Financial Services Bill

My Lords, we have just started to emerge from a financial crisis that has affected businesses and consumers across the world. This global crisis has led us, in the same way as other countries around the world, to fundamentally review our financial system and its interaction with the broader economy. Last year, with the Banking Act, we ensured that UK authorities have the power to deal with failing banks, while continuing to protect consumers and taxpayers. This year, we have an opportunity to revitalise the financial framework, so that the UK is ready not only to address the effects of the crisis, protecting consumers and businesses, but also to tackle its root causes. Well managed, well functioning financial institutions are in the national interest. It is clear that our objective should be to help build a financial sector that supports the wider economy, and is not only commercially viable, but also stable. The Government have a duty to ensure that we harness the lessons of the past two years, and make sure that, in future, any crisis will be not only less damaging, but less likely altogether. To achieve this, we need to tackle shortcomings throughout the system. There is no one silver bullet that can remedy in a single attempt all the global challenges we face, and that is why we need to pursue a comprehensive set of measures. We need to deal with both the way firms are managed, and the quantity and quality of capital they hold; both the way regulators assess and monitor risk, and the way the authorities co-ordinate their activities; and both the way consumers handle their financial affairs, and the way they get redress in cases of detriment. This Bill seeks to address some of these important issues. I think all sides of the House will agree that tackling these matters is the right thing to do, and I am pleased that both opposition parties made statements in support of this piece of legislation in another place. Indeed, the Conservative spokesperson in another place said in his speech at Third Reading that, when glancing at the content of the Bill, he realised how much of it he supported. This show of support is indicative of the sensible nature of the measures in the Bill, which are designed to achieve objectives on which we can all agree. First, the Government have a clear strategy to enhance the focus on systemic risk, and provide a clear mechanism for co-operation. Clauses 1 to 4 establish a statutory Council for Financial Stability, made up of the Chancellor, the chairman of the FSA, and the Governor of the Bank of England. The purpose of this council is to ensure that systemic risks to the stability of the UK financial system and the wider economy can be swiftly identified and addressed. It will deal with both immediate and longer-term strategic issues, and will formally consider the Bank’s financial stability report and the FSA’s financial risk outlook in quarterly strategic meetings. I am aware of the extensive debate on the institutional structure of financial regulation that occurred during the discussion of this legislation in another place, but I am clear that our model, with an independent central bank and a single, independent financial regulator, is the right approach. The council will strengthen the existing regulatory structure and provide the high-level framework needed to better co-ordinate the authorities’ approach to financial stability. It will deliver important improvements through a more structured, formal, open and accountable approach to co-ordination between the three authorities. The Bill requires the council: to meet regularly, at least once a quarter; to be much more open, through minuting its quarterly strategic discussions; and to be accountable to Parliament, through a formal annual report on the council and financial stability that will be laid before Parliament. These are all useful, important changes that improve the way tripartite co-ordination works in practice. As noble Lords are aware, the Government are keen to have these enhanced arrangements in place as soon as possible, and we have set up the council in shadow form on the basis of the model set out in this Bill and the draft terms of reference. The council met first on 14 January, and minutes of that meeting are now available on the Treasury website. The meeting, which I attended, was very useful, and I am highly optimistic that it will deliver on its objectives. The council is perhaps not a glamorous or radical upheaval of the current system; instead it is a practical attempt to put the framework for co-ordination on a formal, statutory basis, with greater structure, transparency and parliamentary accountability. I am hopeful that noble Lords will view the usefulness of this forum from a pragmatic perspective, rather than insist on institutional chopping and changing in the hope that simply rearranging the deckchairs will somehow be conducive to the improved monitoring of financial stability. Clearly, that would not be the case. In tandem with the council, the FSA, through Clauses 5 and 7, will be given a financial stability objective and related powers to underline the need to consider systemic risk when supervising individual banks. Clauses 9 to 11 address the issue of remuneration practices that incentivise excessive risk taking. Misplaced incentives for bankers to conduct business in an overly risky or even reckless manner played a significant part in the run-up to the crisis. The Government will not tolerate any further cavalier behaviour where depositors’ and taxpayers’ money is involved, and where failures could significantly affect the rest of the economy. We need to ensure that remuneration and bonus arrangements do not encourage executives to take excessive and unmanaged risks. The measures in the Bill are twofold, with proposals to enhance control of the system of rewards on the one hand, and transparency and disclosure on the