Grand Committee
Arrangement of Business
The Deputy Chairman of Committees (Lord Geddes) (Con)
My Lords, as is normal on these occasions, I advise the Committee that if, as is likely, there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
Energy Bills Support Scheme and Alternative Fuel Payment Pass-through Requirement (Northern Ireland) Regulations 2023
(1 year, 9 months ago)
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Lord Callanan
That the Grand Committee do consider the Energy Bills Support Scheme and Alternative Fuel Payment Pass-through Requirement (Northern Ireland) Regulations 2023.
Relevant document: 26th Report from the Secondary Legislation Scrutiny Committee (Instrument not yet reported by the Joint Committee on Statutory Instruments.)
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, the Energy Bills Support Scheme and Alternative Fuel Payment Pass-through Requirement (Northern Ireland) Regulations 2023 were laid before the House on 11 January 2023.
Throughout this winter, the Government have responded rapidly to the unprecedented rise in energy prices. This includes introducing emergency legislation on energy support. The Government’s support package has protected and will continue to protect households and non-domestic consumers across the United Kingdom.
In December, the Government announced details of the merged delivery of the energy bills support scheme, EBSS, and alternative fuel payment, AFP, in Northern Ireland. Householders in Northern Ireland have already received or will soon receive £600 in a single payment for support with their energy bills. In recognition of the high prevalence of alternative fuel usage in Northern Ireland, the AFP will be delivered to all domestic households in Northern Ireland. The total of £600 is composed of £400 of EBSS, which provides support for the energy costs of all domestic households, and the AFP, which provides an additional £200 of support.
To deliver the scheme, in December the Secretary of State made a direction pursuant to Section 22 of the Energy Prices Act. This placed requirements on Northern Ireland electricity suppliers to provide this crucial support to households this winter. Delivery has commenced and households are already benefiting. We expect the vast majority of eligible households to have benefited by the end of February.
Turning to the pass-through requirements, these regulations will place a legal obligation on intermediaries to pass any benefits received through the schemes to end-users. This will help ensure that the energy support is received by the intended beneficiaries. These regulations have been created under the Energy Prices Act 2022. They are essential secondary legislation to fully implement the schemes.
The regulations are modelled on the pass-through requirements for other energy schemes, such as the EBSS in Great Britain. In that, we are not waiting for intermediaries to act on their own accord; we are legally requiring that they pass on the financial benefit to end-users.
An intermediary is any individual who is party to a domestic electricity contract, has a domestic electricity meter and is the recipient of government energy support. This group includes landlords. An end-user is an individual who consumes the energy and pays for this energy usage. This includes tenants. The regulations also outline when and how intermediaries should communicate with end-users about information regarding pass-through of benefit from the schemes.
The enforcement approach for EBSS AFP NI is consistent with other support such as the energy bills support scheme in Great Britain and the UK-wide energy price guarantee. Namely, if the intermediary does not pass on the benefit, the end-user could pursue recovery of the benefit as a debt through civil proceedings. Should a court rule in the end-user’s favour, they would be entitled to the payment plus interest. The interest is set at 2% above the Bank of England’s base rate.
The Government continue to ensure that the intermediaries and end-users are clear on their obligations and rights. In particular, we have published guidance on GOV.UK to help support intermediaries to discharge their obligations. There are also template letters to support tenants, should they wish to raise concerns with their landlords about their energy bills and the pass-through.
I thank the Secondary Legislation Scrutiny Committee for its view on these regulations. I have noted that its concerns remain the same as those it previously raised on the pass-through requirements of the energy bills support scheme in Great Britain. The committee’s concerns relate to the definition of “just and reasonable”, and to an “inequality of arms” and how that affects vulnerable groups.
The energy market is complex. There is a vast range of contracting structures relating to the supply, resale, provision and charging of energy. This means that there are many different circumstances for how energy can be consumed. That is why it continues to be important that the regulations can account for the numerous configurations of an intermediary/end-user relationship. It is highly risky to draw a narrow and limiting definition which could result in some intermediaries falling outside the pass-through requirements. By requiring landlords to pass on the financial benefit in a just and reasonable manner, end-users will be treated fairly and lawfully.
The fact that the regulations require intermediaries to pass on the amount in a just and reasonable manner means that situations where there could be an inequality of arms are also covered. For example, if a landlord owns multiple properties and receives the scheme benefit on them all, he or she must divide and allocate the amount among their end-users and inform them how they have calculated the financial benefit.
The committee’s other concern, about vulnerable groups, is of course valid. The Government are also making sure that all groups in scope of the pass-through regulations, including vulnerable groups, receive what they are entitled to through our engagement with those impacted. Over the past several months, we have engaged with consumer groups, landlords, housing associations and charities to disseminate communications and to underline the obligations placed on intermediaries and the rights of end-users. Our extensive engagement activities include organisations in Northern Ireland.
In conclusion, these regulations are essential to ensure the effectiveness of the energy bills support scheme and the alternative fuel payment Northern Ireland scheme and that the support reaches the people it is intended to help. Without the regulations, there would be a risk that intermediaries did not pass on the £600 benefit in a just and reasonable way, leaving some households in Northern Ireland exposed to high energy costs. I therefore commend the regulations to the Committee.
Lord Teverson (LD)
My Lords, I thank the Minister for going through yet another of these SIs. I am sure he will not mind if I ask him some just and reasonable questions about it.
First, I note that the measure came into force on 12 January, so it is already in place. Obviously, it is administered, to a degree, by the energy companies, but who is policing it? Is it the Northern Ireland civil servants, or is it BEIS directly? I would be interested to understand that. If it is Northern Ireland officials, are we confident that sufficient management governance will take place from here?
I welcome that the Government and the department have spoken at length to consumer organisations in Northern Ireland. I am interested to understand whether there have been any complaints yet of end-users not receiving this when they feel that they should have, to get some idea of how well it is working.
The Minister talked about the method of civil law, and having fines—plus, generously, an interest-rate benefit if people manage to get through a whole court process. We have said before that it is very unlikely that much of that would happen, but, if an intermediary ignored the need under this legislation to pass on those payments, would the Government have the ability to prosecute that person? I can imagine there being a certain number of landlords who will just think, “No one’s looking at me, there’s not a lot of publicity about this, I’ll just keep the money”. I would be interested to understand whether there is, at the end of the day, a criminal long-stop prosecution ability in terms of fraud and so on. Also, will the Minister say how many more SIs around these schemes are still to come?
Lord Lennie (Lab)
My Lords, I thank the Minister for introducing this scheme. If he feels a bit of déjà-vu, it is because we have already been here. We discussed this on the UK scheme. This scheme is to ensure that support provided to intermediaries on behalf of the end-user in the energy bill support scheme and the alternative fuel payment in Northern Ireland must be passed to the intended recipients. This is welcome and important, but there are questions about what difference the instrument will make to intermediaries if they do not do it.
The Explanatory Memorandum states:
“Relevant intermediaries are any individual that is party to a domestic electricity contract … and passes on the costs of the energy supplied under this contract to an end user of the energy supplied … Intermediaries should pass on the discount irrespective of how the end user pays for their energy use … If an intermediary does not pass through the whole of the scheme benefit provided to them, then they must demonstrate to the end user that the amount they are passing on is just and reasonable, including taking into account the extent to which the intermediary’s charges to end users reflect the increased cost of energy as a result of the energy crisis.”
The Minister said that intermediaries include landlords. They do indeed, but they also include sublets, student accommodation, social housing providers, local authorities, site owners, site managers, marinas for onshore power, combined heat and power operators, electric vehicle charging operators and other residential building managers. It is possible for an intermediary also to be an end-user because they can live in the scheme that they manage. Given the variety and range of intermediaries and the complexity of this calculation, will it have any impact on the number of intermediaries that do or do not pass the benefits through?
The Explanatory Memorandum also states:
“The intermediary must, within 30 days of a scheme benefit being provided, provide information to the end user in writing ... The intermediary must ensure the end user receives the pass-through amount as soon as reasonably practicable ... Where an intermediary fails to effect a pass-through to which an end user is entitled, that end user may recover the amount from the intermediary as a civil debt.”
How many end users will be aware of this? How many will know about this scheme at all? If I am a landlord, is it worth the risk of not passing it on and sitting and waiting to see what happens? If I do not get any orders to justify, I can just keep the funds. It is a small amount of money to a court—a maximum of £600—but to a landlord who may have multiple lettings, it can be a considerable amount of money. Do the Government expect end users will do this for £600? Will fees make it not worth while for them to do it? How will intermediaries be disincentivised from taking this gamble? There is no penalty if you are found not to have passed on the money. Intermediaries are just ordered to pass on the funds in the scheme, plus 2% above interest rates. It does not seem to be a huge gamble that the intermediary might be taking. Will the Government not be enforcing this in any way? As the SLSC said, there is inequality of arms. It almost encourages intermediaries to take a chance, and the victims are the tenants and the end-payers of the scheme.
Lord Callanan (Con)
I thank the noble Lords, Lord Teverson and Lord Lennie, for their comments. I guess they do not disagree with the principle, but nevertheless had some notable questions which I will address in a second.
These regulations are critical to the successful implementation of the energy bills support scheme and alternative fuel payment in Northern Ireland. The Government’s focus has been on delivering this support to those who need it in Northern Ireland. That is why we focused on creating a delivery mechanism which could be rapidly implemented this winter and allow consumers to feel the benefit immediately, which is quite a challenge in government. This includes combining the support from two schemes into a single payment. Now that delivery has commenced, more than 800,000 households in Northern Ireland will benefit from this support. This comes on top of support households in Northern Ireland have received and will continue to receive through the energy price guarantee.
Spearheaded by the energy bills relief scheme and energy price guarantee reviews, the Government are considering the broader energy affordability landscape. Naturally, our considerations will include the needs of those in Northern Ireland.
Lord Teverson (LD)
I wish to comment on the Minister’s reply. It seems just a little supine that the only threat to intermediaries and means of enforcement is their tenants having to go through a civil court process for a fairly small amount of money. To me, that seems to have no consequence whatever. I have that concern but, as the Minister has explained, that is the situation.
