I am delighted to see that the departing chief executive of the Financial Services Authority devoted his last speech to culture. That is a small but positive step. If we focus more on these issues, we can hope eventually to realise a market system that is fair to both consumers and businesses, where risk is rewarded, failure punished, and growth and employment are paramount.

5.27 pm

Baroness Noakes: My Lords, our rules say that, on behalf of the whole House, the noble Lord, Lord Bilimoria, should welcome the maiden speech of the noble Lord, Lord O’Donnell, but I hope that I may be permitted to add my congratulations on his forthright and interesting speech. I hope in particular that eurozone Ministers heeded his wise words on leadership. I should declare my interests as set out in the register of interests. I am a non-executive director of RBS and a shareholder in a number of financial services companies.

My first point on this Bill is that it misses opportunities to ensure that UK plc is at the heart of financial services legislation. Bodies such as the CBI have pointed out that none of the new regulatory bodies is due to inherit the FSA’s current requirement to,

“have regard to the international character of capital markets and the desirability of maintaining the competitive position of the UK”.

The misguided reason given in another place is that this was associated with light-touch regulation and its disastrous consequences, but that is not good enough. Just as important, as other noble Lords have pointed out, is that the FPC’s remit does not have an explicit requirement to have regard to growth in the UK. When I read the attempt made by my honourable friend the Financial Secretary to the Treasury to justify this in another place, I nearly lost the will to live.

The financial services sector is a crucial part of the UK economy both directly in its contribution to GDP and tax yields and indirectly in its underpinning of the rest of the economy. It would be truly disastrous if the new bodies created by this Bill were merely technocratic and divorced from the needs of the wider economy. I hope that the UK’s economic success will be hard-wired into this Bill and that we will avoid the stability of the graveyard.

I cannot pretend to be enthusiastic about everything in this Bill. In particular, I believe that the twin-peaks approach may well create as many problems as it seeks to solve. That the FSA failed as a part of the tripartite arrangement is beyond doubt, but it is less than clear that the Bank of England would have made a better fist of prudential supervision before the financial crisis or that separating out conduct will be net positive.

The FSA was expensively created in the late 1990s and now we are even more expensively creating new arrangements that will have different gaps and overlaps. I can sense the law of unintended consequences waiting to spring into action. My noble friend will be relieved to hear that I am not going to fight a rearguard action, and shall instead concentrate on other areas of the Bill where I believe improvements are required.

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I support the creation of the Financial Policy Committee to give focus to the Bank’s financial stability objective, but the Bank and the Financial Policy Committee must operate in an accountable and transparent way. My noble friend has helpfully confirmed that the Government will make changes in the Bill as it goes through your Lordships’ House, and I hope that this will go beyond the Bank’s own suggestions. I hope that my noble friend will heed the wise words of several noble Lords on this topic, including the noble Lord, Lord Myners, and my noble friend Lord Lamont.

I am sure that creating new macroprudential tools that will be available to the FPC can make a significant contribution to financial stability, but they are much too important to be created and operated in an accountability vacuum. As a minimum, the super-affirmative procedure will be necessary to give parliamentary oversight to their creation.

If we are to have the twin peaks of the PRA and the FCA, they must be made to work together. I am concerned that the solution in Clause 5 rests on a memorandum of understanding, the very mechanism that demonstrably failed the tripartite authorities. My noble friend may already be aware that there is concern about the practical impact on regulated firms of the separation of the FSA into the two arms that will shadow the PRA and the FCA.

There is no requirement in the Bill for the PRA and the FCA to consult on the creation of the memorandum of understanding; nor is there any parliamentary approval of the arrangements or provision for independent review of the effectiveness of co-ordination. This area of the Bill seems decidedly weak, and we need to strengthen it.

The Government have usefully set out in the Bill the regulatory principles to be applied by the PRA and the FCA, including the rather elusive concept of proportionality. This is described in terms of burdens being proportionate to benefits—which sounds okay—but is then qualified by “in general terms”, which of course begs a lot of questions. The London Stock Exchange believes that this needs to be explained in much more detail and that it should be calibrated both internationally and by reference to specific sectors. We need to look at the detail of this in Committee.

The PRA will be charged with operating judgment-based supervision, which of course marks a radical departure from the last decade or so under the FSA. It is important that the PRA gets this right. I do not understand why the FCA will have a practitioner panel that it must consult but the PRA does not. The Joint Committee thought that this might lead to regulatory capture but wanted to see the PRA’s approach to consultation laid out. We have now seen that approach and it has been described as “dismissive” by the British Bankers’ Association and “insufficient” by London First. I am sure that we will need to look again at the way in which the Bill mandates consultation.

I know that the FCA has a number of supporters, who see it as a consumer champion. But we must not forget that the FCA also has responsibility for wholesale markets and as the listing authority. It is the FCA that will have the UK’s seat on the European Securities and Markets Authority. We will need to look carefully at

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the proposed membership of the FCA and its objectives to ensure that it will be properly focused on its whole range of responsibilities.

The FCA will have many powers and responsibilities in relation to consumer protection, including product banning powers. We will need to scrutinise these carefully to ensure that they are proportionate and balanced and that they do not stifle product innovation, which could very easily happen.

I would like to mention three final areas before concluding. First, I welcome the Treasury’s new powers of direction. However, like the noble Lord, Lord Eatwell, and the chairman of the Treasury Select Committee in another place, I believe that those powers should be very considerably extended.

The consumer credit responsibilities of the OFT are to be transferred to the FCA, which is a good idea in principle, but a number of practical issues have been raised by market participants, in particular the Finance and Leasing Association, and I hope that we will be able to deal with those in Committee.

Finally, important clauses in Part 5 of this Bill lay the ground for independent inquiries. My test for these clauses is whether or not they would have made the Bank of England set up reviews of its own role in the financial crisis earlier and more comprehensively. I suspect that we need to amend Part 5 so that duties rather than powers are created.

In conclusion, I hope that my noble friend will be receptive to the many improvements to this Bill that our debate today is showing to be necessary.



5.36 pm

The Minister of State, Foreign and Commonwealth Office (Lord Howell of Guildford): My Lords, with the leave of the House, I will repeat a Statement made earlier in the other place:

“Mr Speaker, with permission I will make a statement on Syria. The whole House will be united in support for the Syrian people, who have endured 15 months of fear and suffering. Eighty-seven thousand people have fled to neighbouring countries and up to 500,000 are internally displaced. As many as 15,000 people may have died and thousands of political prisoners are imprisoned and at risk of mistreatment and torture.

Each day reports emerge of savage crimes. The Syrian military is surrounding and bombarding towns with heavy weaponry, and then unleashing militia groups to terrorise and murder civilians in their homes. These deliberate military tactics are horrifyingly reminiscent of the Balkans in the 1990s.

Two weeks ago in Houla, 108 civilians died in this manner, including 49 children under the age of 10. A similar atrocity appears to have been committed last week in al-Qubair, where 78 people were killed, including women and children. UN monitors attempting to report on these events have been shot at and obstructed.

These grotesque crimes have illuminated to the world the nature of the events in Syria and the conduct of the Assad regime, which is attempting with utter inhumanity to sow terror, break the spirit of opposition

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in Syria and try to reassert control. This is as futile as it is morally reprehensible. By branding its opponents terrorists and using tanks against them, the regime is driving Syrians to take up arms to defend their homes; by singling out particular communities, it is inflaming sectarian tension.

There are credible reports of human rights abuses and sectarian attacks by armed opposition fighters, which we also utterly condemn. We also have reason to believe that terrorist groups affiliated to al-Qaeda have committed attacks designed to exacerbate the violence, with serious implications for international security.

As a result, today Syria is on the edge of civil war. This could lead to thousands more casualties, a humanitarian disaster, human rights violations on an even greater scale and instability in neighbouring countries.

We are working intensively to find a peaceful means of resolving the crisis. Our approach, in close co-ordination with our European partners is, first, to push for implementation of the Annan plan as the internationally agreed road map to end the violence; secondly, to increase the pressure and isolation felt by the regime; and, thirdly, to ensure justice, accountability and humanitarian assistance for the Syrian people. I will take each of these in turn.

First, the UN and Arab League envoy for Syria, Kofi Annan, has set out a six-point plan to end the violence and to start a political process to address the legitimate aspirations of the Syrian people. It is backed by two UN Security Council resolutions, 2042 and 2043. The latter mandated the deployment of the 300 UN monitors who are now on the ground in Syria. I pay tribute to them for their difficult work in dangerous circumstances.

As Kofi Annan has made clear on many occasions, the onus is on the regime to call off its military assault, to adhere to a ceasefire and to allow a process of political reform. Political transition must be based on democratic principles and reflect the needs of all Syria’s minority communities, including the Kurds, Christians and Alawites.

On 1 April, the Syrian regime committed itself to implementing the Annan plan and on 12 April announced a ceasefire. It has not kept to either of these commitments. Two weeks ago, I discussed the situation with my Russian counterpart, Sergei Lavrov, in Moscow. I made the case for Russia using its crucial leverage with the Assad regime to ensure the full implementation of the Annan plan, since the collapse of Syria or descent into civil war would be against Russian interests as well as those of the wider world. I also raised the issue of arms sales to the Syrian regime, which we believe should be stopped immediately.

In Istanbul on 1 June, I held talks with members of the Syrian National Council and other opposition representatives including Kurds, and I returned there last week for discussions with Secretary Clinton, the Turkish Foreign Minister and the Foreign Ministers of 12 European and Arab nations. I am in regular contact with Kofi Annan, and preparations are in hand for a meeting of the Friends of Syria group, which now numbers more than 80 countries, in early July.

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Last Thursday, the Russian Government put forward their own proposal for an international conference on Syria. Such a meeting could help generate momentum behind the Annan plan. However, it would have to be a meeting that led to a change on the ground and did not just buy time for the regime to kill more innocent people. In our view, any such meeting would need to be based on a common understanding that it would lead to a political transition; it should include genuine steps to implement the Annan plan; and it should involve only nations that are committed to being part of the solution in Syria. We will discuss with our partners whether it is possible to agree concerted international action on this basis, discussions which my right honourable friend the Prime Minister will take forward with other Heads of Government when he attends the G20 meeting in Mexico next week.

Making a success of the Annan plan also requires the Syrian National Council and other opposition groups to put aside their differences, to unite around the common goal of a democratic transition and to assure all Syria’s minorities that their rights will be protected in a multiethnic and democratic Syrian state. This has been my consistent message in all my discussions with opposition figures. We welcome the meetings with opposition groups that will be held in Istanbul later this week and subsequently in Cairo, which have our active support.

The Annan plan is not an open-ended commitment. It cannot be used indefinitely by the regime to play for time. If the Annan plan is not implemented, we will argue for a new and robust UN Security Council resolution aimed at compelling the regime to meet its commitments under the plan, and requiring all parties to comply with it. We have already begun discussions at the Security Council on the elements of a resolution. We do not want to see the Annan plan fail but, if despite our best efforts it does not succeed, we would have to consider other options for resolving the crisis and, in our view, all options should then be on the table.

Secondly, we are taking steps to increase the isolation of the Syrian regime. On 29 May we expelled three Syrian diplomats from London, including the chargé d’affaires, in co-ordination with the US, Canada, Australia, France, Germany and Japan and other countries that took similar steps. We are in discussions with Arab League and like-minded countries about measures to tighten the stranglehold on the regime’s resources and external sources of support, building on the 15 rounds of EU sanctions that already target 128 individuals and 43 entities.

Thirdly, we are acting to help end impunity for atrocities, and we are supporting the humanitarian needs and legitimate aspirations of the Syrian people. Britain co-sponsored the UN Human Rights Council resolution of 1 June, which was carried by 41 votes to three. It condemned the al-Houlah massacre, mandated the UN commission of inquiry to investigate and gather evidence about it, and highlighted the UN High Commissioner for Human Rights’s recommendation that the UN Security Council refer Syria to the International Criminal Court. We are working on a further UN Human Rights Council resolution to reinforce these objectives.

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We also sent a team of British experts to Syria’s borders in February and March to gather testimony from Syrians. The team found evidence of violations of international law and international human rights law, including murder, rape, torture, unlawful imprisonment, enforced disappearance and persecution. This work to document abuses is being continued. The team of Syrians which has helped document the al-Houlah massacre was trained by the United Kingdom, and we are working closely with the United States and the UN commission of inquiry to ensure that any evidence is collated and stored for use in a future legal process. We are increasing UK funding for the Syrian opposition and civil society groups, including £1.5 million of assistance in this financial year to help provide human rights monitoring and media training for activists, and other non-lethal support such as communications equipment.

My right honourable friend the International Development Secretary and his department are working with the UN and international community to ensure that urgent humanitarian assistance gets to the 1 million people estimated to be in need. The Syrian regime has now agreed a plan to respond to humanitarian needs. There can be no further delay in its implementation, and humanitarian agencies must be allowed full and unhindered access to all areas in Syria. Britain has helped provide emergency food supplies for nearly 24,000 families inside Syria, safe drinking water for 30,000 people, blankets for 5,000 people, medical assistance for up to 25,000 people and support to refugees in neighbouring countries.

The coming weeks must see an intensified and urgent international effort to stop the violence and restore hope to Syria. The British Government remain absolutely focused on this goal. If all the efforts that I have described fail, then Britain will work with the Friends of Syria group to increase the isolation of the regime and to adopt sweeping new sanctions across the world.

We will not rule out any other option which could at any stage stop the bloodshed, We will not relent in our efforts to ensure the political transition, justice, accountability and security that the Syrian people need and deserve, and to support greater political and economic freedom in the Middle East. This freedom is not only the legitimate right of all the peoples of the region; it is the foundation of lasting peace, stability and prosperity.

The time has long passed for the Assad regime to stop the killing and torturing of its people, and it is time now for all nations on the UN Security Council to insist on the cessation of violence and political process which remain the only peaceful way to resolve this mounting crisis”.

My Lords, that concludes the Statement.

5.48 pm

Baroness Royall of Blaisdon: My Lords, I am grateful to the noble Lord, Lord Howell of Guildford, for repeating the Statement on Syria made earlier in the other place by the Foreign Secretary.

