Lord Barnett
My Lords, I, too, congratulate the noble Baroness on her appointment to the Joint Committee. I hope she will be able to do something that, from what I have seen, the committee has not been able to do before; namely, focus on the job in hand. She said—and I disagree with her strongly—that this Joint Committee would be enough to do the job completely. I cannot see that happening from what I have seen of it now, although I am sure she will not be grandstanding as members of the committee are doing today. My noble friend Lord McFall will probably do a better job; I congratulate him too on his membership of the Joint Committee.
I strongly support my noble friend Lady Hayter on this amendment. I am concerned by the broader issue of the FCA. The Government have changed the name from the FSA to the FCA. I am not sure that the FCA will be any better at dealing with the problems that have arisen about LIBOR or anything else, or with all the mistakes that were made. Perhaps the Minister will have in his brief the number of FSA staff who have now simply changed their letters and become members of the FCA. While I am digressing slightly, perhaps I could digress a little more and ask the Minister if he can do what the noble Lord, Lord De Mauley, could not do earlier; namely, to answer my question about why the Government decided to make a statement about an important issue of loan guarantees on the “Today” programme this morning and not in the House. I look forward to hearing the Minister on that.
The whole issue of what the FCA is going to be able to do within the Bank of England disturbs me a great deal. I am not at all sure that it should have been done in this way. To give huge powers to the Bank of England, as I said, is hardly likely to help, judging by what has happened in the past. We now know from the governor of the Bank and others that they knew nothing whatever about what was going on, which is rather surprising, to say the least.
The noble Baroness, Lady Kramer, was able to bring LIBOR into this whole issue in her amendment. Like my noble friend Lord Peston, I am not quite sure how she managed to get it there but she did, and the best of luck to her. I hope that she gets a reply. For the moment, though, I wonder what changes the Minister hopes to see that will improve what went on before. The FSA was clearly not successful in the role that it had been given. I would like to see some of these amendments approved so that we can see the FCA doing a better job. I wish that that might be true but I am bound to say that I look forward to what the Minister will tell us about how great this new FCA will be. For now, though, I will leave it with him and, as I say, perhaps he can digress slightly and answer my other question.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I hope that the Committee will agree that it is probably better, given the number of members of the committee here, if I stick to matters relevant to this group of amendments rather than wandering off into the long grass from where I might never come back. All three amendments in this group relate to concerns that have arisen in connection with the recent LIBOR scandal, and in that context I am sure that the Committee would like to thank not only my noble friend Lady Kramer and the noble Lord, Lord McFall of Alcluith, but my noble friend Lord Lawson of Blaby, the noble Lord, Lord Turnbull, and the right reverend Prelate the Bishop of Durham for kindly agreeing to join the parliamentary committee on banking standards, which goes to the heart of the concerns raised in the amendments.
I turn to the issue of professional standards. Amendment 104ZB seeks to place requirements on the FCA to impose a training regime. The object of the regime is to specify minimum standards of competence and integrity, and it will include continuous professional development and a code of conduct. Amendment 110ZB seeks to extend the non-exhaustive definition of the integrity of the UK financial system by adding a reference to the professional standards of those working in financial services.
As a former chairman of the IFS School of Finance—what was previously called the Institute of Bankers—I believe as firmly as anyone that professional education has to be a cornerstone of standards in the banking industry. Personally, I wish that more banks would insist on more of their employees going through structured professional education, not just at the start of their careers but right through them. In answer to the point made by the noble Lord, Lord Davies of Stamford, there are indeed providers of these courses of great distinction, including the IFS School of Finance, and many bankers go through them. However, we would all like to see many more going through them and on a continuous basis.
Having said that, particularly in the light of the LIBOR scandal, we must ensure that our regulators have the right powers to set and enforce high standards of behaviour in the financial services industry. That is why we have invited Parliament to set up an inquiry into standards in that industry. While I share many of the concerns of the noble Baroness, Lady Hayter, that does not mean that I can support these amendments, which I consider unnecessary and to be coming forward at the wrong time. Neither amendment gives the FCA powers to impose standards of integrity and competence that it does not already have. The FCA’s integrity objective contains an indicative and non-exhaustive list of matters that are relevant to the UK financial system operating with integrity. The conduct of those working in financial services is already covered by the objective, even if it is not listed here. The list contains a number of matters relevant to the LIBOR example, including the soundness of the system and the orderly operation of markets. These can be ensured only if standards of professionalism are maintained by those in the industry.
