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As this parliamentary Session limps toward its eventual end, the Government are introducing ever more disappointing legislation. This Financial Services Bill, following on from the absurd Fiscal Responsibility Bill, completely fails to inspire or provide any confidence that the Government have finally got to grips with the changes that must be made to regulation in order to minimise the risk of another catastrophic regulatory failure, to nurture our crucial financial services sector back to health and to protect the interests of depositors and borrowers while economic conditions remain fragile.
As many noble Lords have already said, the tripartite arrangements have not worked well. It was always unclear how the Bank of England could properly carry out its objectives to achieve monetary stability and maintain financial stability, without having even the ultimate right to supervise the activities of the principal players in financial markets. With this Bill, the Government have missed the chance to restore the ultimate authority of the Bank of England as macro-prudential regulator. The Minister argues that the Council for Financial Stability will ensure that improved co-ordination between the tripartite authorities will largely eliminate the risk of failure of our regulatory system in future. The Bill does not provide enough comfort that the council will, in reality, be any more effective than the tripartite standing committee which it replaces. It permits delegation of representation by any of its members, so I think it unlikely that the Chancellor of the Exchequer, the Governor of the Bank of England and the Chairman of the FSA would really meet in person as the council, at least once a quarter.
It is clear that the Bank of England is best placed to have the primary responsibility for evaluating systemic threats to financial stability. In order to do that effectively, it needs to have clear, ultimate responsibility for macro-prudential regulation and the right to obtain whatever data it deems necessary in order to discharge its responsibilities effectively. The Government's proposal to give the FSA an additional objective to maintain financial stability-identical to that of the Bank of England-merely serves to confuse further an ambiguous situation.
However, there is a much more serious ambiguous situation which this Bill does nothing-and, I fear, can do nothing-to address. That is that the Government have signed up to the creation of three new super-regulators at the European level. In this situation, the FSA can no longer make any regulatory policy by itself. Even though its voice and influence will clearly be stronger than those of the financial regulators of very many of the other EU member states, it still will have but one vote out of 27 in deciding matters of regulatory policy, on which we will not always agree with France or Germany. That the Government have allowed this situation to arise is extremely serious, and leaves successor Governments with enormous problems. London is the only significant wholesale financial market in the EU, and is arguably the leading financial market in the world. Our regulator should clearly have the right to sit at the top table of financial regulators, alongside the SEC of the United States, Japan's FSA and other regulators of major financial markets. But the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority will claim that they should play this role; and however effective our subordinated authorities-be they the Bank of England or the FSA-may be at protecting London's interests, the loss of national control of our regulators will make it increasingly difficult for Britain to maintain, and further enhance, its role as the world's leading centre for international financial services.
The prosperity of London's key industries will become yet more vulnerable to the whims of legislators and regulators from the EU and other countries. The hedge funds directive, the Alternative Investment Fund Management Directive, is a good example. Even though, belatedly, the Government have tried to obtain improvements to protect the interests of alternative fund managers operating in the UK, the draft directive, which was published five months ago, is still regarded as unworkable as it currently stands by the European Union Committee of your Lordships' House. The committee has only this month urged that,
As the Minister knows, most of the EU's hedge fund industry is here in London. He has himself expressed concern that the directive could lead to an exodus of hedge funds and private equity funds from London. Does he accept the view of the committee not to agree the directive unless it is substantially improved? Do the Government have the power not to agree the directive, should they wish to withhold their consent?
I do not wish to say that we should set our regulatory policy in isolation, but financial markets are global, not European. It makes no sense to co-ordinate or, worse, subordinate, at the European level without first agreeing broad common standards and principles with the United States, Singapore, Hong Kong, Japan, Dubai and all other international financial centres. That is why I welcome the Government's intention to give the FSA a duty in Clause 8 to promote international regulation-though I would like to see a reference to
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As far as the separation of commercial banking and investment banking is concerned, I agree with my noble friend Lord Blackwell that sufficient protection for retail depositors probably could be obtained through strictly ring-fenced, separately capitalised subsidiaries under a revitalised and renewed supervisory regime. I remember, as a member of the Joint Committee under the noble Lord, Lord Burns, which scrutinised the Financial Services and Markets Bill in 1999, that some members regretted that the maintenance of the competitiveness of the UK's financial markets was not made one of the FSA's objectives. The need to have regard to competitiveness is merely one of the principles which should be taken into account in pursuing the objectives. Will the Minister tell the House why the Government have not used this opportunity to protect the competitiveness of the City, given all the other measures they have taken recently which threaten its competitiveness?
