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Financial Services Bill

My Lords, as has been set out, this grouping considers issues relating to competition and proportionate regulation in support of increased competition. Increasing competition in banking has been a priority for government under successive Prime Ministers; this can be traced back to the immediate period following the financial crisis and, indeed, the work of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards, of which I know noble Lords in this Committee were members.

Amendment 29 seeks to ensure that the FCA and PRA give due consideration to competition in exercising their duties and apply their rules and regulations proportionately to different-sized firms. It is important to note that the FCA and PRA are already required to consider competition as part of their statutory objectives. It was essential to put competition at the heart of the post-2007 financial crisis regulatory reforms. For the FCA, this is one of the three operational objectives and, for the PRA, it is a secondary objective—secondary to its safety and soundness objective. Since being given their competition objectives, both the FCA and PRA have taken significant actions to improve competition in UK financial services.

I shall give some examples. First, the new bank start-up unit was set up in 2016 as a joint initiative of the PRA and FCA to make the process of setting up a new bank in the UK more straightforward. Since it was launched, 20 new banks have been authorised, and the PRA continues to ensure that steps are taken to ensure that it is acting on its competition objective. For example, it consulted in summer 2020 on its approach to new and growing banks and, in November 2020, announced its intention to consider a more proportionate prudential regime for smaller banks, which promotes growth. Secondly, the FCA launched its regulatory sandbox in 2015, the first of its kind globally. This sandbox enables businesses to test innovative propositions with customers, improving the range of services and products available to UK customers. The FCA also recently launched a new digital sandbox to allow early stage firms access to data, which enables them further to develop their innovative ideas.

To give some more examples, the current account switch service, or CASS, was introduced in 2013 to allow customers easily to switch account provider when they see a better deal. As of September 2020, customers have switched over 6.8 million times using the service. The Payment Systems Regulator has been created to ensure fair and competitive access to central payment systems so that payment systems work in the interests of the businesses and customers that use them, and an SME credit data-sharing scheme has been introduced to make it easier for challenger banks and alternative finance providers to check the creditworthiness of businesses, improving their ability to lend to SMEs. I hope that reassures noble Lords that competition is already a key priority for this Government and is being properly considered by regulators.

Amendment 43, in the name of the noble Baroness, Lady Kramer, would remove existing capital requirements for banks with assets below £100 billion. As she has already explained, the intention of this amendment is to ensure that the rules on capital requirements for these smaller banks would be replaced by PRA rules with more proportionate requirements. The Government are committed to supporting more proportionate regulation for small and medium-sized banks and enhancing competition in financial services. The delegation of the relevant prudential requirements in this Bill will allow the PRA to introduce proportionality in its implementation, where appropriate.

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However, wider amendments of this nature to the existing prudential regime should come only after adequate consultation and consideration of the potential impact on the wider financial system. Moreover, a focus on these risk-weighted capital requirements, which form only a part of the prudential regime, would not be sufficient to provide a truly proportionate regime. Other parts of the prudential regime may also be too complex for small banks, so reducing capital requirements alone may not in reality significantly reduce the regulatory burden for small banks.

In its consultation published on 12 February, the PRA highlighted the areas where it proposed to tailor its implementation of the Basel III standards to help ensure proportionality. It can do this due to the more

flexible approach to Basel implementation taken in the Bill. For example, the PRA is proposing to increase the scope of more proportionate market-risk capital requirements.

Amendment 91 seeks to mandate clearing banks participating in the Bank of England’s term funding scheme to pass on the funds accessed to alternative lenders on similarly favourable terms. Although I am sympathetic to amendment’s aims, as this change is intended to help alternative lenders to fund bounce-back loans, I am afraid that I cannot support it. The term funding scheme is a monetary policy tool introduced by the Bank of England’s independent Monetary Policy Committee, acting in accordance with the framework set out in the Bank of England Act 1998. The rules of the term funding scheme are a matter for the expert judgment of members of the Monetary Policy Committee, and the Bank’s independence on matters of monetary policy is a fundamental feature of the UK’s economic policy.

