PARLIAMENTARY DEBATE
Financial Services Bill (Fifth sitting) - 24 November 2020 (Commons/Public Bill Committees)

I beg to move amendment 19, in clause 1, page 2, line 21, at end insert—

“(7A) The Secretary of State must, within three years of this Act being passed, prepare, publish and lay before Parliament a report on the impact of the amendments to the Capital Requirements Regulation made by this section and Schedule 1 to this Act.

(7B) The report must assess the impact on—

(a) financial stability;

(b) competitiveness; and

(c) consumer risk.”

This amendment would ensure that, where departures from current capital requirements take place, the Government carries out a review of the impact on competitiveness and consumer risk.

Thank you for your chairmanship today, Mr Davies. With your indulgence, I would like to explain to the Minister broadly the approach we are going to take with these amendments. A number will be about reviewing, producing reports, parliamentary accountability and so on. Another number get into the accountability framework for the regulators and that “have regard to” list, and we will want to explore that quite deeply. Then there will be another set around the later parts of the Bill, relating to the savings provisions, the debt scheme and so on. That might help the Minister and the Committee to understand broadly where we are coming from when we move these amendments.

This first amendment, amendment 19 to clause 1, is in the first of those groups. Clause 1 exempts certain categories of investment firms from the requirements of the capital requirements regulation. This amendment explores what the effect of that might be and not only our right to know that effect, but our obligation to understand it. The reason we tabled this amendment is that capital, or the lack of it, was at the heart of the financial crisis. The banks that keeled over were over-leveraged and behaved as though a rainy day would never come. In fact, it is estimated that when the financial crisis hit, Royal Bank of Scotland, which was one of the biggest banks in the world at the time, was leveraged to a degree of about 50:1, so they had very little cushion of resilience for when more troubled times came.

The Basel II rules, which were in place at the time, failed to stop either the collapse or the public’s having to step in—through taxpayers and Governments around the world—to bail out the sector. Last week, when we were taking oral evidence on the Bill, I quoted Paul Volcker, the former Chairman of the Federal Reserve, who gave evidence in this House about a senior banker who had told him that his bank did not need any capital at all, that money could always be borrowed on the wholesale markets and that the banks could operate without capital. The crash proved that not to be true. The banks need capital. They need a cushion. That is not just their insurance policy, it is ours—it is the public’s insurance policy too.

Following the crash, the world’s regulators, whether in the United States, the UK or the European Union, set out to solve the problem of “too big to fail”, which has been characterised as privatising the profits and nationalising the risks, and developed a new set of capital requirements for banks and financial institutions. It was designed to make them more resistant to downturns. Those rules, on a global level, are set out in the Basel III process, now revised to the Basel 3.1 process, in the CRR and in the actions of national regulators. That is important, because the Basel rules should not be regarded as a maximum when it comes to the safety of our financial institutions. They should be regarded as a floor.

Most banks and regulators will say that today they hold significantly more capital against their loan books and that they are better equipped to handle a downturn or economic shock than they were 12 years ago. That is broadly true. Banks are better capitalised now than they were. However, they do not all like that situation, in truth. They will also say—I am sure that some banks tell the Minister and the regulators—that if only they did not have to hold so much capital they could lend more. They may well be saying that more loudly during the covid situation, when, as we see light at the end of the tunnel, we want to get the economy moving again. The smaller banks and new entrants will complain about being held to the same capital rules as larger and more established institutions. They will argue that that is a barrier to market entry and that it acts to reinforce the oligopoly in the UK where there are four or five major high street institutions, which it is difficult for new entrants to compete against. Other institutions will complain of being held to the same rules as deposit-taking institutions, which is part of the exemptions in clause 1, arguing that the character of their business is different.

Clause 1, as I have said, equips the regulator to respond to some of those points. We are not only onshoring, as it were, the capital requirements regulation, we are making provision, through the clause and other subsequent clauses, for the regulators to depart from it. Of course, departure from a common rulebook is a consequence of Brexit. Indeed, some might argue that it is the whole point. The clause allows it, and it is important that the Committee understands that the amendment would not prevent it. Neither does it seek to relitigate the referendum or to prevent the common rulebook to which we have subscribed for many years from ever being changed. That is not what the Opposition are saying. We are saying that, Brexit or not, and inside the EU or not, capital requirements still matter and they are there for a reason.