In 1999, the Joint Committee also had reservations about giving the FSA an objective of promoting public understanding of the financial system, the "public awareness" objective. This has never sat well with the FSA's principal activities of prudential regulation and oversight of wholesale and retail businesses. The Government have attempted to rectify this by removing the public awareness objective from the FSA and giving it to a new institution-the rather weakly named consumer financial education body.
The principal voluntary agencies-Citizens Advice, Consumer Focus, Which? and others-whose work is so valuable, especially under the current economic conditions, have all welcomed the improved focus on consumer financial education that this body should create. But, however desirable greater public awareness and better understanding of financial markets may be, have the Government considered other more cost-effective ways of supporting it? I think that the noble Lord, Lord Barnett, said the same thing. My noble friend Lord Eccles also correctly questioned the role of the public sector in this area.
We already have too many expensive quangos with a chairman, chief executive and board of directors, even if, as in this case, they are not to be regarded as exercising functions on behalf of the Crown. Would it not be cheaper and more efficient to expand the remit of Consumer Direct, funded by the Office of Fair Trading? The FSA's subvention for public awareness and its contribution to the "Money Made Clear" scheme could be passed to Consumer Direct. This might be more effective and a cheaper way of achieving the Government's purpose, helping to avoid escalation of levies payable by market participants, which also threaten competitiveness and therefore, ultimately, consumer choice.
Consumer Focus also sensibly asks why the Government have not used the opportunity provided by the Bill to strengthen further consumer protection against credit card companies, such as by requiring them to allocate a consumer's debt payments to their most expensive debt first, as is sensible, rather than last, as they mostly do at present.
Clauses 9 to 11 deal with executive remuneration. I believe that these provisions are far too interventionist, especially the power to override employment contracts. I agree that the harmful incentivisation of traders to produce substantial short-term returns in order to maximise their bonuses should be ended. However, the increased capital backing for these high-risk businesses, which is or will be required, will solve the problem by reducing the margin earned in these businesses to a reasonable level. Basically, remuneration arrangements should surely be no concern of the state, except where the state is also the shareholder, as it is in the cases of Northern Rock, RBS and the Lloyds Banking Group, among others.
Clauses 13 to 17 deal with the FSA's enforcement and disciplinary powers, which are already arguably too intrusive and dictatorial. For example, the powers to prohibit or restrict short selling are too restrictive. Surely, powers should be directed at particular instruments rather than institutions. The BBA correctly points out that the FSA's short-selling rules should not be grouped with market abuse rules. Clauses 19 to 25 deal with collective proceedings. I agree with the CBI and the BBA that we should resist the proposal to allow an opt-out approach to collective redress because it would accelerate the undesirable trend towards an increasingly litigious society.
Clause 26, covering consumer redress schemes, attempts to widen the definition of a consumer to include a person who may have contemplated using a service, which, as the BBA has pointed out, is far too broad. The clause also enables the FSA to act as prosecution, judge, jury and executioner in this area, which is unsatisfactory. There must be a system of consumer redress which is subject to independent court approval. I doubt that this Bill will ever reach the statute book, but it has been a privilege to participate in this debate and I look forward to the Minister's reply.
Lord Whitty: My Lords, I apologise to my noble friend for missing most of his opening speech, but he will be gratified to know that the two or three minutes that I heard convinced me that I need to support this Bill. I also need to declare an interest as chair of Consumer Focus. I will not have that post for much longer but my speech will unashamedly be on behalf of the consumer. Missing from this debate has been a recognition among my colleagues-with their vast experience of the City, the banking system and regulation-of the utter distrust and dismay that has affected large numbers of our citizens in relation to the banking system and how it has behaved in recent years.
As customers of banks we have seen our once respected high street banks revealed as gamblers with our money. As taxpayers we have seen the Government bail out the whole system with no very obvious return to the consumer, deposit holder and those seeking loans from the banks. We have seen state-owned banks and a change in the structure of the banking system lead to a reduction in the availability of credit, as well as an increase in the price of credit for small businesses, at a time when the official rates of interest are at an all-time low.
