Clause 8 - Designation of activities requiring prudential regulation by PRA

Financial Services Bill – in a Public Bill Committee at 6:00 pm on 6th March 2012.

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Question proposed, That the clause stand part of the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Several issues need to be raised in relation to clause 8, in particular, those that came up in the pre-legislative scrutiny Committee report. We are, of course, the servants of the House in that we have a duty to raise with the Minister that set of issues that the pre-legislative scrutiny Committee touched on. One such important recommendation related to whether the regulatory perimeter of the PRA, as set out in the Bill, would properly capture the sort of issues that have been very much in the public domain during the past six months.

The Minister will be familiar with the PLS Committee recommendation in respect of the significant failure of the American brokerage firm, MF Global, which was a large, complex and in many ways controversial organisation involved in repurchase agreements, called repos. It used to fund and leverage various arrangements for profitability, often in circumstances of off-balance sheet arrangements. Some of those complex repos have been described as a wrong-way trade, where the firm was too frequently making its own bets on the bond markets of some of Europe’s most indebted countries.

There were liquidity problems at the firm. The sudden disappearance of so much liquidity in those circumstances caused a major headache and the failure of that company. The PLS Committee had concerns—if that arrangement had happened in the UK, with a parallel company undertaking similar arrangements to MF Global—about whether such repo market agreements would be subject to the PRA’s regulatory perimeter. The Government responded at the time by saying that they would consider whether they need to include issues around the rehypothecation of client assets, but did not see the need to make changes in the Bill. I would be grateful if the Minister said whether the regulatory activity orders should include repurchase agreements markets, and whether that ought to be captured by the PRA’s regulatory powers. If not, why not? It is a pertinent point and I would be grateful if the Minister addressed it. I also hope that he will have reflected on the LIBOR situation and whether it should fall within the regulatory perimeter of the PRA. It is a simple question—yes or no?

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

I referred to the clause earlier during the stand part debate on clause 6, and as the hon. Gentleman said, some of the issues surrounding it are not entirely removed from some of the considerations that also apply to clause 7.

I hope that the Minister will colour in the provisions in the clause a little more. I do not doubt the need for legislation that provides for changing business models, new or rotating products, or different practices or patterns that might emerge and need to be addressed. However, given some of the issues with other clauses, and given that we have said that the Bill is not complete and may give rise to gaps, tensions or difficulties in future, we clearly need to provide for supplementary regulation to amplify or clarify provisions in a given situation.

Some in the industry are concerned that clause 8 gives fairly wide powers to the Treasury—the powers that it can confer in the future either on itself or on the regulators. As it stands, the clause does not even intimate the sorts of situations or reasons that might give rise to the exercise of such powers.

In a sense, the Minister is trying to ensure that he has some sort of bat belt available to deal with unforeseen or peculiar circumstances that perhaps cannot be specified or anticipated at this stage of the legislation. He is therefore right to give himself or the Treasury powers to deal with any issues that may arise, either for the Treasury or for the regulators. However, the current drafting of the clause seems to contain no limit or qualification on the activation or introduction of those powers, and that gives rise to questions about the possible impulsive, arbitrary or capricious use of such powers. Indeed, could there be the threat that such powers might be used? Such a threat could come either from the Treasury  or others who may try to badger the regulators, perhaps by lobbying the Treasury for the activation of the powers as a way of exposing or promoting some complaint or issue that they have with either regulator or any business or market sector.

There are questions about the full import of clause 8. I tabled an amendment—albeit a starred amendment—and although it would not have specifically constrained the Treasury, it would at least have indicated some of the considerations or situations that might give rise to the use of the powers, showing that the clause is about dealing with issues that could not be anticipated at this legislative stage and would tackle matters to do with changing products, practices or business patterns that could give rise to various risks, be they competitive, systemic or directly to consumers.

It would be useful if the Minister coloured in some of the possible circumstances that might give rise to the use of the powers. I should particularly like him to say whether clause 8 powers would be used in dealing with prudential regulation by the PRA, but as we know, the powers are not confined to those that might be exercised by the PRA. Does the Minister have it in mind that powers under the clause might need to be used if issues relating to the possible conglomeration of retail financial services and other retail services arise in future?

