House of Lords
Wednesday, 24 October 2012.
3 pm
Prayers—read by the Lord Bishop of Leicester.
Isles of Scilly: Helicopter Services
Question
3.06 pm
To ask Her Majesty’s Government what steps they are taking to ensure a lifeline passenger service to the Isles of Scilly following the closure of the helicopter service on 1 November 2012.
Earl Attlee: My Lords, the Isles of Scilly Steamship Company, which operates the ferry and fixed-wing services, has already announced plans to increase those services to meet some of the passenger demand following the closure of the helicopter service. My honourable friend the Parliamentary Under-Secretary of State, Mr Norman Baker, has recently met, and is due to meet again, delegations including the Isles of Scilly Council to discuss transportation to and from the Isles of Scilly.
Lord Berkeley: I am grateful to the Minister for that reply because it marks some progress, even if the Isles of Scilly Steamship Company is now a monopoly supplier of transport services. Is he aware that during the five months between now and the beginning of next April, there will be only a small fixed-wing service of aeroplanes that are susceptible to wind and fog— for example, the service did not run yesterday? If the evidence of last winter is taken into account, the service would not run for 22 days over five months. With a population of around 2,000 people earning the fourth lowest wages in the UK and a reliance on tourism, those who use the aeroplane service have to pay £140 return. Does the noble Earl agree that in Scotland, most of the islands have both air and ferry services as lifeline services, and the fare for the equivalent distance is £25 return? Will the Government now look at a lifeline service for the Scilly Isles so as to take this forward and make the service comparable with that in Scotland?
Earl Attlee: My Lords, the noble Lord used the word “monopoly”, which implies that there can be only one operator. It is a free market and other operators can come in. We need to see how the market develops. The noble Lord also talked about the “lifeline”, which is a term generally used to describe vital transport connections between mainland and island communities. However, it carries no formal or legal status. The Government recognise that many people regard maritime passenger and freight services to the Isles of Scilly as a lifeline, and that is why we have said that we are committed to ensuring that these continue.
Lord Cameron of Dillington: My Lords, are the Government aware that the cost of transport to the Isles of Scilly is four times more expensive than that from the mainland to the Scottish islands over an equivalent distance? As a result, businesses and the tourist industry in the Scilly Isles are suffering badly and are in rapid decline when compared with those industries in the Scottish islands. The total absence of a ferry service, as already mentioned, between November and March means that running a business or even leading a normal life is becoming a pretty precarious enterprise in the Scilly Isles.
Earl Attlee: My Lords, I have read carefully the report produced by the Council of the Isles of Scilly comparing transport services to the islands with those of Scotland. It is a well written report, but I would point out that the situation in Scotland is different because it involves much more complicated and wide-ranging services that cannot be operated on a commercial basis. At the moment, the service to the Isles of Scilly is operated on a commercial basis.
Baroness Trumpington: Perhaps I might ask the Minister whether the air ambulance service will operate in that area when the ordinary air service ceases.
Earl Attlee: As ever, my noble friend asks a very good question. There is an air ambulance service that can deal with medical emergencies. In addition, there is the search and rescue service from the Royal Naval Air Station at Culdrose.
Lord Teverson: My Lords, following up the point made by my noble friend Lady Trumpington about medical services, these are very important because one of the key issues that has been identified is that fixed-wing services cannot substitute for the helicopter service in terms of speed or indeed handling individuals. I understand that the cost of RNAS Culdrose offering that service is £14,000 per return trip. What provision will be made over this winter for medical emergencies, not just for individuals but for medical supplies and blood samples, so that the islands are not isolated in this key way?
Earl Attlee: My Lords, the problem we face is that we have lost the helicopter service to the Isles of Scilly for the time being. I understand that the Isles of Scilly Steamship Company, which operates a fixed-wing air service, has now made arrangements with the local primary care trust to take over some of the transportation of patients and medical supplies, including blood products and samples, which were previously carried by helicopter, having secured the appropriate CAA licences. Noble Lords will recall that the noble Lord, Lord Berkeley, identified that there were only a few days in the year when helicopter services could go to the Isles of Scilly but fixed-wing aircraft could not.
Lord Greenway: My Lords, is it not the case that the Isles of Scilly Steamship Company also operates two cargo vessels, one of which sails three times a week during the winter, and which carries a few passengers?
Earl Attlee: The noble Lord is correct. However, we must also understand that the problems of transport services to the Isles of Scilly make for increased costs for the people living on the islands, so we need a solution that is not too expensive but which meets the needs of the people on the islands.
Baroness Dean of Thornton-le-Fylde: My Lords, I was pleased to hear that the Minister has read the comparative study produced by the Council of the Isles of Scilly, which demonstrates very clearly—and factually—just how poorly the Isles of Scilly compare with the islands of Scotland. The Minister has just said that they are different. They are different because we recognise in Scotland that these services are not commercially viable and therefore the Government pay, but the Isles of Scilly is a commercial arrangement. Will the Minister consider changing the designation for the Isles of Scilly to give them the same status as that of the islands of Scotland?
Earl Attlee: My Lords, we could make a public service obligation if the market failed. The market has not yet failed. In addition, there would have to be a competitive bidding process. We do not want to interfere at this point because we want to see whether there will be a commercial solution to the problem.
Lord Davies of Oldham: My Lords, the Minister has given some encouraging news about the increase in services, but he will appreciate that the House is still greatly exercised about communication with the Scilly Isles, particularly during winter. If we find that the Scilly Isles are effectively cut off for a number of days in winter, I hope that the Minister will return to this issue and take some action.
Earl Attlee: My Lords, I assure the House that my honourable friend Mr Norman Baker takes these matters very seriously and is on the case.
EU: UK Net Contributions
Question
3.15 pm
To ask Her Majesty’s Government how the rise in the UK’s net annual contributions to the EU budget to over £10 billion per annum (as set out in the Pink Book 2012) relates to public sector cuts in other areas.
The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, the UK’s net contributions to the European Union have indeed increased over recent years. This is mainly the result of unacceptable increases in the annual EU budget and to changes to the calculation of the UK abatement, agreed by the previous Administration. This Government’s top priority is budgetary restraint, thereby ensuring that the EU budget contributes to domestic fiscal consolidation.
Lord Vinson: I thank the Minister for his considered reply. Does he appreciate that while we practise austerity here in the UK, our net contribution to the EU has doubled since 2006 to over £10 billion a year? The UK has to borrow every penny of it from others, thus increasing our national indebtedness. As our Government were outvoted in their attempt to reduce the 2013 budget, will the Minister strive to get a better deal in the forthcoming negotiations, not least by withholding our £5 billion a year contribution to the structural funds? If invested here in our infrastructure, it would help to create over 250,000 badly-needed jobs.
Lord Sassoon: My Lords, as the House is aware, we are coming up to the negotiations of the multi-year financial perspective. That agreement requires unanimity of member states. My right honourable friend the Prime Minister has made it clear in a statement, jointly with other European colleagues, that the maximum acceptable expenditure increase through that period is a real freeze in payments. That continues to be the Government’s position. As for structural funds, we cannot just opt out of any particular area of EU expenditure, although I agree that in the area of structural and cohesion funds, it is absurd that so much money is recycled from wealthy member states back into other wealthy regions of Europe. That is one of the many issues that need to be addressed.
Lord Pearson of Rannoch: My Lords, to put this question into everyday perspective, do the Government accept that £10 billion per annum equates to the annual salaries of 91,320 nurses being thrown away down the Brussels drain—or policemen, soldiers, or any other public servants at £30,000 per annum? Does this Question not remind us that there is no such thing as EU aid to the United Kingdom? For every pound that Brussels sends us, we have sent them £2.20.
Lord Sassoon: My Lords, the UK benefits from its membership of the EU. The UK should make a proper contribution to the net EU budget, but we have to see that the completely unacceptable proposals from the European Commission for the next multi-year period are reined back. The Commission’s proposals, as opposed to a real freeze, would mean an increased UK contribution of £10 billion, or £1.4 billion a year. That is indeed many nurses, policemen and other front-line public servants.
Lord Wigley: My Lords, the Minister said that the UK benefited from membership of the EU, and I think that many people will be glad to hear him say that. However, will he confirm that it is not just the rich regions of Europe that benefit from the structural funds? In fact, Wales, with the lowest GVA per head of any country or region in the UK, gets considerable benefit. If there were to be changes in this direction, can he give a guarantee that those sums will still come to Wales?
Lord Sassoon: My Lords, I certainly accept that money should be targeted at the regions where it is most needed. I merely say that recycling money into the wealthiest regions seems like wasteful activity.
Lord Dykes: Can my noble friend reassure the House that there will be a friendly compromise on this matter when the full negotiations take place?
Lord Sassoon: I would love to see that happen. Of course, I cannot give any assurances about how it will play out.
Lord Davies of Oldham: My Lords, of course we agree that the European budget needs to be tightly controlled and, if possible, redirected towards jobs and growth. We are not too confident that this Government will produce the same priorities. However, can the Minister confirm that the Prime Minister will be calling on his many friends among the leaders in Europe in this negotiation?
Lord Sassoon: What I can confirm is that the UK’s priorities for expenditure include the following: substantial cuts to the common agricultural policy. However, I agree with the noble Lord that priorities for the UK include growth and competitiveness, climate change and external action. I am not going to speculate on how the negotiations will play out.
Lord Hamilton of Epsom: Will my noble friend confirm that, in the absence of any compromise, what is being asked for by the European Commission is a 6.8% increase in the budget? Is this not an extraordinarily high figure which shows an unbelievable insensitivity to the problems that Governments are facing across the EU as they try to rein back their deficits?
Lord Sassoon: Yes, I completely agree with my noble friend.
Lord Tebbit: My Lords, did my noble friend say—did I hear him correctly—that this proposal requires unanimity? If so then surely there is no need to negotiate. All one has to do is simply say no.
Lord Sassoon: My Lords, would that life were so simple.
Schools: Pupil Premium
Question
3.22 pm
Asked By Baroness Massey of Darwen
To ask Her Majesty’s Government how the pupil premium will be monitored to ensure that it benefits individual children.
The Parliamentary Under-Secretary of State for Schools (Lord Hill of Oareford): My Lords, we want to help schools to narrow attainment gaps. One way of doing that is through the pupil premium, which represents additional funding rising to £900 per pupil next year for children on free school meals. From this September, schools have to publish details of how they use their premium. My department publishes in the school
performances tables information about disadvantaged pupils’ achievement. Ofsted has a closer focus on how the premium is used and on how it benefits pupils.
Baroness Massey of Darwen: I thank the Minister for that reply. I am sure he is aware that a recent Ofsted report states that very few teacher leaders think that the pupil premium has changed the way in which they support disadvantaged pupils. I understand from him that Ofsted will in future be asked to comment specifically on the use of the pupil premium. What effective measures will be chosen to assess those reports?
Lord Hill of Oareford: The principle that we are adopting generally in introducing the pupil premium is to leave discretion on how it is spent as much as possible to individual heads because they will know the circumstances of the children for whom they are responsible. However, the noble Baroness is right that those approaches that are working well—which we will discover through the publication online of details of how schools have done, through inspections by Ofsted and through spreading good practice through the education endowment fund—should be spread as widely as possible, with lessons being learnt from them.
Lord Storey: My Lords, the Minister will be aware that, according to an Ofsted survey of, I think, 300 schools, 50% were using the money effectively and were seeing real changes. How can we ensure that the other 50% are using the money, which we have heard is going up next year, in such an effective way?
Lord Hill of Oareford: My answer makes a similar point. It is important that we learn lessons from the ones that are spending it effectively. We will do that through the work of the Education Endowment Foundation, which was set up specifically to spread good practice and help other schools learn the most effective ways of tackling disadvantage. It is early days, but as more information is published, the fact that from this September schools are having to account for how they have spent their money and what they have spent it on, and demonstrate a linkage between that money and results, will help us achieve the goal of my noble friend Lord Storey.