Meanwhile, consumer groups such as mine, the competition authorities and others have revealed the misdemeanours of banks in relation to overcharging for overdrafts, bamboozling customers over the real cost of credit cards, requiring non-effective protection insurance of unsuspecting customers and so on. In all those areas, ordinary individual consumers and small businesses are pretty much bereft of any serious means of redress that they can normally afford.
In all that, the regulators have failed. The FSA has failed not only as a macro-prudential regulator, but also as a protector of the consumer interest. Last year, Consumer Focus drew up a report of all economic regulators. The FSA turned out to be one of the least well grounded in terms of consumer experience, one of the least transparent in information to consumers and one of the least demanding of the regulated industries in relation to the provision of meaningful information to consumers.
I know that there is a view in the City and the financial commentariat-a few moments ago, it was expressed in this House by the noble Lord, Lord Stewartby, who is not currently in his place-that one of the reasons for the FSA's failure was that it has concentrated far too much on consumer protection. That is misguided. I do not exactly argue the opposite, but I believe that the FSA has failed consumers just as much as it has failed the banking system. If we are looking at changing the powers and the role of the FSA, we have to address both parts. Whatever the name on the door of the organisation, our regulatory system has to address both problems.
In broad terms I support the Bill and the provision that it makes for more effective processes and for redress for consumers collectively. I support the changes in the role and enforcement powers of the FSA and the provisions for enhanced consumer education for financial capability. The Bill also deals with abuses, such as the bewildering array of charges for store and credit cards.
I congratulate my noble friend on the bulk of the provisions in this Bill, although I have some misgivings, to which I will turn in a moment. What concerns me about bits of this debate so far-I am aware of the debate outside this Chamber, too, although this view was also expressed by the noble Lord, Lord Henley-is that there is a move, supported by the CBI, to dilute virtually out of existence the provisions in the Bill that provide for collective redress. I will not repeat the arguments made by my noble and learned friend Lord Goldsmith on the need for provision for collective redress and the desirability of having some form of opt-out redress in this system. He also dealt effectively with the argument that this will get us into an American-style class action bandwagon for lawyers.
I have not the same interest to declare as my noble and learned friend Lord Goldsmith in relation to bonanzas for lawyers, but there is no comparison between the situation provided for in this Bill for collective redress and that which prevails in the United States. We operate a different system and there are safeguards in this Bill to ensure that there is not abuse of the system. What is proposed is much needed
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On the role of the FSA, I support the creation of the proposed consumer financial education body, but I have some reservations about it. My concern is on two levels. Work has been done in the FSA-the Money Made Clear programme is particularly impressive-but we have to recognise that, despite the poor record of much of the financial sector on consumer service and consumer protection, some areas can be made more effective by a more effective organisation in this area. Also, taking what has perhaps been the most effective part of the FSA's empire in relation to consumer protection out of the FSA may make the remainder of the FSA concentrate less on consumer protection, consumer enhancement and consumer information than it currently does. That danger is enhanced by the inclusion of Clause 6, which removes the objectives from the FSA for improving financial understanding.
Is it my noble friend's intention that the FSA will no longer have any responsibility in this field? Surely this needs to run through its regulatory and supervisory interventions in any case, even though there may be a separate body delivering the education programme. It is even more incongruous that that responsibility should be taken away, because the FSA is still responsible, under Schedule 1A, for setting up the new body. In the long run, the new body should probably be entirely separate from the FSA, but that is not what the Bill says. It is also important for more general purposes that the FSA should retain some responsibility in this field.
We know that there are alternative plans around for restructuring the boundaries of regulatory activity in this area and that the Opposition-the noble Baroness, Lady Hogg, mentioned it today-would, if elected, probably abolish the FSA entirely, move micro-prudential regulation to the Bank and have a separate consumer protection agency. I could be persuaded of that, but it would, on the face of it, leave the consumer dimension of this out of the responsibilities of the main regulator, which would, under those circumstances, be the Bank of England.
