My Lords, in moving Amendment 41, I will speak to Amendments 42 and 43. My noble friend Lord Sharman has put his name to them as well but sadly he cannot be with us tonight. This is familiar territory for noble Lords who took an interest in Committee, so I will endeavour to cut to the chase, emphasising both the reasons for these amendments and why I have so far failed to be reassured by my noble friend’s response. These amendments seek to change Clause 6, which introduces a new Section 3B entitled:
“Regulatory principles to be applied by both regulators”.
The clause goes to the heart of the philosophy that underpins the new regulatory structure. At present, the regulator is only required to be “proportionate” in its approach. My amendment seeks to add the words “reasonable and fair” so that there are three adjectives.
I make it clear at the beginning that this is not an attempt to plead for lower regulatory standards. It is absolutely in the interests of the City to have proper standards of regulation, which is the best way to encourage the growth and development of the financial services industry. Achieving the appropriate level of regulation requires a difficult balance to be struck. If it is too low, London’s reputation as a good and safe place to do business will be damaged and business will move away. If it is too high, the costs, both financial and in management time, will mean that innovation will be discouraged, whole areas of activity will have the stability of the graveyard and plans for the expansion of established businesses will be shelved or transferred to other financial centres. Somebody explaining it to me in the City said, “It’s like Neapolitan ice cream, you have to try to scoop out the vanilla layer that is in the middle between the chocolate and the strawberry”.
I am convinced that the new system will work most effectively if we can encourage the use of judgment and not rely merely on the rigidities of process or box-ticking. Process of course has an important part to play; it provides the framework of the regulatory
system, but unless it is informed by judgment it cannot be truly effective. In earlier debates on this issue, I explained why, in my view, confining regulatory principles to “proportionate” emphasised process at the expense of judgment. I explained in Committee the definition of these three words in the Oxford English Dictionary. I pointed out that “proportionate” suggested a defined, fixed relationship, as well as a one-way one. The example that I used from the Oxford English Dictionary was:
“The toll .. on the canal is proportionate to weight”.
By contrast, “reasonable”—
“Having sound judgement; ready to listen to reason, sensible”—
suggested an element of judgment and of a two-way process.
Currently, there is a widespread view in the City that the regulatory philosophy has shifted to give a much greater emphasis to process and box-ticking, and to the regulator being seen to have covered the bases at the expense of an open judgment-based relationship. I referred earlier to the Star Chamber-like processes of the significant influence function committee, whereby individuals are left in a Kafkaesque limbo for months. I have referred to the indiscriminate use of Section 166 skilled persons reviews, 800 of which are said to be outstanding and likely to cost some £160 million to £200 million to complete. All of that will in due time be paid for by the consumer.
My noble friend Lord Sassoon, not here tonight, has pointed out that if people or firms believe that they have been unfairly treated, they can apply for judicial review. The idea that an individual would take on the might of the regulator is laughable. Whichever of my noble friend’s Bill team officials drafted that reply needs to get some exposure to the real world.
This change of approach by the regulator has caused an equal and opposite reaction in the regulated community. We have seen the emergence of plea bargaining. Just as Mr Tappin, extradited to the US on a charge that he strongly denied, concluded that a guilty plea leading to three years in a UK jail was preferable to a possible 30 years in a US penitentiary, so individuals decide to give up the fight and agree to a reduced penalty in return for a guilty plea. As one person put it to me, “I want to get on with my life”. He did not believe that he was guilty, but he had a life to live and did not have the time available or the resources that the regulator has at his disposal.
As my noble friend Lord Flight pointed out in our debate in Committee on 24 October, firms now disclose the minimum necessary to comply with the law. They have learnt that any admission of weakness will be seized on by the regulator, who all too often appears to act as if they believe that they have been told only half the story.
I do not believe that these and similar developments bode well for a future regulatory approach. How do we break this vicious circle? The early signs from the FCA are not encouraging. Some testosterone-fuelled remarks about “shooting first and asking questions after” have been quoted previously in your Lordships’ House. Could there ever be a sensible regulatory principle? The tone of Journey to the FCA, the booklet recently
published, seems to give only the slightest of nods to the need to create appropriate relationships with the regulated firms. I have quoted previously at some length from that document to show what I mean and I shall not trespass on the good will of the House at this late hour again this evening.
This is not just a theoretical discussion. Once confidence in the regulator’s readiness to listen to reason is damaged or lost, we risk a move away from the United Kingdom and the City. It may be a trickle at first, but it could quickly gather pace. I hope that the Minister’s officials have drawn his attention to the article in last Friday’s Financial Times,
“MPs to probe London job losses”,
in which a lobby group points to,
“an ‘amber warning light’ flashing over the country”.
I hope that his officials have also picked up the piece in the Sunday Times about London being ousted by New York as the largest financial centre. The Bill team may disregard that as journalistic puff, but they might like to read the document from the ABI which states:
“As we discussed in Chapter 1, we would like to go further in developing a common FCA and industry sense of purpose, to deliver well-functioning markets that benefit consumers and, ideally, help the country tackle some significant public policy challenges. It is in the interests of the FCA and the industry to work together to jointly enhance their reputations. Increased public trust and greater customer confidence would be beneficial for the industry, but they would also reflect well on the FCA, and indeed the Government”.
Significantly, it then states:
“This requires a change from the FSA’s traditional approach, which did not usually convey a drive towards medium-term positive outcomes”.
These may or not be the beginning of a trickle, but they are certainly a lot of straws in the wind of people dissatisfied with the philosophy that is being adopted and that would be enhanced if we had just the word “proportionate” left in the regulatory principles.
I shall make one final point. I said earlier that my noble friend had always maintained that there is no need to add “reasonable and fair” because “proportionate” includes that requirement. As I have explained, I do not agree. However, I am not sure that the Government really agree either. When my noble friend wrote to me, the noble Lord, Lord Phillips, and the noble Baroness, Lady Kramer, about the social investment issue that we discussed earlier today, the note read,
“Ministers are clear that this should not be done at any cost … we want to see the regulator react flexibly, openly and proportionately”.
Clearly, his officials do not believe that the definition of proportionality includes flexibility or openness, or why would they have drafted the note in that way? How then can they argue that “proportionate” includes “reasonable and fair”? If my noble friend were to say that, if I were to withdraw my amendment in favour of one that replaced the words “reasonable and fair” with “flexible and open”, he would accept it, I would be happy to do so. I beg to move.
9.30 pm