Baroness Whitaker: My Lords, is the Minister aware that almost all Roma children, no matter how poor they are, do not qualify for the pupil premium because their parents may not have been here long enough. What can the Government do to remedy this manifest inequality?
Lord Hill of Oareford: I understand how dear a subject that is to the noble Baroness, Lady Whitaker. The reason that we have gone for a single and simple measure of eligibility, based around free school meal status, is that we think it is important to keep the pupil premium as simple as possible so that we can learn the lessons and not make it too complex. The best proxy
that we felt that we could have was economic disadvantage, because we know the difference there is between how the poorest children achieve and how better-off children achieve. That is why we went for that simple measure.
Baroness Howe of Idlicote: My Lords, given that 50% of the schools are perhaps not using the pupil premium effectively, what role does the Minister expect school governors to play in ensuring that the money does in fact go to the right pupils?
Lord Hill of Oareford: I know that the noble Baroness, Lady Howe of Idlicote, agrees with me on the importance of the role of governors generally in concentrating on the performance of the school and the achievement of pupils. One of the key indicators that there will be, through Ofsted and the performance tables, is how schools are doing, particularly for children on free school meals. Governors can play an extremely important part in holding the head, and the rest of the school, to account for delivering that.
The Chancellor of the Duchy of Lancaster (Lord Strathclyde): My Lords, noble Lords cannot speak at the same time. I think it is my noble friend’s turn.
Lord Avebury: Further to the question asked by the noble Baroness, Lady Whitaker, will my noble friend confirm that, in future, Ofsted inspections will pay specific regard to the position of GRT—Gypsy, Roma and Traveller—pupils, bearing in mind that they are the most deprived group of any section of the community in terms of educational achievement and attainment?
Lord Hill of Oareford: My Lords, as I think I said to the noble Baroness, Lady Whitaker, the focus of the Ofsted inspection is particularly on children suffering from economic disadvantage—those on free school meals—and those are the criteria and judgments that Ofsted will be using.
Lord Touhig: My Lords, three tries for a Welshman. Many parents, including those with autistic children, are told that schools do not have funding to support their child’s special educational needs. I do not think they are helped by the fact that the Government have failed to publish guidance to schools on the use of the pupil premium. Can the noble Lord tell us whether the reforms of the SEN system will ensure that the pupil premium is now better used to help children with special needs?
Lord Hill of Oareford: My Lords, generally the reform to the special educational needs system through the Bill that the Government will be bringing forward next year will help tackle the needs of all children with special needs more effectively than the current system. Not all those children will be suffering from economic
disadvantage, so, in addition, the pupil premium will, I hope, help to tackle that issue. I agree with the noble Lord, Lord Touhig, that we need to make sure that we spread good practice. The Government have a role through things like the Education Endowment Foundation, which is an independent organisation that can spread good practice. We certainly need to make sure that best practice on how money is spent on children with special educational needs is spread through the system.
Lord Lucas: My Lords, is my noble friend aware that there is a lively business among private companies in helping kids who have left school with no English or Maths to get up to Level 2 standard and that they charge rather less than a pupil premium for doing it? Does he think that schools might make use of that resource as well as employers?
Lord Hill of Oareford: One of the important principles of the pupil premium is that schools can decide how to spend that money. If they are sensible they will go to a range of providers to help to narrow those gaps.
Baroness Hughes of Stretford: My Lords, it is welcome news that in the future schools will be required to report on how they spend the pupil premium but many pupils have already lost out because, according to Ofsted, the money that schools have had has been misspent. Will the Government go further now and ring-fence the pupil premium and give schools the proper guidance that my noble friend Lord Touhig referred to? That would ensure that the money really is focused on individual disadvantaged children with schools purchasing interventions that we know work.
Lord Hill of Oareford: Spreading good practice, yes, ring-fence, no, my Lords.
Unemployment: Young People
Question
3.31 pm
To ask Her Majesty’s Government what further steps they will take to reduce the level of unemployment, particularly among young people.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud): The recent rises in employment and falls in unemployment, including among young people, are encouraging. We are committed to providing support to young people to give them the work experience and skills they need to find sustained employment. This includes the youth contract, which will provide nearly half a million new opportunities to young unemployed people over the next three years, as well as the Jobcentre Plus offer and the Work Programme.
Lord Bates: I am very grateful to my noble friend for a very encouraging answer. It is wonderful to see more young people getting a job, but would he agree with me that there is one thing better than getting a job, and that is creating a job? Would he therefore consider bringing in new measures to encourage more young people—be they unemployed, school leavers or
graduates—to set up their own businesses and thereby unlock the vast creative capital among our young unemployed?
Lord Freud: Yes, my Lords, my noble friend makes a most valuable point. We are expanding the New Enterprise Allowance to encourage more people—in particular young people—to start up businesses. While this includes financial aspects such as offering loans and financial support, it is the mentoring tied up with that process that helps the youngster, or indeed anyone taking part, in actually making that business a success.
Baroness Wall of New Barnet: The noble Lord, Lord Bates, has referred to creating jobs, and having a job is really important. But would the Minister agree that having a career that includes an apprenticeship gives those very young people a substantial opportunity to grow? In the funding that is available there are opportunities for young people to go straight into apprenticeships, which creates an income, not only for themselves, but for UK plc going forward.
Lord Freud: The noble Baroness is absolutely right. Apprenticeships are a vital route for youngsters to get into the workforce. We have put a lot of extra funding into apprenticeships, and the numbers are going up pretty steeply.
The Lord Bishop of Leicester: My Lords, could the Minister tell us what the Government are doing to ensure that the most vulnerable young people who enter the Work Programme are not simply parked by contractors because it is not financially viable to invest the resources needed to support them into work?
Lord Freud: Well, my Lords, the structure of the Work Programme is designed to make sure that no one is parked in that way. There are specific measures to prevent that happening. The main way in which to get the people who are the most difficult to get into work is by pricing; we price those people more highly than people who are simpler to get into work. We have also, as noble Lords will be aware, introduced a subsidy programme to encourage employers to take youngsters who are NEET into the workforce.
Lord Martin of Springburn: My Lords, the Minister will readily acknowledge that because of unemployment, some young people are unable to get work until they are 19 or 20. I know that he does not have the information now, but could he place in the Library the figure for how many UK adult apprenticeships there are? That would be very helpful.
Lord Freud: My Lords, the figure I have on apprenticeships for 19 to 24 year-olds is 31% of the total, which is 457,000 starts. I cannot work out the 31% in my head, but I might be able to do it later.
Lord McKenzie of Luton: My Lords, on the matter of the youth contract, how many wage subsidies have been taken up to date? How does the Minister consider that sustainable employment opportunities for young people would be enhanced by denying the right for under-25s to access housing benefit?
Lord Freud: My Lords, the wage subsidy is paid after six months. It was introduced at a time when remarkably few came into the workforce, so we would expect to see the figure start to move in the months to come and will be publishing the information on that basis. As to the second question, that is not government policy, although it is a matter of debate what is the right level of support for youngsters in the housing market.
Lord Roberts of Llandudno: Is the Minister aware that the youth unemployment situation varies from area to area: in some places it is very severe; in other places it is more favourable? What are the Government going to do to concentrate any extra resources in those areas that are really in most desperate need?
Lord Freud: My Lords, we have a whole range of programmes now. All of them are much more individualised than previous programmes, so there should be a response to different regions so that the money goes where the need is. I have previously cited the figure for how many youngsters are inactive and unemployed. In the most recent set of figures, I am pleased to say that we have got that figure down to 1.36 million, which is below the level at the last election. So we are doing something about that terrible structural problem of the NEETs, which has been growing over the past decade.
Civil Aviation Bill
Order of Consideration Motion
3.37 pm
That the amendments for the Report stage be marshalled and considered in the following order:
Clauses 1 to 13, Schedule 1, Clauses 14 to 30, Schedule 2, Clauses 31 to 47, Schedule 3, Clauses 48 and 49, Schedule 4, Clauses 50 to 55, Schedule 5, Clauses 56 to 59, Schedule 6, Clauses 60 to 72, Schedule 7, Clauses 73 to 76, Schedules 8, 9 and 10, Clauses 77 and 78, Schedule 11, Clauses 79 to 82, Schedule 12, Clauses 83 to 90, Schedule 13, Clauses 91 to 99, Schedule 14, Clauses 100 to 112.
Financial Services Bill
Financial Services Bill 4th Report from the Delegated Powers Committee
Committee (9th Day)
3.38 pm
Relevant documents: 4th and 8th Reports from the Delegated Powers Committee.
Clause 64: Cases in which Treasury may arrange independent inquiries
190AA: Clause 64, page 140, line 36, leave out subsection (4) and insert—
“(4) If subsections (2) or (3) apply, the Treasury must arrange for an enquiry to be held under section 65 unless the Treasury consider that it is not in the public interest that there should be an independent inquiry into the events and the circumstances surrounding them.”
Baroness Noakes: My Lords, I shall also speak to Amendments 190B and 192ZA in this group. These amendments, and others in the group, concern the inquiry and investigation provisions of Part 5. I should say at the outset that I regard the provisions of Part 5 as crucial to the Bill. The earlier parts of the Bill created new regulations with very significant powers, and it is entirely likely that the new regulators will make mistakes in the use of those new powers and that things will go wrong, so we need strong provisions in the Bill—
Lord Newby: My Lords, I remind your Lordships that if you are leaving the Chamber, please do so as quietly as possible.
Baroness Noakes: My Lords, I was saying that Part 5 of this Bill is crucial because it sets up the provisions that will deal with things when they go wrong—if the regulators make mistakes or if things do not turn out well. Part 5 ensures that there are proper investigations and proper reporting of those investigations. I remind the Committee that there have been problems in this area in the very recent past. It took the heroic efforts of the Treasury Select Committee in another place to get the FSA’s report on the failure of RBS into the public domain. We still have nothing on HBOS. The FSA’s reports on both RBS and Northern Rock were internal reports, and therefore non-independent. The Bank of England, which will be the new home for the PRA, is not itself a beacon of good practice when it comes to reviews of its own performance. So we need to be sure that we get this part of the Bill absolutely right.
I welcome the new duties in Clauses 69 and 70 on the FCA and the PRA to investigate and report on possible regulatory failures. I similarly welcome the powers in Clause 73 which allow the Treasury to direct the regulators to carry out investigations in certain circumstances. However, internal investigations will often not be good enough, which is why in principle the powers in Clause 64 are very welcome. These allow the Treasury to arrange independent inquiries where there have been certain events which, to paraphrase, threatened the stability of the financial system or risked or caused significant damage to the interests of consumers or businesses.
The first amendment that I tabled to Clause 64 was Amendment 192ZA, which is one of our familiar and much-loved may/must amendments. I could see no circumstance in which the Treasury, having satisfied itself that a public inquiry is in the public interest, should have any optionality about whether to set up an independent inquiry. Amendment 192ZA would change that “may” into a “must” so that, if the public interest test is met, the Treasury must set up an independent inquiry. Having looked at this a second time, however, I tabled Amendment 190AA, which would replace subsection (4) and turn it round. Under my proposed new subsection (4) the Treasury must arrange an inquiry unless it believes that the inquiry is not in the public interest. I believe that this more naturally represents the thought process that would go on in the Treasury; that is, the Treasury would order
an inquiry unless there was a sound reason for not doing so. For good measure I have also tabled in this group Amendment 192ZA, which is another may/must amendment, this time to Clause 73, which allows but does not require the Treasury to direct the FCA or the PRA to carry out an internal investigation. My amendment would require a direction.