Lord Davies of Stamford
The Minister agrees with me that it is highly desirable that there should be regular courses for people working in the financial markets, so that those advising the less sophisticated can be kept up to date. Yet I cannot understand why he resists the suggestion that that should be a statutory, mandatory requirement—that, as my noble friend’s amendment lays down, such people should be forced on an annual basis to have their qualifications validated. What is his reason for resisting that?
Lord Sassoon
If the noble Lord, Lord Davies, would permit me to complete the argument, I have explained that the FCA has an integrity objective, under which standards of professionalism need to be maintained by those in the industry. Within the overall integrity objective the FCA already has a mandate and powers to deal with these issues. It will specifically have powers to impose standards, including training and qualification, on individuals. Training, qualifications and minimum standards will be of considerable importance to the issue of re-establishing a proper banking culture. They are matters which will be relevant to the regulators’ consideration of applications by persons wishing to become approved to carry out significant influence functions, but it is a big step from that to the FCA mandating a training regime across all areas of financial services.
The forthcoming reviews, including that of the parliamentary Joint Committee, will show whether my analysis is right, or whether the committee believes that the FCA needs additional powers. To answer at least one of the challenges from the noble Lord, Lord Barnett, I refer back to the existence of the committee; this is going to be central to what it is looking at. I see one member of the committee nodding assent, but I think it is obvious.
Lord Peston
From what we know about the LIBOR scandal is it not valid to infer that, whoever these people engaging financial intermediation are, they are not a bunch of professionals? Is someone not going to have to be responsible for raising professional standards, or if not raising them then introducing them? I am surprised that the Government do not take this as seriously as they should.
Lord Sassoon
My Lords, we take it extremely seriously and that is why we thought that it was right to set up the Joint Committee. Unlike the noble Lord, Lord Barnett, I do not doubt that it will get through its work efficiently, effectively and quickly.
Lord Sassoon
I recognise that we are giving it a big challenge and I am grateful to it for taking the challenge on, and for the terms of reference, but we should wait to see what it comes up with in this area. Even if it came up with nothing, there are adequate provisions. On another point that the noble Lord, Lord Barnett, raises, what will be different with the FCA? One of the things that will be different is that the Government are publishing new threshold conditions for all regulated firms. Indeed, they have been published today on the Treasury website in advance of the relevant clauses being debated in due course. They include tougher standards on the probity of staff and management in regulated firms. The noble Lord, Lord Barnett, is right to insist that tougher standards should be imposed by the FCA than the FSA, and that is exactly what we are doing. As ever, he is right on the ball and goes to the heart of the matter.
Baroness Hayter of Kentish Town
Is that it?
I will start with a small correction. The Minister said that these amendments arose from LIBOR. If he had picked up my hints when I anticipated him—code for “That’s what his friend said in another place when it was going through Committee in March”—he would know that two of these amendments predated LIBOR.
Lord Sassoon
Just to be clear, I said that these relate to concerns that have arisen in connection with the recent LIBOR scandal. Of course, they arise in relation to the conduct of the industry more generally. I fully recognise that and I did not in any way exclude that from my remarks.
Baroness Hayter of Kentish Town
Not purposefully; I did not mean it like that. But these amendments are built on many other things. I thank those who have contributed to this debate—the noble Baroness, Lady Kramer, as well as my noble friends Lord Peston, Lord Davies and Lord Barnett. On a small issue, if there are new requirements on the Treasury website today, perhaps they could be shared with Members of the Committee.
I think the Minister gave us the ammunition that we are asking for. In talking about his role as chair of a training organisation or an accreditation organisation, he said that he wished more banks did structured training. That is the point we are trying to make. Because they do not all do it, we want it mandated. He also said that there will be a higher entry bar for new approved persons. But this is not just about people coming into this industry; something needs doing now. That is also what these amendments are about.
Most worrying, however, is that there was no reference to a code of conduct. That is why I was slow to get to my feet; I was awaiting another page. Obviously, the Government do not feel that is needed in this industry for financial professionals on whom we rely as clients and consumers. It is highly regrettable that the one thing the Minister did not bother to answer on was the need for a code of conduct. I do not know what it is about that that he cannot accept. I do not know why he cannot accept the demand for proof of competence. As was made clear, there need not be one proof of competence for everyone in this field; there can be a range of them. We are not asking for a single mandate; we are asking for the FCA to come up with a regime that would have competence requirements.
