Schedule 12 - Amendments of Parts 11 and 23 of FSMA 2000

Financial Services Bill – in a Public Bill Committee at 1:30 pm on 15th March 2012.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 1:30 pm, 15th March 2012

I beg to move amendment 88, in schedule 12, page 244, line 40, at end insert—

‘In section 165A after subsection (10) at end insert—

‘(11) Data Collection

(a) The PRA should require the submission of reports from any PRA-authorised person for the purpose of assessing the extent to which a financial activity or financial market in which the PRA-authorised person participates may pose a threat to financial stability in accordance with the PRA’s general objective. The PRA shall collect, in a manner determined by the PRA and in consultation with the FPC, financial transaction data and position data from PRA-authorised person companies.

(b) For the purposes of (a)—

(i) financial transaction data shall mean data pertaining to the structure and legal description of a financial contract, with sufficient detail to describe the rights and obligations between counterparties and make possible an independent valuation; and

(ii) position data shall mean data pertaining to data on financial assets or liabilities held on the balance sheet of a financial company, where positions are created or changed by the execution of a financial transaction and which includes information that identifies counterparties, the valuation by the financial company of the position, and information that makes possible an independent valuation of the position.

(c) The FCA shall assist the PRA in accordance with Clause 3D to ensure that the PRA is able to exercise its function as described in (a);

(i) To facilitate the effective collection of data, the PRA should prepare and publish, in a manner that is easily accessible to the public and in the form of a summary or collection of information so framed that it is not possible to ascertain from it information relating to any particular person—

(ii) Where possible, the PRA shall co-operate with foreign regulators to the extent required to collect relevant information on PRA-authorised persons already collected by those foreign regulators;

(a) The PRA shall develop and maintain sufficient resources to review the collection of data referred to in (a) above in order to—

(i) develop and maintain metrics and reporting systems for risks to the financial stability of the United Kingdom;

(ii) evaluate stress tests or other stability-related evaluations of financial entities overseen;

(iii) investigate disruptions and failures in the financial markets;

(iv) conduct studies on the impact of policies relating to systemic risk;

(v) promote best practices for financial risk management to PRA-authorised persons.

(b) The PRA shall publish a report which compiles the data collected in accordance with (a) on a periodic basis as determined by the PRA, which shall be—

(i) made available to the public in an easily accessible medium; and

(ii) in the form of a summary or collection of information so framed that it is not possible to ascertain from it information relating to any particular person.”.’.

I did not think it necessary to talk about the provision in clause 38 that essentially facilitates the placing of schedule 12 provisions in legislation. However, we are now talking about significant changes, and I do not think that schedule 12 goes as far as it ought in relation to the shortcomings that the regulators might experience in gathering data, improving transparency and ensuring the timely disclosure of information about financial transactions in our financial system.

The Committee will see that amendment 88 is quite considerable. It has been drafted so that we can properly try to work with the Government and take the opportunity to create a new set of responsibilities for the Bank of England FPC in particular but also, in the new regulatory environment, to make the improvements necessary to give effect to all the new superstructure that the Minister is putting in place.

Ultimately, the creation of new structures will not in itself ensure that the regulators do a good job. Simultaneously, the regulators will need other tools. No one disputes the need to improve systemic oversight and the sustainability of the financial services sector, but the success of the prudential regulation process will rest on the information and analytical capabilities available to those charged with forecasting potential crises before they hit. That is a difficult job, which the Minister might characterise as crystal ball gazing, but that is the final purpose of what he is doing by moving to a more proactive regulatory arrangement. It ought to be possible, therefore, to give the new regulators the powers to demand transaction-level transparency from the companies that they regulate.

In the equivalent American regulatory change, the Dodd-Frank Act, the regulators were given significant powers through something called the Office of Financial Research. We too need to take that level of rigour to heart. Members of the Committee might recall how, back in October 2007, the takeover of ABN AMRO by the Royal Bank of Scotland was, sadly, not prevented by the regulator, even though, as we now know, it noted the lack of information available to it. It felt that the public nature of the deal, despite its ignorance of the information, meant in essence that no intervention was necessary, but we now know the lessons to be learned from that situation. [Interruption.]

Photo of Edward Leigh Edward Leigh Chair, Public Accounts Commission

Order. I deplore sedentary interventions. If the Whip wishes to speak, he should stand up.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Luckily, I did not hear what the Whip said, and I do not know whether I will get the joke when I read it in Hansard. Perhaps I missed it.