I am aware that the wording and structure of Clause 64 follow that of Section 14 of FiSMA. However, I do not believe that that is necessarily conclusive. The new duties set out in Clauses 69 and 70 in respect of regulatory failure positively require the PRA and the FCA to organise investigations in specified circumstances. The only let-out is if the Treasury directs them that they are not required to carry out investigations. Can the Minister explain why “must” is the correct formulation for the PRA and the FCA, but not the correct formulation for the Treasury?
I hope that the Minister will explain the relationship between Clause 64 and Section 14 of FiSMA. It seems to me that Section 14 becomes redundant when this Bill is made law, but I could not find any provision for its repeal. So I ask my noble friend whether it is to remain in force, and if so, for what purpose?
Lastly, I ask the Minister to explain in what circumstances the Government would intend to use the independent inquiry route in Clause 64, as opposed to the self-investigation route in Clauses 69, 70 and 73. I tried to research how often Section 14 of FiSMA has been used but drew a blank; in fact, I am not sure that it has ever been used. I hope that the Minister will be able to explain in what circumstances the Government would want to use the independent inquiry route, rather than relying on self-investigation. For example, given the circumstances surrounding the financial crisis, would they have thought it appropriate to have ordered an independent inquiry—that is, one not left simply to the regulator concerned—or do the Government believe that self-inquiry is the appropriate route? If there is no independent inquiry for something as grave as the financial crisis that we have recently experienced, what is Clause 64 for? I look forward to hearing my noble friend’s response. I beg to move.
3.45 pm
The Lord Speaker (Baroness D'Souza): In calling Amendment 190AA, I must advise noble Lords that if this amendment is agreed to I shall not be able to call Amendment 190B by reason of pre-emption.
Lord Peston: My Lords, I hope that I have heard the gist of what the noble Baroness was trying to say. She ended by asking the fundamental question, which is not only what Clause 64 is here for but what this whole section of the Bill is here for. That is not very clear. If these powers had been enshrined in statute, are we to believe that the catastrophes of the recent past would not have occurred? Is that the purpose? I cannot believe that you do investigations to prevent a catastrophe occurring; what you do is intervene and stop it. This section must therefore be there simply to say, “Look, we made a mess of things, including ourselves as policymakers and regulators, so we’re setting up this inquiry to discover what we can learn from the mess
that we’ve got ourselves involved with”. I take it that that is probably the answer to the noble Baroness’s question but, like her, I look forward to hearing what the Minister has to say.
Lord Barnett: As I originally put down the first “may” or “must” group of amendments, together with my noble friend Lord Peston, I have some sympathy with the noble Baroness. We were told by the Minister—I forget whether it was on the sixth, seventh or eighth day—that he had asked his officials to go through the whole Bill for the mays and musts to see which were appropriate. Knowing Treasury officials, I am sure that they will have come back with something to say whether they thought a “may” should be changed to a “must”. Was this group included in that? Perhaps the Minister could tell us. It looks as though the noble Baroness is quite right and that this is one of those occasions where the word should be “must”. I would welcome the Minister’s reply. My own experience of the thinking of Treasury officials goes back too far for me to be sure, as I last took advice from Treasury officials more than 30 years ago and I may have forgotten a bit about how they operate. However, I am sure that they are still as good today as they were then, and I would welcome the Minister telling us what they came back with to his request.
Lord Davies of Oldham: My Lords, I hope that the noble Baroness, Lady Noakes, can stand the accolades that are coming from this side of the House after her speech. I think that she has posed the Minister some very appropriate questions, while my noble friend Lord Peston goes a little further by saying, “What’s the clause here for at all?”. So the Minister has quite a lot on his plate in responding to this debate already, and all this puts the official opposition amendments very much into the minor case. Our amendments in this group, Amendments 192ZZA, 192ZZB and 192C, call for the directions to be laid before Parliament. These are directions in respect of a direction to the FCA from the Treasury to carry out an investigation into possible regulatory failure. Of course, I am at one with my noble friend Lord Peston when he indicates that investigations are about what has gone wrong, and the lessons which can be learnt in order to prevent any reoccurrence. Intervention in time is what is needed if one wants to prevent things going badly wrong. Therefore, with these amendments, we are merely seeking for the issues to be open and transparent. Nothing could make them more transparent than that they should be laid before Parliament.
In passing, on other amendments in this group, those in the name of my noble friend Lord McFall also have some merit. He calls for the person appointed to chair any inquiry set up under these provisions to be “suitably qualified and experienced”; I hope that the Minister can give a positive response to that. He also calls for an exemption for information in respect of which a claim to legal professional privilege could be made; I am sure that the Minister will look sympathetically on that. Of course, his Amendment 193 says that any investigator appointed must be “suitably qualified and experienced”. Now, the Minister and I understand that he only has to reply to the amendment
that has been moved in this group but, as we are in Committee, it might be useful if the Minister gives us as comprehensive a reply as possible to the whole group.
Lord Desai: My Lords, before the Minister replies, I am puzzled, given what the noble Baroness has said, when I read the clause. What are the circumstances under which the Government will not order an inquiry? Are they things like when we had the fiasco with RBS, where an inquiry was conducted, hushed up and not published until we literally marched in the streets for the FSA to do so? Can the Minister explain under what circumstances the Treasury would not order an inquiry if such events had happened?
The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, I will try to address a number of those points. I will stick to the amendments that have been moved or spoken to rather than those that have not.
This group of amendments, as we have heard, relates to two of the mechanisms by which the PRA and the FCA can be held to account for regulatory failures. One of the key lessons learnt from the crisis, of course, is that we need greater openness and transparency about where things go wrong and about what lessons can be learnt. In that context, I think that my noble friend has got it completely right about the circumstances in which an independent inquiry might be called for, as opposed to self-investigation. I will leave that one at that.
I would also just say to my noble friend that Section 14 of FiSMA is being repealed. That is dealt with in Clause 5(1). However, the Treasury can use the new power in Clause 64 to arrange an inquiry into action that predates the Bill.
Baroness Kramer: I appreciate the Minister giving way. I request some clarification. He talked about investigations into the FCA and the PRA, but surely the regulatory body referred to in subsection (3)—the clearing house—is actually the Bank of England. Can he confirm that it is included in this rubric, as it were?
Lord Sassoon: I believe that that is the case. If it is not, I will clarify things as I reply to my noble friend Lady Noakes.
Lord Peston: My Lords, I did not catch the last few words that the Minister said before the noble Baroness asked her question. I thought he said that if the Bill is enacted, this part would enable the Treasury to set up inquiries into what happened in the past few years. Did he actually say that?
Lord Sassoon: In so many terms, yes. In reply to my noble friend’s question about the repeal of Section 14 of FiSMA, I wanted to make it clear that a gap is not left in the Treasury’s ability to arrange inquiries into events, even though they might be ones that predate the coming into force of the Bill.
Lord Peston: The provision would then become much more significant. If we pass this Bill into law and it becomes an Act then the disasters of the past few years could be inquired into by a major independent committee, which might tell us who were the real architects of the disaster and where policy failed. If the Bill is to enable that to happen—and it seems to me overwhelmingly that it must happen—then we really do need the word “must” in this case.
Lord Sassoon: I will get there eventually. If the Committee will permit me, I will address the point. I will not necessarily give complete satisfaction but we will get there.
The Bill makes a number of provisions that are intended to deliver greater accountability and carries forward the power of the Treasury to arrange independent inquiries into regulatory failures. It also provides for new duties on the two authorities to carry out investigations of their own—if necessary, at the instigation of the Treasury—and report their findings to the Treasury where there has been regulatory failure and certain other criteria are met.
I turn first to Amendments 190B and 192ZA, which probe why, if the public interest test is met, the Bill provides that the Treasury “may” require an inquiry. By changing “may” to “must”, their intended effect—as we have heard—is that in all cases where the test is met, the Treasury should have to require an inquiry. Amendment 190AA achieves the same end by a different means, specifying that the Treasury must arrange an inquiry where the two conditions in Clause 64 are met unless there is a public interest in not doing so. I agree with my noble friend that, if there is an overwhelming public interest in having an independent inquiry or in the regulator carrying out an investigation, the Treasury should step in to ensure that that happens. As it stands, the Bill gives the Treasury a little bit of discretion here. This is not about wriggling out of the need to call for an inquiry; it simply acknowledges that in reality, circumstances may dictate that even though the test is met, an inquiry or an investigation under this Bill is not necessarily the best course of action.
For example, there may already be an alternative independent inquiry going on—perhaps a parliamentary commission or other parliamentary inquiry—or an inquiry under the Inquiries Act. In the case of the provisions relating to investigations carried on by the regulator, the regulator itself may already be carrying on an investigation under Clauses 69 or 70. However, as my noble friend is aware, and as the noble Lord, Lord Barnett, has reminded us, I have already confirmed that I am giving careful thought to the wider use of “may” and “must” throughout the Bill. This is a huge exercise, taking up some mighty brains. All I would say at this stage is that although there are certainly not many cases that deserve intense scrutiny, this is certainly one of the instances that merit serious consideration. I will leave it at that. We will come back if we find any suitable candidates for changing.
Amendment 193 to Clause 79 seeks to place an explicit duty on the regulators to ensure that when a complaint against a regulator needs to be investigated, they appoint an investigator who is suitably qualified and experienced. This amendment is not necessary; it
has also not been spoken to by the noble Lord, Lord McFall of Alcluith, so I will leave it at that. I shall turn to Amendments 192ZZA, 192ZZB and 192C.
Lord Barnett: Perhaps I misheard the Minister on the must/may argument, which he did not seem fully to explain. He must have had a major reply from officials to his request on a Bill as huge as this, with so many musts and mays throughout. What exactly did they recommend? Did they recommend, as always, that there must be agreement with the noble Lord or was there a point at which they said that it is possible that must might be better than may? Is this one of them?
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Lord Sassoon: My Lords, I do not want to get the Committee too excited about this matter because, as any noble Lord, including the noble Lord, Lord Barnett, will know, it is very rare for a piece of considered legislation, particularly coming from the Treasury, to get any of these matters wrong in the drafting. I really do not want to raise false expectations.
All I would say is that the exercise is carrying on and that the matter raised by my noble friend Lady Noakes is certainly one of the may/must instances that merits serious consideration. When there is any more news to report to Peers who are interested in this Bill, we have plenty of ways of communicating it. If there is anything to say, the noble Lord, Lord Barnett, will be among the first to hear.
The group of amendments on which the noble Lord, Lord Davies of Oldham, spoke rather modestly towards the end of this discussion nevertheless are ones which we need to take seriously. Amendment 192ZZA would provide that if the Treasury issues a direction to the FCA not to proceed with an investigation into possible regulatory failure, that direction must be laid before Parliament. Amendment 192ZZB makes similar provision for such investigations by the PRA.
Amendment 192C would provide that where the Treasury issues a direction specifying the parameters of an investigation into regulatory failure by the PRA or FCA, or suspending or halting such an investigation, that direction must be laid before Parliament.
The Bill is drafted to give the Treasury some discretion here and, all things being equal, we had wished to preserve this. However, in this instance I am somewhat persuaded by the case that noble Lords have made. The Government are very much committed to greater openness and transparency in our regulatory architecture. With that in mind, I am happy to confirm that I will be taking on board the insightful comments of this Committee and will return to this issue on Report, placing the Treasury under a duty to disclose any directions issued under Clause 74, unless doing so would not be in the public interest.
I know that the noble Lord, Lord Davies of Oldham, is looking a bit surprised by this turn of events. On previous occasions he has compared himself and his batting average to the late, great Sir Donald Bradman and I really did not want to disappoint this Committee by seeing his batting average going down too far. I do not think that the noble Lord does himself justice: he is a great strike bowler when it comes to this type of
thing. By my reckoning, the noble Lord’s success rate is now back up to around 20%. I have no idea how one translates that into a conventional bowling average but I think that it is pretty good. I note that his fellow Lancastrian, Jimmy Anderson, is on 30.41 for his test average. I think we can say that the noble Lord, Lord Davies of Oldham, is close to that. However, I am left with the question as to why the noble Lord is not being promoted to the strike bowler role. He comes on as the first change bowler day after day; we want to see him, like Jimmy Anderson, as the strike bowler from hereon.
