Financial Services Bill
The Committee consisted of the following Members:
James Rhys, Marek Kubala, Committee Clerks
† attended the Committee
Chris Leslie (Nottingham East) (Lab/Co-op): Good morning, Mr Leigh. What a wonderful, beautiful spring morning it is—an opportunity to turn over a new leaf and start the day by discussing clause 15 on the discontinuance or suspension at the request of the issuer in terms of the procedures of the United Kingdom Listing Authority. Many hon. Members will remember that we have had quite a long discussion about listing arrangements, so the Minister took the opportunity to present the rationale behind the clause. All that sounded fairly sensible. It might be a drafting issue, but can the hon. Gentleman clarify one particular aspect?
The clause is about allowing swifter communication of the need for discontinuance or suspension, but under what is a sensible provision as soon as the Financial Services Authority has given oral notice at the request of the issuer, presumably written notice will follow as soon as possible. As I read the provision, the Financial Conduct Authority will be required to give only oral notice? In the swift emergency procedures, will an oral notice be followed formally by written notice? I presume that that will be the case, but if the hon. Gentleman will clarify the matter, I am happy for him to write to the Committee. I am just making a procedural point, as I presume oral notice would usually have to be followed by written notice later on down the line.
The Financial Secretary to the Treasury (Mr Mark Hoban): I assume that confirmation will be required to follow up an oral notice given by the FCA at the request of the issuer rather than the FCA giving it to the issuer, but I imagine that good practice will require a written follow-up.
‘(9) The Treasury must lay before Parliament a copy of any statement published under this section.’.
‘(9) The Treasury must lay before Parliament a copy of any statement published under this section.’.
‘(8) The Treasury must lay before Parliament a copy of any statement published under this section.’.
Chris Leslie: It will not be a surprise to the Committee that the amendments relate to our general concerns about the need to improve parliamentary accountability and scrutiny of the new institutions, their reports and the functions that they fulfil. The three amendments hopefully represent an opportunity to embed those principles when it comes to the issuing of statements by the FCA. In our view, it is not enough to charge the FCA or the Treasury with publishing statements or directions simply as a way of appearing best calculated to draw it to the attention of the public. It seems rather odd in this instance for the regulator to publish a document for the benefit of the public, but not lay it before the public’s elected representatives in Parliament.
We do not want the FCA or the Prudential Regulation Authority simply to become creatures of Her Majesty’s Treasury. There is general anxiety about the Bill in that respect, so the amendments would balance the procedure in favour of a parliamentary interest and not only a Treasury interest. I have explained the rationale behind our amendments, and we hope that the Minister will understand the logic of such provisions.
Mr Hoban: I certainly agree with the hon. Member for Nottingham East that it is important, when appropriate, that documents are laid before Parliament, and the Bill identifies circumstances when that should happen. For example, under clause 77, reports into failure should be laid before Parliament, as should annual accounts. The clause is about various rules and guidance, and there is a danger that we lay too much before Parliament. We do not want to avoid parliamentary accountability or scrutiny, but there is a risk that we lose sight of the important documents that Parliament should scrutinise and those documents on which Parliament should hold the regulator to account.
Routine and detailed materials, such as rules and guidance, or statements of policy on penalties, should be published by the Financial Services Authority, but they do not need, given their volume, to be laid before Parliament. We do not disagree with the principle of laying documents before Parliament, and we have stipulated elsewhere in the Bill that that can happen, but we want
Chris Leslie: I understand the Minister’s logic, and there is some sense in making sure we do not bog down the poor old House of Commons Library with voluminous copies of notes and details of arrangements, but I have one caveat. In this particular circumstance, it might be useful to publish statements or details relating, perhaps, to poor standards or misbehaviour on the part of a firm or set of firms. Putting something in the public domain and the parliamentary domain offers useful additional censure, which could put helpful pressure on companies or regulated bodies. They will then recognise that if they fall outside the proper standards of regulatory behaviour, there is the prospect of public censure or public reporting of their behaviour. However, I understand the Minister’s point.
