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8.57 pm

Division on Amendment 29.

Contents 27; Not-Contents 48.

Amendment 29 disagreed.

Division No. 1


Anelay of St Johns, B. [Teller]
Cope of Berkeley, L.
Craigavon, V.
Dixon-Smith, L.
Dundee, E.
Eames, L.
Eccles, V.
Fookes, B.
Henley, L.
Higgins, L.
Hodgson of Astley Abbotts, L.
Howard of Rising, L.
Lucas, L.
Marlesford, L.
Montrose, D.
Morris of Bolton, B.
Noakes, B.
Northbrook, L.
O'Cathain, B.
Seccombe, B. [Teller]
Sheikh, L.
Skelmersdale, L.
Stewartby, L.
Taylor of Holbeach, L.
Ullswater, V.
Waddington, L.
Walpole, L.


Andrews, B.
Archer of Sandwell, L.
Bach, L.
Bassam of Brighton, L. [Teller]
Bilston, L.
Brett, L.
Brookman, L.
Chandos, V.
Clark of Windermere, L.
Crawley, B.
Davidson of Glen Clova, L.
Davies of Coity, L.
Davies of Oldham, L. [Teller]
Deech, B.
Donoughue, L.
Dykes, L.
Evans of Parkside, L.
Farrington of Ribbleton, B.
Faulkner of Worcester, L.
Finlay of Llandaff, B.
Foster of Bishop Auckland, L.
Foulkes of Cumnock, L.
Graham of Edmonton, L.
Haskel, L.
Haskins, L.
Hollis of Heigham, B.
Howarth of Breckland, B.
Hoyle, L.
Janner of Braunstone, L.
Jay of Paddington, B.
Jones, L.
Jones of Cheltenham, L.
Jordan, L.
Judd, L.
Layard, L.

15 Mar 2010 : Column 546

Lea of Crondall, L.
Massey of Darwen, B.
Meacher, B.
Myners, L.
Nicholson of Winterbourne, B.
Patel, L.
Pendry, L.
Radice, L.
Rees of Ludlow, L.
Rosser, L.
St. John of Bletso, L.
Snape, L.
Tunnicliffe, L.
9.08 pm

Amendments 30 to 32 not moved.

Clause 5 : Financial stability objective

Amendment 33

Moved by Baroness Noakes

33: Clause 5, page 4, line 8, at end insert-

"( ) proceedings of the Council for Financial Stability as set out in section 2 of the Financial Services Act 2010"

Baroness Noakes: My Lords, I thought that the Committee might like to move on to Clause 5. Amendment 33 is the first of a small series of amendments which will tease out the relationships between the Bank, the FSA and the Council for Financial Stability.

When we looked at amendments to the earlier clauses we were looking at the interrelationships from the perspective of the council, which is where they come together. I now seek to probe the interrelationships when seen from the other end of the telescope, namely from the perspective of the FSA or the Bank.

Clause 5 amends the Financial Services and Markets Act 2000 and sets out a new objective for the FSA to contribute to financial stability. Clause 5(3) expands on the financial stability objective, and sets out in subsection (2) of new Section 3A of FSMA various things to which the FSA must have regard. My amendment adds to that list and says that in considering the financial stability objective, the FSA must have regard to the proceedings of the Council for Financial Stability.

In another place, the Minister said that the amendment was unnecessary and that nothing was to be gained by it. He said:

"The FSA will clearly take account of the discussions in the council when considering how best to meet its objective of contributing to financial stability".-[Official Report, Commons, 25/1/10; col. 632.]

This is a traditional ministerial defence of government drafting. First you say that it is unnecessary and then say that it will happen anyway. Some of us have become cynical about this defence. The noble Lord, Lord Myners, used it last year in connection with the Banking Bill debates, when he resisted the substance of what is in this clause. Last year he said that the FSA did not need a financial stability objective because it was already implicit in its market confidence objective. He said that a financial stability objective was not appropriate. If something is not in plain language in the Bill, we cannot assume that it will be taken for granted. The Minister cannot give a Dispatch Box assurance about what the FSA will or will not do, and so we have to judge the Bill for what it says, not what the Minister would like it to mean. I beg to move.

