Clause 8

Financial Services Bill – in a Public Bill Committee at 3:00 pm on 7th January 2010.

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Promotion of international regulation and supervision

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 45, in clause 8, page 6, line 7, leave out ‘financial stability objective’ and insert ‘objectives’.

With your agreement, Mr. Gale, it may be helpful if I wrapped up my stand part remarks with my amendment.

One of the consequences of the financial crisis that we have been through is an increased appreciation of the consequences of globalisation. We see that many of the financial services businesses operate on a global basis. They operate not just in their home market, but overseas as well. We know that when a global banking business goes sour, the domestic Government and their taxpayers pick up the bill for bad lending decisions, whether the loans were made in Dudley or Dubai. That has been one of the messages that has come home for Britain, re-emphasising the consequence of the financial crisis. That means a tension, because banks are operated  on a global basis but regulated in the individual jurisdictions in which they act. We recognise that some of the risks taken overseas can have a profound effect at home.

Such a consideration has underpinned a great deal of the work that the FSA has been doing in recent years. For example, it works with other regulators in supervisory colleges—a group of regulators of particular institutions come together and work together. That is a very good example of international co-operation and something that the FSA has been very good at doing over recent years. It does not work only in regulating financial institutions; it works in many other ways in different organisations. Lord Turner, the chairman of the FSA, said in a speech in October last year:

“There were many different causes of that crisis and many aspects of the reform programme needed in response. But among the most important and most difficult are those related to the international nature of the financial system. The essential challenge is that we have a global financial system...but that governments, regulations and supervisory approaches are national, and that when banks get into trouble it is national fiscal resources which are employed to rescue them or compensate depositors.”

One might think that that was a new insight that has driven the need suddenly for the FSA to act on an international basis; it lacked the remit to do so in the past and therefore needs the insertion of a new duty in the Bill. In reality, it has been operating on an international basis for years, and not just in the supervisory colleges—it has been acting in other international forums. Indeed, Lord Turner has become the chairman of the Financial Stability Board’s Standing Committee for Supervisory and Regulatory Co-operation, so he has gone in advance of the duty that has been imposed on the FSA in the Bill. We know, for example, that the FSA has been co-operating for some time with international institutions through the EU. Its chief executive, Hector Sants, was until recently a member of the CEIOPS steering committee, which deals with insurance and occupational pensions.

We know that the FSA regularly gives evidence to the European Parliament as well as negotiating technical aspects of European directives, so we see already that there is an engagement from the FSA from the very highest position through all its departments and divisions. It is difficult to understand why we have proposed new clause 6B in the Bill, because the FSA is already fulfilling the duty. What more is added by including proposed new clause 6B? As with financial stability, is it simply making the implicit explicit? Is it to create an illusion of activity on the part of the Government? It is hard to understand what the objective of having the new clause in the Bill is, because the FSA has already been taking seriously its duty to promote international regulation and supervision.

The amendment asks whether the new clause goes far enough. I am sure that the Minister will explain why it is needed and why it is additive rather than a restatement of what happens already. Why is the FSA’s responsibility limited to the financial stability objective? There are other objectives that have an international impact. If we consider the nature of markets, they are not defined by national boundaries any more; they are international. Why are the market confidence and consumer protection objectives not covered? I am keen to understand from the Minister why the duty is limited to only one of the FSA’s objectives and not to others.

Consider the financial crime objective, where money laundering takes place on a global basis and where the FSA needs to co-operate with international authorities. Why is that objective not covered by the new duty in new clause 6B? I am probing why we need it in the first place. If we do need it, why is it not more broadly drafted?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The hon. Member for Fareham is right when he says that the FSA already engages in international forums. Clause 5, which we have already discussed, provides the FSA with an explicit financial stability objective. Subsection (2)(c) of the new section 3A establishes that the FSA, as part of its new financial stability objective, must have regard to the impact of wider European and international issues on the stability of the UK financial system.

It is very apparent to all members of the Committee that the global financial crisis has demonstrated the need for strong domestic regulatory systems to be complemented by enhanced supervision of international firms and markets through more robust international standards, closer co-operation between authorities and a more coherent international regulatory architecture. As we have already discussed, the FSA already operates at an international level. The purpose of the new duty, therefore, is to formalise, clarify and strengthen the FSA’s efforts to work internationally.

There is a global agreement that a strengthened regulatory system requires greater consistency and systematic co-operation between countries, and a framework of internationally agreed standards to ensure a robust global financial system. The existence of effective international regulation and supervision will contribute to the stability of the UK financial system by providing a robust framework for our own regulatory structures and also by reducing the risks of international instability, which could in turn affect the UK. That is why clause 8 inserts new clause 6B to FSMA—to provide the FSA with a new statutory duty to promote international regulation and supervision.

In its forthcoming Bill, the US is proposing similar measures for an enhanced international role related to financial stability for its regulators. Hong Kong is already doing that and, in line with international partners, we also want to impose a specific duty in legislation. Clarifying the FSA’s international position in that way is something that has been widely supported by respondents to our public consultation, as the hon. Gentleman is aware. I do not think that I need to read out the quotations from the British Bankers Association and others who have supported this measure, but it is very clear that the steps we are taking are widely welcomed.

