Financial Services (Banking Reform) Bill
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Lord Eatwell (Lab)
My Lords, having listened to my noble friend Lord Brennan and the noble Lord, Lord Phillips, I found this discussion quite disturbing. The creation of a criminal offence is one aspect of the Bill that pushes forward the regulatory regime in the UK and creates an environment more suited to the somewhat cavalier nature of finance in a global marketplace—in particular by identifying those activities that have inflicted enormous harm upon our fellow citizens. What I heard was that, as drafted, the probability of securing a conviction or even a prosecution, as the noble Lord, Lord Phillips, put it, is vanishingly small. Unless the terminology is clarified in a way laid out so clearly by my noble friend, this part of the Bill will simply bring that aspect of regulation into disrepute because it will be worthless. That is why I regard the remarks that I have heard from the two distinguished lawyers who have just spoken to be very disturbing. It is incumbent upon the Government not simply to produce a pat answer here this evening but again to produce a carefully written assessment of the case for an appropriate criminal regime and its implementation in order that the whole House has an opportunity to assess this important aspect prior to Third Reading.
Lord Newby (LD)
My Lords, these amendments essentially aim to make three changes to the criminal offence: first, to allow defendants to be prosecuted under the offence when a number of decisions taken together cause the bank to fail; secondly, to enable the offence to be made out when the decision or decisions in question were a significant contributory factor to the failure of the bank, rather than its sole cause; and, thirdly, to include within the definition of bank failure the systematic failure of the bank to prevent liability with regards to broader criminal offences.
On the first two issues, while I understand noble Lords’ concerns, I assure them that these amendments are not necessary to deliver the effects they intend. First, I assure noble Lords that, as a matter of law, under Section 6 of the Interpretation Act 1978 words in the singular include the plural unless express provision is made otherwise. The term “decision” includes “decisions”, plural. Therefore, where appropriate, it will be possible to prosecute on the basis of the implementation of a number of decisions. The Interpretation Act 1978 ensures that it is not necessary to repeat the defined terms or make express provision for the singular to include the plural in every single statute. The case for abandoning that practice seems rather minimal in this instance.
Moreover, in practice we generally expect a prosecution of the offence to focus on one individual decision in order to maximise the ability of the prosecution to make its case effectively when asking the jury to consider what are likely to be very complex events. This would enable the prosecution to focus on the causal relationship between the implementation of one decision and the failure of the bank, where that relationship seems to be most clear. In these cases, any other relevant decisions would be taken into account by the jury as the circumstances in which the key decision was taken, when the jury was deciding whether the defendant’s behaviour fell far below that which reasonably could be expected of him or her. For example, a decision to take on a risky acquisition may be more or less reasonable depending on earlier decisions to strengthen or weaken the bank’s capital position.
These amendments also include references to agreeing to the carrying on of activities by a firm. This would add nothing to the offence as currently drafted, since the reference to agreeing to the firm carrying on certain activities assumes that those activities in some way require authorisation and this must involve taking a decision, or agreeing to the taking of a decision, by or on behalf of the firm, and is therefore already included in the offence.
Moving on to Amendments 94, 95, 100 and 102, under general principles of criminal law the test for an action having “caused” an event to occur is that, had that action not been taken, the event would not have occurred. Therefore, in this specific offence the test is that, if the decision or decisions in question had not been implemented, the bank would not have failed. The implementation of the decision need not be the sole or even the main cause of the bank’s failure. In practice, because of the evidential standard that applies to criminal cases, we expect that cases will be prosecuted only where it is very clear that the implementation of the decision or decisions in question was a significant contributing factor to the failure of the bank.
In addition to these general points, the Government oppose some aspects of the amendments in principle. As well as including reference to “activity”, Amendment 97 would lower the bar of the reasonableness test for when the offence would be committed. As set out in Committee, the Government do not think this is appropriate. Referring to conduct which is far below that which would be expected has precedents in the Law Commission proposal for a statutory offence of killing by gross carelessness and in legislation creating the offence of corporate manslaughter. We have used this particular phrase knowing that it works and can be effectively interpreted by the courts. There is no precedent in UK criminal law for criminalising behaviour that is merely unreasonable. To do so would amount to an indiscriminate diffusion of criminal liability, in a way that made it hard for individuals to know with sufficient certainty when they might be committing an offence.