Energy Bill Relief Scheme (Non-Standard Cases) Regulations 2023
(1 year, 9 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Callanan
That the Grand Committee do consider the Energy Bill Relief Scheme (Non-Standard Cases) Regulations 2023.
Relevant document: 26th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, I beg to move that the Energy Bill Relief Scheme (Non-Standard Cases) Regulations 2023, which were laid before the House on 11 January, be approved.
The EBRS regulations require licensed suppliers to discount their prices for the supply of electricity and gas to non-domestic consumers. Licensed suppliers provide the vast majority of electricity and gas supplied to non-domestic customers but some UK businesses do not receive their energy in this way. The Energy Prices Act 2022 allows us to provide financial assistance for energy costs using non-legislative schemes. On 9 January 2023, the EBRS non-standard customers scheme opened for applications. This is a grant scheme that allows payments to be made to those non-domestic customers who receive an unlicensed supply of electricity or gas that has been drawn from the public electricity or gas grid over the period from 1 October 2022 to 31 March 2023. The regulations we are discussing today are ancillary to the non-standard customers scheme.
The businesses eligible to benefit from the scheme include energy-intensive critical national infrastructure. They have been exposed to high energy costs in the same way as those who have benefited from discounts under the EBRS regulations. The scheme enables them to receive relief at a level comparable to the customers of licensed suppliers. We expect businesses to begin receiving support under the scheme this month; this will be applied retrospectively. The EBRS non-standard cases regulations are essential secondary legislation needed to support the operation and delivery of the EBRS non-standard cases scheme. I pay tribute to the work of the Secondary Legislation Scrutiny Committee for reviewing these regulations and note that it has no comments.
Let me turn now to the detail of the regulations for the benefit of the Committee. Identifying who is eligible to receive payments under the scheme is not always straightforward. The regulations provide the Secretary of State with powers to obtain information from those involved in the often quite complex supply chains through which this energy flows, so that we can be sure that the right businesses are admitted to and benefit from the scheme. They imply some terms into the contracts between those involved in these supply chains to help the scheme work more smoothly.
Finally, as in the case of all the schemes put in place under the Act, they provide for certain intermediary businesses—again, often landlords—that receive a benefit under the scheme but which in turn provide energy to others, often in another form, such as heat, and pass a fair share of the benefit that they receive on to their end-users. The regulations also make provisions for pass-through requirements. The energy provider must calculate and pass through a just and reasonable amount of the benefit to end-users as soon as reasonably practicable.
These regulations set out the information which relevant intermediaries are required to provide end-users about the scheme benefit, including the amount and supporting details about how they have calculated this in a just and reasonable manner. Where the energy provider fails to effect a pass-through, the amounts are recoverable from the energy provider by the customer as a civil debt.
To accompany the regulations, we have published a suite of scheme terms and non-statutory guidance, which provides further detail on how the scheme for non-standard cases works. Given the urgency of ensuring that organisations receive the support they need this winter, we have not launched a formal consultation. Instead, we launched a call for evidence on 17 November requesting examples from organisations that are unable to access the EBRS because they are non-licensed suppliers of energy or supply energy to businesses in non-standard ways.
We have also had informal consultation with energy providers, and their energy-intensive customers, on the scheme terms and guidance. My department will continue to monitor this instrument following its implementation, including any feedback from stakeholders, and will of course review as necessary.
Support delivered through the scheme provides relief on the wholesale element of customers’ gas and electricity bills. Customers eligible for support under the scheme are exposed—sometimes very exposed—to high energy costs. In some cases, relief from those costs may well help to avoid firm closures and potential redundancies. More broadly, by reducing industry’s energy costs, the scheme should support economic growth and limit inflation.
In conclusion, the EBRS non-standard customers are a source of critical support for non-domestic customers in the UK, particularly those in energy-intensive industries, many of which are essential to our national infrastructure. I emphasise that the measures in these regulations are crucial for the effective operation of the non-standard cases scheme. The scheme complements the existing large-scale support that the Government are providing during the energy crisis. On that basis, I hope that noble Lords will support these measures and their objectives and I commend these regulations to the Committee.
Lord Teverson (LD)
My Lords, again, this instrument came into force on 12 January and we are now more or less into February. Can the Minister remind us when the scheme ends, because we must be getting quite close to that?
I have only one question on this, and I will not ask the one about prosecution, because these are large amounts of money; I would have thought it was more important. According to the Explanatory Note on page 11,
“Regulations 3 and 4 provide the Secretary of State with a power to obtain information about the supply of gas or electricity to persons who are or may be eligible for assistance under the Scheme.”
I am interested in whether the Minister’s officials have done that, and how they found it.
Lord Lennie (Lab)
My Lords, this requires energy providers to share information with the Government, such as meter readings and contract agreements, to allow BEIS to ensure that appropriate relief can be passed on to businesses that are not eligible for the energy bill relief scheme because their energy is supplied by the grid, not from a licensed supplier. The current energy bill relief scheme, announced in September, comes to an end in March 2023. It supports businesses and public sector organisations such as schools and hospitals, and so on, by providing the discount on wholesale gas and electricity prices.
First, this instrument applies only until March 2023; it has been in effect since September without this information. How much relief has not gone to the relevant businesses in this time period? What impact will this error have had on these businesses and how long will it take the Government to gather this information, analyse it and enact the required changes?
The Government have announced a new energy bills discount scheme, the EBDS, from April 2023 to April 2024 for eligible non-domestic customers in Great Britain and Northern Ireland. Is the error that occurred in the original scheme now fixed so that, from day one, the EBDS will be fully effective?
Lord Teverson (LD)
They are not even fined; they just get the money back plus the interest.
Lord Lennie (Lab)
I agree; there is no penalty at all. They just have to pay back the money to the individual that they should have paid in the first place, plus a bit of additional assistance.
Lord Callanan (Con)
I again thank the noble Lords, Lord Teverson and Lord Lennie, for their contributions. As both noble Lords have said, the EBRS Great Britain and Northern Ireland regulations are already in force and delivering support to organisations across the United Kingdom. However, the Government have responded to the concerns of stakeholders to ensure that a further group of non-domestic energy consumers, including some critical to national infrastructure, can also receive support to avoid decreases in production or, even worse, the closure of some businesses. These regulations are essential secondary legislation which is needed to support the delivery and operation of the EBRS non-standard scheme.
The Government remain committed to taking decisive action during this energy crisis to assist the widest possible range of consumers. As well as providing immediate assistance, this relief will support economic growth and limit inflation caused by increasing energy bills and their knock-on impacts on prices, labour, goods and services. We are confident that providing relief via the non-standard cases scheme will help mitigate the risks of closures and redundancies among eligible businesses and ensure that they can continue to operate.
The scheme has been designed to operate robustly and guard against fraud, error and gaming. We will continue to monitor it to ensure that this support is provided to the businesses it is designed to help. The Government remain committed to ensuring that consumers receive help with the rising cost of energy. The regulations are vital in ensuring that support is delivered to those businesses.
I turn to the questions asked by both noble Lords. The noble Lord, Lord Teverson, asked whether the scheme will run for the same period as the standard EBRS. Yes, it runs from 1 October to 31 March. He also asked about passing information to the Secretary of State—whether the department has done this and how it found it. So far, we have found that energy suppliers are providing the information we require to support their claims in a timely manner, which ultimately supports their own customers and end-users.
The noble Lord, Lord Lennie, asked why it applies only until March 2023; that is, the same finishing date as the existing EBDS. Of course, there are substantial costs on the Exchequer. I am sure the Chancellor keeps all these things under review, but at the moment, the scheme ends at that point. The noble Lord also asked whether the EBDS will be fully effective after the EBRS is ended. I assure him that many civil servants in my department are working to ensure that that is exactly the case and that there is a smooth transition between the two schemes.
The noble Lord also asked whether a mistake has been rectified with EBRS. It was not a mistake. We identified that there was a group of businesses supplied with energy by unlicensed suppliers and we have set up this scheme to provide support for those businesses which did not benefit when others benefited because they receive their energy through licensed suppliers. We stood up the scheme as quickly as we possibly could, given all the demands that have been placed on the department from all the other schemes as well.
In response to the noble Lord’s questions about intermediaries, we believe that in those cases, energy providers are working closely with their end-customers to ensure that they are all offered support. Of course, in many cases, these are very big businesses, and we have direct communication with many of the end-customers. Normally, we do not have a problem making sure they realise their eligibility, but we are of course seeking to provide as much information as possible to ensure that they are aware of their rights—although, in those cases, I am sure they are well aware of them themselves.
I think I have dealt with the questions from both noble Lords, and I therefore commend the regulations to the Committee.
Financial Services and Markets Bill
Monday 30th January 2023
(1 year, 9 months ago)
Grand CommitteeRead Full debate Financial Services and Markets Act 2023 View all Financial Services and Markets Act 2023 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-III Third marshalled list for Grand Committee - (30 Jan 2023)
“FCA powers beyond designated activities
(1) This section applies to any person (P) conducting or purporting to conduct any financial services and markets activity, including advisory services, whether or not that activity is designated or regulated, provided that P—(a) occupies a position in which they are expected to safeguard, or not to act against, the financial interests of another person (CP), or in which there is significant asymmetry of information,(b) dishonestly abuses that position, and (c) intends, by means of the abuse of that position—(i) to make a gain for P or another, or(ii) to cause loss to another or to expose another to a risk of loss.(2) A person may be regarded as having abused their position even though their conduct consisted of an omission rather than an act.(3) If the conditions set out in subsections (1) and (2) are met, the FCA has the following powers in relation to P—(a) a power to require the supply of information;(b) a power to make investigations (including the making of reports);(c) a power of entry into premises controlled by P;(d) powers of inspection, search and seizure with respect to premises controlled by P;(e) a power to make a private or public statement of censure;(f) a power to impose monetary penalties.(4) The Treasury may by regulations make provision about enforcement in connection with the powers included in subsection (3), and may make such modifications to the provision in subsection (3) as the Treasury considers appropriate.(5) If the conditions set out in subsections (1) and (2) are met, P is liable—(a) to account to CP for any gain P has made directly or indirectly by the transaction, and(b) to indemnify CP for any loss or damage resulting from the transaction.(6) If the FCA is satisfied that the conditions set out in subsections (1) and (2) are met, it may order P to pay to the appropriate person or distribute among the appropriate persons such amount as appears to the FCA to be just, having regard to the profits appearing to the FCA to have accrued to P.(7) The FCA has the power to institute criminal proceedings, including under section 4 of the Fraud Act 2006, provided that the conditions set out in subsections (1) and (2) are satisfied.”