Finally, my question, like that of my noble friend Lord Barnett, is this: what will improve without such amendments? If this is just the FSA becoming the FCA, will we see anything different? I believe we need some signals about a code of conduct and raising standards. This may be something we need to return to later but for the moment I beg leave to withdraw the amendment.
Lord Stevenson of Balmacara
My Lords, I support the amendment in the name of my noble friend Lord McFall. I declare an interest as chair of the Consumer Credit Counselling Service, the country’s leading debt advice and debt management charity. I want to focus in particular on people who struggle with debt, often because they have got into arrears with their credit cards or personal loans and other consumer credit products, but also because of mortgage arrears, rent arrears and, increasingly, fuel and utility debts and council tax.
CCCS has helped more than 1.5 million people in the past three years and about half of them told us that unemployment or reduced income were the main reasons for their debt problems. People also say that life events such as illness or separation can quickly overwhelm family finances and cause or contribute to mounting debt. What they find is that debt is rarely a problem in isolation. There are nearly always other factors that need to be addressed, including the link between problem debt and depression. Nearly half of CCCS clients said they had been worrying about their debts for a year or more before seeking help from a debt advice provider. Around a third of people said that their debt problems had weakened their relationships or led to a break-up. Nearly half said that debt had shattered their self-confidence to support themselves and their families.
The pre-crash boom in consumer credit, which peaked in about 2007, also remains a key part of the UK debt narrative. Even after several years of near zero lending, the total outstanding secured and unsecured debt is still some 91% higher than it was 10 years ago—so it is a pretty bad picture. Research for CCCS by the Financial Inclusion Centre concluded that some 6.2 million households are currently either already in financial difficulty or at risk of getting there, and it is going to get worse.
The IFS estimates that real median household incomes will fall by 7.1% between 2009-10 and 2013-14 as a result of low growth and fiscal tightening, the largest decline since the 1974-77 fall of 7.5%. Unemployment remains at a stubbornly high 8.3%, or 2.65 million people, although it has just reduced. Youth unemployment sits at 22%—more than one in five young workers is without a job. This is particularly worrying as we know that time spent not in employment, education or training as a young adult can have a scarring effect as well as reducing earnings.
At the same time, we are experiencing an extended period where households are facing rising costs for essential goods and services. Food, fuel and transport costs are rising sharply and we will sooner or later face a rise in interest rates, which are unnaturally low at present. Figures from the Financial Inclusion Centre show that if living costs rise by more than £50 per week, it would double the percentage of households—which is currently 30%—who have no spare cash at the end of the month.
There is surely sufficient evidence in what I have said that the idea that consumers should be required to take full responsibility for their decisions does not accord with what happens in the real world. My noble friend Lord McFall made this point very eloquently, and we strongly support his idea that in considering what degree of consumer protection may be appropriate, the FCA must have regard to the differing ability, disability and vulnerability of different consumers.
However, it goes further than that. The FCA has also got to take into account what the CCCS and FIC research tells us about the way people’s history and the impact of family issues, illness and relationships interact with their credit arrangements. Families are being squeezed hard at both ends, with incomes and expenditure under pressure. The Bill ought to be amended to reflect less of the theory of caveat emptor and be more reflective of what is happening on the ground.
Lord Sassoon
My Lords, the debate on this group of amendments has been very interesting. However, it has some characteristics of straying into Second Reading territory because it has gone much wider, albeit over very important areas, into questions of broad mis-selling standards in the industry, which we have discussed already this afternoon. Therefore, I will not go over all the points that have been made but stick to the issues that are the focus of the specific amendment, subject only to one general point about the important questions raised by the noble Lord, Lord McFall of Alcluith, on proposed new Section 1C—on the consumer protection objective, which clearly goes to the heart of this—and his observations and questions on proposed new Section 1C(2)(e), which concerns the general principle of care.
One issue around the drafting that we should bear in mind is that the FCA will be responsible for the protection of retail consumers, but will also have a responsibility for wholesale markets, professional markets and counterparties. The reason behind the drafting of proposed new Section 1C(2)(e) is to make sure that it encompasses both the very strong duty of care that is due to individual consumers, on the one hand, and the fact that between professional counterparties the nature of the duty of care is very different. Indeed, in the terms of this particular principle, there may be no duty of care under this provision if the market is purely professional—it is very different from a consumer product market. It is important to understand that background to the discussion. However, these amendments are very much concerned with protection of the consumer.
