Financial Services Bill

My Lords, I am grateful to the Minister for introducing this debate. I must declare an interest, in that I am employed by Mizuho International plc, which is regulated by the FSA, and I am a director of other investment companies. As this parliamentary Session limps toward its eventual end, the Government are introducing ever more disappointing legislation. This Financial Services Bill, following on from the absurd Fiscal Responsibility Bill, completely fails to inspire or provide any confidence that the Government have finally got to grips with the changes that must be made to regulation in order to minimise the risk of another catastrophic regulatory failure, to nurture our crucial financial services sector back to health and to protect the interests of depositors and borrowers while economic conditions remain fragile. As many noble Lords have already said, the tripartite arrangements have not worked well. It was always unclear how the Bank of England could properly carry out its objectives to achieve monetary stability and maintain financial stability, without having even the ultimate right to supervise the activities of the principal players in financial markets. With this Bill, the Government have missed the chance to restore the ultimate authority of the Bank of England as macro-prudential regulator. The Minister argues that the Council for Financial Stability will ensure that improved co-ordination between the tripartite authorities will largely eliminate the risk of failure of our regulatory system in future. The Bill does not provide enough comfort that the council will, in reality, be any more effective than the tripartite standing committee which it replaces. It permits delegation of representation by any of its members, so I think it unlikely that the Chancellor of the Exchequer, the Governor of the Bank of England and the Chairman of the FSA would really meet in person as the council, at least once a quarter. It is clear that the Bank of England is best placed to have the primary responsibility for evaluating systemic threats to financial stability. In order to do that effectively, it needs to have clear, ultimate responsibility for macro-prudential regulation and the right to obtain whatever data it deems necessary in order to discharge its responsibilities effectively. The Government’s proposal to give the FSA an additional objective to maintain financial stability—identical to that of the Bank of England—merely serves to confuse further an ambiguous situation. However, there is a much more serious ambiguous situation which this Bill does nothing—and, I fear, can do nothing—to address. That is that the Government have signed up to the creation of three new super-regulators at the European level. In this situation, the FSA can no longer make any regulatory policy by itself. Even though its voice and influence will clearly be stronger than those of the financial regulators of very many of the other EU member states, it still will have but one vote out of 27 in deciding matters of regulatory policy, on which we will not always agree with France or Germany. That the Government have allowed this situation to arise is extremely serious, and leaves successor Governments with enormous problems. London is the only significant wholesale financial market in the EU, and is arguably the leading financial market in the world. Our regulator should clearly have the right to sit at the top table of financial regulators, alongside the SEC of the United States, Japan’s FSA and other regulators of major financial markets. But the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority will claim that they should play this role; and however effective our subordinated authorities—be they the Bank of England or the FSA—may be at protecting London’s interests, the loss of national control of our regulators will make it increasingly difficult for Britain to maintain, and further enhance, its role as the world’s leading centre for international financial services. The prosperity of London’s key industries will become yet more vulnerable to the whims of legislators and regulators from the EU and other countries. The hedge funds directive, the Alternative Investment Fund Management Directive, is a good example. Even though, belatedly, the Government have tried to obtain improvements to protect the interests of alternative fund managers operating in the UK, the draft directive, which was published five months ago, is still regarded as unworkable as it currently stands by the European Union Committee of your Lordships’ House. The committee has only this month urged that, ""the Government should not agree the Directive unless it is compatible with equivalent legislation with regulatory regimes in third countries and in particular in the United States, in order to avoid a situation in which EU AIFMs lose competitiveness at a global level"." As the Minister knows, most of the EU’s hedge fund industry is here in London. He has himself expressed concern that the directive could lead to an exodus of hedge funds and private equity funds from London. Does he accept the view of the Committee not to agree the directive unless it is substantially improved? Do the Government have the power not to agree the directive, should they wish to withhold their consent? I do not wish to say that we should set our regulatory policy in isolation, but financial markets are global, not European. It makes no sense to co-ordinate or, worse, subordinate, at the