Amendment 118 would expand the definition of institutional failure that would trigger the offence to include occasions where there was a systematic failure of the bank to comply with a range of laws imposing criminal liability in connection with the conduct of financial services business. A similar amendment was raised in Committee, focused specifically on compliance with the Fraud Act 2006, the Proceeds of Crime Act 2002 or the Money Laundering Regulations 2007. The Government’s position on this remains unchanged—this offence has been introduced to plug a gap in existing legislation where there are no criminal powers available to sanction senior managers who have recklessly caused their banks to fail. By definition, criminal liability can arise where offences already exist that individuals can be convicted for and appropriately punished, depending on the seriousness of the breach. In certain cases, they can also be charged with consenting to or conniving in such activities. It is difficult to see how this amendment strengthens the offence.
The noble Lord, Lord Brennan, raised the question of the definition of “way”. The expression includes both the activities in the business and how those activities are carried out. This makes the offence broader. The noble Lord also suggested, if I understood him right, that in some cases the real risk is that people did not know what risk they were taking or wilfully turned a blind eye. While it might appear attractive to include incompetence by senior managers in the offence, doing so could introduce unwelcome and potentially damaging uncertainty into the sector. Further, to comply with the European Convention on Human Rights, the offence must be sufficiently certain to enable individuals to know when they are at risk of committing the offence. However, this does not mean that it is possible for a senior manager to simply close their eyes to the risk the bank is taking. In some cases a court may decide that it can be inferred that a particular person had knowledge of a risk. In the case of a director, ignorance of a risk to the bank’s existence may, in some cases, be to admit to breaches of the duties under the Companies Act 2006. Accordingly, there are cases in which an argument that a defendant had no knowledge of a particular risk would carry very little credibility and could even expose the defendant to criticism for breach of duty.
We take this offence extremely seriously as a key part of the new infrastructure that we are putting in place and we believe that it meets the test we have set out. On that basis, I hope that the noble Lord will withdraw his amendment.
Lord Phillips of Sudbury
My Lords, first, is my noble friend quite certain that the Interpretation Act 1978 does not itself operate subject to the context of the language which is being interpreted? If that is so, I believe that there will be real ambiguity about this clause because, as I say, the law is construed strictly in favour of the accused. Secondly, does he accept that in a clause like this, to rely on the Interpretation Act rather than put in some plain words that make it clear, is unhelpful to people who must refer to this piece of legislation in the future?
Lord Newby
I am not sure that I do, my Lords, but I wonder if I might write to the noble Lord to clarify our thinking and, it is hoped, persuade him that we have got it right.
Lord Brennan
My Lords, listening to the exposition of the Minister leads an experienced lawyer to think that those were the kinds of arguments that would make for an entertaining tutorial at university and deprive the participants of any career at the criminal Bar, because they simply would not know what they were talking about in terms of what a judge and jury would expect by way of argument. I am sorry to put it so bluntly, but it really is a clash with the Interpretation Act that would lead to ribald laughter in most criminal chambers. I am being serious about this. It is the kind of argument that you would expect to get from a bright lawyer with no criminal law experience. The Government must face up to this. I do not understand why they cannot take advice from a competent independent Treasury counsel on the scope of the offence in order to make sure that they can prosecute, or at least hope to prosecute. Creating such an offence in-house is, I think, highly suspect.
I will go through this point by point. First, why should not the statute say decision and/or decisions—one of the two? Secondly, why, as the noble Lord has suggested, do we have to get ourselves into the circumstance of having to identify the key decision? It may be extremely difficult to do that because it may be a refined banking judgment where a series of acts or decisions which led to failure may be cumulative and not the result of the key decision. Thirdly, how the word “cause” in the criminal law can be construed to be “significantly contributed to” is not, I think, something that figures in the criminal law books.
I turn next to corporate manslaughter. The argument has to be met. The fact that you get the same words in another statute is of no importance until you consider the context in which the words are being used. Far below that, in the industrial safety context, is the matter of common sense. In terms of banking behaviour, it is an extremely complex exercise to expect a jury to carry out, and an unnecessary one. The answer given in response to the amendments did not include any explanation of why this statute is taking itself down a different route from R v G. Wilful blindness is a specific criminal law phrase designed to embrace the people who deliberately close their eyes to something. It does not embrace innocent incompetence. The very word wilful imports the culpability of it.