Baroness Liddell of Coatdyke
There is some confusion in my mind about what the noble Lord is saying. He is talking about the responsibility and the environment of risk in wholesale markets as against retail markets. Even in wholesale markets, there is now a need for a duty of care. The noble Lord was managing director of financial regulation at the Treasury, so he will be aware that from the time of Barings onwards there has been an issue about the duty of care in the wholesale market, too. I am not saying that it should be equated across the board with the duty of care to consumers, but no one who has watched developments over the past few years can take a laissez-faire attitude to what is happening in wholesale markets.
Lord Sassoon
I am not suggesting for one moment that there should be a laissez-faire attitude. I am merely pointing out that a very different set of parameters has to be used by the FSA, and will have to be used by the FCA, when dealing with different parts of the financial services market. To those who argued earlier that we should not lose caveat emptor, I point out that in professional-to-professional markets, of course there has to be a high degree of integrity. Recently we saw exactly what appears to have been going on in what are fundamentally professional markets. However, that is very different from the duty of care owed in the case that we are talking about, which is of selling products to vulnerable, disabled consumers. Wholly different considerations apply from those that apply in professional markets. I point that out because the noble Lord, Lord McFall of Alcluith, got into this broader question, and as background to the question that we need to come on to, which is whether it is appropriate to include amendments to highlight important issues about disability, ability and vulnerability that address consumer product markets.
Lord Davies of Stamford
I hope that the Minister will think again about this before Report, because he has got it profoundly wrong. There is a duty of care for all clients. Of course, it has different consequences according to the nature of the client and according to their sophistication, capital resources and ability to absorb risk. When Goldman Sachs placed collateralised debt obligations—securitised packages of mortgage loans—with professional clients, they knew that the products were junk, and internal e-mails referred to them as such. They were breaching a duty of care; there is no doubt at all about that. The courts will be looking at this in connection with LIBOR and are very likely to decide that if it were the case that even professional clients were working on the basis of a falsified LIBOR rate, there was a breach of fiduciary responsibility and duty of care. Duty of care is an enormously important term of art. The Minister, this afternoon, is trying to weaken and dilute it. That is an extremely dangerous line to go down.
Lord Sassoon
No, my Lords, I am trying to use duty of care in the precise way in which it is used in FiSMA and the regulations that go with it. There are, of course, all sorts of other considerations that apply, whether it is in the LIBOR market or other markets. However, I am trying to use the term precisely as it relates to this legislation and the regulations under it. If we want to redefine duty of care or anything else as something that it is not, now is not the time to do it. This has been a wide-ranging debate. However, I would like to focus on the amendments themselves, which highlight important issues with much more focus than some elements of the discussion we have just had. The issues concern disability, ability and vulnerability. I fully share the views of the noble Lord, Lord McFall of Alcluith, that the ability of consumers to engage in financial services can be affected by their age, disability or other personal circumstances. These are points that have been made by a number of noble Lords in this debate, albeit that some other points went rather wider.
The first thing to be clear about is that I disagree with the noble Baroness, Lady Liddell of Coatdyke. It would be nice to be in a world in which these issues did not have to be referred to in legislation at all, but that is not the position I take. I believe that they should be reflected in legislation, and indeed they already are in a number of ways. For example, both the FSA and the Money Advice Service, which we have been talking about, have duties under the Equality Act 2010. The FCA and the PRA will be subject to the same requirements, so the Equality Act also bites on them. Also, under the public sector equality duty set out in the Equality Act, both the FCA and the PRA will be required to assess their rules and processes for their impact on protected groups, and take mitigating action where appropriate. In addition, equality law applies to financial services providers so that firms are required to make “reasonable adjustments” to their services for consumers with a disability under the Equality Act, depending on the nature of the product, the barrier and the size of the business. So there is indeed a body of law that goes very much to the points which the noble Lord, Lord McFall, makes.
Then there is the question of monitoring compliance by the industry with equality law. This is not a job for the FCA or the PRA. It is for the Equality and Human Rights Commission, as the regulator responsible, to enforce the law, and it indeed has the powers to do that. These powers include helping individuals with their legal cases and taking legal action against organisations that appear to have broken the law.
Amendment 136 specifically concerns the regulatory principle concerning consumer responsibility to which the PRA and FCA must have regard in discharging their general functions; and through Amendment 105 the noble Lord wishes to ensure that the FCA, in determining what an appropriate degree of consumer protection is, has regard to the way in which certain consumers may need extra help and protection. These issues are reflected in the FCA’s proposed principles-based approach to regulation, which is designed to ensure that firms adapt their approach depending on the needs of the customer. Instead of having myriad detailed rules and requirements that focus on different degrees of vulnerability, disability or other personal circumstances, requirements on firms will focus clearly and unequivocally on the overarching principle that firms need to take account of their customers’ needs and treat them fairly.
