It was a tough choice to throw at a thus far unsuccessful candidate, but I responded by saying, “Certainly not. If I am going to have to take this on, you must not take the sugar off my pill”. Sir Toby Low agreed to consider my point. A few days later came a reply that

25 July 2012 : Column 727

disappointed me. “Reluctantly”, he said, the authorities had nevertheless agreed to give me a chance. When the debate came it was one of the high points of the conference. Tempers ran high. Our reforming amendment was carried by a large majority and a few months later I was invited by Henry Brooke, the then Home Secretary, to join a committee that he set up to consider detailed proposals for compensation. Within two years, a suitable scheme was established without having any resort to legislation. It was one of the first in the world and has served us well, as the House recognises, for many years.

For me, it was an early lesson in the importance of sticking to one's guns and may be one reason why I have remained such a tiresome creature ever since then. But I commend the subject of the debate. I am tempted to say a little word of sympathy about some of the criticisms, but not so as to offend my noble friend Lord McNally. I am sure that he will deal with them in his reply in a suitably positive way.

Lord Davies of Stamford: My Lords, I am sure that the whole House will have listened with great respect and interest to the intervention of the noble and learned Lord, Lord Howe. The incident that he has retailed from 50 years ago shows what a very humanitarian politician he has been during 50 years of extremely distinguished public life.

My noble friend the Leader of the Opposition and my namesake, my noble friend Lord Davies of Coity, spoke powerfully on this subject and I agree with them. There would be no point in repeating what they just said. But I rise to ask the Minister a question. Can he tell the House what is the average time taken to process applications under the criminal injuries compensation scheme? My noble friend gave us some rather different figures, but if the noble Lord’s figures are correct and annual disbursements are of the order of roughly £200 million and the total liabilities of the scheme are about £500 million, it implies that rather a long time is taken to process each individual claim.

If my noble friend’s figures represent reality, the situation may be slightly better, but it is important for the House to know exactly the effectiveness of the bureaucracy handling this important scheme and therefore what sort of time is taken.

Will the noble Lord also tell us the cost at the present time of administering claims? Perhaps he could break down the average cost of the claim so that we can see how much of taxpayers’ money that goes into the scheme is used for the benefit of victims and how much goes to the administration of the bureaucracy involved.

Lord Stoddart of Swindon: My Lords, I, too, support the amendment moved by the noble Baroness, Lady Royall, and I support the remarks made by both noble Lords, Lord Davies. It will be interesting to see the answer to the question that the noble Lord, Lord Davies of Stamford, posed.

I support the amendment because I believe that the people who are being disadvantaged are the very people whom the Government say they want to look after.

25 July 2012 : Column 728

They are also the people who make this country work, such as postmen, people in shops and people on the shop floor. They are the people who are likely to be worst affected by these cuts.

It puzzles me why we make cuts of this sort for essential compensation while at the same time we spend huge sums on matters that appear not to matter. We also ladle money out to foreign countries, which perhaps should start looking after themselves.

I had a Question answered about the £10 billion that many countries have agreed to make available to Afghanistan. I asked how much that would cost Britain. The Answer came back that it would cost £170 million a year between 2013 and 2025, so it seems that we can find money to support people abroad. I have no objection to that, but I want decent treatment of the people of this country.

The amount of money that is involved is relatively small. If the Government really believe in this big society in which we will all be treated properly, perhaps they should reconsider what they are doing in the matter of this compensation order.

I do not believe everything that I read in the newspapers about the Government being completely out of touch. But, frankly, almost every day we have an indication that the Government are completely out of touch. For example, the Exchequer Secretary to the Treasury, Mr Gauke, suggested that people who pay cash to some of those who might be injured are immoral for doing so. The Government do not appear to realise that millions of people in this country do not have a bank account. There is only one way in which they can pay and that is in coin of the realm.

I put that forward as an illustration of how the Government appear to be completely out of touch with what is happening in the country and the needs of people, particularly those who are unfortunately victims of accidents or other incidents.

Baroness Donaghy: My Lords, I support the amendment moved by my noble friend Lady Royall. First, there is the issue of people being attacked by dangerous dogs. This particularly concerns the UCW, the trade union representing postmen and women, but has also been raised by a wide range of other organisations, including the Police Federation, the Royal College of Nursing and the Local Government Association. The MoJ consultative document proposed to tighten the current policy under which claims have, in some cases, been considered from applicants attacked by dangerous dogs not kept under proper control. The Government’s response to the consultation claims that:

“A small number of respondents expressed concern”.

That is a travesty, as widespread concern was expressed. We should not forget that not so long ago this was the subject of cross-party support and I regret that that is no longer the case.

The Government acknowledge the complexity of defining a crime of violence. They believe that these cases involve injuries sustained in incidents outside the core purpose of the scheme and that proper redress in these circumstances would be found elsewhere, through an insurance claim, a compensation order as a result

25 July 2012 : Column 729

of criminal proceedings or a civil claim. This is the height of cynicism. The Criminal Injuries Compensation Scheme is the very last resort when all else has failed. The options suggested by the Government would offer no recompense, as the Minister well knows. A further suggestion by the MoJ is that postmen and women injured in dog attacks could sue their employer, the Royal Mail. However, the Royal Mail has a good record in discharging its duty of care to reduce risks and it is virtually impossible to secure personal injury compensation from an employer in a civil court in respect of criminal injury, with employers liability insurers resisting such claims vigorously and the courts, when tested, holding that the employer is not liable, on the whole.

The determination of deliberate attack, as the Government themselves acknowledge, is extremely complex. I live in an area of London where dogs are often kept as aggression accessories. To close off the opportunity for compensation to people who have suffered mental and/or physical injury as a result of dog attacks is inhumane. These cuts will also affect thousands of people who work in shops and public offices. Compensation is very important to the innocent victims. At present, only injuries that disable the victim for at least six weeks are compensated. It gives public recognition for pain and suffering, helps to pay off debts and can help recovery from trauma. Those who work part-time, as my noble friend Lord Davies has already said, which is 35% of retail staff, earn too little to qualify for SSP. The Government’s own impact assessment admits that the scheme has very stable running costs—around £210 million per year—and,

“we assume that in the absence of reform this will continue”.

There has been too much emphasis on the CICS as a demand-led scheme when it is, in fact, reasonably stable. As the general secretary of USDAW, the shopworkers’ union, John Hannett, has said:

“We do not believe that the innocent victims of violent crime should bear the brunt of austerity, or that these cuts are justified by the £50 million projected savings”.

Victims are to be asked to pay up to £50 upfront to obtain their initial medical evidence. If they are off work or still shaken from their experience, this could prevent genuinely injured victims from bringing a claim. The proposals for future loss of earnings could be worse off by £139.15 per week, which could result in serious financial hardship. The changes, as my noble friend Lady Royall said, fail to take account of the current job market, by demanding that people be regularly paid for a period of at least three years when temporary periods of unemployment are reasonably common nowadays.

The Government’s stated intention was to cut the lower awards to provide better protection and support for the most seriously injured victims. There is no evidence that this has happened. Even those with the most serious injuries will suffer as a result of these changes. In conclusion—and we have already heard from the noble and learned Lord, Lord Howe, about what happened 50 years ago—it will be 50 years ago in December that the then Lord Chancellor, Lord Dilhorne, said in this House:

25 July 2012 : Column 730

“For the innocent victims of such crimes we all feel sympathy, but we feel that sympathy alone is not enough”.—[Official Report, 5/12/62; col. 305.]

If the Government’s proposals go through, this will be a very sad anniversary indeed.

2.15 pm

Lord Christopher: My Lords, I am anxious not to repeat what has been said, but there is little doubt that we have, day by day in recent months—indeed for a year or two—heard nothing but sad news for those who are represented by the people that this order will affect. There is a callousness about so much legislation at the moment that is very hard to believe. Perhaps there has been a little hope raised by the noble and learned Lord, Lord Howe, that the heart of the party is not wholly stone. Having heartily enjoyed a number of years negotiating with him across a table, usually, I think, to mutual benefit, my feelings are, come back, Geoffrey, all is forgiven.

What is the benefit that has been received by the country for all these cuts? The news at one o’clock was that we are now in the third quarter of recession. There is no sign at all that what is being done by the Chancellor is having any material helpful effect. It is extremely sad that we are now dealing with what, in money terms, is a minority issue to the Treasury, but is a very significant issue to those affected by these cuts. We have a useful audience in the Gallery, but I think it is important for the record that we have some indication of what we are talking about, because there is no precision, as things stand.

There have been two broad groups affected by attacks. I was surprised that the number is as high as it is in the USDAW field. We certainly had them in the days when I was responsible for the staff in the Revenue. They could be serious and every attempt was made by the department to ensure that these were kept to a minimum. What sort of injuries are we talking about for those who are receiving the higher award? We are talking about significant facial scarring; permanent brain injury resulting in impaired balance and headaches; penetrating injury to both eyes; fractured joints including elbows, both knees and vertebra, resulting in continual significant disability; and a punctured or collapsed lung. This is the nature of the injuries for which there is now to be significantly reduced compensation.

I conclude with one of three examples provided by USDAW of the kinds of practical changes which will take place. I shall read about Simon, aged 33, the manager of a convenience store in Stoke on Trent who risked his own safety when he disarmed an axe-wielding man during an attempted robbery. He says:

“I saw a man at the till waving an axe and shouting at the checkout assistant. As I went to grab the handle of the axe there was a bit of a tussle and it fell to the floor. I managed to kick it out of the way. Two customers came to my aid and we held him down until the police arrived. He became more aggressive and started lashing out, then he bit my leg”.

Simon received £1,250 compensation for his injuries and the mental trauma he suffered, which, I suspect, was considerable. He received a public bravery award from the local police. Under the new proposals, he would receive nothing. I regard this as utterly outrageous,

25 July 2012 : Column 731

as I am sure does the Gallery, and it is high time that there was a rethink and that these sorts of changes were removed from your Lordships’ agenda.

Lord McNally: My Lords, first, I say to the noble Lord, Lord Christopher, that the reality, which apparently still takes time to sink in across the House, is that we are all a lot poorer than we thought we were four years ago. Whichever Government had come in would have carried out drastic cuts in public expenditure. That has been acknowledged by the Opposition in their moments of candour. Therefore, every time that the Government come before the House with some saving in public expenditure, the Opposition say, “These are not the kind of cuts that we would have made”. The Liberal Democrats have neither the resources nor the inclination to do this, but I know of parties who keep a running total of cuts in expenditure which the Opposition would not have undertaken, and it adds up to something that questions their economic competence.

As for my noble and learned friend, Lord Howe, I hear his story. I have been in a few small parties myself, but the Aberavon Conservatives, which he led, must have been almost of Liberal Party size in its gatherings. The scheme that he pioneered in the 1960s cost £6 million. We are debating a scheme that costs more than £200 million. Also included in his long and distinguished career was a period as Chancellor when, like me, he must have stood at Dispatch Boxes listening to the impact of cuts that were necessary at the time. That is one of the responsibilities of government.

Lord Stoddart of Swindon: I have a simple question. What would £6 million be in today's money?

Lord McNally: That is in current prices. The actual scheme cost less than half a million pounds when first introduced, so I was not trying to belittle it. We have all known schemes which have been introduced with the best of intentions but have had long-term consequences. As the noble Baroness acknowledged, the previous Government took a hard look at this in 2005 and then backed off from making similar decisions.

Noble Lords: Oh!

Lord McNally: I suggest that some of the roots of the economic problems that we later faced was that they backed off too many difficult decisions—something that we are not doing.

The noble Baroness asked me how the ex gratia schemes compare. People who are victims of terrorist attacks which took place between 1 January 2002 and 16 October 2012 will, in general, have until 16 October 2012 to claim. The scheme is based on equivalence to those in tariffs under the existing domestic scheme. Eligibility is restricted to those with an ongoing disability as a direct result of an injury sustained in a designated act. Only injury payments are available, in accordance with the tariff of injuries; bereaved relatives are not eligible for an award. Tariff payments are in line with those in Criminal Injuries Compensation Scheme 2008. The maximum payment for a single injury on the tariff of injuries which forms part of the scheme is £250,000.

25 July 2012 : Column 732

The noble Lord, Lord Davies, raised the issue of the impact on shop workers, as did other noble Lords. Shop workers, and all trade unionists who have been named, are still covered by the scheme, but not for small payments for minor injuries. I heard the example given by the noble Lord, Lord Christopher. Perhaps those in the Gallery also ask whether £1,250 for a very noble, brave act is not enough. Should we build into a scheme which is supposed to address real victims of crime pay-outs of significant sums—not life-changing but, for low-paid workers, significant sums—for injuries that also are not life-changing? We are removing the lower end.

Lord Christopher: The examples, which the noble Lord says that he has read, are life-changing.

Lord McNally: My Lords, those are examined by CICA under the scheme and some of them, frankly, I cannot believe would be outside the scheme, but that is something that the authorities take account of.

The reforms that we have discussed today not only put the criminal injuries compensation scheme on a more sustainable financial footing but will achieve our aim of focusing compensation on those most seriously injured as a direct result of deliberate violent crime.

I touch on a couple of other points made. The noble Baroness, Lady Royall, asked what happens with multiple injuries. The situation will remain as now: 100% for the most serious injury; 30% for a second-rated injury; 15% for the third most serious injury. The noble Lord, Lord Davies, and others mentioned shop workers. They are treated as other victims are, but where they suffer long-term mental injury lasting for more than six weeks, they will still be able to claim. The noble Lord, Lord Davies, heard the cost of running CICA. The time to process claims is seven to eight months for a first decision and about five months to review a decision.

I heard what the noble Baroness, Lady Royall, said: that somehow the backlog is not real. What is real is that we paid £480 million—the largest sum ever—in compensation this year in part to deal with claims that go back beyond 1996.

Lord Brookman: I say to the noble Lord, Lord McNally, that it is quite evident to me and, I am sure, to the whole Chamber and the Gallery, that you have not had one voice from the coalition government Benches in support of what you are saying. It is obvious that in this Chamber there is strong resentment about the changes proposed, even from your Benches.