It is probably necessary that I withdraw the amendment at this stage, but I would place on record the fact that, in doing so, I in no way wish to downplay the strength of feeling about the need to have proper routes back to Parliament and not just the Executive. Having had the opportunity at least to discuss the point, however, I beg to ask leave to withdraw the amendment.
Chris Leslie: Again, this is a sensible clause. It relates to the powers to suspend sponsors advising issuers on listing rules and disclosure, and it makes good sense. It says the FCA can decide to suspend, rather than ban, a firm from being a sponsor or adviser to a company that is going for listing. It also brings into line the rules on individuals and firms.
I would be grateful, however, if the Minister could clarify what rights of appeal there are against an FCA decision to suspend sponsors. Is there a normal process of appeal, should individuals feel that that decision was in any way unjust?
Mr Hoban: Yes. The clause introduces new disciplinary powers. Giving the FCA the power to suspend is quite a proportionate response. The hon. Gentleman is right to ask whether there is a procedure for appealing against such a decision. Proposed new section 88B sets out the procedure and the right to refer a decision to the tribunal. I hope that reassures the hon. Gentleman that there is a right of appeal in the Bill.
Chris Leslie: The clause relates to something called primary information providers. It is sometimes difficult to step back from the language we use in such statutory descriptions and properly to understand what we are
The clause is also about the way in which the FCA will be able to monitor the behaviour of those information providers, to ensure that there are good disciplinary powers available in the event of abuse of those arrangements.
I am sure that the Minister is aware of concerns that were expressed during consultation, in the draft Bill process. I do not necessarily share the views in question, which were to do with the costs involved in appointing skilled persons—primary information providers. Organisations that may have conducted such business previously are worried that a series of onerous tests and hurdles will be put before them, and the costs may be passed on to consumers, and so forth.
I think it is entirely proportionate to require the meeting of thresholds in standards and tests by individuals who are fortunate enough to be categorised as regulated, or who are the persons referred to in the Bill for the purposes set out. However, it is important to establish that the costs will not be so onerous that they will crowd out those who want to carry out the business in a professional way, to high standards.
What regulatory assessment has been made of the costs that are likely to be involved? Will the Minister give us a sense of the typical costs to a typical issuer of financial instruments, given the change of circumstances under the Bill?
Mr Hoban: The clause relates to the regulation of primary information providers. There are a number of new services that enable information about financial instruments to be disseminated broadly. While that is primarily the responsibility of the issuers, they use those additional channels to get the information out.
The hon. Member for Nottingham East was right to highlight concern about skilled persons. That is why, as a result of the consultation process, we have dropped the relevant requirement from the clause.
At the moment the information services are not regulated by the FSA. The Financial Services and Markets Act 2000 does not permit that; but there is a list of criteria that someone must satisfy to be such an information provider. The clause will put that in a more formal setting, so that the service is now approved. The clause includes rules to enable that to happen. In a sense, what is happening is the formalisation of the process that applies already, and giving the FCA some sanctions to apply where one of the information providers breaches the rules.
I think that the regime is proportionate. A lot of reliance is placed on the services in question, to provide accurate and timely information, and the approach is the right one. The hon. Gentleman raised the matter of cost-benefit analysis, and the cost-benefit analysis rules always apply to the listing process as well, so we need to make sure a proportionate regime is in place. I hope that that will reassure the hon. Gentleman.
Chris Leslie: That is very helpful. It is important that the Minister has said that provisions in the Bill about proportionality and burden will also apply to clause 17. As I have said, I do not feel concerned about the matter, but I thought that those who are following the proceedings might want that point to be made. I am content with the clause as it stands.
Chris Leslie: The clause is very short, and it would change section 91 of the Financial Services and Markets Act 2000 with respect to penalties for breach of part 6 rules. Those rules are mostly related to listings arrangements. It brings into focus the general question of the appropriate nature of penalties for breaching any series of Financial Conduct Authority rules. It is appropriate to discuss only listing arrangements in relation to the clause, but we could characterise the provision as a statute of limitations.
