Good afternoon, Mr Gray. What a pleasure it is to be back in Committee discussing the Financial Services Bill under your firm but fair hand. Hopefully, we are now in the final straits. This is the last programmed week of debate; we have already had several occasions to debate whether more time should perhaps be given to discussing the Bill, but that issue is for another occasion.
The clause relates to mutual societies and the transfer of functions between various regulators in respect of how we regulate the financial well-being and conduct of the mutual and building society sector. It provides for several orders that are consequential to the preceding clause, 47, and the transfer of some provisions under the Financial Services and Markets Act 2000 which would not otherwise be applied or disapplied without its provisions.
The Government have published a draft mutuals order to help inform, in theory, our debate. I do not know whether members of the Committee have had a chance to read the 42 pages of technical statutory changes proposed by the draft mutuals order, but if the document is a definition of “helpful”, I am not sure what an “unhelpful” document might look like. However, I should not disparage the Minister’s efforts. It is always useful to have draft arrangements put before the Committee, but it is a matter of regret that no explanatory notes are attached to them.
Will the hon. Gentleman at least share my regret that, by the time we reach the end of such an important document, bang on page 42, we think, “Hold on a minute, hopefully some light might have been shone on some of the technical provisions in the draft mutuals order”? I did look online for such detail, but the key information was missing. I should be grateful if the hon. Gentleman said when the explanatory notes will be published; it certainly would be useful if it were in time for our discussions on Report. If not, I hope they can be made available before consideration of the Bill in the other place. I understand that the Government will publish a consultation paper “later this year” on their general policy approach and the detail of the order. That paper might relate to the state of the explanatory notes; I am not sure whether the hon. Gentleman can explain what will be in the consultation paper and when it is likely to be published, but such information would be useful.
Obviously, the Government are considering whether the Prudential Regulation Authority’s objective should be applied to various other functions under the mutual legislation, which is part and parcel of the consultation process. I accept that it is not easy to go back through previous legislation and disentangle the question of which of the two new regulators should have responsibility for what. However, given that we are trying to apply the concept of prudential regulation to some friendly societies Acts, credit union Acts and so forth, it would be useful if the Minister gave us a flavour of what, if anything, will be different in the PRA’s oversight of certain matters. It would also be useful if the Minister gave us a fairly straightforward and simpler explanation of whether any substantive points are buried in either the clause or the draft mutuals order.
My question—perhaps this is what I was looking for in the explanatory notes—was about the consultation on the arrangements. My understanding is that the consultation document will focus predominantly on the PRA’s objectives and how they will be applied to mutuals legislation. Why are the FCA’s objectives not included in the consultation? I might have missed something, but it would seem that the consultation question should have both in parallel.
The draft mutuals order—again, I might have missed something in reading it because there was no explanatory note—talks about the transfers to the FCA or the PRA as though the question of which regulator will step in at which moment has been left as a grey area. That approach is peppered throughout the order. It is as though, in drafting the order, the Minister has hedged his bets, making reference to both regulators just so that one or the other will capture the issues. Why are we leaving it for the regulators to carve up responsibilities between themselves in certain circumstances?
Does my hon. Friend sense a potential problem here for mutuals? At the moment there is uncertainty as to what will happen in the future, at a time when we should be encouraging them to have confidence to grow.
That is absolutely right. There is a broader point, to which I will come, which will include some of those questions. One of the implicit downstream consequences of transferring some of the regulatory responsibilities for mutuals and building societies to the FCA and the PRA concerns whether we aid and enhance the ability of the mutuals sector to grow and flourish, or whether we cloud and confuse its ability to navigate through the regulatory system. Consequently, will it be materially disadvantaged in the regulatory system when compared with the plc model?
I know that some of my hon. Friends on this Committee not only represent their own political party, but are Co-operative Members of Parliament. Indeed, I am a Labour and Co-operative Member of Parliament, as are my hon. Friends the Members for Kilmarnock and Loudoun and for Islwyn. It is rarely noted that we represent two different political parties. I mention that because it is highly relevant to clause 48 and other clauses before us. It is important to take the opportunity to challenge the Government on their professed desire to support the co-operative principles and the mutuals model, and their claim to support diversity in financial services more generally.
I want to get from the Minister a sense of a number of specific things. Primarily, I want to ask him about the commitment on page 9 of the coalition agreement, which states that the Government will
“bring forward detailed proposals to foster diversity in financial services, to promote mutuals and create a more competitive banking industry.”
Given that we are talking about transferring responsibilities between regulators, which regulator will be the champion for the mutuals model? Who will actively encourage the benefits that can flow from a non-plc corporate form? Will either of the regulators have any responsibilities for such matters, or will neither?
It is a moot point under which clause in part 3 the issue arises, but this one seems as good a clause as any under which to discuss it. Ultimately, the Treasury ought actively to seek to diversify the financial sector. Therefore, by corollary, the Treasury ought to take steps to promote options for mutual enhancement of various corners of the financial services sector. However, I am sceptical about whether the Treasury is fulfilling such a function, and we should therefore ask which of the regulators might do so.