My last point, in agreement with my noble friend Lord Eatwell, who is known as an academic, is that the legislature would be shooting itself in the foot if it created a criminal offence which the public came to treat as having no effect, bordering on the ridiculous. That would be a major political mistake. Those on the government Bench who take such matters into account should pay more attention to that than to the legal advice they are getting. I beg leave to withdraw the amendment.
Lord Deighton
Lord Deighton
Lord Deighton
Lord Deighton
“(2) “Financial institution” means a UK institution which—
(a) meets condition A or B, and(b) is not an insurer or a credit union.(2A) Condition A is that it has permission under Part 4A of FSMA 2000 to carry on the regulated activity of accepting deposits.
(2B) Condition B is that—
(a) it is for the purposes of FSMA 2000 an investment firm (see section 424A of that Act),(b) it has permission under Part 4A of that Act to carry on the regulated activity of dealing in investments as principal, and(c) when carried on by it, that activity is a PRA-regulated activity.”
Lord Deighton
Lord McFall of Alcluith (Lab)
My Lords, Amendment 178 concerns continuous payment authorities. This is an issue that I raised during the passage of the Financial Services Act 2012. Continuous payment authorities are a recurring payment mechanism involving a debit or credit card where the debtor gives his or her card to the company and they contact the bank. Unlike direct debits or standing orders, this allows a firm to take regular payments from a customer’s bank account without having to seek express authority for each payment. When I made this point to the Minister, the noble Lord Lord Newby said that,
“abuse of the CPA is one of the most concerning practices of payday lenders”.—[Official Report, 28/11/12, col. 235.]
Consumer groups, the Law Society and the OFT have expressed ongoing concerns about this issue. The real issue is that the debtor—the customer—is not in full charge of their affairs. The continuous payment authorities do not offer the same guarantee as direct debits or standing orders. In effect, they give the company authority about how much is taken from an individual’s account and when. This is hugely important to those who take out payday loans, whose financial position is tenuous. Unlike direct debits and standing orders, there is no written communication between the individual and the bank. This situation has led to the banks reviewing up to 30,000 complaints from customers since 2009. According to the Financial Conduct Authority, quite a number of those will be eligible for compensation. That authority has said that many of the banks or providers are not cancelling recurring payments to payday loan firms.
Last December, the OFT warned that businesses should not lock customers into CPA traps because people did not know what they were signing up to. The OFT opened formal investigations last November into several payday lenders over aggressive debt collection practices. Their progress report focused on concerns regarding unfair or improper practices:
“Using the CPA in a manner which is unreasonable or disproportionate or excessive in failing to have proper regard to the possibility that a debtor is in financial difficulties”.
This includes,
“seeking payment before income or other funds may reasonably be expected to reach the account”.
The Financial Ombudsman Service was seeing 50 new cases a month at the end of last year. My information is that that number has increased since.
Such blatantly unfair treatment of consumers should not be restricted to a matter of guidance. The new clause that I am proposing ensures that debtors are informed about their rights and that only the debtor may cancel or vary a CPA in communication with the bank. Furthermore, the debtor’s bank is obliged to comply with the debtor’s instructions, as they do with direct debits and standing orders. I suggest to the Minister that in these austere times we ought to legislate to protect such debtors and to ensure a level playing field between the lender and the debtor.
Lord Newby
My Lords, I am grateful to the noble Lords, Lord Sharkey and Lord McFall, for raising this very important issue again. The Government wholeheartedly agree that consumers must be protected when they borrow from payday lenders and use other high-cost forms of credit. Payday lenders are causing unacceptable consumer harm and the Government are committed to putting that right.
As noble Lords will know, the Government have taken decisive action to protect borrowers by fundamentally reforming the regulatory system governing these lenders. This House strongly supported the Government’s proposals to transfer the regulation of consumer credit to the FCA during the passage of the Financial Services Bill last year.
The Government have ensured that the FCA has robust powers to protect customers of high-cost lenders. It will thoroughly assess every lender’s fitness to continue to trade. It will put in place much higher standards that firms will have to meet, and those requirements will, for the first time, be binding on firms. It will proactively monitor the market, focusing on the areas most likely to cause consumer harm. The FCA has a broad enforcement toolkit to punish breaches of the rules: there is no limit on the fines it can levy and, crucially, it can force lenders to provide redress to consumers.
