The amendment makes it clear that the PRA board will set the PRA’s strategy and will be accountable for the success or failure of that strategy. It also requires the PRA board to consult the Bank about the strategy. That will help to ensure that the PRA’s supervisory approach is co-ordinated with the wider financial stability strategy of the Bank. The PRA must publish its strategy. That will help to ensure that Parliament, the financial services industry and the wider public are clear about the PRA’s direction of travel and priorities. That will assist with calling the PRA to account for the way that it carries out its regulatory and supervisory responsibilities.
Government Amendment 147A makes it clear that the PRA may not delegate responsibility for setting the strategy, which is clearly appropriate. Government Amendment 147B makes express that the Bank should approve the PRA’s budget. In practice, the PRA board will draw up the budget, looking at the strategic priorities for the year ahead, and propose this to the Bank. If variations to the budget are required during the course of the year, that will also require the approval of the Bank. This arrangement will ensure that the PRA must account fully for any budgetary increases. Of course, its expenditure will also be audited by the National Audit Office under the provisions already in the Bill. This will provide strong accountability for costs incurred—costs which, as noble Lords have pointed out during previous debates, are ultimately borne by industry.
It would be appropriate if I respond to the other amendments in this group when the noble Lords who tabled them have spoken to them, so, for the moment, I beg to move.
Lord Flight: My Lords, I rise to speak to Amendment 144K, which is intended to ensure that the non-executive members of the PRA board have relevant experience and expertise. In particular, the board should have the benefit of members who have expertise in the sectors regulated by the PRA.
As others have already said, the insurance industry has been something of an orphaned relative. Indeed, I think that the Governor of the Bank of England is on record as saying that the arrangements do not entirely match his wishes. I believe that the Government’s intention is that this should be the case. It is clearly desirable, however, that the PRA should have appropriate representatives from that industry with the right experience, and, indeed, they should be equipped to contribute if the life industry balance sheets get into a position where there needs to be a temporary suspension of the rules, should equity markets plunge dangerously.
Lord Sharkey: My Lords, I rise briefly to support Amendment 144K, in the name of my noble friend Lord Flight, and even more briefly to support Amendment 144L, in my name, which covers some of the same ground but is more focused on the need for the PRA board to have non-executive members with relevant experience and expertise in the insurance sector. I am sure that neither of these amendments should be at all controversial. It would be very hard to argue that the PRA non-executive members need not have among them people of experience and expertise across the regulated sectors, but I think that it would be wrong to argue that this provision is not needed in the Bill. There is no reason for this to be left simply to the discretion of the Bank and the PRA and every reason why they should have an obligation to act in the way that both amendments suggest.
Amendment 144L in my name focuses on insurance because I am concerned that the PRA—as a subsidiary of the Bank, and with a special financial stability purpose and a number of Bank officials on the board—will be much more explicitly focused on the banks. It is also true, I think, that the Bank of England has no
history of regulating insurance. The FSA currently does this, in succession, I think, to the DTI. In order to make sure that the PRA also effectively and properly focuses on the insurance sector it seems right that it should have, among its non-executive members, people with the appropriate experience and expertise in that sector. That is what my amendment and the amendment of my noble friend propose.
Baroness Noakes: My Lords, I support Amendments 144K and 144L, which are driving in the same direction, particularly in relation to insurance. Insurance companies have been the orphans: they have been tossed around Whitehall with the DTI and the Treasury; then they went to the FSA, where they were not the most important part of the FSA’s responsibilities; and now they know that they are being taken, rather grudgingly, into the Bank of England. They are worried that the particular features of their industry will not be given due weight, so the appearance of somebody with the requisite experience at board level is a minimum requirement. Because of the degree of concern in the industry, I do not think that it is enough simply to say, “Well, the Bank will do the right thing”—as I am sure the Minister is going to tell us in a minute. It is right that the Bill should reflect the concerns that exist in the industry.
Lord Davies of Oldham: My Lords, it is for the Minister to respond to those arguments for the specific interests regarding representation on the PRA, and I will be very interested in his response. The concern of the opposition amendments in this group is of a rather more general nature with regard to governance, which, as the principal rule by which it is all going to operate, is of the greatest significance.
Amendment 139B would ensure that each regulator must act in a way which follows principles of good governance, including having regard to the UK corporate governance code. I hope that the Minister will find no difficulty at all in accepting that broad principle on which the regulator should operate. Our two other amendments, Amendments 144M and 146A, are rather more specific.
Amendment 144M extends the principles to which the Bank must have regard when making public appointments to the PRA. The Bill states that it must have regard to general principles. We want them spelt out more specifically; that is why we have proposed the insertion of the words, “merit, fairness and openness”, in front of “good practice”, to give specific illustration of what we mean by good practice in this area.
Amendment 146A is a minor addition but an important public safeguard with regard to remuneration. No one in this House can ignore that remuneration at any level in financial services is an issue of great public concern and therefore will certainly be of concern with regard to the governing body of the PRA. At present, the PRA must pay its members,
“such remuneration as may be determined by the Bank”.
“with the approval of the Treasury”,
so that we have the necessary public safeguards on this issue.
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Lord De Mauley: I thank noble Lords for introducing their amendments. Let me go through them. Amendment 139B would make explicit that both the PRA and the FCA should have specific regard to the UK Corporate Governance Code. That is an important point. The code is the benchmark for good governance. The Bill makes clear that both the PRA and the FCA will be required to have regard to such principles of good corporate governance as it is reasonable to apply to them. That includes principles from the UK Corporate Governance Code. The Government fully expect the regulators to comply with the relevant principles of that code.
However, generally accepted principles change over time—it is worth noting that just two years ago the UK Corporate Governance Code was called the combined code. I hope that noble Lords will accept that it would not be appropriate to put an explicit reference in the Bill to a specific document which may change from time to time, or the name of which may change completely.
Amendment 144K would require that the Bank must be satisfied that the non-executive members of the PRA board have relevant experience in the sectors that the PRA will regulate, including banking and insurance. Amendment 144L would require that the Bank must be satisfied that the PRA board must include members with insurance expertise. I thank my noble friends for raising this issue, which is also important. The Bank and the FSA have been clear that they understand that the nature of insurers’ business models exposes them to a different set of risks than banks, and that therefore the regulation of insurance requires a different approach.
I can categorically confirm to the Committee that the Government and the Bank are clear that the PRA board will have members with the necessary expertise in each of the sectors that the PRA regulates, including insurance. It will also be important for the PRA board to have expertise in investment banking, building societies and credit unions, for example.
My noble friend Lord Sharkey said that insurance expertise on boards should not be left to the discretion of the Bank. He is right; it will not be; the Treasury will approve the appointment of PRA non-executives. I hope that noble Lords will therefore accept that it is unnecessary to make such detailed provision in the Bill.
Amendment 144M would make explicit that appointments to the PRA board must take place in accordance with the principles of merit, fairness and openness. Of course the Government agree with the intention behind the amendment. Paragraph 10 of Schedule 1ZB already requires that the appointments to the PRA board should take place in line with,
“generally accepted principles of good practice relating to the making of public appointments”.
The clearest articulation of those principles is the Code of Practice for Ministerial Appointments to Public Bodies, published by the Commissioner for Public Appointments. The aim of that code is,
“to ensure that public appointments processes are fair, open and transparent, command public confidence and result in appointments which are made on merit”.
Although some of the principles in the code are relevant only to ministerial appointments, some have wider application. Merit, fairness and openness clearly fall into that category.
Amendment 146A would require that the Treasury approve remuneration of the PRA board. Let me respond to this amendment in the context of the Government’s approach to the FCA and the various policy committees of the Bank. The Treasury has no role in relation to the setting of remuneration for the FSA board, nor will it have any such role in relation to the FCA board. This is as it should be. The FSA is, and the FCA and the PRA will be, independent of government. The Treasury has no role in the setting of the remuneration of external members of the MPC because the Bank is separate from government. The Bank determines how much it needs to pay to get the right people, while still ensuring value for money.
Similar considerations apply to the PRA board. The Bank will need to assure the quality of the leadership of the PRA, so it must be able to determine the remuneration of the PRA externals in the same way as it determines the remuneration of other parts of the Bank group. The Bank and the PRA operate separately from the Treasury and they account separately to Parliament. Parliament has a key interest in whether the PRA is delivering value for money, which is why the PRA falls within the remit of the National Audit Office.
I hope that I have persuaded noble Lords to accept the government amendments and not to press their own in this group.
Baroness Noakes: My Lords, could I clarify with the Minister what he said about the composition of the PRA board? I think he said that the Government were clear that there would be a member with insurance expertise. Did he mean any member, or a non-executive member? There only has to be a majority of non-executive members. I think that my noble friend said that, under that formulation, he believes that that could be met by having an executive member with insurance expertise. The drive of the amendments that we have been discussing was that there should be a non-executive member in an oversight role on the PRA board, bringing in insurance expertise.
Lord De Mauley: My Lords, I categorically confirmed to the Committee that the Government and the Bank are clear that the PRA board will have members with the necessary expertise in each of the sectors that the PRA regulates, including insurance. I did not specify, in answer to my noble friend’s question, but I will write to her if I may.
Amendments 129 and 129ZA not moved.
Lord Sharkey: I will also speak briefly to Amendments 129ZC and 130ZA in this group.
All these amendments address the PRA’s general duty to consult. As the Bill stands the PRA must consult PRA-authorised persons or, where appropriate, persons appearing to the PRA to represent the interests of such persons. This consultation is to be on the extent to which the PRA’s general policies and practices are consistent with its general duties under new Sections 2B and 2G. These general duties include, for example,
“contributing to the securing of an appropriate degree of protection for those who are or may become”,
insurance policyholders. This is a very wide if not universal category, as the noble Lord, Lord Flight, has pointed out. They also include a duty to have regard to the regulatory principles in new Section 3B, which include,
“the general principle that consumers should take responsibility for their decisions”.
In both these cases it is clear that the PRA will need to know what consumers want and need; what their experience is and has been; and, particularly when it comes to the caveat emptor clause, what information consumers need to be able properly to take responsibility for their decisions.
These three amendments simply add “consumers” and “the Consumer Panel” to the list of groups that the PRA must consult or whose representations it must consider. Quite apart from the obvious justice of consulting those who may buy the end products, consulting consumers can also have the beneficial effect of preventing the PRA being totally isolated from the real world and the real consequences of their actions. We can all see from recent events the danger of any part of our financial system, regulatory or otherwise, losing contact with what is actually happening or what people are actually experiencing.
These are simple and clear amendments with a simple and clear purpose. I hope that the Minister will give them sympathetic consideration. I beg to move.
Baroness Noakes: My Lords, I have Amendment 129A in this group and it concerns practitioner panels. With the leave of the Committee, and at the request of my noble friend Lord Northbrook, I shall also speak to his Amendment 130ZZZA and to Amendment 130ZAA in this group. When a Marshalled List has to resort to using the letters “ZZZA” there is something wrong.
My amendments concern consultation with practitioner panels. A number of amendments in this group concern consultation with consumers and the noble Lord, Lord Sharkey, has just spoken to his amendments. I am sceptical about the role of consumers in relation to consultation on prudential regulation. I shall be interested to hear what my noble friend has to say in response, but I shall concentrate on practitioners.