If anyone was in doubt as to the seriousness of the situation in Syria, a simple examination of the facts should be enough to convince them of the scale of the

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horror that we are witnessing. The conflict in Syria has been raging for 15 months. The death toll is now estimated at more than 15,000. As the Minister has today told the House, two weeks ago, the village of al-Houlah was the scene of one of the worst reported massacres. United Nations observers on the ground have confirmed that at least 108 people were killed, including 49 children and 34 women. I join the Minister in praising the work of UN monitors in attempting to document those events. They have been repeatedly shot at and obstructed in trying to carry out that important task.

This is not some historical conflict; it is unfolding in real time, documented on television screens and YouTube footage, so I welcome this opportunity to scrutinise the Government’s response. Fifteen months on, instead of approaching its end, if anything, in recent weeks, the conflict seems to be entering a new and bloodier phase. The Assad regime continues to show utter contempt for the value of human life, perpetrating a violent and brutal crackdown on innocent people across Syria, for which the regime must ultimately be held to account

However, expression of revulsion in response to that slaughter is not enough. Let us be candid and admit that the international community is dangerously divided in its response to the conflict and that division is drastically hampering the effort to stop the violence. The point of consensus for the time being is the Kofi Annan peace plan, but by any reckoning, the UN-backed plan has so far failed to bring an end to the violence. Do the Government think that increasing the number of monitors and boosting Mr Annan’s resources would improve the prospects of that plan succeeding?

To date, the Annan plan has been judged to be the only option on the table, but, as the Minister rightly said:

“The Annan plan is not an open-ended commitment”.

What are the time limits and tests for the Annan plan? How much slaughter is required before the international community acknowledges that the plan has failed and begins to formulate an alternative means of ending the crisis? Of course, further diplomacy is needed if the divisions in the international community are to be overcome, but the difficulty of the task must not detract from its urgency. What is the Government’s assessment of the recent judgment of the noble Lord, Lord Ashdown, who is in his place, our former high representative in Bosnia, who said of the Government’s strategy for dealing with the crisis:

“I don’t think that is wise diplomacy”?

As the Annan plan is currently not working, the challenge is to ask what beyond the Annan plan can be done, even accounting for the divergence of views in the international community. There are several steps short of military intervention that should be considered to sharpen the choice facing the Syrian regime.

First, on the financing of the regime, without a comprehensive oil embargo in place, Syria is still able, in principle, to export oil to countries outside of the EU and US. What discussion has the Foreign Secretary had with the Government of India, who do not have bilateral sanctions in place and who have allegedly recently been approached by Syria to purchase Syrian oil? The Syrian regime is also still able to import diesel

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from countries such as Venezuela, which allows the regime to sustain its military operation, including tanks, through such foreign imports. What is the likelihood of a comprehensive oil ban being agreed at the UN and, failing that, what pressure have the Government put on countries considering trading with Syria in that way?

Secondly, there is the security situation and support for the opposition. There are steps that, without breaching the arms embargo, could alter the realities on the ground, such as blocking the communications of Assad’s forces and choking off his remaining finance by neighbours such as Lebanon enforcing the Arab League sanctions which they have previously agreed.

The Syrian military is one of the key pillars still sustaining the political regime in Syria and the newly appointed head of the SNC, Abdel Basset Sayda, was right to call for mass defections from the regime in one of his first statements since taking control. What is the Government’s assessment of the present rate of such defections, and what steps can be taken by the international community to encourage and facilitate them further? Does the Minister agree that more should be done to publish internationally the names of any officers ordering atrocities as a clear signal of intent that they will face the full force of international justice for their crimes? The Minister mentioned al-Qaeda as operating in Syria. What is the British Government’s view of the scale of that activity?

I welcome the Foreign Secretary’s recent visit to Russia. Can the Minister tell your Lordships’ House whether he believes that the Russian position is likely to shift significantly in the immediate future as the situation deteriorates further? I welcome, too, the Government's comments on the Friends of Syria group and news that a further meeting of the group is planned. Alongside that group, how effective does the Minister think that an international conference on Syria—as has been suggested by Russia—would be, and does he share our concern that it may simply allow the regime to play for time?

The Minister said that the Prime Minister intends to raise the issue of Syria at the G20 in Mexico. In the light of statements from a Chinese Minister earlier today that the situation in Syria should not be on the agenda at the G20, can the Minister give us the Government’s assurance that they are taking all the necessary steps to ensure that appropriate time is found to discuss it?

The Minister says in the Statement that if the Annan plan is not implemented, the UK Government will argue for a new and robust UN Security Council resolution aimed at compelling the regime to meet its commitments under the plan. How will the British Government endeavour to shift the view of Russia, in particular, to allow for agreement in the Security Council for the passing of such a resolution?

The scale of the humanitarian crisis is growing by the day. The Foreign Secretary talked at the weekend of the British Government having committed £8.5 million to help alleviate the humanitarian situation. This morning, the Times newspaper reports that a group called the Union of Free Syrian Doctors is questioning that commitment and says that help for doctors trying to

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get medical supplies in through Turkey has come only from a one-off donation by France and from private individuals. Can the Minister use this opportunity to clarify that case? Finally, what thoughts have been given to creating large humanitarian enclaves for civilians—safe areas in countries such as Turkey or Jordan?

All of us in the House have the same objective. We want the violence ended and the Syrian people free to decide their own future. In the 1990s, the world failed to act to prevent a genocide in Rwanda. The Foreign Secretary warned at the weekend that the bloodshed resembles that of Bosnia in the 1990s. Within weeks of the conflict starting in Bosnia, thousands of refugees were herded into concentration camps and suffered appallingly at the hands of the Bosnian Serbs. Those crimes were broadcast around the world at the time, just as the slaughter in Syria is being relayed on our screens today.

In Bosnia, it took three years and the massacre of 8,000 people at Srebrenica before a bombing campaign led to a peace settlement. Despite the best efforts of Kofi Annan, no effective diplomatic response to this crisis has yet been agreed by the international community. After Rwanda and Bosnia, we said never again. The coming weeks and months will determine whether the international community meant it.

5.56 pm

Lord Howell of Guildford: My Lords, I thank the noble Baroness for her support for the work of the UN and the broad thrust of what the nations, including this nation, are seeking to do, and for her candid and telling analysis of the grimness of the situation, on which she fully concurs with the Government.

A great many of her questions touch on the position of Russia—I counted four or five—so I shall deal with those first and then her other questions. First, the key matter is: what can we do to reinforce or reassert the momentum of the Annan plan, which has clearly been ignored—disavowed, indeed—by various parties in Syria? The answer begins and ends with the question of Russia and, to some extent, China. It is the Russian position in, apparently, continuing to supply arms and the Russian and Chinese reluctance to see a UN Security Council resolution of the kind we wanted to go forward that prevents the council from bringing forward any such resolution and, no doubt, gives licence and encouragement to other countries such as Venezuela to carry on supplying and trading with Syria.

As the noble Baroness knows, my right honourable friend went to Moscow. He talked to Sergei Lavrov. The idea now from the Russians is that there should be an international conference. The Statement which I read indicates that that might work, that might be worth taking forward, but we would have to have a very firm agenda and make sure that it was not just an excuse for a lot more talking and no further action while people continue to be murdered in hideous and evil ways.

That is the assessment we have to put before our Russian friends and the Chinese. They are great and responsible nations in the community of nations and in the world civil order, and we believe that they

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should be brought to see that if there is a combined front, there is the possibility for much tougher action to close down the loopholes and routes by which arms and equipment are procured and oil is traded out and the stranglehold made increasingly effective. That is the broad answer to the whole question of what we should now do to invigorate the aims and aspirations of the Annan plan and the ideals behind it. It had six very clear aspirations, all of which in general terms are agreed, but they must be made to work and that requires action of the kind which many countries want but, apparently, not yet the Russians and the Chinese. That is where we have to work. The oil embargo could then be tightened up and there could be tougher moves on international communication.

The noble Baroness asked about defections. There could be more encouragement there. It is obviously reassuring that senior people are moving across, abandoning the Assad operations, and we want to encourage more of that. Whether we could make the names of targeted individuals more widely known is something that we certainly would consider as we try to work out with our EU colleagues how tougher sanctions can be developed.

The assessment of al-Qaeda involvement is difficult. Basically, one has to understand that al-Qaeda is interested in more violence and stirring up everything, regardless of size, causes, suffering or anything else. These are unrestrainedly evil people and they no doubt take some delight in the bottomless evil of the outrages of those human beings who can destroy and murder children in cold blood. We have no illusions about that. They may well be swarming around—swarming is too strong a word, but they may be present in numbers to involve themselves in and promote and exacerbate the position. We have no doubts that that is their motivation.

I have mentioned the Russian position and the international conference. We will certainly seek to have Syria kept on the G20 agenda and the Prime Minister intends to raise it. Like the noble Baroness, I read the report this morning on the union of doctors. We were a bit surprised by it. It did not really tally with what we are seeking to do, both through the international agencies and global humanitarian aid, where we have made a substantial contribution, and through direct efforts.

If I can be associated with the matter of enclaves, although the noble Baroness did not ask about them—she talked of humanitarian corridors—for them to work it requires organised force, troops and a political will that they should be allowed to operate. That political will is not there in Syria at the moment. The stage where we would have to talk about troops has not been reached. As my right honourable friend says, all options are on the table. However, as the noble Baroness recognises, there are steps that can now be taken to toughen up the sanctions, increase the stranglehold and, we hope, bring Russia and China into stronger co-operative action. That should be tried first and is what we are now working on. We hope—indeed, we insist—that more should now be done to put the pressure on the Assad regime and on all those who are in the killing business to halt their hideous destruction and pave the way for a better Syria.

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6.03 pm

Baroness Falkner of Margravine: My Lords, does my noble friend accept that while the Statement is extremely detailed and sets out where the Government believe they are, it is nevertheless a sign of the impotence of the international community that we have found ourselves in a position where the Russian Government have been able to propose an international conference in Syria which will undoubtedly push the situation into the long grass? That is not least because, as my noble friend repeated, the Statement says,

“it should only involve nations that are committed to being part of the solution in Syria”.

When we have Russia, Saudi Arabia and Qatar, which have all been on different sides of the argument, arming combatants in the regions, it is hardly likely that they would be able to achieve a consensus behind the Annan plan or, particularly, to protect the rights of minorities in the region. Will my noble friend tell the House what we will do when that open-ended commitment to the Annan plan is dropped and what steps might we take? Would we then look to our own duties under the norms of responsibility to protect?

Lord Howell of Guildford: I understand my noble friend’s feelings, which are largely mine, that the Annan plan is not working and has to be reinforced. We think that is the pathway forward and that the principles behind it are right, but clearly the killing and the horror continue on a totally unacceptable, impossible and outrageous scale, so something more must now be tried. When my noble friend talks about nations not being committed, she should bear in mind that the one uncommitted nation actively promoting the arming of the Syrian regime is Iran. The Iranians are the ones who should not be included in any further conference, although it has been suggested by some that they are clearly actively opposed to any kind of path towards peace and settlement. That is what that phrase is really aimed at; that Iran is on the side of violence, and more violence.

I do not necessarily share my noble friend’s view that the talks with Russia and with the Chinese are never going to work and that there will never be some understanding that this cannot go on and that there must be a united effort to close up the loopholes and stop the arms supplies by the really big powers, such as Russia and so on. I do not share her view that this is an impossible aim. I do not say that we have got there but this has to be worked on, combined with all the other sanctions and proposals that we are now committed to, to end the violence and repression.

The Lord Bishop of London: My Lords, everyone will recognise that Her Majesty’s Government are dealing with a tragic and complex situation. Again and again in the Statement that the Minister repeated, the rights of minorities were drawn attention to. Have Her Majesty’s Government been able to make direct contact with the substantial Christian minority, who are 10% of the population of Syria and whose influence on the Russian Government is not inconsiderable? There is certainly direct contact between the Christian minority and the Russians. If there is, as the Minister

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underlined, an absolute commitment to defusing the fears of the minority communities in Syria, which must be part of any kind of moving forward, have Her Majesty’s Government been able to use the channels of communication that exist with the various Christian communities that make up that 10% minority in Syria?

Lord Howell of Guildford: The right reverend Prelate is absolutely right that the Christian position is important. All along, we have heard suggestions that while the Christians may find repulsive what the Assad regime is doing, they also fear alternative regimes. Instability might jeopardise their position even further, so they are definitely an important part in the jigsaw of possible pressures in the future. I think that is as much as I can say.

As far as direct contact is concerned, I am not in a position to say exactly what contacts HMG have had with the Christian minorities. We have encouraged all of the Syrian opposition groups to reach out to minority communities and maintain a clear commitment to a peaceful, non-sectarian approach. We have insisted that they reassure all Syrians that they are working towards a Syrian state which is inclusive, representative and respectful of the ethnic and religious minorities. That is the line we have consistently taken but I cannot really promise that it will be an absolutely guaranteed condition in a situation where bloodshed, hatred and violence are prevailing on all sides. However, it is a matter very much in our minds. Another part of the jigsaw, which the right reverend Prelate rightly raises, is that the Christians in turn could have some kind of contact and dialogue with the Russians to persuade them that the situation requires a more unified approach. That is a possibility but I do not think I can put any more flesh on these ideas at the moment.

Lord Gilbert: While I agree entirely with the Minister that Iran forms an important part of this problem, I disagree with him entirely that that is a reason for it not to be at a conference. I thought there was every reason for the Iranians to be at a conference to let them hear what other people think of their attitude and behaviour, and to make it clear to them that it is in their best interests to get the situation solved and to stop supplying arms to the Syrian Government if they are doing so. It seems to me that the Government’s logic is upside down on this.

Lord Howell of Guildford: Well, my Lords, I am not sure that I agree with the noble Lord. His views are usually very challenging and make one see things a different way, but in this case he is asking for the inclusion of a power that is actively concerned to delay and screw up—if I may use the vernacular—conferences and talks and to promote violence and is continuing to supply arms direct to the Syrian regime. It does not seem as if that would be a very good voice to have at the table at a time when we are trying to persuade other nations, such as our Russian friends, to realise the vital need for a unified approach to close off the loopholes. I understand the psychology of what he is saying—that perhaps it could work the other way around—but the best guess for the moment must be

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that to have the Iranians at the table and welcomed at any new conference would be a guarantee that it would produce nothing whatever.