The FCA takes up its new regulatory responsibilities in this area on 1 April next year. But it has already demonstrated that it is serious about cracking down on high-cost lenders. Its draft rules, published on 3 October, restrict some of the practices that cause most consumer detriment, and have won widespread support. But we are convinced that further action will be needed to ensure that this market functions in a way that is in consumers’ interests. As noble Lords will be aware, the Government have announced that they will bring forward an amendment to this Bill at Third Reading to require the FCA to use its powers to cap the cost of payday loans.
I will not pre-empt our discussion at Third Reading but I would just like to make a few key points on the need for a cap on the costs of credit. The Government have always kept the case for a cap under review as the market has evolved. With growing evidence, including from other countries, in support of a cap, we believe that now is the right time to give the FCA a clear parliamentary mandate to take action under the powers we have given it to implement a cap on total costs.
The FCA has an important job to do: it must ensure that it designs a cap that works in UK consumers’ best interests and fits the UK market. To do that, it needs to consider the evidence thoroughly, including drawing on the valuable work being undertaken by the Competition Commission to investigate the fundamental problems in the payday market. As the noble Lord, Lord Sharkey, has already pointed out, we do not intend to wait until the Competition Commission has finished its work and have committed to implementing the cap in January 2015.
The Government’s commitment this week sends a strong message to lenders: “Do not wait for the authorities to act, raise your game and start charging and treating your customers fairly now”. We will have a full debate on the government amendments at Third Reading—
Lord Watson of Invergowrie
I thank the Minister for giving way. He made the point about treating customers fairly. I understand that he is making a broader point but I noticed that he was nodding a few minutes ago when I spoke about the potential damage to somebody trying to get a mortgage, having taken out a payday loan. Does he agree that some way should be found of ensuring that specific information is given to those taking out a payday loan so that they do not affect their ability to handle other aspects of their financial affairs?
Lord Newby
I was going to come on to this point but I will do so now. I did not see “Newsnight” but I read about the report in today’s papers. It seems demonstrably unfair. I have two sons in their 20s. I have no idea whether they take out payday loans but I know that at some point in the next six years one or both of them might think of getting a mortgage—if they keep working hard. It does seem demonstrably unfair that someone taking out 50 quid for a payday loan today could be automatically denied a mortgage in six years’ time. If the noble Lord will permit me, I propose to draw that to the attention of the FCA.
There are two elements to this. First, there is the point that the noble Lord made about what might be on the website to point this out. There is also another issue, which is whether it is reasonable for people offering mortgages automatically to deny them to someone who may have taken out a small payday loan and paid it off rapidly. I do not know, for example, whether that rule applies to somebody who has taken out a loan under the traditional method of door-to-door payday-type loans that we had in this country for many decades. I shall draw that to the attention of the FCA.
I was just beginning to say that we will have a full debate on Third Reading, and I can commit to operating, as the noble Lord, Lord Sharkey suggested, on Committee stage rules. Having sat through many debates in your Lordships’ House, I do not think that, even if I said that we were resistant to noble Lords’ proposals, that would make a huge difference to the behaviour of noble Lords. In any event, I am happy to give that assurance now.
Turning to the amendments before us, starting with that tabled by the noble Lord, Lord McFall, the Government share his deep concern about the potential for consumers to be misled by lenders. It is essential that consumers are well informed of the risks before entering into an agreement. However, I believe the noble Lord’s concerns will largely be addressed by the FCA’s proposed rules, or already exist in legislation.
Regulations made under the Consumer Credit Act 1974 in accordance with the consumer credit directive currently require that creditors provide adequate information to enable the consumer to assess whether a proposed credit agreement is suitable to their needs and financial situation. Requirements on lenders to be clear to consumers are also set out in the OFT’s Irresponsible Lending guidance. These requirements will be transposed into binding FCA rules. The noble Lord was worried about guidance; this is being transposed from guidance into rules.
The FCA has also proposed a tough package of measures to restrict how payday lenders can access money from their customers’ bank accounts via the continuous payment authority mechanism on their debit and credit cards. These include limiting the use of CPAs to two attempts, and banning part payment. The FCA is also proposing to turn the guidance around the use of CPAs from the outgoing regulator, the OFT, into binding FCA rules. Several of the provisions set out in the noble Lord’s amendment are therefore directly covered by these proposed rules, including a requirement for lenders to give the debtor a statement of their rights in relation to the CPA, and the ability of a borrower to cancel a CPA at any time.