Lord McNally: You may make that assumption. We will see what happens when we come to a vote. I am fully aware, as has been readily acknowledged, that the trade unions, which have been readily represented on the opposition Benches—and rightly so—today have argued against the changes. I understand that. I understand less the willingness of those on the government Benches—sorry, the opposition Front Bench—to leap on this passing bandwagon.

It is no use pretending. We are dealing with relatively small payments from the scheme for temporary injuries. In return for that change—I notice that the noble Baroness did not mention this—we are substantially

25 July 2012 : Column 733

reforming the amount of money that will go into victim support. I think that I will have support in this House for this concept that rather than paying small amounts here and there—small penny-packet amounts to various minor injury claims; some maybe justified, some very much less so—it is better to devote that money to real victim support and to dealing with the trauma of crime at the sharp end, when it happens, in a way that is effective. That is the basis of these reforms.

I understand where the trade union members are coming from, but I do not know where the noble Lord, Lord Stoddart, is coming from when he throws in overseas aid. One of the things I am very proud of is the way that this Government have sustained overseas aid.

Lord Stoddart of Swindon: I gave that example because I had just received an Answer that we are going to spend a further £178 million in Afghanistan—that is, after billions and billions of pounds for our military presence there. I raised this amount because we have people who need to be looked after in this country. We are talking about some of them now. If we can afford to spend £178 million to help people in Afghanistan, which is fine, surely we can find an extra few million to help unfortunate people in our own country.

Lord McNally: We are finding it for unfortunate people in our country, but Afghanistan remains one of the poorest countries in the world. I am proud of our aid programme there. If the noble Lord rereads what he said he will probably find echoes of that great conservative sentiment of “hang ’em and flog ’em” and “don’t give it to foreigners”.

Noble Lords: Oh!

Lord McNally: Noble Lords know exactly what I am talking about. In the past, in some of the battles over civil liberties, human rights and the way that we treat people in overseas aid I would have relied on the Labour Party. The Labour Party has gone a long way from the one that I remember in many of these areas.

Noble Lords: Oh!

Lord McNally: That is why—

Lord Bach: My Lords—

Lord McNally: No. Well, if you want.

Lord Bach:I will intervene just briefly. We would have relied on the Liberal Democrats as far as legal aid was concerned. What went wrong there?

Lord McNally: We have had the whole gamut today of the Labour Party never supporting a cut and never facing up to a responsibility. I listened to what the party opposite has said, and we have taken the tough decisions. Not only have we done that; in this case we have also made the sensible decision to move victim

25 July 2012 : Column 734

support to where it is needed, at the sharp end. We are finding the resources by these reforms and I commend them to the House.

Baroness Royall of Blaisdon: My Lords, I answer this debate as the Leader of Her Majesty’s Opposition, a very responsible Opposition. I am also a proud trade unionist. I am not leaping on a bandwagon that was put together with a bunch of trade unionists. I am doing what I believe to be right and I am proud that the trade unions have sought to support the workers whom they represent. However, I have to say that many of the representations that I received prior to today’s debate were from lawyers who are also concerned about victims.

Today we are talking about victims. Yes, we are living through a financial crisis; we are living through a double-dip recession which one might say was made in Downing Street. However, as noble Lords will know, my party is rightly being extremely careful in relation to financial commitments, precisely because we are entirely realistic about the financial situation that this country faces.

The Minister says that we are against all cuts. That is not true. We simply believe that some of them are too far and too fast. When making financial decisions one is also always faced by a choice. We believe that the choice that the Government have made in relation to victims is the wrong one. Victims do not choose to be victims. They have suffered through no fault of their own. In proposing the Draft Criminal Injuries Compensation Scheme 2012, the Government seem to be putting deficit reduction before victims. I wish to test the opinion of the House.

2.36 pm

Division on Baroness Royall of Blaisdon’s amendment to the Motion.

Contents 117; Not-Contents 171.

Amendment disagreed.

Division No.  1

CONTENTS

Adonis, L.

Ahmed, L.

Anderson of Swansea, L.

Andrews, B.

Bach, L.

Bakewell, B.

Bassam of Brighton, L. [Teller]

Berkeley, L.

Bilston, L.

Birt, L.

Borrie, L.

Brookman, L.

Browne of Ladyton, L.

Campbell of Surbiton, B.

Christopher, L.

Clinton-Davis, L.

Cohen of Pimlico, B.

Collins of Highbury, L.

Davies of Coity, L.

Davies of Oldham, L.

Davies of Stamford, L.

Dean of Thornton-le-Fylde, B.

Deech, B.

Donaghy, B.

Drake, B.

Dubs, L.

Eames, L.

Eatwell, L.

Erroll, E.

Farrington of Ribbleton, B.

Gale, B.

Glasman, L.

Gordon of Strathblane, L.

Grantchester, L.

Grenfell, L.

Griffiths of Burry Port, L.

Grocott, L.

Hanworth, V.

Harries of Pentregarth, L.

Harris of Haringey, L.

25 July 2012 : Column 735

Harrison, L.

Hart of Chilton, L.

Hayter of Kentish Town, B.

Healy of Primrose Hill, B.

Henig, B.

Hilton of Eggardon, B.

Hollins, B.

Howarth of Breckland, B.

Howarth of Newport, L.

Howe of Idlicote, B.

Howells of St Davids, B.

Hughes of Woodside, L.

Hunt of Kings Heath, L.

Irvine of Lairg, L.

Janner of Braunstone, L.

Jay of Ewelme, L.

Jones of Whitchurch, B.

Judd, L.

Kennedy of Southwark, L.

Kennedy of The Shaws, B.

King of Bow, B.

King of West Bromwich, L.

Kinnock of Holyhead, B.

Kirkhill, L.

Knight of Weymouth, L.

Laming, L.

Lea of Crondall, L.

Lister of Burtersett, B.

Low of Dalston, L.

McAvoy, L.

McConnell of Glenscorrodale, L.

Macdonald of Tradeston, L.

McFall of Alcluith, L.

McIntosh of Hudnall, B.

MacKenzie of Culkein, L.

Mackenzie of Framwellgate, L.

McKenzie of Luton, L.

Masham of Ilton, B.

Morris of Manchester, L.

Morris of Yardley, B.

O'Loan, B.

Pendry, L.

Pitkeathley, B.

Plant of Highfield, L.

Prescott, L.

Puttnam, L.

Radice, L.

Ramsay of Cartvale, B.

Rea, L.

Reid of Cardowan, L.

Rosser, L.

Royall of Blaisdon, B.

Sandwich, E.

Sawyer, L.

Simon, V.

Smith of Basildon, B.

Smith of Finsbury, L.

Stevenson of Balmacara, L.

Stoddart of Swindon, L.

Stone of Blackheath, L.

Symons of Vernham Dean, B.

Temple-Morris, L.

Thornton, B.

Tomlinson, L.

Tonge, B.

Tunnicliffe, L. [Teller]

Turnberg, L.

Uddin, B.

Wall of New Barnet, B.

Walpole, L.

Watson of Invergowrie, L.

Wheeler, B.

Whitaker, B.

Whitty, L.

Williams of Elvel, L.

Wood of Anfield, L.

Worthington, B.

NOT CONTENTS

Addington, L.

Ahmad of Wimbledon, L.

Alderdice, L.

Allan of Hallam, L.

Anelay of St Johns, B. [Teller]

Ashton of Hyde, L.

Astor of Hever, L.

Baker of Dorking, L.

Barker, B.

Bates, L.

Bell, L.

Benjamin, B.

Berridge, B.

Bew, L.

Black of Brentwood, L.

Blencathra, L.

Bonham-Carter of Yarnbury, B.

Brabazon of Tara, L.

Bradshaw, L.

Brinton, B.

Brittan of Spennithorne, L.

Brooke of Sutton Mandeville, L.

Brougham and Vaux, L.

Burnett, L.

Buscombe, B.

Butler-Sloss, B.

Caithness, E.

Campbell of Alloway, L.

Cathcart, E.

Cavendish of Furness, L.

Chadlington, L.

Colwyn, L.

Cope of Berkeley, L.

Cormack, L.

Cotter, L.

Courtown, E.

Craigavon, V.

De Mauley, L.

Dholakia, L.

Dixon-Smith, L.

Dobbs, L.

Doocey, B.

Dykes, L.

Eaton, B.

Eccles, V.

Eccles of Moulton, B.

Empey, L.

Falkner of Margravine, B.

Faulks, L.

Fellowes of West Stafford, L.

Fink, L.

Flight, L.

Fookes, B.

Forsyth of Drumlean, L.

Framlingham, L.

Freud, L.

Garden of Frognal, B.

Gardiner of Kimble, L.

Gardner of Parkes, B.

Geddes, L.

German, L.

Goodlad, L.

Green of Hurstpierpoint, L.

Griffiths of Fforestfach, L.

Hamwee, B.

Hanham, B.

Harris of Richmond, B.

Henley, L.

25 July 2012 : Column 736

Higgins, L.

Hill of Oareford, L.

Hodgson of Astley Abbotts, L.

Hooper, B.

Howe, E.

Howe of Aberavon, L.

Hunt of Wirral, L.

Hussain, L.

Hussein-Ece, B.

Hylton, L.

Inglewood, L.

James of Blackheath, L.

Jenkin of Kennington, B.

Jolly, B.

Kalms, L.

Kramer, B.

Lang of Monkton, L.

Lawson of Blaby, L.

Lester of Herne Hill, L.

Lexden, L.

Lucas, L.

Luke, L.

McColl of Dulwich, L.

Mackay of Clashfern, L.

Maclennan of Rogart, L.

McNally, L.

Mancroft, L.

Mayhew of Twysden, L.

Miller of Chilthorne Domer, B.

Montrose, D.

Morris of Bolton, B.

Neville-Jones, B.

Newby, L. [Teller]

Newlove, B.

Nicholson of Winterbourne, B.

Noakes, B.

Northover, B.

Norton of Louth, L.

Oakeshott of Seagrove Bay, L.

O'Cathain, B.

Parminter, B.

Patten, L.

Perry of Southwark, B.

Phillips of Sudbury, L.

Plumb, L.

Popat, L.

Randerson, B.

Rawlings, B.

Reay, L.

Redesdale, L.

Rennard, L.

Renton of Mount Harry, L.

Ribeiro, L.

Risby, L.

Rodgers of Quarry Bank, L.

Roper, L.

Ryder of Wensum, L.

St John of Bletso, L.

Saltoun of Abernethy, Ly.

Sassoon, L.

Seccombe, B.

Selborne, E.

Selsdon, L.

Shackleton of Belgravia, B.

Sharkey, L.

Sharp of Guildford, B.

Sharples, B.

Sheikh, L.

Shipley, L.

Shrewsbury, E.

Shutt of Greetland, L.

Skelmersdale, L.

Slim, V.

Spicer, L.

Stedman-Scott, B.

Steel of Aikwood, L.

Stoneham of Droxford, L.

Stowell of Beeston, B.

Strasburger, L.

Strathclyde, L.

Swinfen, L.

Taverne, L.

Teverson, L.

Thomas of Winchester, B.

Tope, L.

Trefgarne, L.

Trenchard, V.

Trimble, L.

True, L.

Tugendhat, L.

Tyler, L.

Tyler of Enfield, B.

Verma, B.

Wallace of Saltaire, L.

Wallace of Tankerness, L.

Walmsley, B.

Warsi, B.

Wasserman, L.

Wei, L.

Wheatcroft, B.

Wilcox, B.

Wright of Richmond, L.

Younger of Leckie, V.

2.47 pm

Motion agreed.

Victims of Overseas Terrorism Compensation Scheme 2012

Victims of Overseas Terrorism Compensation Scheme 2012 6th Report from the Joint Committee on Statutory Instruments

Motion to Approve

Moved By Lord McNally

That the draft scheme laid before the House on 10 July be approved.

Relevant document: 6th Report from the Joint Committee on Statutory Instruments.

Motion agreed.

25 July 2012 : Column 737

Financial Services Bill

Financial Services Bill 4th Report from the Delegated Powers Committee

Committee (5th Day)(Continued)

2.48 pm

Amendment 122

Moved by Lord McFall of Alcluith

122: Clause 5, page 21, line 16, leave out “and”

Lord McFall of Alcluith: My Lords, I can assure the Minister that this amendment will not increase his blood pressure. We have a common aim here. Quite simply, it is for the FCA to appoint individuals to the smaller business practitioner panel. Given that the membership of the FPC adequately reflects the four constituent parts of the United Kingdom, we wish this to mirror what happens with the FPC. Given that more people work in financial services outwith London than in London, it is important to reinforce that the financial services industry is not London-centric but is a UK financial services industry. It says that in the Bill on page 20 at new Section 1I:

“In this Act ‘the UK financial system’ means the financial system operating in the United Kingdom”.

I feel that it is important to reflect the four constituent parts of the United Kingdom. I beg to move.

Baroness Hayter of Kentish Town: My Lords, I support the amendment with, predictably, an interest in ensuring that Wales is well represented on panels. Too often these westerly people are forgotten, especially as they have rather less of a financial sector. The needs of Welsh citizens are perhaps greater, given how poorly served they are in rural areas. The financially excluded, many of whom are found in Wales, are also poorly served by financial services. I thank my Scottish friend, my noble friend Lord McFall, for his concern for my country and, I am sure, for Northern Ireland.

I turn to Amendment 128 in this group, which provides that the panel should represent households using products. That seems to be key, if only to emphasise the importance of the financial services sector to the whole community. In effect, it is a public utility with some of the same obligations on the industry to provide a universal service even in non-profitable areas. It is equally important to ensure that users of the less profitable services are part of the system of regulation or its scrutiny. It is individuals and families who often rely most heavily on the financial services, even if they do not feature on a CEO’s radar.

