Bank of England and Financial Services Bill [HL]
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Lord Bridges of Headley
Baroness Kramer (LD)
My Lords, I shall say a brief word. My noble friend Lord Sharkey and the noble Lord, Lord Davies of Oldham, have both been very calm on this issue, but I shall admit that, frankly, I am outraged. The obligations that exist for so many people in the public sector to report misconduct—on teachers, police officers and members of the NHS—are taken as absolute requirements. There is no question of whether they are costly; it is understood that the importance of propriety and integrity in all those activities is crucial. I suggest that, after the years that we have been through following the financial crisis, no one should doubt that integrity in this sector is absolutely vital.
When we sat on the Parliamentary Commission on Banking Standards, we discussed whistleblowing extensively. Every single institution that we talked to and everyone we could identify had in place mechanisms for whistleblowing; the problem is that none of them was effective. The kind of issues that were reported through whistleblowing systems were situations such as when someone had noticed someone sliding a £5 note out of a cashier’s desk—they were on that kind of scale. So none of the major abuses, whether it was PPI, the LIBOR scandal, the mishandling of credit issues or money-laundering, came to the surface through any kind of whistleblowing system. This measure—the statutory requirement to report a breach when someone sees or recognises that it is happening—is one of the few mechanisms that we could conceive of to try to counter that particular set of problems. Without exception, everybody who gave evidence to the parliamentary commission talked about the importance of making whistleblowing much more effective. So far as I can see, there is no replacement to this requirement that is effective, that has been proposed—and, frankly, if there is a burden, surely any burden is significantly smaller than living with the consequences of sustained and ongoing abuse.
The Parliamentary Secretary, Cabinet Office (Lord Bridges of Headley) (Con)
My Lords, I thank the noble Lord, Lord Sharkey, for provoking this short debate. I heed what the noble Baroness, Lady Kramer, and the noble Lord, Lord Davies, have said. I shall try to explain the Government's position. I need to examine the very insightful comments made by the noble Lord, Lord Sharkey, and may want to return to some of them in writing. If I do not address them here, I shall endeavour to do so in writing.
At first glance, this seems an obvious and straightforward requirement to impose on authorised persons. As the noble Lord will be aware, this requirement was introduced by the coalition Government through the Financial Services (Banking Reform) Act 2013. It is through that planned implementation of this provision that we have learnt that it is simply disproportionate.
Before I go into more detail, I reassure noble Lords that this does not mean that firms will be under no obligation to report wrongdoing to the regulators. First, a separate proviso in the 2013 Act will still apply: the requirement for firms to notify regulators that they have taken disciplinary action against an individual subject to the conduct rules, be it through dismissal, a reduction in pay or a written warning. Secondly, this requirement builds on the regulators’ existing principle for business that firms must tell them of anything that may be of interest to them. If a significant issue arose with the conduct of a member of staff that for some reason did not lead to disciplinary action, the firm would still need to consider whether it would be appropriate to alert the regulators.
In this context, the Government believe that a blanket requirement to report all known or suspected breaches of the conduct rules is disproportionate. In particular, an obligation to report suspected breaches is potentially open-ended and wide ranging for it forces firms to work out the point at which possible indications of breaches of rules of conduct would amount to a genuine suspicion. Then the firm would have to train staff to spot and assess those indications, and finally firms would need systems—
Baroness Kramer
The argument the Minister has made suggests that he does not believe that whistleblowing is a justified process. Almost every whistleblower who raises a suspicion is very unlikely to be able to present a signed and sealed case. It is surely the responsibility of the organisation where the whistleblowing has taken place to explore that. In fact, they constantly guarantee that that is exactly what they will do. The Minister is now saying that that is far too onerous. I find that incredible.
Lord Bridges of Headley
I am not saying that. I am saying that the process as a whole is potentially too onerous. I heed what the noble Baroness says, and of course whistleblowing is important. I shall continue, and we can continue to have this debate.
Finally, firms would need systems to ensure that the information is captured and transmitted to regulators, but it does not stop there. Having been notified of a suspicion, the regulators would have to decide whether to investigate and then, if appropriate, to consider what action to take. No doubt there would be many cases where there was only suspicion and nothing more and no action would be taken, but all cases would have to be investigated to some extent, and it would be difficult for regulators to do nothing at all once they had been notified.