Baroness Bowles of Berkhamsted (LD)
My Lords, the amendments in this group address matters of fraud or misrepresentation that occur around and because of the regulatory perimeter and have been factors in various recent scandals. Amendment 38 establishes a regulatory offence for fraud by abuse of power and reaffirms FCA power to undertake criminal prosecutions for fraud. I thank the noble Lord, Lord Naseby, for his support on that amendment. Amendments 39 and 198 deal with instances where there are forms of deception or inadequate or lack of information that can mislead about regulated status but which are not caught by existing offences.
A central feature in various scandals has been the abuse of a position of power and/or a belief that an entity was regulated and therefore all its activities had some seal of approval. It has later been discovered that there is no regulatory, supervisory or any other cover and no redress via regulators. The list of examples is extensive, and includes Lloyds Bank’s business support unit, HBOS Reading, Blackmore Bond, London Capital & Finance and RBS’s Global Restructuring Group, but there are many more.
Smaller but nevertheless still substantial businesses have been particular targets: bankers taking advantage of business lending being outside the regulatory perimeter, seemingly not covered by the integrity objective or anything else, which I and other noble Lords have laid out in detail and has been covered by the APPG on Fair Business Banking and others.
The FCA explained in excruciating detail how the asset stripping in the GRG case fell outside its objectives and its own created interpretations, and Andrew Bailey, then CEO of the FCA, said that even if the SMCR had been active at the time, it would not have been covered by it. Later, he hedged and said that maybe it would have applied, but it would all depend.
In its final report, the FCA concluded that there was no case to rule senior RBS managers not fit and proper, because the bar was too high. The fact is that the relationship that businesses and individuals have with their bank is a special one: finance, loans, mortgages, outgoings and income, available capital and other assets, trading accounts, major clients, cash flows—all such things are known by the bank, indeed required to be known, to access finance. But little is known about the bank’s assessment criteria. The relationship is inherently asymmetric in both power and information, and can and has been abused repeatedly.
The relationship with your bank is the lifeblood of businesses, especially small businesses, the homes of which are often subject to a charge. It is known what you are good for and can be taken for. Consumers have had additional protections that businesses do not.
Amendment 38 is specific to abuse of power within financial services and it uses the same wording that appears in Section 4 of the Fraud Act 2006 for fraud by abuse of power. The Fraud Act conditions are that if a person is in a position in which they are expected to safeguard, or at least not act against, the interests of another person, or where there is asymmetry of information, and there is dishonest abuse of that position to make a gain or cause loss to another, it is a criminal offence. My amendment replicates those Fraud Act provisions and introduces a corresponding regulatory offence.
Subsection (7) of my amendment reaffirms the power of the FCA to institute criminal proceedings under Section 4 of the Fraud Act. I say “reaffirm” because the FCA has power to prosecute beyond offences explicitly listed in FSMA, as confirmed in Regina v Rollins [2010] UK Supreme Court 39, in which the court found that the FSA’s powers to prosecute criminal offences were not limited to the offences referred to in Financial Services and Markets Act. The FSA always had been able to bring any prosecution, subject to statutory restrictions and conditions, provided that it was permitted to do so by its memorandum and articles of association, which were so permissive. The FCA, in essence, has the same articles and legal position as the FSA did then, but seems to need both more tools and more encouragement.
Various particularly relevant offences continue to be singled out and put into FSMA. Adding an offence of fraud by abuse of power is therefore long overdue, given the power and asymmetry of information that I have already explained. We know that the bar is high for criminal prosecution—to the extent that some rely on that, a chain of command and shared responsibility to eliminate mens rea and the ability to obtain a conviction, hence my suggestion that there is also a regulatory offence.
Turning to the other amendments in the group, Amendment 39 is also about when a regulated person carries out unregulated activity, the boundary is not clearly understood, and a customer may not know when they have strayed into riskier waters. A common thing may be to see headed paper or a website displaying, as required, that a person is regulated for a given activity, but the limiting language is not always going to be meaningful to the ordinary person. As we discovered in the Gloster report, even the FCA got it wrong.
Baroness Kramer (LD)
My Lords, my noble friend Lady Bowles’ speech was so powerful that I saw a lot of heads nod, but perhaps that has discouraged other noble Lords from standing up to speak on this occasion.
I am not going to attempt to repeat an excellent speech which made the points which such clarity. I just want to underscore two things. Whenever I have conversations with the FCA and whenever you read its articles, it prays in aid the complexity of the regulatory perimeter so that on so many occasions it is hard to know exactly where it is and how it is applied. However, when you look at abusers and scammers, they have absolutely worked out where the regulatory perimeter stands and know exactly what scope they have, and they make sure they use every scrap and every inch of that space which is provided to them. That is addressed by these amendments.
The second issue that I want to underscore was raised by my noble friend. It is that, culturally, the FCA seems to be very timid about pushing to the limit of the perimeter the regulatory powers it already has. It is so because it is very afraid of stepping over the boundary at any point. These amendments provide not only much more clarity but some backbone for the FCA to take a far more positive stance. It is quite shocking to most people that the key financial regulator can be absolutely aware that abuse is taking place, that mis-selling is taking place, but feels that it is unable to do or say anything because there is a regulatory perimeter after which the issue is caveat emptor and those who are defrauded can turn only to the enforcement agencies, which relies on finding a local police force that has the resources and capacity to pick up the issue. We know that with the Lloyds Reading case small businesses that were very badly abused went to police force after police force and were turned down until they went to Thames Valley Police, which had more resources, and the police and crime commissioner, Anthony Stansfield, whom I utterly praise in this issue, decided to take on the case—a very rare instance. They got no help from the National Crime Agency or the Serious Fraud Office because they considered that the fraud that everyone recognised was taking place was too small fry to occupy them. Frankly, it is a shocking situation to be in. Many people have said that this must be remedied. I congratulate my noble friend on bringing forward an amendment that aptly provides that remedy. I very much hope that the Government will take it up.
Lord Tunnicliffe (Lab)
My Lords, I am impressed by the arguments made by the noble Baronesses, Lady Bowles and Lady Kramer. To me, the fundamental issue seems to be the asymmetry in both power and information between those who have been defrauded and the fraudsters. These amendments are a useful vehicle to try to adjust that asymmetry, at least in part. I look forward to the Minister’s response and hope that she says something positive.
The Parliamentary Secretary HM Treasury (Baroness Penn) (Con)
My Lords, tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector to better protect the public and businesses from fraud, reduce the impact of fraud on victims and increase the disruption to and prosecution of fraudsters.
As the noble Baroness, Lady Bowles, explained, Amendment 38 targets fraudsters; the Government strongly agree with the spirit of it. However, strong punishments for those carrying out these acts already exist under the Fraud Act; also, the police and the National Crime Agency already have the powers to investigate fraud, with the FCA providing strong support. That is why we are ensuring that the police have appropriate resources to apply the existing powers to identify and bring the most harmful offenders to justice, including through severe penalties for those who target some of the most vulnerable in society. The Home Office is investing £400 million in tackling economic crime over the spending review period, including £100 million dedicated to fraud.
As the noble Baroness noted, although FSMA does not provide the FCA with an express power to prosecute fraud, it is able to prosecute fraud if it furthers its statutory objectives. The FCA continues to pursue firms and individuals involved in fraud; most of this work is against unauthorised activity operating beyond the perimeter, which is where the FCA sees most scam activity occurring. As at the end of September 2022, the FCA had 49 open investigations, with 217 individuals or entities under investigation.
In its 2022 strategy, the FCA outlined and emphasised its broad existing remit in relation to reducing and preventing financial crime, including fraud; it also recognised the important role that it plays in tackling this issue.
Baroness Kramer (LD)
I am sorry but can I ask the Minister a specific question? The Blackmore Bond case was a massive abuse in the mini-bonds scandal when 2,000 people lose something like £46 million. Other than dealing with a small entity that was doing some illegal promotion, the FCA declared that it could not act because the case was beyond the regulatory perimeter. I am therefore rather befuddled by the Minister saying that the FCA acts beyond its perimeter when it is associated with its principles; the principle of integrity obviously applies.
Baroness Penn (Con)
In dealing with the noble Baroness’s points, I should perhaps write to her on the particular case to which she refers. However, as I understand it, the FCA has a remit to tackle fraud, for example where unauthorised firms are purporting to undertake authorised activity—a point that we may come on to in our debates on later amendments.
Baroness Kramer (LD)
May I just have clarity? The Minister said, “Only where an unregulated firm undertakes an authorised activity”. Blackmore Bond was selling mini-bonds, which was not a regulated activity at that time. Is the Minister explaining to us that the FCA and regulator do not or cannot act in that area and that she is satisfied with that situation?
Baroness Penn (Con)
No, I am saying that I gave an example of where the FCA could take action for activity beyond the regulated perimeter, but I will write to the noble Baroness on the specifics of the Blackmore Bond case as an example of the question that she asked about this interaction and limitation on where the FCA can act.
Further action was taken to avoid a repeat of cases such as Blackmore Bond and London Capital and Finance. In November 2019, the FCA banned the promotion to ordinary retail investors of high-risk speculative illiquid securities, which includes the types of bonds sold by Blackmore and LCF. The Government have also set out our intention to include non-transferable securities, including mini-bonds, within the scope of the prospectus regime. This would mean that issuers of mini-bonds would be required to offer their securities via a platform when making offers over a certain threshold, which would ensure appropriate due diligence and disclosure and be regulated by the FCA, providing stronger protection for investors. However, I know that that does not address the noble Baroness’s particular point, on which I will write.