With regard to the specific amendment raised by the hon. Gentleman, he questioned whether we are going far enough through what I envisage is a probing amendment. The Government’s view is that it is not necessary to widen the duty to promote international regulation and supervision to cover all the FSA’s objectives, as he suggested. The proposed legislation will ensure that the FSA takes into account international regulatory developments on financial stability and that that should be the main focus of its international duty. In fulfilling  that, the FSA will increasingly be involved in the large volume of G20 and European work relating to financial regulations and stability.

The hon. Gentleman will be aware that the FSA already participates in the Lamfalussy level 3 committees and will be involved with the new European supervisory authorities, the European systemic risk board’s work and the three committees that are also being established. It is important that it continues to play that role. We do not think that it needs to play a role in other areas, as suggested by his amendment. For example, protecting consumers in another country, which is one of its objectives, may not necessarily protect consumers in the UK. While there might be instances where that is the case, it would not be desirable to make that a central concern of the FSA at the risk of diverting resources and attention from more pressing international work relating to financial stability.

We think that focusing the FSA more narrowly on financial stability is the right thing to do. However, there is nothing in what we propose that will prevent it from pursuing its existing international role in other areas. The FSA currently has to have regard to the principles of good regulation, one of which is the international character of financial services and markets. The hon. Gentleman makes some valid points on financial crime; the FSA already plays an international role in seeking to combat such crime. Focusing narrowly on financial stability with this new power and acting in co-ordination with other international jurisdictions that are introducing similar powers is sensible. It sends the right sort of signal and is appropriately targeted. That is why I urge the hon. Gentleman to withdraw the amendment.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 3:15 pm, 7th January 2010

The longer the Minister spoke, the more apparent it became that the new clause, although it may be welcomed by many, is redundant. The FSA is already fulfilling that aspect in much of its work. The Minister said, when arguing against the amendment, that the FSA can already act under its existing remit. In reality, the FSA has been working for some time on an international and European basis to promote regulation and supervision without the benefit of the new clause. The Minister did not make a particularly strong argument as to why the new clause was necessary or why it was anything more than cosmetic.

Part of the challenge in much of the Bill is that the FSA is already doing these things. To use the Minister’s words, the Bill is making the implicit explicit. We want to see the FSA and successor bodies and regulators working on a European and international basis, but they are already doing so effectively. The challenge is for our regulators to use their leverage to ensure that standards are raised across the world, in order to ensure better supervision and greater consistency in other jurisdictions. There are other markets, and for all the regulatory failings that we have seen in recent years, there is still a lot that we can teach other jurisdictions about what can be done.

As the focus of regulatory activity in determining the regulations moves from the UK to Brussels, it is being increasingly informed by the conclusions of the G20. We want regulators to play an important role in that  debate. We need to ensure that our voice is heard. It is in our interests that the UK should have a strong, clear voice in those discussions; the UK has the greatest interest in the regulations that affect wholesale financial markets across Europe.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

That is why we want to enshrine the FSA’s international role in legislation. It clearly needs to participate, and although it has been participating in international forums the hon. Gentleman will appreciate the growing importance of its continuing to do so. That therefore needs to be reflected in the FSA’s objectives.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am not sure that I entirely buy that argument. The FSA is already doing so without the need for an explicit objective, and it will continue to do so. The Minister suggests that Lord Turner will wake up one day and say, “You know, I’ve had enough of this European lark; I’m not going to Brussels this week.” He may say, “I’m not going to take part in the work of my sub-committee, the financial stability board, because it is not worth the candle.” The FSA will then have to turn off all its activities, because it has no explicit duty under FSMA to take part.

There is no need to include that duty in the Bill given that the FSA is already devoting significant resources to its interactions in Europe and internationally. Whenever I talk to Hector Sants, it seems clear that resources are being made available to do that.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I do not want to prolong the debate, but surely the hon. Gentleman appreciates that the FSA has to make decisions on the resourcing of particular activities. It will therefore be most helpful for resourcing decisions to be based on the objectives of the organisation. All businesses need to update their objectives. Given the increase in prominence of international negotiations and forums, it is right and proper that that is reflected in the FSA’s plans and its resourcing decisions. It therefore makes sense to have the new clause, which makes the organisation’s objectives more explicit.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I do not wish to extend the debate either, but I point out that the FSA seems entirely capable of acting internationally and of devoting resources in respect of such matters without this duty. Therefore, I do not get the sense that there are insufficient resources or that the FSA feels that it needs a new statutory duty to enable it to spend more money and time on this area. If there is a duty on international co-operation to be imposed, it may be on the Treasury. Certainly, the Treasury demonstrated last year that although it put a great deal of time and effort on the G20, it perhaps spent insufficient time and effort on our relations with our European counterparts when it came to the reform of the financial regulatory system. That issue, however, goes wider than the new clause.

I have made my point. I think that the new clause is cosmetic and does not add much to what the FSA is able to do. I do not think that the lack of such a new clause has inhibited the organisation in the past. The Minister has reassured me that under the FSA’s existing objectives, it is able to pursue the international dimensions of other aspects of its objectives without widening the duty any further. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 8 ordered to stand part of the Bill.