My point was that 11 months after that ABN AMRO situation, the Barclays buy-out of the then bankrupt Lehman Brothers was prevented, because the regulator felt that ignorance of what was going on was sufficient to stop the transaction. It then got worried, and the rest is history. Now we know that lack of information for regulators is not excusable; we have to ensure improved data collection standards for the regulator. That does not have to be a burden; investment banks already report most of their financial transactions through centralised clearing operations, often in international contexts, so the regulator should therefore have access to such information.

If the Bill is to make our regulators fit for the 21st century, we need to give them a proper map or toolkit relating to the risks and where they are concentrated in our financial system. The Americans have begun that process; we need to ensure that the Bank of England has a data centre to match those capabilities. To do that in the UK would require the creation of standardised databases of counterparties and financial instruments; reports could then be made to the Bank of England’s data centre in real time, as and when each transaction takes place. The value of standardised databases to the City, not only the regulators, should not be underestimated. They would facilitate a much better consolidation of risk management within firms, and allow further, much-needed innovation. That knowledge is surely essential not only for the regulator, but for banking executives.

Obviously, we all hope that there will not be a crisis on the scale that we experienced in 2008 and 2009, but the post-mortem that followed those events should teach us the right lessons. Not all banks lent recklessly, but the problem when the crisis arrived was that the regulator could not adequately discern the neglectful banks or guarantee which banks were acting sensibly. Instead, the Government had little choice but to protect the whole system. Next time—hopefully there will not be a next time—with regulators informed and armed with the measure of each player in the system, there should not be a reward for failure. At times of collapse, the regulator could have more clear information on which investment banks had been reckless; there would then be no excuse when it came to bailing out losers.

In February 2007, the then chief executive of the Royal Bank of Scotland told shareholders that the bank had successfully avoided sub-prime lending. Unknown to shareholders—this was only revealed in the FSA’s report on the demise of RBS—the bank had decided in June 2006, eight months prior to reassuring the market, that it would expand into the high-risk structured credit business of US sub-prime. It became so dominant that its success was recognised with an award—it was north American securitisation bank of the year 2007.

Although the erosion of RBS’s capital is often blamed on ABN’s toxic portfolio, of the £7.8 billion it lost in 2008, £5.5 billion was lost in the old RBS, and £2.3 billion in ABN. Regardless of whether RBS was too big, its business too complex or it had people who just did not understand the products they were dealing with, we cannot continue with such private information remaining hidden within the banks. By creating a data centre in the Bank of England, as envisaged by the amendment, we should produce a regulatory regime that is fit for purpose. Without it, we are worried that we might unintentionally be leaving our regulators blind, and regulating the 21st century financial system with 20th century tools.

We are not discussing the subject in isolation. Andy Haldane from the Bank of England made a speech yesterday in New York on similar issues, and said:

“With financial data captured in a homogenous fashion across financial firms, the stage would be set for mapping much more comprehensively the contours of the financial world…Technologically, there is no reason why tracking the financial web should be any more complex than tracking global supply chains or the web. Monitoring global flows of funds, as they ebb and flow, should be possible in close to real time.”

He went on to say that

“risk warnings, like weather warnings, would form part of the regulatory toolkit. So too would stress-tests of the impact of extreme financial events on the functioning of the global financial web.”

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

If the Bank of England is across those questions, as is evidenced by Mr Haldane’s speech, why should we have to write such a provision into the Bill?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Currently, the Bank of England is not across such issues. I am talking about a suggestion by one person in the Bank of England. It is not yet the policy of the Bank of England to develop a data centre. Clearly, there would be legislative implications if we mirrored the American arrangements, and as we are in the middle of discussing the Financial Services Bill, it is worth taking the opportunity to ensure that the necessary legislative provisions are in place to allow the Bank to create a data centre. If we do not put the necessary caveats in the Bill, there is a danger that we will not facilitate the Bank’s ability to develop such a centre.

Photo of Mark Garnier Mark Garnier Conservative, Wyre Forest

Does the hon. Gentleman have an assessment of the cost implications of the measure?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

As I say, given that many centralised clearing arrangements already require a certain degree of information to be made available, albeit on a private market basis, the disclosure issues would not necessarily be particularly burdensome, but costs would probably be involved. As many of our globally oriented financial  firms already have to disclose some of the data in an American context to the Office of Financial Research, a lot of work will have already been done to allow their systems to facilitate that. Reading that work across to a British context would not be particularly difficult.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

Will my hon. Friend comment on the interventions that have been made? On the one hand, it was suggested that we would not need to add such a measure to the Bill, because the changes would be happening anyway. If it will happen anyway, it will have a cost. It will either happen or not.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 1:45 pm, 15th March 2012

Quite. The quasi-Minister in this Committee has some insight into those questions, but ultimately only the Minister himself can tell us whether the Government think that data collection will happen anyway, which makes it entirely possible that they will resist the proposal.

