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Financial Services Bill

April 23, 2012

Mark Field (Cities of London and Westminster, Conservative): It is a pleasure to be part and parcel of such an interesting debate. I especially commend the speech of my hon. Friend Mr Tyrie. Chris Leslie also made a thoughtful contribution, which covered a range of issues. As he said, it is regrettable that much of the real scrutiny of the Bill will be carried out in the other place, partly because of the guillotine but also because of the way in which votes on amendments are driven through here. I do not think that that reflects at all well on the House of Commons, which should be a place for genuine scrutiny rather than one that railroads Bills through their stages.

I do not go quite as far as the hon. Member for Nottingham East does in amendment 28. I do not think that we should get rid of clause 5 altogether. However, there is little doubt that the regulatory changes proposed in the clause, and the creation of the new supervisory architecture, will do little to address some of the significant risks that currently exist in the market. I say that as someone who speaks to practitioners every day in my role as Member of Parliament for the City of London.

A central issue is the ability of the FCA to carry out prudential regulation of firms that have sizeable assets and, often, complex structures. The recent failure of firms such as MF Global, Arch Cru and Keydata—all of which would have been prudentially regulated by the FCA—demonstrates the need for firms that have sizeable assets and are engaged in complex activities to be properly managed. One outcome of the failure of those firms has been that the liabilities of other UK businesses to the financial services compensation scheme are increasing in line with larger payouts to UK consumers. A wider effect has been that smaller and more innovative companies which, by their very nature, have less capital available to pay compensation on behalf of other firms face increased risk and rising costs. That will ultimately erode the attractiveness of London and, indeed, the UK as a venue for financial services businesses.

The FCA will not be a specialist prudential regulator. The experts will be located in the Prudential Regulation Authority, and it will be important for the FCA to work closely with the PRA to ensure that complex firms within its scope receive an adequate quality of prudential regulation. It is therefore crucial for the Bill to contain adequate safeguards and assurances that robust information-sharing agreements will exist between the two regulators. That important detail is lacking in both the Bill and the draft memorandum of understanding.

The Government should provide greater protections in clause 5, specifically in regard to the relationship between the FCA and the PRA. That would enable the two regulators to share information on systematically important companies to ensure that the PRA could make a judgment on whether they needed macro-prudential regulation. A key question is whether the FSA has learned from the problems of Lehman Brothers and the events of the past three and a half years or so. Despite the financial crisis, the FSA has failed to adjust the manner in which it supervises firms. The Turner review, published in 2009, provides a detailed analysis of the causes of the economic crisis and the areas of the financial and economic system in which the FSA and other, global regulators failed to identify growing problems.

The review promised a new philosophy of regulation that it describes as “intensive supervision”. That amounts to a huge number of new initiatives and commitments:

a significant increase in the resources to be devoted to the supervision of high-impact firms; an increase in the resources devoted to sectoral and firm comparator analysis; investments in specialist skills, with supervisory teams able to draw on enhanced central expert resources; a much more intensive analysis of information relating to key risks; and an investment in specialist prudential skills.

Three years on from the publication of the Turner review, the FSA has increased the number of conduct interventions, a proportion of which have not involved consumer detriment—for example, in client asset and financial crime cases—but it has not been able to prevent the failure of a number of non-systemic companies.

The most worrying feature of what is going on at present, with the collapse of MF Global, Arch Cru and Keydata, is that under the new regulatory system they will all be prudentially managed by the FCA. It is set to be a competent financial conduct regulator, but it is no secret that it is not an expert prudential regulator. The prudential experts will all be located in the PRA. That is fine when the firms that are prudentially regulated by the FCA are small and relatively straightforward with few systemic risks, but none of the three firms to which I have referred can be regarded as small or straightforward businesses.

We are going to hear a lot more about MF Global in this House in months and years to come. It was involved in complex transactions as an intermediary on a range of financial products. The estimated gap owed by MF Global to futures customers is as large as $1.6 billion following bankruptcy. The total cost for MF Global UK has been estimated in the region of £600 million, and about $1 billion of client money remains locked in other financial institutions according to its administrators, KPMG. The total liability to consumers when Arch Cru collapsed was some £100 million, and a £54 million financial redress scheme was agreed between the FSA and the other professional organisations, Capita, HSBC and BNY Mellon.