Perhaps I should fess up at this point that I was vice-chair of the Financial Services Consumer Panel, so I am acutely aware of the absolute necessity of a broad range of experienced views and backgrounds on the panel. The new panel would deal with a range of issues that impact on a wide variety of consumers. That is part of the reason we so need a panel, because consumers are not a homogeneous group. Their needs, capabilities, life experience and expectation, as well as their interaction with the sector, cannot easily be slotted into a “consumers” box and ticked off by the regulator. The panel would need to draw on the policy, research, intelligence and expertise of those people long embedded in the consumer world, who bring with them in-depth knowledge and understanding of

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consumer behaviour, consumer detriment and—equally important—consumer law, debt management, credit, insolvency, complaint handling, redress, retail sales, the financial world and possibly even Europe. I am particularly pleased that the noble Baroness, Lady Wilcox, who is very experienced in consumer matters, particularly when speaking on redress, is in the Chamber at the moment. However, aside from that expertise, the panel will also need some streetwise input, perhaps from people less exposed to the intricacies of regulatory regimes, Europe, consumer law and research, but who know what the world feels like from less exalted heights than the portals of Canary Wharf.

I now turn to the major issue, which is Amendment 136ZA standing in the names of my noble friend Lord Eatwell and myself. It is about the need to balance the caveat emptor principle—buyer beware—with an equal responsibility on those advising or providing services to consumers to act in the “best interests of clients”. We have heard of the challenge facing consumers in judging whether a company is prudentially secure, or whether the product they are buying is fit for purpose, presents value for money or even covers the risk they assume it will. Added to that, as mentioned earlier today, the very pricing of products, their complexity and people’s lack of understanding of their own risks, let alone the risks inherent in products, makes it very hard for consumers to have the knowledge to take responsibility for the choices they make. The level of risk left with consumers is often unclear. The meaning of “guaranteed” or “tracker” may differ quite substantially from their common-use meaning. Consumers often bear a level of risk unknown to them and seldom explained; they are effectively making choices blindfold.

In an ideal world, of course, we support the responsibility principle. Markets are made to work by consumers shopping around and driving up standards. However, in this market, with those long-term “credence” goods, opaque structures and the asymmetry of information, we need to reintroduce some trust and transparency by balancing consumer duties with provider duties. It is an industry beset with low levels of compliance and high levels of complaints; there are no agreed standards for complex long-term products, so it is hard to expect consumers to adopt a higher degree of responsibility than is already legally acknowledged.

I have concerns, therefore, that by writing consumer responsibility into the Bill, new section 3B(1)(c) appears to “up” the existing situation. In law there are no obligations placed on consumers other than to act honestly. It is not clear what a greater emphasis on consumer responsibility might achieve. Why impose this possibly new principle of consumer responsibility without any countervailing responsibility on the service provider? Amendment 136ZA expresses the need for that balance, at the point where the industry might otherwise grab hold of this wording and say, “See—it was their responsibility and their choice”. The noble Lord, Lord Turner, whose chances of becoming Governor of the Bank of England I might now damage by quoting him approvingly, said yesterday that people,

“doubt banks’ values; and they doubt whether banks have their interests at heart”.

He went on to say that the boards of directors and managers must introduce,

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“effective controls against dishonest behaviour”,

in order to change the perception of bankers. This amendment seeks to ensure that providers act in the best interests of clients, which would be just one way of guaranteeing the good behaviour for which the FSA chair awaits. Why should only consumers accept responsibility for their own decisions? Why not regulated firms, and authorised firms? It is as if the Bill’s draftsmen are at pains to ensure that consumers should have only themselves to blame. If this phrase “consumer responsibility” is to mean more than the current legal position, then the Minister needs to explain that to us. If it is only common law, then why include it?

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, I will take Amendments 122 to 127 and 128 first of all. As the noble Lord, Lord McFall of Alcluith, has explained, these would require the FCA to appoint persons representing the constituent parts of the United Kingdom to each of its consultative panels. The role of the panels is to provide a forum for focused consultation. I believe that the current provisions, which require the persons appointed to be representative of consumers and practitioners in particular sectors, provide the right focus here. To do this requires the FSA now, and the FCA in the future, to seek a diverse range of panel members. I am satisfied that the FSA already takes account of these matters in making appointments. For example, as a matter of practice in making appointments to the consumer panel, which is done through a fair and open process, the FSA aims to make sure that the panel as a whole not only encompasses a broad range of relevant expertise and experience but also represents the constituent parts of the UK. That is as it already is.

The FSA also looks for some geographical spread in the smaller business practitioner panel membership, where that is possible. The large retail firms that sit on the other practitioner panel, by definition, tend to have a large geographical spread that they bring to the table as national firms. Diversity in terms of geographical spread of representation can, therefore, be achieved in the existing model where members are appointed to represent the interests of consumers and practitioners rather than to represent parts of the UK.

For these reasons, although it is important to have on the record how this operates now and how I would expect the FCA to operate in the future, I would be concerned that these amendments could reduce the effectiveness of the panels as forums for focused consultation on the issues which matter most to those most affected by the FCA regulations. I would not want in any way to either dilute or change the focus of the panels on what they are ultimately there to represent.

3 pm

Amendment 136ZA would expand the principle to which the regulators are required to have regard, such that consumers should take responsibility for their decisions only where firms abide by,

“the duty to act in the best interests of clients”.

The consumer responsibility principle set out at new Section 3B(1)(c) establishes that the regulators should

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not be aiming for a regime where consumers abdicate all responsibility for their decisions. As I think the noble Baroness recognises, that is balanced by Section 3B(1)(d), which requires the regulator to have regard to the principle that senior management of authorised firms should be responsible for ensuring that they comply with the regulator’s requirements. Taken together, the two principles confirm that the transaction between a firm and its customer involves responsibility on both sides. Although strong regulation ensures that firms are required to provide important information in a comprehensible fashion, it is ultimately the customer’s decision whether to enter into the transaction, and it is the firm’s responsibility to comply with the regulator’s requirements.

The consumer responsibility principle is a matter to which the regulators must have regard but does not create a duty, or impose any new or additional responsibility, on consumers. I am not suggesting that the noble Baroness was saying that it did but, in talking about common law and so on, there is a danger that we might stray into convincing ourselves that it does create a duty or an obligation on consumers. However, we should be clear that it does not. The consumer responsibility principle exists to inform the way that the authorities pursue their general functions and does not bite directly on individual firms or individual regulatory decisions.

This amendment would only serve to dilute and perhaps confuse the way in which the authorities have to have regard to consumer responsibility, such that the regulator’s rules and requirements would have to envisage that consumers do not take any responsibility for their decisions when they judge that firms have not been acting in their best interests. I do not believe that can be right. Although I agree that consumers and firms should enter into transactions in good faith and that firms should be sanctioned when they do not comply with the regulator’s requirements, the authorities should not be required to regulate under the assumption that consumers, however sophisticated they may be, abdicate all responsibility for their decisions when firms fail to act in their best interests.

The Bill contains a wide range of powers to protect the interests of the full range of consumers who might transact with authorised firms. This amendment would blur the boundaries between consumers, firms and the regulator. For that reason, I cannot accept it. On the basis of those explanations, I ask the noble Lord, Lord McFall of Alcluith, to consider withdrawing his amendment.

Lord McFall of Alcluith: My Lords, I beg leave to withdraw the amendment.

Amendment 122 withdrawn.

Amendments 123 to 127 not moved.

Amendment 127ZA

Moved by Baroness Noakes

127ZA: Clause 5, page 22, line 26, at end insert—

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“(7) The Bank must consult with the Markets Practitioner Panel on the regulation of clearing and settlement infrastructure when the FCA agrees that proposed changes will have an impact on the regulation of trading infrastructure.

(8) The Markets Practitioner Panel will be able to request information from the Bank via the FCA to enable them to provide appropriate advice to the FCA.”

Baroness Noakes: My Lords, with the leave of the Committee and at the request of my noble friend Lord Northbrook, I rise to move Amendment 127ZA and also speak to Amendment 128AAA in his name. My noble friend is unable to be with us to speak to these amendments due to other commitments.

The new regulators will have many new powers to add to the formidable armoury of powers already held by the FSA. Consultation with practitioners in the industry about the practical aspects of policy, rules and practice is crucial. Amendment 127ZA concerns consultations carried out by the Bank of England in relation to the clearing and settlement systems that it will regulate in future, together with the role of the FCA in that. In general, the consultation arrangements in the Bill for the market areas covered by the FCA are welcomed by practitioners. In particular, the Bill, which mandates several panels to be used for consultation, includes a specific markets panel. However, there is concern in relation to the clearing and settlements systems, which are to be regulated by the Bank of England rather than the FCA. I understand the reasons that led to that decision, but it results in some fragmentation of regulation. Clearing and settlements systems will now be separate from the rest of markets regulation and practitioners are concerned that, in the absence of provisions in this Bill for consulting practitioners about clearing and settlement aspects, there could be problems.

Amendment 127ZA sets up a consultation requirement in this respect by requiring the Bank of England to consult the markets practitioner panel, which is set up under new Section 1P as part of the FCA’s consultation mechanisms. This amendment also allows the panel to request information from the Bank via the FCA in order that the panel can then advise the FCA on any related issues—for example, regulatory changes made by the Bank in relation to clearing and settlement systems, which may well have an impact on trading infrastructure, which the FCA itself will be regulating.

I thank the Minister’s officials for explaining to me how the Bank’s new powers will work legislatively and how the consultation provisions fit in. As I understand it, there will be a statutory requirement for the Bank to consult generally on the exercise of its new regulatory powers in relation to recognised clearing houses, but the consultation with practitioner panels or the FCA is not mandated. The Bill is silent in relation to settlement systems, and we have to wait to see what the eventual regulations will say.

Will the Minister explain how the Government intend consultation to work for settlement systems? Can he also say how the Government see proper co-ordination between the FCA and the Bank of England in this area? Is there, for example, any intention to involve the markets panel—and if not, why not? In respect of clearing houses, can the Minister explain

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why the requirements in respect of consultation by the Bank for clearing houses in Schedule 7, which applies the general PRA requirements for consultation on rules, specifically remove the requirement for the PRA to consult the FCA and has no requirement to consult panels?

Amendment 128AAA in this group tackles a rather broader issue. Under new Section 1R, the FCA must consider representations made to it by the panels and must publish responses to representations. The corresponding FiSMA requirements were for the FSA to respond in writing with reasons for disagreeing with a panel’s recommendations but this has been omitted from the Bill. The amendment of my noble friend Lord Northbrook reinstates that requirement.

Everybody understands that the FCA will not accept every single recommendation or view put to it, but it is not acceptable that the FCA can merely ignore any recommendations put to it by the panels and merely publish a response “from time to time”, which is all that new Section 1R requires. The FCA ought to be open to the possibility of dialogue with the panels. It is entirely possible, for example, that the FCA could misinterpret a comment or recommendation made to it. The Bill might make the FCA near-omnipotent, but it should not be predicated on the FCA being near-omniscient.

Both these amendments have been suggested by the existing financial services practitioner panel, which has done good work since the FSA was set up. It knows what it is talking about and if it is concerned, I believe that the Committee should be too. I do not claim that the drafting of my noble friend’s amendments is perfect but they are probing amendments. I beg to move.

Viscount Trenchard: My Lords, I support the amendment in the name of my noble friend Lord Northbrook and moved by my noble friend Lady Noakes. While I understand very well the reasoning behind splitting regulators into a multitude of new regulators, it nevertheless remains very necessary to make sure that regulation is well co-ordinated, not duplicated, and made as understandable as possible to practitioners and consumers alike. It is very sensible indeed that the regulation of trading infrastructure also be brought within the sphere of influence of the FCA. The requirement that,

“The bank must consult with the Markets Practitioner Panel on the regulation of clearing and settlement infrastructure”—

deals with that. I agree with my noble friend that the drafting is not yet perfect. In particular, I find somewhat confusing the second paragraph, which states:

“The Markets Practitioner Panel will be able to request information from the Bank via the FCA to enable them to provide appropriate advice to the FCA”.

However, in principle, this is a move in the right direction and I strongly support it.

One of the problems with regulation is that regulators, even if they have practical experience of banking, insurance or other financial services, very rapidly become out of date because markets change so rapidly. There are many very competent former bankers working for the FSA who are out of date with the way markets actually operate today. Therefore, I think it very necessary

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to have a practitioner panel for the PRA as well as for the FCA. However, that is the subject of a subsequent amendment.

Amendment 128AAA also deserves support for putting the requirement back on the FCA to give a statement in writing of its reasons if it disagrees with a view expressed by the practitioner panel. That is very sensible.

3.15 pm

Baroness Hayter of Kentish Town: My Lords, I shall speak in support of Amendment 128AB in the name of myself and my noble friend Lord Eatwell. I shall also speak to Amendments 128AAA and 130ZB. Accountability means not just listening, but a dialogue: a conversation which hears and responds, and gives written reasons for disagreements. As the noble Baroness, Lady Noakes, said, they will not always agree, but that is quite healthy: we just want to know why. It has really worked very well with the FSA panels under the old Section 11. The proposal would just take that forward and continue it in the new Bill. This encourages transparency and forces the panels to think very hard about what they say and to do their homework well. It also makes the regulator consider submissions carefully and set out where and why they have problems, either with the analysis or with the conclusions. This adds to the openness of the regulator’s thinking, but also to that of the panels, so that consumers and practitioners can also track the record and impact of those who purport to represent their interests, and know how well they are impacting on the regulator’s work. I hope this is one of the areas where the Minister is able to “say yes”.

Lord Sassoon: My Lords, to manage expectations before the break I attempted to say that I was not going to be as accommodating all through the day. In qualitative terms I will be as accommodating, but I can only work with the material that is in front of us. In this case, it is possibly a matter of explanation and reassurance. I hope that some, if not all, of the matters here are going to be covered satisfactorily.

Amendment 127ZA to which my noble friend Lady Noakes spoke would mandate some quite complicated arrangements for the Bank of England to consult the markets practitioner panel of the FCA, in certain cases. I do not make a comment about the drafting, but the general arrangements here would be quite complicated. In addition, the markets practitioner panel would also have the ability to request information from the Bank, but only via the FCA and only for the purpose of assisting the FCA. I had not been quite sure what the amendment was trying to achieve, but I now understand from my noble friend that it is a matter of strengthening the co-ordination between the Bank and the FCA in relation to market infrastructure, as well as strengthening the consultation arrangements in relation to infrastructure matters. I understand why this is important, but will attempt to explain why I believe it to be unnecessary.