Lord Wright of Richmond: My Lords, in the debate in this House on 16 March, I asked the Minister if he could give us the Government’s assessment of the assistance in terms of finance, arms and “foreign fighters” being given to the opposition in Syria. I do not know whether he is able to answer that question now, but I note that the frequent reports of assistance being given to the opposition in this area in terms of finance, men and other assistance have not been denied in the Gulf. I think that it is now accepted, certainly in the Middle East, that Saudi Arabia and Qatar have arranged between them for a massive supply of military assistance to the opposition in Syria, not with the aim of, to quote the Statement, stopping the violence and restoring hope to Syria but rather in order to replace the Shia secular regime in Damascus with an extremist Sunni regime enjoying the support, ironically, of al-Qaeda. Coincidentally, the “Today” programme this morning reported that the casualties of the regime’s forces in the past few days have outnumbered those of the opposition—a reminder, surely, that we should not immediately put all the blame for the terrible things happening in Syria on the Syrian regime.

Syria is being plunged into a secular war, with potentially disastrous consequences for the security of the Middle East and, incidentally, for the future of the Christian community to which the right reverend Prelate referred. I hope that the Minister can assure the House that the Government will not only resist the understandable pressure to intervene ourselves but will do all in our power to discourage any further military intervention by our friends and allies and will continue to do everything we can to support Kofi Annan’s mission, however unpromising its prospects.

Lord Howell of Guildford: The noble Lord’s presentation of, if not the immediacy then certainly the possibility of, this being a religious regional civil war between Sunni and Shia is perfectly valid. That is what it could become and perhaps in some aspects, although the situation is very complicated, is becoming already. That may well be part of the picture that he also describes of arms going to the Syrian opposition forces, though whether in massive quantities or not I do not know—I cannot give him precise figures. We do not know to what extent Saudi Arabia and Qatar, whose leaders have talked about the need for arms, are actually supplying them and whether they are doing so officially or whether it is being done by various other channels. We simply have not the means to know. We know that some arms are getting through, though whether they could be described as massive I could not corroborate. That is how the situation is developing.

My right honourable friend’s Statement made clear that not all the grim violence has been on one side. He rightly condemns any manifestations of similar horrors and outrages by the opposition. Whether or not this is a civil war between the religions in the region, this is rapidly becoming, as my right honourable friend has said, a civil war within Syria, and I am afraid that it is

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a matter of history that it is sometimes in civil wars that the worst atrocities of man against man and man against woman are exercised. That, I am afraid, is unfolding before our eyes. So it is correct that not all the blame is on one side. That it could become a gigantic Sunni and Shia war within Islam is a possibility; it is one of the concerns underlying our attempts to put out this monstrous consuming fire before it devours many other people in neighbouring regions.

As for the details of what arms are being passed, it is very hard to track down how many arms are going from Russia to Syria, and there was mention of Venezuela possibly supplying arms as well. Then there is what Iran is doing; we know that it is pouring arms in on the regime’s side. On the other side, there are arms going to the opposition. These are difficult things to pin down in a very confused situation.

Lord Inglewood: Do the Government believe that the militias that are carrying out these murderous activities are under the ostensible control of those under whose metaphorical banner they are marching?

Lord Howell of Guildford: My right honourable friend made a comparison with the horrors in Bosnia at the end of the previous century, when militias claiming to be acting in the name of one side or another may or may not have been condoned or even have been instructed by the authorities. To answer my noble friend’s question, that comparison reflects on the assessment that we have to make of the present situation. It is hard to tell how much these murderous attacks—village against village, region against region—are, at the very lowest level, simply the settling of old scores or, at a higher level, people who are inspired by one side or another to think that they can put a label on themselves and go and murder everyone in sight. Perhaps, at the highest level of all, they are actively receiving orders and encouragement from the Syrian regime. Those are all possible, and there is evidence that at all levels there are those sorts of motivations. However, you cannot distinguish and draw lines in all these cases; you cannot say that all these horrors and the revolting, outrageous and evil killing of children are ordered from the centre. If they were, that would reinforce everything that we fear about the nature of the regime, but I do not think that that is the case in every instance; there are probably other evil motives at work as well.

Lord Anderson of Swansea: My Lords, at a time of the cooling of the right to protect and humanitarian intervention, I was puzzled by one word in the Statement. It was the word “compelling” in this passage:

“we will argue for a new and robust UN Security Council resolution aimed at compelling the regime”.

Given the Russian and Chinese position, surely there is no prospect of such a resolution. If these are not just empty words, that could mean only military intervention outside the UN framework, which is most unlikely to happen. Who would lead that? There was talk this morning about drones targeting or showing the way for the targeting of opposition areas. Do the Government know who provides and controls these drones?

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Amid all the horror, there is increasing concern about the way in which a likely Sunni-dominated successor regime would deal with minorities. Do the Government share this concern, especially with regard to, as the right reverend Prelate has mentioned, the Christian minority within Syria and the many refugees from Iraq who are there? If so, what are the Government doing to ensure that as far as possible there will not be a regime that persecutes minorities, as other Sunni-led regimes in the area do?

Lord Howell of Guildford: On the last point, I addressed that very point when it was raised by the right reverend Prelate. The position of the Christian minorities is of great concern. To answer the question about what the Government are doing, as I said earlier, my right honourable friend, officials and representatives of HMG have constantly urged the Syrian opposition to extend tolerance and a full place to ethnic and religious minorities, and that embraces Christian minorities. That is what we are doing.

As to the word “compelling”, the noble Lord is very skilled and active in these areas, but I think he is slightly misreading its meaning. I go back to my earlier point that with the full co-operation of the Russians and the Chinese—if we could get it, which at present does not look very promising, but great efforts are being made—there would be a compelling and effective stranglehold. It is possible to switch off a society and to close down a regime altogether and make further governance impossible by cutting off basic utilities, power and all ingoing and outgoing supplies, but that is impossible as long as these two great nations, Russia and China, and a few others, are carrying on with trade and supplying equipment and arms. It is not realistic to imagine that without Russia and China we would resort to arms. That is pointless. It is a dead end. Russian and Chinese co-operation are essential for the stranglehold to work, and that has got to be the path of compulsion that we go to before we come to even grimmer possibilities. However, as my right honourable friend repeated, all options are on the table. There are steps ahead that we can take and which we will take, and we will work night and day to hold dialogue with Moscow and Beijing because they have a vital role in this process.

I cannot comment on drones. I will not comment on intelligence aspects, but if I have any more knowledge, I will gladly write to the noble Lord; at the moment, I have none.

Lord Ashdown of Norton-sub-Hamdon: Following my noble friend’s answer, surely the difference between this and Bosnia is that in Bosnia we could act but chose not to, whereas in Syria we would like to act but cannot because we cannot get agreement from the Security Council. Surely the lessons that we should have learnt from Libya are that getting agreement from the Security Council and, above all, making sure that the Russians and the Chinese do not exercise their veto are far better served by letting the coalition of local voices lead the call for action and that we should concentrate on humanitarian action, not regime change. So why have we abandoned them? Why have we reverted to the prospect that the West leads the charge and is

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seeking the removal of the one person, the one friend, Russia has by seeking regime change up front? Has that not made it easier for the Russians and the Chinese to cast their veto? Is the consequence of that not that we now find ourselves in an impasse which is in part because of rather unwise diplomacy, which will not only lead to greater bloodshed in Syria but to the even more baleful prospect of a widening Sunni-Shia conflict throughout the whole of the Middle East?

Lord Howell of Guildford:I listened very closely to the noble Lord who has enormous expertise, certainly on the Bosnian scene, but I do not think we have abandoned the idea that the regional powers—the Arab League and Turkey and other responsible powers in the region—should be right up in the front and leading the pressure. This is not just a western story; this is a story where the global order is looking with horror at what is happening. Responsible nations are actively helping. We are arguing with Russia and China, which we hope will become fully responsible nations—they should act as responsible nations, as they are great powers—in the same vein and on the same path. That is what we are trying to do. I do not think there is another path of diplomacy that somehow would magically put certain regional powers in a forward position, and I do not think this is seen just as a western show. That was last century stuff; today, no one moves in international affairs, as my noble friend knows perfectly well, without full consultation with the African Union and the Arab League and increasingly with Beijing and Moscow, which play crucial parts, and with many other countries as well. This is not the century of the West; this is the century of Asia and Africa and the new international and multinational organisations which are reinforcing the ones we inherited from the 20th century. So I do not accept my noble friend’s analysis, but the wisdom behind his thought is correct.

Financial Services Bill

Second Reading (Continued)

6.24 pm

Lord Whitty: My Lords, I want to approach this Bill in a slightly different way. Although I no longer have any formal role in the consumer world, I want to look at the Bill from the point of the view of the average consumer of banking and other financial services and of the microbusinesses that have to deal with our financial institutions. They are faced with a very powerful and often quite incomprehensible financial system and a fairly incomprehensible system of regulation. I am not sure that this Bill will help them or, indeed, many practitioners in this field. The Bill is not only, as my noble friend Lord Eatwell said, slightly messy in its presentation, for all the pre-legislative efforts, but the way that it is drafted makes it difficult to follow, and it also excludes substantial parts of the jigsaw. The Minister referred to the Vickers report, the forthcoming White Paper and a separate banking Bill, and in another part of the jungle we have a change in the competition regime and changes in EU financial regulation, all which need to be taken into account before anybody

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can form an overall position about whether this new regime replaces the old regime in a way that is beneficial to the consumer.

It is clear that there were serious failures in the 1997 tripartite structure. It is also pretty clear that there were serious failures in the pre-1997 structure that concentrated powers in the Bank of England and the Governor of the Bank of England. We need to look to see whether this third attempt is any better. Many of us would conclude that the problem was not so much the institutional structure as the nature of the regulation. I would say it was too light touch—the noble Lord, Lord Bilimoria, would say it was too wrong touch—and I am not sure that the current structure makes it much better.

I, slightly surprisingly, find myself on the same page as the noble Baroness, Lady Noakes, on this one. The separation of the FSA into two distinct parts does not necessarily commend itself to me. Of course, there are those like the noble Lord, Lord Lawson, who will say that consumer protection got in the way of proper prudential supervision; there are also some on the consumer side who would say that the FSA was overburdened and failed in its consumer protection, partly because it had multiple functions. Total separation, which this Bill appears to create, seems unfortunate. After all, if you look at Northern Rock, it failed on its own corporate microprudential side and, indeed, made a major contribution to the failure on the macroprudential side because it was selling inappropriate products to the wrong consumers. In other words, in that case the consumer interface was important in the prudential sense in the total running of the monetary system, as it was in the United States with those who advanced subprime loans and so forth. Separating them totally is dubious. However, like the noble Baroness, I think I will be flogging a dead horse on this one if I pursue that in Committee. After all, the previous Government also proposed separating them, and I think I had better concentrate on what I would regard as a slightly second-best solution; namely, that the Bank of England and the PRA should also have some regard to consumer considerations and that there should be more effective co-operation between the PRA and the FCA and between the Bank of England and the FCA in relation to consumer issues and consumer issues implications through the broader supervisory role. That could be in a memorandum of understanding, but since the previous memorandum of understanding did not really work, as several noble Lords who have great experience of these matters have said, I would prefer to see it in primary legislation. It is certainly something that we should return to in Committee.

Turning to other consumer issues, why are we not writing a consumer mandate throughout the Bill? Where are the enhanced consumer powers? I welcome the additional powers for the regulator with regard to such things as products—I recognise that there are restraints on those—but where are the powers for the consumers themselves? Under Alistair Darling, the previous Government proposed, for example, at least a limited form of collective redress in financial matters. That would greatly simplify the current mess over PPI. Whether such a system of collective redress would be

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opt-in or opt-out is a secondary consideration. However, that additional direct power for consumers or consumer organisations appears nowhere in the Bill.

I have other concerns. One consumer concern in particular relates to privacy. The nature of the banking sector is changing. Organisations that are not banking organisations are setting up banks or quasi-banks. We heard about Marks & Spencer just this morning. There is protection for the privacy of data for the consumer of one subsidiary of a bank; the parent company cannot use that information in a different context. However, no such provision seems to apply to supermarkets. They already have a huge amount of data on their customers, which they could use to customers’ detriment were they to pass them to their financial wing—Tesco bank or M & S bank, or whatever we will call it. That is a loophole that we need to address.

There are also issues in relation to the competition structure. When, under the previous Government in 2008, this House approved the takeover of HBOS by Lloyds TSB and the nationalisation of RBS, I argued that we had to agree to it, given the emergency, but that in 18 months’ time there should be a full Competition Commission investigation into the structure of retail banking. However, if anything, the situation has got worse since then. I hope that the fact that the OFT has powers in relation to CCA issues does not mean that we end up with yet another sectoral regulator of everything in financial services that has competition well down its list of considerations. After all, some other sectoral regulators, such as those for energy and water, are adamantly opposed to any reference to the Competition Commission because they see it as a failure on their part. We need to avoid that.

I make a brief point on governance—not so much governance of the Bank of England as of all banks. Banks are unique companies. The rules that apply to joint-stock companies and other bodies generally are not really appropriate for banks. We must all recognise that if we do not change the responsibilities of the boards of banks and those who sit on them, we will go through a similar crisis again. At some point, in the course of either this Bill or the banking Bill, we should address that issue.

Finally, I agree wholeheartedly with the right reverend Prelate the Bishop of Durham, who made a very effective speech. We have a two-tier financial market in this country. Around 20% of our population do not have access to banking facilities, credit or insurance in the way that most of us do. On the credit side, many are driven to those who offer loans at a rate of around 1,000% APR and often, as the right reverend Prelate said, into the arms of criminals. Unless we not only intervene in that market under the new regulatory structure but impose on the mainstream banks and credit creators some responsibility for universal provision, I am afraid that the two-tier financial market, financial exclusion and the whole system—of which payday loans are but one example—of division within our society will persist. I hope that somewhere within the Bill and this structure we can address that issue as well.

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6.34 pm

Lord Mawson: My Lords, I will focus my remarks in this Second Reading debate on the opportunities for growth and investment in the East End of London, particularly in the Lower Lea Valley, where there is a real investment opportunity. When I first arrived in the East End, nearly 30 years ago, the Isle of Dogs was a wasteland. The local joke was that there were two buses a day to the island. At that time the financial centre at Canary Wharf did not exist. The culture of the public and voluntary sectors was anti-business, a dependency culture was rife, and it is fair to say that the councils running the surrounding London boroughs of Newham, Tower Hamlets and Hackney were mostly basket cases.

