My Lords, I start by declaring my interests as in the register which are, I am afraid, rather specific to the Bill. I am a non-executive director and deputy chairman of a small British bank regulated by the PRA and the FCA. As a director of a bank, I am also an approved person, so I potentially have some conflicts of interest in the Bill, which I fully recognise.
New to the debate on banking regulation, the Bank of England and so on, I rather naively thought that the Bill would be relatively uncontroversial. Listening to this debate has rather changed that view, and I look forward to our debates in Committee because they have every potential to be quite interesting. I express my sympathy to the Minister because he is obviously in for a difficult time.
I welcome the changes proposed to bank regulation. They almost look like a tidying up of the internal structure of the Bank of England, but potentially they do more than that by integrating still further the PRA into the Bank of England. I hope that this will give the Bank of England the opportunity to strengthen the regulation of the financial sector in the UK. One of the reasons London is successful is because foreign investors and institutions have confidence in our tough but flexible financial regulations. In my experience, one of the weaknesses of the late, not very lamented, FSA was that it was very rules-based. Its rules ran to several substantial volumes, as those who dealt with it will remember well.
Financial institutions, and banks in particular, are not easy to regulate. On the face of it what they do is very simple, so to make a decent living banks have to devise clever ways of adding value and of distinguishing themselves from the competition. Many are very innovative and pay key staff a lot of money to find new ways of providing services to their clients. They are always
developing new products and new ways of doing business. Regulating them based on what they did last year, or last time there was a financial crisis, will guarantee that the regulator is behind the curve on the risks that banks are taking. Arguably, this was a major contributory factor to the crash of 2008. Regulators around the world did not understand, or if they did, they did not have the powers to stop the banks taking unreasonable risks or selling products whose risks neither the banks nor the regulators could assess. I do not know if fully integrating the PRA into the Bank of England will make this better come the next financial crash, but it should make it easier for the Bank of England to run financial regulation on a holistic basis rather than on rules designed to stop the previous financial scandal.
I am not advocating a return to regulation by a nod and a wink, which formed at least part of the regulatory system prior to 1998, but it is vital for regulators to have access to market intelligence and to be able to act on it. Maybe market intelligence is putting it too high; what I really mean is that regulators should be able to listen to gossip and rumour. Perhaps this is a similar point to the one made by my noble friend Lord Flight when he was talking about the Court of Directors. Regulators have to have the power to follow and act on leads that no self-respecting lawyer would consider evidence-based. This would be helped if the Bank of England could take back some of the day-to-day money market activities presently undertaken by the Treasury. As an aside, I hope that the closer integration of the PRA and the Bank of England will enable the regulators themselves to be paid properly. If they are not, the good ones will be sorely tempted to switch sides and work for the banks they used to regulate, weakening the ability of the regulator to regulate and enabling the banks to game the system.
The other part of the Bill I want to mention is the proposed extension of the authorised person regime to all financial institutions in the UK including:
“UK branches of corresponding foreign institutions”,
and all types of financial service firms. This has to be long overdue although I can see that it will be fraught with difficulties. We are seeing a convergence of the risks taken by investment banks, hedge funds, family offices, sovereign wealth funds and investment managers. I dare say that some of these will not be capable of regulation under this—or probably any other—Bill or, at any rate, not without severely damaging London as a financial centre, which would be throwing the baby out with the bathwater, so to speak.
I welcome the Bill. I hope that when it comes into force the Bank of England and the PRA will use it to develop ever-smarter means of controlling risk in the financial sector, while encouraging innovation and the growth of the UK as a worldwide financial centre. I look forward to our discussions in Committee.
9.51 pm