There is of course nothing to stop the Bank of England consulting the markets practitioner panel or any other panel, or their members or anyone else. It is

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worth remembering that. It is also important to bear in mind—it may be more important in this case—that the Bank of England will be regulating only a very small number of institutions in this highly specialist area. That really is the key point. I suggest that there is not a lot to be gained by trying to institutionalise consultation arrangements in this way because of the small number of specialist players.

The Bank will indeed be able to consult each of the entities that it regulates individually, should it wish to do so. That is of course an inconceivable position for most of the other subsectors of financial services, where a panel arrangement is therefore necessary to corral views efficiently. I am not sure what a requirement to consult the markets practitioner panel would necessarily add here. More generally, the Bill already introduces a requirement for the Bank and the FCA to have a memorandum of understanding relating to infrastructure regulation, while there is of course nothing to stop the Bank and the FCA working together in any way that they want, subject to the framework of the Bill.

I think that panels are not required in this area. I hesitate a bit because my noble friend Lady Noakes may come back at me on the settlement question. I accept that on that aspect I should possibly take a bit more time to reflect on my noble friend’s views, just to make sure that all angles have been covered in what I have said and in what has been indicated by the Bank and the FCA, so far as it is relevant to them. However, specifically on settlements, I appreciate that I might reflect a little further.

I turn to Amendments 128AAA, 128AB and 130ZB, the first two of which require the FCA to provide a statement in writing to any panels it establishes where it disagrees with any of the representations. Amendment 130ZB would make a similar provision for the PRA. I note that these amendments replicate the existing provisions in FiSMA. It may help if I explain the thinking behind why the Government consider it right to depart from the existing approach in FiSMA. It is because the Bill imposes a general duty on the regulators to publish responses to the representations they have received, which is wider than the current requirement in FiSMA. The regulators must respond to all representations, rather than simply those with which they may disagree. That was a conscious change because it did not seem right that the only responses the regulators should have to give to the panels are where they disagree with them.

We do not want to promote an antagonistic relationship between the regulators and any of the panels that they may establish. We have also required the regulators to publish their responses to help inform public understanding and enhance accountability. I reassure the Committee that this duty will, in practice, require the regulators to give their reasons for rejecting or departing in any significant way from a recommendation of one of their panels. With those explanations, I hope that my noble friend will feel able to withdraw her amendment.

Baroness Noakes: My Lords, I thank my noble friend Lord Trenchard and the noble Baroness, Lady Hayter, for their contributions to the short debate and

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I thank my noble friend the Minister for his response. I note that he will look again at the settlement system, which raises slightly different issues because of the different way that it is dealt with legislatively. I doubtless await a letter from him during the summer, which I shall look forward to.

The Minister said that there was nothing to stop the Bank of England from consulting anybody—it may be that he was playing that for laughs. The real purpose of tabling this amendment was because there is no specific mention of panels, and there is a concern that the Bank of England will not use its general obligation to consult the right people. The right people are not necessarily just the people they are regulating but also those who are impacted by regulation, such as the people you would find on something like the markets panel. That is also why I tried to press my noble friend the Minister on why the Bank did not have to consult the FCA when dealing with regulatory matters in this area. I put it to my noble friend that he has not quite addressed those issues. I hope that he will think further on this before we get to Report, and I will certainly reflect on what he has said.

In respect of the second amendment in this group relating to explanations in writing, the Bill states:

“The FCA must from time to time publish in such manner as it thinks fit responses to the representations”.

This does not convey the sense of what the noble Baroness, Lady Hayter, referred to, which is dialogue. At the moment the panels operate in a much more collaborative mode, feeding through ideas as well as making formal representations, and they are being seen here, I think, as just another consultee to be dealt with along with responses from any other consultee. The sense that the practitioners have is that the quality of relationships will deteriorate going forward, and that is a matter of concern.

These amendments were tabled by my noble friend, as I said, following the comments made by the financial services. I know that my noble friend will want to talk to them before we return to this Bill at Report. I thank my noble friend the Minister for his reply today but I do not think that I can regard the issues as settled. However, I am prepared to withdraw the amendment today.

Amendment 127ZA withdrawn.

Amendments 127A to 128AB not moved.

Amendment 128B

Moved by Baroness Noakes

128B: Clause 5, page 23, line 8, leave out “may” and insert “must”

Baroness Noakes: My Lords, I shall speak also to Amendment 130A in this group. These amendments deal with value-for-money studies for the FCA and the PRA respectively. I am delighted to see that the noble Lord, Lord Eatwell, and the noble Baroness, Lady Hayter, share my enthusiasm for value-for-money studies for the FCA and I hope to persuade them that they should be enthusiastic about value-for-money studies for the PRA as well.

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Amendment 128B amends new Section 1S of FiSMA, inserted by Clause 5 of the Bill. The new section states:

“The Treasury may appoint an independent person to conduct a review of the economy, efficiency and effectiveness with which the FCA has used its resources in discharging its functions”.

My amendment would change that “may” to “must”. Amendment 130A does exactly the same thing to the equivalent new Section 2M for the PRA. These are probing amendments. As a veteran of may/must debates, I am well aware that the Government will argue for flexibility to respond to circumstances and not be tied to any particular course of action, so my noble friend need not spend a long time reading out all of those comments from his notes.

My purpose in tabling these amendments is to ask the Government to state how they intend to use the powers. There is a similar power in FiSMA in respect of value-for-money reviews of the FSA, but the only time that I can recall it being used was when the C and AG was asked to carry out a review around 2007. I believe that my honourable friend Mr Mark Hoban last year described Section 12 of FiSMA as being “underused”. Because the existing power was used so sparingly, the simply rollover of the FiSMA formulation into this Bill is surprising.

My amendments say that the Government “must” set up independent reviews, but I accept the criticism of the Minister’s officials that I have not rounded that off by saying how often such reviews should be conducted. My own view is that they do not need to be conducted absolutely every year but they do need to happen reasonably often—for example, every three years. I hope that the Minister will set out how the Government intend to use the powers to subject the FSA and the PRA to VFM reviews.

My noble friend will be aware that the FSA was much criticised by large swathes of the regulated community for lack of economy, efficiency and effectiveness. The FSA raises its moneys through fees, and the only thing that appeared certain was that fees would go up, often by significant amounts. Consultation on its key proposals did little to silence its critics. Subjecting the FSA to an independent VFM review was seen as important as there are no natural downward pressures on the FSA’s costs. It obviously has no marketing wish to compete and it is not accountable to the Treasury for its use of resources. This is a recipe for inefficiency, and it is important that the successor bodies to the FSA are genuinely put under pressures to deliver regulation at a cost that is proportionate to the benefits.

The FSA’s current budget is going up very considerably and people understand in part why that is, although not all sections of the regulated community understand why their particular share of the costs is going up. Generally people accept that the costs of regulation will rise, but I hope that the Government will agree that lack of efficiency or effectiveness must not be allowed to shelter behind the banner of tougher regulation and that the successor bodies to the FSA must routinely be exposed to an examination of how well they spend their money.

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I would also like to use this amendment to ask how the Minister explains the relationship between the reviews that can be set up under the new Sections 1S and 2M and the annual audits of the new bodies. Under Schedule 3, the Comptroller and Auditor-General will carry out the annual audits of the bodies, which is fine, but will the C and AG be entitled and expected to carry out regular value for money reviews of the FCA and the PRA? Will value for money reviews therefore happen when the C and AG wants it to happen or only if the Treasury uses its powers under this Bill? I hope that my noble friend will be able to respond positively to the thrust behind these amendments.

3.30 pm

Lord Eatwell: My Lords, I support the noble Baroness, Lady Noakes, in the amendment that she proposes. I have added my name, as has my noble friend Lady Hayter. It is clear that there must be a satisfactory set of amendments for reviewing the effectiveness of this new regulatory structure and whether it provides value for money as conceived, particularly given the added complexity of what the noble Viscount, Lord Trenchard, referred to as the multiplicity of regulators now created out of this single structure.

I speak, too, to Amendments 128BB and 130AA in the name of myself and my noble friend Lady Hayter. Amendment 128BB adds to a definition of an independent person that a person appointed to review the FCA must be independent of the FCA but also of the Bank of England. We should have somebody standing outside this regulatory complexity who should be deemed to be independent. I suggest that if the person appointed is a staff member of the Bank of England, the notion of independence will be compromised, even though the FCA stands outwith the Bank of England. I hope that none the less there will be continuous regulatory dialogue between all the elements in the regulatory apparatus that we are designing here and that it will therefore be necessary, if somebody is independent, that they should stand outside that regulatory community, of which the Bank of England will be a leading part.

The point with Amendment 130AA is that the Treasury in appointing an independent person to conduct a review should inform the Treasury Select Committee of the nature and arrangements of the review, the idea being that that committee itself conducts reviews of the operations of regulatory institutions and will greatly economise on and facilitate the overall operation of a review procedure if there is no duplication and if there is clear communication and understanding between what the Treasury Select Committee and the independent person are doing. These two scrutiny agents should be co-ordinated and we should not have further segmentation; we have too much in this Bill already, and we should not have further segmentation in the procedures that we are designing.

Lord Sassoon: My Lords, first, I will make some comments on Amendments 128B and 130A, and explain who can initiate reviews. One of the main points made by my noble friend was essentially about how things are different from the way they have been up until

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now, and who can initiate reviews. I am sure we all agree that the Treasury’s power to appoint a person to carry out a value-for-money review is important to support accountability to the Government, to Parliament and to the public, not least because those reports of reviews must be published and laid before Parliament.

However, regarding my noble friend’s particular point, in future the NAO will also be able to initiate its own VFM reviews. As she identifies, that flows as a result of the Bill making the regulators subject to the NAO audit. I hope that provides reassurance to her on that important point. Clearly our expectations should be in the right place. The NAO can only conduct a certain number of VFM reviews each year across the whole of the public accounts which they audit, but I think my noble friend explicitly said—and I agree with her—that it would not be a question of an annual review. At the same time, the Government need to be able to order a review of the FCA at any time, with the option to focus on areas of the FCA’s activities they see as a priority, and be accountable for the way they exercise this power. In practice, the Treasury is likely to choose to appoint the NAO to carry out such a review. As such I do not see what would be added by placing an obligation on the Treasury to order reviews under new Section 1S, particularly as the amendment does not specify the time period or any of the other circumstances in which a review should be held; I think my noble friend recognises that. Particularly in the light of the fact that the NAO itself will be able to initiate VFM reviews, it would be too early to say how frequently the Treasury will use its power, because it will clearly dovetail to some extent with what flows from the audit. However, in response to my noble friend’s key point—she quoted my honourable friend the Financial Secretary—I am confident that the arrangements we have proposed will deliver a step change in the FCA’s accountability to Parliament, as compared to the way it has been with the FSA, for the way in which the FCA uses its resources to achieve value for money.

Amendment 128BB seeks to amend the requirement that a person appointed by the Treasury to conduct a review must be “independent of the FCA”, by adding the requirement that they must also be independent of the Bank of England. I absolutely agree that it is important that VFM studies of the FCA are carried out by someone independent of the FCA itself. That is what is proposed in the draft of the Bill itself, not least to provide assurance that they are objective and impartial. As I have said, in practice the Treasury is likely to choose the National Audit Office to carry out such a review. However, the Treasury will have the discretion to appoint an independent expert or a commercial firm with relevant specialist expertise to conduct a review. In that context the amendment is too wide, in that it could prevent any firm or expert which had done any significant amount of work for the Bank of England from carrying out such a role. From what the noble Lord said I appreciate that that was not the intention, but ruling out that population of firms or experts would be the effect of requiring the FCA reviewer to be independent of the Bank.

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Lord Eatwell: If I may say so, that is absolute nonsense. Are we actually suggesting that any independent firm or individual who has done work for a government department is thereby compromised and no longer an independent person? Are we saying that an independent person who has happened to write a few papers for the research department of the Bank of England is now no longer an independent person and is thereby compromised because he is not independent of the Bank of England? That is a misuse of language.

Lord Sassoon: First, I am not sure why the noble Lord, Lord Eatwell, talks about advisers to government departments. Here, we are talking about finding firms to carry out value-for-money reviews of the FCA, and independence from the FCA would seem to be the overriding concern. We are not talking about the Bank of England itself or some part of the Bank of England’s wider group doing the review. As I am sure the noble Lord knows, with all the increasingly tough professional codes that exist, the definition of independence is becoming ever tougher. Therefore, although the noble Lord and all of us might like to go back to a sort of common-sense, gentlemanly world that once existed, I absolutely stand by what I said. The amendment—whose effect incidentally goes wider than the noble Lord indicated in speaking to it—would capture a range of firms just because of the way that professional independence has come to be defined these days. Therefore, I stand by my analysis of the amendment.

Amendment 130AA would require that when the Treasury orders a review of the economy and efficiency of the PRA, it informs the Treasury Select Committee of the nature of, and arrangements for, the review. I understand that the amendment is driving at the importance of accountability to Parliament. The Government agree that that is important, which is why there is already a large amount on this subject in the Bill, including the provision for NAO audit, which we have discussed.

Requiring the Treasury to inform the Treasury Select Committee of the nature of, and arrangements for, the review at such an early stage might have some benefits of the sort that the noble Lord identified but I fear that it is more likely to be seen as an invitation for the Treasury Select Committee to comment on or even attempt to change the remit of these important reviews. I suggest to this Committee—I would not suggest anything to the Treasury Select Committee—that adding another political hurdle could slow up the process of producing these reviews. It may even make it less likely that they will be commissioned in the first place if there has to be a negotiation of the sort that I fear.

I hope that those explanations are sufficient for my noble friend to be able to withdraw her amendment.

Baroness Noakes: My Lords, I am grateful for the contribution of the noble Lord, Lord Eatwell, to this debate and for my noble friend’s reply. Perhaps I may comment on Amendment 128BB in the name of the noble Lord, Lord Eatwell, concerning independence. I think that my noble friend has stretched even the most stringent modern interpretation of independence way too far. On his interpretation, the NAO might not be independent of the FCA and therefore might not be

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able to carry out any further reviews of the FCA. I hope that my noble friend will reflect on the need for independence. We have to remember that when the Bank of England, rather belatedly, appointed people to carry out reviews of itself recently, independence was not exactly plain in the appointments that were made.