Under part 6 rules, the listings authority—in this case, the FCA—would issue a warning notice, and the clock would start ticking over a period during which a judgment must be taken and a penalty for an infringement be made. Presently, after a two-year period has expired, no penalty can be applied. The Bill will extend the statute of limitation to a three-year period. Will the Minister explain the rationale behind choosing a three-year rather than a two-year limit? Why has he not gone for a four-year limit? Some cases are exceptionally complex. If they end up being referred to the legal system, the process might be onerous and voluminous and take a considerable period of time. Why did he not take this opportunity to change the limit to four years for safety’s sake? Why has a three-year limit been chosen?
My other question for the Minister is about the nature of penalties, particularly those relating to listings infringements. What sorts of penalties can be applied? Are they simply fines? Can people be struck off? Can people even be referred to other areas of civil or criminal cases? What powers will the FCA have in relation to breaches?
Mr Hoban: Let me deal with the hon. Gentleman’s last point first, then I shall return to the two or four-year issue. He has asked about the penalties that can be imposed under section 91. The provision allows the Financial Services Authority to impose penalties for breaches of part 6 rules following a procedure. Penalties are in line with the usual FSMA model, and include warning notices, decision notices and references to the tribunal if a person does not agree with the FSA’s decision. The full range of powers is available, as it would be for any other breach of FSMA, so I hope that reassures him.
The hon. Gentleman has made an interesting point about the time periods. If we did not make the amendment there would be a discrepancy in proposed new sections 88A and 89Q, which refer to a three-year period, so clause 18
It is worth reflecting that when the Bill that became the Financial Services Act 2010 was debated before the general election, clause 17 proposed increasing the limitation period from two years to four years. People were concerned that extending the period to four years was unreasonable. My noble Friend Baroness Noakes tabled a Lords amendment to stop the increase in limitation period, but the hon. Gentleman’s noble Friend, Lord Myners, tabled another to increase it to three years, so he rowed back a bit on the four-year extension. The amendment proposed by Lord Myners was accepted in the wash-up. It was a Government amendment. The amendment tabled by my noble Friend Baroness Noakes was not accepted; some things do not change, I am afraid. I think there is consensus on three years being a reasonable period.
Chris Leslie: I understand that there has been a history of debate in the other place on the matter, and I do not want to duplicate those debates. However, it is important to put on the record that a three-year process sounds reasonable. I hope that the Minister will keep the issue under review in case we find people escaping the system, perhaps because they have dawdled for too long.
Chris Leslie: This clause, which is even shorter than the previous one, will repeal section 95 of the Financial Services and Markets Act 2000. My powers of deduction tell me that the clause is very much linked to the more mammoth clause 22, which will introduce new arrangements for the regulation of a number of behaviours and practices by the regulators generally. We are deleting provisions in existing legislation at this point of the Bill to have new provisions inserted later; I think that is the case.
Section 95 of the 2000 Act is currently designed to ensure that where a provider or practitioner’s actions have a significantly adverse effect on competition, either by exploiting or unfairly dominating the market, action may be taken by the regulator to check that behaviour. There will be new arrangements in clause 22 to replace those. We could discuss them either now or later, but given that there are a number of other things to be discussed under clause 22, will the Minister explain now the difference between the competition powers that are being abolished by clause 19 and those to be introduced? How will improvements be made by his intended replacement provisions?
Mr Hoban: I am sure that some inspiration will flow, as most of my speaking notes relating to competition are on clause 22. I am happy to come back in clause 22 to talk about the new competition arrangements, which will make quite an important change to the interrelationship between the OFT and the FCA. There are amendments in a later group on the memorandum of understanding between the FCA and the OFT.
Returning to where we were on Tuesday night, as part 6 was done on a stand-alone basis, just in case the UKLA was moved from the FCA’s remit, it has particular competition powers, which are no different than those elsewhere in FSMA. It was just in case we needed to do a lift and shift to another body. Now that we have determined that the UKLA will be a permanent part of the FCA, it will be subject to the same competition powers that apply to the FCA more broadly. Whereas historically the OFT has played a greater role in competition in financial services, as we have given the FCA the competition objective, the FCA will now play a greater role in pursuing competition in financial services. That is an important change in the new regime compared with the previous one.