Lord Hunt of Kings Heath (Lab)
My Lords, I accept that the Minister is, essentially, responding in the narrow terms of the amendment before us, but she will be aware that our Lordships’ Select Committee looked into the whole issue of financial fraud and crime. The Minister mentioned the FCA, but the committee found that there are so many agencies involved that their collective effort is a total lack of integration and co-ordination, and that thousands of people are left completely unsupported. Less than 1% of police resources are spent on tackling a huge sector. The Government have now stopped publishing statistics in relation to crime that includes financial crime. I wonder why.
Baroness Penn (Con)
I opened my remarks by acknowledging that fraud needs a co-ordinated response from government, law enforcement and the private sector. That is at the heart of our approach, and it is why the Government established the Joint Fraud Taskforce to bring all those actors together. I attended it towards the end of last year, and it meets regularly. There are many different actors that need to take action in this space, including the regulators but also law enforcement, industry and companies—not just the financial services sector. Measures in the Online Safety Bill look at online platforms, for example.
Lord Vaux of Harrowden (CB)
I apologise for interrupting, but all this would be a lot easier if we had the national fraud strategy. When can we expect it?
Baroness Penn (Con)
I agree with the noble Lord. We can expect it soon—or imminently; I could use a variety of different descriptors, but it will be sooner than “in due course”.
Lord Tunnicliffe (Lab)
I hope the Minister will appreciate the utility of publishing it before Report.
Baroness Penn (Con)
I note the noble Lord’s point about the timing of that.
The noble Lord, Lord Hunt, mentioned resources. I repeat that additional resources have gone into tackling economic crime—£400 million during the spending review period, including £100 million dedicated specifically to fraud.
In its 2022 strategy, the FCA outlined and emphasised its broad existing remit in relation to reducing and preventing financial crime, including fraud, and recognised the important role it plays in tackling this issue. This existing remit allows the FCA to take proactive steps to tackle fraud and wider financial crime while driving a whole-system approach with relevant stakeholders.
Baroness Bowles of Berkhamsted (LD)
I thank the Minister and other noble Lords who have spoken and intervened in this debate. We have strayed a little from my amendments into the general issues of fraud, which will come up in later groups because I think the body of opinion is that not enough is yet being done to prevent fraud.
The Minister suffers to some extent from exactly the same tunnel vision as the FCA, in that it wants to deal only with those things that are convenient, and it is not looking for the enemy and the evil within—and within regulated entities. One would have thought that those banks that defrauded business customers were reputable institutions, and that deception is not addressed at all by anything that the FCA is doing or that the Minister has said. It is doubtful whether it can be addressed even by the senior managers regime, because again, that has been diluted and spread around in such a way that you have the same problem as trying to find mens rea with a board.
The FCA may have done all the things that the Gloster report required but most of those were to do with things that were operationally bad within the FCA; they were not necessarily going to do anything to address the kind of “enemy within” fraud in banks, on their customers, that I outlined in my first amendment.
There is an urgent need to do something about this. It is ridiculous to say that there is a role or any integrity in our financial markets when this kind of thing can go on and be unpunished. The FCA may indeed be able to take a criminal offence if it ever finds the guts to do so, but I was giving it a regulatory offence here, which would be much easier for it to do, and at least there would be punishment and maybe more awareness through reputational damage within the banks so that that they would do something about it. I am not convinced that it cannot happen again. This is special—the inherent asymmetry of power and information—and this appears to be totally disregarded both by the FCA and by the Minister.
The other two amendments also plug important gaps that, no matter much you tweak Section 24, are not covered by it; therefore they can be used and abused. So I am far from satisfied that the Minister or the FCA is in any way serious about trying to tackle the type of fraud that I am discussing here. We will come on later to other kinds of things—there are other ways to do it. However, to say it is caveat emptor everywhere does not leave us in a good state when the next scandal comes along and everybody says, “There’s the rotten UK banking system again. Don’t do business in the UK—your own bank might fleece you.”
Due to lack of enthusiasm, obviously I will withdraw this amendment for now. However, I will not leave this issue alone, because it is quite clear that the Government have not understood the seriousness of this for businesses—small businesses and profitable businesses—which are being scammed by their own banks. However, with the leave of the Committee, I beg leave to withdraw the amendment.
Lord Sharkey
“Regulation of commercial lending to SMEs
(1) The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544) is amended in accordance with subsections (2) to (4).(2) In article 60C, in paragraph (3), at the end of sub-paragraph (b) insert “, and(c) the borrower is not an SME.”(3) In article 60D, at the end insert—“(6) This article does not apply to an agreement if the borrower is an SME.”(4) In article 60L(1)—(a) at the appropriate place insert—““SME” means a small or medium-sized enterprise, being any person who is not an individual which—(a) carries on business of any kind which employs fewer than 250 persons, and(b) has either an annual turnover not exceeding £40,000,000 or an annual balance sheet total not exceeding £36,000,000.”;(b) in the definition of “relevant recipient of credit”—(i) omit the “or” at the end of paragraph (a), and(ii) at the end of paragraph (b) insert “, or“(c) an SME;”.”(5) Article 3(1) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (S.I. 2001/2256) is amended in accordance with subsections (6) to (8).(6) In sub-paragraph (a), for “any individual, unless he” substitute “any individual or SME, unless he or it”.(7) In sub-paragraph (b), after “individual” insert “or SME”.(8) At the end insert—“(c) “SME” means a small or medium-sized enterprise, being any person who is not an individual which carries on business of any kind which employs fewer than 250 persons; and has either an annual turnover not exceeding £40,000,000 or an annual balance sheet total not exceeding £36,000,000.””Member’s explanatory statement
This would bring lending to SMEs within the perimeter of the FCA.
Lord Sharkey (LD)
My Lords, Amendment 40 is in my name and that of the noble Baroness, Lady Bennett of Manor Castle, whose support I am grateful for. The amendment would bring lending to SMEs within the FCA’s perimeter and would allow a private right of action to enable SMEs to sue lenders for breaches of regulatory protection, as I believe would Amendment 219 in the name of the noble Lord, Lord Holmes of Richmond.
However, there appears to be some uncertainty about the definition of an SME. The government website, which I checked this morning, says that it encompasses all businesses with no more than 250 employees and a turnover or balance sheet of no more than €50 million—the qualification is still given in euros—but it seems that Liz Truss might have changed all this. In an article in the Telegraph of 3 October last year, she raised the employee limit from 250 to 500. I cannot find this on any government website and I do not know whether the turnover and balance sheet requirements were also raised. If this is still government policy—perhaps the Minister can tell us whether it is—that is a good thing, bringing with it a significant relaxation in reporting rules and red tape to an important part of our commercial base. In fact, any encouragement or support for SMEs is a good thing.
As Rishi Sunak said in the policy booklet he wrote in 2017 for the Centre for Policy Studies:
“We have a world-beating record when it comes to creating entrepreneurial start-ups. Some 21% of UK firms are less than two years old, a higher figure than even the US … Yet when it comes to growing those businesses—the stage at which access to capital is most crucial—Britain’s record is dismal. In a ranking of 14 OECD countries, the UK comes a lowly 13th in terms of the proportion of start-up businesses that grow to having 10 or more employees within three years.”
He also noted that
“UK companies are far too reliant on banks for their credit financing needs”,
a reliance that has increased post pandemic. This reliance has been extremely problematic. Mistreatment of SMEs by banks is a truly serious problem, not just because it causes immense damage to companies and individuals but because the means of redress are cumbersome, full of long delays and generally unsatisfactory.
Commercial lending to SMEs is not regulated. It sits outside the FCA’s regulatory perimeter. In its annual perimeter report published last year, the FCA said:
“SME lending is a longstanding perimeter issue, as business lending is generally only a regulated activity where both the loan is up to £25,000, and the borrower is either a sole trader or a ‘relevant recipient of credit’”.
That excludes most of the SME sector by value. That sector operates without FCA regulation and has suffered some of the most appalling mistreatments at the hands of banks. Some examples of this have already been quoted this afternoon by my noble friend Lady Bowles.
There was the scandal of the mis-selling of interest rate hedging products, about 90% of which were subsequently found to have been mis-sold. There was also the treatment of SMEs by the Royal Bank of Scotland’s global restructuring group; the Tomlinson report on the scandal suggested that there were occasions where RBS had engineered businesses into default to move them out of local management and into the clutches of the GRG. The FCA later found that there was a systemic and widespread mistreatment of SME customers between 2008 and 2013. Andrew Bailey said
“GRG clearly fell short of the high standards its clients expected but it was largely unregulated and so”
the FCA’s
“powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.”
Then there was the HBOS Reading fraud in the early 2000s. A group of bankers was found by a court to have run
“an ‘utterly corrupt scheme’ that left hundreds of small business owners ‘cheated, defeated and penniless’”.
Those are just three of the major scandals affecting SMEs. There are others: mis-selling of loans under the Government’s enterprise finance guarantee scheme; mis-selling of tailored business loans by Clydesdale plc; allegations of misconduct involving business support units at other banks and mistreatment of small business borrowers when they are in arrears. There is clearly widespread, long-standing mistreatment of SMEs by financial services organisations. The case for regulation is particularly compelling because SMEs rarely have the practical ability to enforce whatever legal rights they may have against the banks. It would be exceptional for an SME to have the financial resource to take a bank to court.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in the second day of Committee on this Bill. In doing so, I declare my financial services interests as set out in the register. In speaking to my Amendment 219, I give more than a nod to the amendment in the name of the noble Lord, Lord Sharkey, which he set out so eloquently; had I had a pen, I almost certainly would have signed it and put my name against it.
In simple terms, this is very straightforward: SMEs are the backbone of the British economy. They are the largest private employers and the big companies of tomorrow yet, in this area, we are leaving them high and dry and at the will of many of the schemes that were set out so well by the noble Lord, Lord Sharkey, and the noble Baroness, Lady Bowles. I know that the noble Baroness, Lady Kramer, has all those unfortunate instances tattooed and ready to come out at any moment—rightly so because they all demonstrate that, when things go wrong, they go badly wrong. All too often, it is individuals and, in this instance, SMEs that are on the wrong end of it without a right of action against the FCA. My amendment would provide that right of action for breaches of the FCA handbook; I believe that it is similar to the amendment set out by the noble Lord, Lord Sharkey.