Over the past 30 years, major changes have taken place and east London has been transformed. Because of the focused leadership of the noble Lord, Lord Heseltine, and others, a phoenix is rising from the ashes. East London is once again becoming a global destination and a centre of enterprise, innovation, finance and business. It is increasingly recognised as a powerful engine of the British economy, as it was for several hundred years previously, before the demise of the docks. Many years ago, after the closure of the docks, the noble Lord, Lord Heseltine, began what many of us working on the ground have come to understand as a 50-year regeneration journey. As we prepare for the Olympics in six weeks’ time, we are half way through that journey. The opportunity to present the scale of business investment in the valley to the world, through this global event, is great.

However, do central and London government truly understand the importance and scale of this wider investment narrative around the Olympic site? Recent meetings that I have had with the key people responsible for articulating this story to more than 20,000 journalists, who are soon to arrive, have not filled me with confidence. They are not familiar with east London or its history and are struggling to develop a clear and concise story. We get one shot at selling east London to the world and we must not miss this investment opportunity. This matter is urgent.

Nearly 16 years ago, three of us met just a few hundred yards from the Olympic stadium. We began to dream about the Olympics coming to east London and to explore its potential added value. The instigator of the meeting was the indefatigable champion of a London Olympics bid, Richard Sumray. At that first meeting, we realised that if the Olympics were ever to come to London, the only place with enough land was the Lower Lea Valley—a forgotten corner of the city on our doorstep. Historically, this was the home of some of the country’s greatest innovators and entrepreneurs. Michael Faraday carried out his electrical experiments at Trinity Buoy Wharf, opposite the Dome. Isambard Brunel built his ship SS “Great Britain” there. The world’s first biotechnology process was developed at the Clock Mill in Bromley-by-Bow.

The Games provided us with a fantastic opportunity to give the world a new perspective on the Lower Lea Valley—a story of business, investment and the growth of an enterprise culture. The Olympics would be a catalyst that allowed us to reach out to investors

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across the world. They would connect the financial centre then emerging at Canary Wharf with other key development nodes in Greenwich, Canning Town and Stratford in the north. At that time, I reminded my colleagues that the late Reg Ward, who was the life force behind the Canary Wharf development, had always described east London as a water city. Fly into City Airport, look down, and you will see exactly what he meant. East London is surrounded by many miles of docks and waterways. We reminded ourselves that water had driven the economy in east London for 200 years. If the Olympics ever arrived, we needed a vision with integrity that we could communicate. We needed a simple story to draw in potential investment partners from across the world.

After this initial meeting, two of us went to see the noble Lord, Lord Rogers of Riverside, just to check that we were not coming off our trolleys. Within minutes, he agreed that water was the key to both the Games and future investment in the valley. Together, we wrote what must be one of the first documents to position the site for the Games at the heart of the valley and link it to the investment and development nodes that we saw emerging there. This document shows an emerging city in east London, growing around the waterways, ripe for investment and growth, and with the necessary infrastructure coming into place. It also champions new ways of growing enterprising communities with local residents by connecting them to this emerging business and enterprise culture. I still have the booklet today and the present buildings on the Olympic park are not far from what we imagined then.

We sit here 16 years on and we have seen a variety of people and organisations join the Olympic bandwagon. My colleagues and I do not claim all the credit for starting it moving, but we played an important small role as a catalyst beginning to connect the financial service industry at Canary Wharf to the growth potential that now surrounds it.

As chairman of the All-Party Parliamentary Group on Urban Regeneration, Sport and Culture, it has been a privilege in recent years to take many colleagues from your Lordships’ House and the other place by boat up the waterways of the Lower Lea Valley so that they might see the bigger picture around the Olympic site. The Olympics, although important, is not the biggest show in town in east London but it is a fantastic catalyst that can drive investment in the area and join the dots of development. Development nodes are well advanced in Greenwich around the O2, at the expanding City Airport, the growing international conference centre at ExCel, the global business district at Canary Wharf, the £3.7 billion of investment taking place in Canning Town and the £1 billion housing and regeneration scheme further north in Poplar that my colleagues and I are involved with. Here, I must declare an interest.

At the new Westfield shopping centre across the River Lea, we witnessed 1 million shoppers in the first week of opening and a new international station waiting for Eurostar to stop at its prepared platform. Today, with UCL relocating to Stratford, a life sciences-focused enterprise zone in the Royal Docks, the European

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Medicines Agency at Canary Wharf, and the Tech City concept at Old Street, the area is rapidly developing as a UK science and technology hub. As well as that, right there, there is also the Queen Elizabeth Olympic Park that will hold five new villages and a commercial district. Here, I must declare another interest as a director of what is now called the London Legacy Development Corporation.

Noble Lords are probably asking what all this has to do with the Financial Services Bill. I am no expert on the intricacies of financial regulation. I will judge the legislation by effect. But I know that all the above would not have been possible without individual entrepreneurs being able to take a calculated risk and back a promising idea. It was risk that made the docks the trading capital that they once were and that turned around the fortunes of the Lower Lea Valley once more. While not encouraging bankers to raise their heads recklessly above the parapets, I would remind them that the financial story of our nation would have been somewhat different if the Faradays, Brunels and Heseltines had not dared to take appropriate risk. We did not build significant trading links across the world from east London by battening down the hatches and lowering the anchor.

While a stable, better regulated financial sector is an obvious benefit for all those involved in business and enterprise, my concern is whether an excessive focus on financial stability will prohibit banks and others taking calculated risks and backing potential growth. Over the coming years, in east London and across our country, I look forward to seeing small and large businesses being able to raise the capital that they need, local families taking out mortgages that they can repay, and entrepreneurs opening bank accounts with ease. At the moment, the bureaucracy surrounding these processes makes me think that it is easier to return to keeping the money under the bed.

It seems to me that the new Financial Policy Committee will set the tone for the financial sector. Although the FPC has a financial stability objective, the Bill prohibits it from doing anything to seriously prevent growth. But in the interests of long-term, sustainable growth, should there not be a strengthening of this provision? I believe that a secondary objective for the FPC should be created so that it can support the Government’s economic objectives and support growth positively.

Secondly, where is the human dimension to this legislation? My experience in other fields causes me to worry that the macro financial deals made in the lofty towers of Canary Wharf and the City may not be well connected with the micro realities on the ground at the foot of the towers or with the small businesses and practical day-to-day realities of earning a crust. I would remind the House that the City, whose wealth came through the docks in east London, started with coffee houses where people met each other and did deals. This world was about relationships and integrity—“my word is my bond”. You can create endless regulation and legislation but if people do not act with integrity and relate to each other it will not work.

Much has been done to encourage Canary Wharf and the City to deepen their ties with local and surrounding businesses. The Queen Elizabeth Olympic Park and the companies based at Canary Wharf are

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beginning to realise the long-term advantages of deepening relationships with local business and enterprise. While large organisations cannot be expected to connect with individual entrepreneurs, it is important for them to find a middle ground and to support successful businesses and enterprises which, in turn, will positively impact upon and attract individual entrepreneurs.

My experience is that being in a strong relationship with the world around you, rather than being isolated in ivory towers, is what keeps you safe and honest. If banks had focused on maintaining closer working relationships with their communities, many of our current difficulties could have been prevented. With this in mind, might it not be sensible to have a fifth external member join the FPC who positively engages with small business and has hands-on practical experience in the field? The micro and the macro need to be connected to generate success.

The questions we have to ask today are: will this legislation add to the isolation of the financial services industry or will it help further relationships with enterprise and business? The Bank of England needs to be concerned with more than financial stability. It needs to be concerned with issues central to business and enterprise growth, to have practical and pragmatic objectives, and to have a desire to provide assistance where needed. Theory is one thing but practice is quite another.

6.46 pm

Lord Tugendhat: My Lords, I will not follow the noble Lord, Lord Mawson, down the Lea Valley but I should like to revert to the causes of the troubles in 2008, for which I think there were two main reasons. First, by far the most important was the belief in light-touch regulation, to which both main parties, the financial community, most economists and commentators, and I at that time subscribed. To this was linked the near universal view in this country that the lighter the touch, the greater London’s competitive advantage.

The second reason was that in the build-up to the crisis, and after it had struck, the FSA and the Bank of England performed badly as institutions but also in terms of their co-ordination. The story is well known and I will not rehearse it here but I would point to one big difference between those two institutions. The FSA admitted error ages ago and instituted an inquiry while the Bank of England refused to do either until very recently, and then it was very grudgingly.

Clearly, Governor Montagu Norman’s maxim that the Bank should “never explain, never excuse” lives on. Against that background, I find it strange that the Government should feel that the Bank of England’s record before and during the crisis, and indeed since, is such as to warrant it receiving the vast increase in powers that are being lavished on it. I also recall from personal experience as well as anything else that the Bank’s record of financial regulation in the 1990s and the early part of this century was far from ideal. Johnson Matthey, Barings and, of course, the secondary banking crisis all come to mind.

I am glad that the Government have agreed that the Chancellor should have the power of direction over the Bank of England for use in a crisis where public funds are at risk and that they have put the Bank of

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England and the Treasury under a statutory duty to co-ordinate when managing threats to financial stability. But that does not alter the fact that in normal times during which the conduct of policy will either avoid or provoke possible crises, the Bank of England will wield enormous powers for which it must be held accountable. I will revert to that point in a moment but I want first to deal with another.

Instead of seeking to improve on the institutional structures that they inherited by adapting them and the way they interact in the light of experience, the Government have opted for root and branch organisational change. That is the same choice that they have made on the National Health Service. It is a strategy that always involves very great dangers, because it creates the classic conditions, during the process in which the changes are taking place, of uncertainty, in which risk management, the reconciliation of diverse objectives and keeping reporting lines open can go awry.

I have other worries, too. The burden on the governor will be immense, as other noble Lords have pointed out. He or she will be the master of monetary policy and both micro and macroprudential regulation in the world’s fifth or sixth largest economy and its second largest and most complex financial centre. That is quite simply too much for one person.

In addition to these responsibilities, as again has been pointed out, the governor will have to function effectively at the European and international levels and will have a constant responsibility to justify his or her actions to Parliament and the general public. Finding somebody to fulfil all those roles is going to be very difficult indeed and, however good the person who is chosen, they will bear an immense burden, which I think it is very unwise to create.

I also fear that problems in one area of the Bank of England’s activities will contaminate its reputation and abilities in others. In particular, I fear that any controversy, let alone any errors, in its handling of regulatory matters will contaminate its reputation and render more difficult its handling of monetary policy. Regulation is always a subject of crises and controversy—that is the nature of the beast. So I do not see how this form of contamination can be avoided.

My final fear under this head is of group think, to which a number of noble Lords have referred. Under the tripartite system, co-ordination could and did go wrong. Under the new one, there is the danger that there will not be enough debate, exchange of ideas, free expression and thinking outside the box about issues, dangers and what might be coming down the track. This is not an unfounded fear. If ever there was an institution prone to group think and institutional orthodoxy, it is the Bank of England—and I have already referred to Montagu Norman’s dictum, “never excuse, never explain”. The Bank of England has been going for more than 300 years. It is a very fine institution but, like any great institution, it has faults and other characteristics, which are very difficult to eliminate and are likely to endure. That is why it is very dangerous to put it in such an overwhelming position.

This brings me to the admirable report of the Commons Treasury Select Committee. The Government have chosen the wrong way to reform but, given the route

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that they have decided to go down, the Treasury Select Committee’s recommendations are absolutely essential to guard against the inherent dangers of the new system and enable it to work properly. I will not enumerate the recommendations in detail, because others have referred to them and we are time-limited. But I attach particular importance to the recommendations relating to the role, powers and composition of its proposed supervisory board. I also think that the role, powers and character of its chairman are a matter of great importance, as are the manner and terms of appointment of the governor and the need for published indicators of financial stability by which the Bank of England’s performance in that field can be assessed. Finally, under that heading, what the report has to say about the role of external members, both of the supervisory board and of the various committees, is very important indeed. I urge the Government to look very closely at this report and accept most of its recommendations.

With this Bill, the Government are creating an overmighty subject, whose decisions will impinge directly on households and businesses. The Treasury Select Committee’s proposals will go a long way to ensuring that it is subject to proper internal control and parliamentary accountability. They will also help it to function better than would otherwise be the case and, perhaps, to overcome some of the fears and doubts that I have expressed.

6.55 pm

Baroness Cohen of Pimlico: I declare an interest as a non-executive director for many years of the London Stock Exchange and a veteran, like many of us here, of the financial crisis. There is much to welcome in this Bill, but that does not include the format, which involves the amendment of a couple of other Acts and is painful and confusing—and above all not at all user-friendly. It adds to the conviction that regulations are confusing, arcane and accessible only to experts.

I had the honour of sitting on a committee of this House chaired with patience and clarity by the late, lamented Lord Newton, called the Tax Law Rewrite Committee. It did not, of course, rewrite tax law, because we could not, but it codified it so that anybody who wanted for example to get a grip on capital gains tax had only one Act to refer to rather than juggling several Acts at once. If it was worth doing for capital gains tax, how can it not have been worth doing for a major Act to govern for many years the vital regulation of financial activity? The Bill is of course for the long term, but could we not have started with a self-contained document?

However, as my noble friend Lord Turnbull observed, we are where we are—and there is much to welcome in this Bill. It is particularly pleasing to feel that your Lordships’ House is in agreement that we must all get the best Bill that we can, however difficult the format. The effective regulation of our financial services industry is vital to stability, for consumers to save and businesses to invest, and getting the balance right is vital for any Government, especially as so many jobs depend on it.

As someone who has spent the past 11 years concerned with the working of capital markets, I welcome particularly

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that those markets, including the London Stock Exchange, will be regulated by the Financial Conduct Authority. I welcome the announcement this morning of its chairman, John Griffith-Jones, and expect that he and his CEO, Martin Wheatley, will make a strong team. It is also greatly welcome that the Government have listened to representations on the appropriate home for market regulation and have confirmed that the UKLA will be located in the FCA. It is of course true that effective regulation does not depend on structure, but it is a very good start to have the working parts of successful capital markets regulated in the same place.