I hope I have reassured the Committee that we share its desire to see accountability and transparency in the system, and that my noble friend will be prepared to withdraw her amendment.
Baroness Noakes: My Lords, despite having spent a couple of years in the Treasury in the dim and distant past, I could never do cricketing talk so I shall not try to follow my noble friend the Minister. I am sure that the noble Lord, Lord Davies of Oldham, is thrilled with his success in this opening group of amendments. I am very grateful for the support of noble Lords opposite for my amendments and I was pleased to hear what my noble friend had to say. I look forward, as do we all, to the outcome of the may/must investigations which are clearly occupying the great brains that live in the Treasury night and day. With that, I beg leave to withdraw the amendment.
Clause 65 : Power to appoint person to hold an inquiry
Clause 66 : Power to appoint person and procedure
Clause 69 : Duty of FCA to investigate and report on possible regulatory failure
Clause 70 : Duty of PRA to investigate and report on possible regulatory failure
192ZZB: Clause 70, page 144, line 3, at end insert—
“( ) Any direction under subsection (5) must be laid before Parliament and published.”
Lord Davies of Oldham: I beg to move.
Lord Skelmersdale: My Lords, as an observer of this scene, it is clear to me that my noble friend Lord Sassoon has said that he will take into consideration
the two amendments in the name of the noble Lord, Lord Davies of Oldham, and bring something back—whether it is a total positive or a half positive, we do not yet know—at the next stage of the Bill. Therefore, it would be appropriate if the noble Lord would also withdraw this amendment.
Lord Davies of Oldham: My Lords, I apologise to the House. I am sure that the noble Lord is absolutely right and that I got lost in my cricketing batting average. I beg leave to withdraw the amendment.
Clause 72 : Modification of section 70 in relation to Lloyd’s
Clause 74 : Conduct of investigation
192A: Clause 74, page 145, line 20, at end insert—
“( ) In carrying out an investigation, the regulator must have regard to its regulatory principles and act proportionately, reasonably and fairly.”
Lord Hodgson of Astley Abbotts: My Lords, after that diversion through a possible Division and a discussion of batting averages, I rise to move Amendment 192A and shall also speak to Amendment 192B. We discussed, in relation to the previous amendment moved by my noble friend Lady Noakes, whether an investigation should take place. My amendments are concerned with Clause 74 and the way investigations take place once they are under way—the conduct of investigations, as in the heading of the clause.
At our Committee session just before we rose for the Summer Recess on 25 July, I moved a series of amendments which were designed to ensure that the regulatory approach was properly balanced and appropriate. Those amendments related to a point some way back in the Bill, on page 28, where we were looking at the regulatory principles to be applied by both regulators. My noble friend, who is not here at present, was able to reassure me on a number of the amendments that I moved, but on one I fear he failed. I argued that it was not sufficient for a regulator to be only proportionate in his activities; he also needed to be reasonable and fair. I then gave the Committee some practical examples of where, in the view of many in the financial services industry, the regulator may have been acting proportionately but was not acting
reasonably or fairly. Therefore, my Amendments 192A and 192B are concerned with Clause 74, which relates to the conduct of investigations, and they seek to bring those two words into the phraseology of the clause.
At present in Clause 74 the wording is quite strange in the sense that in subsection (2) the regulator has only to,
“have regard to the desirability of minimising any adverse effect that the carrying out of the investigation may have on the exercise by the regulator of any of its other functions”.
It says nothing about the investigated firm; it refers only to the duties and responsibilities of the regulator. When my noble friend on the Front Bench comes to reply to the debate, it would be helpful if he could explain the exact purpose of this clause and what its practical effect would be.
Amendment 192A is designed to make it clear that investigators must be not only proportionate but, for the reasons that I have made clear, fair and reasonable in their work. Amendment 192B amends subsection (3) of the clause and provides for the postponement or suspension of the investigation where those regulatory principles are not being met.
When we discussed the “fair and reasonable” issue on 25 July, one reason that my noble friend gave was:
“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”.—[Official Report, 25/7/12; cols. 794-5.]
My noble friend read his speaking note beautifully but he cannot really believe its consequences. He is far too experienced a campaigner to consider that judicial review provides an answer to a firm that has been unfairly and disproportionately treated. A judicial review will take months and perhaps years to complete, whereas the effective life of a financial services firm in these circumstances can be measured in days. Confidence, as all of us who work in the City know, is an essential part of any firm’s reputation. Confidence is a fragile flower and news of an impending judicial review will cause it to wither and die. Indeed, fighting the regulator by means of a judicial review will increase the damage to the firm. Even if, after several months, the judicial review finds in favour of the firm, the firm will most likely then be only a pile of ashes.
When my noble friend replied, he said that “proportionate” equalled “fair” equalled “reasonable”, so I have since spent a little time with the Shorter Oxford English Dictionary. At page 2372—so “shorter” is not very short—“proportionate” is defined as:
“That is in … proportion (to); appropriate, proportional, corresponding”.
“The toll … on the canal is proportionate to weight”.
In other words, there is a fixed relationship. There is no flexibility. There is the weight of the goods and that is what is going to be charged.
Turning to “reasonable”, the definition is:
“Having sound judgement; ready to listen to reason, sensible”.
That seems to be a slightly different relationship. It is slightly more of a two-way relationship which the definition of proportionate did not imply. So I would argue, despite my noble friend’s persuasive remarks in July, that fair and reasonable are not otiose in relationship to “proportionate”.
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Another issue that one has to guard against is that one is seen as being interested only in reducing regulatory stringency. It is not about reducing regulatory stringency in any way. These amendments are about ensuring that the regulator, first, engages with regulated firms in a positive and constructive way and, secondly, demonstrates some imagination as to the consequences of any action he may take. The regulator and the regulatee have at least some symbiotic relationships, and not entirely pedagogic ones, which are implied by the Bill as presently drafted.
Last week, my concerns were further enhanced by the publication by the FCA of its document, Journey to the FCA. I am not alone in my concerns. The Lex column in the Financial Times on 17 October says that,
“the exact route of the FCA’s journey is still unclear and, despite its insistence that companies doing the right thing have nothing to fear, both the industry and investors who have backed it should be wary. First, while the FCA’s paper gives a nod to innovation and new ideas, they are not its core purpose. If the FCA makes overactive use of its power to ban products, the industry will lose its incentive to innovate. Just look at the impact of growing regulation on the pharmaceutical industry.
Second, the government is trying to rope the FCA in to its drive for more competition in financial services. That suggests a wider remit—market structure is not the same as market conduct and the FCA could struggle to combine the two.
Finally, it is not clear whether the FCA will look at consumer conduct. The wave of claims for mis-sold payment protection insurance (over a quarter of which, according to some banks, are fraudulent) demonstrates a growing enthusiasm for launching legal complaints at the drop of a hat, raising costs for both investors and other customers. The danger is that, encouraged by their PPI success, claims management companies swiftly move on to another target. This type of financial services conduct should also be covered by the FCA’s journey”.
It is only in chapter 6 of the document, headed “Maintaining effective relationships”, that you get to the beginnings of something about relationships. However, the effective relationships that are being listed there are, first:
“We will be part of the wider family of regulatory bodies that are in place”;
“We will shape policies and drive the consumer protection agenda in Europe”;
“We may take action to address domestic issues even if standards are due to be set internationally at a later date”;
“We will work with consumer groups to help us … understand issues”;
“Our communication with firms will also improve. There will be more regional workshops and roadshows to clarify our expectations.”
All the wording is a one-way street which will not be “fair and reasonable”, but will just be a pedagogic relationship without the firms, or the interests of the industry, being properly considered.
Against this background there is a growing fear and suspicion in the City that investigations are becoming fishing expeditions. The regulator cannot find the evidence to support his suspicion, however flimsy and unsubstantiated, and sets up an investigation to see if anything can be found. Investigations need to be carefully circumscribed, both as to their inception and their conduct. That is what Amendments 192A and 192B seek to do by adding “fair and reasonable” to “proportionate”. I beg to move.
Lord Flight: My Lords, I wish to speak in support of my noble friend’s amendment. It touches on unfortunate developments. The reaction of regulators to being criticised for what were described as the failures of light-touch regulation have increasingly led to a much more tough-guy, macho approach by them. In turn, I find major, totally responsible financial services businesses saying to me when they are unhappy and think some regulatory proposals are mistaken, “But we don’t want to talk to the regulators in case they punish us”. An unfortunate culture has developed of seeing the regulators as being very likely to use their powers against you, if you fall out with them.
The whole light-touch regulation story is a misinterpretation. What was wrong with FiSMA in that territory was the assumption that large institutions could be left to run their own affairs, which, as I warned at the time, missed out the fact that when large institutions go wrong they risk bringing down the whole system. The amendment may be belt and braces—I agree with my noble friend that to rely on complicated legal processes to get justice is not satisfactory—but I think it is perfectly straightforward, sensible and common sense to have that guideline as regards how investigations are handled. In the present climate, I think that is necessary.
Viscount Trenchard: My Lords, I, too, support my noble friend's amendment. I apologise for going back to the regulatory principles, but I continue to believe that it is a huge pity that the regulatory principles, by which both the PRA and the FCA are bound to operate, do not contain, to my mind, the very necessary principle that they should have regard to maintaining the competitiveness of the marketplace on which the United Kingdom depends so much for tax revenues, for prosperity, for employment and for all kinds of things.
I also speak with the experience of having been a member of the executive committee of a regulated firm for several dark years. I can assure the House that at least 90% of the time of an executive committee is spent discussing how to respond to regulators. There is a real fear of increased supervision and a more intrusive approach and, nowadays, many firms spend very little time talking about how to develop and to expand the business in order to provide further employment and earn more money so that the business can be consolidated and maintained in London. In the absence of, to my mind, such necessary principles, which ought to be
there and by which the new regulators ought to have to abide, it is more necessary than it otherwise would have been that the regulators should act, as my noble friend’s amendment suggests and requires, “proportionately, reasonably and fairly”. I wholly support the amendment and I look forward to hearing the comments of the Minister.
Lord Peston: We are indebted to the noble Lord, Lord Hodgson of Astley Abbotts, for raising these matters, although we discussed similar matters last week under the guidance of the noble Lord, Lord Flight, and my noble friend Lady Hayter. The central question here is our fear—fear in the relevant sector as well—that the regulators damage our financial services sector rather than improve its performance. I think that is the theme that lies behind these matters. I have two questions, but I am bad at reading amendments, so I want to be certain about them. Presumably the new subsection proposed in Amendment 192A would come before subsections (1) to (7) in Clause 74. Am I right that it would be the lead-in?
Lord Hodgson of Astley Abbotts: Yes.
Lord Peston: It would establish the principle which everything else must follow. That is fine; I understand what the noble Lord is saying. That leads me to ask two central questions. In Clause 73, and I think in something similar earlier, subsection (2) refers to “Relevant events” that occur in relation to,
“(b) a person who is, or was at the time … carrying on a regulated activity”.
What worries me as a matter of logic is whether we will end up with the regulator having to investigate him or herself. If these people have not met the standards, who is responsible? They are partly, of course, but this would also be an indication of regulator failure. To my way of looking at it, we have a part of the Bill that is totally bizarre. From a logical point of view, the answer to the question “Quis custodiet ipsos custodes?” is that the regulator is the custodes himself, if you like. I would certainly welcome an analysis from the Minister in his reply which shows that we are not seriously involved in a logical contradiction here.