The Government talk, rightly, about the need to grow the UK economy. That growth will come largely from SMEs. Does my noble friend the Minister agree that they deserve our support? By simply accepting either of these amendments or, indeed, tabling a government amendment on Report, they would enable commercial loans over £25,000 to be brought within the perimeter and give SMEs not only the protection but the support that they should have from the regulator—and through that, from the Government—to enable that growth, which we all need for the UK economy and society. I ask my noble friend whether she will look to engage and potentially bring a government amendment to this effect on Report.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a pleasure to take part in this debate on the second day of Committee. I have to say that it has been an extraordinarily powerful debate thus far and an absolute indictment of the UK financial sector. I begin by apologising for not taking part in the first day of Committee, despite having signed a number of amendments. I am afraid I was taking part in the debate on the so-called Genetic Technology (Precision Breeding) Bill, and it is impossible to spread oneself across too many places.
The case for these amendments, in particular Amendment 40 in the name of the noble Lord, Lord Sharkey, to which I am pleased to attach my name, has already been powerfully made, by the noble Lord himself and by the noble Baroness, Lady Bowles of Berkhamsted, in the debate on the previous group of amendments. I will make a couple of additional points. In particular, I draw on a survey by the Federation of Small Businesses, published in December, which found that 30% of small and medium-sized enterprises thought that they had signed financial contracts that contained unfair clauses and provisions.
The survey also found that successful applications for loans and other financing for SMEs had fallen precipitously. Less than half were successful in the third quarter of 2022; before Covid, two-thirds had been successful. One of the things we are always hearing from the Government is, “Rely on the market! People can shop around and choose”. We have already heard the reality of the inequality of arms—as the lawyers would put it—between a small business and a giant financial-sector company. But there is also no opportunity: small and medium-sized enterprises have to take money from wherever they can get it, if they are lucky enough to get it at all.
What we have here is a practical reality, as the noble Lord, Lord Holmes of Richmond, just set out. The financial sector is not meeting the needs of the real economy, and that issue underlies all our debates on the Bill. Is the financial sector there as a high-stakes casino in which a few people can make a lot of money and the rest of us have to pick up the pieces when it all goes wrong, or is it there to meet the needs of the real economy and give us a genuinely sustainable—in all senses of the word—society?
Although we have perhaps not needed him, it is a pity that the noble Lord, Lord Sikka, is not currently in his place, as he could also have contributed very powerfully to this debate. What we have is a litany of disaster. The FCA has a terrible track record. Your Lordships’ Committee is trying to do something to fix that, and, boy, does it need fixing.
Baroness Altmann (Con)
My Lords, I too support both amendments in this group. I congratulate my noble friend Lord Holmes on his Amendment 219, and the noble Lord, Lord Sharkey, on Amendment 40 and the way in which he explained it. I urge my noble friend the Minister to take seriously the comments that have been made and the reference to the Treasury Select Committee, which recommended just this kind of change.
I would like to understand from my noble friend: if the Government do not agree with the Treasury Select Committee, why? How do they believe that SMEs are protected against the kinds of scandals and bad behaviour that have clearly been rife within the sector over a number of years? Does my noble friend seriously believe that small and medium-sized enterprises are equipped enough to stand up against the information and resources available to the financial services industry to avoid the kind of problems that we have seen in the past?
Baroness Kramer (LD)
My Lords, the last group of amendments and this one are not identical and cover different aspects of abuse by financial institutions. Were the Government to accept them, together, or to draft their own versions, that would completely change the playing field. Small businesses would be in a position whereby they could breathe easily and make business decisions, and not worry that, embedded in whatever product they were purchasing—
The Deputy Chairman of Committees (Lord Geddes) (Con)
I hate to interrupt the noble Baroness, but a Division has been called in the Chamber. The Grand Committee stands adjourned until 5.20 pm.
Baroness Kramer (LD)
My Lords, in light of all the pressures we have—the speeches were so brilliant—I will not try to add to them, other than to say that I very much support the amendments in this group.
Lord Thomas of Cwmgiedd (CB)
I will make one brief observation and declare my interest as chairman of the Financial Markets Law Committee. It seems to me that the real problem, which both amendments rightly seek to address, is to give SMEs an effective remedy. The courts system—for various reasons—and the costs that lawyers charge make it almost impossible for SMEs to take on the banks. Therefore, there seems a good deal of force in the arguments that have been put forward. I would be grateful if the Minister were able to tell us what the attitude of the regulators, particularly the FCA, would be to extending the position in this way. It is very important for the Committee to know what they think of this amendment. Really, the object of it is to cure a deficiency in the way in which our legal system functions.
Lord Tunnicliffe (Lab)
My Lords, once again, the arguments for these amendments seem quite persuasive, and I look forward to the Minister’s reply. Having probably been responsible for this legislation in the past—since I failed to duck most of it—I cannot remember for the life of me why SMEs are excluded. Before addressing the amendments, I would be grateful if the Minister could explain the thinking behind the law as it stands.
Baroness Penn (Con)
My Lords, Amendment 40 intends to offer additional regulatory protections for businesses taking out finance. I hope this, in part, addresses the question of the noble Lord, Lord Tunnicliffe: the Government are committed to regulating business lending only where there is a clear case for doing so. Bringing SME lending into regulation would risk increasing costs for banks and alternative finance providers, which would in turn be passed on to businesses in the form of higher fees and interest rates. This could negatively impact the price and availability of credit for small businesses.
However, the Government see a case for regulation where that asymmetry which we have talked about is at its greatest. At the moment, loans of £25,000 or less to the smallest businesses are already regulated as consumer credit agreements under the Financial Services and Markets Act 2000. This captures over 60% of all UK businesses and aims to protect them where there is the potential for detriment in their dealings with banks and alternative finance providers.
Even for medium and larger firms outside the perimeter, multiple protections are already in place which, in some instances, act as a de facto extension to the regulatory perimeter, without the associated costs that formal regulation would bring. Over 99% of UK businesses can access independent dispute resolution through either the Financial Ombudsman Service or the Business Banking Resolution Service. I note the comments from the noble and learned Lord, Lord Thomas of Cwmgiedd. Alternative dispute resolution services provide a form of access to businesses that can be less costly to them. On his specific question about the views of regulators on the regulatory perimeter, I will write to both the noble and learned Lord and the Committee.
Furthermore, a recent FCA investigation found that many lenders, particularly large banks, extend regulatory protections to many or all of their unregulated business relationships. All the major bank lenders are signed up to a voluntary industry code, the Standards of Lending Practice, which contains clear guidance on best practice and can be considered by the Financial Ombudsman Service when adjudicating a business’s complaint against a financial institution. This achieves many of the same outcomes as extending the regulatory perimeter, so many loans that are not captured by consumer credit regulation nevertheless benefit from effective protections.
Given these factors, at this time, the Government do not believe that there is a clear and proportionate case for bringing business lending into regulation. I should be clear that we are open to considered, evidenced arguments on specific regulatory questions related to SME lending. That is why we have invited views on it as part of our ongoing consultation on the reform of the Consumer Credit Act.
Amendment 219 seeks to ensure that SMEs are given rights of action against firms that breach the FCA handbook. Currently, a breach of the FCA handbook may not be actionable by an SME in court—as noted by my noble friend. However, as I have already said, the Financial Ombudsman Service provides consumers and small businesses with a route to raise complaints against firms. This is an alternative to going through the courts, which can be expensive for the parties involved and delay redress. The Financial Ombudsman Service is required to decide cases on the basis of what it considers is fair and reasonable, in all the circumstances of the case, including whether there has been a breach of FCA rules.
Since 2019, SMEs with an annual turnover of up to £6.5 million and fewer than 50 employees have been able to take cases against financial services firms to the Financial Ombudsman Service. All firms regulated by the FCA are required under the FCA’s rules to co-operate with the ombudsman, which includes complying with any decision that it may make.
Since 2021, SMEs with a turnover of between £6.5 million and £10 million can also raise complaints about firms to the British Banking Resolution Service. This is a voluntary body set up and funded by banks to provide an alternative dispute resolution service without the need for litigation or external legal support. Given that more than 99% of UK businesses can access independent dispute resolution through either the FOS or the British Banking Resolution Service, it is unnecessary to provide for a right to take civil action in the courts for a breach of the FCA handbook.
Lord Tunnicliffe (Lab)
The Minister’s argument seems to be about the cost of introducing regulation—that there is a big black cloud that means they cannot do it—but I have not heard any figures. Can she find an estimate of the cost of introducing the sort of regulation envisaged under the amendments and send us all a letter when she has?
Baroness Penn (Con)
I will write to the Committee with that information, where it is available. I will also write to the Committee on the point about the proposal to change SME definitions.
Those were all the points—
Lord Sharkey (LD)
The Minister mentioned the BBRS as part of this panoply of organisations that are spending their entire time defending SMEs. How many cases has the BBRS handled since its inception?
Baroness Penn (Con)
I do not have the figure to hand. I note that it started in 2021, so is a relatively new organisation. Perhaps I could also—
Baroness Kramer (LD)
Perhaps the Minister would confirm that the only cases in which the BBRS will intervene is where the bank complained against is Barclays, Danske, HSBC, Lloyds, NatWest, Santander or Virgin Money and that any institution outside that group—and there is a great range of new banks, challenger banks and others—is not included in its activities? Is that correct?
Baroness Penn (Con)
I note that it is a voluntary body. I do not have the list of those who have signed up to it to hand. If it differs from those outlined by the noble Baroness, I will write to the Committee, but she may well have listed those who have signed up to it. I note, however, that the combination of that service, and the scale of those involved in it, with the ability to go to the Financial Ombudsman Service means that research suggests that more than 99% of UK businesses can access independent dispute resolution. We should look at the size of the customer base as well as the number of organisations signed up to such dispute resolution mechanisms. I will write to the noble Lord, Lord Sharkey, on the number of cases taken by the organisation.
