My Lords, we on this side of the House broadly support the conclusions of the Wheatley report and commend Mr Wheatley and his team for the prompt delivery of such a comprehensive document. I say “broadly” because there are a number of details that we believe are not quite right and which require careful consideration in these—let us call them—quasi-Committee proceedings.
The grouping of all the amendments relating to LIBOR into a single group is exceedingly unwieldy and not conducive to constructive scrutiny. After all, as the noble Lord himself pointed out, there are three distinct elements within this group: first, the amendments designed to bring the setting of benchmarks within the compass of regulated activities under FiSMA; secondly, the rules requiring participation in the process of establishing the benchmark; and, thirdly, the establishment of criminal penalties for abuses of the process of setting a benchmark. Each of these three elements merits separate discussion. Rolling them all into one group just because they carry the label “LIBOR” is, to put the matter politely, extremely unhelpful.
For the purposes of this debate, at least, let us degroup the cumbersome group 1 into group 1A, definition of a benchmark; group 1B, establishing the benchmark; and group 1C, criminal offences. Group 1A encompasses Amendments 70 and 71. Amendment 72 is simply consequential. Amendment 70, which incorporates benchmarks into the order-making process, requires some clarification in that, as far as I can read through the existing FiSMA, an affirmative resolution of both Houses will be required for that order to be made. I think I heard the noble Lord say that in his speech, but he said so many other things as well that I hope he can confirm that incorporating any new benchmark into this process will require an affirmative resolution of both Houses.
Moving on to Amendment 71, which is the definition of a benchmark chosen by the Treasury, I disagree with what the noble Lord said. He asserted that this
proposed new subsection would also cover commodity benchmarks and he was probably thinking of the recent scandals in the gas market and the accusations levelled at Barclays by the US authorities over the manipulation of the electricity market in California. These particular benchmarks were not specifically involved with investment, but would really come under the heading of trading. Amendment 71 refers to “relating to investments”. All the qualifications are in proposed new subsection (6)(c). Proposed new subsection (6)(c)(i) refers to,
“the interest payable, or other sums due, under loan agreements or under other contracts relating to investments”.
Proposed new subsection (6)(c)(ii) refers to,
“the price at which investments may be bought or sold”.
Proposed new subsection (6)(c)(iii) measures “the performance of investments”.
The scandal in the gas market was to do with trading, not investment. Similarly, I believe the problems in the Californian electricity market are to do with trading, not investment. Unless the noble Lord is extending the meaning of the word “investment” to include all trading activities, which, I suggest, is an abuse of language, then the commodity benchmarks are not included, as he asserted, in Amendment 71. Moreover, if this were true and what the noble Lord says is correct, why did the Financial Secretary to the Treasury make the following statement? He declared:
“The recommendation to consider the use of benchmarks in other financial and commodities markets will be taken forward through the relevant international bodies”.—[Official Report, Commons, 17/10//12; col. 25WS.]
If commodities markets were already included, why did the Financial Secretary say that there was to be a process to take them forward through international bodies? Given the rather lackadaisical attitude displayed by the Financial Secretary, which was quite out of tune with the repeated arguments for the necessity of speed that peppered the noble Lord’s remarks, why are the Government, with respect to these other benchmarks, taking the long, slow route through the international institutions when the revelations about commodity benchmark manipulation have been made over the past few weeks? After all, commodity market trading manipulation has just the same scale of impact, if not a greater impact, on ordinary households, as does the manipulation of LIBOR. Perhaps I may suggest to the noble Lord that if we look for clarity instead of the abuse of language, it would be worthwhile for the Government at Third Reading to extend the scope of the new subsection put forward in Amendment 71 to include trading as well as investment.
Group 1B, as I call it, comprises Amendment 70 moved by the Government and Amendments 80A to 80C, 80CA and 80D tabled by my noble friend Lady Hayter and me. Amendment 80 is the key to the Government’s approach to setting out the rules requiring participation in the benchmark. That participation involves two distinct types of legal person: first, those providing information for the setting of the benchmark and, secondly, the legal person charged with setting the benchmark. A peculiarity of this legislation is that it has an enormous amount to say about the former and virtually nothing to say about the latter.