My second question is whether the fact of an investigation of the kind we are discussing is to be in the public domain. In other words, will it be publicly known that the regulator is investigating one of the things going on here? It may be that I have not read it properly, but is not that itself potentially enormously damaging, again a point that was raised last week? I should like the answer to these two questions. It may be that Treasury officials will have to do a bit of thinking about this part of the Bill when they are not thinking about the logical nature of “may” versus “must”. As I have pointed out before, there is a vast philosophical literature on this. How much of it they will have time to read, I do not know. However, the central point is to get a rational response to the amendment moved by the noble Lord, Lord Hodgson.
Lord Davies of Oldham: My Lords, I am grateful to the noble Lord, Lord Hodgson, for identifying this issue, but I must say that if noble Lords opposite do not think that the nation is expecting a Bill and eventually an Act of Parliament that tightens up regulation
in the wake of the circumstances we suffered four to five years ago, then all I can say is that such a position is not tenable. The noble Lord, Lord Hodgson, is indicating that the principles of the regulator should be expressed in these terms. Who can be against the principles of fairness? Of course we want and expect the regulators to act fairly, but let us remember that they may be acting under a direction from the Treasury because something has gone wrong. The idea that the first thing the regulator must do is consider the principles on which it must act rather than in fact investigate the nature of the problem, as it has been instructed by the Treasury to do, seems to put the cart very firmly before the horse.
In responding to this amendment, I am sure that the Minister will have some warm words for his noble friends who have spoken in favour of the amendments, but I hope that he will defend the basic objective of the Bill. I shall give way to the noble Lord.
Lord Hodgson of Astley Abbotts: I am extremely grateful. I did not want to interrupt his peroration, but dare I say that if he had listened carefully, he would know that I said that this is not about reducing regulatory stringency? I made that absolutely clear and I said it in terms; there is no question about that. This is a question about being fair and reasonable, it is not about reducing regulatory stringency. I do not want that particular line of attack attached to my amendments. I could not be clearer than that, and I think my noble friends on this side of the Committee are all as one so far as that is concerned.
Lord Davies of Oldham: The noble Lord will forgive me if the consideration that others might have with regard to a regulator potentially operating under direction from the Treasury to deal with a serious situation is that it should be dealing with it quickly and efficiently, and not just having regard to how much it acts appropriately or fairly, in the way in which the noble Lord has indicated. Of course, regulators know that if they act entirely improperly, even unlawfully, legal action will follow against them, but, in a Bill that is concerned to make regulation more effective, it surely cannot be that the principles upon which the regulators must act are more important than the effectiveness with which they carry out their role.
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Lord Newby: My Lords, I will start by giving the Government’s response to the first of these two amendments, and then come to the specific points that have been raised by a number of noble Lords.
As noble Lords have pointed out, Clause 74 provides in some detail how investigations should be conducted in order to deliver transparency and confidence, which, as I think everybody agrees, well conducted and appropriate inquiries should bring about. Amendment 192A seeks to add to these requirements by setting out that,
“the regulator must have regard to its regulatory principles”
in carrying out these inquiries, and to act proportionately, reasonably and fairly. I agree that high standards of
conduct should apply as much to the conduct of an investigation as to the regulator’s normal regulatory work, but the noble Lord, Lord Hodgson, will probably not be totally surprised when I say that there are two reasons why the amendment is not necessary.
First, on proportionality, we do not believe that it is necessary to put this in the Bill again because the regulator already has to have regard to the regulatory principles in exercising its general functions, and the regulatory principles include proportionality, under proposed new Section 3B. Proportionality is already built in to the way that the regulator does everything so we do not think it is necessary here.
Secondly, as the noble Lord has set out, and we have set out before, public law already requires regulators to act reasonably, and the principles of natural justice require the regulator to deliver procedural fairness. The noble Lord talked about the problem of judicial review. I think everybody agrees that if you have to initiate a judicial review, this is an extremely expensive, long, drawn-out process, but if the noble Lord’s amendment was accepted, my understanding is—I may be wrong—that if the regulator were to be challenged it would be under a judicial review anyway, so the same problem would arise. The noble Lord, Lord Flight, said that this amendment was a question of belt and braces. We agree, but in legislation you do not need belt and braces—you need a good belt or good braces, and we think we have got that.
The other thing that is possibly slightly confusing is that the investigations we are talking about in this part of the Bill are investigations into regulatory failure rather than the conduct of firms. The noble Lord, Lord Peston, asked whether an investigation would come into the public domain. The real concern, which we have debated before, relates to the conduct of business of a company—has it been misbehaving?—which is different from the issue of regulatory failure, which is what Clause 74 deals with.
Lord Peston: The noble Lord did say that this will be an investigation into regulatory failure. Therefore, the investigator is investigating himself or herself. After all, who has failed? It is the regulator.
Lord Newby: My Lords, we come to the noble Lord’s point which concerns Clause 73(2)(b). The architecture is that the regulator will look at the failure of firms and regulatory failure. We have seen this with the work the FSA did on RBS. It produced a comprehensive report on what it saw as regulatory failure. Although there were arguments about what would or would not be published, in terms of whether the regulator did a good job and whether it is capable of doing so, the answer we would draw from that investigation is that it did do quite a good job. There will be many cases when it is appropriate for the regulator to look back at what has happened in the past—
Lord Peston: I am sorry to interrupt the noble Lord, but I am trying to get some sense of reality about this. It is the Treasury that considers that something needs to be done. Therefore, the Treasury must suspect
something. Where, for example, does the Treasury get its information from, for it to feel that it has to issue this directive? What does the Treasury know that the regulator did not? Then it tells the regulator to look at something because it observes regulatory failure. The whole thing seems to be an intellectual mess. That is my point. It is not necessarily the point that was made by the noble Lord, Lord Hodgson. Like my noble friend Lord Davies, I am keen to have a powerful and effective regulatory system. I am also keen that we do not have a botch of a regulatory system. What we have said on the previous two Committee days on the Bill is that we think quite a few aspects of this are a botched job. Is that going too far in criticising? I do not think so.
Lord Newby: My Lords, the noble Lord asks a number of questions. First, why might the Treasury have a role and why is the regulator not doing it already? There may be a number of occasions when the Treasury first gets information from somebody and wants to tell the regulator. There are some occasions when the Treasury might want to prod the regulator into action. I have been critical of occasions when I felt the regulator has not moved as quickly as I would have liked in undertaking investigations. This part of the Bill enables the Treasury to give it a kick if it is needed. The other point, which is a valid point, is that if there is a really serious problem of regulatory failure, this is not the only way in which the Treasury can make sure that an investigation is undertaken. The Treasury can appoint any kind of investigator that it wants. This part of the Bill simply explains how the Treasury operates and the rules which apply if there is a lesser regulatory failure which probably happened some time in the past, where it seems appropriate for the regulator to have a look. I understand the noble Lord’s concerns, but he should not be as worried as he is.
I will respond to the second amendment in this group, which we have not debated at great length. It seeks to add to the grounds on which the regulator may decide to postpone or suspend an investigation if the investigation did not meet the principles by which the investigator must abide. Unlike with the previous amendment, where we agree with what the noble Lord seeks to achieve but do not think that he needs to have his belt and braces, we think that this amendment could have perverse and unexpected effects by enabling the regulator to stop an investigation for any reason it wanted. For example, it could realise that an investigation was going to be very time-consuming and burdensome, perhaps because of the level of detail involved. Under this proposal, it could end an investigation and argue that it was doing so because the investigation breached its principle on economic and efficient use of resource. For those reasons, we cannot support that amendment.
A number of noble Lords, including the noble Lords, Lord Hodgson and Lord Flight, expressed broader concerns about the FSA and the noble Lord, Lord Hodgson, quoted Lexin aid of that. The noble Viscount, Lord Trenchard, and the noble Lord, Lord Peston, said that the FCA should have regard to competitiveness. These are broader issues that go beyond the scope of the amendments, but on the concerns
expressed by Lex, I can understand why people are at this stage worrying about whether the balance that the regulators strike between the interests of the firms and those of the consumers of their products is right. We are pretty confident that it will be. The noble Lord, Lord Davies, pointed out that it is important that the regulators are rigorous and balance the interests of the firms and those of their consumers. The way in which the Bill is structured should enable them to do that and we are confident that they have that very much in mind.
Competitiveness has been debated previously and we have already agreed that we will look at this issue, particularly the degree to which the PRA and FCA should have regard to the importance of economic growth. We have said that we will return with further amendments in this area on Report, when we will no doubt have an extremely interesting debate on them. For today, however, I hope that the noble Lord, Lord Hodgson, will decide not to press his amendments.
Lord Hodgson of Astley Abbotts: My Lords, I am grateful to my noble friend Lord Newby for that extensive and courteous response. I am grateful to the noble Lord, Lord Flight, and the noble Viscount, Lord Trenchard, for their support. I can accept that this is a part of the Bill where the particular concerns that I have do not weigh as heavily as they did on the regulatory principles on page 28 of the Bill which we debated before we broke for the Summer Recess. I am happy to withdraw my amendment today, but I am not yet convinced that “reasonably and fairly” is not a useful addition in some part of the Bill even if it is not here. I beg leave to withdraw the amendment.
Amendments 192B and 192C not moved.
Clause 79 : Arrangements for the investigation of complaints
Amendment 193A had been retabled as Amendment 187TA.
Clause 80 : Relevant functions in relation to complaints scheme
Clause 80, as amended, agreed.
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193BA: Before Clause 84, insert the following new Clause—
(1) The Banking Act 2009 is amended as follows.
(2) In section 3 (interpretation: other expressions), after “this Part—” insert—
““client assets” means assets which an institution has undertaken to hold for a client (whether or not on trust, and whether or not the undertaking has been complied with),”.
(3) In section 4 (special resolution objectives), after subsection (8) insert—
“(8A) Objective 6, which applies in any case in which client assets may be affected, is to protect those assets.
(8B) Objective 7 is to minimise adverse effects on institutions (such as investment exchanges and clearing houses) that support the operation of financial markets.”
(4) In section 8(2) (Condition A: private sector purchaser and bridge bank)—
(a) in paragraph (b) for “the banking systems of the United Kingdom, or” substitute “those systems,”, and
(b) after paragraph (c) insert “, or
(d) the protection of any client assets that may be affected.”
(5) In section 47 (restriction of partial transfers), for subsection (3) substitute—
“(3) Provision under subsection (2) may, in particular, refer to—
(a) particular classes of deposit;
(b) particular classes of client assets.”
(6) In the Table in section 261 (index of defined terms), after the entry relating to “central counterparty clearing services”, insert—
Lord Sassoon: My Lords, last week I introduced the first set of amendments that seek to extend the UK’s resolution regime for banks to investment firms, group companies and UK clearing houses. Today, I am introducing the remaining amendments, which put in place a regime that gives the Government and the Bank of England the powers to take action when one of these institutions is likely to fail, allowing them to resolve the situation in an orderly manner in order to maintain the financial stability of the UK.
Amendment 193BA adds two new special resolution regime objectives. The collapse of Lehman Brothers in 2008 and MF Global in late 2011 highlighted the difficulties and uncertainties surrounding the treatment of client assets and money when an investment firm enters insolvency. During normal business, client assets and money are held by the investment firm on behalf of the client, in segregated or non-segregated accounts. Firms also rehypothecate client assets, borrowing them to use for their own purposes. There can be complex arrangements to unwind if a firm enters insolvency or resolution.
The new objective 6 is intended to ensure that the resolution authorities look to protect not only cash deposits but also shares and other assets. The new objective will apply to any resolution where client
assets are held by the firm, whether it is a bank that offers investment services or an investment firm which is not a bank. To complement this legislation, the FSA has recently launched a wide-ranging consultation on client money and client asset rules. The Government will report to Parliament on the review of the special administration regime—the bespoke insolvency regime for investment firms —by February 2013.
