and the results were sensational. The first was the 2012 Olympic and Paralympic Games. We were able to get 18 government departments to work together on a horizontal to deliver a pretty sensational summer of sport and a legacy which still beats, not just in the heart of east London but right across the country, as a result of staging those Games. It happened because the departments wanted to be involved. Similarly, over the last year, we have seen a fabulous cross-Whitehall effort on the Covid crisis. We had to, but we absolutely did. We need to reimagine the whole timetable for policy and consultation and an approach—which the centre would lead on—which put much more data and insight into decisions.
If we do not look at such a centre, and if we do not use the Bill to put into practice many of the recommendations from the fintech strategic review, when will we bring them into play? At the beginning of the Covid crisis, fintechs—often at weekends and in a short number of hours—came up with potential solutions for the effective, efficient and largely fraud-free distribution of CLBILS, CBILS, BBLS and self-employment payments. HMRC was unable to engage with them or port them into their systems. We now have an extraordinary toxic tail of fraud which will run long into the years ahead. We still have fintechs which, right now, could look back over time and solve those issues. Will the Minister comment on what the Government’s approach will be, across all departments, to engage with fintechs better? This is really a larger question: how can the Government engage with firms of all shapes and sizes, with SMEs obviously being critical to that?
I have spoken at length; I hope I have brought a picture of how these individual amendments add up to a potential transformation that we could have if we truly embraced the opportunity that fintech presents. We have the talent; we have the technology. Does the Minister agree that the time is now, and that we must act? I beg to move Amendment 112.
My Lords, it is a pleasure to follow the noble Lord, Lord Holmes of Richmond. He is, without a doubt, the House’s expert, and indeed enthusiast, on all these issues. In this large group of amendments, he has covered a broad range of issues of what is a huge area of the future of finance. He and I might differ somewhat in our balance between enthusiasm and concern about the risks, but it is really important that we are able to debate this. It is disappointing, however, to see the very small number of participants on this group, which brings up an issue that I will raise later, about the capacity of this Committee of your Lordships’ House to fulfil the role laid on us to scrutinise such large, complex, new and fast-moving areas.
Given the pressure of time, I will restrict myself to commenting on three amendments in this group. I start with Amendment 112, to which the noble Baroness, Lady McIntosh of Pickering, has also added her name. It calls for an artificial intelligence officer in companies—someone such as, I should imagine, a chief financial officer. I did a master’s thesis partly on artificial intelligence 20 years ago; I was then and remain an AI sceptic. After 20 years, we seem to be at the same point that we were then, which is “We are about to get to AI really soon, now, yes, it’s going to work”. In those 20 years, however, there has been massive progress in what is known in shorthand as “big data”, or the ability to crunch truly astonishing quantities of data and to manipulate and use it. So I suggest to the noble Lord, Lord Holmes, that perhaps what is needed is some kind of title or combination of roles that takes in both data and AI together.
On Amendment 118, the ethical use of artificial intelligence, the noble Lord has already covered this quite well, but it is important to stress that, in recent years, we have seen huge exposure of the difficulties of a sector that is profoundly unrepresentative of people whose lives it increasingly impacts. The noble Lord gave the example of soap dispensers which, in these days of Covid-19, is a potential matter of life and death; but we also need to think about access to your finances and being able to manage your finances, and even simply being able to manage them without having to take vastly more time and effort than some other person just because the AI mechanisms are discriminatory. These are all issues that need to be engaged with. I note, for example, that some of the events that have been happening recently at Google do not fill one with confidence about the ways in which the culture of the entire artificial intelligence community is moving—certainly in some areas.
I will comment finally on Amendment 119, about digital resilience. This is one of the most important factors of all. We increasingly hear talk of the internet of things, and of tying together the internet of things and fintech. I think particularly of the recent opening of a store in which there are no checkout people and no scanning and where lots of cameras watch and monitor everything that happens in that store and then a bill appears in your email later. This relates to an earlier group and our discussion on the nature of work and good work, but it also relates very much to the issues of discrimination and resilience.
I was in Lancaster a few years ago, after it had suffered an enormous flood. For several days, the city was without power and it was clear that things very nearly fell apart, due in large part to our reliance already on technology and fintech—that was how people paid for things. We need to think hard about issues of resilience in our age of shocks and how we build systems that will not be at risk of profoundly falling apart—not just the cash machines falling apart, but an inability to even obtain food.
I also need to mention the issues around bitcoin and other digital currencies. There are huge and growing concerns about their environmental impacts and indeed the sustainability of those impacts. Bitcoin and other such currencies are extremely energy-hungry by design. A single bitcoin transaction uses 707 kilowatt hours of electricity, which is the equivalent of 24 days of use by a single average US household. On an annual basis, were bitcoin alone to be a country, it would be 39th in the world in its energy consumption. These are massive changes that need to be considered in the round—the kind of triple accounting that the noble Baroness, Lady Kramer, talked about before. They are issues that deserve far more time and focus than we can give them today, but they really do need to be tackled.
I am delighted to follow the noble Baroness, Lady Bennett, and find myself in agreement with much of what she said, especially on finding a balance between regulations and introducing more fintech into financial services. I am delighted to speak to this group of amendments and must apologise from dropping out of the previous group, which goes to the question that the noble Baroness raised about the number of participants. I was participating in the Domestic Abuse Bill in the Chamber; I am sure many will be in that position, because we cannot be in two places at once, unfortunately.
I say at the outset that I yield to no one in my admiration for my noble friend Lord Holmes’s knowledge, expertise, passion and commitment in the area of artificial intelligence and fintech. I pay tribute to the work he has done in bringing forward this wide-ranging group of amendments. I am delighted to have co-signed and to support Amendments 112 and 115 and, rather than go through all the points that my noble friend raised, I shall just put a question to the Minister, when she comes to wind up this small debate. If we accept that there is a role for fintech and artificial intelligence in financial services, and accepting the competitive market, the nature of which my noble friend Lord Holmes explained, will the Minister support the amendments, or will she be able to set out today in what regard she accepts that we would like to promote the wider use of technology and artificial intelligence in the financial services sector? Given that, as my noble friend said, we have a good story to tell and do not wish to fall behind, does the Minister accept that, given the increasing number of graduates in the field of artificial intelligence, we owe it to them and to the universities that set them on this path to ensure that they have opportunities in this country to put their academic knowledge to good use? Are we not missing a trick in this regard by not ensuring that we enhance those opportunities? With those few comments, I shall be delighted to hear the Minister’s response to the amendments when she sums up.
My Lords, the noble Baroness, Lady Neville-Rolfe, was inadvertently left off the list of speakers, and I call her now.
My Lords, I thank my noble friends Lord Holmes of Richmond and Lady McIntosh of Pickering for tabling these amendments and I very much agree with my noble friend Lord Holmes on the scale of the transformation that will be driven by fintech. It is more important to the sector, in my view, than Brexit, and my noble friend Lady McIntosh’s question is therefore a good one.
I rise to speak on Amendment 115 on digital identification. I have taken a substantial interest in facilitating the provision of digital ID for several years. It is the sort of thing where the UK, with its early digital adoption and its skill in matters of security, should be ahead of the curve. Some good systems exist and have been rolled out in other European countries, but not here. This is probably because we have been waiting for the banking sector to make a decisive move.
I tabled amendments on digital identification during the passage of the Covid legislation, with support from some noble Lords here today. I did not press the matter because I was promised progress, and I had good meetings with my noble friend Lady Williams and the Digital Minister, Matt Warman MP, who published proposals for the UK digital identity and attributes trust framework on 11 February, with comments on it due from us all by tomorrow.