The Financial Policy Committee will have the power to move markets and affect consumers, as the Monetary Policy Committee now does. In designing the body, the Government have taken powers to contain the use of those very powerful tools to prevent a negative effect on the real economy. However, the Bill is not consistent or clear about how to meet that objective, and we need to clarify it. After all, the Financial Conduct Authority is going to regulate capital markets, which are estimated to support over 7 million jobs in UK companies, and in the financial sector will regulate 27,000 firms, which contribute £63 billion in tax revenues and provide over 2 million jobs—two-thirds of them not in London. Furthermore, the authority will be a global ambassador and the first point of contact with the UK for international businesses. It needs and deserves a consistent view, which will continue under a Government of whatever character, on markets and the desirability of maintaining the competitive position of the UK.

The original FSA statute provides that the FSA must have regard to,

“the international character of capital markets and the desirability of maintaining the competitive position of the United Kingdom”.

As it stands, the Financial Conduct Authority will not inherit that requirement, despite the FCA regulatory approach document published last year stating that,

“the regulation of markets for capital-raising and trading has worked well”.

If that phrasing is to be discarded, the proportionality principle needs to be clarified in the Bill. The current definition is too vague to be useful. For example, it speaks of benefits and burdens “considered in general terms”, whereas a reference to the impact on the growth of the economy, as the Bill already has in relation to the FPC, would be more tangible.

Proportionality is supported by a requirement to carry out cost-benefit analysis, but again the Bill provides no explicit direction as to what costs should be considered. For example, a direction to consider the impact of actions on the attractiveness of the UK as a business location would be more specific. In their response to the Treasury Select Committee, the Government stated that they see the proportionality principle operating to,

“help to ensure that the UK remains a competitive place to carry on business in the financial sector”.

The Government’s intention in this respect should be reflected explicitly in the Bill. A wide coalition of business groups backs the need to keep regulators focused on the attractiveness of the UK for international business, including the CBI.

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The Government have shown real willingness to act in the national interest in the international market. I cite the less well known current action against the European Central Bank, which sought to provide that euro-denominated transactions can be cleared only in eurozone countries. The Government have gone to court to prevent this. The Government’s support for trading on the renminbi is also thoroughly welcome.

However, in a highly competitive market we cannot take for granted the capital markets’ manifest advantages such as location in a time zone handily placed between the major markets of the USA and the Far East; deep liquidity; and skilled and experienced market participants and financial services people. We can afford to ignore the odd petulant threat from individuals to take off for the Cayman Islands or worse, but in dealing with large, foreign-based companies it is always vital to remember that they do not have to come here. The welcoming arms of Hong Kong or New York beckon them and we should always be conscious of this.

Therefore, I submit that we need a constructive debate about what proportionality means in order to ensure that the Bill effectively delivers the Government’s vision of regulation that supports, not undermines, the competitiveness of the UK and the impact on growth and jobs. This is not about light-touch regulation—the FCA does not regulate the banks, and will not—but about the 7 million jobs in UK companies supported by markets which are subject to FCA regulation, and the £161 billion which has been raised by companies on UK markets since the start of the financial crisis. There is a real balance here that the Government need to acknowledge in linking the actions of the FPC to the growth of the economy, and in their statement of intent for proportionate regulation to support the competitiveness of the UK. This is about a system which will endure and continue to deliver an effective balance.

The Joint Committee that scrutinised the draft Bill stated:

“To be successful the reforms will have to change the regulatory culture and philosophy … A change in culture is not something that legislation can guarantee but legislation can influence the culture of a regulator by: … setting objectives; … allocating and aligning powers and responsibilities … establishing appropriate systems of accountability”.

The culture of regard to regulatory impact on the real economy, jobs and the UK’s competitiveness is alive and well, but if it is to endure for the future, the legislation needs to be more precise in stating this. The proportionality principle is the right place to start. I look forward to discussing this in Grand Committee.

7.04 pm

Lord Hunt of Wirral: My Lords, I declare my interests, set out in the register, as chair of the Lending Standards Board and the Press Complaints Commission, as well as being a practising solicitor and partner in the global commercial law firm DAC Beachcroft for nearly 45 years.

The Bill establishes a new framework for financial regulation in the United Kingdom. I share the determination of colleagues to improve the Bill, including that of the noble Baroness, Lady Cohen of Pimlico, whose expertise and experience in this matter I greatly

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respect. I warmly welcome her emphasis on proportionality. However, I would like to concentrate my remarks on the regulation of consumer credit. I support the move from the OFT to the Financial Conduct Authority. This will result in all retail banking products becoming the responsibility of one statutory regulator, bringing benefits for consumers and firms and avoiding the problems of split regulation. I am, however, concerned that there is still no decision about what type of statutory regime is appropriate for consumer credit—the regime which existed under the Financial Services and Markets Act or the Consumer Credit Act or, as is now proposed, a combination of the two.

I want to make it clear to the House that I strongly believe in self-regulation, particularly effective self-regulation. It has concerned me that to date little consideration appears to have been given to what role self-regulation through industry codes might play in the new regime. I do not believe that it should be a choice between statutory regulation or self-regulation; they both have a place. I strongly believe that the best outcome would be for them to continue to co-exist. We should take the best of what each has to offer to achieve an appropriate and proportionate balance between consumer protection and the commercial needs of a properly functioning competitive market. The new regime has to be demonstrably better than the sum of the current constituent parts; otherwise, why on earth are we incurring the considerable transitional costs and risks? Therefore, in my view, self-regulation remains important and relevant. In consumer credit, The Lending Code sponsored by the British Bankers’ Association, the Building Societies Association and UK Cards Association, and enforced by the independent Lending Standards Board, which I have the honour to chair, has an excellent track record and I believe is seen by consumer bodies and other stakeholders as efficient and effective. Of course, industry can and should take a lead in rebuilding the trust and confidence of its customers, but this will not be achieved overnight and I support action on a number of fronts. However, one of these must be effective self-regulation.

There are five principles of good regulation and, for me, the most important is proportionality. Regulation should be proportionate to the risks posed and costs should be identified and minimised. Vast tomes of very prescriptive statutory rules will usually add little to consumer protection. There is increasing concern about the potential costs of moving to and complying with the proposed new regime—costs that will, of course, ultimately have to be borne by the consumer. I strongly agree with the noble Baroness that at the moment the Bill is not user friendly. However, I was very pleased to see reference to the principle of proportionality in Clause 5 in new Section 3B(1)(b) at the bottom of page 28 of the Bill.

I would like to see self-regulation in the following form. I want there to be strong codes of practice with effective independent monitoring and enforcement that would not only be proportionate to the perceived problem or risk but score highly against the other four principles of good regulation—consistency, accountability, transparency and targeting. What do I mean? Self-regulation can set higher standards than statutory rules. One such example is the latest set of provisions

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introduced into

The Lending Code

whereby banks must retain responsibility for the fair treatment of customers after a debt has been sold to a third party. Voluntary codes can also avoid super-equivalence problems where they set standards that go beyond European regulations such as the EC consumer credit directive.

I could give many examples. Codes offer a vehicle to embody industry best practice and can cover areas that are not appropriate for inclusion in statutory rules. Self-regulation is more flexible and responsive to change and emerging issues. Codes provide a level of conduct of business detail that supports high-level statutory rules and can help industry better to interpret and apply the statutory requirements. It is better to have one externally visible code than myriad different lender-specific internal codes. Codes can also be market-focused or product-focused, as compared with the broad generic approach that is symptomatic of statutory regulation. That would produce much better consumer outcomes.

Improvements to self-regulation must be part and parcel of this approach. A number of codes of practice currently operate in the consumer credit market. Not all have standards that are as robust as those contained in The Lending Code or the FLA code to which my noble friend Lady Noakes referred. These codes are followed by the major banks, building societies and credit card providers. In promoting the case for self-regulation as a component of the future regulatory regime for consumer credit, Governments should encourage the sponsors of these codes to look at strengthening their rules, as has recently happened in the payday lending market. Most importantly, they should ensure that the codes are independently monitored and enforced.

The new regime would benefit from a close working relationship between those enforcing such codes. Ideally, there should be some provision for recognition or endorsement of codes by the FSA. Endorsement could provide a degree of protection for firms if they were to follow the codes’ provisions. That would encourage commitment on the part of the industry. I do not think that the statutory regulator would be abrogating ultimate responsibility; it could work along the lines of the OFT’s compliance partnership approach.

In conclusion, self-regulation is the right way forward—complementary self-regulation policed by an independent regulatory body that would protect the consumer without destroying the creativity and competitiveness of the market. Unfortunately, statutory regulation tends to be very heavy-handed, whereas self-regulation can supply not a light hand but a firm hand—and sometimes even a helping hand.

7.13 pm

Lord Barnett: My Lords, we are debating the Second Reading of a large Bill that is split into two parts to make it look smaller, I suppose—one containing the clauses and the other the schedules. When I first saw the Bill, I was reminded of days long gone when I took Finance Bills through both Houses. I was in opposition on Finance Bills to the noble Lord, Lord Lawson, and we debated them at great length over many years. We

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considered two Bills a year in my time—the second amending the first. I fear that that will happen again because Oppositions of all parties tend to choose the sexier points of a Bill to debate and leave the main parts undebated and unscrutinised. The situation is a bit better these days, in the sense that the House of Lords—although Finance Bills are money Bills, and this Bill is not—examines clauses in Select Committees, of which I have been a member. They do a good job, but it is very limited. The Commons does nothing at all about these matters.

The situation is not much improved these days, although I hope that this Bill will be a lot better because it has had a great deal of pre-legislative scrutiny. We have had Select Committees, Joint Committees, Command Papers and White Papers. In fact, there is so much paperwork attached to the Bill that I confess I have not read it all. I am sure that every other Member of the House who has spoken will have done so. I hope that the pre-legislative scrutiny will help, but despite all that, I hope I will be forgiven for believing—as with Finance Bills—that we might see in years to come a lot more Financial Services Bills that amend this one.

The Bill amends a number of Acts, not least the Bank of England Act that the right honourable Gordon Brown, as Chancellor, introduced to the House of Commons. At the time, I thought that it was not a bad Bill, apart from in one or two major areas. However, in practice, I had reservations. In an article in today’s Financial Times, John Gieve, a former senior Deputy Governor of the Bank of England, said:

“The debate so far has revolved around one fixed point: the assumption that no change is required in any respect to the … Monetary Policy Committee”.

He had obviously not read or heard my speeches over many years because, together with the noble Lord, Lord Peston, who is my noble friend and professional tutor, I tried to persuade the Chancellor at the Second Reading of that Bill—we also did so privately—that he needed to make a major change that has been referred to by a number of noble Lords, I think even in the excellent maiden speech of the noble Lord, Lord O’Donnell. There were three words in that Bill which should not have been there. The words were “subject to that”. They meant that the Monetary Policy Committee must look at the problem of inflation and only then—I repeat, only then—look at the major economic and financial problems that the country faced. I give notice to the noble Lord, Lord Sassoon, that we will try again—given that the Bank of England Act is referred to in the Bill—to remove those three small words.

The real question before us is whether the Bill will deal with the kind of crisis we had in 2008. A number of noble Lords have expressed doubts. The noble Lord, Lord Tugendhat, with whom I very much agreed, asked why on earth the Bank of England, of all places, should have huge powers such as those given to it by the Bill. After all, its past record would not normally justify giving it greater powers, yet that is what the Bill does in a big way. We are now going to have deputy governors of the Bank. All we are told is that the Bill is to avoid a repeat of the financial crises that we have had in the past. Perhaps I may express the hope that it will do that—but I doubt that it will because the plain fact is that part of the reason for the crisis, as the noble

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Lord, Lord Sassoon, mentioned, was what happened when Northern Rock was lending 120% mortgages. Auditors have been blamed. In my long-lost past when I was a junior auditor and before I became a senior partner, I often wondered how I would deal with an audit of major banks lending at this rate. Under their present terms, auditors could not deny them a certificate, and of course this Bill will not do anything about that.

I have a feeling that we have this the wrong way round in that this Bill should have come after the banking Bill. I ask myself whether all the new prudential regulations and new committees—the new Financial Policy Committee and the new Financial Conduct Authority—should have come up for discussion after the introduction of a banking Bill, which we are now going to have. Perhaps the Government will tell us when we will have that Bill and when it is likely to become an Act. It is urgently needed. I would not like to say that without such a Bill all the banks are going to be unable to cope with the sort of crisis that we met in 2008, and ultimately it may well be that without sufficient scrutiny, as I mentioned, that Bill will not achieve any kind of objective. Perhaps after nearly 48 years in one House or the other I have become overly cynical. Perhaps I have taken through too many Finance Bills and have debated finance and economics too often. I hope that I am not cynical but I fear that I am. It is very difficult to be confident that the great new structure brought in by this Bill is going to solve the problems that we are facing and meet the objectives clearly set out in the Bill.

I do not agree with noble Lords who said that they regret that the Bill is to be taken in Grand Committee. I find that Grand Committees provide closer and more detailed scrutiny of Bills. This is not the kind of Bill that is helped by being debated on the Floor of the House. Our House is a bit like the House of Commons in that only the sexier parts are debated at length, whereas in Grand Committee you can look at Bills more closely.

I look forward to the amendments that will be moved by me, my noble friend and many others. I hope that ultimately my worst hopes and excessive pessimism will not be met and that the Bill will emerge in a better form than it is in today.

7.22 pm

Baroness Valentine: I declare that I am chief executive of London First, a not-for-profit business membership organisation, whose members are drawn from a wide range of business sectors, including banking, insurance and professional services firms, and their customers

Over centuries and through several crises, the UK has built a global reputation as a safe and honest place in which to do business. Its financial sector is seen to offer a deep pool of knowledge and expertise that is, arguably, unrivalled. Businesses value this expertise and the ability to harness it to their own requirements. These can be as diverse as raising capital, structuring and financing mergers and acquisitions, or hedging against price fluctuations in their raw materials. These are essential services for businesses. Therefore, in developing the framework for regulating the financial

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sector, we must take into account the likely impact on not only the financial institutions themselves but, perhaps more importantly, their clients.

For business, the price, range and availability of financial products and services will be contributory factors in achieving economic recovery and maintaining international competitiveness. With this in mind, I join other noble Lords in expressing concern that the proposed objective of the Financial Policy Committee is solely to focus on ensuring financial stability. This objective should, I believe, be complemented with a duty to foster an environment in which the financial sector can continue to support economic development—for example, by helping to ensure a stable supply of credit.