Of course it is very good that the Bill contains a requirement for the PRA to consult in new Section 2K. However, the Bill merely enables—it does not require—the PRA to set up practitioner panels. That is in stark contrast to the existing requirement on the FSA to set up practitioner panels and the very detailed requirements in new Sections 1N to 1Q for the FCA to set up various kinds of panels as part of its consultation
arrangements. My Amendment 129A would require the PRA to set up one or more practitioner panels as part of its consultation arrangements.
My noble friend Lord Northbrook’s Amendment 130ZZZA mandates a single practitioner panel, and it goes a little further than my amendment by setting out what it should do—namely, it should be a regular forum for policy debate for the PRA and also consider the cumulative regulatory impact of the FCA and the PRA; that is, it should not merely be reacting to specific concentration exercises by the PRA but should also be involved, on a more in-tune basis, as a conduit for practitioner views. That harks back to the concept of dialogue that we talked about earlier when we spoke of consultation in relation to the FCA.
There ought to be clear advantages for continuing with practitioner panels for the PRA as well as for the FCA. The panels have been a well understood and welcome part of the FSA’s interaction with the financial community, certainly from the perspective of the industry. I believe that they are generally regarded as having worked well.
These amendments are supported by the Financial Services Practitioner Panel. Its chairman, Mr Joe Garner, has written to me to say that his panel very much hopes that this Bill will be amended so that the practitioner panel will be able to continue to help the PRA in future as well as the FCA. He sees its role as making a positive contribution to regulation. I have also heard from several industry bodies and other bodies which also support the continuation of practitioner panels.
I have very great respect for the work done by the pre-legislative scrutiny committee on this Bill, but I believe that it was wrong to reject the practitioner panels as involving regulatory capture. I believe that that misunderstands the nature of the quite detailed and technical nature of the work that is carried on by the panels. The FSA did a lot of things wrong, but I do not believe that one of them was being captured by its practitioner panel. Amendment 130ZAA in the name of my noble friend Lord Northbrook seeks to put that beyond doubt by specifically providing that the PRA is not accountable to practitioners if it rejects their recommendations.
The issue of practitioner panels might be less important if there were confidence that the PRA’s approach to consultation would be carried out well. Unfortunately that has got off to a bad start, with considerable concern about the draft of the PRA’s approach to consultation which was recently issued by the FSA and the Bank of England. As I noted at Second Reading, there has been considerable dismay at the dismissive and patronising language used. If the document which is on the Treasury’s website is representative of the kind of thinking which would permeate the PRA, I believe that it is a problem in the making. I could list the problems with the published PRA guidance at consultation but I am conscious of time today. However, I am happy to give the Minister the litany of problems identified with the draft to date. These problems are serious from the perspective of those who are expected to be consulted.
Even if the shadow PRA had pretended that it really embraced consultation, I do not believe that it would have removed the need to set up in legislation
a definite structure of consultation, such as the existing practitioner panel arrangements. However, the evident lack of enthusiasm on the part of the Bank of England and the PRA rather strengthens the case for recognising in this Bill the need to have practitioner panels.
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Lord Flight: My Lords, I support the noble Baroness’s amendment and will also speak to my own Amendment 129B, which goes slightly further. As well as calling for practitioner panels, my amendment argues that there should be PRA consumer panels,
“and where appropriate consumers falling within the scope of the insurance objective”.
It is a mistake to leave the decision as to whether to have panels simply to the PRA, rather than being a requirement in the Bill. This is a fair point; it is appropriate to provide proper safeguards for regulated persons and for consumers. Although it is at a slight tangent, the Treasury Select Committee has made valid points about the tendency to too much arbitrariness on the part of the Bank of England, and the structure. I can see no reason why appropriate panels should not be provided for.
Further—the noble Baroness also raised this point—where the PRA disagrees with the representations made to it by such panels, as under the FSA, I cannot see why it should not be required to have the courtesy to explain why that is the case.
Baroness Hayter of Kentish Town: My Lords, in a way these amendments ask for quite simple things. First, the PRA must have arrangements in place to consult consumers or their representatives and report annually on these arrangements. Secondly, the PRA should consider any representations from the FCA’s practitioner or consumer panels. Thirdly, practitioner representatives should similarly be hardwired into the PRA’s working practices. We welcome Amendment 130ZAA in the name of the noble Lord, Lord Northbrook. It is key to have practitioners involved, but for their expertise, not as representatives. On our side we are content that no new panels need to be created either for practitioners or for consumers, provided that the PRA is committed to enter into dialogue with the FCA panels and respond to other relevant submissions.
However, the need for the amendments in our name and that of the noble Lord, Lord Sharkey, are more important perhaps, given the paper released on Monday. I do not know whether that is the same one referred to by the noble Baroness, Lady Noakes, but I think not. This one is entitled The PRA’s Approach to Consultation. This is a slightly different concern from the one she has, but to have a whole paper on consultation in which the word “consumers” is not mentioned seems a particularly alarming reflection of its approach.
The probing amendment in our name—Amendment 130ZZB, which proposes an annual report of the arrangements, rather than the content, of consultation activities—now becomes rather more of a real than a probing amendment. We have grave doubts as to how a paper on the PRA’s consultation could omit any reference to consumers, concentrating only on regulated firms. That is not even-handed or very sensible.
In response to the query from the noble Baroness, Lady Noakes, I will just say why consumers do have an interest in the role of the PRA. This is not of course simply about the prudential issues but about some of those raised by my noble friend Lady Drake earlier. Consumers have many interests in issues that are the responsibility of the PRA, particularly, as the noble Baroness mentioned, with-profits policies but also leveraged ratios and even bank charging policy, about which we have heard things from the putative head of the PRA. It would be strange for the PRA not to hear input from consumer representatives on these matters and simply for it to respond to the panel when it takes a different view. Unless the Bill is amended as suggested, consumers will be excluded from the PRA’s decisions on prudential matters. The PRA will lead on regulation of with-profits policies, but there is no requirement on it to consider representations from anyone representing the consumer interest on that. There are a number of issues relating to with-profits policies, orphan estates and others, which they do have an interest in.
My noble friend Lady Drake talked earlier about £330 billion, I think, being under management in with-profits funds. That is 25 million policyholders, and it is essential that the interests of these policyholders are properly considered, which can only be achieved by working with consumer groups and not simply seeking the views from the FCA. It is the same issue with mortgages, where prudential requirements can have huge implications for consumers. Decisions about the stability of the market potentially restrict the availability of mortgages to a large number of people who, up until that moment, had been servicing their mortgages without any problem. It is vital that the application of any prudential controls treats all customers fairly. The existing consumer panel has been involved in the regulation of insurance and prudential issues in relation to the mortgage market review, and I understand that its advice has been acknowledged as particularly valuable. All we are asking is that consumers get a hearing, which does not seem too much to ask, but also that the expertise of practitioners similarly gets an appropriate hearing.
Baroness Cohen of Pimlico: I support the amendments proposed by my noble friend Lady Hayter and the noble Baroness, Lady Noakes. Both consumer panels and practitioner panels are extremely important and it is very difficult to see an argument against them, particularly because the PRA will be regulating insurance companies. I declare at this point that my own background includes being a non-executive director of a couple of smaller insurance companies in the 1990s. The accounts and concepts are difficult, but such firms are of enormous importance to the economy and to everything that matters to us. Pensions, whole-life policies and insurance in general are important to us all, and it seems quite irrational not to have a consumer panel and, indeed, a practitioner panel, which should include people who really know about insurance policies. It could be the next disaster waiting to happen in financial services, simply because people do not know very much about insurance companies. Their accounts and the way they are managed are quite difficult to understand. For that reason, I support both amendments.
Lord Sassoon: My Lords, this is a big group to do justice to, but I will make a start with Amendments 129ZB and 129ZC, which would require the PRA to make and maintain arrangements for consulting consumers as well as practitioners. I agree that consumers have a key interest in the outcome of the PRA’s decisions. In particular, consumers will be one of the beneficiaries of a safer and more stable financial system. However, the PRA will not focus on consumer protection as an end in itself—that will be the job of the FCA. In its regulation of insurance outside the special arrangements for regulation of with-profits business, the PRA will deliver its policyholder protection mandate through effective prudential regulation. Of course, consumers will be able to respond to public consultations on rules and to the PRA’s annual consultation following publication of its annual report. However, the main way in which the consumer interest is represented will be through the FCA. The FCA will provide the PRA with advice and expertise wherever consumer interests need to be taken into account. The draft MOU that has been published by the Bank and the FSA makes clear that such consultation will take place at an early stage.
Amendments 130ZC and 130ZZC would require the PRA to make and maintain arrangements for consulting consumers, and to consider representations made to it by the FCA consumer panel and practitioner panels. On the first element of this, as I have explained, where the PRA needs input on an issue of consumer protection, this will be provided by the FCA. I therefore do not think it necessary to require the PRA to consult consumers or their representatives directly. However, just because the FCA will advise the PRA on consumer issues, that does not mean that the FCA panels should be tasked with a formal role to advise both authorities.
Under the Bill, the FCA panels rightly focus on issues of concern to the FCA and will not have the expertise or mandate to examine the PRA’s approach. The PRA and the FCA will develop different approaches to regulation, consistent with their different objectives and the fact that the PRA will be regulating a much smaller number of firms. The panels are free to make representations when the PRA consults on rules, or indeed at any other time. However, I do not think that it would be right to require the PRA to give special attention to representations made by bodies designed and maintained for the purpose of advising the FCA on its work.
Amendment 130ZA would require the PRA to consider representations from the FCA’s consumer panel. The Government value the work of the panel and its important contribution to the development of consumer protection policy. However, as I have explained, the Government’s view is that it should continue to play this role through engagement with the FCA rather than the PRA.
Amendment 141A would require the PRA to make and maintain effective arrangements for consulting the consumer panel, consumers, or their representatives in relation to the PRA’s responsibility for with-profits insurance policies. The Government acknowledge that there are particular issues around with-profits regulation, balancing questions around the fairness of with-profits
policies with the effect of making payments from with-profits funds on the safety and soundness of the firm. The PRA will have to consider these carefully and put in place appropriate arrangements for consulting others with relevant expertise, and is specifically required to seek the FCA’s advice in discharging its sole responsibility for with-profits regulation to ensure that it is taking account of the FCA’s consumer protection expertise. In giving its advice, the FCA is of course at liberty to consult consumer protection experts and panels as it sees fit. Taking all this into account, the Government do not think that a separate consumer panel for with-profits regulation is either needed or proportionate.
I now turn to the amendments in the group that would require the PRA to maintain consultative panels. Amendment 129A would require that the PRA’s arrangements for consulting practitioners under new Section 2K must include the establishment and maintenance of one or more panels. The Government agree that in order to carry out effective regulation, the PRA will have to consult industry in order to gather information, expertise, and outside perspectives on its work. That is why new Section 2K puts the PRA under a high level requirement to consult. However, the Government remain of the view that the PRA should have discretion as to how it goes about this consultation.
Given the PRA’s greater focus on firm-specific prudential decisions, a standing panel might not be the most effective way of ensuring a productive dialogue with industry. I should be clear that the future management team of the PRA have made clear that it does not envisage that maintaining a panel would be the most effective way of gaining the information that it needs to deliver judgment-led prudential regulation. The PRA will also have a much smaller community of regulated firms than the FSA, or indeed the FCA, and so may wish to tailor consultation exercises on individual rules or measures more precisely to the firms most affected by them. A single, industry-wide panel is not ideally suited to this kind of consultation.