I thought that I would get another chance to press my case when our Covid laws were renewed but there is no sign of any such opportunity. I noted, however, that on 4 March my noble friend Lord Bethell, the Health Minister, told us that digital certificates, not physical ones, are being used for vaccines to avoid fraud, underlining the need to make progress in the financial area. The fraudulent attempt to trick my noble friend Lord Holmes in relation to his driving licence underlines exactly the scale of fraud in everyday life, an issue that is calling for digital ID.
I am disappointed about the pace of change on digital ID and although I support Amendment 115, it needs to be stronger. Waiting yet another six months for a plan is too slow. Why can we not get a grip of this important area, as we have done in the much greater challenge of vaccines? Give the job to Matt Warman with a remit to bring in digital ID for those who need it by 1 September. That would be novel provision but we need to accelerate this change.
My Lords, after all those excellent speeches, I shall try to be brief but I need to declare my interests in the register because they apply to this group of amendments.
Fintech is an extraordinary success story in the UK. In 2011, shortly after having the privilege of being appointed to this House, I sought out and invited the chief executive of every fintech in the UK that I could find to come to a meeting. We needed only a small conference room over in Millbank House. Today, the QEII Centre would not be adequate. That alone speaks to the extraordinary success of the industry, much helped by an enlightened view from the Financial Conduct Authority, which had to be dragged kicking and screaming into looking benevolently upon the industry and understanding that it required appropriate regulation to grow. However, once it got there, the FCA has been incredibly positive and powerful.
I want to plead against complacency, which is a rather British weakness. In the days before Brexit, many of our fintechs chose to expand into continental Europe, using passporting and the e-commerce directive. They also attempted to go into the United States but few have been successful, partly because of the competition there and the difference in structure. The European market is incredibly important for expansion. We also know that it has been important for recruitment, which raises many issues around visas. A single person is perhaps not so hard to attract but someone whose wife or husband is unable to work may not be so cheered in taking up a visa to come to the UK. That is an underlying problem that we face for entrepreneurs and skills.
Many issues have been raised in this debate, including AI and fintech: the two merge over some significant territory. The issues raised by the noble Lord, Lord Holmes, are important and will, I hope, be a prod to make sure that we continue to deal with them at pace and to understand that there is no easy time. Berlin has, frankly, become a centre for tech within Europe and it would not be so very difficult to swivel that around and begin to absorb fintech. We do not want to put ourselves into that situation.
I wanted quickly to make two other points, picking up on points raised by the noble Lord, Lord Holmes. Digital fiat currency is now the issue of the moment. We have a relatively small window in which to decide whether we want to play in that area in such a way as to make us a significant player. One could say that sterling is not a natural global currency and we therefore need to be first mover. Picking up on the noble Lord’s point, I hope that we will look more at that area.
AI obviously brings with it extraordinary complexities and question marks but they are issues that can all be worked through if we focus on them. They will not become easier over time; they are just as difficult now as in the future, so one might as well deal with them as is. The issues raised by the noble Lord, Lord Holmes, deserve a proper debate on the Floor of the House and I am sure will draw in many more people than those who focus on financial services issues alone. I very much look forward to that opportunity as well as listening to the Minister’s response.
My Lords, I am grateful to the noble Lord, Lord Holmes of Richmond, for tabling this group of amendments, which deal with various aspects of fintech. His contributions on this Bill have been thoughtful, and nobody should be surprised by him pushing this agenda today, given his role as co-chair of the relevant APPG. As other noble Lords have mentioned, this debate is a topical one, following the publication of the Kalifa review on fintech last month. We welcome that review and hope that the Government will support our world-leading fintech sector to continue innovating and do so in a way that spreads opportunity to all parts of the country.
When we refer to things being life changing, we often do so in a hyperbolic manner. However, it is no exaggeration to say that technological innovation in the financial services sector has fundamentally altered our understanding of and everyday experiences with money. The pace and scope of change has been incredible; the journey from cheques to mobile phone payments, for example, has been a swift one. Many young people conduct virtually all their banking activity online through the apps of high-street banks or using entirely digital services such as Monzo. Elsewhere, terms such as crowdfunding and crypto currency have become common parlance, with the emergence and increasing use of new technologies, including artificial intelligence and blockchain. The possibilities are almost beyond comprehension.
Taken collectively, the noble Lord’s amendments point to the crux of the issue: how can we maximise the opportunities that undoubtedly exist in the sector while guarding against the risk inherent in the use of new technologies and working practices? Artificial intelligence is an interesting case in point. AI tools, which are regularly deployed in a number of sectors, have the potential to assist with a variety of issues which we have covered in previous debates, such as identifying fraudulent or otherwise suspicious transactions. However, Amendments 112 and 118 refer to some of the ethical considerations that arise from automated decision-making.
In a recent piece for the House magazine, and again in his opening remarks, the noble Lord issued a challenge to the Government that they should take steps now to foster the potential for our fintech sector or risk losing talent to our competitors, falling behind in the global tech arms race and, ultimately, having to play catch-up. I am not necessarily convinced of the case for legislative requirements for reports and reviews on these issues. The noble Lord is right to seek more information on the Government’s intentions. If London is to be the world-leading financial centre that the Chancellor and many others would like it to be, how do the Government plan to strike the balance that I spoke of previously? In striking that balance, how do Ministers plan to ensure that consumers and citizens are placed at the heart of a digital finance package? With technology touching all our lives, it is only right that we should all reap the benefits of change. However, as I mentioned previously, we must also take steps to identify and mitigate the risks.
There is probably far more that could be said than time allows. I look forward to seeing how much ground the Minister is able to cover.
My Lords, I am grateful for this opportunity to discuss the important issue of the use of technology in financial services and how technological developments will continue to impact the sector. The UK has been independently ranked as one of the best places in the world to start and grow a financial technology, or fintech, firm. I reassure my noble friend Lady McIntosh of Pickering that, as the Chancellor set out in his November speech on the future of financial services, we are not complacent. We want to build on this strength and use technology to deliver better outcomes for consumers and businesses and make the most of the job opportunities that this sector presents.
Many of the questions raised by the adoption of cutting-edge technology apply across the whole economy, not just to financial services, so although I am sympathetic to the purpose behind a number of the amendments—ensuring that the UK embraces the opportunities that new technology can bring—I am not convinced that they are the best route forward at this time.
The Government and the financial services regulators are taking a number of actions in this area, including the ongoing development of open banking and open finance, and a significant piece of work on crypto assets and distributed ledger technologies. I shall speak about those when considering the amendments.
Amendment 112 seeks to require financial services firms that use AI technology to appoint a designated AI officer to have oversight of their use of that technology. As I said, this question goes far beyond financial services firms, which is why the Government have established an Office for Artificial Intelligence. We have also established the Centre for Data Ethics and Innovation, to provide independent expert advice on the measures needed to enable and ensure safe, ethical and innovative uses of AI and data-driven technologies.
Amendment 115 seeks to require the Government to publish their plans for digital identity in financial services. I reassure my noble friend Lady Neville-Rolfe that the Government recognise the value of making it quicker and easier for people to verify their identity using modern technology. That is why, following a call for evidence in 2019, the Government committed to developing a legal framework to enable the adoption of secure digital identities that can be used in the greatest number of circumstances.