When we look at other national regulators or central banks, we see that they are often given similarly balanced objectives. For example, in the US the Federal Reserve maintains the goals of maximum employment, stable prices and “moderate” long-term interest rates. The Reserve Bank of Australia has both its social and its economic purposes clearly defined in law. Its job is to ensure that its monetary and banking policy contributes to,

“the economic prosperity and welfare of the people of Australia”.

Closer to home, as other noble Lords have noted, the Bank of England’s own Monetary Policy Committee includes in its objectives the aim of supporting the Government’s,

“objectives for growth and employment”,

albeit, as the noble Lord, Lord Barnett, notes, as a subsidiary objective.

Financial stability must, of course, be a core objective of the regulatory system—it is a precondition of economic well-being—but it should not be the only criterion against which we measure success and, indeed, we should not be seeking financial stability at the cost of economic development. If we do so, we risk hard-wiring a bias towards conservatism into the new regulatory architecture. We have to recognise that innovation is part of what will keep us at the cutting edge of global markets. Without it, the economy will continue to be stifled.

At a time when our economy is in a double-dip recession with an anticipated slow and bumpy road to recovery ahead, all aspects of the regulatory framework, including financial regulation, should be designed and implemented in support of growth. I cannot see why this approach is not relevant for the Financial Policy Committee and, in his closing remarks today, I would welcome some explanation from the Minister of the rationale for adopting such a narrow brief.

I further note that the Government have established a Regulatory Policy Committee to ensure that any new regulation meets the principles of good regulation. There is a strong argument for bringing the FPC and its sister bodies within its scope.

My second concern relates to the approach that the UK is taking towards integration with the new European regulatory framework and the need for those working with the new European bodies, on the UK’s behalf, to have relevant market experience and expertise.

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Increasingly, the regulation and supervision of financial services is driven by decisions taken outside our Parliament at a European or G20 level. This is right if we are to ensure a consistent approach to supervising global institutions, but it seems strange that the proposed UK framework does not correspond to the recently established European framework. We appear to be developing a new imperial system while the rest of Europe consolidates a metric one.

The UK already punches below its weight in voting terms. Despite having more than 35% of the European wholesale financial markets, under qualified majority voting we have fewer than 15% of the votes on decisions governing those markets. British nationals occupy only 5% of the posts in the Commission, even though we make up 12% of the population, and that proportion is falling. At a time when the so-called Anglo-Saxon model of financial services faces considerable suspicion from some quarters, for the UK to be so under-represented is worrying. My fear is compounded by the general lack of experience of truly international financial markets among those responsible for regulation and supervision in the new European regulators. It is essential that Britain’s regulators offer a coherent voice that can provide these new institutions with the expert guidance and insight they will need to fulfil their functions without damaging the very markets they have been established to protect.

Lord Lea of Crondall: I am most interested in the point that the noble Baroness has just made about whether we have the right number of people in Brussels, Frankfurt or wherever. Is that the view of her constituency in the City of London and, if so, what are the members of that constituency doing about it?

Baroness Valentine: I could give a long answer to that. I do not believe that industrial representatives from the City are necessarily welcome in the European supervisory bodies, and that creates a complication in dealing with that particular issue. I think that they would be happy to put forward people but you have to be clear that the Chinese walls are there. I am not sure whether that answers the noble Lord’s point.

I welcome the Government’s creation of an international co-ordinating committee to present issues and concerns from the UK regulatory bodies. However, I believe that its effectiveness and credibility would be enhanced by mandating a secretariat made up of individuals who have experience of the international markets and have worked in international organisations. This would be a significant step towards ensuring that the UK’s contribution to EU financial regulation was proportionate to the importance of the financial sector to our economy, and would send a clear signal that the Government recognised that contribution.

Last week the chairman of the Treasury Select Committee commented that this Bill was,

“the most important overhaul of financial regulation ever undertaken in this country … It is crucial that we get it right”.

I could not agree more.

Despite laying claim to be the birthplace of modern football, it is many years since any of our national

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teams have been dominant on the field—as I fear the French may well be demonstrating this evening. I do not know the score.

Noble Lords: A draw.

Baroness Valentine: A draw. However, we have long been pre-eminent in financial services and we should aim to remain so. I therefore urge the Government seriously to consider the suggestions I have made this evening.

7.31 pm

Lord Lucas: My Lords, it is very important that when we come to the Report stage of this Bill and the arguments that we will doubtless still be having with our Front Bench, we vote according to our expertise and not our politics. We are holding ourselves out in this House to be a source of expertise. The debate, at least until now, has demonstrated that to excess. If we allow ourselves, when it comes to votes, to be pushed around by our Whips, we become a mere House of politics, which is what Mr Clegg wishes to make us. If we are to be a House of politics let us be elected and get it done with. If we are going to be a House of expertise, it is important that when an argument has been won in this House and the Government still resist it, our views make their way down to the other end. I very much hope that when my noble friends and I come to discuss such important points as the duties and responsibilities on regulators, and we have reached a settled conclusion in this House, we vote that way and do not let ourselves be put off by spurious political considerations. We are a House of expertise. We should be proud of it and we should live up to it.

It seems to me that many of those who have spoken have focused on the way in which duties are placed on the various regulators. This is crucial; things obviously have to be divided between ministries and responsibilities are given out to one or another. The same happens with bits of ministries, but if you do not allow some overlap, you get situations like the current spat between the UK Border Agency and BIS where the UK Border Agency regards university students as some kind of poisonous plague and BIS, quite rightly, wants to encourage as many as possible. We need the UK Border Agency to have regard to the effect of its policies on the economy as a whole rather than just on immigration. You need to blur the boundaries from time to time and to place responsibilities on agencies that go beyond the powers that they actually have, so that they take into account the wider effects of what they do. The case has been very well made today that we must have regard to that consideration in this Bill.

I will focus mostly on minutiae. The big picture has been well covered by people who know it better than I do. I reassure my noble friend the Minister that during the Committee stage I will not try to insert any of these peculiar particular considerations into the Bill, other than making sure that the regulators, when they are created, have the power to deal with these things without having to come back for primary legislation. The three things that concern me particularly are high-frequency trading, consumer regulation and disintermediation. High-frequency trading has got to

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the point where stock exchanges—I do not know whether this is true of the London Stock Exchange, but it certainly is for some of the American exchanges—are allowing privileged access to data streams to high- frequency traders. These people with their computers are sitting co-located with the Stock Exchange. They are getting the data before anyone else, so the common experience of a pension fund manager trying to shift a block of a few million shares is that the market moves ahead of them because the high-frequency trader can see what is happening. This is licensed insider trading. The only people who benefit are the few running these specialist computer installations. The people who suffer from it are all of us through lower returns on pension funds. It is a thoroughly undesirable activity.

I am no friend of the Tobin tax; I can understand why people want to impose it but I do not think that it would work. However, we have to find a way, either through looking at the definition of insider trading which, it seems to me, high-frequency trading is well over the boundary of in some instances, or by looking at things like instant registration of share ownership. Why not update that so that companies have much more control of who is on their register rather than having a sea of unregistered deals out there? Why not bring company registers up to date and see what benefits that might give? I want the regulatory authorities to be able to explore those sorts of questions. It will take time but I do not want them to find that they are limited in what they can do in the way they are at the moment with consumer regulation.

There is a boundary between what the FSA can look at and what it cannot when it comes to collective investments. You would think when you read the pages of the Guardian or similar newspapers with their whole-page spreads for tropical forestry investments that they were collective investments. They are in the sense that a lot of people are piling into them all together. But because the investment at the end of the day is in individual named trees, the FSA cannot touch it. These are the most monstrous scams and people will suffer because of them. There was a supplement in the Guardian that must have had five or six whole pages of advertisements for these things. Why the Guardian deserts its responsibility to its readers to that extent I do not understand, but at some point these things get big enough so that the FSA should take an interest. I do not want it to be hobbled by provisions saying that there are artificial boundaries that the FSA cannot cross. It must be able to look at the effects that these products have on consumers, the likelihood of disaster and misbehaviour, the way in which they are sold to unsophisticated customers rather than sophisticated customers and say, “This looks like an area that we should investigate and therefore we can”, rather than being obstructed by technicalities.

The same appears to be true of some wine investments. This is not something that is without its extensions. The noble Lord, Lord Whitty, raised the interesting question of customer data and how Tesco Bank would be able to combine my liking for baked beans with my banking records. I can see why that would be useful. You say a lot about yourself in your pattern of purchases. Doubtless it could use that in judging my creditworthiness.

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Perhaps it is a good idea that it should, but we jolly well ought to debate it. Whatever financial regulator we create ought to be able to deal with that sort of emerging problem as it comes along.

Lastly, I come to disintermediation. I shall not take long because Andrew Haldane of the Bank has said such wise things about it. We have to make sure that the regulators we produce can unblock the road. At the moment they are in a totally ridiculous situation. The Treasury says people like Zopa and Funding Circle, which are disintermediating between members and borrowers, cannot have tax offset. If you make a capital loss because some of your loans go bad, you cannot offset that against the interest you have earned. So, this restricts these operations to only the finest possible lending. It also says that they cannot put their products into ISAs or similar things. It says they cannot do these things because they are not regulated and they are not regulated because the Treasury will not let them be regulated. We invented this disintermediation. I think that I am right in saying that Zopa was the first in the world. It is as if we had invented Google and then prevented it doing business. There are now hundreds of these things all around the world, but we have a block on the development of our own industry, which could be a fundamentally good thing that would offer new opportunities.

When the right reverend Prelate the Bishop of Durham comes to look at community lending, he will see that we will be able to produce the sort of disintermediation structures that work at a local level. When the sector becomes sizeable it will start to reduce the burden on the Treasury of the £85,000 guarantee, because the direct system will not qualify for that. We will start to attack the whole problem of lending short and borrowing long, because if we do it through the likes of Zopa or Funding Circle we will take the time risk but we will have a tradable asset. Therefore, we will get rid of the systemic risk that caused such great problems in the banking sector. We ought to encourage these things, but the Treasury has put a total block on their development and as a result the rate of growth in this country of that kind of business is terribly slow.

We must make sure that in producing new structures we are conscious of the fact that there will be people who will want to innovate in disintermediation. It is not only mechanised lending that is capable of disintermediation; investment management is also capable of it. We are conscious that investment managers as a class earn very large rewards. We are beginning to see disintermediation at the seed capital end of things. I am associated with one such firm. It would be nice to see that in mainstream investment management. We ought to be able to disintermediate annuities. Old people want income, young people want capital. That is a classic disintermediation opportunity, but it will be possible only if we write the regulations correctly. Otherwise, we will put young firms at a total disadvantage compared with the established, regulated operations against which they are trying to compete. The Bill ought to be on the side of innovation and dispersing rather than concentrating risk, but at the moment it may not be.

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7.41 pm

Lord Borrie: My Lords, a short while ago the noble Baroness, Lady Valentine, quoted the excellent chairman of the House of Commons Treasury Committee, Mr Andrew Tyrie, who described the Bill as,

“the most important overhaul of financial regulation ever undertaken in this country”.

She will know that, at the conclusion of the Bill’s discussion in the other place, the committee considered that it left there still defective in a number of significant respects.

I will concentrate my remarks this evening on the consumer protection aspects of the Bill, and on the role it gives to the Financial Conduct Authority. I appreciate the valuable role of the other regulatory body created by the Bill, the Prudential Regulatory Authority. It will be just as important to consumers as to big and small businesses, and to the economy generally. We all benefit from financial stability; we all need a firmer base for avoiding financial crises in future.

The Bill makes it clear that a key objective of the Financial Conduct Authority is to promote effective—I emphasise “effective”—competition. At present it is evident from a number of matters, including the existence and persistence of many expensive short-term, quick-fix payday loans, that competition is not working. If it were working properly, the detriments that these loans often have of imposing not only high charges but high default charges would disappear from the marketplace.

Among the essential requirements for effective competition is clear information that is understood by the people who see it. It has been commonly thought by the intelligentsia, consumer groups, the Civil Service and successive Governments that the annual percentage rate is the best way of enabling consumers to compare different offers of credit. If we were all sophisticated, the APR would have a lot to recommend it. However, a percentage sign with whatever number is in front of it is not as readily understood by the great mass of people as a pound sign: how much they will have to pay in interest. What is often needed—not as a substitute for APR, which is perfectly good for all sorts of obvious reasons, but in addition—is a clear statement in cash terms of the total cost of credit. If that were explained to people, many loans that were objectively undesirable would not be taken out.

I am happy to note that among the supporters of this proposition is the Trading Standards Institute, of which I have the honour to be a vice-president. However, it also wants a legal cap on charges. I have never been sure about the case for a legal cap, on the grounds that other noble Lords expressed today: namely, that many borrowers would be worse off if they were pushed into the arms of unregulated and unlicensed moneylenders whose debt collection methods would be likely to involve threatened or actual violence. I am sorry that the right reverend Prelate the Bishop of Durham is not in his place. He said many important things about the value of mutuals and credit unions, and about the serious disadvantage of unlicensed moneylenders purveying credit to members of the public.

The relevant trade associations have agreed to improve their codes of practice. I agree with the noble Lord, Lord Hunt of Wirral, that improving codes of practice may be a substantial help. However, it would be a pity

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not to take up the opportunity of putting into the Bill certain legal requirements to make it clear that we are not just urging people—codes of practice usually “urge” people—to think carefully before taking out a short-term loan, but are making it much clearer that these loans are expensive.

I referred to the need for the consumer to get clear information in order for effective competition to take place. There is also room for discussion of improvements to the Bill proposed by Which? to require the Financial Conduct Authority to ensure that information provided to consumers is “accurate and intelligible”. This wording would be more helpful than that in Clause 5, which uses the currently popular phrase “fit for purpose”, which is far vaguer. I am fond of the phrase “fit for purpose”—as is anyone who has studied the Sale of Goods Act in its original form. However, people have borrowed it to refer to all sorts of unrelated matters and it is not terribly clear.

One of the most useful and imaginative consumer protection provisions of consumer credit legislation was the creation of joint liability in law of finance companies and traders who provide goods or services. Section 75 of the old Consumer Credit Act 1974 indicates that when goods are bought with credit provided by a finance company or card company, the finance company is deemed to be engaged in a joint enterprise, and usually it is the finance company which has the greater resources to meet any claim for breach of contract the consumer may want to bring.