Proposed new Section 137DA, as inserted by government Amendment 80, refers to,
“the setting by a specified person of a specified benchmark”.
But as regards who this specified person might be or even what might be the process by which they are specified, who has the responsibility for specifying them and with what characteristics they are endowed, on all these matters the Bill and the government amendments are entirely silent. Mystified, our team asked the Bill team for the answers to those questions. Following a long and what we interpreted to be a somewhat embarrassed silence, the answer was that all this was to be left to later. That is not good enough.
Mr Wheatley’s report suggests that the responsibility for LIBOR be taken from the BBA, which anyway does not want it any more, and given to another body determined by tender. Here we part company with Mr Wheatley. It is not clear that a private organisation that has the experience and the expertise to set a benchmark will not also have serious conflicts of interest. It is especially not clear because the Government have so far failed to publish the criteria which they believe any successful tender should fulfil. All we know is that a committee has been established under the noble Baroness, Lady Hogg, to define the criteria and to establish the tender process. Before examining the tender process, will the Minister tell us why the Government did not consider establishing an independent body to set LIBOR? After all, one of the most important benchmarks in this country was for many years set by such a body, the Retail Prices Index Advisory Committee. Why was that model not followed in this case? Why is there this putting out to tender?
Turning to the route chosen by the Treasury, why, given the continually professed urgency of LIBOR legislation, does the committee to be chaired by the noble Baroness, Lady Hogg, still have no membership other than the noble Baroness herself? What brief is the noble Baroness working to, what criteria is she expected to work to in establishing a tender process and what characteristics is she expected to seek in the specified person? Why is the Bill totally silent on these matters?
The fact that these serious matters are, to quote the email we received, being left for later not only suggests complacency on the part of the Government—they are putting on a show of doing something rather about the LIBOR scandal than actually doing something—but it also places a number of serious question marks over the legislation as drafted.
The amendments in my name and that of my noble friend Lady Hayter in group 1B address some of these deficiencies, though I confess that more time and more careful scrutiny would probably not only allow us to prepare more focused amendments but would also reveal other deficiencies in the current drafting.
Amendment 80A refers to the,
“code or other document published by the person responsible for the setting of the benchmark”.
The responsibility for setting the code, like so much in the LIBOR amendments, is rather amorphous. We suggest that the Financial Reporting Council might be included as a possible institution for setting and regulating
the code. The reason is obvious to anyone who has worked with the FRC or studied its activities. The FRC is the only body in the UK that has general oversight over such codes of conduct in the financial services industry. For example, the FRC oversees the codes produced by the professional bodies—the Institute of Actuaries, the Institute of Chartered Accountants and so on—ensuring that their codes are appropriate to the needs of the organisation. It oversees supervision in enforcement.
Of probably even greater importance, though, the FRC includes independent persons in its council. This means that it is not just the actuaries who agree their code or the accountants who agree their code. So we have introduced the FRC into the Bill at this point—remarkably, the only point in the entire Bill at which it might be mentioned—in order to stimulate the Minister to say that, in setting a code to control behaviour of those participating in the setting of the benchmark, the responsibility will not be given to insiders—to the bankers—to establish their own code. There must be the same sort of external oversight as that practised by the FRC to ensure that the code is objective, effective and enforced. How will the Treasury ensure that that is the case?
Amendment 80B, which the Minister has already referred to, tabled by my noble friend Lady Hayter, would clear up a drafting error in the Government’s amendment, establishing consistency in references to the code. I asked my noble friend what would happen if she decided not to move it, and I think the answer is that the Government would be embarrassed—but there we go.
Amendment 80C addresses a serious deficiency in what we believe is the Government’s proposal with respect to the specified person responsible for setting the benchmark. We understand that the committee—as yet not established under the chairmanship of the noble Baroness, Lady Hogg—will devise procedures and rules for a tender process to select the specified person.
First, what if that person does not perform satisfactorily? What if there is another scandal with LIBOR or some other specified benchmark? Who then steps in to clean up the mess? At the moment it has been the Treasury and the FSA/FCA, but this is in circumstances in which the BBA wishes to give up its role. What if the specified person is underperforming but does not wish to give up the role? Moreover, it is not clear at the moment whether the award of a tender is to be time-limited or whether it might be subject to some sort of review. We need to be clear. Who is responsible on an ongoing basis for awarding and revoking the tender?