Baroness Altmann (Con)
I thank my noble friend for giving way, but perhaps I could press her a little more on the effectiveness of the Financial Ombudsman Service in providing a deterrent against poor practice in the areas where we have seen it in the past. The noble Baronesses, Lady Bowles and Lady Kramer, and the noble Lord, Lord Sharkey, have outlined instances of banks not treating their customers well. Does my noble friend agree that having a statutory duty written into the legislation would be much more of a deterrent against the behaviour we have seen than the potential threat of someone going to the Financial Ombudsman Service?
Baroness Penn (Con)
That is one element to be considered. I was pointing in particular to the combined role of the FOS and the Business Banking Resolution Service in providing a route of redress for over 99% of businesses. In part, it comes back to my question in relation to Amendment 40 from the noble Lord, Lord Sharkey, on the Government’s commitment to regulating business lending only where there is a clear case for doing so, given some of the increased costs that bringing SME lending into regulation would bring. I return to the point that we currently have a consultation out on the Consumer Credit Act in which there is a question on business lending; the Government are considering this through that consultation.
With that, I hope that the noble Lord, Lord Sharkey, will withdraw Amendment 40 at this stage—
Baroness Bennett of Manor Castle (GP)
I think the whole thrust of the noble Baroness’s argument is that the non-statutory protection effectively offered to SMEs through the ombudsman and independent dispute resolution procedures is essentially the same as having statutory protection. She suggested that statutory protection would cost more, but if the protection is equal through these other mechanisms, surely the costs of the banks providing the documentation and the system to enforce those mechanisms would be very similar to the statutory costs.
Baroness Penn (Con)
The noble Baroness touches on one possible difference in documentation needing to be provided where something is regulated versus where it is voluntary. That comes back to the question of SME lending having increased costs for banks and alternative finance providers. This can be passed on to businesses in the form of higher fees and interest rates, and it can affect the availability of credit for small businesses. The noble Baroness, Lady Kramer, mentioned start-up banks and challenger banks. When we have discussions elsewhere on other issues related to financial services regulation, we also discuss how we create a more competitive environment in the banking sector, as smaller banks can struggle to deal with regulations. This is a general point about balance.
Baroness Bowles of Berkhamsted (LD)
I am sorry to intervene again, but I am also intrigued about what the extra cost is of this coming into regulation. We are not suggesting that there should be great big oversight mechanisms which mean that the FCA would have to do a lot more—until problems occur, when there must be a route to justice. Is the Minister saying that banks will make less profit when they cannot cheat their customers, and that is where the cost comes from? I do not understand it. The suggestion was that it might be documentation, but the cost of that is the same wherever the documents go. What is this extra cost other than banks having to behave responsibly?
Baroness Penn (Con)
In relation to Amendment 40, there are benefits—which we have heard about—and costs to any activity being brought within the regulatory perimeter. I think that point is fairly well accepted. The noble Lord, Lord Tunnicliffe, asked me for further details on that, and I will write to the Committee.
On my noble friend’s Amendment 219, there are costs related to bringing disputes through the courts system as opposed to other dispute resolution mechanisms. There can also be benefits to that mechanism, but it is not enormously contentious to say that there are both costs and benefits to these solutions, which need to be weighed up when we consider them.
Baroness Kramer (LD)
I will add one more piece to the response from the Minister—one more request. I just want to double-check what she said. She said that small businesses could go to the FOS and that they have to employ fewer than 50 people. The definition of a small business seems to encompass something much larger than that. Can she help us understand what happens to the businesses that are still considered small but have more than 50 employees? I would imagine that they are pretty easy targets. As I say, one of the things that is always noticeable is that those who decide to exploit are very clear about where the perimeters are and who they can freely approach, so they get away with it.
Baroness Penn (Con)
As I hope I was setting out for the noble Lord, Lord Sharkey, there are different definitions of businesses that can have different protections and routes of redress within a system of small business lending. The system that we have is aimed to be proportionate, focusing on the smallest SMEs which are at the most risk. On the difference between the voluntary measures that are in place and bringing it within the regulatory perimeter, we are not saying that those are entirely equivalent protections but that they are proportionate protections to the risks faced by those firms. I set out different thresholds in my answer in relation to both those businesses that are protected under the Consumer Credit Act, which are sole traders, loans under £25,000 and a few others there, and businesses that are able to access either the FOS or the Business Banking Resolution Service. There are other thresholds too. Therefore I appreciate the point that that is different from the definition of a SME that the noble Lord asked about. The system is designed to be proportionate to the size of the SME and the protections it affords to them as regards business lending.
Baroness Altmann (Con)
I thank my noble friend for giving way once again. This is an important area for the whole financial services framework that we have in this country. I think that the noble Baroness, Lady Bowles, the noble Lord, Lord Sharkey, and my noble friend Lord Holmes are all trying to press the Minister on the issue of protection before scandals happen so that our system can be trusted more. The point here is about deterring financial institutions from even trying to undertake these actions by having stronger regulatory protection upfront, rather than this or that right of redress after the event has happened.
Baroness Penn (Con)
I understand my noble friend’s point, and of course the Government also consider that when we look at what to bring into the regulatory perimeter or the right of redress, both as a route of redress and as a point of deterrence. The Government take all those factors into account when considering this question.
Baroness Bowles of Berkhamsted (LD)
If I may ask one more question, one area that might be interesting for comparison, especially if we are looking at the Consumer Credit Act, is what the difference is between the loans of £25,000 to small businesses and bounce-back loans, where the conditions of the Consumer Credit Act were dispensed with. Can we have a comparison to see whether they have fared better or worse? That will perhaps show us where the true costs of regulation and lack of regulation lie.
Baroness Penn (Con)
The noble Baroness makes an interesting point. However, bounce-back loans were designed for a specific set of circumstances, and the aim of disapplying the Consumer Credit Act provisions was to do with the speed of being able to get bounce-back loans out to customers. The noble Baroness has indicated that there can then be some regulatory cost to having those protections in place. That is an interesting point, which I am sure people will want to think about in the consultation that is under way on the Consumer Credit Act and the direction of travel there.
Baroness Bowles of Berkhamsted (LD)
I must point out that I was fearing that the true cost was with the small businesses.
Baroness Penn (Con)
The true cost of the protections afforded under the Consumer Credit Act—
Baroness Penn (Con)
To be honest, I am not sure that I totally follow the noble Baroness’s point.
Lord Sharkey (LD)
I thank the Minister for her response but this all seems astoundingly Panglossian. It is as though there is nothing wrong with all this and the SMEs are protected, happy and profitable. That is not the case. If it were the case, why has there been this succession of appalling scandals and appalling mistreatment, causing so much damage to our small businesses? We cannot both be right here. If the system is working, why do all these things continue to happen?
I beg leave to withdraw the amendment and give notice that we will return to this issue on Report.
Baroness Sheehan
“Vote reporting
(1) The FCA must—(a) make rules requiring relevant FCA-regulated persons to give clients information on request about the exercise by the persons or on their behalf of all voting rights attached to assets in which the clients have an interest, including in respect of any specified description of scheme or investment vehicle, and(b) issue guidance in respect of the format of the information provided.(2) A Minister of the Crown must make regulations requiring other relevant persons to give beneficiaries information on request about the exercise by the persons or on their behalf of all voting rights attached to assets in which the clients have an interest.(3) In this section—“relevant FCA-regulated persons” means—(a) managers of personal pension schemes within the meaning of an order under section 22 of FSMA 2000 (regulated activities),(b) managers of stakeholder pension schemes within the meaning of such an order,(c) persons managing investments within the meaning of an order under section 22 of that Act, including the activity described in paragraph 6 of Schedule 2 to that Act,(d) persons effecting or carrying out a contract of insurance within the meaning of an order under section 22 of that Act;“other relevant persons” means—(a) trustees of occupational pension schemes within the meaning of section 1 of the Pension Schemes Act 1993 with £1 billion or more in assets;(b) an administering authority of the local government pension scheme.”Member’s explanatory statement
This amendment requires (a) the FCA to make rules requiring fund managers, personal pension providers and insurers to give information on request to clients, and (b) Ministers to make regulations requiring pension funds to give information on request to beneficiaries, on the exercise of all voting rights on their behalf, however those rights are held.
Baroness Sheehan (LD)
My Lords, I rise to move Amendment 42 in my name, to which the noble Baronesses, Lady Hayman and Lady Wheatcroft, have added their names; I thank them for their support. I refer noble Lords to my interest as per the register as a director of Peers for the Planet.
Amendment 42 seeks to inject a much-needed dose of realism into this Bill. I quote my noble friend Lady Kramer’s summing up of the debate on it at Second Reading:
“This is an industry that knows how to promote itself and speaks with a great sense of invincibility.”—[Official Report, 10/1/23; col. 1394.]
Yet this is also the industry that comprehensively crashed the economy in 2007. Some individuals walked away with accumulated profits, leaving the taxpayer to pick up the costs, with the most vulnerable suffering the most—as ever—through the years of austerity that followed.
I am sure that there are those who say that the financial services sector is our biggest asset; that we must unleash its potential, not shackle it with undue openness and transparency; and that we should most definitely not saddle it with an overarching requirement to safeguard the future of the one and only planet we have. However, I profoundly disagree, which is why I think that a healthy dose of realism is needed—not wishful or short-termist thinking, but reflection on what is happening to our planetary ecosystems in the real world and whether our sons and daughters will curse us in future as the last generation that could have acted in time to save the planet but did not do so.
Money matters. Money drives our economy and all our futures. We need to be able to find out easily what is being done in our name with our money. Amendment 42 is a simple but necessary one. It would require the FCA to make rules requiring fund managers, personal pension providers and insurers to give information on request to clients. It would also require Ministers to make regulations requiring pension funds to give information on request to beneficiaries, on the exercise of all voting rights on their behalf, however those rights are held.
This amendment is necessary because, at present, investors cannot easily find out how fund managers managing their money have voted on their behalf. This cannot be right. Good disclosure principles dictate that investors should be able to find what they need easily, be able easily to understand what they find and be able to use what they find to make informed investment decisions. It also goes without saying that good disclosure principles are a precursor to good governance and essential to a stable financial sector.