As my noble friend has noted, as an important first step, DCMS recently published the prototype of a trust framework for UK digital identity, for organisations that want to provide or consume digital identity and attribute products and services. The Treasury will continue to work with industry and DCMS to ensure that the Government’s approach to digital identity reflects the needs of financial services businesses and customers.
Amendment 118 would introduce an obligation on the financial services sector to follow guidelines published by the Centre for Data Ethics and Innovation, a body that I have already mentioned. This is an independent body made up of industry experts in data and technology. It draws on evidence and insights from regulators, academia, the public and business. The CDEI does not, however, act as a regulatory body, but instead acts to provide independent expert advice on the measures needed to enable and ensure safe, ethical and innovative uses of AI and data-driven technologies. It is therefore not within its remit to mandate industry, including the financial services sector, to abide by any guidance it may publish. However, its future role is being consulted on as part of the Government’s national data strategy.
Amendment 119 calls for a review of the digital operational resilience of the financial sector. I reassure the Committee that there are already robust obligations on firms and regulators to ensure their digital operational resilience. This issue is at the forefront of the regulators’ minds in the Bank of England, the PRA and the FCA. For example, threat-led penetration testing—CBEST—is regularly used to identify vulnerabilities and strengthen finance firms’ cyber defences.
Amendment 125 seeks to require a detailed plan to establish a UK centre for applied innovation that would have responsibility for developing standards for data sharing. Amendment 130 would require the laying of draft regulations requiring financial services data providers to make data available to third-party providers. Data sharing in the financial services sector is a key priority for the Government, as is demonstrated by our progress in developing the use of open banking and open finance. The UK’s open banking standard has been widely recognised as world-leading in enabling consumers to share their data with third-party providers to increase access to products and services that better suit their needs. There is an active programme of work on open finance, which would extend the benefits of open banking to a wider range of financial products.
However, the Government recognise that increased data sharing must be balanced by the appropriate management of any associated risks. That is why the FCA recently published a call for input on open finance, to understand what role regulation should play. It will respond by the end of this month to address next steps for the delivery of open finance. On Amendment 130 in particular, BEIS has already announced plans to bring forward legislation that will give the Government powers to mandate data sharing across sectors.
Amendment 128 would require the Government to produce a report relating to the impact of transaction reporting requirements in the UK, and whether those impacts could be alleviated through the use of blockchain technology. Amendment 133 would require the Government to consider options for a pilot scheme for market infrastructures based on distributed ledger technology. Amendment 136E calls for the Government to report on legislative and regulatory changes required to enable the UK’s financial market infrastructure to process digital instruments.
The Government are keen to explore the application of distributed ledger technology in financial services. It is hugely important that the financial sector grasps the potential opportunities presented by new technologies. This technology could have a transformative effect on markets, fundamentally altering the current market ecosystem and delivering more efficiency, improved liquidity, enhanced transparency and greater security. However, this is also a new and quickly developing area and it is important that innovation does not come at the cost of financial stability.
That is why, in January, the Treasury published a consultation on crypto assets and stablecoins and, as part of this, included a call for evidence on the use of distributed ledger technology in financial market infrastructures. The call for evidence asks for industry views on what the Government should be doing, including whether initiatives could be taken forward for trialling or testing this proposal—for example, by making use of existing schemes such as the FCA sandbox. The consultation closes this month and the Government are committed to exploring how best to proceed on this important agenda.
Amendment 136B would require a report on the implications of the financial technology strategic review on financial services regulation. The Kalifa review was published last month. It set out key actions to ensure that the UK’s world-leading fintech sector continues to go from strength to strength, and makes recommendations across a number of priority areas, of which regulation is one. The UK has long been a global leader in fintech, thanks in no small part to our forward-leaning approach to regulation. For example, the FCA was the first regulator to globally implement a regulatory sandbox, which has been key to fostering innovation, by providing a safe space for firms to test new ideas. This approach has been emulated by many of our international competitors. As I have said, the Government are committed to maintaining our lead, so we strongly welcome the review and are carefully considering its recommendations before setting out our next steps in due course.
I conclude by considering Amendment 136D, which would require the Government to report on what action they intend to take to reduce scale-up gaps in the UK financial services sector. The Government already have an extensive programme of work to tackle the scale-up gap across all sectors of the economy, not just financial services. The Government have supported thousands of innovative businesses in their early stages to scale and grow, through tax incentives, grants and loans, as well as through support in accessing finance, notably though the British Business Bank’s lending and equity programmes.
I applaud my noble friend Lord Holmes for bringing this important topic to the attention of the Committee. It is an area within which the Government, as well as the financial regulators, are very active. We intend to remain a world leader in this area. This has been a wide-ranging debate and I am conscious that we are limited in time. If there are any questions that I have failed to address in detail I will write to noble Lords. In the meantime, I hope that the work I have described will mean that my noble friend feels able to withdraw his amendment.
My Lords, I thank all noble Lords who have taken part in this debate.
I say to the noble Baroness, Lady Bennett, that her point on bitcoin was well made but, for the record, it is probably worth clarifying that that is a construction only of that particular cryptocurrency rather than an inevitability of a blockchain-based system.
I thank my noble friend Lady McIntosh of Pickering for her comments and for signing two of the amendments in the group. Similarly, I thank my noble friend Lady Neville-Rolfe for her comments on digital ID. I very much take her putting some more lead in my pencil to underscore the urgency of the issue; I am in complete lockstep with her on that point. I also thank the noble Baroness, Lady Kramer, and the noble Lord, Lord Tunnicliffe, for their constructive and positive comments, and indeed the Minister for her response. With that, I beg leave to withdraw Amendment 112.
Amendment 112 withdrawn.
Amendments 113 to 119 not moved.
120: After Clause 40, insert the following new Clause—
(1) There is to be a Supervisory Board to perform the function of monitoring the FCA and PRA.(2) The Supervisory Board must consist entirely of stakeholders.(3) Recruitment for the membership of the Supervisory Board is to be conducted through open competition and the appointments are to be confirmed by the House of Commons Treasury Committee, or another relevant House of Commons Select Committee. (4) The Chancellor of the Exchequer may nominate individuals to the Supervisory Board.(5) The following are ineligible for appointment to the Supervisory Board—(a) current and past employees of the FCA and the PRA, and(b) current employees of organisations supervised by the FCA and the PRA.(6) A member’s membership of the Supervisory Board cannot exceed a period of five years beginning with the day the member’s appointment is confirmed under subsection (3).(7) The Supervisory Board has no responsibility for—(a) the day-to-day operations of the FCA or the PRA, and(b) investigations and enforcement of the rules devised by the FCA and the PRA.(8) The Supervisory Board’s functions are to—(a) provide strategic oversight of the Executive Boards of the FCA and PRA responsible for day-to-day operations;(b) inquire into the adequacy of resources used and available to the FCA and the PRA;(c) seek explanations from the Executive Board for reasons for the delay in launching and completing investigations; and(d) seek explanations from the Executive Board in relation to the efficiency and effectiveness of the FCA and the PRA in discharging their statutory duties.(9) The Supervisory Board shall have powers to—(a) demand explanations from the Executive Board on any matter affecting the protection of consumers from harmful practices;(b) secure information from the Executive Board about their transparency and accountability to the public; and(c) liaise with whistle-blowers and examine FCA and PRA policies for protecting and rewarding whistle-blowers.(10) The Supervisory Board must hold open meetings with the Executive Boards of the FCA and the PRA at least once every three months.(11) The working and background papers of the Supervisory Board must be made publicly available.(12) The Supervisory Board must lay before each House of Parliament an annual report highlighting matters of concern relating to the operation of the FCA and PRA which it has discovered in exercising its powers and functions.(13) The Supervisory Board must be consulted on appointment and reappointment of the Chief Executives of the FCA and the PRA.”Member’s explanatory statement
This new Clause would create a Supervisory Board to monitor the Executive Boards of the FCA and PRA and provide a diversity of views on the conduct of the FCA and the PRA.