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Baroness Noakes: My Lords, can the Minister explain in a little more detail why the FCA is not allowed any discretion about whether it has panels but the PRA does have discretion? Is it just because it is the Bank of England, and the Bank is saying that it has to have discretion?
Lord Sassoon: No, my Lords, of course it is not because it is the Bank of England and it says that it has to have discretion. This is government legislation and the Government are presenting a Bill that we believe is appropriate to the new financial architecture. Of course we consult the Bank of England, the FSA and all sorts of other people. We have also had the input of the Joint Committee. My noble friend is quite right to challenge me on this but I am quite clear on it. As I have tried to explain, it is understandable but simplistic of people to read across that there are panels now that would like to continue to be engaged with both new regulators. I can understand where the panels come from and why, as I have explained, since
consumers have a considerable interest in the decisions taken by both bodies, consumers superficially may say, “Actually, we would like to be engaged directly with both”.
Baroness Hayter of Kentish Town: My Lords—
Lord Sassoon: If the noble Baroness will allow me a moment, the PRA is a very different animal. We risk, in some of this discussion, slipping into a frame of mind of thinking that the FCA and the PRA are somehow going to be two peas popping out of the same sort of pod. They will be very different regulatory and supervisory bodies with very different mandates and very different numbers of firms that they are regulating. It would be quite wrong to have a one-size-fits-all approach to consultation in these circumstances.
Baroness Hayter of Kentish Town: But consumers are not asking for this superficially. It is their money that is being looked after and overseen by bits of the PRA, and they make a very serious request. As I said, we are relaxed about it not being a specific panel, but the existing panels should have a right to be heard. It is simply not enough to depend on the FCA, whose chief executive comes from the industry—as does its new chair, with 27 years in banking and enormous experience. However, they do not represent the consumer interest.
Finally, my fear is that if there is no right to be heard, consumers, and maybe practitioners as well, will retreat to the other way of getting a hearing: to go to the press. One of the great things about the consumer panels is that you very rarely hear about them because they have a back-door entrance. They can go in and have early dialogue. Deny them that and I am afraid that we will revert to the other way, which is an open dialogue through the press.
Lord Sassoon: I understand all that and I know very well that the consumer panel in which the noble Baroness played an important part has had and continues to have an extremely important role. It is not as if the PRA will not be consulting consumers and the public; it must consult publicly on draft rules, for example, and that would involve consulting not just practitioners. Generally, however, the FCA will be the expert on consumer issues and it is right that it should be the primary channel to focus the PRA’s approach.
I repeat that the PRA will be a supervisor with a much more firm-specific, prudential decision-making focus—as opposed to the FSA and the FCA, which will have a much broader rules-based approach. We are talking about very different animals. Indeed, it is worth recognising that, if we are talking on the practitioner side, the FSA tends not to consult the current practitioner panel on firm-specific prudential decisions any more than I would expect the PRA would or should. The dynamic is very different. Therefore, for the reasons that I have given and will continue to give in going through the rest of these amendments, and for the reasons that my noble friend Lord Flight put very clearly in relation to consumers, I believe that what we have put in the Bill is right.
I believe that we are at Amendment 129A. There is no more that I can usefully say on that amendment, so I will move on to Amendment 129B, which would require that the PRA’s consultation arrangements should include industry panels and, where appropriate, a panel representing insurance policyholders. I should start by being clear that where the PRA consults on issues with particular impact on insurers, the Government agree that it should ensure that it engages with insurers in order to understand their views. Such consultation might be done as part of its general consultation under new Section 2K or through consultation on specific rules. Regarding consultation with insurance policyholders, as I have said, where consumer interests are engaged, the PRA will be provided with advice and expertise by the FCA. The Government do not expect it to be necessary for the PRA to make specific arrangements for consulting policyholders any more than other consumers.
Amendment 130ZZZA would require the PRA, as part of its consultation arrangements under new Section 2K, to establish a panel for policy debate with senior representatives of firms and to consider the cumulative impact of regulation by the PRA and the FCA. Policy debates about regulation take place in many forums—for example, between regulatory authorities at the European level, in the FSB and at the IMF, and of course in your Lordships’ House. However, I do not think that it would be right for the PRA to be engaged in policy debate with those that it regulates. Regulated persons are free to make representations to the regulator. There are mechanisms for this is in the Bill. However, to enshrine in legislation the idea that firms should enter into a policy debate with the regulator is contrary to the concept of judgment-led regulation. The PRA will listen to firms but it will form a view based on its own regulatory objectives and priorities, not on the commercial objectives and priorities of firms.
On the second element of the amendment, I agree that the PRA should consider cumulative regulatory burden. It will do this as a matter of course when it considers proportionality under the general duty to co-ordinate. There are already numerous opportunities for industry to comment on the effectiveness of co-ordination. In particular, the PRA and the FCA are required to include in their annual reports an account of how they have complied with the general duty to co-ordinate. Industry and the general public will be able to make representations, for example, at the annual general meeting of the FCA, and as part of the PRA’s annual consultation on the effectiveness of its strategy.
Amendment 129ZD would amend new Section 2K to require that:
“When carrying out a consultation, the PRA”,
“have regard to the desirability of ensuring a broad representation of practitioners and consumers”.
I have some sympathy with the sentiment. I agree that, in order for the PRA to regulate effectively, it will need to consult widely. For example, if it is considering putting in place a new framework for the purposes of supervising credit unions, I would expect it to form a comprehensive view of the sector by talking to credit
unions, large and small, based in different parts of the United Kingdom. Where appropriate, I would also expect it to talk to academic experts and other interested parties. However, I do not think that this needs to be underpinned with a specific provision in legislation. The PRA will need to consult effectively if it is to deliver its statutory objectives, and it will be held to account by Parliament for doing so. New Section 2K already requires the PRA to consult the full range of PRA-authorised persons and not just those who are practitioners.
Amendment 130ZZA would provide that the arrangements for consulting PRA-authorised persons may include consultation with persons with specialist knowledge of PRA-regulated activities. Again, I agree entirely with the sentiment. As the Government have made clear, the PRA will consult expert individuals when developing policy. It need not rely solely on industry experts, but also those in academia and other experts. At present, new Section 2K makes express reference to consultation with industry because industry will be directly affected by regulation. It is appropriate to recognise that fact in the Bill, while making it clear that the PRA may decide how to engage with them. But consulting industry is different from consulting “persons with specialist knowledge”. The PRA may of course consult such individuals, whether as part of a public consultation or for a specific purpose, if it will help it to better deliver its objectives. It might also wish to consult all sorts of other categories of person—for example, international organisations such as the FSB and Basel committee. It seems unnecessary to include that level of prescription in the Bill.
Amendment 130ZAA would clarify that the PRA is not to be deemed to be accountable to those firms that it regulates. I am glad that my noble friend has raised this point, as it is an important one. The Government and the Bank of England have been absolutely clear that the PRA should not be seen as accountable to those it regulates. We agree. Firms are accountable to the regulator, and the regulator is accountable to Parliament. However, the lines of accountability are clear in the Bill, and it is not clear what such a declarative statement would add.
Finally, Amendment 130ZZB would require the PRA to report annually on its consultation activities. The Government fully agree with this intention, and indeed the PRA is already required to so do as part of its annual report by new Schedule 1ZB, in paragraph 18(1)(c) on page 186.
I come back to the fundamental point. We have considered carefully the separate consultation requirements for the two regulatory authorities. I understand all the concerns, some of which I hope I have been able satisfactorily to address. But others have consciously been left on the table, reflecting the very different nature of the beast, which the PRA will be as a focused regulator with its small community and one very clear objective. On the basis of that rather long canter through the group of amendments, I ask my noble friend to withdraw his amendment.
Baroness Noakes: Before the noble Lord, Lord Sharkey, decides what to do with his amendment, I would like to come back to a couple of points raised by the Minister. I do not believe that he has given a rationale yet for why the PRA has a free-for-all in this. I believe that the Government should be concerned about the PRA’s potential attitude to consultation. The Minister said that the PRA was not going to set up consultation panels—that has been clear—because it did not need them to gain the information that it needed. The Government seem not to get the concept that the panel is about a form of dialogue, feeding back concerns as well as responding to specific questions.
I skimmed over the quality of the consultation paper. I do not know whether it is the same one as that of the noble Baroness, Lady Hayter. I have had mine for several weeks. I did not discuss earlier the kind of problems that there are; there is no commitment to a minimum period of consultation, to proactive consultation, to consulting on the exercise of national discretions on the implementation of EU policy or to decent implementation periods. I could go on. There is a very serious concern about the attitude to consultation in the PRA, which would be partially resolved if there were a more definite requirement in the Act not simply generically to consult but to make sure that groups were consulted. I have to say to the noble Baronesses, Lady Hayter and Lady Cohen, that I think that I am persuaded that consumers, too, should be formally recognised within that structure. I hope that the Minister, even if the noble Lord, Lord Sharkey, lets him off this afternoon, takes this away and looks at it again over the summer, because I do not believe that the Government have got it right.
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Lord Sassoon: Of course, I note what my noble friend says. She is always very clear and direct. I absolutely refute that the PRA has anything approaching a free-for-all. I have explained the many general and specific requirements it has to consult on, whether they are individual rules or setting things out on an annual basis and so on. Earlier on, I think she promised to send me a letter setting out some of the concerns, which she has just summarised, on the recent consultation. I will be very happy to receive that, and the Treasury will of course look at it as well.
Lord Sharkey: My experience in commercial life has left me with a deep respect for the wisdom of consumers, and a deep conviction that consumer groups, properly constituted and properly consulted, are a source of sound guidance, and a vital way of making sure that decisions are properly grounded in current experience, views and expectations. Critically, this wisdom and this learning is always best delivered directly and not through an intermediary. I continue to think that the Government are mistaken in excluding consumers from direct consultation with the PRA, and I think it is unwise to rely on second-hand unmediated input. I suspect, given the comments around the Chamber this evening, that this is an area we might well return to on Report. In the mean time, I beg leave to withdraw.
Amendments 129ZC to 130AA not moved.
130B: Clause 5, page 28, line 38, at end insert “, and so as to minimise the burden and cost of compliance borne by persons subject to their principles and rules”
Lord Flight: My Lords, I address Amendments 130B and 144B. I am not entirely clear why these have been grouped together as they cover very different territories.
Amendment 130B reverts to points which I endeavoured to stress much earlier on in the process of this Bill: at the end of the day it is the consumer who pays the costs of regulation; the new twin-peak arrangements are likely to be inherently more expensive because they double up in certain areas; there is no shared overhead cost and there is not that much in the legislation which is at least there as a discipline to keep costs of compliance to a minimum. Amendment 130B seeks simply to write into the Bill that the PRA and FCA should use their resources efficiently and economically towards minimising the cost and burden of compliance on individuals.
Amendment 144B is in very different territory. The Bill provides for the FCA to have product intervention powers, which in the main I accept is a sensible proposal, because without those intervention powers time drags on before faulty products get addressed. In the mean time, consumers get hurt. However, it seems to me that everyone should be learning from that process. Therefore the amendment provides that the FCA should report annually on the use of these powers and on how it has complied with its statement of policy, including an evaluation of the outcomes of the regulatory actions and whatever intervention powers have been used.