Many practitioners and others are concerned and saying, “We know that the Vickers report is saying that there needs to be clear separation of retail banking and investment banking and there always needs to be such ring-fencing”, but many are saying, “What’s going to happen in relation to retail banking by, say, a company such as Tesco”, which has plans to expand heavily at the retail banking end and is going all-out with a bank on its own, unlike some other high street names that we know, which, although they issue cards and offer financial services, essentially do so on behalf of other institutions that would be duly regulated.

The issues to do with conglomeration would arise in terms of those who would be in a position, with their dominance on the high street retail market, to move more aggressively and actively into the retail banking market. There would be questions about conglomeration in that regard and about whether there needed to be a differential and ring-fencing. Many hon. Members seem to have tabled early-day motions and whatnot and got exercised about how Google’s use of information in one part of its business supports another part. A company such as Tesco is in a position to know exactly what its customers are buying. It knows what bank and credit cards its customers use, and has a lot of information. How far can it use information and intelligence from its supermarket business to advance its profile and market share in relation to its interest in retail banking?

There will be issues of scale and tipping points can be reached. We want competition and more players coming in, but as with the grocery market, the House is seized with questions about proportionality and sustainability. The same could apply when some major retail providers flex their muscles and exercise themselves in financial services.

We should like to know whether the Minister anticipates any future issues arising in this regard or in respect of another provision. We do not know what those will be,  but we cannot say that they will not arise and will not be coming at us, or that consumers and many other people in the sector, including practitioners and other providers, will not be concerned. What I term the bat-belt powers in the clause are designed to give the Treasury some recourse to pick up on such matters, particularly if regulators and others bring them to their attention—or are the clause 8 powers intended for other purposes, which are unqualified and relatively unspecified?

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury 6:15 pm, 6th March 2012

Clause 8 relates to the scope of regulation by the PRA. It creates a new order-making power for the Treasury to specify which of the regulated activities are subject to prudential regulation by the PRA. Such regulated activities are referred to as “PRA-regulated activities” for the purposes of FSMA. The Treasury has published a draft order under proposed new section 22A confirming its intention that the PRA will be responsible for the prudential regulation of deposit takers—if Tesco is a deposit taker, it will be regulated by the PRA on prudential grounds—insurers and some investment banks as designated by the PRA with reference to the criteria set out in the order.

Proposed new section 22B states that the first order made under proposed new section 22A should be subject to the affirmative procedure, as should subsequent orders, which include a statement by the Treasury that the effect of the order is to vary the scope of PRA regulation by either expanding or reducing the range of regulated activities that are subject to prudential regulation. Proposed new section 22B also provides for the use of the 28-day affirmative procedure where the Treasury notifies that there is an urgent need to make the order without prior parliamentary approval.

Let me try to deal with the issue that the hon. Member for Foyle raised. Financial services markets have changed and will continue to change regularly. The nature of the regulated businesses changes. One of the weaknesses of the previous regime was its lack of a mechanism for identifying those changes and the right response to them, so one of the roles we have given the FPC is to horizon scan. It will look not only at the threats to financial stability but at the horizon, to see whether any businesses currently outside the scope of regulation should be regulated and what we need to do to bring them inside the scope of regulation.

That really relates to clause 7, which was more about the perimeter of regulation through the amendment to the regulated activities order. Clause 8 comes into play when a business that is prudentially regulated by the FCA changes its nature so that it clearly puts its balance sheet at risk in pursuit of its business, in the way a bank or insurance company would; perhaps it should then fall within the PRA for prudential regulation. Rather than assuming that the division between what is regulated and not regulated—or the division between the PRA and the FCA—is set in stone, clauses 7 and 8 provide a mechanism for changing the perimeters and the boundaries.