European level without first agreeing broad common standards and principles with the United States, Singapore, Hong Kong, Japan, Dubai and all other international financial centres. That is why I welcome the Government’s intention to give the FSA a duty in Clause 8 to promote international regulation—though I would like to see a reference to the "necessity" rather than just the "desirability" of maintaining the competitive position of UK financial services. As far as the separation of commercial banking and investment banking is concerned, I agree with my noble friend Lord Blackwell that sufficient protection for retail depositors probably could be obtained through strictly ring-fenced, separately capitalised subsidiaries under a revitalised and renewed supervisory regime. I remember, as a member of the Joint Committee under the noble Lord, Lord Burns, which scrutinised the Financial Services and Markets Bill in 1999, that some members regretted that the maintenance of the competitiveness of the UK’s financial markets was not made one of the FSA’s objectives. The need to have regard to competitiveness is merely one of the principles which should be taken into account in pursuing the objectives. Will the Minister tell the House why the Government have not used this opportunity to protect the competitiveness of the City, given all the other measures they have taken recently which threaten its competitiveness? In 1999, the Joint Committee also had reservations about giving the FSA an objective of promoting public understanding of the financial system, the "public awareness" objective. This has never sat well with the FSA’s principal activities of prudential regulation and oversight of wholesale and retail businesses. The Government have attempted to rectify this by removing the public awareness objective from the FSA and giving it to a new institution—the rather weakly named consumer financial education body. The principal voluntary agencies—Citizens Advice, Consumer Focus, Which? and others—whose work is so valuable, especially under the current economic conditions, have all welcomed the improved focus on consumer financial education that this body should create. But, however desirable greater public awareness and better understanding of financial markets may be, have the Government considered other more cost-effective ways of supporting it? I think that the noble Lord, Lord Barnett, said the same thing. My noble friend Lord Eccles also correctly questioned the role of the public sector in this area. We already have too many expensive quangos with a chairman, chief executive and board of directors, even if, as in this case, they are not to be regarded as exercising functions on behalf of the Crown. Would it not be cheaper and more efficient to expand the remit of Consumer Direct, funded by the Office of Fair Trading? The FSA’s subvention for public awareness and its contribution to the "Money Made Clear" scheme could be passed to Consumer Direct. This might be more effective and a cheaper way of achieving the Government’s purpose, helping to avoid escalation of levies payable by market participants, which also threaten competitiveness and therefore, ultimately, consumer choice. Consumer Focus also sensibly asks why the Government have not used the opportunity provided by the Bill to strengthen further consumer protection against credit card companies, such as by requiring them to allocate a consumer’s debt payments to their most expensive debt first, as is sensible, rather than last, as they mostly do at present. Clauses 9 to 11 deal with executive remuneration. I believe that these provisions are far too interventionist, especially the power to override employment contracts. I agree that the harmful incentivisation of traders to produce substantial short-term returns in order to maximise their bonuses should be ended. However, the increased capital backing for these high-risk businesses, which is or will be required, will solve the problem by reducing the margin earned in these businesses to a reasonable level. Basically, remuneration arrangements should surely be no concern of the state, except where the state is also the shareholder, as it is in the cases of Northern Rock, RBS and the Lloyds Banking Group, among others. Clauses 13 to 17 deal with the FSA’s enforcement and disciplinary powers, which are already arguably too intrusive and dictatorial. For example, the powers to prohibit or restrict short selling are too restrictive. Surely, powers should be directed at particular instruments rather than institutions. The BBA correctly points out that the FSA’s short-selling rules should not be grouped with market abuse rules. Clauses 19 to 25 deal with collective proceedings. I agree with the CBI and the BBA that we should resist the proposal to allow an opt-out approach to collective redress because it would accelerate the undesirable trend towards an increasingly litigious society. Clause 26, covering consumer redress schemes, attempts to widen the definition of a consumer to include a person who may have contemplated using a service, which, as the BBA has pointed out, is far too broad. The clause also enables the FSA to act as prosecution, judge, jury and executioner in this area, which is unsatisfactory. There must be a system of consumer redress which is subject to independent court approval. I doubt that this Bill will ever reach the statute book, but it has been a privilege to participate in this debate and I look forward to the Minister’s reply.