My Lords, these amendments are about the heart of banking and insurance. They are about stewardship. Amendment 46A requires the FCA and the PRA to co-ordinate to ensure effective stewardship. Amendment 79B clarifies that the FCA’s powers enable it to make rules on stewardship. They give stewardship an explicit place n the Bill and confirm that the Government expect the FCA to act on this.
In the aftermath of the financial crisis it was acknowledged that institutional investors had acted as “absentee landlords”, not doing enough to challenge the risky behaviour of the banks they effectively owned. This had direct consequences for the savers whose money these shareholders were investing. The Financial Reporting Council established the stewardship code to encourage investors to behave as active owners in the companies in which they invest. This is vital to building responsible capitalism where shareholders exercise greater oversight of, for example, executive pay. As the noble Lord, Lord Turner, told the Joint Committee,
“shareholders … have major responsibilities. A lot of what went wrong with our banking system was encouraged by a set of shareholders who thought that high levels of leverage, rapid growth of EPS and aggressive acquisitions were rather sensible”.
Stewardship was identified by the Kay review as a principle of more effective capital markets. The first of his principles reads:
“All participants in the equity investment chain should act according to the principles of stewardship ... respect for those whose funds are invested or managed, and trust in those by whom the funds are … managed”.
Therefore, if this Bill is to help prevent another financial crisis, regulators must address the quality of shareholder oversight.
The FSA has a rule requiring asset managers acting on behalf of institutional clients to disclose whether they commit to the stewardship code. However, the organisation FairPensions found that the quality of such disclosures is often poor, particularly over managing conflicts of interest. Furthermore, this FSA rule does not mandate compliance and does not apply to firms acting on behalf of retail clients. It looks rather as if the FSA does not regard stewardship as a consumer issue, despite its implications for consumer outcomes.
The Bill makes no mention of stewardship despite the importance of the objectives of both the FCA and the PRA and despite the fact that shareholders have the primary responsibility for ensuring that banks are well run. Regulators simply must take an interest in how shareholders discharge this responsibility. I should add, as was mentioned earlier, that the millions of employees soon to be auto-enrolled will depend in part on their agents making sure that the companies in which they invest are well run.
Stewardship is key but there is a mismatch between the code and its enforcement. The FRC oversees the stewardship code, but does not regulate the entities to which the code applies. The PRA may take little interest because the firms are FCA-regulated. Yet the FCA may not accord this any priority, given that the system-wide problems caused by a lack of stewardship make it hard for the FCA to intervene in relation to a particular firm or group of consumers.
The current duty of co-ordination will not resolve this, since it focuses on reducing the burden of regulation on dual-regulated firms, rather than on preventing gaps in regulation between the two new authorities. Stewardship might just end up between the cracks. I feel sure that the Minister will agree on the importance of stewardship and I therefore ask him where responsibility for it will sit in the new architecture. I beg to move.
10 pm