Financial Services Bill

My Lords, the Bill is an odd mixture of the grand sweep and the fine detail. It is, as the noble Lord, Lord Eatwell, said, a pudding without a theme, even though many of its ingredients might in themselves be quite palatable. Just to pursue the culinary theme, the noble Lord, Lord Hodgson of Astley Abbotts, described the infrastructure as made of jelly. I am tempted to say that that is why it wobbled so much in the crisis. I turn to the grand sweep of the Bill—which is where the Bill begins, with macro-prudential regulation. It proposes formalising the tripartite agreement by establishing a Council for Financial Stability and it adds to the FSA a financial stability objective and an objective of promoting international regulation. As a number of noble Lords have pointed out, these provisions largely formalise what already exists. It is very difficult to believe that they represent a major change of substance. I very much agree with the noble Baroness, Lady Hogg, when she says that a new Parliament should be spending its time discussing many of these big issues. It is perhaps unsurprising that much of the debate in your Lordships’ House tonight has concentrated on them. Although it is commonplace to attack the tripartite system, as we have had it up to now, for its behaviour and performance before the crisis broke, once the crisis did break, it worked pretty well. In the lead-up to the crisis, the problem was not the structure but the fact that there was a bubble mentality that affected all the players, whether it was the Bank, the FSA, the Treasury or the banks themselves. To argue that changes, including the changes proposed in the Bill, would have made much difference to that bubble mentality is largely wishful thinking. Equally, it is wishful thinking to believe, as the Conservative Opposition do, that changing the name on the door of the FSA will make a fundamental difference in the effectiveness of the regulatory system. The noble Baroness, Lady Hogg, made some very cogent arguments as to why it will be much more difficult to change the system as the Opposition propose to do than they themselves have set out. As she pointed out, they have made it clear that they do not intend to do it in a rush. I will be very interested to see if and when they do indeed get round to it. It seems to me that once you start unpicking the system, the problems that she described will grow in importance. More than anything else, what will make regulation over the next decade more effective is the fact that the regulators themselves have just had the shock of their lives and they do not want to repeat going through that process. Future generations of regulators need an enforced study of the circumstances that led up to this crisis. That will be much more relevant to their effectiveness than their job titles or the committee structure within which they are expected to operate. The big issue that was debated this evening, which we will have to come back to, was whether one should be splitting up the banks. Slightly unusually, I agreed with almost everything that the noble Lord, Lord Lawson, said on the issue. It was extremely interesting that he got such heavyweight support from his Conservative colleagues. There were differences of nuance—whether or not a firewall can be effective—but the basic principle was accepted by the Conservative Benches. I shall be very interested to see whether that support for breaking up the banks is reflected in the summing-up of the noble Baroness, Lady Noakes. I turn to the measures in the Bill with a less grand sweep. We welcome the establishment of the consumer financial education body, because responsibility for consumer education is fragmented. We currently have a patchwork quilt with holes in it, and one hopes that this provision will result in the replacement of that patchwork quilt by a more coherent approach. I share the concerns of the noble Viscount, Lord Eccles, about the costs and bureaucracy that the body could involve. The important thing is to ensure that, having collected the money, the body gets it down to those who can spend it effectively, which will not be the body itself. Organisations such as the CAB are already doing so much good work in this area. The watchword of the body is obviously "prevention is better than cure". I generally like the idea which the noble Lord, Lord Sawyer, adumbrated about involving customers in the actions of retail banks. One of the benefits of such an approach would be to improve the education of customers, who would be encouraged to look not just at how the banks work but at how they get involved in the financial system. We are glad to see legislation on remuneration. We are also pleased to see the likelihood of the imminent implementation of the Walker report. The Bill as it stands is extremely draconian; it means that the Government can do almost whatever they want on remuneration, subject to secondary legislation. As with other aspects of the Bill, it is unsatisfactory that we have not seen draft secondary legislation at this stage. I do not agree with the noble Lord, Lord Blackwell, when he says that we should not set out non-director remuneration for public view. The levels and forms of remuneration for non-directors played a part, arguably a significant one, in some of the excessive risk-taking by the banks, and therefore in the debacle that followed. In that respect, senior and highly remunerated bank employees are different from Jonathan Ross and Wayne Rooney. Equally, I cannot agree with the noble Viscount, Lord Trenchard, when he says that this should not be a matter for the state. The state is still picking up the bill for the remuneration systems that led to such reckless risk-taking. Recovery and resolution panels have