My Lords, Amendment 120 seeks to strengthen regulation by empowering stakeholders to watch over the conduct of the executive boards of the FCA and the PRA, so that stakeholder interests do not continue to be marginalised.
Throughout the passage of the Bill in this House and the other place, considerable concern has been expressed about regulatory failures. In particular, the noble Baronesses, Lady Bennett of Manor Castle and Lady Bowles of Berkhamsted, and the noble Lord, Lord Davies of Brixton, drew attention to the well-known problem of regulatory capture.
Regulatory bodies such as the FCA and the PRA are too close to the interests of the finance industry, often at the expense of broader social interests. The revolving doors swing both ways as regulators come from the industry and, after a stint, they return to the industry. The regulatory capture has inflicted misery on millions, as shown by numerous scandals. There is no resolution of the HBOS and RBS frauds, there is dithering on mini-bonds, the London Capital & Finance and Connaught scandals testify to regulatory failures, the FCA was absent in the Carillion scandal, puny sanctions for mis-selling numerous financial products have not really changed corporate culture, and there has been little success in curbing tax avoidance, money laundering, and interest rate and exchange rate rigging. Indeed, there is a long history of regulators doing the bidding of the industry; my earlier interventions referred to the regulatory sympathies for HSBC, Standard Chartered bank and BCCI even though they were involved in anti-social and criminal activities.
Regulatory capture is built into the system as individuals close to the industry occupy senior decision-making positions as executive and non-executive directors. Ministers and others often argue that individuals of particular experience are needed. The focus on technical expertise inevitably privileges industry insiders and marginalises the experience of the people who are actually practised upon, who remain relatively invisible. These experienced people rarely blow the whistle on corrupt practices or check the groupthink that has become all too prevalent in regulatory bodies.
In theory, non-executive directors are expected to provide some oversight of executives of regulatory bodies, but they, too, have little independence from the industry. The non-questioning of the regulatory practices inside the regulatory boards only deepens the crisis. Even when whistleblowers give executive and non-executive directors hard evidence, their concerns are often ignored. Who can forget the heroic efforts of the late Paul Moore, who alerted regulators of problems at HBOS before the financial crash? But he was ignored. Corporate grandees at regulatory bodies all too often see the issues through the industry’s lenses. Regulatory bodies have become echo chambers of the vested interests. We are talking here not just about simple regulatory capture but cognitive capture, which standardises subjectivities and has naturalised the interests of the finance industry within the regulatory bodies.
In previous speeches, Ministers explained that press releases and annual reports hold the regulators to account. These documents are all too often sanitised and are simply full of self-congratulatory statements. They rarely draw attention or refer to the dark side of their practices. They rarely tackle issues about capture and have not prevented the FCA, the PRA and their predecessors being subservient to the interests of the finance industry.
So far in your Lordships’ House, various proposals have been advanced for external scrutiny of the FCA, such as through parliamentary committees, special reviews, standing committees and a variety of other mechanisms. These can help, but regulators also need to be invigilated from within. After all, the Nelsonian practices are incubated by organisational culture, and it is that culture that needs to be disrupted.
About two years ago, I led a research team which conducted a study of the UK’s regulatory architecture. I had meetings with many regulators, including financial regulators. They were asked to explain what their main purpose was. Without fail, they all claimed to be serving the public interest but, when probed about how they constructed and enacted a particular meaning of the public interest, they had considerable difficulties. They were unable to provide evidence to show that the public was privileged in their organisational architecture. I also remember the words of a former non-executive director of a regulatory body, who said, “The organisational culture makes it very difficult to raise questions about the conduct of senior colleagues. After all, one has to face them again and again.” Again, that ensures that the regulatory bodies are not that effective in checking their capture.
My amendment calls for a two-tier board structure for the FCA and the PRA. One tier, the executive board, is already in place and is responsible for the day-to-day operations of the regulatory bodies. The supervisory board will not interfere with that. The supervisory board will consist of stakeholders, and the amendment provides some information about its composition, appointment and role. Members of the supervisory board can come from civil society organisations, NGOs or trade unions or can be individuals seeking to improve the effectiveness of regulation to ensure that it serves the interests of the people. These outsiders will offer alternative views on environmental development, and thereby check the groupthink and temptation for the executive board to be subservient to the industry.
The independent stakeholders will exercise strategic oversight of the FCA and the PRA. They can offer their own evaluation of the effectiveness of the FCA and PRA executive boards in meeting their statutory objectives. These evaluations can have a bearing on whether executives will retain their jobs or be reappointed. This will act as a disciplining mechanism and as a bulwark against capture by the industry.
The amendment that I have proposed recommends complete sunshine, with meetings of the supervisory board and background papers being available to press and the people. If a supervisory board existed, it could have asked some very important questions. For example, it could have asked—
I am sorry to interrupt. A Division is taking place in the House. We will return in five minutes and the noble Lord, Lord Sikka, will be able to finish then. I do apologise to him.
Sitting suspended for a Division in the House.
My Lords, I think all of us who were going to vote have now done so, so I invite the noble Lord, Lord Sikka, to finish his speech and move his amendment.
My Lords, I wanted to provide some examples of the kind of questions which the supervisory board might raise. For example, it could ask the FCA/PRA executive board to explain the delay in securing compensation for the victims of the HBOS and RBS frauds—that could be one question; I shall give a few more examples. It could ask why no one at the board level of HBOS and RBS has so far been prosecuted or why HSBC took 20 hours to respond to calls on its fraud helpline—which is of concern to many people. It could ask whether it was appropriate for the FCA to commission Section 166 reports from organisations involved in antisocial practices, or what progress the FCA had made in dealing with the issues relating to banks forging customers’ signatures. It could ask what policies were being developed to deal with global warming—which, again, is of interest to many people. It could ask what the regulators were doing to protect people from predatory lending practices—payday lending problems have not gone away, as we all know—or to protect businesses, especially small businesses, from excessive charges by credit card companies. It could ask what the PRA was doing to address the shortcomings of the Basel III recommendations. Lastly, as we all know that a remit of the FCA is to promote competition in respect of financial services, the supervisory board could ask how the FCA would do that given that many towns now lack bank branches.
These kinds of probing questions do not interfere with the day-to-day running, but they provide oversight and they push back against regulatory silence and capture. A supervisory board will erode the space for regulators to sweep things under their dusty carpets. It can transform our country and ensure that regulators work to protect the people and address their concerns.
Ministers often say that regulators are there to serve the people, so what objections can there be to empowering people to sit on the supervisory boards and democratise the regulatory structures and our society? Empowering people has a much lower cost than that associated with scandals and financial crisis.
I beg to move the amendment.
My Lords, I understand that Amendment 120 in the name of the noble Lord, Lord Sikka, seeks to establish a supervisory board for the two regulators. My first thought was that the noble Lord intended that this board should function in the same way as a joint co-ordination committee, as proposed in Amendment 86 in the name of my noble friend Lord Blackwell, which we debated on Monday. The explanatory statement, however, does not suggest that the board would co-ordinate the activities of the two regulators; rather, it would simply monitor the executive boards of the regulators and provide a diversity of views on their conduct.
