Financial Services Bill

My Lords, this rag bag of a Bill tells us all that we need to know about a Government which have lost their sense of purpose but are struggling on, pretending that they are doing purposeful work. Two weeks ago we debated the vacuous Fiscal Responsibility Bill. That Bill is now an Act but it is no more and no less likely that the Government will be fiscally responsible. This Bill has as its centrepiece the Council for Financial Stability, but if it passes into law, it will be no more and no less likely that financial stability will be preserved. Some parts of the Bill are welcome in principle but are still works in progress and carry the danger of legislating in haste. This House must, in particular, be on guard against good intentions or populism resulting in bad law. We will need to do a lot of work to make what is in the Bill good legislation. There are also great gaps in the Bill where substantive matters should have been addressed. We shall try to fill those gaps. All told, it is not a fine Bill. My noble friend Lord Henley has already deconstructed the Government’s not even half-baked plans for collective action. The spectre of US-style class actions, referred to by the noble and learned Lord, Lord Goldsmith, has rightly terrified the business community in the UK. It has not been reassured by what the Government have said in another place. My noble friend also exposed the weakness at the heart of the changes to the consumer redress powers in Section 404 of FSMA. They are retrospective and sweep away parliamentary oversight and replace it with only judicial review, which is not a proper remedy. We are clear about our support for effective consumer remedies. We would be completely behind the Government if they had demonstrated a balanced and holistic vision of consumer redress in the financial sector, across all consumer-facing sectors and in the European context. However, after 13 years they have chosen to use their last gasps in power to pursue this imperfect legislation. The consumer clauses might be flawed but they do at least tackle an issue of real substance. There is far less substance behind the clauses which set up the Council for Financial Stability. No one should be taken in by dressing up the failed tripartite arrangements in new legislative clothes. I am sure that lessons were learnt from the failures in 2007 and the tripartite authorities will not make the same mistakes again. They do not need the Bill for that. The recent financial crisis exposed the consequence of the Prime Minister’s vandalism when he tore banking supervision out of the Bank of England. He single-handedly destroyed the link between macro-prudential oversight and micro-prudential action. My noble friend Lord Stewartby reminded us that warning signs of overleverage were analysed by the Bank but not translated into practical action. Interdependencies, which were correctly identified by both the noble Lord, Lord Desai, and my noble friend Lady Hogg, were missed. My party’s policy is to reunite macro and micro-prudential supervision in the Bank. There will be no need for a Council for Financial Stability under our policies. Leaving that to one side, the Bill is just not good enough. It fails to identify who is in charge or where the buck stops, to use the phrase of my noble friend Lord Hodgson. It also fails to identify the tools that are needed to maintain financial stability. It leaves many big issues unresolved. How should banks and other systemically important organisations contribute to the cost of failure? Should the structure of the banking industry be changed to minimise risk? My noble friends Lord Lawson and Lord Blackwell offered slightly differing visions of this but agreed that we must address the issue. My honourable friend George Osborne has never ruled this out, but we have always stressed the importance of concerted action in such areas on a global basis. We shall need to return to many of these issues in Committee. At first sight, the financial stability objective introduced by Clause 5 is just another government U-turn. The noble Lord, Lord Eatwell, reminded us that last year, during the Committee stage of the Banking Bill, he sought to introduce that to the FSA. The Minister said clearly and emphatically that it was not "appropriate". Now it appears that it is. The Minister will need to come to Committee with his files full of analysis of why, one year later, Clause 5 is now appropriate. We are completely behind the desire to improve financial understanding and education. While I share my noble friend Lord Eccles’s distaste for yet another public body with its own bureaucracy, we support the creation of a consumer financial education body. The base lines in this area are shockingly low and the task is therefore huge. We are not surprised that the new body will be expensive. The impact assessment talks of costs to the industry and government of £1.5 billion. Only a fraction of this could conceivably come from dormant account money. My party’s view is that the financial services industry should pay for this body, but that means that the industry should have a say in what is spent and how it is spent. The Bill does not achieve this. In the impact assessment, there are some completely wild figures relating to the benefits