Lord Hodgson of Astley Abbotts: My Lords, I have Amendments 131, 132, 133, 134 and 135 in this group. I certainly support Amendment 130B moved by my noble friend Lord Flight but my amendments go rather further and are rather more prescriptive in their approach. They relate to the attitude, approach and culture of the regulator, which we have been discussing. There has been a lot of hollow laughter about culture in the banking system, which I understand, but the financial services industry covers much more than the banks—it covers the IFA community, the insurance community and Lloyds. I think that in recent years the regulator has moved from a reasonably open, even-handed relationship with its regulated firms to one of much greater risk aversion. Of course, I understand that safeguarding client money and avoiding financial crime are very important indeed, but the regulator seems to have forgotten many chunks of the introduction to FiSMA, which sets out other objectives, requirements and issues that it has to consider in carrying out its regulation. Nowhere has this shift in culture been seen more than in the relationships with the smaller and medium-sized firms. Very often these are firms where innovation and some of the most exciting developments are taking place.
Specifically, I should like to draw to the Minister’s attention three or four things which I hope we can agree are being practised in an undesirable way at present and which are regulatory commercial approaches that henceforward we should try to avoid in the structure.
The first is Section 166 inquiries—the expert person investigations. These were designed to be used rarely but there are now 840 outstanding. A rough estimate of the cost of a Section 166 inquiry in professional fees for the regulated firm is £100,000, although it could be £200,000. Therefore, we are talking of between £84 million and £150 million of costs, and that is without the cost in terms of the management time spent providing the information needed for the professional firm carrying out the inquiry on behalf of the FSA.
This is sub-contracting regulation. There is really no restraint at all on the FSA in undertaking these inquiries. Such an investigation costs it nothing; it simply has to engage a professional firm to carry it out and away it goes. That is without the Section 404 thematic reviews, and without TC4, which are the run-off requirements when a firm is closing down. Of course, closing down a firm requires some very difficult judgments to be made about what you will be able to realise from the assets, the time over which you will be able to realise them and the consequent costs incurred during that period. If you make a series of extremely negative and conservative estimates, then of course you can put a firm in a very difficult position and make it almost impossible for it to carry on.
Last but not least is the position of the SIF—significant influence function—committee. I should like to give a real-life example of this, which I want to use to underpin the detail of my amendments. I have recently resigned as the chairman of a regulated firm. In April 2011 we took on from another regulated firm a new finance director, who came with good references. In July, he was told by the SIF committee that he was not able to take up the role of finance director. I went to the FSA and asked why. It said it could not tell me as there was an investigation and it was confidential. I asked the FSA if it could tell him what he had done. It said it could not do that either as it was confidential. That was June or July 2011. He is still waiting to hear the outcome a year later. He cannot find out what he has been accused of and is in a Kafkaesque situation. This is the sort of culture and risk-averse nature of the situation we now find ourselves in. My amendments are designed to prevent this being carried over into the new structure.
In the regulatory principles to be applied by both regulators in new Section 3B on page 28, I seek to add “operational rules” after “burden or restriction” because it is the unofficial stuff that can be made extremely expensive and difficult. It should cover firms as well as people. In particular, in Amendment 134, after “proportionate” I want to add “reasonable and fair”.
I have just given in some detail—and I apologise for going back to it—the example of the SIF committee. I can see how the regulator could argue that, if you have a person who has been involved in a firm which is under investigation, preventing him operating might
be proportionate but to hold him in limbo for 13 months cannot be reasonable or fair. It offends the principles of natural justice.
I hope very much that my noble friend, when he comes to wind up and reply to this important set of amendments, can give me some assurance as to how we are going to make sure that the culture going forward is more even-handed and better than it has been over the past couple of years. It is absolutely vital that the future regulatory architecture enables financial services firms to play an effective role in the economy. To enable this role to be fulfilled, the regulatory regime needs to take an approach that considers whether interventions are proportionate, reasonable or fair.
My set of amendments would address a number of concerns. There would be assessment of business-specific risks—for example, the insurance sector presents very different risks from those of banks and has a very different business model. If the regulators are required to consider whether their approach is reasonable and fair, they should ensure that consideration is given to whether it is appropriate to apply regulations drafted with banks in mind to other industries in the financial services sector, including insurance. Then there is the question of the culture. My noble friend has said many times that the Government wish to avoid the stability of the grave. A requirement to have regard to what is reasonable and fair will help to ensure the regulators take a more measured approach. For example, the PRA has signalled a desire to make greater used of skilled persons and external auditors in its approach to supervision. While you have to recognise that these are important regulatory tools, it is imperative that they are used appropriately and in relation to those firms which represent a significant risk to the PRA’s objectives. This set of amendments is designed to help these considerations.
Baroness Noakes: My Lords, I have Amendments 144A and 147C in this group. They are in the name of the noble Lord, Lord McFall, and myself. I want to start by saying that I support what my noble friends Lord Flight and Lord Hodgson have said in respect of their amendments.
My amendments are much more modest. They just deal with Schedule 3, which sets up new Schedules 1ZA and 1ZB to FiSMA, which deal with the much more routine aspects of the FCA and the PRA. These little amendments simply add one requirement to the list of things that the FCA and the PRA have to include in their annual reports to the Treasury. That requirement is to include an analysis of the costs and benefits arising from regulation for which the bodies are responsible. It is important that this report is then laid before Parliament so the issue is kept visible.
These amendments come from the Treasury Select Committee’s first report of this Session, as do others in my name and that of the noble Lord, Lord McFall. The Treasury Select Committee has received a lot of evidence from the financial services sector about the rising cost of regulation—I have mentioned that once already this afternoon. I know that in particular the non-bank parts of the financial services sector feel that they are paying a price that cannot be justified by
reference to the risks related to their own activities, which is why the issue of costs and benefits is particularly important.
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The Treasury Select Committee recognised that the Government have shifted their position considerably during the development of the Bill, but it remained concerned that there would not be significant improvement over what it describes as “current inadequate practice” in the regulator. If the current regulator is inadequate in relation to the current regulatory structure, it would be doubly so in the context of the new powers and the new focus under the Bill. There are lots of ways of dealing with this problem, and the approach of my amendments is a very minimalist one of simply including costs and benefits in the annual report. The amendments are no more prescriptive than that. I am sure that my noble friend will say in a moment that there is no need for a statutory requirement because the new bodies will be encouraged to be mindful of regulatory burdens, but what is not stated in statute is often forgotten. That is why we need some more recognition of the issue in this Bill—probably going beyond my modest amendments.
Lord Teverson: My Lords, I shall speak to the amendments in my name and that of my noble friend Lady—
Lord Teverson: My apologies to my noble friend Lady Kramer. I am thinking ahead and getting too far ahead in my own mind.
Amendments 144C, 144D, 144E, 147D and 147E refer to Schedule 3 and are very much in the area of the annual duties of the FCA and the PRA to make public their actions over the previous year. Apart from producing annual accounts, three methods of accountability are mentioned in Schedule 3. There is the annual report, which is the responsibility of both the FCA and the PRA; there is a public annual meeting for the conduct authority, but not for the PRA; and there is a consultation process for the PRA on the annual report that is followed by a further report by the PRA on that consultation. It seems to me that all three processes are not only admirable but essential for the full accountability of these important and key organisations both to the industry and the public.
My amendments would put the same responsibilities on both those organisations so that the FCA will also have a consultation process on its report, and a report on that, and the PRA would also have an annual public meeting. I note with interest the Minister’s remarks about one size not necessarily fitting both these organisations because they are very different. Clearly their responsibilities, actions and how they work are different but, in terms of their responsibilities to the broader industry and to the public, their responsibilities are very similar. That is why I think it is important that, as in my amendment, the Prudential Regulation Authority should have an annual public meeting. Again, the reasons seem to me to be pretty
straightforward. Although the PRA has a relatively limited clientele compared with the FCA, its work, as we have seen through the financial crises of the past few years, is very relevant to the remainder of the financial services industry, customers of those institutions and to all taxpayers, who at the end of the day, if the regulators of those major institutions have been ineffective, carry the can for the cost of that regulation not working. For those reasons the very admirable process of annual accountability should be reflected in both organisations. On that basis I hope that the Minister will look favourably on these amendments.
Lord Davies of Oldham: My Lords, I have little to add to this debate. I will keep my remarks very brief, but they are remarks of some cheer. I never thought that I would from this Dispatch Box congratulate the noble Lord, Lord Flight, on an amendment, but I very much approve of his Amendment 130B, and the precision with which he spoke, as well as the noble Baroness, Lady Noakes, who has made such a contribution to our proceedings today.
Lord Sassoon: My Lords, I fear that again this is going to be relatively long one in which I will not be able to satisfy all my noble friends. I hope that my arguments will speak for themselves, but I have a suspicion that I might not quite be able to do it. Let me give it a go, because this is a series of important amendments.
Amendment 130B would add to the efficiency principle to which both regulators will be required to have regard when carrying out their general functions. The efficiency principle ensures that the regulators should have regard to using their resources in the most efficient and economic way. This is the principle in FiSMA at the moment, but we are going further. We have made the accounts of the FCA and the PRA subject to audit by the National Audit Office and provided that the NAO will be able to carry out value-for-money studies into the new regulators, as we discussed earlier today. This ensures an important line of accountability for the regulators to Parliament, through the Public Accounts Committee, in how they use public money.
If the regulators are required to consider minimising burdens on firms without any counterbalancing provision, they may be distracted from pursuing their focused objectives, particularly if one considers that minimising burdens on firms could be used as a rationale for inappropriate regulatory forbearance. Instead, the proportionality principle ensures that costs of individual regulation are balanced against the pursuit of regulatory objectives that will benefit the whole financial system and its consumers, by requiring the regulators to consider whether the burdens imposed on firms will be proportionate to the benefits brought about by that imposition.
Amendments 131 to 135, in the name of my noble friend Lord Hodgson of Astley Abbotts, look to amend the proportionality principle to which both regulators will be required to have regard when carrying out their general functions.
Given the importance of the proportionality principle to the new structure, I am very glad to have the opportunity to discuss it further via this series of
amendments. Amendments 131 and 135 would add to the proportionality principle a requirement on the regulators to consider whether an operational rule or operational requirement is proportionate to the benefits which result from that rule.
I can assure my noble friend that the existing reference to a burden or restriction already includes burdens or restrictions which relate to operational matters. So when the regulators make rules or impose requirements which require firms to alter the manner in which they operate their business, they will be required to have regard to the proportionality principle.
In fact, my honourable friend, the Financial Secretary to the Treasury, tabled amendments to the Bill on Report in another place to ensure that the regulators will have to demonstrate how they have considered such matters when making rules.
Specifically, they will have to set out in the compatibility statements that they are required to publish when consulting on new rules, how they consider the proposals to be consistent with the principles of regulation in new Section 3B, including the proportionality principle. Amendments 131 and 135 pick up the important point that much of it comes in the operational matters but that it is picked up, and specifically that the requirements of the Bill were extended in another place, which makes Amendments 131 and 135—and Amendment 132, which is consequential—unnecessary.
Similarly, Amendment 133 seeks to add “firm” to the proportionality principle, so that the regulators will have to consider the burdens and restrictions placed on firms, adding to the current wording which uses the term “persons”. We may have touched on that before, but again, for the avoidance of doubt, if we have not mentioned that in Committee, I would like assure my noble friend that “person” is defined in the Interpretation Act 1978 as including,
“a body of persons corporate or unincorporate”.