I thank my noble friend for his responses on value for money. It is slightly odd that the Government intend to use the NAO to carry out value-for-money studies, but they have set up the NAO to be appointed the auditors, so it might carry out value-for-money studies. I am still left with the feeling that the carryover of the ability to appoint somebody to do a review is just repeated legislation which might lay fallow, as the FiSMA legislation largely lay fallow. However, I thank my noble friend for his response and beg leave to withdraw the amendment.

Amendment 128B withdrawn.

Amendment 128BA had been withdrawn from the Marshalled List.

Amendment 128BB not moved.

3.45 pm

Amendment 128BC

Moved by Baroness Noakes

128BC: Clause 5, page 23, line 28, at end insert—

“1SA Report to Treasury Select Committee

(1) The FCA must conduct reviews of its own policy and performance if requested by the Treasury Committee of the House of Commons.

(2) On completion of a review, the FCA must make a written report to the Treasury Select Committee setting out the result of the review.”

Baroness Noakes: My Lords, in moving Amendment 128BC I shall speak also to Amendment 143B in this group. These amendments are in the name of the noble Lord, Lord McFall, and myself and are part of the suite of amendments we have tabled to ensure that the views of the Treasury Select Committee in another place are given a proper hearing and receive a proper government response.

Amendment 128BC introduces a new Section 1SA which requires the FCA to review its own policy and performance, if requested by the Treasury Select Committee, and to send a written report of the review to the TSC. We have just debated the Government’s powers to initiate value-for-money reviews of the FCA. This amendment goes further and allows Parliament, through the TSC, to require reviews.

The cause célèbre which underpins this amendment is the FCA’s review of the failure at RBS and its own role in that. I should remind the Committee that I am a director of RBS, but, thankfully, I was not involved at all during the period covered by the report. It took huge pressure from the Treasury Select Committee to get that report into the public domain.

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The Government’s response has been that such reviews and their publication are a matter for the Executive, rather than Parliament. However, the problem that the Government have is that it did not work in the case of the RBS report, which leaves Parliament without any direct means of dealing with any similar cases in future. It is not always self-evident that the Government of the day have the same interest in transparency and accountability as Parliament, especially when the Government have themselves been so closely involved in a particular event or series of events.

Amendment 143B features another aspect of the role of the Treasury Select Committee—this time in relation to the appointment of the chief executive of the FCA. Under the new Schedule 1ZA of FiSMA the chief executive is to be appointed by the Treasury and the amendment would add the words,

“following consideration by the Treasury Select Committee of the House of Commons”.

On our first Committee day, which I was unable to attend, there was much discussion of the role of the Treasury Select Committee in relation to the appointment of the Governor of the Bank of England. The Government’s position appears to be that the Treasury Select Committee is to have no role whatever in the appointment but that it may hold pre-commencement hearings. My noble friend Lord McFall—sorry, he is not my noble friend; it feels like he is my noble friend but he is actually the noble Lord, Lord McFall—asked the Government to think again about that.

The reasons usually trotted out by the Government are unproven assertions. In particular, the role of the governor is said to be so market sensitive that it has to take place without any parliamentary involvement. I am not sure that there has been any empirical evidence to back that up, but it is much more extraordinary that the Government are citing market sensitivity for the appointment of the chief executive of the FCA. The Treasury Select Committee does not accept this assertion, and it calls into question exactly how the Government think that markets work in practice.

The age of parliamentary examination of candidates for major public offices is already upon us. In general, they go well; but there have already been reports of cases from committees in another place which have not gone well. In at least one pre-appointment hearing the candidate withdrew because the hearing did not go well. Provided that this can be handled with dignity, it seems to me that this is a sensible part of a parliamentary democracy. However, post-appointment and pre-commencement hearings raise quite different issues. I recall a distinctly lukewarm if not completely damning report by the Treasury Select Committee in respect of one of the MPC appointees. It did not invalidate the appointment but it got off to a difficult start and certainly undermined the credibility of the individual involved.

If the Government stick with post-appointment hearings only for posts such as chief executive of the FSA, it is only a matter of time before the Treasury Select Committee, or a similar committee, reaches a different conclusion from the Government and makes

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its views plain, as indeed it should do. Where does that leave the position of an appointed but disapproved of chief executive of the FCA?

The Government need to think this through again. If, as I suspect, the evidence which stacks up shows that the case for market sensitivity is not convincing, it would be wise to ensure that Parliament’s view is taken fully into account before executive decision-making. I beg to move.

Baroness Hayter of Kentish Town: My Lords, I rise to give particular support to the second amendment to which the noble Baroness has spoken. I shall not repeat the very strong arguments that she made about the need for this to be pre rather than post-appointment. I would just add a few comments about the importance of the role of the chief executive of the FCA to consumers—as may be a bit expected of me now. After all, consumers are the people on whose savings, or need to borrow, this industry depends.

The Financial Conduct Authority has been called the consumer champion, albeit the word “consumer” no longer appears in the title. That is how, I am delighted to say, the newly appointed chair described it to me. I know that that is what consumers will want it to be. We need this new architecture to have the confidence of the public—some of whom undoubtedly hold financial products at the moment, while some may have done so in the past, and some might do so in the future. Without the confidence that this sector will behave and conduct itself in their interests—with integrity, professionalism and high standards of behaviour—what chance is there that those individuals will save for their homes or pensions, or that small businesses will borrow to produce growth and jobs?

The people who can hold the FCA to account and to scrutiny on behalf of all those millions of small savers, borrowers and those with simply a bank account are, of course, our Members of Parliament. They should, therefore, through their Treasury Select Committee, hold a pre-appointment hearing of the chief executive. This will establish in successful candidates’ minds that they are responsible to the people for the performance of their organisations. Chief executives will know that they will return to the Treasury Select Committee from time to time to account for their record and explain their decisions. That will be a healthy relationship. It does not give the Treasury Select Committee a veto, but it makes clear that the candidate needs to establish the confidence of that committee before taking up the post, and that before appointment she or he has the capability and the vision to stand in the shoes of clients and safeguard their interests. That is not too much to ask.

Lord De Mauley: My Lords, my noble friend’s Amendment 128BC would require the FCA to conduct reviews of its policy and performance if requested to do so by the Treasury Select Committee, and to report to it on that review. It is clear that, under the current system, the regulator is not sufficiently accountable when things have gone wrong, so the regulator itself needs to take primary responsibility for initiating reviews. The Bill provides a much clearer framework for when

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the FCA should initiate a review into regulatory failure. It includes a number of measures intended to rectify this.

In future the FCA will be required to conduct an investigation and report on possible regulatory failure with the triggers set out in statute. This is supplemented by the power of the Treasury to order an investigation when it considers that an investigation would be in the public interest. The Treasury must, subject to limited exceptions, then lay such a report before Parliament. There are also the value-for-money and NAO audit powers to which my noble friend referred in the previous group. This is an extensive framework that should significantly enhance the ability of Parliament to hold the regulators to account in future.

I understand that the Treasury Select Committee has recommended that the Bill should go further, and clearly Parliament has an important role in calling for reviews. However, it does not need additional powers to do so. If the Treasury Select Committee believed that a review under Clauses 69 to 76 was required but was not being conducted, it could request such a review. The FCA will in any but the most unusual circumstances comply, as is the convention. Of course, the FCA would be available to report back to the Treasury Select Committee. This is, in fact, what happened in the case of the FCA’s report on the failure of RBS. Additional wording in the Bill is not necessary.

Amendment 143B seeks to create a statutory requirement for pre-appointment scrutiny of the FCA chief executive. This is something that the TSC recommended in its report on the FCA. The Government believe that it is more appropriate that the appointment should be subject to a pre-commencement hearing. Let me explain why. This is the same approach that has been taken for the appointment of the chair of the FSA, and appointments to the MPC. Pre-appointment Select Committee hearings are not convened for all public appointments and, indeed, have seldom been held for chief executive posts. They are not held for the appointment of chief executives at other sectoral regulators such as Ofcom and the Office of Rail Regulation. They are generally used for appointments where the post plays a key role in regulating government itself, or in protecting public rights, or where independence from Ministers is particularly vital to the credibility of the post.

Although this process is appropriate for some offices and non-executive appointments, it introduces scope for delay and public disagreement over whether a candidate is fit for an appointment, which risks damaging confidence and undermining the effective operation of the ultimate appointee. It would not be appropriate for appointments to a regulator of financial markets and services, which is, additionally, a market-sensitive appointment. Pre-commencement hearings will provide the right balance between allowing for TSC scrutiny and protecting markets from undue uncertainty.

I therefore hope that noble Lords can accept that the Government’s proposal will significantly enhance the Parliament’s ability to hold the regulators to account, and that I have explained why I do not believe that it is necessary or appropriate to go further in the way that the amendments suggest. I therefore hope that my noble friend will feel able to withdraw her amendment.

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Baroness Noakes: My Lords, I thank the noble Baroness, Lady Hayter, for her response to Amendment 143B, and I thank the Minister for his reply.

In connection with the reviews, my noble friend relied heavily on the provisions which are in the Bill—which we will come to later—in respect of regulatory failure leading to reviews, as if that was the beginning and end of it. My amendment and the amendment suggested to us by the Treasury Select Committee itself—or by the clerks to the committee—provide that the FCA must conduct reviews of its own policy and performance. That is to say, it is much broader. It does not wait until things have gone very badly wrong before asking the FSA to carry out a review. I am not sure that the Minister’s response has dealt with that point. It seems that he is still keeping all the power to the Executive, except when there is clear and manifest regulatory failure, when all the pressures would build up and the Treasury Select Committee might be required again to argue its corner, as it had to do in the case of the RBS report.

On the pre-commencement as opposed to the pre-appointment hearings in respect of the chief executive, I hear what my noble friend says in respect of chief executive appointments, and I would like to reflect on that. However, I think that he was making up policy on the hoof in relation to other public appointments. It is a relatively recent phenomenon that public appointments have been subject to pre-appointment hearings, and it is my impression that they have been expanding, not declining, in scope in recent years. It may be that my noble friend is indicating that the Government are now trying to significantly row back on what was regarded as an important expansion of the ability of Parliament to be involved in these important decisions and to hold the Executive to account.

I would like to think more carefully about what my noble friend has said in response to that, and possibly discuss it further before coming back at Report. However, I beg leave to withdraw the amendment.

Amendment 128BC withdrawn.

Amendments 128BD and 128BE

Moved by Lord Sassoon

128BD: Clause 5, page 24, line 20, leave out “or”

128BE: Clause 5, page 24, line 21, at end insert “or

(d) a qualifying EU provision that is specified, or of a description specified, for the purposes of this subsection by the Treasury by order.”

Amendments 128BD and 128BE agreed.

4 pm

Amendment 128BF

Moved by Baroness Noakes

128BF: Clause 5, page 24, line 26, after “promoting” insert “competition among and”

Baroness Noakes: My Lords, I feel a bit like a number 11 bus—it does not come along for a long time and all of a sudden four come along at once. In moving Amendment 128BF, I shall also speak to Amendment 128BG in this group. Both amendments stand in my name and that of the noble Lord, Lord

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McFall, and deal with a further issue that the Treasury Select Committee in another place believes was not dealt with properly before the Bill left the other place.

Amendment 128BF amends the PRA’s general objectives in subsection (2) of new Section 2B. The objective currently says that it is for promoting the safety and soundness of PRA-authorised persons. The amendment would mean that it would promote competition among PRA-authorised persons.

Amendment 128BG is similar, but adds a subsection to new Section 2B requiring the PRA to discharge its functions in a way that promotes effective competition in the interests of consumers. But that has to be compatible with its general and insurance objectives.

The Treasury Select Committee was concerned that the PRA’s low tolerance of failure, as expressed in particular by its former chief executive, would entrench the market position of larger market players. The committee noted that competitive markets needed what it called the freedom to exit as well as freedom to enter, although I doubt that a failing bank would regard its impending implosion as a freedom. The theory is that a market that artificially restricts exit will almost inevitably inhibit entry as well.

The Government have said that no firm is too important to fail and they point quite rightly to the fact that the legislation is predicated on allowing failure. I fully accept that. I also accept that the FSA has been clear that it does not regard the job of the prudential regulator to prevent failure at all costs. But—and this is a big but—it is also clear that the new regime will be failure averse. New rules on regulatory capital, liquidity and leverage are designed to make banks safer and the implementation of the Vickers proposals in the way recently announced by the Government will do the same. Bail-in capital will also tend to work in that direction. The resolution plans that banks are working on are themselves in effect partly about preserving the status quo. Ownership may change, but large chunks of banks will remain in the market.

We all want financial stability, but a consequence of that is that the default assumption will be that bank failure is a last resort. Even then, resolution will preserve much of what has failed. All that the amendments do is to correct that balance. Without upsetting the core prudential objectives, the PRA has to have regard to the desirability of effective competition.

While supporting the thrust of the amendments, I do not wholly support their wording and I believe that “promoting competition” may go a little too far. I do not really like Amendment 128BG to the extent that it refers to competition in the interests only of consumers, because competition benefits not only the consumers but the wider economy by creating efficient businesses that can compete internationally to the benefit of everyone, not just the people who use their particular services. For that reason, I also support my noble friend Lord Hodgson’s Amendment 129ZA in this group, which is rather more rounded and balanced approach to ensuring that the PRA does not forget the wider environment of the business that it will be regulating. I beg to move.

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Lord Hodgson of Astley Abbotts: My Lords, my Amendment 129ZA in this group follows the line of argument ably put forward by my noble friend Lady Noakes. It is about how we set the regulatory bar at a level that does not discourage and squeeze out innovation if it is too high but not so low that there is a free for all and loss of reputation. As someone who briefed me on this said, “This is the Goldilocks’ porridge issue: not too hot and not too cold”.