The new objective 7 will help minimise the adverse effect on financial market infrastructure, such as investment exchanges and clearing houses, when stabilisation powers are used. For example, in resolving an investment firm, this objective will require the resolution authorities to consider the impact of their actions on exchanges and clearing houses in which the investment firm was a participant.
Under the Banking Act 2009, no special resolution scheme objective is prioritised over any other—the regulator must take each into account equally. The same will apply to the new objectives inserted by these amendments, so the resolution authority will have to balance the objective of protecting client assets with the objective of minimising the adverse effects on financial market infrastructure.
The public interest test in Section 8 of the Banking Act 2009 for the exercise of stabilisation powers currently refers to the protection of depositors. Subsection (4) of the proposed new clause therefore adds reference to the protection of client assets. In line with the extension of the special resolution regime beyond banks, the proposed new clause also amends the reference to the “banking systems” of the UK in the public interest test in Section 8 into a reference to the UK’s financial systems. This makes Section 8(2)(b) of the Banking Act suitable for the resolution of all the types of firm that we propose to be eligible for the special resolution regime.
The effect of the new clause inserted by Amendment 193F is to extend the resolution tools under the special resolution regime to investment firms and their group companies. In doing so, it is important that this legislation captures only those firms that are deemed systemic to the financial stability of the UK. Casting the net too wide, and unnecessarily capturing firms whose failure would not pose a threat, could adversely affect the UK’s competitiveness. On the other hand, we do not want to exclude from the special resolution regime those firms that, in normal market circumstances, would not be seen as systemic but which, in times of market crisis, might pose systemic risks.
This is a difficult balancing act. With an eye to developments in Europe, particularly the European Commission’s recovery and resolution directive, the legislation adopts a wide definition of “investment firm” from European law but also confers on the Treasury a power to exclude categories of firm from the special resolution regime. In this way, we can ensure that smaller firms that clearly do not pose a threat to financial stability—such as a small stockbroker or financial adviser—will not be subject to the new regime, while on the other hand providing the necessary flexibility to react as circumstances change. I beg to move.
Lord Barnett: My Lords, this is a big enough Bill without two more new clauses being put in it. I hope the noble Lord will forgive me but the amendment refers of course to the Banking Act 2009. Why have we got these amendments here? We have got a banking Bill wending its way through the House of Commons which will no doubt arrive here soon, so why do these new clauses not go into the banking Bill and we could consider them then?
The likelihood is—certainly I want to see it—that the present situation will be substantially changed so that investment firms, which are referred to in both these new clauses, are no longer part of the main bank. There will be a separate bank looking at investment firms so these amendments, it seems to me, are certainly very relevant to the new banking Bill. Why are they here? Perhaps the noble Lord could first tell us the answer to that one?
Are we now to understand that the Government are absolutely set on accepting the Vickers report? I have not yet seen the details of what they are accepting, but I hope the noble Lord will forgive me since there are enough papers to look at on this huge Bill without looking yet at the banking Bill. I am sorry if I am straying into areas I should not be entering—except that these two major amendments are related to banking. I wonder why they are here.
Lord Flight: My Lords, in relation to these proposed new clauses, can the Minister tell me where lender-of-last-resort doctrine stands with regard to this legislation? A brief piece of history I observed in the course of my career was that at the time of the collapse of Johnson Matthey and Barings, there was a change in lender-of-last-resort doctrine. Since the 1870s it had operated on the basis that, in the event of a run, the central bank stood behind any bank that was properly managed. It was changed to stand behind any banks which were too big to fail. That led on to moral hazard and cartel, and a lot of smaller banks like Hambros closed, resulting in much less competition. At the time I had conversations and correspondence with Eddie George when he was Governor of the Bank of England, who virtually said he agreed with me but it was the way the then Conservative Chancellor of the Exchequer, Ken Clarke, had cast things.
Some of what the Minister just talked about touched slightly on the issue, but I would very much hope that the intent is to go back to lender-of-last-resort arrangements as originally intended, and as operated amazingly well for more than 100 years. I am not at all clear where we are.
Baroness Kramer: I have a couple of comments —they are really questions—on both amendments. Amendment 193F, as the Minister has said, essentially extends the Banking Act 2009 special resolution regime to investment firms. In the next two groups there are similar amendments extending that same resolution regime to holding companies and clearing houses. I am sure the Minister does not want me to speak three times on the same point, so perhaps he could extend his comments to those two groups as well.
I share some of the concerns expressed by the noble Lord, Lord Barnett, that we are getting a set of amendments which, by definition, will have to change
fairly significantly because this area is being driven by European directives. Even the definition that we are using for an investment firm is a European directive. It is very difficult to understand how this works when the context and framework will be constantly changing. Perhaps the Minister could help us understand how that process is going to happen. With ring-fencing likely to change the way in which we look at and define an investment firm, that is one obvious set of problems. It may end up being different under European law from the application in the UK, because we may draw lines at different points. We may choose ring-fencing, and others separation. I cannot see how this set of language manages to comprehend all those complexities.
It is not just me who is concerned; I know that I have raised this issue before. This time, the BBA is very concerned about marching all the troops up the hill in one direction, finding that there has to be substantial change, and marching them all the way down and back up in another direction. I cannot understand why we are doing this now when we will have clarity in just a few months’ time.
I also want to raise a question which I have asked before but to which I have not had much of an answer, under Amendment 193BA. Again, it concerns the central clearing houses and the central counterparties. I am trying to understand if that amendment deals with an issue that concerns me: the waterfall of the resolution and whether, at the end of that waterfall, it is permissible under the legislation to tear up contracts. That is a reading which the Minister will know that the industry has asked about. When he talks about the protection of client assets, does that apply to contractual relationships—for derivative contract or whatever else—where the clearing house may not be able to meet its obligations because it has got into difficulties and has been put into a resolution procedure? I am unclear whether the legislation establishes that that contract may be torn up as the last resort in the resolution process. That is a big issue that needs general discussion, if that is right. It would be extremely helpful if the Minister could give us some clarity on that.
Lord Davies of Oldham: My Lords, the Minister has a few interesting issues to respond to, but I must say that I am very much on the Government’s side with regard to these two amendments. After all, they are the result of consultation. We agree with the Government that investment firms and clearing houses have the potential to cause instability in the financial system and that therefore, including them within this scheme to ensure their orderly resolution or, perhaps, wind-down in the event of failure, is obviously sensible.
I am slightly embarrassed by the fact that, although 35 years ago, as his PPS, I was used to agreeing with every word that my noble friend Lord Barnett uttered as a Member of Parliament, I have to say to him today that I do not quite agree with the line which he has adopted. I entirely recognise that we will be enmeshed in many of these issues in the not too distant future with another significant Bill but, on the whole, when the Government have a good and constructive idea, it is best for the Opposition to seize it with both hands as early as possible, and that is what I want to do.
Lord Sassoon: My Lords, I am very grateful to the noble Lord, Lord Davies of Oldham, because he has got it exactly right. The previous Administration brought forward the 2009 Bill, which necessarily came forward in a hurry as a proper part of the response to the crisis. This Bill picks up a lot of other lessons from the crisis, but the Banking Act 2009 put in place some arrangements for banks. We have now seen through the examples of what happened in the crisis and, regrettably, to MF Global and others since, that the 2009 Act, although it put in place some important new powers, did not cover the waterfront. We are therefore seeking to ensure that we learn the lessons and that arrangements are made that cover other very important parts of the sector.
As I said to the Committee last week, I think that we would be very severely criticised as a Government and as a House of Parliament if we were to delay putting in place an extension of a regime that is already based on one that is in law in the 2009 Act. The banking reform Bill has not yet started its passage in another place and it will be some time after the completion of this Bill that it comes into law. We really should get on and make proper provision, as I said last week, for situations that we do not anticipate. In this very uncertain environment one can never be sure what may next hit the system. It is important, therefore, that we get on to it. In answer to my noble friend Lady Kramer, if there are changes coming out of the banking reform Bill or out of Europe, then in due course we will amend these provisions to take account of that. However, we would be putting ourselves in a terrible position if we said that we can only move at the speed of Europe or at the speed of some slower Bill that is coming on. It is better to put these necessary clauses and arrangements in place now and change them later if we have to.
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Lord Lawson of Blaby: What my noble friend has said is most helpful. Can he give us an indication of when the banking reform Bill is likely to reach this House? I am sure that noble Lords on all sides will be greatly interested in this.
Lord Sassoon: I shall probably get into trouble if I say anything that is terribly helpful. However, the Government want to get on with it as quickly as we reasonably can. I would like to think that it will not be very many months before the Bill gets here. But, whenever it arrives, it is no excuse for not getting on with these clauses.
Lord Barnett: My Lords, perhaps I may make it clear that I do not disagree with the two new clauses. I was saying that we will have a banking Bill in this House shortly. This Bill relates to banks and investment firms. However, if the banking Bill is amended to allow two separate companies, as I hope it will be, so that investment firms are handled quite separately from the way they are handled in the present situation, it would change the whole process. The Minister says that we must get on with it. But this Bill will not be an Act until approximately the end of the year. The new Bill will be before us a few months later. Does the Minister know of some crisis that we do not know about?
Lord Sassoon: No, my Lords. I have already answered these questions. I know of no crisis. However, we would be remiss if, having identified a sensible, consulted-on extension of the regime that came in under the Banking Act 2009 to cover these other, systemically important parts of the system, we did not act. If we left even a few months, having identified what needed to be done, we would be open to very heavy criticism as a House and as a Government. Now is not the time to discuss the ins and outs of the banking reform that is proposed. However, it is certainly not the case that—as the noble Lord, Lord Barnett, put it—investment firms and banks will be in separate groups. They will not be.
As I say, if the detail of the resolution arrangements changes, then of course these clauses can be amended to take account of the new structure. We have future-proofed them as far as we can, in the sense that my noble friend, quite rightly, talks about the European approach. As I said last week but will say again, of course we are going to remain fully consistent with the European approach to these matters and indeed we are actively taking part in shaping it. The fact that we have a worked-out solution ahead of others in Europe itself puts us in a very good position to influence things, and the legislation—the proposals that we are introducing and considering today—is consistent with what is set out in the Financial Stability Board’s document on key attributes for an effective resolution regime. We have taken every possible step to ensure consistency with Europe.
Lord Peston: I am sorry to interrupt the Minister but I want to ensure that noble Lords understand what he is saying. He is saying that the Treasury has discovered two problems that can be dealt with rapidly by mending the Banking Act 2009 and he is therefore using this Bill, which is not specifically about banking, as a convenient vehicle to put those into law. That is the result of the Treasury's work; it has found those two things and feels that it ought to act rapidly. I also therefore infer, validly, that the Treasury has not found any other changes that need to be made rapidly and could well have been dumped in this Bill as well—just these. That is my interpretation—that they have found these two and we must get a move on. Am I right?
Lord Sassoon: First, my Lords, these clauses fall properly in the Bill because essentially we are giving powers to the Bank of England to resolve things. I would not like to leave the thought that we were somehow using the Bill as a Christmas tree to add on other unrelated things; this is definitely related to the purpose of the Bill because we are talking about the powers of the authorities.
Secondly, the noble Lord, Lord Peston, could be mistaken for giving the impression that somehow we just discovered these things last week or last month. As I have already said, very important new powers were put in place in the Banking Act 2009. Over a period it was then, partly after seeing the collapse of other investment firms and partly by talking to the market, a consultation process, so this is not something that has just emerged. In this area, we have nothing
else up the Treasury’s sleeve, as it were. If anyone identifies any other gaps in the regime, of course we will consult on them and do all the proper things that Parliament would expect us to do.