not been much touched on; it is a very technical issue. They sound quite sensible in principle, but I have considerable doubts about their practical value. I share the concerns raised by the noble Lord, Lord Eatwell, when he talked about the difference between what is good in systemic terms and what is good for an individual institution. One of the common features of these plans is that they will involve banks that are going into administration selling off parts of their business. If you have a systemic problem like we had 18 months ago, all the banks will be faced with the same problem: they are trying to flog off the same kind of assets into a falling market. The Treasury documentation talks about the banks negotiating a deal with potential purchasers in advance of their going into administration. That seems wishful thinking. It seems extremely naïve to think that one bank could go to another which might be a purchaser and say, "If we go bust, how much will you buy this part of the bank for?". I also have concerns about the bureaucracy that is implied and planned under this system. I had the benefit on a recent transatlantic flight of reading the Treasury’s document entitled Establishing Resolution Arrangements for Investment Banks. Although this document is an intellectual tour de force and extremely long, the more I flicked through it, the more it made my heart sink. It proposes, for example, establishing a board-level business resolution officer—a BRO—who will spend up to a day a week working on resolution plans. The BRO will produce a BIP—a business information pack—for administrators which is described as a "living document", continuously updated. It will probably require a client assets trustee, and it will require a client asset agency as part of the FSA. As the noble Baroness, Lady Valentine, pointed out, this really is over-engineering on a pretty grand scale. Collective proceedings are the most complex and controversial part of the bank, once we have dealt with macro-prudential management. The principle of giving easier redress to classes of people who have suffered loss as a result of the behaviour of financial services firms is one that everyone supports. My principal concern about the Bill’s approach to this is that it puts in place two parallel approaches—one via the FSA and one via the courts. In principle, groups of consumers could pursue the two in parallel, which does not seem sensible. It would be better for the FSA to be the first route for those seeking collective redress. The advantage of going to the FSA first is that the FSA is likely to be able to operate more quickly and cheaply—and to get the redress sorted out—than going through the court route. I agree with the noble Lord, Lord Henley, that the court route should be the last resort, rather than, potentially, the first resort. Like others, I have several other concerns about the details of the provisions. I agree with the noble and learned Lord, Lord Goldsmith, that there has been inadequate consultation. There has been no consultation of any substance. I am concerned that the provisions apply only to FSA-authorised firms, not to firms holding consumer credit licences. We will table amendments to deal with that. At the moment, the Bill raises a number of unanswered questions. Who will be able to initiate collective proceedings? How do the provisions of the Bill chime with international discussions and likely developments here? How will costs be apportioned? Will the "loser pays" principle remain? Is it sensible to have both opt-out and opt-in approaches? These are all issues that need to be debated at some length in your Lordships’ House. There is another area where I have some concern. Like a number of other noble Lords, including the noble Lord, Lord Whitty, I fear that—although we will not necessarily get to the US stage of massive class action suits left, right and centre—American law firms are setting up practices in the UK specifically to deal with these issues. Even before we had this provision, in previous mis-selling cases, such as the split capital investment trust case, investors gave law firms significant sums, which they often could not afford, to pursue class actions that were bound to fail. We cannot be at all complacent in this area, but I fear that the consumer bodies have sometimes sounded complacent. As for the Bill’s consumer redress schemes, although the prohibition of credit card cheques is obviously welcome, we will be looking to add a new provision to ban unsolicited increases to credit and store card limits. This is a major problem for the vulnerable groups who build up debt on credit cards, which they are encouraged to do, without having to express their opinions. This debate has a slightly surreal air to it. We are discussing an extremely important and complex Bill as though it were business as usual. However, we all know that unless the Government give the Bill total primacy over all other parliamentary business over the next month, the chances of it going through your Lordships’ House in the normal manner are nil. It is set to be a victim of the wash-up. That is a serious concern. As we have debated tonight, many aspects of the Bill are contentious and need detailed debate. To make matters worse, over the next few weeks we face the prospect of concentrating on those parts of the Bill which will be reversed if we have a Conservative Government, because those are the parts that come up first. Many of the consumer provisions are towards the end of the Bill. We are in danger of giving them little or no consideration. This is a most unsatisfactory situation. What plans, if any, do the Government have to ensure that the Bill is properly debated, rather than being either nodded through or eviscerated in the wash-up?