That brings me neatly to MF Global, which the Joint Committee raised. We have touched on the debate about shadow banking before, and we need to understand the issues that arise from the failure of MF Global. The Government, the Bank and the FSA will continue to work in that area. There is a role for the interim FPC, which has a mandate to advise the Government on perimeter issues. As hon. Members will know, no changes  are being made to the Bill as consequence of MF Global, because the legal framework already provides for sufficient flexibility for changes to be made through secondary legislation, whether that is through the regulated activities order or the orders to be made under proposed new section 22A. We have the powers that we need if we decide that there are perimeter issues that affect MF Global.

The hon. Member for Nottingham East raised the issue of LIBOR and whether it was a regulated activity. The FSA and other national authorities are investigating LIBOR, which is also being examined by EU anti-trust regulators. The setting of LIBOR is not a regulated activity under FSMA, but the methods used to calculate it are publicly available, as are the data made available to it by various contributors, and the process is regularly reviewed by market participants.

The hon. Member for Nottingham East needs to think about the division between the FCA and the PRA, which will look at the safety and standards of mutual institutions, particularly banks, insurers and certain investment firms. LIBOR is more akin to a product, and is potentially more about a conduct than a prudential issue. As he will recollect from our debates on clause 5, one objective of the FCA that we barely touched on, although it is a key one, is market integrity, which includes the smooth functioning of wholesale markets. I do not want to pre-empt any review, but we should bear in mind—

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

I will, as I know the hon. Gentleman is desperate to crack on and make progress, but we should bear in mind the distinction between the roles of the regulators, and market function comes under the role of the FCA.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am grateful to the Minister for his open thought process on LIBOR, which is a timely one. We are creating two separate regulators, but the assumption that things fit neatly into either a prudential or a conduct box will be tested by the report about LIBOR. It might very well be considered as a conduct issue but, given the multiple trillions of pounds and dollars that are under its auspices, it could also be seen as a systemic question. I can see the Minister’s anxieties about where the subject falls but, if there is a review, will he write to members of the Committee as soon as the Treasury has reached any conclusion, because that matter is relevant to the Bill?

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

A whole host of issues arise almost every day in the Financial Times that provide such a challenge—every day, market issues emerge that require compartmentalisation or pigeonholing—but if any advances are made about which I should advise the Committee, I will happily do so. The clause is about defining the regulatory perimeter of the PRA, and it will strengthen parliamentary approval of that process. If such parliamentary approval flows from our new regulatory structure, I hope the Committee will support it.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

The Minister has repeated the point that the clause is about the regulatory perimeter of the PRA, but it will also confer powers on the Treasury or either regulator, and the impact of those powers is not confined to the PRA and its activities.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

If I give a wrong answer, I am sure that I will be corrected. Effectively, if something is brought within the PRA boundary, powers will be conferred on the Treasury in consequence of some companies being regulated by the PRA.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

No, I am only saying that, by virtue of coming within the PRA’s boundary, the Treasury may have powers conferred on it that arise from a company being regulated by the PRA. No new powers are being envisaged, but existing powers would be extended to new prudentially regulated activities.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury) 6:30 pm, 6th March 2012

Will the Minister tell us how the clause is confined only to the definition of perimeters and not to the creation of new powers? It refers to orders that can

“confer powers on the Treasury or on either regulator”,

and it makes it clear that provision

“may amend any primary or subordinate legislation, including any provision of, or made under, this Act.”

Those are sweeping powers. The clause also refers to orders to “provide for exceptions”, which, as I understand from the Minister, would need to be made in changing situations. But the powers do seem to be wider than the Minister says.

Photo of George Howarth George Howarth Labour, Knowsley

Order. I am assuming that the hon. Gentleman is making an intervention; it is beginning to turn into a speech. Minister.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

I will allay the hon. Gentleman’s concerns, perhaps with a short note. Inevitably, when something is brought within the regulatory perimeter of the PRA, there may be situations where consequential amendments are required. I do not see this as a Henry VIII clause, and it if was I think that people would have picked up on it rather sooner. It is all about consequential amendments. I will perhaps just pause for a second—I think that what I have said is correct.

Question put and agreed to.

Clause 8 accordingly ordered to stand part of the Bill.