It is therefore not appropriate to legislate to determine how the details of a scheme run by the Bank of England work. Rather, it is vital that the Bank of England maintains its independence where its own monetary policy schemes and initiatives are concerned, and that political interference is avoided. For the same reason the approach suggested by my noble friend Lady Noakes, of amending the terms of access to the scheme, must remain a decision for the Bank of England.

However, as I mentioned, I am sympathetic to the amendment’s aims. Indeed, the Government have already taken actions to help alternative lenders participate in government-backed loan schemes. For example, we made changes to allow the transfer and assignment of the government guarantee for all coronavirus business loan schemes, including bounce-back loans. Alternative lenders asked for this to support their ability to access funding in order to participate in these schemes. The British Business Bank estimates that these changes have led to loans worth £2 billion being approved by alternative lenders.

Amendment 126 seeks to require the Government to report to Parliament on the current regime for regional mutual banks with regard to the barriers to their establishment. The Government are supportive of the efforts to set up co-operative banks within the current legislative framework. The co-operative model is a long-established one, but mutual banks are a recent innovation and still in the process of raising capital, with many just in the initial stages. That said, I understand that mutual banks have already had some success in raising capital within the current framework. The Government aim to continue to support the sector, where possible.

I am aware that some barriers have been identified, for example within the Co-operative and Community Benefit Societies Act 2014. However, I stress that that Act in particular contains provisions that are vital for all co-operatives but may be regarded as barriers to establishing mutual banks, so any action that sought to remove these perceived barriers to accommodate mutual banks must be considered in the light of the wider impact on the co-operative sector. However, I reassure my noble friend Lord Holmes that the

Government will continue to engage with mutual banks to understand any barriers and how we can support the sector within the current framework.

On capital adequacy in particular, as I have described, this Bill will delegate elements of the capital requirements regulation to the PRA, subject to an enhanced accountability framework. The PRA will then be able to make rules on delegated areas, which could benefit mutual banks. On my noble friend’s suggestion on the use of dormant assets as seed capital for regional mutual banks, the Dormant Bank and Building Society Accounts Act specifies financial inclusion and social investment as specific priorities for these funds. However, the organisations responsible for distributing dormant assets, such as Big Society Capital and Fair4All Finance, are entirely independent of government and, therefore, we cannot direct them to spend money on any specific projects. Finally, on home collected credit, raised by my noble friend Lord Naseby, I understand that my noble friend Lord Agnew wrote to him on this matter after Second Reading, setting out the Government’s approach to this issue, including the approach of the FCA and the FOS.

Amendment 94 aims to remove the restriction on registered societies which hold withdrawable share capital from carrying out the business of banking. Prospective mutual banks have indicated that they would use the removal of this restriction to issue withdrawable share capital in the form of additional tier 1, or AT1, capital instruments. These are complex instruments and, while I understand that other institutions can issue them, it is not appropriate to create a framework for these instruments through repeal; a more detailed set of considerations would be required.

It is also unclear whether withdrawable instruments would be useful for mutual banks at this stage. If the prohibition were removed, as the noble Baroness, Lady Kramer, noted, mutual banks would be subject to the restrictions that currently apply to co-operatives, which are allowed to issue only £100,000 of withdrawable share capital per member. This is designed to ensure that no member has undue influence over a society. Such limits are longstanding in UK co-operative legislation and present in other jurisdictions. This means that mutual banks are unlikely to benefit from the issuance of AT1 capital as they can raise only limited amounts of withdrawable capital per member. These instruments only supplement core capital, which is the current priority for mutual banks, therefore limiting their usefulness.

I hope that I have provided sufficient reassurance to the noble Baroness, Lady Bowles, for her to withdraw her amendment and for other noble Lords in this group not to move theirs.