This builds on the FSA’s current approach. For example, principle 7 of the FSA’s Principles for Business states:
“A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading”.
In setting penalties for the failings of firms, one key aspect the FSA considers is,
“whether the breach had an effect on particularly vulnerable people, whether intentionally or otherwise”.
There are examples of where the FSA has taken very significant action. I will cite only one, but I am sure the noble Lord is familiar with it. Late in 2011, the FSA fined NHFA—a subsidiary of HSBC—£10.5 million for mis-selling products to elderly customers. The firm sold asset-backed investment products to elderly people wishing to fund their care home costs, but in fact many of them were not expected to live beyond the period for which it was recommended the products were held. I could also cite cases in relation to the Bank of Scotland and Swift 1st Ltd, so the FSA has been on the case.
The principle that a customer with greater needs should be better protected or offered more support and assistance is clearly enshrined in the regime, but it would not be appropriate to take a more detailed approach, for two reasons. First, we would not want the FCA to cut across or duplicate the efforts of the Equality and Human Rights Commission in considering what circumstances might need special care, and how they should be accommodated. The current approach strikes the right balance of setting a high-level framework with requirements directly imposed on firms by the Equality Act and, on the other hand, with discretion for the FCA to impose more detailed requirements as necessary to ensure appropriate consumer protection.
Secondly, I do not think it is right to list all these matters here. Again, it is potentially duplicative, but more importantly it also risks being incomplete. For example, we might legitimately add age, gender or geographical location—issues which I believe have been raised in previous debates on this Bill—to the list already proposed in the amendment, but where would we stop? I believe there are sufficient powers there. We will come on in due course to the new product intervention powers, which are important in this context compared with what the FSA has at present. Although we will no doubt come to them in detail in due course, the product intervention powers in new Sections 137C and 138M, which mean that in extreme cases a product could be banned with immediate effect, are also additional important safeguards to back up the general principles and approach which I have outlined.
I hope that I have made it clear that the Government take these issues extremely seriously. Unfortunately we cannot and should not rely on people doing the right things, which is why we have the various provisions in the equality legislation as well as the provisions for the FCA—provisions that will be tougher on intervention powers than the powers that the FSA currently has. I therefore invite the noble Lord to withdraw his amendment.
Lord McFall of Alcluith
My Lords, in withdrawing my amendment I express my disappointment with the Minister’s response. Just to illustrate that individuals in this House are up to date with electronic technology, I can say that I took advantage of looking up the meaning of “objective” in Dictionary.com, because that is in bold at the top of the paragraph we are talking about. “Objective” means,
“something that one’s efforts or actions are intended to attain or accomplish”.
In other words, it is the purpose, the goal or the target of what we are to achieve. I submit that there is nothing more comprehensive than that. Therefore, we do not stray away from the subject; this is very germane to the subject. There is still disappointment in the FCA being expected to attend something rather than having a duty to attend. Tonight, we expect to get to a particular clause before we adjourn at 10 o’clock, but the consequence of not getting that far is that we take it on the next day. In other words, the consequences are not very great. There is a difference between that and a duty.
I submit that the Minister, for whom I have great respect, has muddled thinking on this. I wish that he would look at this again so that we can come back on Report to get clarity. Besides me, quite a number of people cannot understand what the Minister is trying to achieve here. I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, I shall respond to the amendment that has been moved but I shall not respond to the amendment that has been not been addressed. Amendment 106ZA seeks to add to the list of matters to which the FCA must have regard in advancing its consumer protection objective. The new “have regard” proposed by my noble friend focuses on data protection, as he has explained, and specifically would require the FCA to consider the issue of consumers having to give informed consent in order for their data to be shared, in particular within a group of companies which includes a non-financial services institution.
Of course, I agree that consumers should have full knowledge about what is being done with their data at all times and have to consent to any sharing of them. I will do my best to reassure the Committee, as I think it is fairly clear, that there is already legislative provision in place to deliver what my noble friend wants to achieve and that this applies whether or not we are talking about different entities—because it is essentially a legal entity test—within a banking group or different entities within a supermarket group. The bank within a supermarket group is bound to be in a different legal entity from the supermarket operation itself. The same considerations apply whether within a banking group, within other financial services groups or within a supermarket group.