I want to mention two other aspects. The first is consistency across the consumer field, both within the financial sector and more broadly. There are parts, particularly the credit dimension of financial services, which are non-mainstream-those that affect the poorest elements of our society-and there is a mishmash of regulation in that area at the moment. This applies in part to the relatively benign activities of credit unions, which the noble Lord, Lord Bew, mentioned in a Northern Irish context, but also to the less benign activities on home loans, pay-day credit, pawnbrokers and pre-payment systems, right through to illegal activities
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I also think that these provisions should extend, or be capable of being extended, more widely. I mentioned in my declaration of interest that I shall soon cease to be chair of Consumer Focus. This is because, in another part of Whitehall, as the noble Lord, Lord Henley, mentioned, the BIS department is creating a consumer advocate, whose job will subsume the job that I currently do as chair of Consumer Focus. I would like to see the consumer advocate have a role in the financial services area, but it is not clear whether that will happen. Moreover, I would like to see the collective redress provisions extendable into areas other than the financial services. I think that, at this stage of the Bill and this stage of the parliamentary process, the only way I could hope to get that would be through a relatively simple clause that would provide for an affirmative resolution to extend the provisions into other areas. I do not expect the Minister to come up with full-scale provisions in this area, but I should like to see what I have suggested reflected in the Government's intention to enhance consumer powers and the redress that consumers can obtain.
My final points relate to the structure of the banking sector. The Minister may recall that, when we suspended the competition laws in relation to Lloyds-HBOS a few months ago, and when he dealt with the Banking Act in 2009, I made a couple of suggestions. One was that those retail banks with a significant part of the market should reflect the consumer interest within their own structures, much along the lines mentioned by my noble friend Lord Sawyer. My other suggestion was that, at some time, when this crisis at least looks as though it is over, we should have a proper competition inquiry into the structure of banks. We have ended up in this country with an oligopolistic situation in mainstream banking, much of which is partly owned by the Government.
I do not know what the ideal structure of banks would be. I do not know whether the proposition of the noble Lord, Lord Lawson, on Glass-Steagall is operational in these current, modern circumstances. I do not know whether it is right that some banks are too big to fail and too big to be broken up. However, I know that the current situation is probably leading to less choice, less flexibility, more people excluded from access to financial services and the domination of our financial and banking structure by relatively few companies. We need a competition inquiry into that. It is not necessarily the case, of course, that more banks will necessarily mean more choice-we could end up with more banks and fewer branches, fewer products and fewer choices for individuals-but at least we should have a proper, thorough investigation into that. I suggest a Competition Commission inquiry into the whole area.
My final point is on the governance of banks. When I raised this with the Minister previously, he referred me, as he may recall, to the then impending Walker report. While I agree with some of the provisions
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Lord Hodgson of Astley Abbotts: My Lords, one of the interesting things about the Bill is the very wide range of submissions that have been received by me and, I am sure, by other noble Lords in advance of this debate. There are, of course, the usual suspects, but a much wider range of people and organisations has got in touch with us than is, I think, normally the case. The more direct among them have described the Bill as "a ragbag". The smoother have described it as "an eclectic mix", but whatever the adjective one uses to describe it, there is evidence of the Bill having been put together in quite a hurry and some of the Minister's opening remarks left me to wonder whether his heart was really in it.
As I came 18th in the debate, a lot of the ground has been extensively ploughed, so I shall confine my remarks to something on the architecture, something on collective claims and something on the consumer financial education council and avoid repeating a lot that has been said before. I have interests to declare as the chairman of three firms involved in private equity, specialist insurance broking and the provision of independent financial advice. They are all in the Register, but they are all firms regulated by the FSA and I am an authorised person of the authority. I was also a founder member of the Security Investments Board and subsequently, as the noble Lord, Lord Eatwell, kindly pointed out, a member of the board of the Securities and Futures Authority, one of the self-regulatory organisations replaced by the FSA under FiSMA.
This is not a cry for the re-establishment of the ancien regime. Self-regulation was tougher in its impact than is popularly supposed, as the noble Lord, Lord Eatwell, pointed out. I am afraid that it could no longer command public confidence; it could too easily be characterised as letting your friends off over lunch. However, it had at least one aspect in its favour which I agree with the noble Lord, Lord Eatwell, is worth preserving in the future: it was very close to the markets that it regulated, because it was made up of practitioners who were earning their daily bread dealing face to face with a range of firms. Therefore, one came to know quite clearly the quality of the processes and the quality of the people in individual firms, which are critical issues in a fast-moving industry. My concern is that, as we create the more elaborate structure envisaged in Clause 1, with more committees, there is a danger that theoretical discussion in the citadels of government will obscure the hard edge of developing market practice.
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