of the consumer body. We need a much clearer idea about monitoring the achievements of the new body and its value for money. There are also issues about its engagement with consumer groups. Even in this relatively uncontentious part of the Bill, there are major issues for us to explore in Committee. We should all like to think that the new consumer financial education body will deliver sensible financial planning and increased saving, but the hard truth is that the biggest problems to solve lie at present in excessive personal debt. Education, at least in the short term, will not be enough on that front. That is why we welcome the Bill’s ban on credit card cheques, but we are equally disappointed that the Government have not gone further. My noble friend Lord Marlesford, who was unable to be with us for the whole of today’s debate, intends to table amendments to place greater responsibilities on credit card issuers. I agree with my noble friend Lord Trenchard on the other measures needed on credit cards, and we should deal with the OFT’s powers in relation to bank overdrafts following the Supreme Court’s decision. We also agree with the Financial Services Consumer Panel that consumers should have the added protection of earlier disclosure of warnings issued by the FSA for regulatory breaches. We will bring forward amendments in Committee to deal with all these issues. We have made it abundantly clear that we strongly disapprove of many of the current bonus arrangements in banks. They have profited from action taken by Governments and monetary authorities around the world to protect the global financial system. We believe that banks should now be rebuilding their balance sheets and supporting British businesses with increased lending, not paying large cash bonuses. We completely agree that the remuneration practices of banks must reflect risk and that the regulator must be concerned with that. But we must be wary of legislating for a regime which speaks to today’s rather than tomorrow’s issues. Remuneration controls may well be part of a rational framework of prudential supervision, but they must not be drafted with the court of public opinion in mind. We must also ensure that we keep in step with the rest of the world and get the balance right between protecting financial stability and usurping the role of owners and shareholders. These are not easy issues to deal with in legislation, as we shall doubtless expose when we scrutinise Clauses 9 to 11 in Committee. The issue of the draft regulations on remuneration disclosures has also been raised. The Minister in another place said in early January that the draft would be released for consultation "as soon as possible", and the Minister in this House used the word "shortly". He will know that this phrase and word are two of the most slippery in the ministerial lexicon. Can the Minister assure the House that the draft regulations will be available before our Committee stage? We have also made plain our support for recovery and resolution plans which are set out in Clause 12, but, as with the remuneration clauses, we must be sure that our legislative response is properly targeted and durable for the long term, rather than a response to short term issues. It must also be aligned with international rules and be proportionate. We are less than clear that that is what the Bill achieves. There are many issues related to the various additional powers that this Bill seeks to confer on the FSA. Our concerns here tend to be more detailed and technical but, if there is a common theme, it is between the need for the FSA to get the job done, which we recognise, and the FSA being able to steamroller anything or anyone in its path. We will need to explore the balance in Committee. There is one overall point which we must not lose sight of as we scrutinise this Bill. It concerns the cumulative impact on our financial services sector of post-financial crisis changes, including those in this Bill. The financial services sector is a large and important part of our GDP, as my noble friend Lord Howard reminded us. While we may wish that other parts of our economy were stronger to balance this out, I hope that no one wishes harm to one of our most successful industry sectors. As we go through the remaining stages of this Bill, I hope that noble Lords will bear in mind the warnings of the noble Baroness, Lady Valentine, that punishing the banks for their real or perceived failings may end up harming the UK. Overloading the banks with regulatory responses and other burdens may have the effect of cutting off our nose to spite our face. Where does that leave us overall? This Bill is not a major contribution to the big issues facing the financial sector. There are some good points, but many parts of the Bill have as much capacity to do harm as good. Our task of course is to eliminate as much of that harm as we can. Today’s debate has demonstrated that the passage of the Bill will not be straightforward. Your Lordships’ House will need to devote considerable effort if we are to return it to another place in anything like an acceptable form. The Government can do their own sums. There are relatively few days left for scrutiny of legislation. If the Government choose to use those days on this Bill, we will not be found wanting.