I would argue that for the UK the need for financial resilience is even greater than it is for most economies. We are a medium-sized economy with a huge financial sector. The consequences of that sector getting into deep trouble are potentially all the greater for our economy than for some others. Having a big financial sector is in many ways a great strength, of course. It brings employment, tax revenue and investment to the country, but it is a risk when it gets into trouble, as we found out in our recent history.

The other thing that we learned during the crash was how interconnected the system was. With so many institutions lending to and trading with one another, when one falls over the consequences for the whole system can be catastrophic. That old saying “The thigh bone’s connected to the knee bone” was certainly true during the financial crash, as it is of our interlocked and interdependent financial system.  We therefore have a duty, at the very least, to be vigilant about capital requirements. They are, as I said, the public’s insurance policy against having to bear the costs of another crash or steep financial crisis. The changes that have been made since 2007 and 2008 through the CRR, the Basel rules and other steps are, as yet, untested. Yes, the regulators do conduct stress tests and scenarios about what would happen if employment rose to this level or GDP fell to that level, but these are inevitably not quite real-world exercises. They are as real as war games compared to the real thing.

All the amendment does is ask for a report from the Treasury after three years of the new regime. That report should cover the impact of any departure from the current capital requirements in three areas: financial stability, that is to say the overall health of the system, because we learned how interconnected it all was; competitiveness, which is built into the regulator’s aims in the Bill and is bound to be the argument for any changes to the capital requirement rules; and, importantly, consumer risk. If we are only thinking about the competitiveness of our financial institutions and not considering consumer risk, we have not learned from the financial crisis. That is the other side of the scales. We can make the system ultra-competitive by asking institutions to hold hardly any capital but that exposes the consumers and public to greater economic risk. That last point is crucial.

To recap, the amendment does not attempt to freeze the situation forever as it is now. It does not stop clause 1 doing what the Government want it to do. It does ask for a report on the consequences and broader issue of divergence from capital rules, should the regulator allow greater divergence in the future. We should not allow this regime to be set up and then opened up to all the banking and industry lobbying that is likely to take place without making sure we have a means of understanding the consequences of that. Given the importance of this sector for the UK economy, we should be careful of these consequences. By enshrining these in a report from the Treasury, we can ensure that Parliament and the public see the consequences of divergence. That is the purpose of amendment 19.

I am a softly spoken and moderate man; it has not always done me good, but I am on track here at the moment.

I want to respond to the Minister’s reasons for advising us not to press the amendment. I talked at the beginning about three pots of amendments, and it strikes me that there are really two or three pots of reasons why Ministers say no to amendments. The first is that the amendment is wrong or not competently written in some way. Pot two is that it has completely misunderstood the Bill and therefore is not just incompetently written, but actually wrong in its intent. Pot three is to say that it is covered anyway. Usually, if somebody is not going to say yes to an amendment, it falls into one of those categories. The Minister has gone for pot three today. He has not really argued that the amendment is wrong in its content or that there is anything wrong with the way it is written; he has argued that this kind of thing is covered anyway. There is a problem for us in accepting that.

My hon. Friend is absolutely right. Perhaps there is even a fifth one, which is, “Wait for the consultation on something else.” The problem with going for pot three and saying the amendment is covered anyway is that that concedes that it would be completely harmless and there would be nothing wrong if it were accepted. The Government are, in effect, agreeing with its intent and saying they will do it.

I just have a couple of questions for the Minister. He described the rationale behind the clause, but can he tell us how many firms we are talking about? How many of the non-deposit-taking investment firms are likely to be exempt from the capital requirements regulations under the terms of the clause?

What is the Minister’s response to the point that my hon. Friend the Member for Wallasey and I have been trying to make about interconnectedness? He has advanced a reason as to why such investment firms should be treated differently, but how will the regulators cope with the interconnectedness of the system if companies are treated differently in that way?

I have just one question. The Minister mentioned country-by-country reporting, which we may come to at other points in the debate. Could he help the Committee by telling us what is covered in the country-by-country reporting? There is an ongoing and very live debate about what we expect multinationals to cover in country-by-country reporting in order to avoid tax arbitrage or transfers between countries that do not stand up to scrutiny. What are the things covered by country-by-country reporting in schedule 1?

I do not really have substantial questions at this stage, because schedule 2 sets out the detail, and I think we will probably have an extensive debate on it.