The point is that we think the regulators need data capabilities. We should learn lessons not only from the British experience, but from how other jurisdictions, particularly the Americans, are developing their capabilities. There is an ongoing discussion; it is not settled that the Bank of England wants to move in that direction. As legislators, we should suggest that they take the opportunity to do so.

Government Members will embrace the fact that various European directives, such as the markets in financial instruments directive, are coming down the track, and will create disclosure requirements. However, the MIFID arrangement is probably two or three years away. It is better to take the opportunity now to design systems that are appropriate to our British approach, and that can put us on the crest of the wave, rather than have us following in the wake of European provisions. I hope that the Minister will accept our amendment with enthusiasm.

Photo of Chris Evans Chris Evans Labour, Islwyn

I have such a high profile, Mr Leigh. Thank you so much. I have sat here for three weeks, and you still cannot remember my name.

I support the amendment. I take a holistic approach to the Bill: what are we here for? The Bill is about avoiding another financial collapse. How do we achieve that? I think of what the former Chancellor said—that it was not that banks were too big to fail, but that they were too interconnected to fail.

People might look at the amendment and say, “Oh well, we are not going to monitor financial transactions.” They are doing it in America already, and the vast majority of banks deal with American banks anyway. If we are to look at systematic figures in future, we need information, so we must track financial transactions.

I shall use an example that my hon. Friend the Member for Nottingham East touched on. In the case of Lehman Brothers, the regulator said there were problems. Barclays considered taking over Lehman’s before it collapsed, and because of time or other considerations, our regulator said it was okay. That  might have been a disaster, because we did not have the information to hand. Four years after the major collapse, we still do not have it. If we do not have information, how will we know whether there are problems in the system and how can they be rectified? Those are important questions that need to be answered. The system is already set up in America, so why do we not have the same one here?

I echo what my hon. Friend said, and hope that when the Minister responds he acknowledges the amendment’s importance. There must be some tracking of financial information. I shall leave it there and await his words of wisdom.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

If the public in general think anything about the Bill—I am sure they do, on a daily basis—they will want to be satisfied that preventive measures that are as thorough as possible are in place. We all agree that that should not be a complex process of issuing reports later in the day to say what should have happened. It may be impossible to catch everything, but we hope to be far better at seeing what is coming. The proposal goes some way towards helping us to do that. That is what the public want.

I shall be interested to hear whether the Minister says, “Well, actually, this is what we will be doing anyway, so there’s no need to put the measure in the Bill,” or whether he thinks the change could be achieved adequately by others. Part of the problem when it comes to the disclosure and gathering of information by individual institutions, companies and organisations—within a competitive framework, naturally—is that the information is always for their eyes only; sometimes, it appears, it is not even for their shareholders.

Part of the amendment is about maintaining sufficient resources to review the collection of data. If the PRA is not sufficiently resourced to do that, and does not have the technical or financial expertise or the people to analyse and understand the information coming in, there will probably not be much point in collecting data, because it will simply sit somewhere without someone having an eye on what is happening. The resource part is particularly important. That may be a separate issue from whether there should be provision for a data centre in the Bill, but if we put that part of the amendment in the schedule, there would be a clear guarantee to the public that the matter will be looked at properly.

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

I always think that it is important to have lots of up-to-date and timely information, and it is important for the regulator to have that; no one would dispute that. However, I wonder whether hon. Members speaking in support of the amendment have timely and up-to-date information themselves. The hon. Member for Nottingham East said that when MIFID comes into force, it might cover the proposal, but MIFID I is already in force, and article 25(5) of the directive states:

Member States shall provide for the reports to be made to the competent authority either by the investment firm itself, a third party acting on its behalf or by a trade-matching or reporting system approved by the competent authority or by the regulated market or MTF through whose systems the transaction was completed.”

Transaction reporting is already in place; to say that it is not is erroneous. The Bill also gives regulators the power to require firms to hold their data in specific  formats if the regulator judges that to be an appropriate and proportionate way of meeting the objective. I know that the amendment was proposed by Intellect, a trade body that has interests in data standards—that is not a problem—but the reality is that the regulators already have the power to collect that information in a format that they deem appropriate. It has to be proportionate to meeting their regulatory objectives.

The hon. Gentleman has prayed in aid of the Office of Financial Research in the US, but let us not forget that the US system is different from the UK system. The OFR has been set up to collect information on behalf of the US Financial Stability Oversight Council. That is not necessary in the UK, because the regulators already have the power to collect the data in the format that they request. The amendment is redundant, because we are talking about things that are already required in MIFID and in place in FSMA; the power is there for the regulators to collect the data in the format in which they request it.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

The Minister has said that the powers are already there, which I think is a moot point. Whether the powers are there or not, are regulators actually doing this? Is the Bank of England establishing a data centre with sufficient rigour?