As my noble friend said, there is a danger of regulators becoming risk averse and, as she put it, having a low tolerance for failure. Innovation stifled because the bar is too high will not cause problems for the regulator because the innovation will disappear, but the failure of a firm trying innovation obviously does. We have a particular interest in the UK because our financial services industry is vulnerable; it is not backed, as is that of the US, say, by a very large domestic market and therefore we have to be smarter, quicker and more innovative. That is what my amendment intends to facilitate.

To give a real-life example of what I mean, some noble Lords may have seen the briefing from the Equity Release Council, which is the industry body for equity release, which allows individuals aged 55 and over to respot money from the property they live in without having to make any monthly repayments. They have a no-negative-equity insurance policy so that people cannot go overdrawn. This equity release is a thriving, growing industry with 150,000 customers and about 25,000 new customers each year.

We have discussed in this House the problems of funding old age. Of course, equity release enables people to stay in their home, either by withdrawing some equity to pay for care, or to make physical alterations to their home to make it easier for them to stay there, but it is not a concept that has taken root anywhere else in the EU, so if the PRA does not have a competition objective, there will be no formal requirement for the regulator to strive for this effective balance between financial stability and an appropriate level of market competition and growth. This could lead to the PRA taking the default position of, first, increasing capital buffers in response to any market issue; and, secondly, disproportionately gold-plating future EU legislation when transposing it into UK law, which could be to the disadvantage of UK firms.

As I say, this will be a particularly difficult issue where EU regulations are being promoted which effectively do not cover any country but the UK because the practice is not carried out elsewhere in Europe. Other noble Lords will have had other briefings; there was one from the Council of Mortgage Lenders that mentions:

“The uncertainty that the FCA’s product intervention powers can have the potential for stifling innovation within the market. There are few details of how these powers might be used and under what circumstances. It is crucial, therefore, that a clear set of governing principles are developed”.

Therefore the four sub-paragraphs (a), (b), (c) and (d) of my Amendment 129ZA, which inserts a completely separate clause on Page 26, deal with the point made very ably by my noble friend, but do so in a slightly wider way.

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Baroness Kramer: My Lords, Amendment 128BG stands in my name and that of my noble friend Lord Sharkey, and I am delighted to hear that the noble Baroness, Lady Noakes, and the noble Lord, Lord McFall, are adding their names. Their names have not made it onto the Marshalled List, but it is very good to know that they actively support the amendment. I think that all of us would look at the wording in more detail, but it is, as are others, a probing amendment. The language was supplied by Which?, an organisation that I help, and it seems to me to be reasonably well drafted.

The PRA, as your Lordships will know, is the body which will authorise new banks. The track record of the regulator in authorising new banks in the United Kingdom is pitiful: one new banking licence in 100 years, for Metro Bank. Other banks which people may think of as new are organisations which have purchased an existing banking licence. It is a sharp contrast to virtually every other developed and, frankly, not-yet-developed country. We have seen consolidation in our high street banking services, not expansion and added competition.

The regulator, if spoken to, would argue that the reason so few licences have been issued, or only one, is that new investors are not coming forward with proposals for new banks.

I think that it would acknowledge that some have come forward, gone part of the way down the process and then reached such hurdles that they have essentially been required to withdraw. It is also true that most potential investors are discouraged before they begin. The Metro Bank case is publicly known; we know that it cost it between £25 million and £35 million to get through the approval process. That is not the regulatory capital; that is simply getting through the regulatory hurdles. That took about two and a half years. Anyone to whom I have spoken who would pick up the role of working with a potential investor has said that their advice today would be, “Do not even think about it. Find yourself an existing banking licence or give up the idea altogether”.

We have some new players in the industry. There is Virgin Money. The Co-op has picked up some Lloyds branches. All that is very good news and will add to competition on the high street. There is a new small bank in Cambridge, which has picked up the banking licence of the old pension bank in that area. I am not saying that there are no new players in the market. I just point out that they are appearing off the collapse of RBS and Lloyds, so this is a one-time only event; it is not a step change or a door opening to bringing new and effective players to provide competition.

I understand that, even without any assistance from the Bill, the PRA will reduce at least one barrier. In the past, the regulator has asked for a higher capital requirement from a new player than from existing players. I understand that that is likely to change, so that at least that playing field will be level.

We in this country are missing an entire layer of banking. We have spoken about this before in several debates. The small, local, community bank, frequently with social impact obligations as part of its core philosophy and mandate, often sponsored by a charity

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or supporting a social enterprise, plays a significant role in the economies of competitor countries. Germany has its savings bank structure; the Swiss their cantonal bank structure; the United States its community development banks. We all know that those small banks behave in a very different way from high street banks.

First, they are willing to work with vulnerable individuals in the community in a way that our major high street banks have no interest in doing—they provide basic bank accounts, but under duress and have no interest in such consumers. Because those small institutions are committed to a particular community and rise or fall with the success of that community, they are also committed to small businesses—both new start-ups and existing small businesses—within those communities and stick with them through thick and thin.

Looking at the German and US experience, savings banks, in the one case, and community banks in the other, increased their lending to small business during the recent financial crisis and period of austerity, because they knew their borrowers, they knew when management was capable, they understood the microclimate for a particular company. They could do the level of credit work that our major high street banks ceased to be able to do some time ago; they are largely sellers of commodity product, they are not real credit managers in the way that banks used to be.

We are missing that whole layer of banking. I argue that, for the sake of our communities and community growth, we need to rebuild that whole sector, but we cannot if we have a regulator so utterly resistant to any new entrants. For a small bank to serve a narrow community, perhaps within a single borough in London or a portion of, say, Liverpool or Sheffield, to set the hurdle that it must raise between £25 million and £35 million to get through the approval process means that it cannot even think about getting off the ground. We need an entirely different regime. Those are banks which are never going to put us at systemic risk.

I recognise that, to allow those new banks to come in, perhaps with a more modest banking licence, which would be a good way to do it, and certainly with lower capital levels, the regulator must accept that a number of banks will fail. We have a good example in the United States where these banks fail. Within seven days they are under new ownership and masterminded by the FDIC. This acts as the regulator to make sure that the depositor and the business book are protected. The shareholders may be wiped out, which is fair and appropriate, but the banks then revive in a new environment. From the depositor’s perspective there is no hiccup. That is an appropriate kind of failure regime.

4.15 pm

I see no attempt in this legislation either to create the capacity or require the regulator to create it for a failure regime that can deal with that kind of small collapse and disaster, making sure that it has no broader impact. We have a resolution process in the Banking Act 2009, but it does not seem to be addressing this problem. To get the regulator to move and deal

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with this issue, we have to have a competition obligation that talks directly to the PRA and not simply to the FCA, which sits at the side and essentially has a market responsibility. Many noble Lords will have raised the issue, for example, of the pay-day lenders and spoken of their concern that pay-day lenders are moving into the small-business lending arena, with the most extraordinary kinds of interest rates.

These groups are moving in because there is a vacuum. As long as we leave it there we create the possibility for groups such as Wonga and others to come in and legitimately fill the vacuum in the market. We have no reason to complain unless we make sure that there is a mechanism in place to ensure that new, small institutions, designed to serve the market in an appropriate way with fair pricing, can come in and provide the necessary services.

In the past, I have raised this issue with the Government. I have often had the reply that the credit unions can do it. Can I point out to anyone who wishes to raise this argument that the credit unions, for which I have huge respect, cover something like 2% of the population? Even with great support from the DWP, as I know new money is on offer to them, they will be responsible only for a small percentage growth of the market. I hope they do it rapidly, but it is not going to solve the problem. They have restrictions on the interest rate that they can charge. They are not allowed to offer credit services to small businesses unless those services have already been rejected by one of the high-street banks. There are all kinds of constraints on what they can do and we need to recognise that this vacuum exists. We have to put pressure on the PRA to start taking the problem seriously, to recognise that it is looking not at a single sector, but at a sector with distinctive strands that must be regulated in a different way. After all, the purpose of the regulator is to make sure that this sector is fit for purpose for our economy. Unless we exert that pressure our chances of getting past today’s problems are going to be limited.

Again, I support Amendment 128BG and have great sympathy for the other amendments that have been discussed by the noble Baroness, Lady Noakes, and the noble Lord, Lord Hodgson.

Lord Flight: My Lords, I support all three of these amendments. I declare an interest as a director and founder-member of Metro Bank.

Part of the total objective for the PRA of a safer banking system and banking stability is a need for more competition in the UK. One of the main sources of our problems has been a cartel. Whenever there are cartels bad habits tend to creep in. There is a history behind the cartel coming in, going back to Walter Bagehot in wanting to consolidate banks for safety, but there needs to be a balance. The PRA cannot achieve its major objectives without staunchly advocating greater competition and helping it to come about.

From my experience, it was agony going through a year and a half with the FSA getting the licence for Metro Bank. The sums of money that we had to spend were not quite as great as the noble Baroness reported but they were very substantial. The FSA kept changing

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its mind. The proposals for capital were out of all proportion to the risk of the bank. At the time, I wrote to the Minister reporting on the experience. Strangely, I do not think that there was ill intent by the FSA. It was very much about individuals wishing to protect their own position and not wanting to be attacked in some way in the media for having been too lenient on licensing a new operation. Memories go back to the early 1970s, when banking licences were given out too easily, and that was a major cause of the secondary banking crisis in 1974. However, it is absolutely right that a more competitive environment in banking should be a key factor which the PRA supports.

On international competitiveness, I have understood recently that the Government’s main objective is that they feel that this is somehow related to light-touch regulation that has got into trouble. I do not see that at all. It seems to me just silly for the UK to shoot itself in the foot with regard to an important industry that employs a lot of people, earns a lot of invisible earnings and so on. I would have thought that, in terms of regulating, it would be normal to consider the effect on international competitiveness. What was wrong with light-touch regulation—I remember it well—was the doctrine: “You don't need to regulate large institutions too much because they can look after themselves”. The weakness of that doctrine was that, if they got it wrong, as subsequently transpired, the problems for the whole system were that much greater. I think that was what was wrong and it has little or nothing to do with the competitiveness of the UK’s international banking services.

I do not accept at all the argument that a brief to keep watch on international competitiveness relates to inadequate or inappropriate regulation. Taking the point to absurdity, to ignore a debate about particular measures, which were clearly going to be highly damaging to the UK industry, would just be silly.

Viscount Trenchard: My Lords, my noble friend Lord Flight is, of course, completely correct in his assertion that the proposed new regulatory framework makes far too little mention of the need to preserve competitiveness of the marketplace, not just competitiveness from the point of view of the consumer but the very competitiveness of the marketplace for practitioners to participate in. For that reason, financial services companies from all over the world have come into London and that has helped to provide more consumer choice, and it will continue to do so in the future, as well as providing the Exchequer with a very large proportion of its annual revenue. It is a huge pity, as my noble friend has pointed out, that the Treasury mistakenly believes that preservation of international competitiveness implies approval of inappropriate or inadequate regulation.

All three amendments have some merit but of the three I tend to prefer the amendment proposed by my noble friend Lord Hodgson because it gives a duty to the PRA to have regard to competition. I would have preferred that the PRA had an objective to protect the competitiveness of the marketplace as well but I realise that there are some valid arguments against that. To have a duty—“duty” is a strong word—to have regard

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to competition is the preferred of the three amendments put forward. The points in my noble friend’s amendment are all to do with minimising adverse effects, or avoiding restrictions or unnecessary regulatory barriers to entry; they are all negatives rather than positives. I would prefer this issue to be expressed in a more positive manner. I have worked for a Japanese-owned financial institution; I am not sure whether this is a UK institution under proposed new paragraph (d) in my noble friend’s amendment. It is, of course, a UK-incorporated plc. Could my noble friend clarify what “UK institutions and companies” means? It is very important for London that the level playing field for all participants is preserved and I hope that the amendment refers to UK incorporated or UK resident financial institutions and companies.

My noble friend’s amendment also makes it very clear how necessary it is to have collaboration and co-operation between the PRA and the FCA. Proposed new paragraphs (b) and (c) impact on matters that are of great concern to the FCA. I hope that these matters will be properly covered in the memorandum of understanding to be drawn up between the PRA and the FCA.

Lord Sassoon: My Lords, the most important issues to be addressed in this group of amendments are those around barriers to entry linked to resolvability. A sea change is needed and is coming. If the Committee bears with me, I will get to this issue, because it is at the heart of the concerns in this area, as identified in particular by my noble friends Lady Kramer and Lord Flight.

Let me start with Amendments 128BF and 128BG in the terms in which they are drafted. My noble friend Lady Noakes says that in some respects they go too far in terms of the duty to promote competition. However, I should do the amendments justice by speaking to them as drafted, although I accept that my noble friend put somewhat of a qualification around her amendment.

There are three reasons why the Government do not agree with the proposition in the amendments. First, all PRA-authorised firms will also be regulated by the FCA according to their objectives, and will therefore fall under the FCA’s objective to promote effective competition in the interests of consumers. To correct one point, it is also the case that authorisation has to be carried out by both the regulators. For those that are seeking a PRA authorisation, the PRA will lead, but others will be led by the FCA.

Secondly, the Government’s view—this goes to the heart of the new structure—is that the FSA simply has an impossible job in trying to balance so many competing objectives, which has led to its lack of institutional focus on prudential matters. In order to avoid repeating this mistake, we have decided that the PRA should have a single, general objective, supplemented by tailored, focused objectives, which are specific to particular regulated activities, such as the insurance objective set out in new Section 2C.

4.30 pm

Thirdly, in addition to the strengthened power for the FCA to make referrals to the OFT included in Clause 40, the Bill provides for both PRA and FCA

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regulatory requirements and practices to be scrutinised by the competition authorities. This is set out in Chapter 4 of new Part 10A of FiSMA.

Amendment 129ZA seeks to impose a number of new factors to which the PRA must always have regard. On competition, the general duty to co-ordinate requires the FCA and the PRA to consult each other before taking steps that could harm each other’s objectives, including the FCA’s competition objective. This will ensure that the PRA understands where its decisions may harm competition and works with the FCA to minimise detriment to both authorities’ objectives.