other. First, Clause 11 strengthens the FSA’s hand to take action against remuneration policies that encourage excessive risk taking. The FSA, as regulator, is best placed to ensure that remuneration is consistent with effective risk management, as it is close to the industry, independent and subject to obligations of fairness. The measures that we propose do not simply reaffirm the FSA’s existing powers: they place a duty on the FSA to ensure that remuneration policies are consistent with effective risk management, and are in line with the Financial Stability Board’s recommendations, which take into account the importance of international agreements in this area. We are also empowering the FSA to make rules that impose specific prohibitions on the way in which individuals can be remunerated, by providing for any element of a remuneration agreement that breaches such a prohibition to be automatically void, and for the recovery of any related payment made. This will ensure that executives are not rewarded for failing to manage risk effectively. I assure the House that these provisions will not be retrospective, and that the Government have amended the Bill in another place to clarify this point. Secondly, Clauses 9 and 10 provide the Government with the power to make regulations to implement in full Sir David Walker’s recommendations on disclosure and transparency. This will sit alongside and complement the FSA’s greater control over the system of rewards. These measures will enhance shareholders’ ability to exercise effective oversight over the remuneration paid in companies in which they are investors—a critical deficiency in current custom and practice. We will shortly publish draft regulations setting out the detail of how the Government plan to implement Sir David’s recommendations. The regulations will naturally be subject to full consultation and to the affirmative resolution procedure. Clause 12 relates to recovery and resolution plans, which are sometimes called living wills. These plans will play a key role in reducing the probability and the impact of failure. They aim to make it more credible that firms will be allowed to fail, thereby addressing the moral hazard problem that is particularly associated with systemically significant firms. The recovery and resolution plans are only one element of the Government’s comprehensive policy to deal with systemic risk posed by firms, which also includes tougher prudential requirements on firms that pose the greatest risk. Clauses 6 and 18 to 27 contain measures designed to support and protect consumers. The FSA will establish a new independent consumer financial education body with a remit to enhance consumers’ understanding of money matters and to improve their ability to manage their financial affairs. With support and education, consumers will be empowered to make the right financial decisions, and will be better able to manage their money today and safeguard their livelihoods for the future. The new body will co-ordinate the implementation of a national money guidance service beginning this spring, making available for the first time accessible and impartial information and guidance on a range of financial issues online, on the phone and face-to-face. As well as improving consumers’ financial skills and awareness, we need to provide consumers with better mechanisms for redress. In recent years there have been several instances in which a large group of consumers has suffered detriment at the hands of firms. We cannot allow this to continue. The Bill introduces two measures to enable a large number of similar claims to be dealt with more effectively. Clause 26 proposes to streamline and expand the FSA’s existing power to make rules requiring firms to set up consumer redress schemes where there is evidence of a widespread failure by firms to comply with legal and regulatory requirements. In Clauses 18 to 25, we also propose to enable a representative body to bring an action through the courts on behalf of a group of consumers. This may be necessary when regulatory action is not appropriate, for example, when the law is unclear. This is a ground-breaking development for UK law. It is the first example in the UK of a full collective action in the courts for people with similar claims. It will empower consumers to group together to take legal action against firms, and it avoids the situation where a large number of consumers would have to make identical or similar individual claims. The rule committee of England and Wales and the rule-making bodies in Scotland and Northern Ireland will make generic rules governing court practice and procedure. The Government will then consult further on the supplementary regulations that may be necessary to deal with financial services claims. These may cover, for example, regulatory alternatives and further conditions for authorising collective proceedings, including the approval of the representative. Regulations can also provide for damages to be awarded as a lump sum and ensure that claims do not become time-barred unfairly. Consumers will be able to use collective proceedings to pursue claims relating to financial services once regulations and court rules come into force. We are also proposing to ban unsolicited credit card cheques which tempt those who may already be in financial distress to increase their borrowing, rather than resorting to cheaper and more appropriate forms of credit. These measures are key to renewing consumer confidence in the financial services industry. I am sure the House will agree that giving consumers the information that they need to make sound decisions and the opportunity collectively to seek redress are both good and imperative. I hope that I have provided some additional context to the various measures contained in the Bill and what they will achieve. I very much look forward to the speeches this afternoon, and in due course the Committee debates.