The ability of a subsidiary to share personal information about its customers, either with the parent company or with another member of the group, is already regulated by the Information Commissioner under the Data Protection Act 1998. It is legislation that applies to a financial services firm in exactly the same way as it applies to a supermarket or any other data controllers. If a financial services firm has breached a customer’s rights under the Data Protection Act—for example, if it has used the customer’s personal information unfairly, for a reason that is not the one for which it was collected, or without proper security—then the right course of action is for the customer to complain to the firm and then to the Information Commissioner. The Information Commissioner has the powers to force compliance with the law.
The FCA will not, therefore, be the first line of defence in the area of data protection. It is important that we do not blur the lines of responsibility between a financial services regulator and the Information Commissioner, who, as we have seen through numbers of cases, whether in financial services or in other areas, is a regulator with teeth. The case in 2007 of Nationwide is an example of the Information Commissioner taking aggressive action. In support of that, the FSA will take action where appropriate. The Information Commissioner is the first line of defence, but if a financial services firm were to do something reckless, such as losing a laptop with consumer data on it, then it will be fined, as Nationwide was fined £1 million in 2007.
We have the Information Commissioner as the first line of protection to make sure that information cannot leak from one entity to another within the group without the informed consent of the consumer and that the data within the entity are properly used in the way I have suggested. However, as a second line of defence, in areas such as the one that I have described, of the loss of a laptop, the FSA—and in future the FCA—will have important supporting powers. Therefore, I would suggest that this “have regard” is one that is not necessary or appropriate and might raise false expectations about the responsibility of the FCA in an area where there is a regulator with proven ability to come down hard on those institutions that abuse consumer data. I ask my noble friend to withdraw his amendment.
Lord Lucas
My Lords, I am very grateful for that explanation. At this stage, it is exactly what I was hoping for. I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, there is a lot to deal with because of the number of amendments in this group, although they all broadly cover the same ground. I feel that if I err on the side of treating them in short order I will not do justice to each individual amendment, but if I deal with each in turn I risk going on too long. I think that in this case I should probably err on the side of doing justice to these amendments, because each is somewhat different.
The amendments all focus on the need for firms and advisers to act honestly, fairly and professionally in the interests of consumers. This follows a recommendation from the Joint Committee in its pre-legislative scrutiny of the Bill. I doubt that anyone in this Committee would question the need for such integrity in firms’ dealings with their customers—certainly, they have not done so in this debate—but I do not believe that the approach suggested by the amendments would help secure the outcome intended.
I can assure noble Lords that we carefully considered the wording suggested by the committee, but concluded that the best way to address the concerns underlying its recommendation was to modify the matters to which the FCA is required to have regard, thus reflecting what firms should already be doing, rather than to seek to impose directly some kind of high-level duty on firms.
The consumer protection objective ensures that, as the FCA acts to protect consumers, it will be required to have regard to the level of care that firms should provide to their customers, based on the level of risk involved and the capability of the customers. This is set out in new Section 1C(2)(e). The phrase “level of care” is wide enough to ensure that fairness, honesty and professionalism, and certainly acting in consumers’ best interests, are all taken into account. I am not sure how the amendments being proposed would add to the existing provisions; in fact, they may narrow the definition of “level of care that is appropriate”, which I am sure the Committee would not wish to do.
I thought that I heard my noble friend Lord Sharkey refer to the enforceability in law of principles of regulation. I make it absolutely clear that principles of regulation are indeed enforceable in law. It was those general principles which the FSA used to pursue, for example, the Barclays LIBOR case, and it will be exactly the same for the FCA and the PRA.
Amendment 106A would create a “general duty” for firms to act in the way that the amendment suggests. Such a duty would be so high level and vague as for it to be very difficult for firms to know what was expected of them, and it is far from clear what, if anything, such a duty would add to the contractual requirements and terms that already protect clients and consumers. Such a vague duty would also be difficult for consumers or the regulators to enforce. It is the Government’s position that it is clearer, better and safer for consumers for the FCA to make a body of clear, specific and targeted rules that give both firms and consumers an understanding of what level of care is expected, and that is the approach that we have taken.
Amendment 136A would add to the “senior management” regulatory principle an acknowledgement of the requirements for senior management,
“to act honestly, fairly and professionally”.