That leaves one area that my noble friend Lord Flight asked about: the doctrine of “lender of last resort”. Fascinating and important though it is, I am reluctant to get into this area because it does not directly impact on where the lender of last resort doctrine, as he puts it, has now got to. It was the Banking Act 2009 that made sure that the authorities, including the Bank, had the full suite of powers. The Bill further improves those tools and clarifies responsibilities, but of course it does not alter the basic premise that the Bank will continue to be the lender of last resort to the banking sector and to the resolution authority for a variety of firms. As for the precise doctrine of how they operate, that is a matter for the Bank of England and should remain so. I recognise that that is clearly called into question by the events in 2007 and 2008, but I assure my noble friend that it is not affected by the substance of the clauses that we are discussing today.
Baroness Kramer: Will the Minister basically send me a note on how the resolution process is going to work with the clearing houses? I have an outstanding concern. In our discussions in Committee last week, he was very keen to assure the House that, in a resolution situation, clearing houses would not turn to their members and ask for additional funds in order to meet their outstanding obligations. He made it clear that the resolution process would contain the liability that would fall on members. However, we have had no discussion of what happens with an outstanding contract entered into in good faith by a party with that clearing house for, say, the future delivery of FX, or foreign currency. What happens to the person with that outstanding contract in a case of resolution? Where do they stand in that process? We need some clarity at some point on who is carrying the liability. Of all the innocent parties involved, they would seem to be the main one.
Lord Sassoon: I apologise to my noble friend because I forgot to answer her question. The answer to her question on whether contracts will be torn up is an unequivocal no. Contracts will not be torn up. That is quite clear. In answer to the other question—
Lord Sassoon: If my noble friend will forgive me I will answer the other question first. It is an important question about the call on members and shareholders of firms. I thought that I had made the position completely clear last week: there will be no new powers here to call on shareholders and members to put up new funds, except in circumstances where there are already agreements in place for contingent calls or other ways of calling down funds in arrangements that exist before this situation kicks in. I know very well that there are one or two clearing houses and others who do not seem happy to accept that assurance of last week. I can only give it again—that is the position
under the clauses that we have been debating. There is nothing here that causes calls to be made on members if it is not under an existing arrangement.
Baroness Kramer: I am afraid that the Minister misunderstands where my concern is coming from. I recognise that there are some in this House who are very concerned to give that kind of assurance to the various members of the clearing house—that there will be no further call other than that which has been agreed in their fundamental arrangements. However, that leaves open the question of the open contracts that are left if a clearing house fails. This becomes very serious as we move to a limited number of extremely large clearing houses with a very significant number of contracts in their hands. Who will meet the obligation under those outstanding contracts? If it is not going to be the members of the clearing house, because there can be no further call on them, will it be the taxpayer? If the taxpayer is not standing behind this then we are in a “tear up contract” situation. We really need to understand how that waterfall is going to work rather than end up in the actual situation in life and find that we have lawsuits served from every direction and some real undermining of the whole system. That is what I am trying to get to the bottom of. If the Minister has not really sat down and addressed that question, perhaps somebody in his team could send me a note.
Lord Sassoon: My Lords, we have addressed the situation. First, the contracts are the contracts. They need to be enforced by the appropriate mechanisms, whatever they are, which may require legal routes to be gone through. What we are trying to do here is to make sure that, as far as possible, we put in place arrangements and tools which mean that some of the difficult unwinding of contracts, such as were seen in MF Global, for example, can be dealt with more quickly and effectively.
As for who pays up at the end of the day, there are well established procedures to make sure that, first, the shareholders pay, subject to the limitations on shareholders as we understand them—my noble friend is not challenging that. Then, of course, there may be holders of debt. Beyond that, the normal arrangements that exist through the financial services system will apply as regards where the liability falls. Nothing we are doing in these clauses makes any changes to the arrangements that are generally in place about the split between the taxpayer and other parts of the financial services industry to pick up liabilities.
Clause 84 : Private sector purchasers
Clause 86 : Reports following exercise of a stabilisation power
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193E: After Clause 86, insert the following new Clause—
(1) The Banking Act 2009 is amended as follows.
(2) In section 1 (overview), for the entry in the Table relating to sections 82 and 83 substitute—
(3) In section 20 (directors), after subsection (1) insert—
“(1A) Subsection (1) also applies to a director of any undertaking which is a banking group company in respect of a specified bank.”
(1) A property transfer instrument may enable the Bank of England—
(a) to remove a director of a specified bank;
(b) to vary the service contract of a director of a specified bank;
(c) to terminate the service contract of a director of a specified bank;
(d) to appoint a director of a specified bank.
(2) Subsection (1) also applies to a director of any undertaking which is a banking group company in respect of a specified bank.
(3) Appointments under subsection (1)(d) are to be on terms and conditions agreed with the Bank of England.”
(5) For the italic heading before section 82 substitute “Groups”, and after that heading insert—
“81B Sale to commercial purchaser and transfer to bridge bank
(1) The Bank of England may exercise a stabilisation power in respect of a banking group company in accordance with section 11(2) or 12(2) if the following conditions are met.
(2) Condition 1 is that the PRA is satisfied that the general conditions for the exercise of a stabilisation power set out in section 7 are met in respect of a bank in the same group.
(3) Condition 2 (which does not apply in a financial assistance case) is that the Bank of England is satisfied that the exercise of the power in respect of the banking group company is necessary, having regard to the public interest in—
(a) the stability of the financial systems of the United Kingdom,
(b) the maintenance of public confidence in the stability of those systems,
(c) the protection of depositors, or
(d) the protection of any client assets that may be affected.
(4) Condition 3 (which applies only in a financial assistance case) is that—
(a) the Treasury have recommended the Bank of England to exercise a stabilisation power on the grounds that it is necessary to protect the public interest, and
(b) in the Bank’s opinion, exercise of the power in respect of the banking group company is an appropriate way to provide that protection.
(5) Condition 4 is that the banking group company is an undertaking incorporated in, or formed under the law of any part of, the United Kingdom.
(6) Before determining whether Condition 2 or 3 (as appropriate) is met, the Bank of England must consult—
(a) the Treasury,
(b) the PRA, and
(c) the FCA.
(7) In exercising a stabilisation power in reliance on this section the Bank of England must have regard to the need to minimise the effect of the exercise of the power on other undertakings in the same group.
(8) In this section “financial assistance case” means a case in which the Treasury notify the Bank of England that they have provided financial assistance in respect of a bank in the same group for the purpose of resolving or reducing a serious threat to the stability of the financial systems of the United Kingdom.
(1) In the following provisions references to banks include references to banking group companies—
(a) section 10(1), and
(b) section 75(5)(a).
(2) Where the Bank of England exercises a stabilisation power in respect of a banking group company in reliance on section 81B, the provisions relating to the stabilisation powers and the bank administration procedure contained in this Act (except sections 7 and 8) and any other enactment apply (with any necessary modifications) as if the banking group company were a bank.
(3) For the purposes of the application of section 143 (grounds for applying for bank administration order), the reference in subsection (2) to the Bank of England exercising a stabilisation power includes a case where the Bank of England intends to exercise such a power.
81D Interpretation: “banking group company” &c.
(1) In this Part “banking group company” means an undertaking—
(a) which is (or, but for the exercise of a stabilisation power, would be) in the same group as a bank, and
(b) in respect of which any conditions specified in an order made by the Treasury are met.
(2) An order may require the Bank of England to consult specified persons before determining whether the conditions are met.
(a) is to be made by statutory instrument, and
(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.
(4) If an order contains a statement that the Treasury are of the opinion that, by reason of urgency, it is necessary to make the order without complying with subsection (3)(b)—
(a) the order may be made, and
(b) the order lapses unless approved by resolution of each House of Parliament during the period of 28 days (ignoring periods of dissolution, prorogation or adjournment of either House for more than 4 days) beginning with the day on which the order is made.
(5) The lapse of an order under subsection (4)(b)—
(a) does not invalidate anything done under or in reliance on the order before the lapse and at a time when neither House has declined to approve the order, and
(b) does not prevent the making of a new order (in new terms).
(6) Undertakings are in the same group for the purposes of sections 81B, 81C and this section if they are group undertakings in respect of each other.
(7) Expressions defined in the Companies Act 2006 have the same meaning in section 81B and this section as in that Act.”
(6) In the Table in section 259 (statutory instruments), in Part 1 after the entry relating to section 78 insert—
(7) In the Table in section 261 (index of defined terms), after the entry relating to “bank insolvency order” insert—
Lord Sassoon: My Lords, the purpose of Amendment 193E is to extend powers available under the special resolution regime, or SRR, to group companies. It will
grant the Bank of England the power to exercise share and property transfer powers in respect of companies in the same group as the failing entity in order to facilitate the resolution of the failing entity. We believe that extending these powers is necessary because the situation could arise where exercising powers over only the failing entity may not be sufficient to fully protect the public interest.
For example, the business of a failing bank may rely on assets or services provided by another group company which is itself in trouble and the only way to preserve a viable and coherent business may be to transfer those assets or facilities out of the other group company. Having said what I said about the previous amendments and clauses, we now move on to another area which will be of interest to my noble friend Lady Kramer, because we think that, in particular circumstances, it is also right to call in assets or facilities out of another related group company.
The legislation will give the Treasury the power to set conditions to the exercise of powers over group companies. The Government intend, for example, to set the condition that the group in question must be engaged primarily in financial services in order for these powers to be exercisable. We will also set a requirement that the Bank of England exercise powers at the lowest level of the group. The clauses also give the Bank powers similar to those available to the Treasury to remove or vary the appointments of directors of failing entities and, if necessary, to group companies where it exercises stabilisation powers.
It may be useful for me to give an example of how this power might be exercised. There could be a large listed entity—a retailer, for example—that has subsidiaries engaged in banking or other financial services as well as in traditional retail businesses. The extension of powers that we are introducing will ensure that the Bank of England has the ability to exercise share and property transfer powers over financial subgroups operating under the listed retailer, but not in respect of the retailer itself.
The legislation we are debating today contains further safeguards. The Bank of England will only be able to exercise powers over group companies where necessary in the public interest, and it must have regard to the need to minimise any adverse effect of its actions on the rest of the group. Therefore, although these are broad powers, the Bank will only exercise them where necessary, and must do so proportionately.
The order-making power will be subject to approval by both this House and the other place, either on a draft order or, where the power is exercised in an emergency, within 28 sitting days. I beg to move.
(2) In section 1 (overview), after the entry in the Table relating to sections 84 to 89 insert—
“(8) Section 89A applies this Part to investment firms with modifications.”
(4) In section 75(5) (power to change law: application to other institutions), omit the “or” following paragraph (c) and after that paragraph insert—
“(ca) to investment firms,”.
(5) After section 89 (and in Part 1) insert—
“Investment firms
89A Application to investment firms
(1) This Part applies to investment firms as it applies to banks, subject to the modifications in subsection (2).
(2) Ignore sections 1(2)(b), 4(2)(b) and (6), 5(1)(b), 7(7), 8(2)(c) and 14(5).”
“159A Application to investment firms
This Part applies to investment firms as it applies to banks.”
(1) In this Act “investment firm” means a UK institution which is (or, but for the exercise of a stabilisation power, would be) an investment firm for the purposes of Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions.
(2) But “investment firm” does not include—
(a) an institution which is also—
(i) a bank (within the meaning of Part 1),
(ii) a building society (within the meaning of section 119 of the Building Societies Act 1986), or
(iii) a credit union (within the meaning of section 31 of the Credit Unions Act 1979 or Article 2(2) of the Credit Unions (Northern Ireland) Order 1985), or
(b) an institution which is of a class or description specified in an order made by the Treasury.
(a) is to be made by statutory instrument, and
(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.
(4) If an order contains a statement that the Treasury are of the opinion that, by reason of urgency, it is necessary to make the order without complying with subsection (3)(b)—
(a) the order may be made, and
(b) the order lapses unless approved by resolution of each House of Parliament during the period of 28 days (ignoring periods of dissolution, prorogation or adjournment of either House for more than 4 days) beginning with the day on which the order is made.
