My Lords, this group of amendments proposes changes to the statutory objectives of the PRA and FCA, following the recommendations of the PCBS. The Government recognise the importance of getting the objectives of the regulators right. They have carefully considered the PCBS recommendations. We agree with the PCBS on the need for competition in banking and have made changes to the PRA’s objectives to reflect the important role it can play in this regard. We did not agree, however, with the conclusion to drop the FCA’s strategic objective and so I will start by explaining that.
During the progress through Parliament of the previous Financial Services Bill we listened to concerns expressed as part of the consultation process and made quite substantial changes to the FCA’s objectives as a result. On the strategic objective, the Government took note of calls by the ICB and others that the objective proposed in the draft Bill which was,
“protecting and enhancing confidence in the UK’s financial system”,
needed to be changed. So the FCA was given the strategic objective of,
“ensuring that the relevant markets function well”.
This change has been broadly welcomed by the ICB and by consumer and industry stakeholders alike.
Of course, the FCA is now up and running and the strategic objective does what it was meant to do by acting as a high level mission statement that brings together the diverse aspects of the FCA’s work in to a single focus. We have considered the arguments that the strategic objective makes the FCA’s remit too complex and risks diverting the FCA from its operational objective.
The three operational objectives of consumer protection, effective competition and market integrity are the matters which the FCA must seek to advance, and in doing so it must bear it in mind that ultimately this should be done in a way that ensures that markets function well, rather than being damaged or undermined. This seems straightforward and there are no reports of the strategic objective causing confusion or problems in practice.
There is also a concern, previously raised by the Treasury Select Committee, that because the FCA’s actions have to be compatible with the strategic objective, this objective can trump the other objectives. The structural requirement to pay heed to the strategic objective would only really create a problem if the content of the strategic objective were in conflict with the operational objective. However, the strategic objective of ensuring markets function well reflects the values in the operational objectives and does not undermine them. That is quite deliberate. So the Government do not agree that the FCA’s strategic objective creates a genuine problem.
It is absolutely appropriate that the mission statement of the FCA should be enshrined in statute. And we agree with the ICB and others that it is equally important that the FCA has an overarching aim of making markets work well. So, on balance, we propose that the FCA’s strategic objective should not be removed.
I turn to the second amendment. Strong competition in financial markets is essential for getting good outcomes for consumers. One impact of the financial crisis has been an increase in concentration in core banking markets to levels where they are almost certainly harming competition. The Government are doing a lot to address this. The account switching service, the payment systems regulator and the existing regulators have a role to pay in ensuring a competitive banking market. That is why we have given the FCA a competition objective and duty, and are giving it strong competition powers so that it has the right tools to get the job done.
The PRA’s main responsibility is towards a safe and stable financial sector, and this is right; but prudential regulation, while vital, can run the risk of securing the position of dominant incumbents in the market, deterring new entrants, and hampering innovation. Therefore, it is crucial that the PRA gives close consideration to competition when going about its duties. We believe that the PRA can take a more active role in facilitating competition in banking markets than under the current requirement to have regard to adverse effects on competition. This would build on the important changes made to capital and liquidity requirements and to the authorisation process as a result of the barriers to entry and expansion review in March this year. The Parliamentary Commission on Banking Standards was also of this view; it suggested the PRA be given a secondary competition objective, and the Government have accepted this recommendation.
I therefore welcome the intention behind the amendment tabled by noble Lords, but I regret that I am unable to accept the amendment as drafted, preferring instead the amendment which stands in my name. I suspect that this will come as no surprise to the noble Lord. However, I assure him that the objective behind the two amendments is a shared one. The noble Lord’s amendment is intended to make the competition objective subject to safety and soundness, but I am not convinced that it has this effect in all contexts, and it does not make competition subordinate to policyholder protection when the insurance objective is in play.
There are various functions of the PRA that are exercisable for the purposes of advancing any of its objectives. By including competition in the definition of objectives in Section 2F, the PRA would be able, for
example, to impose a requirement on a firm under Section 55M of FSMA solely for competition reasons, and it might be seen as required to do so. That is not, I think, what the PCBS intended by its recommendation for a secondary objective. To require the PRA to create rules and codes solely to advance competition, as I think the noble Lord’s amendment does, would mean the PRA becoming a competition regulator and would risk distracting it from its primary role as a prudential regulator, which is to ensure the safety and soundness of firms.
The Government amendment ensures that the PRA, in the exercise of its general functions such as making rules, must facilitate effective competition while not compromising its vital role in ensuring the safety and soundness of firms. The PRA will remain the watchdog for stability. It requires the PRA to facilitate effective competition, while maintaining the integrity of the two regulators’ clearly defined roles. Our expectation is that this secondary objective will see the PRA staffing up with greater competition knowledge and expertise and embedding a pro-competition mentality throughout the organisation. The PRA will need to ensure that competition will always be a fundamental consideration when making new rules, or determining its policies and procedures, and the PRA will need to use this expertise to keep its prudential rules and regulations under review to see whether changes can be made to provide a better environment for competition.
Finally, the PRA will need to work with the FCA, which has a strong focus on competition, to ensure a cohesive strategy for competition in financial services. I beg to move.
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