Noble Lords will be aware that with ownership of listed companies comes the opportunity to exercise the right to vote at the company’s AGM, including on the appointment of the chair and other independent directors, to accept or reject the annual report and accounts, to appoint auditors, and to agree pay arrangements and any shareholder resolutions which have been tabled or to table resolutions if they meet the minimum threshold. Voting with or against the management and supporting or rejecting shareholder resolutions is an incredibly important tool in ensuring good corporate governance, good long-term investor returns and good economic outcomes more broadly.
Of course, it is also important for the journey to net zero. The Treasury acknowledges this in its report Greening Finance: A Roadmap to Sustainable Investing, which was published in September 2021. In that report, the Government set out their expectations that pension funds and investment managers should
“Actively monitor, encourage, and challenge companies by using their rights and direct/indirect influence to promote long-term, sustainable value generation”
and
“Be transparent about their own and their service providers’ engagement and voting, including by publishing easily accessible, high-quality quantitative and narrative reporting.”
This is what Amendment 42 would do. It is necessary because, regardless of the Government’s expectations, the reality is that the complicated architecture of investment with large numbers of intermediaries, such as investment managers, insurers, consultants and additional fund managers, means that despite efforts by the DWP and the FCA to give pension savers greater transparency about how votes connected with their investments have been cast, it is still practically impossible for savers and often difficult even for the pension funds to get the information.
It is true that the FCA has made rules under the shareholder rights directive, which—in another world many millions of years ago now, it seems—the UK Government championed to improve levels of corporate governance and oversight across the EU. However, in DWP’s implementation of the directive, the pension fund must publicly report on only those which it considers significant. Guidance issued by the pension funds trade body—the Pensions and Lifetime Savings Association—recommends that around 10 out of at least 1,000 votes in which a pension fund typically has a stake should be disclosed. A fundamental weakness is that the pension fund does not have a statutory right to information on unreported votes from the fund manager, and the pension saver does not have a statutory right to information on unreported votes from the pension fund. Obscurity rules, it seems. I guess that even this weak reporting requirement will be swept away by the Retained EU Law (Revocation and Reform) Bill.
The difficulties with obtaining information on voting were covered at length by the DWP-commissioned task force on pension scheme voting implementation—I think it is called TPSVI—which reported in September 2021 and recommended that the DWP and the FCA should closely monitor delivery of vote reporting at fund level. It recommended that if investment managers do not deliver by the end of 2022 the FCA should legislate or issue handbook guidance to deliver fund-level reporting. Managers have not so far delivered.
In its letter to the DWP in October 2022, more than a year after the report, the FCA indicated that it was setting up a vote-reporting group with a view to having draft proposals by the middle of this year. However, the solution still seems entirely reliant on voluntary participation by investment management firms, which I understand are lobbying furiously against standardised disclosure. Some firms do not wish to provide reports on request because it will make them look bad and some do not want to invest in the technology to allow them to provide the data, but neither of these positions is acceptable today.
It was surprising to hear, in response to two Parliamentary Questions from the noble Baroness, Lady Ritchie of Downpatrick, that the Government do not appear to know anything at all about the voting records of UK-authorised fund managers and pension funds in relation to climate-related resolutions at AGMs. Yet the Government are reliant on the financial sector to take strong action on climate change through the exercise of voting rights.
For 16 years, the Government have had powers to require comprehensive vote reporting via the Companies Act 2006, but they have not yet used them. My amendment is intended to give the FCA, which regulates the voting behaviour of fund managers and insurers, the duty to make rules, rather than BEIS or the Treasury.
The US Securities and Exchange Commission regularly updates requirements for standardised disclosure of voting by fund managers, which must be presented in a consistent and machine-readable form, so action by our regulators in the UK is long overdue. Smart regulation is a vital aspect of retaining competitiveness, and this amendment is intended to be smart by giving the FCA the nudge to make rules and ensure that reporting is standardised, with similar provisions for pension funds, but it is not prescriptive on the details. If the FCA intends to make comprehensive reporting in standardised form mandatory, the Minister should welcome the amendment. I look forward to his response. I beg to move.
Baroness Wheatcroft (CB)
My Lords, it is a pleasure to follow the noble Baroness, Lady Sheehan, and I echo everything she said. I apologise to the Committee that I was unable to be at Second Reading.
I believe that this amendment is necessary if we are to have a properly active shareholder democracy in this country. At the moment, shares are not held by the majority of individuals directly; they are held through institutions, and shareholders tend to be passive. The individual shareholder does not know what is happening with his or her money. Yet when we look at how companies behave, all too often, one is reduced to saying, “How on earth could the owners allow that to go on?” Whether it is overpaying executive directors while the people at the bottom of the pile in the business are dependent on universal credit, paying the executives in the water companies huge bonuses while they pour sewage into our rivers or continuing to do business in Russia when the country is absolutely begging people to come out of Russia, too many companies behave badly, and they are not held to account.
It is very rare for institutional investors to vote against a remuneration report to the extent that a majority forces the company to think again. It is probably even rarer for institutional investors to vote against a proposed merger when it will be in the long-term interests of the executives, perhaps, but not of the workers in the UK.
We need individual investors to take a serious interest in what the business is doing. Not all of them will, but for those who are interested, it should be very easy for them to find out how their money—their shares—are being voted. It is a perfectly simple thing to do. Websites could easily be made accessible to show how the vote has been cast on every issue with every company at every annual meeting. Technology would find that quite straightforward. The majority of private individuals with investments in pension funds and insurance companies would not find it difficult to access that information, but it has to be made available.
It has to be an absolute requirement that all companies make all that information available, not just a fraction of it, and the sooner the regulators and the Government move towards that position, the better. The more information is out there, the more individuals will look at it and decide, for instance, that their company—the company in which they have a stake through their pension fund or insurance company—is not behaving as they would wish it to, and they can begin to put pressure on those who hold their shares. That might be because they are passionately involved in the employment issue or in remuneration, or because they want to see evidence that the company is taking its net-zero responsibilities seriously, and in many cases companies now have a vote on the net-zero target and how they are meeting it. Let us give the majority of people who hold shares through intermediaries the chance to see how those shares are being voted and to decide for themselves whether they approve of the way their shares are being used.
Baroness Hayman (CB)
My Lords, as this is my first contribution in Committee, I remind the Committee of my interests as set out in the register, particularly Peers for the Planet. I also have a son who is employed by Make My Money Matter, an organisation that campaigns in this area.
We have had two powerful speeches in support of this amendment, and I do not need to detain the Committee long in registering my support for it. It comes back to that very basic issue that both noble Baronesses dealt with: transparency. It is only with information that individuals can make meaningful choices about the investment of what is their money. It is tremendously important that we do not fall behind on this and assume that decisions that will be made are nothing to do with the little people who actually put the money into the companies which make the decisions. As I understand it, other jurisdictions have found ways through technology and standard reporting procedures to allow this to happen as a matter of course. I would be interested to hear from the Minister why we cannot do that in this country too.
Baroness Bennett of Manor Castle (GP)
My Lords, I will briefly express support for this amendment, which has already been so powerfully argued for. I would have signed it had I caught up with the legislative deluge.
I want to make two additional points. First, the Pensions Regulator’s most recent survey of defined contribution schemes found that more than 80% did not allocate any time or resources to managing climate risk. It would be interesting if we were to see the way in which fund managers were voting, not only to have that recorded, but I would assume that they would have to have some kind of thought behind it to explain what was recorded. The transparency might force some more thinking to happen, which would clearly be a good idea.
I also want to ask a question of the proposers of this amendment because I was slightly puzzled by the information on request element of the amendment. The noble Baroness, Lady Sheehan, noted that US regulators forced this to be published openly as a matter of course. It seems that that would be the logical thing, that this should be available not only to clients but to anyone who might like to make an assessment of how companies and asset fund managers are behaving and why they are behaving in that way. Perhaps in my classic Green position, I wonder whether we should not go further, and, rather than saying “to clients on request”, say that this should be freely published and available to all.
Baroness Kramer (LD)
My Lords, with three outstanding speeches, I have very little to add other than to say that I very much support this. However, I have a question for the Minister. I was just looking up the definition of a fiduciary duty, which is when someone
“has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”
We know that many people feel that there is an implied and inherent fiduciary duty between the person who puts their money into a pension fund and those who act to invest it—I see that the noble Baroness, Lady Noakes, is shaking her head. I know that in various pieces of legislation there has been an attempt to clarify that. However, surely at the very least there is a responsibility to transparency. This seems to me a very mild but important principle to establish. I suspect the Minister would be very concerned if she were to put her money into an entity and did not know, within reasonable boundaries, how it was being invested and used and what impact it had. Surely, these amendments are minor and mild but important.
Lord Harlech (Con)
My Lords, I thank the noble Baronesses, Lady Sheehan, Lady Wheatcroft, Lady Hayman, Lady Bennett of Manor Castle and Lady Kramer, for raising voter reporting.
The Government recognise that the ability of investors to exercise their voting rights is an important issue, which is why they are taking steps to address barriers in this area. The Financial Reporting Council’s world-leading UK Stewardship Code 2020 already requires detailed and annually assessed reporting from its voluntary signatories on voting disclosure, and the recent stewardship guidance for pension scheme trustees from the Department for Work and Pensions, which included substantial guidance on the exercise of voting rights, came into effect in October 2022.
However, the Government recognise that there is still more work to do. The DWP’s guidance includes sustainability-related issues, and its stewardship guidance focuses on areas where existing policies and reporting appear to be weakest: stewardship and, to a lesser extent, consideration of financially material ESG factors and non-financial factors. Stewardship encompasses a range of activities, and this guidance focuses specifically on voting and engagement; it is about creating long-term, sustainable value for savers and includes recognition of environmental and social governance factors, which is encompassed in the DWP’s guidance.
Furthermore, the DWP has already made a public commitment to review voting disclosure requirements in the response to the consultation on Climate and Investment Reporting: Setting Expectations and Empowering Savers. This review will be conducted jointly with other government departments, including the Treasury, and regulators. This will ensure consistency across the investment chain. The review will begin in late 2023, which will give the Pensions Regulator time to gather evidence on how the DWP’s existing guidance has influenced standards of voting disclosure.