Thus “person” includes individuals and other forms of legal person such as companies, partnerships and unincorporated association. So Amendment 133 is unnecessary.
Finally, Amendment 134 would add the words “reasonable and fair” to the proportionality principle. I agree that the regulators should be both reasonable and fair in the way that they pursue their objectives. I understand my noble friend’s concerns. He has taken us through a number of examples where he feels that the current regime is operating unfairly. I will certainly not detain the Committee by giving the other side of the case in each of those examples, but there is one. Part of what we are doing will work right through the structure only if there are changes of attitudes in lots of ways in which people go about their business.
I appreciate the argument that the best way of making people change their attitudes is to include certain things in the Bill. However, I know that the FSA and the PRA are reading these debates carefully and understand the spotlight that they are under. All these exhortations to them to do what, in this case, is my noble friend’s direction of travel, which I fully appreciate, are being listened to carefully. But the provision itself in Amendment 134 is unnecessary. The
regulators have a duty under public law to act reasonably and can be challenged in the Upper Tribunal or by way of judicial review if they fail to discharge that duty, which would be broadly the case if the requirement were on the face of the Bill. The regulators are already under a duty to comply with the rules of natural justice—in other words to follow procedures and processes which are fair.
Amendments 144A and 147C would require the regulators to set out the costs and benefits of the regulation for which they are responsible in their annual reports. The regulators are already required to include in their annual reports a significant amount of information about how they have adopted a proportionate approach to delivering their objectives for the FCA, in new Schedule 1ZA(10) and for the PRA Schedule 1ZB(18). They must set out how they have complied with the regulatory principles, including the proportionality principle.
The financial services regulators are being brought within the statutory remit of the NAO, which I have said before, which will be able to carry out its own value-for-money studies. It would be excessive to add to this an annual requirement for the regulators to conduct their own cost-benefit analysis of the entirety of their regulatory activity.
Amendments 147D and 147E would require the PRA to hold an annual general meeting, as is required for the FCA. Amendments 144C to 144E would require the FCA to put in place arrangements to consult on its annual report, as is required for the PRA.
The Bill provides for the PRA and FCA to take different approaches to annual consultation on the effectiveness of their regulatory approach, and I welcome this opportunity to explain why that is the case. The provisions for an annual meeting under FiSMA provide a useful opportunity for stakeholders to make high-level comments on the FSA’s strategy and approach. Like the FSA, the FCA will supervise the conduct of all financial services firms. Given the wide range of issues under consideration, and the large number of firms, it is useful to have a single annual forum where stakeholders can voice their views. But as I said in discussing the last group, the PRA will be looking in much greater detail at a much smaller number of firms, and will be focused on complex issues of prudential risk. Given the PRA’s narrow focus and the complexity of the prudential issues it will tackle, a written consultation will be a more effective way of obtaining input from industry about how it has performed against its objectives. This will enable firms, consumer groups and others to put in detailed submissions addressing the PRA’s prudential approach in a level of detail that they would not be able to do in an annual meeting.
These are alternative, rather than complementary, mechanisms—horses for courses—and it does not seem necessary to subject both regulators to both mechanisms, and in doing so create additional cost.
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Lord Teverson: My Lords, I understand that argument about the PRA and a public meeting, but it seems to me that all of us that are in public bodies, in politics or
whatever, know that there is nothing that makes you feel more accountable than knowing that you have to face an audience face to face once a year and people can turn up and ask you live questions. That is why corporate annual general meetings are not perfect, but at least they can be effective in that way and be quite focusing for the board of that company, or, in this case the members of the prudential regulation authority. It seems to me that since prudential regulation is so important to the financial health of the country, it would be a good thing for that reason.
Lord Sassoon: I well understand my noble friend’s argument. It is, of course, far from the case that the PRA and the Bank of England will be able to hide from direct questioning of what they do because I am sure that they will be in front of the Treasury Committee much more frequently than annually, under the full spotlight of television cameras and so on. It is not like a normal corporate situation in which the board may be able to hide away from that sort of scrutiny except annually. There will be very regular public challenge, principally through the Treasury Committee, and I can only repeat that it would have been the simple, easy answer to just put both requirements on both the successor bodies, but I come back to the underlying point: we must remember that we are creating two bodies that have to be, in very many respects, different from what we have with the FSA at the moment. If it is merely shifting the chairs around, we need not be spending the many hours that we are spending over the Bill.
Lord Sassoon: Well, that is why we are not merely shifting the chairs around; there will be a very fundamentally better structure in place for all sorts of reasons that we have debated, but as a consequence of that, some of the easy solutions of “one size fits both regulators” is not the right way to go and in this case it is essentially a disproportionate imposition of the public meeting on the PRA, for the reasons I have given.
Amendment 144B seeks to require the FCA to account in its annual report for how often the FCA used the product intervention power in Section 137C and financial promotions power in Section 137P, what the outcome of each intervention was, and how the FCA complied with the statement of policy concerning the temporary product intervention rules in Section 137N. Both powers are very important, but they are also a departure from the current regime and therefore it is important that the regulator accounts for how it uses them. As such, I fully agree with the sentiment behind this amendment, but I reassure my noble friend that it is not necessary. Paragraph 10 (1)(a) of Schedule 3 requires the FCA to report on the discharge of its functions and the FCA’s general functions include making and policing of the rules. The Government therefore fully expect the regulator to account, in this area, for how it has used these powers.
I think that I have dealt with all the amendments in the group.
Lord Hodgson of Astley Abbotts: I return momentarily to Amendments 131 to 135. I am extremely grateful for the Minister’s comments and the comfort that he gave on operational rules and the exchangability of “person” or “firm” under the Interpretation Act 1978, of which I was not aware. On the point about “reasonable and fair”, I think that he said the firm could always take the regulator to the Upper Tribunal. That is not an answer at all. No firm, particularly not a small one, will want to take the regulator to the Upper Tribunal. That is only in theory an answer. There is no way that any firm will want to go through the risks—in publicity, time and reputational damage—to ensure that the regulator has been reasonable and fair. I am not asking my noble friend to come back on this; I understand his point; but his officials should not think that that is an answer, because it is not a practical answer in the real world.
Lord Sassoon: My Lords, I appreciate that the processes of challenge, whether it is by the Upper Tribunal or under the rules of natural justice, are very much back stops and expensive and difficult for firms. That does not mean that large firms have not challenged the FSA and in some cases been successful over the years. I am not sure that it would be any cheaper and easier if such requirements were written into the Bill.
It just remains for me to ask my noble friend Lord Flight to withdraw his amendment.
Lord Flight: I thank my noble friend for his response. With regard to my Amendment 130B, I hope that, by the time we get to the end of the process, he may have some more effective thoughts as to how to ensure that costs are managed economically. I observe that, since the FiSMA, a great deal of forest wood has been cut down, a great deal has been added and little achieved for the consumer as a result. It is a difficult nut to crack, but, in the mean time, I beg leave to withdraw the amendment.
Amendments 131 to 138B not moved.
138C: Clause 5, page 29, line 15, at end insert—
“(g) the need to ensure that each regulator employs staff with the necessary knowledge, experience and expertise of the sectors that they regulate, and of policy making at the European level.”
Lord Hodgson of Astley Abbotts: My Lords, Amendment 138C proposes a new paragraph (g) to the regulatory principles referred to in new Section 3B. It would ensure that,
“each regulator employs staff with the necessary knowledge, experience and expertise of the sectors that they regulate, and of policy making at the European level”.
The FSA has had issues in retaining quality staff in recent years, and recruitment will remain one of the biggest challenges facing the new regulatory bodies. A
failure to address the issue of experience and expertise will undermine the introduction of the new regulatory framework—in particular, the proposed move towards a more judgment-based supervisory approach. The amendment is intended to probe the Government on how they and the regulators plan to address those staffing challenges.
I argue that there should be a commitment that the regulators will ensure that they recruit and retain staff with the necessary knowledge, experience and expertise to apply the regulatory regime in an appropriate and proportionate manner. It will be particularly important that the staff have a balance of sector expertise reflecting the range of industries that they cover, and that appropriate expertise is present at all levels and in all functions. Without proper staffing the regulators will be unable to make sound judgments about the strategies, plans and actions taken by individual firms. They will also struggle to understand the potential impact that regulations and supervisory actions taken against individual firms might have on the financial system as a whole.
Staff employed by the new regulatory bodies will also need to acquire skills and expertise to aid their interaction with the new European supervisory authorities. The ESAs will drive more of the regulatory agenda in future and it is essential that the new authorities play an increasingly influential role in the early stages of development and throughout the process governing the agreement of new regulation. To succeed in this area staff will need the necessary negotiating and influencing skills and require a high level of awareness of the political processes at a European level. We touched on this point during our debate on Amendment 96A, moved by the noble Baroness, Lady Hayter of Kentish Town, at our meeting on 10 July.
I have already referred in slightly unflattering terms to the significant influence of the function committee that authorises individuals on a case-by-case basis before they can take up their roles. A major part of the interview with the SIF committee is taken up with questions designed to discover if the interviewee has the necessary knowledge, expertise and experience. If this test is to be applied to those who run the financial services industry, it should surely also be applied to those who regulate it. I beg to move.
Lord Tunnicliffe: My Lords, I am somewhat surprised to find myself agreeing with the noble Lord, Lord Hodgson of Astley Abbotts. I have been involved in a lot of reorganisations and all too often people do not think about the human content of the organisation, the size of the jobs that they are creating and the extent to which a reasonable human being can do them—whether even an unreasonable human being can be found to fill those roles.
At first sight it is a matter of motherhood and apple pie. To try to get a feel for this Bill and speaking particularly about the PRA, I searched the internet and came across a splendid document by the Bank of England and the FSA, published in May 2011. It is called The Bank of England, Prudential Regulation Authority: Our Approach to Banking Supervision. It is written as a narrative and really it is a gripping one.
All that the Minister says about the PRA is that it is going to be focused. It is going to be much more than focused. It is going to be based on a judgment-based supervision, and I quote from paragraph 15 of this document:
“The PRA’s proposed approach has, at its centre, supervisors making judgements, when needed, about current and future risks to an institution’s safety and soundness and about the action it should take to address these risks. It is recognised that this will mean that, at times, the supervisor’s judgement will be at variance with that of the institution. Furthermore, there will be occasions when events will show that the supervisor’s judgement, in hindsight, was wrong. This is inherent in a forward-looking system”.
This is a very significant intervention. Later the document describes the proactive intervention and at stage 3 points out where,
“significant threats to a firm’s financial safety or soundness may have been identified”.
“The PRA may require any of the following actions: a change to management and/or composition of the board; limits on capital distribution; restrictions on existing or planned business activities; a limit on balance sheet growth and/or stricter leverage limits; and setting tighter liquidity guidelines and/or capital requirements”.
I am sorry that the noble Lord, Lord Sassoon, is not with us at the moment, but he said that the PRA will not become a shadow director. It is pretty clear that I do not understand what a shadow director is, but this is a significant level of intervention. Then you look at the role. A lot of the time, the people in this role will be doing base-level supervision. Let us hope that we have some financial tranquillity. We are now looking for people who will be capable of taking that level of intervention at pretty short notice, interfering in major institutions’ affairs, and having effects which, it is admitted, could be wrong decisions. That will have to be done with enormous care by people of very high quality.