On the regulatory barriers to entry and expansion— this comes to the heart of matters here—the intention, as set out in the White Paper on the Independent Commission on Banking published on 14 June, is for the Bank of England and the FSA to reduce barriers to entry under the PRA such that if regulated firms are “resolvable” without the use of public funds, the capital requirements will be lower than they otherwise would have been. The Bank of England and the FSA will publish the conclusions of their review this autumn and, where possible, have committed to introducing these changes in advance of the new regulatory structure.

I know that there is a degree of scepticism based on the past, but the Bank and the FSA have made these very important new statements. This is linked to the new resolution regime, which is why my noble friend is quite right to talk about that. The new regime is designed to achieve exactly what my noble friend Lady Kramer wants it to do. The PRA will put resolution at the centre of its regulatory framework, as the Bank and the FSA have made clear in their already-published approach document. One can look at a number of examples in the last three or four years of where the new approach to the special resolution regime is delivering things that were not there in the UK regime before. Southsea Mortgage and Investment Company, a bank that failed in June 2011, saw payout executed in under seven days, the Dunfermline Building Society business was split up and sold over a weekend in March 2009, and there was a full payout for depositors with London Scottish Bank in autumn 2008. These are things that we have not seen in the past and they are the basis on which the Bank and the FSA can state their confident intentions about a new approach to capital requirements on authorisation.

Turning to the avoidance of restriction on consumer choice, the Government’s view is that, in this new regulatory framework, the FCA is the appropriate regulator to promote competition and recognise and safeguard the protection of consumers. In a similar way to competition, the duty to co-ordinate will ensure that the PRA recognises the need to avoid consumer detriment and restriction to their choices.

On competitiveness, the last line of Amendment 129ZA would have a similar effect to that of Amendment 129, which we debated earlier. It seeks to impose a statutory duty on the PRA to have regard to ensuring that UK institutions and companies are not placed at a competitive disadvantage. We have already debated how the FCA should have regard to competitiveness issues and I have undertaken to consider, in advance of Report

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stage, whether a more explicit consideration of the wider economic impact of the actions of the regulators should be included in the Bill.

I am happy to make the same undertaking in respect of the PRA as I made in respect of the FCA, and look forward to returning to this on Report. All that said, I hope that my noble friend will feel able to withdraw her amendment.

Lord Hodgson of Astley Abbotts: I ask my noble friend one practical question. I entirely understand what he says about the competition objective of the FCA on page 17. In his argument, that is a reason why it should not be on the PRA. There is no way that the PRA, without its competition objective, can overrule the FCA: that is, there must always be a competition objective in all cases where the PRA cannot outgun the FCA. If there are any occasions where the PRA can outplay the FCA, then of course the competition objective falls away, if there is not one for the PRA. Reading this, it looks to me as though there is a danger that the PRA will be the established centre—the capital centre and so on—and the FCA will be, in some senses, implementing what has been decided as a strategic framework by the PRA. If I have got that wrong, I am delighted to be put right.

Lord Sassoon: I do not think that my noble friend has got it quite right. However, I cannot hide from him the fact that we believe that, because it is right and goes to the heart of the flaws in the present tripartite arrangements, the PRA should have as its single objective the one that I have described. Therefore, the nub of his concern remains, and I cannot pretend that it is not there. All I can say is that we consciously want to have the architecture as I have described it. However, the mitigation—and I think it is an important one—is that the PRA must consult the FCA before taking any steps that could in any way harm the FCA’s objectives, including, in this case, the competition objective. I think it is a reasonable check on the PRA’s action, given the basic architecture which we think is important.

Baroness Kramer: One issue that I have raised to which I have never had an answer, no matter whom I have asked, is where the PRA is expected to move in terms of the cost of getting regulatory approval. The Minister made mention of the capital requirements—and there is a whole set of issues around that—but one does not even get to the capital requirements if one cannot get through an approval process without a phalanx of lawyers, accountants and submissions which frankly act as a complete barrier to any potential small and local banking institution. I do not understand where there is any commitment from the PRA to tackle that set of problems.

Lord Sassoon: The fact that it has already started on the work which will lead to the document in the autumn and which goes to the most expensive element of getting authorised—namely, the amount of capital required—is a fundamentally important and good start. I do not pretend that that completes the business,

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but it tackles first the most expensive element: the cost of putting that capital aside. This is a start. It is not before time, but it is happening as we speak.

Baroness Noakes: My Lords, I start by apologising to the noble Baroness, Lady Kramer, for having appropriated her amendment incorrectly in my opening remarks. I do not quite know when I made the mistake, but I made it quite early and perpetuated it. I latterly discovered that I did not quite like the drafting, and so was slightly disobliging about the amendment of the noble Baroness, which I thought was my own. With apologies to the whole Committee and particularly to the noble Baroness, Lady Kramer, I did not intend to add my name to her amendment. I would not have signed up to the precise wording but, as has come out in this debate, I think we are all speaking from the same territory.

That apart, I believe that there has been quite a lot of agreement among those who have spoken that the Government have not quite got this right. I am concerned that the Government keep saying that they will not repeat the mistake of giving conflicting objectives, which is alleged to have been one of the causes of the problems of the FSA, so this body has to have a single focus. However, I cannot see that a single focus is going to be good for the financial services industry or for the consumer, particularly where competition is just not in its lexicon. If it is not good for them I cannot see how it is good for the UK, so it seems to me to be bad policy.

The amendments that we have put forward today, in varying ways, have been trying to make it a slightly better policy by giving the PRA a broader remit. My noble friend the Minister said that he had undertaken to come back at Report to give a wider economic context, as he had already undertaken to do on the FCA. With respect, that does not meet the points that have come out from the debate today. I believe that there was quite a lot of agreement between my noble friends Lord Flight, Lord Trenchard and Lord Hodgson and I on the amendment tabled by my noble friend Lord Hodgson. When my noble friend the Minister thinks carefully about what to come back on Report with, I hope that he will look again at this issue. Expecting the FCA’s objectives to bear all the burden of reflecting competition in the way that the PRA operates is just bonkers. With that, I beg leave to withdraw the amendment.

Amendment 128BF withdrawn.

Amendment 128BFA

Moved by Lord Eatwell

128BFA: Clause 5, page 24, line 31, leave out “UK financial system” and insert “financial markets in which UK financial institutions operate”

Lord Eatwell: My Lords, this amendment and Amendment 128BFB seek to ask the Government to clarify their definitions of the scope of the markets in which UK financial institutions operate. We have already seen some very peculiar UK-centric views in proposed

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new Section 9C of the Bank of England Act 1998, which I hope we will see extensively modified on Report. In this clause, however, the Bill currently refers to having,

“any adverse effect on the stability of the UK financial system”.

This fails to recognise the global nature of UK banking, and that risks may arise anywhere in the world where UK financial institutions operate.

We want to ensure that the actions of UK financial institutions are such as to sustain the stability of the entire financial system in which they operate. Why? It is because destabilising actions in foreign markets may destabilise subsidiaries of UK financial institutions and, ultimately, the home institution. However, this could not be said to refer to the UK financial system. I will put it again: if in a foreign market a subsidiary is destabilised by actions here, that subsidiary ultimately destabilises an institution here—not the system but an institution. Can the noble Lord please explain how the current wording of the Bill deals with the fact that the balance sheets of UK financial institutions are typically written on a global scale?

Lord Sassoon: My Lords, these amendments seek to give the PRA a global financial stability remit. Instead of the PRA looking at UK financial stability, the amendment would have it looking at the financial stability of every market around the world in which any PRA-authorised person operates. The PRA would have a new responsibility for the financial stability of many markets where it has no powers, no jurisdiction and no tools. I suggest that this is plainly an absurd position. Although cross-border co-operation is vital to ensure the effective supervision of international firms, it is ultimately for each country and its regulators to ensure its own financial stability, or a single currency bloc may decide that financial stability needs to be supervised ultimately on a currency bloc basis.

4.45 pm

Lord Eatwell: My Lords, I think that the noble Lord has misunderstood the amendment. If he inserts the amendment and looks at subsection (3)(a), it would refer to,

“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect”,

on markets in which PRA institutions operate. The noble Lord is suggesting that the PRA would not have jurisdiction, whereas the PRA does have jurisdiction over PRA-authorised persons.

Lord Sassoon: I have read and reread these amendments and discussed them with officials on a number of occasions because I cannot believe that this was the effect that the noble Lord, Lord Eatwell, wanted. Actually, it is entirely the effect of his amendments to require that the PRA’s general objective is to be advanced by,

“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect on the stability of the”—

if amended—

“financial markets in which UK financial institutions operate”.

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They would have to regulate in a way that had regard to the financial stability of all these markets around the world, which does very directly get the PRA into the protection of financial markets way beyond its own control in the UK.

I will explain why I think the Bill adequately covers the noble Lord’s justifiable concern. What I have said so far in no way means that the PRA will ignore the stability of any financial market outside the UK that is relevant to PRA-authorised firms. The PRA will take an interest in the stability of any market that has a significant impact on the safety and soundness of one or more PRA-authorised persons. It will do this not in order to improve the stability of this market but to understand the potential or actual impact on regulated firms and to take steps so that this impact is minimised using all the powers available to it. I cannot identify anything in the Bill that limits the PRA or prevents it from taking account of all those factors. It is quite a different thing to put in wording, as suggested in these amendments, that would make the PRA in some way responsible for the effects on the stability of financial systems outside the UK. With that explanation and reassurance, I hope that the noble Lord will feel able to withdraw his amendment.

Lord Eatwell: My Lords, it is very difficult to be reassured by a statement that the PRA would sit back quite happily and watch PRA firms take actions that would destabilise foreign markets. However, given that the Treasury seems to have no concern about PRA firms destabilising markets outside the UK, I beg leave to withdraw the amendment.

Amendment 128BFA withdrawn.

Amendment 128BFB not moved.

Amendment 128BFC

Moved by Lord Eatwell

128BFC: Clause 5, page 24, line 34, at end insert—

“( ) seeking to minimise, as far as possible, the costs to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry”

Lord Eatwell: The amendment seeks to add to the overall objectives of the PRA the requirement that it operates efficiently, seeking to minimise costs,

“to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry”.

It seems remarkable that the PRA has a series of objectives that it is required to pursue to the very best of its ability and with the application of all necessary resources, but there is no constraint on the utilisation of those resources. It seems to be able to pursue its objectives without any concerns for the costs to the public purse in these particular contexts. The amendment would provide a balance in the approach of the PRA, with the desirable objective of ensuring stability and, in doing so, minimising the costs both to the FSCS and the public purse.

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Lord Sassoon: My Lords, this amendment reflects a recommendation from the Joint Committee that a secondary general microprudential objective be given to the PRA. It seeks to specify a further means by which the PRA’s general objective should be achieved, by minimising the costs to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry. A similar amendment to this was tabled and debated in another place.

The Government acknowledge that there are some attractions to reframing the objective in terms of the prudential outcomes that the PRA will seek to achieve, as the Joint Committee suggested. However, specifying particular desired outcomes creates difficulties. For example, whether the failure of a firm results in a call on public funds will depend to an extent on the actions of the Government of the day—for example, in taking a decision to nationalise or recapitalise a failing institution. In some circumstances, the orderly failure of a firm followed by an FSCS payout may be the best way of protecting depositors and taxpayers while maintaining market discipline. The effect of specifying such outcomes could be to encourage the PRA to take a highly aggressive and expensive approach to supervision with an end goal of ensuring that, if a firm failed, its potential costs of failure to the FSCS and public funds would be zero or negligible. To ensure this outcome, the PRA would need to intervene extensively in a firm’s day-to-day affairs, undermining the responsibility of firms’ management for running their firm. Ultimately, in an extreme case, it could turn PRA supervisors into shadow directors.

To place such a duty on the regulator would be against the Government’s intention, endorsed by the Joint Committee and confirmed in new Section 2F inserted by the Bill, that the new regulatory regime should not be a zero-failure regime. The amendment would bias the PRA towards a zero-failure regime. On balance, the Government believe that it is better to frame the objective more broadly, requiring the PRA to focus on the safety and soundness of individual firms, so as to improve financial stability. This objective gives the PRA a clear mandate to intervene to address risk-taking by firms.

I hope I have been able to make clear to the Committee why I cannot accept this amendment, and why I ask the noble Lord to withdraw it.

Lord Eatwell: The Minister has exposed some very interesting arguments here in the relationship between the degree of protection which should be provided to consumers and the public purse, balancing that against the degree of supervision of firms. The Government seem to want to err on the side of jeopardising the public purse a little rather than providing supervision that would protect the public purse. However, in the context I can see that a balance is being discussed here, and the Minister has made clear where the Government’s view of that balance lies. In that light, I beg leave to withdraw the amendment.

Amendment 128BFC withdrawn.

Amendment 128BG not moved.

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Amendment 128BH

Moved by Lord Flight

128BH: Clause 5, page 25, line 14, leave out “those who are or may become”

Lord Flight: My Lords, the focus of the insurance objective is rightly on policyholder protection. I do not really understand why the drafting includes those who “may become policyholders”. If they do become policyholders, they will surely be covered automatically. If they do not become policyholders, they will not be covered. I am not aware of any other area of financial services where there is any focus on future potential customers. I have a very simple question: why does this include those who “may become policyholders”? What is the logic, if any, behind this inclusion?

Baroness Drake: My Lords, I shall speak to Amendment 141 in my name. The PRA is the prudential regulator of the insurance companies. It has an insurance objective, which will include a requirement to contribute to securing an appropriate degree of protection for policyholders, understandably reflecting the correlation in the insurance sector between the management of risk and the consumer outcome, especially in with-profits policies. The PRA has no explicit consumer protection remit. The FCA does.

The Treasury has, as far as I can see, recognised the need for the PRA to seek advice from the FCA in achieving the balance between the interest of the policyholder and the prudential strength of the company when it comes to with-profits policies. While I understand that the responsibility for that balance should remain with the PRA, it is intended that these matters will be covered by a memorandum of understanding between the PRA and the FCA. However, that memorandum of understanding has to be compatible with the PRA’s view of how to advance its prudential objective. That is where I remain concerned, because this leaves the PRA with a very wide discretion as to what is an appropriate degree of protection for with-profits policyholders.