From his opening remarks, I understand that the noble Lord’s intention is very different. While there have inevitably been some mistakes, I do not recognise the picture that he paints. The regulators have always been willing to learn from what has not gone as well as it might have. As long as the PRA and FCA remain separate organisations with different functions and objectives, it seems to me that this supervisory board would, in effect, have two separate personae or incarnations. It would have to function separately as a supervisory board of the FCA and as one of the PRA. I think it cannot be a part of the legal structure of either regulator or of both regulators. It would seem to duplicate the arrangements for parliamentary oversight which we have discussed and on which I would ask my noble friend the Minister to tell the Committee how his thinking is developing.
The amendment refers to the executive board of the PRA, although the noble Lord, Lord Sikka, should be aware that the board of the PRA was replaced by the Prudential Regulation Committee of the Bank of England in 2017. I do not think that such a supervisory board would replace the need for parliamentary scrutiny of the regulators, which will in itself provide appropriate transparency and accountability, rather than the completely crushing, destructive oversight that I believe the noble Lord’s new board would cause. It would be a cumbersome, expensive and bureaucratic body that would have a negative effect on the future attractiveness and competitiveness of the City of London as a global financial centre, so I cannot support his amendment.
My Lords, I thank the noble Lord, Lord Sikka, for introducing this amendment. I will be brief, because it concerns accountability, which has already been much discussed; and, like the noble Viscount, Lord Trenchard, I have really only just found out the intentions of the noble Lord, Lord Sikka, regarding the amendment—I was a little blindsided about the formal structure. The accountability debate, as we have progressed through this Bill, has shown more appetite to enhance Parliament’s oversight than to create other bodies. My personal view is well known, that ultimately I think more than Parliament will be needed, but if the route of just Parliament is followed, at least to start, then it is true that some of the functions—or challenges—listed in this amendment for the supervisory board could be pursued that way.
However, the other intention of this amendment is to find a way to prevent regulatory capture from within, which I understand. The mechanism to ensure that the supervisory board itself is not captured includes having public meetings and public documents—bringing in the sunshine, as the noble Lord said. This has some merit as a way to reflect the public interest that supervisors seemingly could not define and to democratise in some way—although I am not sure whether it has been correctly formulated yet. I also share the noble Lord’s concern that press releases, annual reports and even appearances before Select Committees do not give penetration beyond the regulators making assertions. That has to be so, because there is a mismatch between reports and assertions and then what we discover further down the track about what was actually going on at the same time as we received those assertions. We have obtained penetration only through reports such as the Gloucester review.
Some stronger powers would be needed to compel better information than is currently provided by regulators and made public. That will apply to all the ideas about oversight that we have been probing. I am not sure that we have found a perfect solution or combination of solutions yet, and I suspect that we will need more than one stage to do that. However, having a mechanism to prevent regulatory capture and groupthink is necessary—never mind the revolving door between the regulators and industry and the representation of industries within the regulators’ structure. The obligation to consult the public about rules is predominantly served through responses from industry. One thing that we know about consultations is that, broadly, they run on the weighing of the responses. At least that is certainly the way when it comes to government. When you have the weight of responses from industry, the relatively few that go in from public interest bodies do not necessarily hold the weight that they should.
The noble Lord, Lord Sikka, has brought forward some issues that we have to recognise and address. We need to put them into the pot of the matters that we think about as we move forward on accountability. I maintain my view that we probably will not achieve what we want simply by saying “enhance Parliament”. We will find over time that we need something else as well.
My Lords, I very much agree with the noble Lord, Lord Sikka, that regulatory capture is a real risk. We certainly saw that prior to the 2008-09 crash, and many people would say that the soft hand of the regulator has ever since reflected an ongoing degree of regulatory capture. I am less focused on the revolving door issue but am much more concerned that the regulator says, “Wait a minute. If we go hard after whichever institution has done wrong, particularly if it is a major one and would involve going after senior people, we will disrupt financial stability. For that greater good, we must go softly and gently”. That approach has not served the industry or the country well.
We have talked extensively about accountability. I see this matter as an extension of that conversation. We have talked about the importance of accountability being extremely well informed in a way in which it is not today, and about the importance of transparency. Numerous ideas have come forward during the process of this Grand Committee. This is another, different approach that essentially tries to get to the same place —a regulator that has to be transparent and which provides genuine, sufficient and high-quality information that can be assessed by people of a relevant skills base, and that is accountable to Parliament. It should not be a regulator that just meets with Parliament and gives it an explanation once or twice a year but one that is actually accountable.
My Lords, the interesting amendment tabled by my noble friend Lord Sikka is another demonstration of the considerable unease felt on all sides of the Grand Committee about the governance of the FCA and the PRA, and their relationship with one another. The amendments moved on Monday by the noble Lord, Lord Blackwell, addressed similar concerns. The question still to be answered is: what would be the composition and terms of reference of such a supervisory board? Is the Treasury not deemed to be performing that role? How can we be confident that the supervisory board would have the authority and expertise to perform a task that my noble friend Lord Sikka rightly identified as being necessary?
I am sorry to sound like a broken record. Are not my noble friend Lord Sikka’s concerns another example of the lack of an effective mechanism of parliamentary scrutiny? Whether an effective parliamentary mechanism can be created is a question that we do not hear or have the ability to address but it must be addressed. I am sure that the Minister will agree.
My Lords, the Government agree that effective oversight of the FCA and PRA is a crucial component of our regulatory framework. Indeed, noble Lords will remember that in earlier debates we discussed the existing mechanisms to ensure effective independent oversight of the regulators by a diverse range of stakeholders. For example, both the FCA and PRA are required under the Financial Services and Markets Act 2000 to consult independent panels on the impact of their work.
I should say that in general I do not recognise the picture of regulatory capture that the noble Lord, Lord Sikka, painted in relation to our two financial regulators, although I shall of course read his comments in Hansard and make sure that I understand all that he said.
For the PRA, this involves consulting an independent practitioner panel of industry representatives, while the FCA must consult four different statutory panels, representing consumers as well as the financial services industry. Furthermore, the regulators are already under a statutory obligation to publish the results of their public consultations, including on proposed new rules.
The amendment proposes that the FCA and PRA should attend hearings in front of a supervisory board. I simply observe that both bodies must already attend such hearings before parliamentary committees, and those committees may also hear evidence from stakeholders about the performance of the regulators. The FCA, for example, must attend general accountability hearings before the Treasury Select Committee twice a year, while the PRA must appear before that committee after the publication of its annual report. Parliamentary committees of both Houses are also able to summon the regulators to give evidence whenever they may choose. For example, the CEO and chairman of the FCA appeared before the Treasury Select Committee on 1 March to answer questions on their regulation of London Capital & Finance.
The amendment proposes that a supervisory board should have the power to inquire into the adequacy of resources used and available to the FCA and the PRA. However, as we have discussed in previous debates, the Treasury already has the capacity to order independent reviews into the regulators’ economy, efficiency and effectiveness. Therefore, all told, the amendment would result in a duplication of existing opportunities for scrutiny and oversight of the regulators’ resourcing.
I realise that the noble Lord, Lord Sikka, has a close interest in the issue of supervision, but I hope I have convinced him that the PRA and FCA are already accountable in meaningful and tangible ways, and that a diverse range of stakeholders has opportunities to participate in scrutiny of their actions.