As with Amendment 106A, I do not believe that this addition would benefit consumers. Both the PRA and the FCA will have powers, under Sections 56, 63 and 64 of FiSMA through amendments made by Clauses 11 and 12 of this Bill, to take action in relation to a failure on the part of an approved person to act in a fit and proper manner in performing functions in relation to regulated activities. Therefore, there is already a perfectly clear and sufficient mandate to ensure that, if either regulator judged an individual to be acting in a way that was not honest, fair or professional, they would be prompted to take robust action against them, up to the removal of their status as an approved person. We do not need extra provision to make this happen. I hope that I can assure the Committee that the amendment is not required.
Amendment 108C would require the FCA to have regard to,
“the general principle that firms or advisers must act honestly, fairly and professionally in the best interests of their customers”.
We agree that they should, but the amendment would not guarantee that they would. It would not establish any duties on firms additional to the detailed rules made by the regulators. It would instead add something to which the FCA would have to “have regard” when considering what was an appropriate level of consumer protection. As I have already said, new Section 1C(2)(e) already deals with the point.
Amendment 138A would include the same phrases, “honestly, fairly and professionally” and “best interests of consumers” in the list of principles to which both regulators will have regard when carrying out their general functions. In addition, it would add the principle that,
“authorised persons should manage conflicts of interest fairly, both between itself and its clients and between clients”.
While I agree with the sentiment of both of these suggested additions, I have to say that they are again unnecessary. I have already explained why I believe that the wording referring to the expected level of care in the FCA’s consumer protection objective is the best way of ensuring this.
On the specific issue of conflicts of interest, if firms were not appropriately managing conflicts of interest, it is unlikely that they would be providing an appropriate degree of protection to consumers. In those circumstances, the FCA would have very clear powers to act. I am not convinced that the amendment would give the FCA power or authority that it does not have already. I thank noble Lords for tabling these amendments and assure them that I understand their concerns. However, in advancing its consumer protection objective, the FCA will already be focused on ensuring that firms treat their customers fairly, honestly and professionally and act in their interests.
Amendment 107 would include in the list of things to which the FCA must have regard when considering what degree of consumer protection is appropriate a firm’s responsibility to act in consumers’ best interests where the consumer has reposed trust in the firm. I should recognise that the noble Baroness, Lady Drake, made a valuable contribution to the Joint Committee that considered the draft Bill. I am pleased to see that Amendment 107 in her name continues that input into these Committee proceedings.
I am sure that we are all again in agreement that financial services firms should always act in the best interests of their consumers. It is an issue which it is important to discuss, as I shall go on to do, but, as the noble Baroness would expect, I argue that Amendment 107 would not ensure the outcome that we all desire. Instead, it would add something that the FCA would have to consider when deciding what was an appropriate degree of protection for consumers. It would require the FCA to proceed on the basis that there is a “duty” for firms to act in their consumers’ best interests where consumers place trust in those firms. Acting,
“in the consumer’s best interests”,
is a noble aspiration, but defining what this means is difficult, particularly in the context of the FCA determining what level of consumer protection is appropriate under such a duty.
The best way to ensure that firms act in their customers’ best interests is not through a general duty on firms. The noble Baroness acknowledged that there would be a difference of view about whether the amendment would impose a new duty on firms. Again, she will not be surprised that I argue that the analysis we have done suggests that there is a new general duty here, but we think that the better way to do it is through FCA rules and principles in support of the consumer protection objective—rules that must be clear, specific and enforceable, and that act to protect consumers against firms that do not or may not act in their interests. Therefore, while I disagree with the substance of the amendment, I support its driving principles. This is why we are creating the much more focused conduct-of-business regulator, the FCA, which will have a very clear consumer protection objective and the suite of new powers to protect consumers that we have discussed.
Baroness Hayter of Kentish Town
I am not quite clear, despite all the noble Lord has said, how conflicts of interest will be dealt with. This is not about timely advice or all those other things he mentions, but it is absolutely central to the issue of duty of care.
Lord Sassoon
To be absolutely clear, the regulators—and the FCA in particular—will have very clear powers to make any further rules on top of those that already exist in the FCA’s rulebook in order to deal with conflicts of interest. I can be completely clear and unequivocal on that point. The powers are there and further rules can be made in this area if the FCA at any point regards them as necessary.
Lord Sharkey
I thank the Minister for his detailed response. I listened very carefully to everything he said, but I was not convinced by the notion that this group of amendments might narrow the FCA’s scope to act in this area. I was equally unconvinced that the general duty to provide services honestly, fairly and professionally was too vague, wide or ill defined, if that is what the Minister was actually saying.