Noble Lords should also note that, although the Government believe that an inflexible requirement to report all known and suspected breaches of conduct rules by all employees subject to them is inappropriate, the regulators can impose more targeted proportionate rules in this area if it supports the pursuit of their objectives.
The noble Lord, Lord Sharkey, raised costs. The costs in the impact assessment are based on the detailed cost-benefit analysis published by the regulators when they set out how they would implement the regime. I understand it is available on the FCA website, but I will write to the noble Lord and all interested Peers on this point. On that basis, I ask the noble Lord to withdraw the amendment.
Lord Sharkey
I thank the Minister for that answer and those clarifications. I cannot help feeling that removing the statutory obligation and replacing it with something that is still not yet entirely clear is perhaps not the best way of proceeding. However, under the circumstances, I beg leave to withdraw the amendment.
Lord Bridges of Headley
My Lords, I thank the noble Baroness, Lady Drake, for prompting this short debate and for her thoughtful and thorough speech on the subject. As she rightly says, we need to improve the way the financial services industry treats its customers. We all want to see better standards in the banking and financial services industries, and to ensure that the customer always comes first. The question before us, however, is whether this amendment would achieve that. I am sorry to say that I am not at all convinced that it would—and I am conscious that your Lordships have been around this issue before, not least in 2013. I read the Hansard report of that debate yesterday. None the less, let me clarify the Government’s position.
The Government do not consider that introducing a fiduciary duty or a duty of care in legislation would help to drive up standards within ring-fenced banks because, as noble Lords know, banks are already subject to a wide range of legal duties. First, a bank is subject to obligations under the Financial Services and Markets Act 2000 and the regulators’ rulebooks. Under the latter—the principles for business—a firm is required to act with due skill, care and diligence, and to pay due regard to the interests of its customers and treat them fairly The enforceable rules of conduct that will apply to banks under the SM&CR, to which the noble Baroness referred, will put the same requirements on the vast majority of bank employees, complementing the obligations on the firm, requiring them to give due regard to customers’ interests and to treat them fairly.
In addition, ring-fenced banks are subject to obligations under their contracts with their customers. These include implied terms—under Section 13 of the Supply of Goods and Services Act 1982 or Section 49 of the Consumer Rights Act 2015, where the consumer is not an SME—that the ring-fenced body will perform the service with “reasonable care and skill”. So, it is not clear that imposing a fiduciary obligation on a bank to its customers or small businesses would add any value. I would argue that a fiduciary obligation is not appropriate in the relationship that a bank has with the majority of its customers. It is a specific kind of obligation that a director owes to a company, or a trustee owes to a beneficiary under a trust.
It would be appropriate for a bank to have such an obligation when it was acting as a custodian, and such obligations can and do arise quite naturally in such circumstances. But, and this is the point, deposits with a bank are not property held on trust, so a fiduciary obligation simply would have no place in the contractual relationship between a bank and its customer—for instance, in a sales relationship. Clearly, it would be meaningless where the bank has lent the customer money.
Some time ago—noble Lords may not remember this, as it was in 1848—the case of Foley v Hill held that the relationship between a bank and its customer was that between a debtor and a creditor: a contractual, not a fiduciary, relationship. It was therefore not within the jurisdiction of the court of equity.
Furthermore, a fiduciary duty, even if it were to be imposed, could only deliver change if it was enforceable. Only the beneficiaries—the consumers and small businesses—could enforce it. This would obviously be expensive, requiring court proceedings, and would only produce financial compensation. The Government firmly believe, therefore, that the amendment would not add anything to the duties that already apply to ring-fenced bodies. Rather, it would add confusion where there is clarity. Banks can comply more easily with specific requirements, and customers and regulators can more effectively hold the bank to account when they do not comply.
I declare an interest here. I spent much of the last few years trying to ensure that one of the country’s largest high-street banks treats its customers fairly and earns their loyalty. In the light of that experience, I point out that the high level of competition and choice that now exists, and the increasing ease with which consumers can switch accounts, makes it even more imperative for banks to treat their customers not just fairly but personally and with real integrity.
This amendment would not improve on the regulations that already govern banks’ relationships with their customers. It would not give banks or their senior managers a clear understanding of what is expected of them, or provide a viable and effective means of holding banks to account. I therefore ask the noble Baroness to withdraw it.