Finally, let me say that the Government are not closing down debate on these issues. As I have set out during other debates, the future regulatory framework review is already exploring how our framework needs to adapt to reflect our new position outside the EU. It would be premature to make changes to these arrangements before we consider stakeholder responses to the ongoing consultation. However, I have noted the contributions from the Committee on what form that may take. Against that background, I ask that the amendment be withdrawn.
I am grateful to all noble Lords for their contributions to the debate, and it would be helpful if I could respond to a few points. First, under my amendment both the FCA and the PRA would need a supervisory board. Indeed, if I were redesigning the entire regulatory architecture in the UK, every regulatory body would have a supervisory board, because that is the only way of putting ordinary people, who are practised upon, inside the organisation, to check the conduct of executive boards and reshape the organisational culture, which has given us such problems.
The amendment does not duplicate in any way whatever what any parliamentary committee or review board might do. The supervisory board would simply be engaged in day-to-day strategic oversight. Those people would be in the organisation on a permanent basis, observing, requiring reports, making recommendations and in many ways hoping to prevent the major scandals that we read about later—often some years later. It has been suggested that such regulatory architecture would be cumbersome and expensive. My response, as always, is, “What do you think the cost of the status quo is?” How many more banking crashes can we afford? How many more London Capital & Finances, how many more Connaughts, and other scandals, can we afford? We simply cannot afford them.
The Minister referred to how the FCA and the PRA are summoned to appear in front of parliamentary bodies—I am well aware of that. Of course, they are incredibly well coached by lawyers and PR people as to what words to say. Indeed, I have seen those things in action, even right down to what colour of suit and tie to wear. That does not amount to a scrutiny of their daily conduct. Of course, regular reports are produced, but we all know that reports are the outcome of a particular kind of politics. If we were to look at many financial enterprises’ accounts, we would not find much by way of admission about, for example, tax avoidance or money laundering, because those things are entirely filtered out. Many of those reports are ritualistic. I suggest that we need to penetrate those rituals to change the culture. That is the main point of the amendment.
Nevertheless, I am encouraged by the Minister’s comment that the Government will possibly think about the issues which have been raised today. My feeling is that these problems will not go away and that we need to insert ordinary people inside the organisations. I hope that will happen perhaps within my lifetime. For the time being, I beg leave to withdraw the amendment.
Amendment 120 withdrawn.
121: After Clause 40, insert the following new Clause—
“Country-by-country reporting requirements
(1) The PRA must include country-by-country reporting requirements in reporting requirements for banks.(2) The FCA must include country-by-country reporting requirements in reporting requirements for investment firms.”
My Lords, this amendment was not intended newly to introduce country-by-country reporting but to maintain the country-by-country reporting requirements that exist through CRD IV and retained EU law. In retrospect, looking at my amendment now, perhaps that is not quite clear.
Once again, as the statutory instrument layer is removed, it is within the purview of our financial regulators to decide that some things are inconvenient or not part of their main remit and to dispense with them. Article 89 of CRD IV requires institutions to report annually, specifying by country in which they have an establishment, information on a consolidated basis including: name, nature of activity and geographical location; turnover; number of employees on a full-time basis; profit or loss before tax; tax on profit or loss; and public subsidies received. Since then, there has been a little more general progress in country-by-country reporting, but I wanted to ensure there were no backward steps as the PRA and FCA start to write the rules.
There was much coverage at the time about the late insertion by the European Parliament of country-by-country reporting that nobody expected, but I can tell the story—which can actually be seen if we look at whole article in the directive. As was the way in trialogues that I chaired in the European Parliament, we shared out speaking. I am sure that the noble Baroness, Lady Bennett, will be pleased to hear that the Greens were leading on country-by-country reporting, but all that had been conceded to the Parliament in the trialogue was an assessment, maybe followed by legislation if appropriate.
I got a note from the Greens’ adviser saying that they were out of arguments and asking whether I could help. Maybe I should have framed that, because a Green being out of arguments is quite an astonishing thing. They knew that at that stage we had nothing to trade in return to get country-by-country reporting in. So I asked the Council and Commission to confirm that the only reason why they objected was that industry was saying that economic damage would be caused by country-by-country reporting. They both swore that that was the only reason why they were objecting to the insertion of such a clause: that they were afraid of what might happen if these really rather mild provisions were introduced.
I then proposed that the information be submitted in confidence to the Commission and that, in consultation with the regulators, there be then a general assessment of potential negative economic consequences of public disclosure, including the impact on competitiveness, investment, credit availability and the stability of the financial system. It sounds incredible, but those were the scare stories that the other institutions had bought into.
In the event that the report, including analysis based on actual data, identified significant effects, then the provision of public disclosures could be deferred or removed, but otherwise the provision would come into force in 2015. Having sworn that the only nervousness was about all these effects, they then had to concede that proposal. All that explains the content that you can clearly see in article 89 and the report in its paragraph 3. Of course, no damage was found, and the article is in force and transposed into UK law. I quote from a 2014 PWC document on compliance:
“HMT sought to adopt a pragmatic approach to provide rules that are practical and which provide some options designed to ease the compliance burden faced by businesses. This optionality has allowed HMT to implement rules that comply with CRD IV, but which, in line with broader Government policy, do not mandate reporting beyond the requirements of CRD IV.”
There are some activities that would trigger investment firms falling within scope, so it therefore seems relevant to raise this matter in the Bill, as the investment firm provisions are about to be rewritten. Of course, small and UK-only investment firms may not fall within the definitions, because I am proposing carry-over of the existing ones, but where they are larger organisations then they should continue to comply. Against that background, I hope that the Government will not say that they want to allow closing down of transparency and that the Minister will understand why I do not believe any of the scare stories about damage. I beg to move.
My Lords, it is a great pleasure to follow the noble Baroness, Lady Bowles, not just because she highlighted the role of the Greens in pushing country-by-country reporting at the European level, and the value of having a Green in the room. A great way of bringing people on board and into the debate is to ask them for help. I will briefly quote the chair of European Parliament’s sub-committee on taxation, MEP Paul Tang:
“I think transparency is a powerful tool for change because many of the current tax policies can’t stand the light of day. Just shine the light on it.”
That was from an interview with Forbes, showing how so many of the defenders of the status quo are increasingly isolated and clearly out of touch, not just with the public but with much of the establishment who realise that things cannot go on as they are.
I have been asked at public meetings over many years how we get multinationals, rich individuals and the financial sector to pay their taxes. My first answer is simple: you need a Government who want to make them pay their taxes. My second, more detailed and technical, answer is, simply, country-by-country reporting. This is something that the UK can impose without needing international agreements. I back the noble Baroness’s amendment to the hilt.
My Lords, I am going to be very brief again on this issue, because I cannot pretend that it is my area of expertise. I remember the period when George Osborne was very proud of saying that not only would he make country-by-country a requirement but that it would be published. My understanding is that that was reversed in 2016. Perhaps the Minister will correct me, but that information is no longer published at a national level and the UK has been fairly instrumental in blocking the OECD from publishing the data at an international level. I apologise if I have got that wrong: I am reading from a Tax Justice Network report. Its calculation is that, as a consequence of not publishing, and therefore not having the cleansing impact of transparency, the UK misses out on collecting something in the range of £2.5 billion in corporate taxes a year.