I continue to believe that there is merit in an explicit inclusion of the two principles that we suggest in the list of the regulatory principles common to both the PRA and the FCA. The debate has also shown the high level of concern about this whole area. The detail of the Minister’s response shows that he is alive to that level of concern. I expect that we will return to this matter on Report. In the mean time, I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, I am sorry to say that this is one of those groups of amendments where I do not think that the Committee’s time will be well served. I have repeatedly made public and private offers to the opposition Front Bench to talk to us in the Bill team at any time about any of their amendments. Not once in the process of this—now long—Committee stage, or before it, have the Opposition taken up the offer of talks to discuss amendments.
Lord Sassoon
If the noble Baroness will let me, I will complete my sentence before letting her in. She herself began by saying that these amendments are defective, and that is indeed the case. As I shall explain, however, they also do not reflect one or two of the simple facts of the situation. Although there is, of course, a proper concern in this area, if the party opposite were prepared to discuss those facts, we might not be talking about some of these amendments in the way that we are.
Baroness Hayter of Kentish Town
My Lords, that offer has not come to me. I was at one meeting with the Bill group and asked whether I had access to the Bill team, but I have yet to be given its e-mail address. I had an e-mail from the team about one of our amendments earlier this week, and I have written to it on another issue. I have not had repeated offers. I have talked to the FRC about this amendment, and it knows all about it. I am therefore slightly surprised by the Minister’s comment.
Lord Sassoon
My Lords, I believe that I made the offer in the last Committee session, on the Floor of the House. Hansard will record when I last made the offer in this Committee. I cannot speak to every member of the opposition Front-Bench team but I have made the offer repeatedly to the noble Lord, Lord Eatwell. Indeed, I know that the Bill team has made quite clear to the opposition research team how it can be reached. I make the offer again because I think that there are many things around which we could clear the ground, and that would be helpful for everybody. I can quite understand that there may be issues here, but there are many interested parties who put forward all sorts of good ideas for amendments which, on scrutiny, might not be reflective of the situation as it exists.
Let me help the noble Baroness with a couple of the facts of the situation. First, the FCA has already brought in a rule with which she may be familiar but to which she did not allude: rule 2.2.3 of the current Conduct of Business Sourcebook. This requires UK-authorised asset managers to put statements of commitment to the stewardship code on their websites, or—if an asset manager does not commit to the code—to provide its alternative investment strategy there. I would of course expect the FCA to carry forward this important rule in its own rule book. So I would suggest to the Committee that the suggestions underpinning the discussion we have just had—the contentions around the lack of joined-upness—are not reflected in the way in which the FCA Conduct of Business Sourcebook already explicitly refers to the stewardship code.
I agree with the noble Baroness completely about the need for an MoU. However, what she does not do in her speech this evening is to recognise that the FSA already has an MoU with the FRC. I believe that it covers all the relevant matters. We have discussed the subject of MoUs before. The Bill provides explicitly only for MoUs between the key players in the regulatory system: the Bank of England, the FCA, the PRA and the Treasury. We have discussed why that should be. That does not mean that there will not be—and are not already—MoUs between the new regulators and other bodies; we have talked about the OFT, and there is already an existing MoU with the FRC.
So I understand where the noble Baroness is coming from in this group of amendments. I believe that the matters are already properly accommodated within the Bill. I wish that we could have had a discussion about this outside the Committee, but I am glad to have now got that on the record. I would ask the noble Baroness to withdraw her amendment.
Baroness Hayter of Kentish Town
My Lords, it would not be very satisfactory not to consider such an important issue in Committee. Concern about it is shared not just by the FRC but by the ICAEW, which last night again expressed its support and its belief that the issue is important. As the Minister will know, there are vital and urgent requirements to improve client asset audits. Those can be undertaken only by regulated professionals overseen by their recognised professional bodies, such as the ICAEW, and these are overseen by the FRC rather than the FSA. So this is key stuff. This is not—this will sound awful but I will say it—“a little discussion with the Baroness, who does not really understand it but can be well briefed outside this House”. I think that that was the tone of the Minister’s comments. I am speaking on behalf of organisations such as the ICAEW, which feels very much that it has a key role to play, which it wants to play, in the regulation of this industry. We know that we need improved rules and guidance about how auditors should work. We know that this is in the hands of professional bodies, not the FCA. If there is already an MoU with the FSA, it seems to me that there will be one with the FCA. So I do not think that writing it in legislation will cause a revolution, nice though that would be. There are important issues of discipline in the hands of ICAEW and other professional bodies overseen by the FRC. It would be inadequate for those to be free-floating and not in the Bill. For the moment, however, I beg leave to withdraw the amendment.