The Government believe that the provisions set out by the noble Lord and not reflected in FCA rules will not, in practice, serve to improve consumer protections. Requiring lenders to provide additional information to consumers on their legal rights presents a real risk of information overload and confusion for consumers. As the noble Lord said in Committee, no one wants to be swamped by hundreds of pages of dense legal text. It is also important to balance awareness of legal rights with promoting awareness of the Financial Ombudsman Service, the free service to help consumers resolve disputes. Taking a case to court can be too expensive for consumers.
Lord McFall of Alcluith
The issue here is a level playing field for continuous payment authorities, and direct debits and standing orders. There has to be a loud and clear message from the Financial Conduct Authority to banks, which have 30,000 complaints against them at the moment, and to companies, that we cannot tolerate an imbalance between the power and authority of a lender and the debtor, who can be in ignorance about what is happening to their account. If the Minister can assure me that he will send that message to the FCA, which in turn will send out the message that it needs a level playing field, at least that would be a step forward.
Lord Newby
Absolutely, I am very happy to do that. I hope that the rules would send that message very clearly, but I am very happy to reinforce it.
I go back to the terms of the amendments. I am concerned that some of the provisions could make it more difficult for a consumer to cancel an agreement—for example, requiring borrowers to sign for cancellation of a CPA. I am confident that the FCA’s proposals will give consumers control with respect to CPAs and in managing their repayments. I strongly support the noble Lord in seeking to protect consumers using the high-cost credit market and ensuring that they know their rights. However, I believe the objectives of transparency and protections for consumers are already provided for by the new regulatory regime; the FCA has already set out the action that it proposes to take in this area.
I turn to the amendment proposed by the noble Lord, Lord Sharkey. His proposal would require the FCA to implement a number of rules from the Florida model of payday regulation, including a requirement for a cap on credit. I can give the noble Lord at least some of the assurances that he seeks in terms of the FCA considering the Florida approach to regulating payday lenders very closely, as it decides how to design a cap on the total cost of payday loans for the UK market and make sure that it works effectively here. It will consider rollovers and look, for example, at the experience of Florida with a real-time database.
While I completely support the noble Lord’s desire to learn lessons from other countries’ experience, I have some doubts as to whether it is as straightforward as he thinks to simply import almost an entire regulatory framework from another jurisdiction. The UK has a very different market from other countries, and it is right that the rules governing regulation of payday loans in the UK reflect our own unique national characteristics. The FCA will be charged with doing that, building on the international evidence and examination of the UK market, and drawing on the Competition Commission’s analysis among other things. Therefore, while I share the noble Lord’s commitment to ensuring the UK consumers are protected when they borrow from high-cost lenders, I hope that he will agree that the best way to achieve that is through development of evidence-based rules that are tailored to protect UK consumers. We have a clear action plan to deliver this objective.
The noble Lord, Lord Eatwell, raised the question of the content of the amendments and the relationship between the Government, in setting policy in this area, and the FCA—where the Government stop and the FCA begins. I heard very clearly what he said. The exact nature of the amendment that we will debate at Third Reading is currently being formulated, and I shall make sure that his point is very much in the minds not only of Ministers but of officials as they set about that task.
With those assurances about the amendment that we will introduce, I hope that the noble Lord will feel able to withdraw his amendment.
Lord Sharkey
I was struck by the point made by the noble Lord, Lord Eatwell, that the Government must at some point surely say how the FCA is to arrive at a rate or an amount for a cap and by what criteria the cap should be determined. I am sure that they will want to revisit that whole notion again at Third Reading.
As to Florida, I am encouraged by what the Minister says. I make the overriding point that the Florida system has been operating for 11 years; it is simple, it is easy to understand and it works. What we have here now does not work, is not simple and is not easy to understand—and it costs three times as much as Florida. That is a powerful reason for looking carefully at Florida and assuming that there is something that we can really learn here, no matter the differences between the two jurisdictions. However, I am very grateful for the Government’s decision to cap the total cost of payday loans, and I look forward to a further discussion of the issues at Third Reading under Committee stage rules. In the mean time, I beg leave to withdraw the amendment.