Secondly, what happens if there is an interregnum? There might be a delay in awarding the contract, or it may be that the specified person runs into difficulties—goes bankrupt, for example, or simply wishes to resign. Who picks up the reins then?
The purpose of Amendment 80C is to ensure that the credibility of the benchmark is sustained by its continuity. The FCA, in our amendment, has that fallback responsibility. The amendment is suitably general so that the FCA may decide to deal with the difficulties in the way “it deems necessary”, but at least
the amendment ensures that someone is ultimately responsible, not simply for regulating the setting of the benchmark but for ensuring that one is actually in place.
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Amendment 80CA is there as an acknowledgement of the rather uncooked status of the LIBOR amendments in group 1B, as tabled by the Government. With the scope of the urgent benchmark legislation unclear and the key role being given to a specified person—on whose appointment, job description and, if necessary, removal and substitution the Bill is entirely silent—and with uncertainty surrounding the process and timescale of the transfer of LIBOR from the BBA to the new specified person, it is imperative that Parliament be given the opportunity to assess the performance of these various known unknowns once the Act has come into force. This amendment calls on the Government to report back to Parliament within a year of the Act becoming law on the progress being made towards the extension of the scope of regulating activities to benchmarking. It is vital that the Treasury be held accountable to Parliament for the process that it is setting in play and for those elements that are to come later.
Amendment 80D addresses the problem that the Bill is entirely silent on the procedure for identifying the specified person, both initially and, as I said just now, on an ongoing basis. Let us remember that this legislation will not only potentially cover the setting of LIBOR but will also encompass the setting of other benchmarks. It will probably be necessary in future to establish other specified persons responsible for specified benchmarks. It is surely right that Parliament should have sight of the rules and procedures being followed in identifying the person responsible for the specified benchmark. It would be helpful to know who is doing the specifying and what criteria they bring to bear. It cannot be the case that this procedure should be purely reactive, being wheeled out only when there is a crisis. So, if there is to be an active procedure, what is it? Does the Minister not agree that we should be told? Does he not agree that it is right and proper that it should be subject to parliamentary scrutiny? While acknowledging that the Treasury Select Committee has an enormous amount of work to do, does he not agree that it is the appropriate body to which the rules should be referred?
I have some comments on what I have referred to as group 1C of these amendments—those dealing with criminal offences. In general, this seems to be the best thought-through and coherent of the government amendments before us. However, I have two queries. The first concerns the defence against the accusation of making misleading statements contained in Amendment 108(3), which refers to price stabilisation rules. There are other consequential references to that matter elsewhere. I am concerned that this potentially introduces a very strong defence. For example, in the recent Barclays LIBOR scandal, price stabilisation would have been a legitimate defence, especially with respect to the post-crisis manipulation. Perhaps this defence was not available in the United States, and perhaps the pre-crisis manipulation was so blatant as to compromise Barclays’s post-crisis activities. Was
either of those the case? More generally, is not this a potential bolthole for those now forewarned of the consequences of manipulation?
My second query concerns what for me is a persistently puzzling characteristic of the drafting of the Bill—the confinement of the offences to the United Kingdom. Amendment 108(4) refers to misleading statements, which must be made,
“in or from the United Kingdom”.
Does this mean that a global bank’s office in New York, or perhaps even a British bank’s office in New York, could make misleading statements with impunity?Similar statements are made with respect to misleading impressions in Amendment 109(10), specifically misleading statements with respect to benchmarks in Amendment 110(6).
I really do not understand this. LIBOR is a global benchmark set in London. It is relevant to global financial institutions, as well as a myriad of smaller institutions, which know no juridical boundaries in their operations, statements or impressions. Why do the Government seek to limit Britain’s jurisdiction in this way? I am sure that the American Government would not be so coy.
To sum up, some of these amendments—not all—give the clear impression of having been prepared in haste, with crucial elements being left until later. Some of the work has been well done, some of it less so. This is particularly and disturbingly true with respect to the operation of the new scheme for setting benchmarks that these amendments seek to establish around Amendment 80. We on this side have tabled constructive amendments to deal with that particular weakness, and I hope that the Government have the good sense to accept them.