Again, this is not my area of expertise, but I shall wish to hear from the Minister. We as a country have always said the answer is transparency. We have insisted that publication is the mechanism for cleaning up abuse. I would be extremely troubled if the regulators felt they were now in a position to weaken in any way country-by-country reporting requirements.
My Lords, the provision of country-by-country data by banks and investment firms will be an important step forward both in combating financial crime and in addressing the vexed question of the fair taxation of international entities. These problems will be solved only by international negotiation and agreement. It is important that we are seen as an exemplar, and satisfactory country-by-country reporting is surely part of that.
My Lords, Amendment 121 aims to ensure that banks and investment firms engage in country-by-country reporting related to the provision of tax information. I am happy to assure the noble Baroness that there is no need for this amendment, because such requirements already exist for these firms in legislation.
Banks and most investment firms are already subject to country-by-country reporting requirements as a result of the fourth capital requirements directive, or CRD IV, which we implemented in the UK while we were an EU member state. This was done through a statutory instrument in 2013, and it requires firms to report relevant information on tax and revenue in each country where they have operations. This statutory instrument remains in place today. In order to implement the investment firms prudential regime, this Bill removes investment firms from the prudential requirements for banks in the capital requirements regulation—in order to allow the FCA to implement the new regime. But Schedule 1 to the Bill ensures that country-by-country reporting requirements will continue to apply to FCA investment firms.
There is an exception for small and non-interconnected investment firms. This is because this new regime aims to ensure proportional requirements for investment firms consistent with their size and activities. These firms are, by definition, small and non-interconnected with the wider financial system, and it would be disproportionate for these requirements to apply to them. This is the same approach that the EU took in the investment firms directive.
Amendment 121 would have the effect of preventing small and non-interconnected firms from being carved out in this way. For the reasons just mentioned, I do not think that this is appropriate. Therefore, when it comes to banks and investment firms, I am confident that the existing country-by-country reporting requirements for these firms are appropriate, and I ask the noble Baroness, Lady Bowles, to withdraw the amendment.
Amendment 121 withdrawn.
Amendment 122 not moved.
We now come to the final group, beginning with Amendment 123.
123: After Clause 40, insert the following new Clause—
“Regular impact assessments on the UK financial services sector
(1) Within 12 months of the passing of this Act, and every subsequent five years, the responsible Treasury Minister, Chairs and Chief Executive Officers of the Prudential Regulation Authority and Financial Conduct Authority must each separately provide reports to relevant Committees of the House of Commons and House of Lords.(2) The reports under subsection (1) must include an assessment and critical analysis of the following—(a) the costs and benefits of the financial services sector in the United Kingdom;(b) the impact of the financial services sector on inequality and economic development;(c) the impact of capital allocation decisions on real economic activity;(d) net gains or losses to the real economy caused by mergers and acquisitions;(e) risks to the real economy of write downs in the value of financial assets;(f) risks inherent in “shadow banking”;(g) the impacts of money and financial activities being moved to offshore jurisdictions.(3) In preparing the reports under subsection (1), the responsible person must consult with, and publish any submissions from, the Financial Scrutiny and Oversight Network.(4) In this section—“shadow banking” means financial services which are not subject to regulatory oversight, including but not limited to unregulated activities by regulated entities;“real economy” means the production, distribution and consumption of goods and services.”
My Lords, I beg to move my Amendment 123 and speak also to Amendment 124. They are quite large amendments, and I would say significant proposals, and I have cut down what I shall say given the time. This is based in large part on the work of the Sheffield Political Economy Research Institute, known as SPERI, and particularly Professor Andrew Baker there, and the Tax Justice Network, particularly Nicholas Shaxson.
I begin with Amendment 123, as it flows on from an earlier exchange between the noble Earl and me, which he kindly continued by letter, confirming my assumption that the source of his claim for the annual tax revenue for the financial sector of £76 billion came from a PricewaterhouseCoopers report. That is, of course, a gross figure, one that reflects income but not costs. It is in no way an impact assessment. It is a pity that the noble Baroness, Lady Noakes, is not with us now.
This amendment proposes that within 12 months of the passing of this Bill and every subsequent five years the responsible bodies must separately provide reports to the relevant committee of the Commons and Lords and consult the financial scrutiny and oversight network, which I shall get to shortly. Behind this is the fact that there is now a large body of academic literature, known as the “too much finance” literature, which supports the idea that some countries, including most certainly the United Kingdom, suffer from the finance curse: too much finance makes us poorer. It seems that the City of London passed the point of optimal finance sometime in the 1980s and has grown massively since then, harming the UK economy. The only study of which I am aware that has attempted to quantify the damage, from SPERI, estimated in 2019 that excess finance reduced economic growth by a cumulative £4.5 trillion from 1995 to 2015. That is the finance curse.
One of the easiest ways in which to think about this is in terms of its consumption of human resources. The example I will use demonstrates the reasons for the inclusion of many elements of the suggested report. A bright young woman from Newcastle finishes a PhD in mathematics. She might go into academic research, advancing human knowledge; she might go into manufacturing, refining or advancing practices and approaches to improve productivity and create new products—or there is the lure of the City, of huge salaries and bonuses and glossy excitement. She may well go on to invent the next fancy financial instrument that brings down a bank or two, after it has made a lot of money for a few people along the way. She will be based in London of course, where all that money is sucked to, including money from privatised local services, care homes, PFI schools, hospitals and roads and outsourced contracts for security and social care, from up and down the country—for the concentration of money in a small part of the country is another part of the finance curse, a major contributor to the UK’s world-leading levels of regional inequality.
In contemplating how to approach the finance curse in legislation, I might have taken a Goldilocks approach, calling for the Government to work out what is a “just right” size of financial sector for the UK, and to develop policies to deliver it. But we have referred much to another impact of the financial sector—its lobbying power, and not just with the Conservative Party that forms our current Government. So the amendment takes a softer approach. All that it asks for is accurate, independent information and transparency, something which, as the noble Earl’s reliance on figures from PricewaterhouseCoopers demonstrates, is clearly lacking.
I referred to the financial scrutiny and oversight network—the acronym FSON perhaps needs some work. In essence, it is a UK equivalent to the EU’s Finance Watch. I am sure that expert noble Lords will be aware of Finance Watch, how it came into being and subsequently acted. With the mandate of making finance serve society, it was established in 2010 by a group of MEPs including Greens, with a grant, tasked with providing advice and counter-submissions to parliamentarians on financial regulatory legislation. In particular, it was given the job of identifying, amending and removing clauses that placed excessive costs and risks on the wider public. I have shared with many noble Lords an account of its successes.
I commented earlier on the sparseness of much of the debate on this Bill and, indeed, the speed at which we are operating now. The contrast with the Domestic Abuse Bill, on which the noble Baroness, Lady McIntosh of Pickering, and I are operating, is clear. We are struggling to manage to deal with this Bill. We have a tiny, sparse crew—and that is no insult to anyone here, particularly when contrasting it with the Domestic Abuse Bill. Everyone here is working very hard but, with the best will in the world, we cannot match the kind of scrutiny and outcomes that Finance Watch has regularly delivered for the EU and that we urgently need in the UK.
We have talked a lot about regulatory and policy capture; it has been well documented. Lawyers talk about the need for equality of arms in court cases. In oversight of the financial sector and its regulation, there is extreme inequality of arms. FSON would not be a magic wand, but it would be a start. I beg to move.