However, the OFT still has an important role. It may scrutinise the rules of the regulators to consider what impact those rules will have on competition. There is also an enhanced referral process from the FCA to the competition authorities to deal with certain market structure issues. The Bill gives the FCA much greater powers on competition, but at the same time retains a key role for the OFT in scrutinising the role of the FCA and the Prudential Regulation Authority. There are also new referral rules in place, which will help overall and lead to a greater strengthening of the role of competition in financial services. All members of the Committee would share the objective of wanting to see a more competitive system. The FCA has a key role to play in that. We cannot, however, overlook the importance of the OFT in this.
Chris Leslie: I appreciate that we will be discussing some of the competition issues in the debate on clause 22 in the not-too-distant future. One example of the strange, convoluted way in which the Bill has been framed is that clause 19 takes out particular provisions, only for those to be replaced later on. I understand that that is broadly a function of the fact that there was a carve-out around listings activities. In extricating the particular legislation around that, the deletion of certain provisions in FSMA arrangements need to be made by this particular clause, and that makes sense. I was seeking assurance from the Minister that the regulator would apply broadly similar competition principles to listing authority activities, as compared with other regulated activities. He gave that reassurance, which will be useful for those involved in those listings activities. I am grateful for that clarification.
Chris Leslie: Clause 20 is still in part 2, but we are now discussing the control of business transfers. From time to time companies will undertake certain sets of financial activities, but may wind those down or have those provisions transferred by acquisition or by merger with other organisations. The regulator therefore needs to ensure that, if a certain type of business activity is being transferred from one company to another, it has the capability of checking the wherewithal of the new provider to oversee an appropriate regulated set of activities under the new controlling arrangements of that particular company.
Section 104 of the Financial Services and Markets Act 2000 has a set of arrangements that apply to both insurance business transfers and banking transfers. That is where, as the Minister will know, things get slightly complicated, because, as I understand it, the arrangements on banking transfers never came into effect. Will the Minister explain the particular history of why the banking transfer arrangements under section 104 of FSMA have never been triggered, while the arrangements for insurance business transfers have? That is a strange anomaly. On the statute book there is the capability for the business transfers of both banking and insurance to be regulated, but currently only the insurance provisions are extant. Why is that? Why has the part of FSMA relating to banking business transfer arrangements not been commenced?
As a corollary of that, why does the Treasury think that this partial commencement for insurance business transfers is not safe enough to leave alone? Why do we need to replace it? In what circumstances might banking business transfer order-making powers be required? I do not understand why the arrangements will not all be written into the new legislation. As a layman, I think that there might be circumstances in which banking business transfer schemes need to come under the ambit of the new regulators. There must be a reason why such an arrangement has not been made, but why fetter the Treasury’s ability to trigger it in future?
Although that may be covered in another part of the Bill, I would be grateful if the Minister explained it because, from time to time—recently, it has happened a lot—aspects of banking businesses move from one company to another. For example, international banking organisations purchase British banking activities, and we might want the regulators to ask questions about that. That must be covered by other provisions, but I want an explanation from the Minister.
Mr Hoban: Part 7 of FSMA provides for the transfer of insurance or banking businesses through a process of court approval. The process is used extensively for insurance companies, so much so that the tax rules dealing with it are complex, but it has not been used for the transfer of banking businesses. I understand that the courts are normally used for the internal reorganisation of insurance companies, while banking businesses are normally transferred through a takeover—for example, Lloyds Banking Group’s acquisition of Halifax Bank of Scotland.
Court-based processes are used extensively to transfer businesses in the insurance sector and as part of internal reorganisations of such businesses. Similar provisions tend not to be used in the banking system, because transfers are done in other ways, including by acquisitions—I have mentioned Lloyds Banking Group—and through the rules in the Banking Act 2009 about arrangements for failing banks. I have received an interesting note; it is always helpful to have illumination. Court processes are widely-used for insurance companies, and therefore the risk arises that they are seen to be compulsory for bank transfers. It is not compulsory for banks to use them, and the provision gives banks other options for making transfers.