David Mowat (Warrington South, Conservative): I completely agree with my hon. Friend’s comments about MF Global and the fact that we did not learn quickly enough the lessons of that or of Lehman. Is there not one major aspect, however, that the Bill does not address particularly well, perhaps because it cannot: the fact that the regulation of such firms must mirror their organisational structure, which is international? Neither the FCA nor the PRA, nor any other regulatory body, can do that without much more effort being made.

Mark Field: I do not disagree with what my hon. Friend says. However, the special administration in respect of MF Global—which, as I have said, will be high profile in years to come—seems to be considerably better organised in every other jurisdiction than it is in the UK. That is doing great damage to the reputation of the UK as a destination for financial services.

Following the failure of the firms to which I have referred, the Financial Services Compensation Scheme has announced it will need to raise an additional £60 million in the investment intermediation sub-class, resulting in rising costs for firms in that category, and in the coming year both MF Global and Arch Cru will, I fear, generate further liabilities of some £600 million or more.

Alun Cairns (Vale of Glamorgan, Conservative): My hon. Friend is making very forceful points, especially on the FSCS. As that is currently funded by the industry itself, and given that the FCA cannot have detailed knowledge of the workings of every product, does my hon. Friend agree that in order to ensure that there is adequate protection, the FCA must work with the industry and accept the intelligence that comes from it?

Mark Field: My hon. Friend is absolutely right about that.

I want to touch on the impacts, however. Smaller firms dominate the advisory and investment sector, and they clearly do not have the capital available to make the sizeable pay-outs that are an integral part of the scheme on behalf of other companies. The larger banks are present in most major financial centres, but it is the success of innovative smaller companies that marks out Britain’s financial services industry, or at least has done hitherto.

I am aware, as I have spoken to this company in recent days, of a FTSE 250 firm whose costs have risen by 270% under the compensation scheme, year on year, from 2009 to 2010. That includes some £4.7 million of interim levy costs for Keydata, a current cost of £470,000 for MF Global—again, I fear that that is an interim cost—and some £700,000 for Arch Cru. The company had predicted that its total cost for MF Global could end up being as high as £9.5 million.

This situation is an enormous concern. Firms are facing increased liabilities through the compensation scheme and the future structure of the supervisory regime does not suggest that prudential regulation of these firms is likely to be improved. This matter should be addressed in this Bill, as the FCA will not be a specialist prudential regulator. As I say, the experts are located elsewhere, so it is crucial that the Bill contains adequate safeguards and assurances that robust information-sharing schemes are to be put in place between the two regulators.

I briefly wish to discuss my new clauses 2 and 3, which seek to amend section 166 of the Financial Services and Markets Act 2000. Section 166 sets out arrangements for a report by a skilled person, and the whole section urgently requires changing. The FSA has the power to insist on an investigation without determining who does it and without paying for it. The result has been that too many recent section 166 reports have cost the players in the financial services market huge sums, without producing anything of great value. Under the current regime, firms are guilty until proven innocent, and they have to pay for their own prosecution, regardless of whether guilt is proved or not.

The number of section 166 reports has, perhaps understandably, risen dramatically since the 2008 financial crisis. Nevertheless, such reports are increasingly used as a standard regulatory method, rather than being reserved, as they should be, for the most serious cases. They are becoming a phenomenally big burden on hard-pressed small firms. The costs can run into hundreds of thousands of pounds in each and every case, and companies often cannot recoup the costs, even if there is no evidence of wrongdoing.

I know that others wish to speak, but I just wish to put on the record the breakdown of the cost of section 166 reports. As I say, this is now an issue of major concern.

In 2006-07, there were just 18 such cases, at a cost of £3.8 million. That number increased to 29, 56, 88 and 95 cases respectively for each of the four succeeding years, with the costs increasing from £3.8 million to £32.2 million for the year 2010-11. It is essential now that the FSA, which has not previously selected skilled persons to have a direct line of accountability, changes its whole approach on this matter. There is much more that I would like to say and I am sorry that time is so limited this evening. I hope that this matter will come back for further scrutiny, although I am afraid that that will be in another place.