I am pleased that the amendment brings Europe into play. In front of us we have a very complex set of organisational changes. It is not clear how it will fit with Europe. There will almost certainly be a number of jarring edges. We need people in this organisation who are capable of overcoming the ambiguities and smoothing the path of the relationship with Europe.
I am sure that the Minister will say that this is not the sort of thing that should be on the face of the Bill. If I were in his place, I know that my brief would say that. Nevertheless, it is for the Minister to assure us that processes will be in place, particularly in the PRA, given the intention to use these powers, which already exist, in such a significant way to meet these very serious challenges.
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Baroness Noakes: My Lords, the noble Lord, Lord Tunnicliffe, reminded me that this morning I carried out my annual clearing out of documents to be binned or not to be retained. One of those that I reviewed was the document to which he has just referred, the Bank’s announcement in relation to how it would manage the PRA. That document did not go into the bin; it was saved for another day. However, it reminded me of the importance of the issue.
My noble friend Lord Hodgson referred to the number of staff who have left the FSA over the past year and a half. It is a very significant number of people at many levels, and often very senior people. The organisation is trying to live up to this new judgment-led supervisory approach and to cope with major organisational change, as the FSA is split into two organisations. My question to my noble friend on the Front Bench is: what confidence do the Government have that new regulatory organisations will have the staff? I am sure he will say, as the noble Lord, Lord Tunnicliffe, anticipated, that this amendment is not necessary. That may be so, but it is important to know from the Minister whether the Government believe that these organisations are ready for the responsibilities that they are to take on.
Lord De Mauley: My Lords, my noble friend’s Amendment 138C would make the FCA and the PRA consider whether their staff are appropriately experienced and endowed with the requisite level of expertise and knowledge to carry out their general functions. That would be inserted into the list of principles of regulation to which both regulators will be required to have regard. Of course, we agree that it is absolutely critical that the new regulators employ the right staff—staff who have the necessary skills and experience to use their informed judgment will be the defining factor in the success of the new regulatory system. Likewise, we agree with the Joint Committee’s assertion that the PRA and FCA will need to attract staff with the appropriate approach and experience. As my noble friend suggests, it is important that staffing decisions are made by the regulators themselves. Specifically, they should be empowered to consider whether they are appropriately staffed in order to meet their statutory objectives.
In that regard, the FSA paper setting out its vision for the FCA’s approach to regulation, published in June 2011, highlighted the importance that the FCA will place on such matters. It says that,
“the FCA will need to retain and attract professional and dedicated staff, equipped with the skills and knowledge to tackle the difficult issues ahead. It will need to be a dynamic and learning organisation, committed to developing individuals within a career that includes management and specialist paths. It will put a premium on flexibility and team-working where resources are allocated flexibly across the organisation”.
There is a similar commitment in the PRA approach to the banking document:
“The PRA will maintain its own in-house specialists including staff with particular expertise in risk management and risk modelling”.
I also understand my noble friend’s concerns about the requisite experience of the European policy-making process. Indeed, engagement with international regulatory bodies will be crucial for the regulators. I confirm, therefore, that I would absolutely expect the regulators both to employ staff with the requisite knowledge of European policy-making and to provide comprehensive training for staff who work in areas where knowledge of this is desirable. However, again, these will rightly be operational matters for the regulators.
My noble friend Lady Noakes asked whether the Government have confidence in the ability of the regulators to find the necessary staff. Yes, we do: we
will draw on the best of the staff of the FSA and of the bank cadres and I am confident that, with focused objectives, they will quickly develop deeper expertise in their areas.
Baroness Noakes: Could I have a follow-up to that one? Has the FSA managed to recruit for all the staff it has lost, particularly those it has lost at senior levels over the last 18 months?
Lord De Mauley: My Lords, I cannot answer that here and now, but I will write to my noble friend on that point.
Meanwhile, I assure my noble friend Lord Hodgson that while staffing is not a matter for the Bill—as the noble Lord, Lord Tunnicliffe, suggested—we regard it as absolutely key for the regulators themselves to consider. On this understanding, I ask him to withdraw his amendment.
Lord Hodgson of Astley Abbotts: I am grateful to my noble friends Lord De Mauley and Lady Noakes and to the noble Lord, Lord Tunnicliffe, for their support. Inevitably, we get down a bit to motherhood and apple pie on these things. However, I say to my noble friend on the Front Bench that the reputation of the regulators will be made quite early on, because the firms will say, “Are these bodies with whom we can have a sensible, grown-up, informed, well judged set of discussions, or have they sent boys to do men’s jobs?”. If they send boys to do men’s jobs, the relationship will never recover, because the regulated firms will not feel that the regulators have the capacity, ability or knowledge to be able to make the informed judgments that this Bill expects of them. I will withdraw the amendment; however, my noble friend must emphasise to the regulators that this will be a once-in-a-lifetime opportunity. If they get it wrong, their reputation will be damaged from the start.
Amendments 139 to 139B not moved.
140: Clause 5, page 29, line 42, at end insert—
“(d) that the exercise of their functions in relation to persons regulated by both the PRA and the FCA is coordinated with a view to avoiding the making of duplicative requests and the imposition of inconsistent requirements on such persons.”
Lord Flight: My Lords, Amendment 140 and Amendments 140B, 140C and 140D are really about the same territory of the co-operation and collaboration between the PRA and the FCA. Amendment 140 is very concerned to focus on the actual, practical dealing with firms in everyday business; it seeks to avoid the making of,
“duplicate requests and the imposition of inconsistent requirements on such persons”.
Those in the industry will be moving from regulation by one body; virtually everyone regulated by the PRA will be regulated by the FCA as well. There is an inevitable tendency for duplication. As we will come to later on, some of that is not necessary. This amendment calls for an addition to Clause 5, which puts in the Bill the objective of avoiding such duplication.
Amendments 140, 140B, 140C and 140D are essentially about the memorandums of co-operation between the two bodies. With regard to Amendment 140B, there are certain exemptions which could significantly limit the territories in which co-operation is required. The amendment seeks to require that additional guidance be given which makes clear the extent to which these exemptions must be used to disapply the duty to co-operate.
Amendment 140C relates to the MoU, which is required to be reviewed regularly and published. However, there is no requirement in the Bill for the PRA and FCA to consult on the changes from year to year and this amendment provides that such consultation should take place. New Section 3E(8)(b) allows technical or operational issues relating to co-operation between the two authorities to be left out of the MoU, but I cannot see any particularly good reason why this is so. Again, this could have a material impact on firms, where important things end up being omitted. Amendment 140D redrafts new subsections here so that they only cover items where publication would be against the public interest, and removes the references to technical and operational issues as being able to be left out.
Lord Hodgson of Astley Abbotts: I have added my name to Amendment 140, moved by my noble friend Lord Flight. I underline the importance of co-ordination and think some means of measuring the effectiveness of the co-ordination mechanisms and processes between the FCA and the PRA should be established. Some annual review would bring significant benefits, and changes could then be incorporated in the MoU that exists between the two bodies, and would help control costs.
As I am sure other noble Lords have, I have had briefings from London First and the Council of Mortgage Lenders stressing the importance of this co-ordination and the need for these two bodies to work closely together. One swallow does not make a summer, but a very large firm rang me up to say that their chief executive was having to have a get-to-know-you session with the FCA and the PRA, talking about the generality of the firm, but they refused to co-ordinate the meeting. The FCA said, “Come down here and we will see you one time but then come down a second time to see the PRA”. He is going to have to make two visits to these organisations. It is a swallow and a cost, but also denotes an attitude, which is the very attitude that I think has to some extent poisoned the present relationships. In order to work in a cost-effective and business-friendly way, the regulators have got to understand that these firms have to operate and cannot just be at the beck and call of the regulator. They have commercial lives to live and the chief executives of these big companies are busy men. It is not beyond the
wit of man, and common politeness, for the regulators to be able to agree a common diary approach for what is a getting-to-know-you arrangement, not an inquiry about something relating to their own particular functions. I very much underline what my noble friend’s amendment says. There is an awful lot of work to do if we are not to set off down the wrong road in this very sensitive and potentially extremely costly area.
Baroness Kramer: My Lords, I will speak to Amendment 140A, which is in this group. It is slightly different but we did not seek to have it regrouped, just in the interest of time. Amendment 140A would establish in the Bill that the PRA and FCA are considered equal in status. We have a letter from the noble Lord, Lord Sassoon, dated 18 June, which indicates that it is the Government’s intention to have parity of status, but I would defy anyone to read the Bill and come away with that particular conclusion. In the Bill, as your Lordships will be aware, the PRA has the right to veto certain of the FCA’s regulatory actions. I have no problem with that—it can be right and proper—but it reads over very quickly into a sense that the PRA is the superior body. The PRA is also part of the Bank of England family, a very powerful family. The FCA stands outside of that, which is right and proper. However, it creates the issue about the balance between those two regulators, particularly since the Governor of the Bank of England chairs the PRA as well as the FPC and the MPC. The FCA therefore stands in a different relationship to the governor and has a very different role. The governor is a very important individual in the international community in terms of public recognition and public standing.
Building a little on the comments just made about culture and behaviour by the noble Lord, Lord Hodgson, we must recognise that within departments there tends to be a sort of default behaviour to live in a silo. It is very difficult to persuade organisations to co-ordinate effectively with each other, and to have the kind of respect that goes with parity. Although there is a memorandum of understanding, a great deal of judgment is involved in that memorandum in terms of deciding when it is appropriate to share information, to consult and to co-ordinate. It depends a great deal upon attitude. I have been in at least two meetings with members who were a fairly broad representation of the financial services sector when it has been evident that the assumption of the sector is that the PRA is the lead institution and the tough guy, and that the FCA plays a somewhat secondary role.
This is of particular concern because of the range of financial services sectors that the FCA will regulate. It comprises 27,000 firms contributing £63 billion in tax revenues, providing over 2 million jobs, two-thirds of which are outside London. We must be very careful that it is not regarded as second class in its role. The London Stock Exchange is particularly concerned about this issue because of the role that the FCA must play in Europe. As your Lordships know, it has the seat of ESMA, which is highly significant. The UK market accounts for between 60% and 80% of EU securities trading but has only 8% of the vote on ESMA. Therefore, the status, standing and significance
of the FCA will matter enormously in those European discussions which affect the City, the financial services industry, and the international world of finance more generally.
This amendment seeks to, in a sense, make it clear in the Bill that the FCA does not have second-class status and that it is equal in its standing with the PRA. It seeks to make sure that that then gets embedded into the culture of how these regulators relate to each other and co-ordinate with each other, and that the FCA has standing in international eyes, and is recognised by international regulators as the body they can appropriately talk to, and not as a body that they must go around in order to speak to the genuine powerhouses.
Lord Stevenson of Balmacara: My Lords, I rise to speak to Amendments 140A, 140BA, 140DA, 143C and 144JA. Amendments 140AA to 140DA appear to be, to use the words of the noble Lord, Lord Flight, in the same territory as those amendments that he was proposing and which have also been supported by the noble Lord, Lord Hodgson. Therefore, I do not think that we need to say much more except that we support them. We hope that our points will also be taken into account—they are relatively self-explanatory. We look forward to hearing the Minister’s response.