My Lords, I think I understand where the noble Baroness, Lady Bennett, is coming from. I am not sure that I personally would want to let the Treasury get its hands on an assessment of the UK financial services sector, because it seems that so much depends on the lens through which you look. But what I would like to be sure of is that the relevant information and statistics—those kinds of metrics that would enable you to assess impacts on the real economy—would be available, because we have quite a number of institutions, including think tanks and academic institutions, that could do really good work on all these areas which would then inform Parliament. I would very much like that to happen.
Perhaps this all feeds back into the issue that we have looked at over and over again, which is that, absent some significant change, the necessary information is just not available, whether one is trying to look at the macro level or the micro level. That information has to be available, or else accountability in any proper sense just cannot exist.
My Lords, I think the whole subject of supervision and the presentation of information for decision-making is very important. I do not think that it could be shoehorned into this Bill. I hope that the Government will note the concerns about this and meet it where we can in parts of the Bill, but perhaps there has to be an ongoing debate, which will hopefully come to some consensus about how we improve the supervision and accountability of the financial services sector.
My Lords, I listened carefully to the noble Baroness, Lady Bennett, in her clear introduction to these amendments, and I thank her for the background briefing papers that she kindly sent me this morning. Having said that, I hope she will forgive me if I do not turn the end of these Committee proceedings into an off-the-cuff economics seminar. Indeed, she will not be surprised if, on behalf of the Government, I adopt an orthodox stance on the role of our financial services sector.
It is the Government’s firm contention that the financial services sector is a vital part of our economy. It employs more than a million people, and two-thirds of the people employed in financial and professional services work outside London. It has been a critical source of tax revenue, whatever the exact figure, especially in these difficult times.
The IMF has described the UK’s financial system as a global public good, so the Treasury is not persuaded by the arguments of the Tax Justice Network around “too much finance” or that finance is inherently a bad thing for the real economy. The financial services sector supports British businesses to expand, manage cash flow, invest in themselves and create jobs. The sector is also one of our leading industries in its own right, driven by a concentration of international, and therefore internationally mobile, firms.
Amendment 123 would require regular reports on the impact of the financial services sector on a range of topics including growth, inequality and risk. Amendment 124 would establish a new oversight body which would consider the impact of this sector on the “real economy”.
I have already set out some of the positive impacts that the sector has in its own right on growth, jobs and tax revenue in the UK. But let us not forget that it is also a sector on which all other parts of our economy rely. This means that the sector is a vital source of funding and services for other sectors of the economy. But, of course, it can also mean that if there are problems in the financial services sector, they can affect other parts of our economy. That is why the sector is so vital, and it is why I am able to assure noble Lords that the Government are absolutely committed to transparency around financial risks and welcome independent scrutiny of risk exposure.
The Bank of England’s Financial Policy Committee also has a responsibility to identify, monitor and take action to remove or reduce systemic risks. The committee was established under the Financial Services Act 2012 and must publish and lay before Parliament a financial stability report twice a year. As part of its assessment of financial stability risks, the Financial Policy Committee already considers and reports on risks arising from shadow banking, also referred to as “non-banks”. Given the rapid growth of non-banks, the Treasury has asked the Financial Policy Committee to publish a detailed assessment of the risk oversight and mitigation systems in place for non-banks. That is expected in the first half of this year.
The Office for Budget Responsibility produces and presents a fiscal risks report to Parliament every two years, and it has previously explored risks posed by and to the financial sector. More generally, the FCA and PRA are required to prepare and lay annual reports before Parliament, assessing how effectively their objectives have been advanced. These objectives are set by Parliament, as noble Lords are well aware.
Of course, as I said, one key role of the financial services sector is to provide funding to the so-called real economy. The Government have recognised that, in this Bill, the provisions on the implementation of Basel require the PRA to have regard to the likely effect of its rules on the ability of the firms affected to continue to provide finance to businesses and consumers in the UK, on a sustainable basis in the medium and long term.
The amendment refers to inequality. On that issue, I can reassure the Committee that the Treasury, the FCA and the PRA are all bound by the public sector equality duty. As part of that duty, all three are required by the Equality Act 2010 to have due regard to the need to eliminate discrimination and to promote equality of opportunity in carrying out their policies, services and functions. The FCA publishes a diversity annual report to set specific measurable equality objectives and publish relevant, proportionate information demonstrating its compliance with the public sector equality duty.
Amendment 124 mentions the impact of the financial services sector on climate change and biodiversity. The Committee will I hope forgive me if I do not repeat what I said in earlier debates on that topic, as I have already set out the actions that the regulators are taking in that space.
I turn briefly to the composition of the oversight network that the noble Baroness proposes. I am completely with her in believing that the regulators should take on board a variety of different views; it is important that they do so. In fact, the FCA already has a statutory requirement to consult independent panels representing consumers and practitioners, and the Bank of England has strong links with many academics. Of course, all the groups mentioned are able to respond to consultations, which the regulators are required to undertake, and where their responses must be considered.
As a general comment, I just say that the topics raised by the noble Baroness are those which the Treasury and the regulators consider every day when making financial services policy. I assure her that the Government are committed to ensuring that the sector has a positive impact for consumers and for the economy as a whole. No Government could do otherwise.
Given all that I have said, which I hope has provided some useful perspectives on this topic, I hope that the noble Baroness will feel comfortable in withdrawing her amendment.
My Lords, I have had a request to speak after the Minister from the noble Lord, Lord Sikka. I point out to him that we are almost out of time for this Committee tonight, and I ask him please to be as brief as possible.
We are grateful to you, Lord Sikka.
My Lords, I thank the Minister for his answer. He focused on the positive impacts of the financial sector and, when he came to addressing negative impacts, he talked a lot about risk. There is of course a lot of focus on risk at the moment with what is happening with Greensill and the shadow banking sector, but I do not believe that he really addressed the other negative impacts such as the diversion of human resources and capital. Indeed, when he was talking about the tax revenue, I thought that my PhD graduate from Newcastle would surely be working in some sector contributing in different ways.
The Minister perhaps misunderstood the issue of equality, so maybe I need to look at redrafting that. I referred to regional inequality and looked at socioeconomic and other areas of inequality.
I will speak briefly on the responses from others. The noble Baroness, Lady Kramer, pretty well said that she thought we should have exactly what I was proposing. She said that there were a great deal of resources in think tanks, academics and NGOs and that we needed to bring them together. That is exactly what is proposed in FSON—a network, not reinventing the wheel, not creating a whole new institution, but just making sure that those things are joined up and have a structure to work together to identify the crucial points.
The noble Lord, Lord Tunnicliffe, said that there were consultations on the way so we would have to wait but, with the risks—as the Minister acknowledged—and the costs of the financial sector, we really cannot wait. We have to act now. I have cited some very traditional, mainstream sources expressing great concern about the problems that the financial sector presents. We cannot have business as usual. As the noble Lord, Lord Sikka, said earlier, the cost of doing nothing is enormous. However, given where we are and the time of the evening—I have cut short my planned remarks significantly—I beg leave to withdraw my amendment, though I suspect I will bring this back on Report.
Amendment 123 withdrawn.
Amendments 124 to 131 not moved.
Amendment 132 had been withdrawn from the Marshalled List.
Amendments 133 to 136F not moved.
Clause 41 agreed.
Clause 42: Regulations
Amendment 137 not moved.
Clause 42 agreed.
Clauses 43 to 46 agreed.
Bill reported without amendment.
My Lords, that concludes the Committee’s proceedings on the Bill. I remind Members to sanitise their desks and chairs before leaving the Room.
Committee adjourned at 7.32 pm.