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Lord Myners: Amendment 33 would require the FSA to have regard to the proceedings of the Council for Financial Stability when considering its financial stability objective. I can agree with the spirit of the amendment but I do not believe that it is necessary. The Government are creating the Council for Financial Stability precisely to be a forum for effective co-ordination between the authorities responsible for financial stability. Clause 1(3) is clear that the council has to monitor and co-ordinate, and paragraph 17 of the terms of reference clearly specifies that the council will consider the financial stability strategies of the FSA and the Bank.

I am confident that the FSA, like the Bank, will work in close partnership with the other authorities in the work of the council. For this reason, we fully expect the FSA to take due account of the council's discussions and that the actions of all the authorities will be informed by the views, actions and approach of other council members.

In addition, paragraph 26 of Schedule 2 to the Bill amends Section 354 of FSMA, which concerns the FSA's duty of co-operation. Paragraph 26 will extend this duty by adding a new subsection which states:

"In pursuing its financial stability objective, the Authority must take such steps as it considers appropriate to co-operate with other relevant bodies (including the Treasury and the Bank of England)".

Therefore, nothing would be gained by adding the proceedings of the council to the list of matters to which the FSA must have regard. I therefore invite the noble Baroness to withdraw her amendment.

Baroness Noakes: Could the Minister direct me again to the reference in Schedule 2?

Lord Myners: I referred the noble Baroness to paragraph 26 of Schedule 2 to the Bill.

Baroness Noakes: My Lords, clearly paragraph 26 will repay most careful study, which I undertake to do before returning to this part of the Bill. I beg leave to withdraw the amendment.

Amendment 33 withdrawn.

Amendment 34

Moved by Baroness Noakes

34: Clause 5, page 4, line 9, after "Treasury" insert "and the Bank of England"

Baroness Noakes: I shall speak also to Amendment 105. Under new Section 3A(3) of FSMA, which is inserted by Clause 5(3), the FSA is to determine and review its strategy in relation to its financial stability objective and must consult the Treasury. When the Bank of England was given its financial stability objective in last year's Act, an identical clause was set up, with the Bank consulting the Treasury on its financial stability strategy. It is clearly right that each body should develop its own strategy because each has its own responsibilities and powers. My amendments do not call for a common strategy but for the FSA and the Bank to consult more widely than the Treasury. If there is to be any meaning to tripartite working, it seems odd that each one must consult the Treasury but not each other.

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9.15 pm

Amendment 34 calls for the FSA to consult the Bank of England on its strategy, and Amendment 105 returns the compliment by making the Bank consult the FSA on its strategy. The draft terms of reference for the Council for Financial Stability has a go at this area. It says that the council,

So we have the Bank and the FSA working on their own strategies and consulting the Treasury, and then those strategies are put before the Council for Financial Stability, which might challenge them or even co-ordinate them. Will the Minister explain what happens if there is a challenge? Two of the three council members have already been involved in the preparation of the strategy. At a council meeting, presumably it is only the third member who will challenge because it is only his organisation that has been excluded from the preparation process.

Will the Minister explain what the co-ordination of the strategies is about? If the FSA and the Bank have individually prepared their strategies in divergent ways, what is co-ordination about? Is this code for sending one or both of the FSA and the Bank back to the drawing board? All this is very mysterious. No further light was shed on Report in another place when, in response to the equivalent amendment, the Minister said:

"In our view, it is unnecessary"-

that useful ministerial concept again.

My amendments are not about ex post consideration but about involvement ex ante in the development of strategies. As the Committee will be aware, our policy would eliminate the gap between the FSA and the Bank of England in relation to financial stability. In our world one body would produce a holistic strategy for financial stability and would, of course, consult the Treasury. In the fragmented world of the Government's creation, the Bill misses opportunities to close the gaps between the tripartite bodies. I do not believe that this is a sensible way to proceed even within the Government's own construct of the tripartite authorities and financial stability. I beg to move.

Lord Higgins: My Lords, we seem to be getting in a position where everyone is looking for stability in the financial system and everyone is consulting everyone, except for some reason at this point the FSA consults only the Treasury and not the Bank of England. However, the real trouble with this arrangement is that one really does not know where the buck stops at the end of the day. It is dividing all over the place, everyone is consulting with everyone, but no one appears ultimately responsible. Which of the three is it?