Unless I am misinterpreting the government amendment in this group, which I will have to wait to hear, the effect of that amendment is to strengthen or give even greater clarity to the fact that it is the PRA which holds the ultimate authority for determining that balance between the prudential strength of the company and the interest of the policyholder. Given that, I believe that it would be desirable if these matters were not left to a memorandum of understanding alone, but that the Bill should guide the approach of the PRA with respect to the regulation of with-profits policies by providing a set of principles which this amendment seeks to set out. Perhaps I may set out my reasons.

The PRA’s focus will be on the prudential regulation of firms, and the stability of the financial system. It will not have the culture to proactively protect consumers who hold with-profits policies, and yet the regulatory framework of with-profits policies has been subject to sustained criticism from the Treasury Select Committee,

25 July 2012 : Column 769

observers, academics—large numbers of people. However, with-profits policies are still a significant consumer issue. There are around 25 million policies, worth about £330 billion. These policies typically state that the policyholder will share in the profits from the fund, which are distributed to the policyholder in the form of bonuses. The policyholder’s contract normally states that they receive 90% of the profits from the fund, and the shareholders receive 10%.

5 pm

However, this is where it becomes complex, because the directors of the insurance company enjoy significant discretion as to how profits are defined and distributed to policyholders. For example, the rules allow firms to use the funds to pay shareholders’ tax bills or to subsidise new business. I believe that to date the regulatory framework has failed to control the conflicts of interest that exist in with-profits funds. We now have a new regulatory regime for with-profits policies which must provide for the fair treatment of policyholders while properly considering the prudential position of insurance companies, which is the primary focus of the PRA. Therefore, the amendment simply seeks to guide the approach of the PRA when determining that balance between the two—the prudential position of the company and the fair treatment of the policyholder—because the responsibility to address that balance rests firmly with the PRA.

The principles set out in the amendment make it clear that the purpose of the with-profits fund is to provide guaranteed benefits and profits for policyholders. They also ensure that the regulator upholds the terms of the policyholder’s contract. As the purpose of the fund is to provide guaranteed benefits to policyholders, the insurer will be allowed to retain money in the fund to meet those guaranteed benefits while the PRA meets its prudential obligation. Furthermore, the insurer cannot manage the fund for its own benefits where this diverges from the purposes of the fund, and an insurer cannot exercise its discretion in running the fund to discriminate against policyholders or to not apply effective controls on conflicts of interest.

The nature of with-profits policies will always involve discretion. The PRA’s primary focus will be on financial stability and prudential regulation. That is why I think it would be beneficial if the PRA was guided in how to discharge its duty to ensure that the discretion applied was not to the disadvantage of policyholders.

Baroness Hayter of Kentish Town: My Lords, I trust that the first amendment in this group, moved by the noble Lord, Lord Flight, will not find favour in the Committee as it would substantially weaken the thinking, role and responsibility of the PRA.

First, it would exclude consideration of those currently excluded altogether from financial products, especially in insurance but also in banking. Unless the regulators take exclusion from financial products seriously, we will be failing in our duty to a large section of our community. Our regulators should act in the interests of the whole community, not just those who are already within the charmed circle.

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Secondly, there may be issues of promotion and advertising of financial services or products—indeed, to the sophisticated as well as to the earlier group—which must be taken into consideration by the regulators.

Thirdly, it is now acknowledged, including by your Lordships’ House, that regulation should cover future as well as present consumers so that it can take account of changes in consumer needs, the environment and product development. This is the case with, for example, legal services. The Legal Services Act 2007 specifically adds in,

“those who are using (or are or may be contemplating using)”,

legal services.

Amendment 141 in the name of my noble friend Lady Drake is clearly an essential addition to the Bill if those who have bought with-profits policies are to have any confidence in their outcome. The funds must be husbanded in their interests, the profits must be shared according to the policy’s rules, profits must be justly distributed and any discretion must be used fairly and equitably.

There is surely not a word about this amendment with which the Minister could argue. As John Kay wrote in his report this week:

“Financial intermediation depends on trust and confidence: the trust and confidence that savers who invest funds have in those they choose to manage these funds”.

Amendment 141 is part of recreating that trust and confidence, and we are happy to support it.

Lord Sassoon: My Lords, let me first speak to government Amendment 140E. When considering the regulation of discretionary payments in with-profits business there is no easy split between prudential and conduct issues. The Bill deals with this by giving the PRA sole responsibility for issues relating to discretionary payments. The FCA remains responsible for all other conduct regulation. However, under the Bill as drafted, use of “includes” in new Section 3F(1) could be interpreted to suggest that the PRA is responsible for other elements of conduct regulation as well. This amendment simply clarifies the drafting, by removing the implication that the PRA could be responsible for other conduct issues.

I turn to the non-government amendments in this group. Amendment 128BH would remove the reference to those “who may become policyholders” from the PRA’s insurance objectives. However, I can assure my noble friend that the inclusion of this reference to future policyholders is both deliberate and important. It is there for completely different reasons from those advanced by the noble Baroness, Lady Hayter, with whom I agree in rejecting the amendment but for much narrower and more technical reasons related to the nature of a with-profits fund.

Let me give an example of what we are thinking about here. If one considers the scenario where the PRA is considering whether a with-profits insurer should be permitted to make a very large distribution to its policyholders, and if the PRA is only required to consider the interests of current policyholders, it might be inclined to allow the distribution. However, that might leave insufficient assets in the fund to ensure that policyholders coming into the fund—if it is operating on a going-concern basis—obtain fair and adequate payments from the fund.

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I should reassure my noble friend that the reference to those becoming policyholders does not require the PRA to go out in some proactive way to protect those who have no current plan to take out a contract of insurance, but who might at some point decide to do so. The PRA is only obliged to provide an appropriate degree of protection and what is appropriate will depend on the facts of the case. In this case, it is the needs of a person who is about to sign on the dotted line for a with-profits policy who needs to be assured by the regulator that the fund to which they are about to subscribe is appropriately strong according to the rules. This provision allows for that.

Amendment 141 would require the PRA to regulate with-profits funds on the basis that the fund should be managed for the purpose of distributing profits to policyholders, as opposed to any other purpose. This is an important issue and I welcome the opportunity to set out broadly how with-profits will be regulated under the new system. It might be worth just pointing out to the noble Baroness, Lady Drake, that new Section 3F—the “With-profits insurance policies” section on page 31 of the Bill—makes it quite clear that the PRA must secure an appropriate degree of protection for policyholders. That is very clear. It is different from the looser wording, to which she referred, about the insurance objective “contributing” to securing protection. It is clear that the language in new Section 3F for with-profits is stronger than in new Section 2C on the insurance objective. That is an important background to the consideration of this amendment, and a point to which the noble Baroness drew attention.

When regulating a with-profits firm, the regulator is concerned with ensuring that the firm recognises a proper balance between the different interests in the fund. These interests include one that is highlighted in this amendment—the interests of with-profits policyholders to the distribution of profits made by the fund. However, there are other legitimate interests in a with-profits fund. They include the interests of the members of the insurer in the case, for example, of a mutual. In a proprietary firm, the shareholders also have an interest in the profits to be distributed. There are also considerations to be balanced between different types of policyholder. I do not suggest for a minute that the noble Baroness seeks to disapply all these other interests in the with-profits fund. Maybe she does—no, I see that she does not. I am glad about that as we would be fundamentally rewriting the law. That would be the effect of the amendment.

I am grateful to the noble Baroness for bringing up this issue. I must say that a balance needs to be struck between the interests of current policyholders, who will be keen to see all available funds distributed, if they are distributed to them, and the interests of future policyholders, which we have discussed, who will pay the price of excessive generosity to previous generations of policyholders. There is also the overriding concern to ensure that the fund remains solvent and able to make distributions.

As I said, under the Bill, the PRA is required to secure an appropriate degree of protection for with-profits policyholders in new Section 3F, and it will have to take all of these factors into account. Although the

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factors to be taken into consideration are complex, in essence the objective of regulation remains the same for with-profits as for any other type of business. The objective fundamentally is to ensure the firm’s safety and soundness, while ensuring its proper conduct, including the fair treatment of consumers. In asking the Committee in due course to support the Government’s amendment, I ask my noble friend Lord Flight to withdraw his amendment.

Baroness Drake: There is an issue that I am not sure the Minister has addressed. The PRA will be focused on prudential regulation, so its approach on how discretion should be applied on with-profits policies could be influenced by a preoccupation with the prudential responsibility, and through that focus may become unfair in how it has balanced the consumer’s interests.

Lord Sassoon: My Lords, I do not believe that to be the case but it might be helpful if I write to the noble Baroness, copying in the Committee, with a fuller explanation of how that will be taken care of.

Lord Flight: I thank the Minister for answering what in essence was a question. In my view, with-profits policies have been and continue to be useful instruments for the man in the street, and I now understand the reason for the phrasing as it is. I beg leave to withdraw the amendment.

Amendment 128BH withdrawn.

Amendment 128BHA

Moved by Lord Eatwell

128BHA: Clause 5, page 25, leave out lines 18 to 35

Lord Eatwell: My Lords, this is a probing amendment seeking clarification of the role of “the specified objective”, as it is called in the Bill. An aspect of regulation that is important is that it should be transparent and predictable. The characterisation of the specified objective is neither. Indeed, the boundaries of regulation now seem to be rather arbitrary in the sense that the Treasury can regularly, perhaps, introduce specified objectives and change the boundaries of PRA activities. This cannot but have a dampening effect on financial innovation, because financial innovation depends upon some notion of predictability. Innovation has, as a result of the crisis, a rather bad name at the moment, but there have of course been entirely beneficial innovations over the years, and regulators stifle innovation at their peril.

Of course, the problem is how to secure good innovation while discouraging bad innovation. This is where clear objectives come in, and clarity and transparency are important. This section, I am afraid, seems notably unclear in that the boundaries of regulation would not be predictable. Having such a degree of unpredictability is bound to have a dampening effect.

I understand that any order under this section will require parliamentary approval under new Section 22A, but it is not at all clear how changes will acquire a sense of being anything other than arbitrary, since no

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concept of consultation with those institutions which would be affected is referred to. Could the Minister please explain?

5.15 pm

Lord Sassoon: My Lords, the noble Lord, Lord Eatwell, raises an important point here that we want to on one hand future-proof the Bill, and on the other hand make sure that the future ring-fence around regulated activities—the regulatory perimeter—is not widened on a whim. It is not an easy line to draw. If it required primary legislation—not that the noble Lord was suggesting that—to extend the PRA’s objectives to bring other activities within the regulatory perimeter, that would be a complicated 12-to-18 month process that would not allow for a timely response.

The situation that I generally envisage is one where the FPC would ask for the regulatory perimeter to be widened. That, I suggest, is sensible and necessary future-proofing that enables the authorities to react to changes in financial markets and financial risks in a pragmatic way, whether it is to allow for innovation, or for any other reason. To give a couple of examples which could come up where the FPC could recommend such an extension of the perimeter, it might relate to some or all shadow banking activities or to peer-to-peer platforms or activities, which we have discussed fairly regularly.

I am looking to see whether my noble friend Lord Lucas is here, or some of my other noble friends—the noble Baroness, Lady Kramer, and the noble Lord, Lord Sharkey, among them—because at some point activities like this could well be recommended by the FPC to the Treasury to be brought within the regulatory perimeter. The Treasury would then make an order to make these activities PRA-regulated ones, and if necessary apply additional objectives to these activities.

I assure the noble Lord that in this context, in accordance with convention and Cabinet Office guidance, the Treasury, as the relevant department, would of course conduct the consultation in the normal form at that point. I hope that explains why this part of the Bill is drafted in the way that it is, and that there are protections in there.

Lord Eatwell: My Lords, that was very interesting because the FPC has not been mentioned at all and it is suddenly being prayed in aid in support of this section. I remain puzzled as to why the Government are willing to risk the Bill appearing to be so restrictive by not including some notion of general consultation. Of course, if the FPC were involved there would be consultation issues around which the FPC itself is hedged. But changes could appear on a whim, as the noble Lord himself put it. I would not expect the Treasury to behave on a whim, but it might appear that way to the industry.

Lord Sassoon: I am sorry, but I am pretty sure that I did not say that the Treasury would do anything on a whim: far from it. I would not like the record to say that. Of course the Treasury would not do something on a whim. I would expect recommendations to come from the FPC, which, as the noble Lord said, has its consultation procedures. It does not need a reference in the Bill to say that if the Treasury makes

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recommendations or an order under this clause nothing else needs to be said. Of course the Treasury will follow the normal consultation processes applicable to this form of order.

Lord Eatwell: One should hope so too. One would have hoped that new Section 22A and other relevant sections, perhaps to be added, would recognise that fact. However, having had an interesting discussion of responsibilities and whims, I beg leave to withdraw the amendment.

Amendment 128BHA withdrawn.


Amendment 128BJ

Moved by Lord De Mauley

128BJ: Clause 5, page 25, line 35, at end insert—

“2DA Strategy

(1) The PRA must—

(a) determine its strategy in relation to its objectives, and

(b) from time to time review, and if necessary revise, the strategy.

(2) Before determining or revising its strategy, the PRA must consult the Bank of England about a draft of the strategy or of the revisions.

(3) The PRA must determine its strategy within 12 months of the coming into force of this section.

(4) The PRA must carry out and complete a review of its strategy before the end of each relevant period.

(5) The relevant period is 12 months beginning with the date on which the previous review was completed, except that in the case of the first review the relevant period is the period of 12 months beginning with the date on which the strategy was determined under subsection (3).

(6) The PRA must publish its strategy.

(7) If the strategy is revised the PRA must publish the revised strategy.

(8) Publication under subsection (6) or (7) is to be in such manner as the PRA thinks fit.”

Lord De Mauley: My Lords, I will speak to the government amendments in this group. Amendment 128BJ specifies that the PRA board must set and publish the strategy in relation to its objectives, having consulted the Bank of England. It must review the strategy annually. The Government have come to the view that it would be helpful to define more clearly in the legislation how the relationship between the PRA and the rest of the Bank group will work in practice.