Amendments 143C and 144JA, raised in the other place, are intended to probe the practical aspects of co-ordination behind the FCA and the PRA on the ground—for example, across the membership of the boards. Schedule 3 on page 177 makes provision for the Bank’s deputy governor for prudential regulation to be on the FCA board. However, paragraph 6 states that:
“The Bank’s Deputy Governor … must not take part in any discussion by or decision of the FCA which relates to (a) the exercise of the FCA’s functions in relation to a particular person, or (b) a decision not to exercise those functions”.
Similarly, new Schedule 1ZB(5) states that:
“The chief executive of the FCA must not take part in any discussion by or decision of the PRA which relates to”—
I do not need to quote it further, it is very similar. There we have two deputy governors, supposedly sitting on these two boards to aid the co-ordination of these two bodies and to have cross-membership, and yet there is a provision that gags those two individuals and prevents them getting involved in discussions in certain areas. There may be a rational reason for this but it beats me as to what might be.
There is a further point. Paragraph 5 on page 177 of the Bill states;
“The validity of any act of the FCA is not affected”,
if there is a vacancy in the office of deputy governor, or if there is
“a defect in the appointment of a person”,
to those boards. However, if a deputy governor happens to stray in discussions into areas that relate to a particular person or to a decision on exercising a function, might there not be a serious risk that on judicial review—for example, a third party could challenge the validity of any act of the FCA—should it be discovered that the deputy governor had uttered a phrase or misspoken in a particular way about a particular person or issue?
One must be concerned about enshrining restrictions on the things that board members can and cannot utter so that they cannot take part in a decision. How would that be implemented? Would they have to leave the room when one of these topics came up? Would every single decision of the FCA and the PRA have to be separated into generic and operational questions? It would surely not be right to fetter internal discussions in this way. If it is right to put them on the boards of both organisations, it must be right to let them discuss everything that comes up on those boards. I look forward to hearing the Minister’s response to these points.
Baroness Cohen of Pimlico: I support the amendment in the name of the noble Baroness, Lady Kramer, and particularly her remarks about the importance of the status of the FCA in relationship to European negotiations. I remind the House that I am a non-executive director of the London Stock Exchange and that until 2010 I also chaired the sub-committee of the European Union Committee that is concerned entirely with difficult negotiations on wholesale finance. It is extremely difficult, particularly in the present climate of financial panic in Europe, to make progress—nay, even to hold our own—in negotiations with fellow European countries. The FCA must, as a very minimum, be seen to be of equal status to the PRA. I cannot emphasise how important this is. Over there in Europe, they have got used to having the FSA and they will be totally puzzled as to who is important unless it is made clear in the Bill.
Lord De Mauley: My Lords, these amendments have in common that they concern the relationship between the PRA and FCA and mechanisms for co-ordination between the two. Amendment 140A would insert a declarative provision that the PRA and FCA are considered equal in status. I agree with the sentiment. The PRA and FCA have very different remits: the PRA for prudential regulation and the FCA for conduct regulation. These are equally important. The Bill gives the PRA and FCA the necessary powers to deliver their objectives. Within their area of competence and expertise, each will have discretion as to how they exercise those powers to achieve their objectives.
Clearly there are differences between the regulators, in structure as well as in their objectives. Indeed, some of them could be construed as making the PRA appear to be the junior partner—for instance, it is the subsidiary of the Bank while the FCA is a wholly separate body. However, nothing in this arrangement should be taken to imply that one is superior to the other. My noble friend Lady Kramer, echoed by the noble Baroness, Lady Cohen, emphasised the importance of the FCA’s equality of status, particularly in the international context. The fact that the FCA will attend ESMA underlines that it will be the UK’s pre-eminent markets regulator.
Amendment 140 would require the PRA and FCA to co-ordinate their actions in relation to dual-regulated persons to ensure that they avoid duplicative requests and do not impose inconsistent requirements. Co-ordination is indeed a key point—one that has
been emphasised by both industry and consumer representatives. The Government have considered this carefully. The general duty to co-ordinate is designed to address exactly the points that the amendment raises.
Subsection (1)(c) of new Section 3D specifies that one of the three purposes of co-ordination is to allow the regulators to use their resources in the most efficient and economic way, and to act in a proportionate manner. An efficient and proportionate approach will require the regulators to minimise duplicative requests wherever possible and avoid inconsistent requirements. This is supported by the new power for the Comptroller and Auditor-General to conduct value-for-money reviews of the financial services regulators and to report back to Parliament. The NAO will of course be able to look into co-ordination between the PRA and the FCA. I hope that noble Lords can agree with me that these mechanisms, already described in the Bill, are sufficient and that we do not need further provision to support them.
Amendment 140B would require the FCA and the PRA to publish guidance explaining the circumstances where the duty to co-ordinate does not apply. I agree that it is important to have clarity about this. The MoU will set out how the regulators will comply with the duty as a whole, including the limitations on the duty established in subsection (2).
Amendment 140AA would modify the general duty to co-ordinate to make it explicit that an objective of co-ordination is to minimise “unnecessary additional expenses” that might arise as a result of the separated administration of the PRA and the FCA, and to,
“maximise any common administrative savings”.
The Government agree that, where possible, costs arising from duplication of effort should be avoided. That is why the duty to co-ordinate requires the regulators to co-ordinate so as to act in a proportionate manner. This will include, for example, co-ordinating their information gathering in a way that will minimise costs. The regulators will be scrutinised by the NAO to ensure that they are delivering value for money. However, if the Bill were amended in the way suggested, I fear that it could be a distraction. There is a risk in requiring the PRA and the FCA to focus too much of their attention on co-ordinating at the expense of focusing on delivering their own separate regulatory objectives. The Government’s view is that this amendment goes too far in that direction.
Amendment 140DA would require that the co-ordination MoU between the PRA and the FCA contains an estimate of the additional annual costs when compared with the estimated costs of the administration of the FSA. I reiterate the point that the Financial Secretary to the Treasury made in another place: a core purpose of these reforms is to reduce the frequency and severity of future financial crises. This will require much tougher and more effective regulation. As we acknowledged in the impact assessment published alongside the draft Bill, there may be additional costs as a result of the separated administration of the PRA and the FCA. However, these costs pale into insignificance when compared with the cost to the economy of the recent financial crisis.
Amendment 140D would remove the provision stating that the MoU between the PRA and the FCA need not include technical or operational matters that do not affect the public. The MoU must set out enough detail to make clear the standards against which the regulators can be held to account, and to enable the public and regulated firms to see the principles and agreements that are driving the regulators’ approach to co-ordination. However, as I am sure noble Lords will accept, it is important that it does not become simply an impenetrable technical manual. The purpose of this is provision is to make clear that it need not include a great deal of detail that is of no interest to Parliament or the public. I think that is a suitable test of the kind of material that need not be set out in the MoU.
Amendment 140BA would require the regulators to include in their MoU provisions about how they would co-ordinate their activities,
“in relation to the promotion of high standards of stewardship by institutional investors”.
The FCA will be the regulator of the conduct of all asset managers, including their conduct in looking after institutional investments. The PRA will take a regulatory interest in asset managers if they also have permission to carry on PRA-regulated activities; but even in those cases the PRA will not be responsible for regulating their conduct as asset managers. It is not clear what activities in relation to stewardship the PRA and the FCA would need to co-ordinate or why they should be specifically required to provide for that co-ordination in the MoU. The MoU will, of course, already cover any necessary co-ordination in relation to PRA-regulated firms that also happen to be asset managers.
Amendment 140C would require the PRA and the FCA to consult publicly on any proposed changes after their annual review of the MoU. It is essential that industry has the opportunity to make representations about the contents of the MoU and the way in which the regulators comply with it. The draft MoU has been published, and the Bank and the FSA have invited comments. The Bill makes provision to ensure that industry and others can make further representations. The FCA and the PRA are required to include an account of how they have complied with the duty to co-ordinate in their annual reports. After publication, they are required to consult publicly on the effectiveness of their strategy. The FCA will do this by holding an annual public meeting, while the PRA will use a written consultation arrangement. Respondents to those consultations will have ample opportunity to comment not just on the content of the MoU itself, but also on the way in which the regulators have put it into practice.
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Amendments 143C and 144JA would remove the provisions of paragraph 6 of Schedule 1ZA and paragraph 5 of Schedule 1ZB, which make it clear that chief executives are not to take part in firm-specific decisions taken by each other’s boards. The reason for these provisions is that the purpose of cross-membership is to ensure effective strategic co-operation—for example, on the development of policy and rules. The CEOs
will participate in discussions around the legislative functions which are reserved to the boards, such as setting policy and making rules. Cross-board membership at CEO level will be useful in supporting this and ensuring that it takes place in an appropriate way.
At the level of firm-specific operational decisions, the PRA and FCA must have clearly defined and separate roles. This could be undermined if the CEOs were seen to be involved in firm-specific decisions taken by the other.
With these explanations, I hope that my noble friend will withdraw his amendment.
Lord Flight: My Lords, empires will be empires. The comments of my noble friend Lord Hodgson were pertinent; the early signs of co-ordination and co-operation are not particularly encouraging and, when I have encountered members of the PRA team, they have given the impression that they think that it is the superior body. The Government might keep an eye on this territory before the Bill is finally enacted because I do not think that what is in it is strong enough to counter those natural tendencies. I beg leave to withdraw the amendment.
Amendments 140A to 140DA not moved.
140E: Clause 5, page 31, line 30, leave out from “responsibility” to end of line 32 and insert “for measures designed, in relation to with-profits policies, for the purpose in subsection (2) belongs to the PRA rather than the FCA.”
Amendments 141 and 141A not moved.
142: Clause 5, page 37, line 16, leave out from “with” to “that” in line 18 and insert—
“(a) a local weights and measures authority in England, Wales or Scotland, or
(b) the Department of Enterprise, Trade and Investment in Northern Ireland,
for the provision by the authority or department to the FCA of services which relate to activities to which this subsection applies.
143ZA: Clause 5, page 38, line 7, at end insert “particularly to those members of the public on lower incomes”
Lord Stevenson of Balmacara: In moving the amendment, I shall speak also to Amendments 143ZB to 143ZD as well as Amendment 144EA. This group of amendments relate to the consumer advice functions of the FCA, currently delivered through the Money Advice Service, and the separate responsibility that the MAS has for co-ordinating debt advice. I declare my interest as a chair of the Consumer Credit Counselling Service, the country’s leading debt advice charity, which has helped more than 1.3 million people in the last few years to deal with their unmanageable debts.
I start by asking the Minister if he can confirm the Government’s intention to retain the status quo in this area in so far as the body known as the Money Advice Service is concerned. MAS has responsibility for delivering money advice to members of the public as part of its consumer education function and has recently assumed responsibility for co-ordinating debt advice, which is currently delivered by a number of charitable bodies, including Citizens Advice, the Money Advice Trust and the Consumer Credit Counselling Service.
As your Lordships’ House will be aware, although the Bill continues the FSA’s current responsibilities regarding these functions to the FCA, new Section 3R in Clause 5 confirms that a consumer financial education body undertakes this function on behalf of the FSA at present and it is intended in this section of the Bill that the body corporate, originally established by the FSA under Section 6A of FiSMA, will continue to deliver these services for the FCA. So the Bill assumes that the MAS will continue.