Lord Hodgson of Astley Abbotts: My Lords, I cannot see how the Government can reasonably resist this amendment. Either we will have a position where the Treasury is calling the shots all the time or we will have

15 Mar 2010 : Column 549

a tripartite co-ordinating structure, which I think is the Minister's plan. He keeps telling us that the council has no Executive responsibility and is a co-ordinating body. The authority does not have to consult the other two members; only one of the other two members is consulted. Surely the very essence of the co-ordination that the Minister has in mind should require all three parties to dance at the same time.

Lord Howard of Rising: My Lords, when the Minister answers, it would be helpful if he could tell us where the buck stops, as my noble friend Lord Higgins has asked. One of the weaknesses of the tripartite system is that there is no buck-stopper around. The Minister should look very seriously at this amendment. Anything that welds the tripartite authority together to make it a more unified structure whereby each part supports the others rather than argues with them is to be applauded.

Lord Myners: My Lords, Clause 5 requires the FSA to prepare a financial stability strategy and, in doing so, to consult the Treasury. Amendment 34 would require the FSA also to consult the Bank of England in this work.

The amendment is not needed, because the effect that the noble Baroness seeks is already provided for in the terms of reference of the Council for Financial Stability. The draft terms require the council to consider the financial stability strategies of the Bank and the FSA. Therefore, the Bank will have a consultative role.

Nevertheless, it is right that the FSA should be required by the Bill to consult the Treasury. As the UK's finance and economics ministry, it is ultimately accountable to Parliament and responsible for decisions that have an impact on public finances. I hope that this provides sufficient reassurance to the noble Baroness that her amendment is not needed, and I invite her to withdraw it.

Amendment 105 seeks to amend Section 2A(3) of the Bank of England Act 1998, which provides that the Bank's strategy in relation to financial stability shall be determined and reviewed by the Court of Directors of the Bank of England. Currently, the court must consult the Treasury before it sets the strategy. The new clause proposed by the amendment would require the Bank also to consult the FSA in addition to the Treasury when setting the Bank's strategy. I reassure noble Lords that this amendment is also unnecessary. The role of the Council for Financial Stability is to act as a forum for discussion and co-ordination of the Bank's and the FSA's financial stability strategies. As noble Lords are aware, the FSA is one of the council's three members and will therefore take an active role in scrutinising the Bank's strategy for financial stability. However, again, it is right that the Bank is required by Section 2A(3) of the Bank of England Act to consult the Treasury, since the Treasury is ultimately accountable to Parliament and responsible for decisions that may have fiscal consequences.

Noble Lords have asked who does the challenging when two parties have already agreed, but I think that it is obvious: it could be one of the two parties to which the noble Baroness referred, having not reached agreement with the other party, or it could be the third party. That is precisely why the Council for Financial

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Stability is meticulous in its requirement not only that the minutes be published but that attributable comments be included in them as agreed by the three members of the council. That will be the test in teasing out any difference of opinion that might arise.

The noble Lords, Lord Higgins and Lord Howard of Rising, again asked who is in charge or who is responsible. We covered this at some considerable length at both Second Reading and on the first day of Committee. I could again repeat the answers that I gave then: the FSA is the independent financial services regulator responsible for the supervision of financial firms. The Bank of England is the central bank; it is responsible for providing liquidity insurance to the banking system; it has oversight of the payments system; and it is the resolution authority. Finally, the Treasury, as the finance and economics ministry, is responsible for the overall institutional structure of financial regulation and the legislation which governs it. It is ultimately accountable to Parliament and responsible for decisions which impact on the public finances. That could not be clearer. There is no doubt who is responsible for what, and there is no doubt in my mind that the Council for Financial Stability will significantly improve transparency and accountability from its predecessor and therefore represents a good improvement on a model that already worked very well during the crisis.

Baroness Noakes: My Lords, I cannot leave unchallenged that this model worked very well in a crisis. We all know that this model failed abjectly the first time it was put to the test, which is why this Bill tries to pretend that the arrangements that used to work just need a little bit of tweaking and improving to make them work even better. We know that is not the case.

The concept that the Minister is really putting forward is that financial stability is not one thing where everybody is working together. The FSA does a little bit working on its own and perhaps with the Treasury. The Bank does its bit perhaps working with the Treasury. The Treasury does whatever the Treasury does and then they come together in this shiny new concept called the Council for Financial Stability and somehow this all works.