Baroness Drake
I thank the Minister for his reply, and I will not enter into iterative debate on a fiduciary duty, other than to say that I will persistently argue from these Benches that the UK’s regulatory framework is inadequate for the consumer. Slowly but surely, in certain areas such as the introduction of independent governance committees in the insurance sector which embrace a fiduciary responsibility, there is a growing recognition that the current regulatory framework is not delivering the right response to behaviours in the banking and financial sector. Yet more layers of sedimentary rock in the regulatory system will not deliver that. None the less, I beg leave to withdraw my amendment.
Lord Davies of Oldham (Lab)
My Lords, I endorse the remarks of my noble friend Lord McFall in introducing the debate on the amendments. My remarks are necessarily cut short because the noble Lord, Lord Deben, provided a great deal of the supportive evidence and arguments the Government ought to take seriously; we hope that they will.
There was a time, not so very long ago, when we prided ourselves on the extent to which this country was to the fore in being aware of the problems of climate change and taking the necessary action to reduce the frightening possibility of the rise in temperatures and general climate change, which would make such great difficulty for the whole world. I know that my noble friend Lady Worthington, who is, unhappily, not with us today, is very concerned that the French this year have taken steps that are somewhat in advance of what we have made so far. They passed a law requiring listed companies to disclose in their annual reports how exposed they are to the financial risks related to the effects of climate change, and what measures have been adopted by the company to reduce those risks. The law also requires pension funds, insurance companies and other institutional investors in France to disclose how they are managing climate change risk. This law makes France the first country in the world to introduce a carbon-reporting obligation on financial institutions.
Amendment 29B gives an indication of the road we could tread. I therefore hope that the Minister will at least commit the Government to creating a standardised set of questions that financial services providers must ask to gather and present information on companies and asset owners. The aim would be to make it easier to compare and assess risks to which companies may be exposed because of the impact of climate change. That is not asking too much of the Minister, in his more constructive mood, and I hope I will establish that point very shortly.
Lord Bridges of Headley
I always try to be constructive with the noble Lord, Lord Davies. I thank the noble Lord, Lord McFall, for introducing this amendment. It is a shame that the noble Baroness, Lady Worthington, is not with us. What strikes me from this interesting and useful discussion is that at issue is not whether we disclose more but how we do it in a meaningful way that people can understand and that is consistent.
Just taking a step back, as I outlined in my response to the noble Baroness, Lady Worthington, on Monday, I fully recognise that climate change, as well as demographic change and technological change, which she referred to, are important structural issues that could have a significant impact on not just financial stability but society more broadly. As my noble friend Lord Deben, who has a lot of experience in this field, said, climate change cannot be put into a silo and seen as the responsibility of one government department, nor, in a business, one part of the business. It needs to be seen as a common endeavour to tackle.
It is right, therefore, that the UK’s macroprudential authority should be alert to climate change as well as to the other long-term systemic risks that I mentioned and that it, and other parties, should have access to clear and sufficient information to make an educated assessment of those risks. As the noble Lord, Lord McFall, and others, are well aware, the Government have put in place legally binding, long-term commitments to reduce our greenhouse gas emissions in the Climate Change Act 2008, and we will be pushing strongly for an ambitious and global agreement on climate change at this December’s United Nations conference of parties in Paris, involving commitment by all countries to act. The steps that will be taken to meet these commitments will involve a range of adjustments to production and consumption across the global economy, and the Government fully recognise the importance of ensuring that this transition is as orderly as possible.
As the noble Lord, Lord McFall, said, the Governor of the Bank, in his capacity as the chairman of the Financial Stability Board, has already highlighted the risks that climate change could pose to financial stability—and, more pertinently to the amendment, the role that consistent, clear and comparable disclosure at international level could play in responding to those risks. As your Lordships will know, the Financial Stability Board has been actively considering these issues and recently, at the end of September, convened a workshop of public and private sector participants to consider how the financial sector should take account of climate-related issues.
Following that workshop, the FSB published for this month’s G20 summit a proposal for an industry-led task force on climate-related risks. The G20 will then recommend principles for climate-related disclosure. I do not want to prejudice that discussion but agree with the noble Lord that obviously more could be done with disclosure practices. As he rightly said, so many disclosures—ironically and perversely in an age where we want more information—could add to confusion and not add clarity. We look for added clarity and consistency.