I beg to move amendment 20, in schedule 2, page 63, line, at end insert—

“(ba) the target for net UK emissions of greenhouse gases in 2050 as set out in the Climate Change Act 2008 as amended by the Climate Change Act (2050 Target Amendment) Order 2019, and”.

This amendment would require that, when making Part 9C rules, the FCA must have regard to the UK’s net zero 2050 goal and the legislation that has been passed in pursuit of this goal.

Amendment 20 focuses on the new accountability framework for the FCA set out in schedule 2. If anyone wants to follow the detail, I am referring to the list at the top of page 63 of the current edition of the Bill. Returning to my opening remarks this morning, we tabled a similar—possibly identical—amendment to the accountability framework set out for the PRA in schedule 3, but we will come to that in due course.

As the Bill stands, the accountability framework in schedule 2 asks the FCA to have regard to three things: international standards, which I do not think anyone would argue with; the relative standing of the UK as a place to do financial business, which can be interpreted in a number of ways, but could be summed up as a competitiveness criterion; and other matters, which may be specified by the Treasury. I ask the Minister, why were those three picked out of all the things that we wanted the FCA to have to regard to in this brave new world, where we are onshoring all this, and not others?

We take the view that this list is incomplete and could be usefully added to. The regulators have an expanded new task, between schedule 2 and schedule 3, of regulating this huge, globally significant financial services industry with a lot of new powers, so what should they have regard to when they do this? There could be a number of things added to this “have regard to” list. Perhaps the most obvious is the UK’s climate change goals, specifically the commitment to reach net zero emissions of all greenhouse gases by 2050.

Why do we want to add that in particular? There are several reasons. First, this is completely bipartisan. The Government are committed to it and the Opposition support it. It does not divide the parties in this House; it has multi-party support. Secondly, we are not asking for something that has not already been legislated for. It was legislated for on two important occasions in this House. We are not tacking on a new, previously undiscussed climate change commitment to the Bill. The legislative history of this, as hon. Members will know, is that the original goal of an 80% reduction in greenhouse gases by 2050 was legislated for in the Climate Change Act 2008 under the last Labour Government, which the Conservative Government changed to a commitment to net zero by 2050 through the 2019 order referred to in the amendment, so this has already been legislated for twice, once at 80% and now at net zero.

My hon. Friend is absolutely right. Joining the dots is exactly what we should do. Of course, she is right that individual investment firms will make their own decisions on these things, perhaps sometimes pressed by pension fund members, consumer groups or trustees in some ways. We applaud firms that do that, but how much more powerful would it be if that was a goal of the regulators, set out in our own financial services legislation? It would be more powerful, because the UK has this huge financial sector, which has around it this cluster of expertise, which we refer to a lot—legal and accountancy firms and all the rest—and because our own domestic commitments can bend the power of that sector towards the net zero goals.

The amendment goes with the grain of what more and more firms and people in this sector are talking about. By including this change, we can take all the fine-sounding commitments on corporate websites and put them at the heart of our regulatory mission. It can mark out the UK financial services regulation as having a new post-Brexit mission. If asked what we want the UK financial services sector to do in this post-Brexit world—we debated divergence and capital rules and all the rest earlier—what would be a better answer than making sure that the power of this is bent towards us achieving net zero, and in so doing encouraging financial sectors elsewhere in the world to go down the same path?

Finance will play a huge role in whether or not we meet the target. I do not propose, Mr Davies, to go through what the Committee on Climate Change has said that we need to do to reach the target in great detail, because we would be here all day, but I want to give the Committee an idea of a few headings that will require enormous investment.

If we are going to achieve the target, we will need a quadrupling of the supply of low carbon electricity. We have done well on low carbon electricity in the UK, in the last 20 years or so. We have vastly expanded the provision of renewables that go into the grid, but even after doing well we need to quadruple that if we are going to meet the target.

We will need a complete automotive transition, from internal combustion engines to electric or other zero emission vehicles. Just a few days ago, the Prime Minister himself announced a new, more advanced target for the phasing out of internal combustion engines.

There will need to be a huge programme of investment in buildings and heating. Whether that is through heat pumps or hydrogen boilers, there will need to be a huge programme of retrofitting equipment to millions of houses throughout the UK.