I invite the Minister to clarify the situation, because rumours have begun to circulate, following the hearings held recently by the Treasury Select Committee on the Money Advice Service. These were fairly rumbustious sessions, and for long parts of them the committee was focusing on what it clearly saw as an unsatisfactory situation regarding the FSA’s current responsibilities for the MAS, its business plans and its operations. I gather that it would not surprise many observers if the Government intended to bring forward amendments on this topic. I will not repeat the rumours that have reached me, but the stories authoritatively report a range of decisions including the abolition of the MAS, to giving it its own statutory position within the Bill. I would be happy to give way to the Minister if he would like to clarify what the position is at this point. He does not wish to do so now so I shall continue.
These amendments seek to clarify the role of the Money Advice Service in respect of its money advice services, to ensure that it focuses with laser-like intensity on the needs of members of the public on low incomes and to ensure that it provides,
“targeted, proactive and easily accessible advice to those encountering economic disadvantage, financial exclusion or financial exploitation”.
In respect of the co-ordination of debt advice, the amendments seek to make sure that this means that the MAS will be explicitly focused on promoting the work of registered charities such as the MAT, CCCS and the citizens advice bureaux, so that people struggling with debt are made much more aware of the excellent free, independent and impartial support that is available to them.
There is one point which I hope the Minister will be able to help me with when he replies. While the MAS is a direct provider of money advice, it is not the Government's intention that the MAS should become a direct provider or regulator of debt advice, in direct competition with and duplicating the work of these long-established registered charities. He will recall that in the other place, the Treasury Minister, Mr Mark Hoban, said:
“The role of MAS is to commission free debt advice, not … to provide [it].”—[Official Report, Commons, Financial Services Bill Committee, 6/3/12; col. 345.]
That having been said, there is an issue here which it would be good to recognise—about whether it is credible to view money advice and debt advice as separate activities. We in our charity certainly take the view that when people come to us with debt problems, our priority is obviously to get them to repay their debts in as short a time as is possible, without jeopardising their basic needs and livelihood; and we are not into debt forgiveness.
However, another of our functions is to use the process that they are going through to educate them about how to deal better with credit in the future. In that sense, I have sympathy with those who argue that money advice and debt advice are two sides of the same coin, if you will excuse the pun. However, that may be an issue for the future. For the moment I am anxious to ensure that the Government are not seeking to complicate the debt advice space. There is a need for co-ordination, a reduction of duplication, and for all concerned to bear down on costs, as well as increase throughput. However, there is no need for additional direct provision of services by the Government. The registered charity sector can and will deliver a brilliant service here.
Recent research by the Financial Inclusion Centre has shown that there are 6.2 million households in the UK that are financially vulnerable. Half of those are already behind with debt repayments or face insolvency action; 3 million are living so close to the edge that they do not know how they would cope if there were to be even a small increase in their regular household bills. That is why the MAS needs to focus on those members of the public who are on lower incomes, and to target advice to those encountering economic disadvantage, financial exclusion or exploitation.
Around half of our debt advice clients have struggled on their own for more than a year before seeking help and many feel ashamed of their financial problems. When people do summon up the courage to ask for help, they need advice about the best remedies for them, and we would argue that they should seek free advice. Around 400,000 people in the UK are thought to be on commercially provided debt management plans, which cost them £250 million in fees every year. We estimate that for a typical debt of £23,000, a client of a debt management company pays more than £4,000 in fees to that company. Clients of charitable providers by contrast only pay back what they owe, and the time taken to get free of their debts is about 18 months less than with a commercial provider.
That is why we suggest in this group of amendments that a key function for the Money Advice Service must be to get financially vulnerable consumers to seek help earlier from charities such as National Debtline, Citizens Advice and CCCS by promoting free debt advice. The public interest here, surely, is to encourage people with debt problems to recognise the free debt advice sector as the best place to go for rehabilitation. Raising the profile of the free debt advice sector is necessary if we are to counter the aggressive advertising of fee-charging debt management companies which seems to be everywhere. However, this is difficult for the charitable sector to do under its own steam, as its charitable funding should really be used to deliver direct charitable benefit. In December last year, the chief executive of the Money Advice Service said that he wanted to build the profile of the free debt advice sector so that ultimately, everybody in need of debt help sees the free debt advice sector as the “better option for them”. I welcome that approach and beg to move.
Baroness Kramer: My Lords, I want to comment on Amendment 143ZE. I have great respect for the CCCS and the work that it does, but there is also at least one commercial player—I am thinking of Payplan—which, I understand, provides free debt advice on a basis very similar to that of the CCCS, and in fact Citizens Advice frequently refers people to it to deal with debt management. Like the CCCS, it gets its funding from the creditor and not by turning to the individual who is in debt.
Although I entirely agree with all the statements that have been made about those—perhaps not all but certainly many—who advertise and often provide a very unsatisfactory and highly questionable service to individuals who are in debt, leaving them in a worse situation than when they started, I am slightly cautious about the suggestion that only the charitable sector can provide free debt advice. We need all the players we can get in this business and, provided they do it in the appropriate way, we should surely encourage all of them.
I question why the companies that seek to have the debts repaid to them should not be more influential in this process. My understanding is that they would far rather work with those who provide free debt advice than those who muddy the waters by essentially taking the fee-paying attitude and offering and delivering a less satisfactory solution for everybody involved.
Lord De Mauley: My Lords, this group of amendments relates to the Money Advice Service and to charities involved in the provision of debt services. Amendments 143ZC, 143ZD, 143ZE all relate to the role of the MAS in the provision and co-ordination of debt advice.
Before I address the amendments, it may be helpful if I explain the MAS’s role in this area, which is to offer free and impartial information and advice on money matters to help people to manage their money better and to plan ahead. Through taking charge of their finances, fewer consumers should fall into unmanageable levels of debt. However, those consumers who do find themselves with high levels of debt will continue to need specialist debt advice.
The MAS, with its consumer financial education remit and national reach, is well placed to take a role in the co-ordination and provision of debt advice as part of its existing service. The Bill therefore includes provision to clarify that the MAS consumer education function extends to assisting members of the public with the management of debt and to working with other organisations to improve the availability, quality and consistency of debt services. However, the MAS does not directly deliver debt advice services itself, as the noble Lord, Lord Stevenson, said; rather, it delivers funding to providers of debt advice services, such as Citizens Advice, and it helps members of the public to access high-quality debt advice services.
Amendment 143ZC seeks to replace the existing requirement at new Section 3R(4)(f) under Clause 5 for the MAS’s consumer financial education function to include,
“assisting members of the public with the management of debt”,
with a requirement to include,
“providing high quality information about, and promoting awareness of, registered charities which provide debt services”.
I reassure the noble Lord, Lord Stevenson, that the Government are committed to the continued existence of the MAS and that there is no intention that the MAS should displace existing funding streams or existing services. The MAS intends to work with a large cross-section of the advice and creditor sectors to keep them up to date with its plans. I also reassure noble Lords that the MAS already signposts to other organisations which provide debt advice services and it will continue to be able to do this.
There are a number of amendments in this group and I have copious notes which address all of them. From the speech that the noble Lord made, I sense that I have dealt with his key points. If he wants me to go on, I shall be very happy to do so. However, if he is happy with that assurance, I hope that I can ask him to withdraw his amendment.
7.45 pm
Lord Stevenson of Balmacara: I am not quite sure what I did agree to—I was nodding so hard and trying to get across the message that I slightly lost what the noble Lord said. I would like to read Hansardas I might want to get into correspondence with him, but we were seeking clarification that MAS would continue to be part of the Government’s plans and they were not intending to change its formal position in statute, according to the rumours that were circulating. If that is the case then that is very good. The Minister was also going to confirm that it would continue to operate as a provider of direct services on financial education advice for people, which he has done, but that its role in debt advice was very clearly that of co-ordinating and funding, not of delivering a service which would be otiose and, in any case, a duplication. I am very grateful for that.
There is a longer conversation to be had on Payplan. This is not the time to have it but one has to bear in mind that we are talking about people who are entering debt management plans. That is quite a small proportion of the total needs people have for debt advice. It is true that the funding mechanism looks quite similar to Payplan but it is not the same as a donation given
to support the work of charities such as Citizens Advice which, as we all know, do such a huge job across a whole range of activities. The commercial aspects of Payplan bear against that ability to operate. That is why we were so keen in these amendments to reinforce the suggestion that the publicly funded MAS—soon to be funded by levy but still operating in a very public space—should focus very closely on the free advice from the charitable bodies and not try to build up, for some faux competition idea, another group of bodies that could be taking money from people who are already distressed financially and therefore would not be in a position to operate.
I think that we are on the same page. Perhaps we might exchange pages later to find out. I beg leave to withdraw the amendment.
Amendments 143ZB to 143ZE not moved.
Schedule 3 : Financial Conduct Authority and Prudential Regulation Authority: Schedules to be substituted as Schedules 1ZA and 1ZB to FSMA 2000
Amendments 143B and 143C not moved.
144: Schedule 3, page 178, line 9, at end insert—
“Publication of record of meetings of governing body9A (1) The FCA must publish a record of each meeting of its governing body—
(a) before the end of the period of 6 weeks beginning with the day of the meeting, or
(b) if no meeting of the governing body is subsequently held during that period, before the end of the period of 2 weeks beginning with the day of the next meeting.
(2) The record must specify any decision taken at the meeting (including decisions to take no action) and must set out, in relation to each decision, a summary of the deliberations of the governing body.
(3) Sub-paragraphs (1) and (2) do not require the publication of information whose publication within the time required by sub-paragraph (1) would in the opinion of the governing body be against the public interest.
(4) Publication under this section is to be in such manner as the FCA thinks fit.”
Amendments 144A to 144EA not moved.
144F: Schedule 3, page 182, line 11, after “Act” insert “or any of the other Acts mentioned in section 1A(6)”
144G: Schedule 3, page 182, line 27, at end insert—
“(3A) Neither section 1A(6)(d) nor the definition of “functions” in paragraph 1 applies for the purposes of sub-paragraph (2).”
144H: Schedule 3, page 183, line 16, leave out from “as,” to end of line 18 and insert “a member, officer or member of staff of the FCA;”
Amendments 144F to 144J agreed.
Amendments 144JA to 144M not moved.
Amendments 145 and 146 agreed.
147A: Schedule 3, page 186, line 9, after “functions” insert “or its functions under section 2DA (strategy)”
147B: Schedule 3, page 186, line 25, at end insert—
“Budget17A (1) The PRA must, for each of its financial years, adopt an annual budget which has been approved by the Bank.
(2) The budget must be adopted before the start of the financial year to which it relates, except that the first budget must be adopted as soon as reasonably practicable after the coming into force of this paragraph.
(3) The PRA may, with the approval of the Bank, vary the budget for a financial year at any time after its adoption.
(4) The PRA must publish each budget, and each variation of a budget, in such manner as the PRA thinks fit.”
Amendments 147 to 147B agreed.
Amendments 147C to 147E not moved.
147F: Schedule 3, page 190, line 6, after “Act” insert “or any of the other Acts mentioned in section 2A(6)”
147G: Schedule 3, page 190, line 22, at end insert—
“(3A) Neither section 2A(6)(d) nor the definition of “functions” in paragraph 1 applies for the purposes of sub-paragraph (2).”
147H: Schedule 3, page 191, line 8, leave out from “as,” to end of line 10 and insert “a member, officer or member of staff of the PRA;”
Amendments 147F to 147J agreed.
Schedule 3, as amended, agreed.