In the light of the need for comparable information across countries, I would argue that this issue is rightly considered at that international level. That said, one may well ask what the Government are doing at a UK level. I point your Lordships to what happened last week when the Treasury concluded a written consultation on reform to the UK’s business energy efficiency tax landscape. This included questions related to greenhouse gas reporting, including a requirement under the Companies Act 2006 for quoted companies to report their greenhouse gas emissions as part of their annual directors’ report. As I said, that is out for consultation.
Lord Deben
Could my noble friend explain the logic that says that Britain moves on modern slavery to set an example by enforcing it at home before we have international agreement, but refuses to move on this because there is to be a discussion about international agreement? Would it not be better for us just to move on it and set the example? That would help guide the discussions that might take place thereafter.
Lord Bridges of Headley
As always, my noble friend makes a perceptive point. As I said, I do not want to prejudice the outcome of the discussions that will likely take place. Obviously, my noble friend makes a good point. I simply make the point in return that, in the case of disclosure, we want to try to make sure that this is as internationally recognised as possible. I heed what he said and will no doubt make that point to those who will be present at that discussion.
On primary issuances, the relevant regime is the prospectus directive—which is currently under review. We are working closely with the European Commission and other European partners to achieve a positive outcome on that. We look forward to hearing any suggestions on how to improve this regime. I thank the noble Lord—and the noble Baroness who sadly is not with us—for this amendment. I hope what I said gives some reassurance that the Government take this issue seriously, but I ask the noble Lord to withdraw the amendment.
Baroness Drake
My Lords, I shall speak to paragraph (f)(i) and (ii) in the amendment which refer to the secondary annuity market, and I draw the attention of the Committee to my registered interests, in particular my membership of the board of the Pensions Advisory Service, which is a delivery body for the current Pension Wise.
In the summer Budget Statement, the Chancellor confirmed that he wishes existing annuity owners to have the freedom to sell their annuity income but announced that plans for a secondary annuities market would be delayed until 2017 to ensure that there is an in-depth package to support consumers. The Pensions Minister, the noble Baroness, Lady Altmann, confirmed that the delay was to ensure consumer protection adding:
“We can’t launch without safeguards”.
It is important, as paragraph f(i) in the amendment provides, first to identify very clearly the risks in this market and the potential advantages and disadvantages to the consumer of converting an income for life into a cash sum before agreeing the regulations with regard to guidance to be provided to individuals considering trading their annuities. If the infrastructure of such a secondary annuity market were to be put in place, it is not yet clear who would be the buyers of the annuities. There are still lots of unknowns about how that market would operate. Until we understand more about how that secondary market will operate and what regulatory restrictions will be imposed, it will be difficult to assess whether customers are able to get a good deal. If an individual got a poor deal in the first place, selling the annuity on would not necessarily reverse that; indeed, it could make it worse. If, as the Chancellor argues, the pensioner freedom reforms were needed in part because the annuity market was not working in the best interests of all consumers for the simpler proposition of selling someone an annuity, why would it be expected that the reverse secondary market, where someone would resell an existing annuity, would work any better?
Some people will certainly be tempted to cash in their annuity for what looks like a large sum but their annuity may be bought at a heavily discounted price. Selling their guaranteed income could prove expensive because of the cost of individually underwriting each transaction. There will be costs to trading, complex pricing systems and consumer vulnerability to poor behaviour by some firms. So many pensioners may not be better off as a result, and it may be difficult to assess whether the lump sum that they have been offered is a fair swap for what they would be giving up. Actually, though, once they have given that up, the decision is irreversible.
The Bill refers to protecting the interests of those who have an interest in a particular annuity, and that certainly needs to be considered. What is the situation in a joint life annuity? What is the definition of those who have an interest? How will their interest be protected? What if a person is not named on a joint life annuity contract? These may seem irritating points of detail, but they will be matters of significant substance for some people who may be the beneficiaries of an income stream from an annuity.
The Government have also advised, as my noble friend Lord McKenzie said, that they want to consider how to explain the interaction between annuity income, capital and deprivation laws in the welfare, social care and council tax reduction system—something that we rather tripped over when implementing pension freedoms. In making that clear to people who are considering selling their annuity, the guidance would need to explain clearly the implications of that interaction.