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

The issue is that the regulators need to identify what information they need to assess risk and to determine how they gather that information. Simply having a huge data centre is not necessarily the solution to the problem. If the Bank of England thinks that it is necessary, it has the powers and will use the PRA and the FCA to collect those data. If it is unhappy with the data being collected, it has the power to collect that information directly. To pretend that no powers exist is wrong, because the powers exist in both domestic and European law and the regulators need to do what is right.

The hon. Gentleman talked about collecting and publishing real-time data, but some of the data that he wants to collect, such as positions in commodity markets and stock exchanges, is commercially sensitive. Firms would be concerned about providing those data publicly on a real-time basis, because it could affect their ability to trade profitably. [Interruption.] The hon. Gentleman talked about it being publicly available. The powers are there.

I do not think the amendment is necessary. It does not reflect the existing powers of the regulator to collect the data or the obligations imposed on firms to provide those data. It is unnecessary and I suggest that the hon. Gentleman withdraw it.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am not very satisfied with that explanation. The Minister says that all these powers are already universally provided for in the Bill, but the situation is not as clear cut as that. If he had said that the Government thought there were potential restrictions or inhibitions on the regulators in obtaining the data and that the amendment needed to be improved, I would have been interested to hear how. But no, it was a simple, chuck-it-in-the-bin response from the Minister. If all these suggestions were erroneous then eminent figures in the Bank of England such as Andy Haldane would not be pushing the boundaries and making them.

The Minister says that all the powers are there in theory, which I dispute, but the regulators are not yet in a position properly to capture the activity. We could have debated the question about publicly available, real-time data versus data that would simply have been available to the regulator. There is an argument about that and I can accept the point about commercial sensitivity, but surely the regulators themselves ought to have access to some of that information.

We have devoted an inordinate amount of detail and legislative space to setting up structures of organisations with various boards, chief executives and governors, but the Minister is a bit complacent about giving them the tools to keep a close eye on what is happening in the market. That is a pity, and I feel that I need to press the amendment to a vote.

Question put, That the amendment be made.

The Committee divided: Ayes 8, Noes 10.

Question accordingly negatived.

Question proposed, That the schedule be the Twelfth schedule to the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

We have had a debate on data collection and retrieving information. Schedule 12 largely relates to that. I should have mentioned in the previous debate that the pre-legislative scrutiny Committee for this Bill also had anxieties about whether there was sufficient collection and analysis capability of data. It recommended that the Bill should be amended to place a duty on the Bank of England, or the PRA, to develop information standards for the financial services sector and to report regularly on those. Obviously, the Government rejected that suggestion. But I have a couple of points specifically relating to schedule 12.

A number of provisions in the Bill allow regulators not just to approve but to make appointments of skilled persons to undertake particular reporting arrangements. My first question relates to the fact that, obviously, many of those changes are welcome, but many of those skilled persons will come from the big four professional services firms. Will the Minister assure us that provisions will ensure that there will be no systemic reliance on those large firms and that due care will be taken to appoint the most qualified applicants?

The Bill also provides that evidence can be seized by the regulators if a warrant is issued in proceedings against particular persons. New section 176A(1) to  FSMA contains arrangements for keeping evidence for as long as necessary. That may be perfectly sensible, but I think that that measure replaces the provision in section 176(8) of FSMA, which refers to a three-month retention period.

Will the Minister clarify the time periods involved? As I read through the Bill, I wondered whether there was a discrepancy between allowing the regulator sufficient latitude and ensuring that they have as long as necessary before returning evidence, because other provisions state a time limit on retention, which may be restrictive.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury 2:00 pm, 15th March 2012

Let me deal with the issue of skilled persons. The hon. Gentleman hit the nail on the head when he said that the best-qualified person should be appointed. That is what we would all want to see, and that is the approach that the FCA and the PRA not only should follow, but will follow. The fact that the large law firms may have a concentration of people means that they do have the best people, but they should not be the automatic go-to place in these circumstances. We should be looking for the best possible people to be appointed as skilled persons.

The hon. Gentleman referred to new section 176A, which is inserted into FSMA by paragraph 15 of schedule 12 and which provides for original documents seized under warrant to be retained for as long as possible, but also for the owner to be able to apply for a court order requiring their return. As the hon. Gentleman rightly points out, that proposal does replace the three-month limit on retention set out in section 176(8) of FSMA. However, we are aligning the powers in FSMA with those under section 22 of the Police and Criminal Evidence Act 1984, which enables evidence seized under warrant to be retained for as long as necessary.

Schedule 12 agreed to.