Chris Leslie: I am sorry to trouble the Minister, but I am still confused about why court processes apply to transfers of insurance businesses but not to banks, and I do not understand the rationale for the different threshold. We might have assumed that a more thorough process for banking transfers was necessary, given the experience of recent years, but possibly I have missed something. It seems an unusually disproportionate arrangement, given that it was originally envisaged in FSMA that both would be subject to a court process. I accept that under the previous Administration the arrangements on banking transfers were not commenced; but there must be a logic for the applicability of court process to insurance as opposed to banking.
I worry that if we do not give the new measures the backstop capability of allowing the court process to apply to banking transfers, should that situation be needed—should the Treasury want to trigger it at a future date—we may be tying the hands of public policy. It might be sensible to keep the arrangement in reserve.
Mr Hoban: Let me have another crack at this one. There are situations in which policy holders might have to give consent to a transfer of insurance business. The court process can be used in that situation, so the court approves the transfer without an insurance company having to seek the consent of every policy holder. That process is more economical for some. For smaller firms it may be the other way round, so that they feel it may
Banks still have the option to use the court process. We are trying to be clear about the fact that there is some optionality around banks. We are not taking the power out completely; it is an option for banks, not something that is required. I hope that that clarifies the point.
Mark Durkan (Foyle) (SDLP): I wonder whether, in the context of the Minister’s remarks, he will shed some light on how what he has said might be relevant to the banking market in Northern Ireland? For instance, there may be issues to do with businesses transferring, and people might say it was disproportionate in the context of that market to insist on court referral, whether it was parts of Irish-owned banks that were up for sale, or, indeed, wholly-owned subsidiaries of RBS.
Mr Hoban: The provisions apply across the United Kingdom, and it would be a matter, then, for individual banks to make the judgment about the appropriate route. There will always be protections for current account holders in those situations.
Chris Leslie: I am grateful to the Minister for clarifying that. I think that he was saying that there will continue to be residual possibilities for bank transfer arrangements to be scrutinised in a court process, should those circumstances arise. I am not quite sure where else in the Bill it crops up, but I accept the Minister’s assurance that the provision is there and, with that, the Minister’s logic, on the face of it, about clause 20.
‘( ) a decision to take action under section 249;’.— (Mr Hoban.)
‘(2A) The FCA may make rules or apply a sanction to authorised persons who offer credit on terms that the FCA judge to cause consumer detriment. This may include rules that determine a maximum total cost for consumers of a product and determine the maximum duration of a supply of a product or service to an individual consumer.’.—(Chris Leslie.)
Chris Leslie: Further to that point of order, Mr Leigh. This is one of those anomalies where we debate an amendment and vote on it later. I tabled amendment 87, which is also in the name of my hon. Friend the Member for Kilmarnock and Loudoun, the hon. Member for Foyle and, interestingly, my hon. Friend the Member for Walthamstow (Stella Creasy), who is not a member of the Committee. The amendment, on which we seek to divide the Committee, relates to regulation of high-cost credit.
Chris Leslie: On a point of order, Mr Leigh. I do not think that clause 21 has been debated. I thought we had agreed to allow schedule 6 to stand part of the Bill, but clause 21 has not yet been debated.
Mr Hoban: On a point of order, Mr Leigh. If the hon. Member for Nottingham East has points to make about clause 21, I am happy for him to write to me, and I will write back to him and circulate the details to the Committee.
Chris Leslie: Further to that point of order, Mr Leigh. I assumed that we had allowed clause 20 to stand part of the Bill and that schedule 6 had stood part of the Bill without debate, but that the question on clause 21 had not been put. I am sure that it is my mistake, and I will take up the Minister’s invitation. It was a minor question.
‘(c) provide for a legal sanction based approach introducing a strict liability for executives and Board members.’.