I suspect the Minister will tell us that the regulators are neutral, hands-off and not in any way concerned about the specific model in the mutual sector. That is a great pity, particularly given the disadvantages that might hit the sector. The Minister will know that there was a very long discussion about whether the mutual sector was at a regulatory disadvantage in respect of the capital instruments that might be classified as core tier 1 capital under prudential requirements regulations—the Basel III arrangements—but I understand that some progress has been made on that in the form of the EU capital requirements regulations.
Will the Minister confirm whether he believes that good progress has been made on those European arrangements? To what extent were the UK Government party to advocating the resolution of the concerns raised? We have not tabled amendments about that, because we sense that changes are in train. Many people, however, are anxious about the mutual sector being at a material disadvantage, because it does not have equity in the usual sense that plcs do, and therefore the mutual sector does not have the same constitutional set-up to enable it to prove its capital reserves and capital base.
Will the Minister explain about the draft mutuals order and the consultation? Will he clarify what the Government’s intentions are and why the FCA’s objectives are not part of that consultation process? Will he let us know what is happening about the capital instruments and, more broadly, will he say which regulator will champion such issues? Certainly, Opposition Members are interested in knowing more.
It is a pleasure to serve under your chairmanship this afternoon, Mr Gray.
This clause is an odd place to have a general discussion about mutuals. We touched on them during the stand part debate on clause 22 in relation to proposed new section 138K of FSMA. I pointed out—perhaps not to the hon. Gentleman, but to the hon. Member for Kilmarnock and Loudoun—that there is a specific duty on both regulators to consult where a rule has a particular impact on the mutual sector, in that the regulator must prepare a statement setting out the impact on it of a rule or regulation. It is a significant strengthening of the relationship between the regulators and the mutual sector for them to have to take into account the particular nature of that sector.
The hon. Gentleman raised the issue of the capital requirements directive IV and the availability of capital instruments for building societies. I have to say that, when we came into office, the impetus behind the mutual sector, despite the number of Opposition Members professing to support it, had rather run out of steam. As a consequence of the work that this Government have done with the Building Societies Association, CRD IV has been altered through consultation to ensure that an instrument is there, which we broadly believe is available to building societies. That is a sign of the coalition living up to its commitment to support mutuality. Proposed new section 138K is also a sign that we are living up to our commitment.
By publishing the mutuals order in January, we sought to inform Parliament and the public, as the Bill progresses through the House, that the Government will publish a consultation paper towards the end of the summer. There will be an informal consultation period to gather views from the industry and the wider public on the policy approach and the detail of the order. The consultation will include views on whether the PRA’s general objective should be applied to its functions under the mutuals legislation. We welcome informal views from members of the industry, including the BSA, in advance of this. There will be a more formal conversation once the mutuals order is published. We expect the explanatory notes to be published as part of that wider consultation.
The hon. Gentleman asked why the draft mutuals order has a PRA objective applied, and not the FCA’s. The point is that the Government are considering whether the PRA’s general objective could be applied to its functions under mutuals legislation. The draft mutuals order has been published with the PRA objective applied to help Parliament and the public’s understanding prior to the consultation in the summer. We have not applied the FCA’s objectives, partly because the FCA has a wide range of objectives and responsibilities under the mutuals legislation. Trying to apply the FCA’s objectives to its functions under mutuals legislation would potentially increase the complexity of the FCA’s decision making with regard to mutuals. Part of the problem is that the Financial Services Authority’s functions are not currently applied to its functions under the mutuals legislation, so we are taking the process a step further.
The hon. Gentleman asked what would be different about the PRA’s oversight of mutuals compared with the FSA’s. Consistent with its general approach, the PRA will take a more forward looking and judgment-led approach to regulating mutuals than has happened in the past. That reflects a general shift in approach by the PRA. Broadly, the prudential regulation of mutuals will map on to the PRA’s regulation of deposit takers or insurers, and, of course, for conduct of business purposes, responsibility will rest, as with other financial services companies, with the FCA.
The provisions in the Bill and the work that we are doing with mutuals more broadly are consistent with commitments in the coalition agreement. We want to see greater diversity. It is encouraging that the Co-op, for example, has preferred bidder status for the divestment of Lloyds bank branches. That will be a significant strengthening of mutuality in this country, which we should welcome.
I am grateful to the Minister for outlining that. I am not quite clear that I have got my head around the difference between the consultation on the PRA’s and the FCA’s objectives. There is a broader discussion to be had. We will shortly be touching on some of it when we debate clauses 50 to 53 in respect of the Government’s wider strategy on mutuality and building societies. I am not convinced that there is sufficient rigour or seriousness within the legislation or the regulators when it comes to matters affecting mutuals or building societies. However, I understand the Minister’s points on clause 48 and on the capital requirements directive, so I do not feel the need to contest this clause.