In the course of the Bill’s progress in another place, the Government stated their wish to replicate that provision in the Financial Conduct Authority consumer rule book. However, they seem to have found that that would not be strong enough and that it may be necessary instead to keep the provision in the Consumer Credit Act, to which I have already referred. The noble Baroness, Lady Noakes, referred to this problem and the Finance and Leasing Association, in its briefing to noble Lords, also referred to the matter.

It is not very clear from government statements in the other place what is to happen. We know that the licensing powers of the Office of Fair Trading are to be transferred to the new body by secondary legislation but, as the FLA fairly asked the question, what about the transitional arrangements? What will happen in between time? We know that other legislation is being brought forward by the Government to merge the Office of Fair Trading and the Competition Commission, so what will happen to the current licensing powers that the Office of Fair Trading has under the Consumer Credit Act? It is important to have clarity on these matters, otherwise things will not go clearly and smoothly. At the moment, the Government seem to have left us all—not only people such as myself but also the FLA—uncertain as to what the outcome will be.

7.52 pm

Lord Naseby: My Lords, before I begin my speech I wish to offer an apology to the House in general and in particular to my noble friend on the Front Bench. Regretfully, due to the vagaries of public transport, I was not in my place as I should have been at the start of the debate. However, I have heard most of the speeches subsequently.

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I wanted to take part in this debate because, as we all know, the financial sector is absolutely vital to the success of this country. It does not matter whether you are a small shopkeeper, a SME or any other form of business, a major or minor saver, the success of our country stems from the success of the financial sector. The Bill, huge as it is, has the potential to create the right conditions providing not only that the structure is there but that we can find the men and women to use, work with competence and understand the culture behind it.

I do not have the skills or the competence to make a judgment on the major financial dimensions and controls of the Bill. Others who do have such competence have spoken today and I hope that my noble friend on the Front Bench will listen to and take on board what they have said today and what will arise in discussion in Committee.

However, there is a certain area where I can claim some competence and skill. It straddles the area that my noble friend—I do treat him as a friend—Lord Borrie has half discussed this evening and I would like to add to that. He and the House will know that I have asked a number of questions about the Office of Fair Trading. Much of the work that it does is good, but there have been a number of examples, particularly in the recent past, where extensive inquiries have been undertaken over months and, indeed, years, costing millions of pounds to both the public sector and the companies or organisations that were under investigation and where it has been subsequently found that there was no wrongdoing.

It has been mentioned by a couple of noble Lords that we are now in a transition period. It is very important in a transition period, if I may use a cricket metaphor, that the ball is not dropped in the slips. One of the areas that deeply concerns me at the moment is that of payday lenders. I asked Citizens Advice whether there was a current short example that I could quote to your Lordships. In November 2011, a citizens advice bureau in the West Midlands saw a woman who was earning £880 a month. This did not prevent her taking out 19 payday loans. She was granted these short-term loans. By the time she came to the citizens advice bureau her entire wages were being taken up in debt repayments. As a result, she was having to use payday loans to replace her income, not to supplement it for short periods as payday lenders suggest in their advertisements.

I was in the world of advertising and I listen to the advertisements and it has come over in the past few days that there are a number of companies in this area. The new authority which is to take over has to have a competence not only to license particular companies in the payday loan area—there is a function there that is required—but has to have an ability to take action early before matters escalate out of control. We are in a transition period and I say to my noble friend on the Front Bench that I hope we will not allow this problem to escalate out of control.

There is a second area in which I have some competence. In the past I had the privilege of being chairman of a friendly society. I took through the House the Building Societies (Amendment) Bill, which was started in another place by a former Member of

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Parliament, John Butterfill. The provisions of that Bill, which came into effect just before the financial crisis in 2008, gave some flexibility to building societies in what they could or could not do and allowed them to develop as good mutuals. Yes, I am one of those who regrets the demutualisation of so much of what was the mutual movement.

When I was chairman of a friendly society we tried very hard to extend niche areas. We were a small operation with assets of only £1 billion at the time. We looked at the niche markets we could provide that were not available or on offer from the banks. Every time we tried the FSA put the claw of scrutiny upon us—which was fair enough—and it was very difficult to find new markets to move into and develop. The same applied to the credit unions. The child trust fund came forward and the friendly society movement received 25 per cent of that market. Indeed, without the drive and enthusiasm of the friendly society movement, the child trust fund would not have developed as it did. Sadly, the knife went in from the Liberal Benches. Whoever was to blame, the scheme could have been modified and need not have cost the Exchequer the money it was costing. The point I wish to make today is that the regulator has to look at the extent of the risk to smaller operations, which often tend to be community based, and not decide that just because they are small they are ultra risky.

There needs to be a change in attitude in a number of other areas. One in particular is the alleged pension mis-selling situation. There is no doubt that there was some pensions mis-selling in the late 1990s. Equally, though, by the time we had gone through the FSA’s requirements, we and many other small pension providers soon found out that, on a generous estimate, up to 25% of pensions might have been mis-sold. There is a requirement in life for a bit of caveat emptor, but the early claims companies got on the back of this and made it into a business of its own, almost regardless of the validity of the claims. Basically, the providers would say, “It is easier to settle than it is to contest this”.

The banks have also had to face challenges in relation to the selling of PPI and some other products. While a person who has genuinely been mis-sold a product should be properly compensated, with the new regulator we must not allow a situation to arise where it is far more troublesome to deal with a tidal wave of claims from the claims houses. They have very persistent people working in them, and it is cheaper to settle than to look at the validity of the claim.

I shall finish by saying that my noble friend Lord Lawson, who has been in his place for almost the whole debate, mentioned the word “cost”. Cost is a crucial feature in relation to anything in financial services, and particularly in relation to the controls and requirements being put on the industry. The new FCA will need to keep abreast of the comparative costs between what is proposed for the UK and what is happening in other major financial centres around the world. We need to remain cost competitive as well as control competitive.

8.02 pm

Lord Desai: My Lords, this has been an excellent debate, especially the maiden speech of the noble

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Lord, Lord O’Donnell. I am reminded of a debate we had when we considered the Financial Services and Markets Bill. At the time we were sure that the self-regulation of various bodies in the City had failed—the noble Lord, Lord Hunt of Wirral, mentioned self-regulation—and that we needed cross-border co-ordination and an overarching authority. We thought we had that in the Financial Services Authority, because at the time the problem lay in the interconnections between different parts of the financial sector that were not well understood. I recall that we were proud of a special provision in the Bill to ensure that the chairman and chief executive of the authority would be the same person. Sir Howard Davies was chosen. We thought that the centralisation of authority in one person was key to the success of the authority.

We have moved on, and now we have the Financial Services Bill “Act Two”. I have absolutely no practical experience of anything, but I want to emphasise that these Bills are always based on an underlying concept. The conceptual basis of the FSA proved to be wrong. It was not just that it was based on light-touch regulation—we all believed in that—but that the kind of world we thought we were regulating was no longer the world that was out there. My main worry is whether, when these bodies have been set up, they will be able to deal with the problems they have to face. I shall take a line from my noble friend Lord McFall, who said that risk is a black box. Our main problem recently in the cases of MF Global, JPMorgan Chase and others has been that the people who are professional workers in the field can no longer grasp the kind of risk they are undertaking.

What is also happening in the literature is that what was once the standard, basic concept, that of a financial analysis of value and risk, is now in doubt in that people wonder whether it is a robust enough concept to guide them through operations in the financial market. As it turned out in the case of JPMorgan Chase, the product it was engaged in putting money into was so complex that the top management, which is among the best management there is, did not actually understand the nature of the risk that its people were taking. Surprisingly, however, when the so-called London Whale was taking a position in the sovereign debt euro market, someone called the New York Monster sitting in New York knew precisely what was going on and spotted the anomaly in the big bet that JPMorgan Chase was taking. He decided that the bet had to fail. He took a counterposition and cleaned up. The market worked, but the institution has completely failed because the people in charge did not understand the nature of the risks that some of their subordinates were taking.

That is exactly the story of Barings Bank. When it failed, it was because the top management at the bank did not understand why they were making so much money in the Far East. They were making money in the Far East because a man called Nick Leeson was taking unhedged bets on the yen. Those bets were publicly known to anyone who looked at what was happening in the Yokohama market. I remember discussing it here at the time. Not only did the top management at Barings not understand what had

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happened, the top men in the Bank of England did not understand it either. A report was later produced which we debated in your Lordships’ House. These regulatory people face a problem: can they keep up with the nature of the reality, which is very fast-changing, complex and mathematical, so much so that even those operating in the field do not understand it? It is almost like playing rugby without knowing the rules, and even then the rules keep on changing while you are trying to play.

There has been some coverage in the Financial Times of the failure of MF Global. It was run by Jon Corzine, a very accomplished man who had been with Goldman Sachs. When that large fund failed—the investigations are still going on—what clearly emerged was the fact that the firm had not set up sufficient internal supervisory and regulatory procedures in order to understand what it was doing. It is the long-term capital management story all over again. The company had taken a position believing that if differences in interest rates are very wide, they will converge. It is one of the basic propositions of Economics 101, except when it does not work. It does not work when things do not come together: when, in fact, they diverge. That is what happened in 2008 and it has happened again and again. Somewhere in the intestines of the FPC or whatever it is, I suggest that there ought to be a research capability that can tell those who are regulating how the reality is continuously changing.

A piece by Gillian Tett in the FT last Friday mentioned an article by someone who worked for the SEC, which said that the thing is now so complex that although there is a reporting requirement on firms operating in the financial market in the United States, the firms themselves cannot describe what they are doing to the satisfaction of the SEC because they do not understand the nature of some of the things they are doing. One of the propositions in this article was that it is no longer that the firms are too big to fail; it is too complex to describe and depict what the firms are doing. This comes out of the fact that the people who do these things are in their 20s and 30s and the people who rule over them are in their 50s and 60s and have absolutely no clue what is going on. That problem will have to be dealt with at some stage. I do not know whether the Court of the Bank of England—of which one hears very little normally; it does not do anything at all, and is made up of the great and the good—is a functional part of the organisation. Someone said that it was the decorous part of the structure.

The FPC will need seriously competent people who are able not only to understand how the market works but to keep up with the rate at which the market is changing. This is hard work. I once suggested in your Lordships’ House—I will do it again—that it would be a very good idea periodically to examine people at the top of banks and financial institutions to see whether they understand the changing nature of the market they are in. We really have to license them and have an examination every three years; if you cannot pass the exam you are not competent to be at the top of a bank. This is exactly what happened at Barings. I do not make this suggestion facetiously; I think it would be a very important thing to do.

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If we have a world in which the products are so complex that the management of the company does not understand the nature of the business, it is time to think about breaking companies up or doing something so that they are a biteable, good size and people can grasp what they are up to. This would relate to the nature of the competition, and to the banking Bill that we are going to get in the future. Banks themselves have become very complex because they combine not just retail but investment banking and other things. Banks have failed because they were too complex. One of the tasks of the FPC should be to keep on doing research at a sufficiently high level so that it understands the complexity. The noble Lord, Lord O’Donnell, mentioned a joint parliamentary committee to which the FPC, the PRA and the FCA would all answer. We need political oversight so that these bodies are accountable.

Finally, I cannot see how the FPC and the MPC can be two separate bodies with no communication between them. Someone has already mentioned that if the interest rate is the instrument with which you control inflation and things like that, it is also a very important instrument for financial stability. If you are going to do things like that, you have to be careful. It is a fallacy to think that macro and microprudential conduct are separate things. There are large micro units and their misbehaviour can have serious macro implications. That is another overlap between the FPC and the PRA that we ought to look at very carefully and not build Chinese walls that will be big obstacles to serious regulation.

8.13 pm

Lord Flight: My Lords, I declare my interests as set out in the register. In particular, I am the senior non-executive director of Metro Bank, the new retail bank, and a commissioner of the Guernsey Financial Services Commission and thus myself a regulator. I also led for the Conservative Opposition 13 years ago in Committee in the other place for FiSMA, and even before that, back in 1974 I was briefly seconded to the Bank of England lifeboat, which did a pretty reasonable job in sorting out a lesser but very serious banking run at that time.

On FiSMA, I was fiercely of the opinion that the central bank should retain responsibility for supervising the banking sector. It seemed natural that a central bank would be more likely to know what is going on. I spoke out equally strongly against the tripartite committee because when a crisis comes someone needs to be in charge. Both these issues were demonstrated most unfortunately in the 2007-10 crisis. I accept that the Bank of England has not acquitted itself that well recently. Indeed, in 2007-08, the Bank was still relying on its economic model, which told it that everything in the garden was dandy, and failed to spot a major banking run gathering momentum right outside its back door, where there was a Northern Rock office with queues of people lined up. The Bank of England needs some re-equipping and some intelligence restored in order to do the job that is going to be put on it and on the PRA.

I would like to stress concerns voiced by others about the costs. I see it from the other side of the coin.

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In various investment management businesses, I see piles of paper that do no one any good, when really all that is wanted is integrity and, if you breach integrity, serious punishment. Everyone seems to forget that it is the consumer who pays. When interest rates are artificially low and equity markets have done nothing for a decade, no wonder no one wants to save when there are now enormously substantial regulatory costs as well. The noble Lord, Lord Hunt, was quite right: what is wanted is proportionality; regulation generally needs slimming down and looking at more effectively on a cost-benefit analysis. I also make this point to many of the consumer lobbies, who want more and more—allegedly in the interests of consumers—and forget that it is their consumers who are going to have to pay for it.

It is dangerous to bury “buyer beware” completely. People need to understand what they are investing in and buying. Telling them, “Oh, it doesn’t matter, the Government will look after you. If anything goes wrong, you will get refunded”, is an extremely unwise mentality in the marketplace. Neither the FSA nor the new body should be expected to educate mature adults, which is a waste of time anyway, but much more should be done in schools. Financial literacy should be part of the core curriculum. It is gradually gaining momentum in terms of some tuition, but it is still pretty thin and most schoolteachers regard it as something with which they do not want to get their hands dirty, so more requirement should be made in that area.

Another noble Lord made the point that the Bill does nothing at least to look at how the accuracy of data in reporting to regulators should be checked; nor has it done anything about FRSA, which contributed greatly to the banking crisis by hugely overstating bank profits in good years and vice versa in bad years and led to bank accounts that no one can understand. The accounting profession has some blame to bear and needs some reform as well.