I think the Minister does not really believe that this will all work. This is really all rather silly. I am getting bored with the Council for Financial Stability. All the Minister has said has not endeared the Council for Financial Stability to my party. I do not think that we are any more impressed with it at the end of these amendments than we were at the beginning of day one of Committee. However, I think it is time to move on from the Council for Financial Stability. I beg leave to withdraw the amendment.

Amendment 34 withdrawn.

Amendment 35 not moved.

9.30 pm

Amendment 35A

Moved by Baroness Noakes

35A: Clause 5, page 4, line 10, at end insert-

15 Mar 2010 : Column 551

"( ) The FSA must issue a statement of policy about-

( ) its understanding of the objective, and

( ) in what circumstances and how it intends to use its powers to achieve the objective.

( ) Before issuing the statement of policy, the FSA must consult-

( ) the Treasury,

( ) the Bank of England, and

( ) such other persons as it considers will or may be affected by the statement."

Baroness Noakes: My Lords, Amendment 35A adds two new subsections to proposed new Section 3A of FSMA as inserted by Clause 5(3). The financial stability objective is not defined in this Bill, as it was not when the Bank of England was given its financial stability objective in last year's Banking Act. We sought then to get a definition in the statute or, failing that, a requirement to define what is meant by "financial stability" in the code of practice. As I recall, more than one definition had surfaced during the consideration of that Act and we thought that clarity would be aided by a definition. We did not succeed in that.

However, we now have a financial stability objective proposed for the FSA and rather different considerations apply. The FSA will be able to use some of its powers solely on the basis of it being desirable for its financial stability objective. Under Clause 7, the FSA's powers are proposed to be considerably enhanced. For example, its own-initiative power in Section 45 of FSMA could, if Clause 7 is passed into law, be used by the FSA if it is desirable in order to meet any of its regulatory objectives. At present, the FSA can use this power only in relation to consumer protection. Similarly, the general rule-making power in Section 138 of FSMA is extended from consumer protection to all of the FSA's objectives by Clause 7.

These are massively widened powers and we will debate them when we get to Clause 7. For the purposes of Clause 5, the relevance is that the FSA has an undefined financial stability objective which it can now invoke to justify the use of various of its powers. I hope that the Government share our belief in regulatory powers needing to be clear in order to give certainty to the regulated community. Clause 5, taken with Clause 7, creates major new uncertainty.

The Banking Act creates a requirement for the Treasury to issue a code of practice setting out how the special resolution powers would be used. This was welcomed by the financial services sector even if the content did not always satisfy those who looked to the code for answers. I believe that this Bill would be improved by something similar.

Amendment 35A calls for the FSA to issue a statement of policy of both its understanding of the objective and in what circumstances it intends to use its powers to achieve its objective. It also requires the FSA to consult the Treasury, the Bank of England, and people who could be affected by the statement. It would clearly not bind the FSA in all circumstances, but it would give reassurance to the financial services bodies that might be affected by what is meant by it.

The amendment was prompted by the memorandum submitted by the City of London Law Society to the Public Bill Committee in another place. It is concerned

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about the breadth of the rule-making powers and the lack of constraints on the use of those powers. In relation to Clause 5, it believes that a statement of policy is the very least of the amendments that should be made to give greater clarity about the objective. The City of London Law Society said that it understood that the Government's main concern was to ensure that the FSA took account of the systemic risk posed by common patterns of behaviour by, and relationships between, regulated firms. I do not know if that is what is intended to be covered; I suspect that there are other things as well-but whatever that is, the FSA ought to be clear about it. I hope that the Minister will share that desire for clarity. I beg to move.

Lord Hodgson of Astley Abbotts: My Lords, other noble Lords may have seen the briefing from the British Bankers' Association that deals with the point made by my noble friend and the issue that her amendment seeks to address. The association says, inter alia, that the provision of a financial stability objective should not be taken as a licence for the FSA to place unreasonable information demands on banks and that there will be a need for full and open dialogue on what further data capture and reporting requirements this may involve. It says that the provision should not be taken as a licence for the FSA to act other than on the basis of proportionate action, based on established need, and a full understanding of the consequences of its action.

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