(5) The lapse of an order under subsection (4)(b)—
(a) does not invalidate anything done under or in reliance on the order before the lapse and at a time when neither House has declined to approve the order, and
(b) does not prevent the making of a new order (in new terms).
(6) In subsection (1) “UK institution” means an institution which is incorporated in, or formed under the law of any part of, the United Kingdom.”
(8) In the Table in section 259 (statutory instruments), in Part 7 after the entry relating to section 257 insert—
(9) In the Table in section 261 (index of defined terms), after the entry relating to “inter-bank payment system”, insert—
193G: After Clause 86, insert the following new Clause—
“Application to UK clearing houses
(1) The Banking Act 2009 is amended as follows.
(2) In section 1 (overview), after the entry in the Table relating to section 89A, insert—
“(9) Section 89B applies this Part to UK clearing houses with modifications.”
“39A Banks which are clearing houses
Sections 89C to 89E (clearing house rules, membership and recognition) apply in relation to a bank which would be a UK clearing house but for section 89G(2) (exclusion of banks etc from definition of UK clearing house) as they apply in relation to a UK clearing house.”
(5) In section 75(5) (power to change law: application to other institutions), after paragraph (ca) insert—
“(cb) to UK clearing houses, or”.
(6) After section 89A (and in Part 1) insert—
“UK clearing houses89B Application to UK clearing houses
(1) This Part applies to UK clearing houses as it applies to banks, subject to—
(a) the modifications specified in subsections (2) to (5), and in the Table in subsection (6), and
(b) any other necessary modifications.
(2) For section 13 substitute—
(1) The third stabilisation option is to transfer ownership of the UK clearing house to any person.
(2) For that purpose the Bank of England may make one or more share transfer instruments.”
(3) For sections 28 and 29 substitute—
(1) This section applies where the Bank of England has made a share transfer instrument, in respect of securities issued by a UK clearing house, in accordance with section 13(2) (“the original instrument”).
(2) The Bank of England may make one or more onward share transfer instruments.
(3) An onward share transfer instrument is a share transfer instrument which—
(a) provides for the transfer of—
(i) securities which were issued by the UK clearing house before the original instrument and have been transferred by the original instrument or a supplemental share transfer instrument, or
(ii) securities which were issued by the UK clearing house after the original instrument;
(b) makes other provision for the purposes of, or in connection with, the transfer of securities issued by the UK clearing house (whether the transfer has been or is to be effected by that instrument, by another share transfer instrument or otherwise).
(4) An onward share transfer instrument may not transfer securities to the transferor under the original instrument.
(5) The Bank of England may not make an onward share transfer instrument unless the transferee under the original instrument is—
(a) the Bank of England,
(b) a nominee of the Treasury, or
(c) a company wholly owned by the Bank of England or the Treasury.
(6) Sections 7 and 8 do not apply to an onward share transfer instrument (but it is to be treated in the same way as any other share transfer instrument for all other purposes, including for the purposes of the application of a power under this Part).
(7) Before making an onward share transfer instrument the Bank of England must consult—
(a) if the UK clearing house is a PRA-authorised person, the PRA, and
(b) the FCA.
(8) Section 26 applies where the Bank of England has made an onward share transfer instrument.
(1) This section applies where the Bank of England has made a share transfer instrument in accordance with section 13(2) (“the original instrument”) providing for the transfer of securities issued by a UK clearing house to a person (“the original transferee”).
(2) The Bank of England may make one or more reverse share transfer instruments in respect of securities issued by the UK clearing house and held by the original transferee (whether or not they were transferred by the original instrument).
(3) If the Bank of England makes an onward share transfer instrument in respect of securities transferred by the original instrument, the Bank may make one or more reverse share transfer instruments in respect of securities issued by the UK clearing house and held by a transferee under the onward share transfer instrument (“the onward transferee”).
(4) A reverse share transfer instrument is a share transfer instrument which—
(a) provides for transfer to the transferor under the original instrument (where subsection (2) applies);
(b) provides for transfer to the original transferee (where subsection (3) applies);
(c) makes other provision for the purposes of, or in connection with, the transfer of securities which are, could be or could have been transferred under paragraph (a) or (b).
(5) The Bank of England may not make a reverse share transfer instrument under subsection (2) unless—
(a) the original transferee is—
(i) the Bank of England,
(ii) a company wholly owned by the Bank of England or the Treasury, or
(iii) a nominee of the Treasury, or
(b) the reverse share transfer instrument is made with the written consent of the original transferee.
(6) The Bank of England may not make a reverse share transfer instrument under subsection (3) unless—
(a) the onward transferee is—
(i) the Bank of England,
(ii) a company wholly owned by the Bank of England or the Treasury, or
(iii) a nominee of the Treasury, or
(b) the reverse share transfer instrument is made with the written consent of the onward transferee.
(7) Sections 7 and 8 do not apply to a reverse share transfer instrument (but it is to be treated in the same way as any other share transfer instrument for all other purposes including for the purposes of the application of a power under this Part).
(8) Before making a reverse share transfer instrument the Bank of England must consult—
(a) if the UK clearing house is a PRA-authorised person, the PRA, and
(b) the FCA.
(9) Section 26 applies where the Bank of England has made a reverse share transfer instrument.”
(4) For sections 45 and 46 substitute—
“45 Transfer of ownership: property transfer
(1) This section applies where the Bank of England has made a share transfer instrument, in respect of securities issued by a UK clearing house, in accordance with section 13(2) (“the original instrument”).
(2) The Bank of England may make one or more property transfer instruments.
(3) A property transfer instrument is an instrument which—
(a) provides for property, rights or liabilities of the UK clearing house to be transferred (whether accruing or arising before or after the original instrument);
(b) makes other provision for the purposes of, or in connection with, the transfer of property, rights or liabilities of the UK clearing house (whether the transfer has been or is to be effected by the instrument or otherwise).
(4) The Bank of England may not make a property transfer instrument in accordance with this section unless the original instrument transferred securities to—
(a) the Bank of England,
(b) a company wholly owned by the Bank of England or the Treasury, or
(c) a nominee of the Treasury.
(5) Sections 7 and 8 do not apply to a property transfer instrument made in accordance with this section.
(6) Section 42 applies where the Bank of England has made a property transfer instrument in accordance with this section.
(7) Before making a property transfer instrument in accordance with this section, the Bank of England must consult—
(a) if the UK clearing house is a PRA-authorised person, the PRA, and
(b) the FCA.
46 Transfer of ownership: reverse property transfer
(1) This section applies where the Bank of England has made a property transfer instrument in accordance with section 45(2) (“the original instrument”).
(2) The Bank of England may make one or more reverse property transfer instruments in respect of property, rights or liabilities of the transferee under the original instrument.
(3) A reverse property transfer instrument is a property transfer instrument which—
(a) provides for transfer to the transferor under the original instrument;
(b) makes other provision for the purposes of, or in connection with, the transfer of property, rights or liabilities which are, could be or could have been transferred.
(4) The Bank of England must not make a reverse property transfer instrument unless—
(a) the transferee under the original instrument is—
(i) the Bank of England,
(ii) a company wholly owned by the Bank of England or the Treasury, or
(iii) a nominee of the Treasury, or
(b) the reverse property transfer instrument is made with the written consent of the transferee under the original instrument.
(5) Sections 7 and 8 do not apply to a reverse property transfer instrument made in accordance with this section.
(6) Before making a reverse property transfer instrument in accordance with this section, the Bank of England must consult—
(a) if the UK clearing house is a PRA-authorised person, the PRA, and
(b) the FCA.
(7) Section 42 applies where the Bank of England has made a reverse property transfer instrument in accordance with this section.”
(5) For section 81 substitute—
“81 Transfer of ownership: report
(1) This section applies where the Bank of England makes one or more share transfer instruments in respect of a UK clearing house under section 13(2).
(2) The Bank must report to the Chancellor of the Exchequer about the exercise of the power to make share transfer instruments under that section.
(3) The report must comply with any requirements as to content specified by the Treasury.
(4) The report must be made as soon as is reasonably practicable after the end of one year beginning with the date of the first transfer instrument made under section 13(2).”
(6) The table mentioned in subsection (1)(a) is as follows—
(1) A property transfer instrument made in respect of a UK clearing house may make provision about the consequences of a transfer for the rules of the clearing house.
(2) In particular, an instrument may—
(a) modify or amend the rules of a UK clearing house;
(b) in a case where some, but not all, of the business of a UK clearing house is transferred, make provision as to the application of the rules in relation to the parts of the business that are, and are not, transferred.
(3) Provision by virtue of this section may (but need not) be limited so as to have effect—
(a) for a specified period, or
(b) until a specified event occurs or does not occur.
(1) A property transfer instrument made in respect of a UK clearing house may make provision about the consequences of a transfer for membership of the clearing house.
(2) In particular, an instrument may—
(a) make provision modifying the terms on which a person is a member of a UK clearing house;
(b) in a case where some, but not all, of the business of a UK clearing house is transferred, provide for a person who was a member of the transferor to remain a member of the transferor while also becoming a member of the transferee.
89E Recognition of transferee company
(1) The Bank of England may provide for a company to which the business of a UK clearing house is transferred in accordance with section 12(2) to be treated as a recognised clearing house for the purposes of the Financial Services and Markets Act 2000—
(a) for a specified period, or
(b) until a specified event occurs.
(2) The provision may have effect—
(a) for a period specified in the instrument, or
(b) until the occurrence of an event specified or described in the instrument.
(3) The power under this section—
(a) may be exercised only with the consent of the Treasury, and
(b) must be exercised by way of provision in a property transfer instrument (or supplemental instrument).
89F Clearing house compensation orders
(1) The Treasury may by order make provision for protecting the financial interests of transferors and others in connection with any transfer under this Part as it applies by virtue of section 89B.
(2) The order may make provision establishing a scheme—
(a) for determining whether transferors should be paid compensation, or providing for transferors to be paid compensation, and establishing a scheme for paying any compensation,
(b) under which transferors become entitled to the proceeds of the disposal of things transferred in specified circumstances, and to a specified extent, and
(c) for compensation to be paid to persons other than transferors.
(a) is to be made by statutory instrument, and
(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.
89G Interpretation: “UK clearing house” &c.
(1) In this Part “UK clearing house” means a clearing house—
(a) which is incorporated in, or formed under the law of any part of, the United Kingdom,
(b) which provides central counterparty clearing services, and
(c) in relation to which a recognition order is in force under Part 18 of the Financial Services and Markets Act 2000.
(2) But “UK clearing house” does not include a clearing house which is also—
(a) a bank,
(b) a building society (within the meaning of section 119 of the Building Societies Act 1986),
(c) a credit union (within the meaning of section 31 of the Credit Unions Act 1979 or Article 2(2) of the Credit Unions (Northern Ireland) Order 1985), or
(d) an investment firm.
(3) Where a stabilisation power is exercised in respect of a UK clearing house, it does not cease to be a UK clearing house for the purposes of this Part if the recognition order referred to in subsection (1)(c) is later revoked.
“central counterparty clearing services” has the same meaning as in section 155 of the Companies Act 1989 (see subsection (3A) of that section), and
“PRA-authorised person” has the meaning given by section 2B(5) of the Financial Services and Markets Act 2000.”
(7) In the Table in section 259 (statutory instruments), in Part 1 after the entry relating to section 89 insert—
(8) In the Table in section 261 (index of defined terms)—
(a) after the entry relating to “bridge bank share transfer instrument” insert—
(c) at the end insert—
Lord Sassoon: My Lords, as the Committee will see, we continue with a related group. Amendment 193G would apply the special resolution regime set out in Part 1 of the Banking Act 2009 to UK clearing houses with a number of important modifications. Where a UK clearing house is in serious financial difficulties that threaten its ongoing viability and pose a systemic threat, the Bank of England will be able to exercise stabilisation powers to ensure that financial stability is maintained.