I hope that the Government will accept that the Bill needs quite a bit of tidying-up before it becomes law. I pick on one or two particular areas in the PRA. Life companies and their balance sheets are very different from banks. They need fair representation and need to be handled very differently from banks. The transfer of consumer credit arrangements, which I argued for 15 years ago, is something of a halfway house and needs looking at before this legislation is passed.

The new fashion in transparency is fine up to a point, but excessive transparency can have dangerous, contrarian effects. Banks will write minutes as they think the regulator wants to see them and decisions will be taken outside the board meeting. Let us not have excessive transparency. In the area of publishing warnings, I know of situations in which the FSA got a major warning of a company completely wrong. If that had been published, the business might have been irrevocably damaged quite unjustly.

The main innovation in the Bill is obviously the FPC, to provide macroeconomic and market oversight. I agree with my noble friend Lord Lamont and the noble Lord, Lord Desai, that the MPC and the FPC have to be one; if they are not, not only will there be conflict between the two but both bodies will overlap in the tasks that they are there to perform.

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The PRA and the merged FPC and MPC need pro-growth as well as stability mandates. As many others have pointed out, the financial services are a major employer and the biggest industry in this country. I am sure the Minister will say that they are not anti-growth, but, as with the Fed, there should be a balance.

There is the question of accountability. Should those committees be ultimately accountable to the Treasury Select Committee? There is a star chamber element to the powers proposed for the FPC, and again there is room for at least some consultation with the industry.

My two main points are about competition and governance. We have competition as a major objective for the FCA only in relation to the consumer. It seems blindingly obvious that a big part of our problems has been oligopoly in the banking sector. I remember arguing in about 2000 with Sir Eddie George that, post-Barings, it was very unwise that lender-of-last-resort powers were limited to banks that were too big to fail—a lot of the smaller banks, such as Hambros, closed down and one had the very moral hazard problem that I thought the situation would lead to. Although competition will not solve anything, the more competition and the more providers you have the better. As we see in America, it is much easier to let banks fail if you have a wide range of providers. We should face the fact that one of the major problems in the banking sector is oligopoly.

Perhaps not intentionally but because regulators are frightened of making mistakes, the FSA is a major anti-competitive force against new banks and new banking licences. We in Metro Bank had to spend about £15 million before we were even led to hope that we might get a banking licence. The FSA changed its mind on several key factors several times and took a year and a half to decide. I certainly understand that we do not want a repeat of 1970 to 1974, when banks were given licences too easily, but we have gone a long way in the other direction. Even at a more humdrum level, all the anti-money laundering legislation requirements make it a nightmare to change your bank account. The transferability of bank accounts is now perfectly possible technically, so I should like the Bill to include a requirement for the banking system to put bank account transferability in place, which would do a lot for competition. It is expensive for new banks to access the payment systems cartel. That needs opening up and the PRA should be thus empowered.

Secondly, the PRA should be required to protect the competitiveness of this country in the financial services industry. One of my main concerns with both the Bill and the Vickers report is that we will end up making this country uncompetitive. Our banking industry is already the second most unprofitable in the world, so that will not be good news for jobs.

On the issue of accountability and governance, I cannot see why the court should not be a proper board. The Guernsey Financial Services Commission is a proper board: we have to meet to take decisions about everything; we can sack the head of the commission if he is no good; and we are held accountable in turn. The days of the court being an ornament are gone. It

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should be a proper board with, bluntly, the power to sack a governor if he turns out to be no use, and the governor should certainly be properly accountable to that board.

I conclude by saying that I give great credit and acknowledgement to my noble friend Lord Sassoon for the work he did in opposition in planning the reorganisation of our supervisory and regulatory arrangements, which was clearly needed. The gist of what is before us is very much in the right direction. I hope—and I think—that the Government realise that there are quite a few items to be thought about further and tidied up, that sufficient time will be left and that the deliberations in Grand Committee will be such that we end up with good legislation.

8.25 pm

Viscount Hanworth: My Lords, we have waited a long time for the legislative response to the financial crisis that began in 2007. The legislative response in the USA to the great crash of 1929, occasioned by rampant speculation in the stock market, was far more rapid. Already, by 1933, the Securities Act and the Glass-Steagall Act were in place. The powerful Securities Exchange Commission was in operation by 1934. The primary purpose of the Securities Act of 1933 was to ensure that buyers of securities received complete and accurate information before making their investments. The purpose of the Glass-Steagall Act was to enforce a separation of investment banks from retail banks and to limit the risks to which the latter were exposed.

A measure of the tardiness of the present legislative response in the UK is the fact that the recommendations of the independent commission on banking are unlikely to be enacted before 2019, by which time the financial environment in which the banks are operating may have changed considerably. We may learn something more about the Government’s intentions on Thursday, when the Chancellor is due to give a speech in the Mansion House. We fear that he will have succumbed to the pressures of some intense lobbying by the banks.

The independent commission might have been expected to recommend a clear separation of investment banking and retail banking to create a regime comparable to that of the Glass-Steagall Act. Instead, the commission has proposed that these activities should remain within the same institutions, provided that they are separated by a firewall. This will allow banks to transfer capital between their investment and their retail branches, thereby enabling them to continue to gamble with depositors’ money.

The Bill we are discussing today deals with none of the aforementioned issues. It deals instead with the minutiae of the formal relationships between the statutory authorities that are intended to constitute a new financial supervisory framework. It proposes to replace the Monetary Policy Committee with a Financial Policy Committee and to replace the Financial Services Authority with two new bodies, the Prudential Regulation Authority and the Financial Conduct Authority.

Those new bodies are to be clustered under the umbrella of the Bank of England. They are to pass their recommendations to the Governor of the Bank of England, who will be responsible for conveying them to the Treasury and to the Chancellor of the

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Exchequer. The Bill will confer greatly increased powers on the governor; and a major point of contention between the Chancellor and the shadow Chancellor, which was debated in the House of Commons during Second Reading, is whether the various authorities should be allowed independent access to the Chancellor.

Together with its Explanatory Notes, the Bill comprises 330 pages. Notwithstanding its length, it is devoid of genuine substantive content. It is extraordinary—at least to my mind—that neither the Bill nor its Explanatory Notes contain any mention of the principal leitmotifs of the financial crisis. There is no mention of credit default swaps, which allow players to place bets on the creditworthiness of assets that they do not own. There is no mention of collateralised debt obligations, which were implicated in the demise of Northern Rock. For the rules on short selling, which allows speculators to profit from tumbling asset prices, one is referred to the Financial Services and Markets Act 2000; and there is nothing much to be found there.

There is nothing in the Bill to address the urgent need to bring the trading of financial derivatives under the auspices of an exchange, where they would be recorded and rendered transparent. In the absence of such arrangements, the preponderance of trades in derivatives will continue to be conducted over the counter; and these trades will continue be a dangerous and imponderable aspect of financial activity. There is no mention in the Bill of the Basel accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision, or of the manner in which British banks made extensive use of special purpose entities to evade these rules. These have the deceitful purpose of removing liabilities from the balance sheets and converting them into seeming assets. Doubtless it will be argued that these matters do not fall within the remit of the Bill but they do not appear to lie within the remit of any other Act, existing or proposed. If they are to be left to the discretion of the new regulatory bodies or authorities, we might ask why those authorities have not been given clear cues or promptings in this regard.

The Government’s approach in proposing this legislation has been remarkable for its conciliatory and consultative nature. There have been inputs to the draft legislation from the Treasury Select Committee of the House of Commons, from a Joint Committee of both Houses, from the European Union Committee of the House of Lords and from many other bodies besides. There has also been an indication from the Financial Secretary to the Treasury that the Government will be seeking further to amend the Bill in your Lordships’ House to strengthen and refine it. All of this seems to speak of a decent diffidence in the face of highly complex and imponderable matters and of a desire to spread the responsibility for getting things right among many of the interested parties. However, this interpretation is belied by the fact that the Government have forced the Bill through the Commons at an indecent pace.

It might seem surly to question the seeming good faith of the Government’s approach. However, one’s suspicions are readily alerted when one hears from senior Conservatives that a basic intention of the legislation is to avoid damaging the financial services

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industry. There is therefore a strong suspicion that the dilatory and protracted nature of this legislative process is a consequence of a desire to avoid interference with the profitable workings of the financial sector. If so, we are witnessing the promotion of a factional interest that has been greatly unfavourable to the rest of us.

The legislative response of the Government to the global financial crisis is also remarkable for its insularity. In drafting the Bill, there has been little attempt to adapt the framework for UK financial regulation to the supervisory framework of the European Union. The matter of how the two should fit together is to be dealt with in a memorandum of understanding and the details are to be left to the discretion of a regulator. Nevertheless, there seems to be a belated recognition in government circles that the UK ought to play a more active role in influencing European Union policy. This is in contrast to the attitudes evinced by the Prime Minister, who is keen to veto any provisions of the European Union that might inhibit the City of London. Thus, he has declared his unyielding opposition to a financial transactions tax, despite the fact that the European Parliament has recently voted in favour of such a tax by a substantial majority. A transactions tax would represent a much needed sedative to be administered to the financial markets and its proceeds could be used to stimulate the economy.

Conservative politicians are aware that the British financial sector accounts for 75% of the financial activities of the European Union. No doubt they feel that this justifies the UK asserting its priority and independence in these matters. However, this figure gives a false measure of the importance of the UK’s financial sector to the rest of Europe. The appropriate measure is a comparison of the size of the UK’s overall economic activities with those of the rest of the European Union. Surely, if the UK proves to be intractable, the rest of Europe may agree to sideline us. The regulatory authorities of the UK have been likened to a caged canary placed in a gold mine for the purpose of giving warnings of impending explosions. However, the toxic gases of financial obfuscation are liable to overcome the bird long before it is able to sing a warning note. We have a right to expect the Government to protect us from the financial services industry. However, it seems that their legislation will not even serve to protect the industry from itself.

8.33 pm

Lord Burns: My Lords, I begin by drawing attention to my entry in the list of Members’ interests: in particular, that I am chairman of a regulated bank, Santander UK, and a shareholder in Santander Group. As we have heard from the noble Lord, Lord Sassoon, the Bill seeks to respond to the lessons of the present crisis. However, I agree with a number of speakers in this debate that we cannot lay the blame for the financial crisis entirely, or even largely, on the architecture of financial regulation. The banking crisis has been a worldwide phenomenon and, as the noble Lord, Lord Eatwell, has pointed out, at its heart was an intellectual flaw—the belief that developments in financial management techniques and globalisation gave us the opportunity to expand lending while spreading risk. This mistake was made by banks, regulators and

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Governments. At the same time, though, it is also widely accepted that in a number of respects the existing architecture, particularly the tripartite arrangements, did not function as well as we would have liked, and this legislation seeks to address some of those weaknesses.

I agree with many noble Lords that the most important aspect of the Bill is the responsibility being given to the Bank of England for what has become known as macroprudential policy. However, while supporting this change, I think that we must be aware of the difficulty of the task. Like all forecasting, identifying financial bubbles is always difficult—indeed, it is almost impossible. After all, the MPC did not foresee the extent of potential effects of the bubble, and it is not clear to me why we should be confident that the FPC would have done so much better in dealing with those problems, unless it had managed to identify some automatic stabilisation mechanisms.

We must also guard against concentrating too heavily on avoiding the pitfalls of the previous crisis. Looking back at the design of the previous legislation at the end of the 1990s, in which I had some involvement, I recall two outcomes that the Treasury sought to avoid. One was that we might end up with an unnecessary overlap of work on financial stability, with both the Bank of England and the FSA competing for influence in this area. In the event, neither organisation was doing as much as we now think appropriate. The Treasury also worried that the Bank of England was too inclined to rescue banks and wanted to build in safeguards for appropriate consultation with the Treasury as the provider of funds. The possibility set out in Alistair Darling’s book that the Chancellor would be pressing the Bank without success to provide more liquidity to banks was not on the list of concerns 15 years ago. So, as well as dealing with the lessons from the most recent crisis, it is important that we also prepare for a wider set of challenges, behaviours and events. As the noble Lord, Lord O’Donnell, said in his excellent maiden speech earlier today, we need a robust framework and should not simply seek to deal with the issues that we have experienced over the past five years.

Personally, I support the ambitions of the Bill. However, there are three areas where I see room for improvement. First, I add my support to those looking to ensure that the framework of the macroprudential policy provides sufficient safeguards to ensure that the proposed FPC adopts a symmetrical approach to macroprudential supervision—that is, it should be equally as aware of the problems of a policy being over-restrictive as it is of over-exuberance.

The Bill has some checks and balances, requiring the FPC to avoid an adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term, but I question whether this is enough. That is not to say that this is not a difficult problem; we can see the difficulties in maintaining symmetry in the present situation. After all, if macroprudential policy means anything, we should now be going through a period where it is directed at supporting economic activity. However, we also have to have sympathy with the instinct of the

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supervisors of individual banks who want to secure the safety of the banks that they supervise by requiring increased amounts of capital and liquidity in those banks. That is, after all, one of the crucial lessons from the crisis.

The problems in the euro area also point to strengthening the liquidity and the capital defences of the banks. My point, though, is that the systemic effect of these individual decisions has to be monitored closely and carefully so that the requirement for the safety of individual banks is balanced with a view about what is needed to support growth in the economy. For me, that would be best achieved by having a clear requirement for symmetry in the conduct of macroprudential policy. How that should be done is not an issue for today but, as a minimum and in line with the MPC’s remit, the MPC needs instructions that make clear that over-rapid reductions in leverage, debt and credit growth should be judged as being just as bad as unsustainably high levels. That is very much the framework for the MPC in terms of inflation, and I do not see why it cannot be carried over into this aspect of policy as well.

My second issue relates to the Chancellor’s power of direction over the Bank of England. There seems to be general acceptance that where there is a material risk to public funds, the Chancellor should have the power of direction. I have two points to make. First, I agree with the Treasury Select Committee that in these circumstances it would be better for the Chancellor to have a general power to direct rather than the complex, circumscribed descriptions that are provided in the Bill. I understand the concerns about giving the Treasury authority to intervene in matters that have been delegated to the Bank of England, but I would rather they were dealt with by reporting and scrutiny arrangements with respect to Parliament rather than by trying to be specific about the instruments of crisis management, which stand no chance whatever of being the most appropriate ones when the time comes.