‘(c) provide for a requirement that an employee representative should be a member of the remuneration committee of a relevant body corporate; and
(d) provide for a requirement that the remuneration consultants advising on remuneration policy shall be appointed by the shareholders of a relevant body corporate.’.
Chris Leslie: We come to amendments 149 and 150 to clause 22, which relates to rules, guidance and the rule-making powers generally available to the FCA and the PRA. The clause deals with significant provisions under the Bill, and we shall be discussing several of them. I wish to place on record my regret that the Bill has not been drafted in a way that would bring fresh provisions into legislation, but cuts and pastes various arrangements from the Financial Services and Markets Act 2000, thus making it quite difficult for the lay person to discern which elements of FSMA are being transferred into the new arrangements and which elements might be disappearing or are being supplemented.
Amendment 149 relates to the important matter of the legal sanction and regulation of bank board members and senior banking executives in relation to their behaviour in the regulated context. As the Committee will know, the failure of a financial institution, unlike other companies where a failure affects only the shareholders, can cause widespread economic instability and, sadly, detriment to taxpayers. Under the rules of limited liability, shareholders suffer capital loss, but directors’ liability is often limited to the loss of £1 or sometimes not even that.
For non-financial companies the possibilities of failure are widely understood, but when a bank fails and the taxpayer loses significant sums in rescuing that institution, members of the public ask not unreasonably about the directors and senior executives who had legal responsibility
The Committee will remember that the Financial Services Authority published a report on the failure of the Royal Bank of Scotland. Several issues arose from the report, but the FSA suggested two options, one of which was that
“A legal sanction based approach, introducing a currently absent ‘strict liability’ of executives and Board members for the adverse consequences of poor decisions, and making it more likely that a bank failure like RBS would be followed by successful enforcement actions, including fines and bans.”
It also recommended an “automatic incentives based approach”. That is, essentially, the flipside of the coin, and puts the spotlight on the remuneration, incentives and bonus schemes that so many executives have felt compelled to chase over many years, often, sadly, at the cost of neglecting their responsibilities to wider society. The FSA therefore said that it also wanted changes to the incentives-based approach in organisations and that that
“would not rely on bringing enforcement cases which proved personal culpability, but would rather seek to ensure that executives and Boards automatically faced downside consequences from bank failure.”
In recent times, we have seen a welcome change at certain banks, which have clawed back bonus arrangements because of the failure to fulfil obligations. Unusually, and in a novel way, Lloyds Banking Group recently clawed back some of the bonus arrangements of previous directors as a result of the failures in payment protection insurance arrangements. That was an important signal. Other banks—I will not speculate which ones—have thought about that but not gone down the same route, although one has followed suit.
Mark Garnier (Wyre Forest) (Con): I agree with the overall thrust of the hon. Gentleman’s remarks—that there should be a commensurate liability to match the potential benefits—but does his description of how Lloyds bank has intervened not demonstrate how such things can happen without necessarily being provided for in the Bill?
Matthew Hancock: As the hon. Gentleman knows, I take a close interest in them. The FSA has introduced clawbacks, but one reason why they have not been used much yet, although we saw them used for the first time at Lloyds, is that they need to be written into employment contracts, and contracts have started to change only recently, under pressure from the new Government. Does the hon. Gentleman not expect evidence of clawbacks to grow over time, as new employment contracts are struck and old ones come to the end of their lives?
Chris Leslie: Yes, I hope that would occur, but I am not sure we can leave it entirely to the market. There is a role for the regulator in shaping the arrangements, in cajoling and persuading institutions to go down that route, and, if necessary, in requiring arrangements to be put into contracts. We have an opportunity to take action in the Bill to take forward some of the FSA’s recommendations, and that is the rationale behind amendment 149.
Mark Durkan: Does my hon. Friend not recognise that, in some of the recent, publicly noted clawbacks, or cases where executives have forfeited bonuses, many people in the industry have argued that it was unfair that such things have had to happen to executives simply because of the ownership conditions. They said that created an unfair situation for executives in one bank, compared with executives in other banks. If there is going to be a level playing field, the regulator should surely have a role.