There will need to be a large programme of afforestation, because remember this is net zero. It will not be that we never have emissions, but we will have net zero. One of the main vehicles, if you like, in absorbing the emissions that we are still responsible for is afforestation, so we will need a huge programme.

We will need changes in farming and food production. We have the return of our old friend, carbon capture and storage. That takes me back, because a decade ago, when I was sitting where the Minister is now, we were announcing carbon capture and storage. It was announced again last week. There might be Members here who are quite new to Parliament, such as my hon. Friend the Member for Erith and Thamesmead, the hon. Member for Hertford and Stortford and maybe others who were elected in 2019. I look forward to them coming back in 10 years’ time and debating a Bill where new carbon capture and storage has been announced. Maybe we will even have achieved it by then, who knows?

The hon. Lady is quite young, so she might be here in 10 years’ time—

Perhaps it is not her ambition to be here in 10 years’ time. Carbon capture and storage is back. There are more things that we will have to do, but all of those headings will need finance, capital and investment. That will not all come from the state. It has got to be a combination of public and private investment, if the country is serious about this goal.

This is not an ordinary piece of legislation or A. N. Other Bill that we want to tack on to the regulatory framework. It is an overarching piece of legislation that will inform investment patterns and work production in a whole range of areas. It is one of the most significant pieces of legislation in this country since the end of the war. Perhaps we do not always realise that, but it really is, if one thinks about the list that I have gone through.

All of those things will take finance. It seems to me not odd to add this to the regulatory framework, but very odd that it has not been added already, particularly because the Government have made so much of the country being an international leader in the area, including asking the former Governor of the Bank of England, Mark Carney, to play a leading role. We absolutely welcome that.

The hon. Gentleman is right and he goes for pot 3 in terms of my reasons. I repeat: the problem about pot 3 is that the reason not to accept an amendment is that it concedes that it is absolutely heartless to do so. He is absolutely right. The Government have said that they want the UK to be a leading player and they appointed Mark Carney, who is a champion of green gilts, I believe. I was pleased to hear the Chancellor’s announcement, because green gilts have been issued by other countries in the past year or two. They have often been oversubscribed, which shows an investor appetite for products geared to that end.

Let me put the point back to the hon. Gentleman. If there are new financial innovations, such as green gilts, that Governments can issue to finance the list of things I mentioned from the Climate Change Committee and if there is investor appetite, as there seems to be, for the limited number of green gilts that have already been issued, why on earth would we not put at the heart of the regulator’s mission that they should have regard to these goals and use them as a guiding principle, particularly as we are going into a post-Brexit world where we will be asked on many fronts what we are for now given that we have left an existing framework? It is particularly appropriate to add this proposal to the Bill. This will require investment and it cannot all be done by the state. It will require innovation in finance. We have mentioned green gilts but other kinds of saving products, investment products, bonds, loans and all sorts of instruments will all have to be geared to the necessary changes to meet the net zero target.

The final reason for the proposal is to stress the ambition of the target. Any one of the things that I read out would require a lot of ambition and a lot of investment. It is pretty hard to see how this can all be achieved if it is not an explicit goal of financial regulation.

To recap, the amendment seeks to make these changes in the least possible contentious way. We have not added a syllable or comma to anything that the Government have not already legislated for. All we are asking for is that the Government signal that they are taking their own legislation seriously by adding the net zero commitment, which the House has already legislated for, to the mission of the financial regulators. That seems to be a most uncontroversial and reasonable thing we can do in the post-Brexit financial regulatory framework.

The Minister is effectively saying that this is not the right time or place, but it is something that the Government will carefully consider. Given the things that have happened in politics in recent years, prediction is a dangerous game, but I expect that this is something that the Government will eventually decide to do, and I think they will make a virtue of doing it at that time. Indeed, I can see the Chancellor making the statement to the House of Commons right now, saying, “This new requirement for the Bank of England, for regulators, for the whole of Government, puts the UK at the heart of this shift to green finance and the achievement of tackling climate change.”

I agree with my hon. Friend the Member for Walthamstow that the more the Minister said he agrees with this, the more it begged the question of why he does not do it now; we have to start somewhere, and putting it in here would only encourage it being put in broader financial regulatory systems. We also have this consultation in the future regulatory framework; it might even be part of the conclusion to that. For that reason, I am minded to press the amendment today.

Question put, That the amendment be made.