In the secondary annuity market, the appropriate form of consumer protection has to be an integral part of any proposals to allow people to resell annuities, and therefore a clear identification and consideration of the safeguards and guidance that are appropriate is required before regulations come into force. It is important to be assured that they are actually fit for purpose. Creating a secondary annuity market is certainly not a simple proposition, which presumably is why the Chancellor has delayed his plans until 2017, although I accept that the proposed expansion of pension guidance to those considering selling their annuity is to be welcomed. However, it will be important for Parliament to understand what guidance will be delivered, and how, to people looking to trade in a secondary annuity market, because such a market will come with risk and complexity and that has to be reflected in the quality and comprehensiveness of the guidance provided. This is not going to be a proposition without problems. Some people have suggested introducing a requirement to take independent advice but even that is not a simple proposition, not least if a requirement to take advice significantly reduces the value of the transaction to the seller.
Lastly, the complexity of a secondary annuity market means it is essential that the pension guidance that is provided is of a high quality, delivered by people with the necessary skills and expertise. This is not going to be a straightforward set of guidance. Reflecting on experience to date, it is very important that those who bear responsibility for signposting to the guidance those who want to trade in the annuity market are not organisations with conflicts of interest in whether that guidance is followed. Sometimes, being better informed and better guided does not make people such good customers. Given that this is even more complex than the pension freedoms market, it is really important to get this proposition right.
Lord Bridges of Headley
My Lords, once again, I thank noble Lords for their very useful and constructive comments and speeches. I thank the noble Lord, Lord McKenzie, in particular.
As your Lordships know, the Government want to ensure that those who will be able to sell their annuities on the secondary market have access to high-quality information and guidance that enables them to make informed choices. That was endorsed by many responses to the recent consultation. We want to build on the success of the existing Pension Wise service, for which the satisfaction levels remain high. The Government are committed to using the lessons learned from the implementation of existing freedoms and the Pension Wise service to help consumers in both this market and the new secondary market for annuities.
I draw your Lordships’ attention to the work that the Government are already doing—in both what is happening now and what is planned—through the prism of the amendment that the noble Lord, Lord McKenzie, has brought before the Committee. First, the amendment would commit the Government to undertake and publish a review of the new pension freedoms and pensions guidance. On this point, the Government have already set up a working group of representatives from industry, regulators and government to review the pension freedoms. This group will collect and analyse information on the choices that people are making when accessing the new pension freedoms and related guidance and advice. It will also identify key information gaps and seek to address them.
In addition, early information from HMRC and the regulators has been published, and key data from the Pension Wise service will soon be available on the Government’s performance platform. Pension Wise is also in the early stages of procuring external research, which will cover the extent to which the pensions guidance has enabled customers to make informed and confident choices about their pension arrangements.
Secondly, the amendment would commit the Government to tracking consumer outcomes from pensions guidance. The Pension Wise research that I have just mentioned will aim to do just that. It will help the Government to understand what customers do following their Pension Wise appointment.
I am conscious that the noble Lord asked me some very specific questions about uptake. If he does not mind, I would like to write to him once I have the appropriate information on those points.
Thirdly, the amendment would require the Government to review pension providers’ reporting requirements. In line with its remit to protect consumers and ensure that markets function in consumers’ interests, the Financial Conduct Authority has specifically committed to monitor developments in the retirement income market and to take action where the market is not operating as intended. The first of these mandatory data requests was sent to firms in September. It includes information on both the stock and the flow of pensions savings held by firms, as well as on sales of retirement income products by providers and cash withdrawals.
The amendment also calls for safeguards against pension scams to be strengthened. A priority of this Government is to protect people from scams. A number of cross-cutting initiatives are already in place, but we will continue to look at ways to strengthen messages for consumers and to arm them with the information they need to protect themselves against scams. For example, the Government are already co-ordinating action to raise awareness of, and tackle, scams through Project Bloom, a National Crime Agency-led task force. It includes the regulators, anti-fraud groups, such as Action Fraud, and police forces. In addition, both the Financial Conduct Authority and the Pensions Regulator have their own pension scam awareness campaigns.
Finally, the Government have put a number of protections in place through the directly provided pensions guidance service, Pension Wise. Pension Wise alerts customers to the risks of scams in guidance sessions, and the website and output document contain warnings and guidance.
Lord Bridges of Headley