Baroness Sheehan (LD)
Why is this review starting in late 2023 necessary when substantial reviews have already been carried out and there are various ongoing task forces? I am really at a loss to understand why this is necessary.
Lord Harlech (Con)
Is the noble Baroness asking why the review is necessary or why it is scheduled for that time?
Baroness Sheehan (LD)
It would be useful to have answers to both: why is a review necessary and why is it scheduled so late?
Lord Harlech (Con)
The review is necessary because it is important to take into account multiple government departments, including the Treasury, and non-governmental bodies such as the regulators. I believe it is scheduled for that time to facilitate the gathering of evidence and set out the scope of the review.
Baroness Wheatcroft (CB)
Rather than talking about a need for more investigation, could the Minister say what he thinks could possibly be wrong with telling organisations that they must put this information up? I cannot see the downside. Can he explain?
Lord Harlech (Con)
If I could go on, perhaps my further remarks will address the noble Baroness’s question; if not, I will endeavour to write to her, if that is all right.
In November 2022, the FCA convened an independently chaired vote reporting group following the recommendations made by the Taskforce on Pension Scheme Voting Implementation. The aim of this is to develop a more comprehensive and standardised vote disclosure framework for asset managers, ensuring a fair, proportionate and practicable approach. The group’s draft proposals are expected to be published in April 2023 for public consultation. Moreover, local government pension scheme funds are already required to publish an investment strategy statement, including their policy on voting rights and ESG matters, with guidance on annual reports also encouraging transparency on how voting rights are exercised.
The FCA’s Conduct of Business Sourcebook—COBS—Shareholder Rights Directive rules already require all investment firms to develop and disclose an engagement and voting policy. This includes how the engagement is integrated into the investment strategy; how environmental, social and governance issues are monitored; and how conflicts of interests are managed. This policy must be reported on annually online.
The Government believe that it would be premature and unnecessary to amend voting disclosure legislation at the current time, given the initiatives that are already under way. I therefore ask the noble Baroness, Lady Sheehan, to withdraw her amendment.
Baroness Sheehan (LD)
I thank the Minister for his response. I also thank the noble Lords who spoke in support of my amendment.
I found the Minister’s response unsatisfactory. It did not address any of the issues that have been raised. We know that the voting reporting group is doing its work at the moment. The issue that I wanted the Minister to address is that participation is going to be voluntary; over the past 17 years, that has not produced any further transparency of the kind that we are looking for in this amendment.
Before he sits down, I want to ask the Minister a question about the rules made under the Shareholder Rights Directive. If the rule Bill becomes an Act, will there be a void there? Will there be nothing in its place? I assume that that will be the case.
Baroness Sheehan (LD)
Undoubtedly, there are a great deal of unanswered questions but, for now, I beg leave to withdraw the amendment.
Baroness Noakes
“Regulation of consumer credit
(1) The Treasury may by regulations make such provision as they consider appropriate for the purpose of, or in connection with, the regulation of consumer credit.(2) The power under subsection (1) is exercisable only by making such provision as the Treasury consider necessary or desirable for or in connection with one or more of the following purposes—(a) promoting effectiveness in the functioning of financial markets; (b) promoting effective competition in the interests of consumers in financial services and markets;(c) facilitating the international competitiveness of the economy of the United Kingdom and its growth in the medium to long term;(d) protecting consumers;(e) providing for efficient and effective regulatory, enforcement, investigatory and supervisory arrangements in relation to the provision of financial services or the operation of financial markets.(3) The provision that may be made by regulations under this section includes provision—(a) conferring powers on the Treasury (including a power to legislate);(b) conferring powers, or imposing duties, on the FCA (including a power to make rules or other instruments).(4) In exercising their powers under this section, the Treasury must have regard to—(a) the general principle that consumers should take responsibility for their decisions,(b) the importance of securing an appropriate degree of protection for consumers, and(c) the principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction.(5) The power to make regulations under this section includes the power to modify legislation.(6) Regulations under this section are subject to the affirmative procedure.(7) Before making regulations under this section, the Treasury must consult the FCA.(8) In this section, “legislation” means primary legislation, subordinate legislation and retained direct EU legislation.”Member’s explanatory statement
This amendment would give HM Treasury the powers necessary to implement the findings of its ongoing review of the Consumer Credit Act 1974, saving the need for further primary legislation.
Baroness Noakes (Con)
My Lords, Amendment 43 would confer on the Treasury a wide-ranging power to legislate for consumer finance.
As I am sure noble Lords are aware, reform of consumer credit has been a long time in the making. The core legislation is nearly 50 years old and remains the Consumer Credit Act of 1974. That legislation was forged in a very different era: there were much lower levels of consumer credit; the internet was only a gleam in the eye of a few researchers; and regulation of financial services firms barely existed, certainly compared with what exists today.
The 1974 Act is based on a very different legislative approach from FSMA; it is based heavily on processes and paperwork rather than outcomes. When FSMA was passed, the Consumer Credit Act was left basically as it was despite the fact that the FSA became a powerful financial services regulator with a clear consumer focus. Some of the 1974 Act was later imported into the FCA model, in 2014, but that was only a partial exercise; the FCA was then tasked by statute to look at what could be done with the rest of the Act’s territory. That review eventually reported in 2019; last December, more than three years later, the Government finally produced their own consultation document.
Lord Tunnicliffe (Lab)
My Lords, I shall speak to both the amendments in this group. I was not going to speak on the amendment of the noble Baroness, Lady Noakes, because, frankly, I did not understand it as well as it was just explained. The key point she is making is that there is a whole series of things about credit. It is complex, and that allows the Government to go behind the screen of saying, “We need this review; we need more time to think about it”, and so on. The gripping words she used were that society needs this stuff up to date as quickly as is reasonably practicable. There is no area where that could be more true than buy now, pay later. We are in a period of enormous stress for poor people. They desperately need reasonably priced credit because they just do not have any reserves.
In this area, there is this wonderful illusion that the credit is free. People do not lend money for free, except, perhaps, foolish parents. Buy now, pay later depends, as far as I can see, on the borrower failing to obey the rules, and companies make their money out of the default situation. They also make some money out of what they charge to retailers, but it is a very uncomfortable area.
I recognise that buy now, pay later can be a lower-interest borrowing option for some consumers, and that it is an area where a lot of innovation takes place, but neither of these points means that it should not be properly regulated. The Government have again and again committed to bring in regulation. Indeed, we are talking about 18 months since we got the first assurances from the Government that this would be subject to proper regulation. The Government have not acted, and harm is happening all the time. For example, Citizens Advice research has found that nearly two in five buy now, pay later customers do not fully comprehend the nature of the loan they are signing up to and often vulnerable shoppers are signing up to financial products that they do not fully get. What are the Government doing and which buy now, pay later companies are they meeting to ensure greater transparency?
We need to act in this area. I cannot understand how the Government can expect the assurances they give on these sorts of legislation to be taken seriously in future with the delays that have appeared in this area.
Baroness Altmann (Con)
My Lords, I support both amendments in this group. I think my noble friend Lady Noakes’ Amendment 43, which she so eloquently explained, is very much needed within our financial services system. I agree that it is possible that we should consider introducing into the wording greater parliamentary scrutiny rather than the discretion that may otherwise be given wholly to the Treasury, but I think the explanation by the noble Lord, Lord Tunnicliffe, of the situation with buy now, pay later is a good example of the kind of amendment that my noble friend wants to put in which would have facilitated some faster action had it been put in. I am not sure, but with the Bill we are going back time and again to the asymmetry of information and power between those transacting with financial services in general and the financial services industry that is putting products out to those customers. I think these amendments would be very useful additions, and I look forward to hearing from my noble friend.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise to express support for Amendment 212 and to make a couple of points about it. I noticed that a couple of days ago the New York Times reported that buy now, pay later is an industry facing “an existential crisis”. I also note that various market analysists are reporting that this is a huge area of growth for the UK economy and the UK financial sector. Putting those two things together is a cause for concern not just for individual consumers, as the noble Lord, Lord Tunnicliffe, set out so clearly, but for the structural impact on the UK economy.
A survey was done for a household debt report by a company called NerdWallet. I cannot attest to the value of the survey, but it confirms what I have observed: 20% of women and 11% of men have used buy now, pay later in what amount to loans. So there is a gender aspect to the use of buy now, pay later. We look at many other areas of our system where women are financially disadvantaged but there is real cause of concern here.
My final point concerns something that really puzzles me—I understand that we may not be able to get an answer on it now. It was reported recently that a company called Zilch, which has 3 million buy now, pay later customers, is planning to report to all the major credit agencies the amount of debt that is being held by its customers. I think customers’ understanding is that it does not show up on their credit records—this is usually a soft search—so they are able to keep borrowing money through this mechanism and it does not show up. I do not quite understand how, if something was taken out on that basis, it can suddenly become declarable to credit rating agencies. This is an area where it is clear that regulation is necessary.
Lord Northbrook (Con)
My Lords, I listened with interest to my noble friend Lady Noakes moving her amendment. Clearly, consumer credit is at a record level, due, I am sure, to a long period of low interest rates. I just find, probably deliberately, that the amendment is a little vague. Like the noble Lord, Lord Tunnicliffe, I like the idea of focusing on specific issues such as buy now, pay later. Perhaps more power should be given to the FCA to look at institutions that are offering huge rates of interest on loans.
Baroness Kramer (LD)
My Lords, I take a slightly different view on the two amendments in this group.
I say to the noble Baroness, Lady Noakes, on her amendment that I am entirely sympathetic to the idea that we need an up-to-date Consumer Credit Act sooner rather than later. However, I am concerned about the absence of parliamentary engagement in the process. To understand how controversial this is, we just have to look back at some of our discussions on amendments earlier today in which Ministers prayed in aid the Consumer Credit Act for taking no action to protect, for example, small businesses from abuse by a great variety of lenders. It is quite a controversial Act, in many ways, and it is one where, when the Government enter into a review, there tends to be quite a bit of industry capture, as we see in virtually all consultations. Essentially, Parliament tends to be the body that brings forward the consumer voice, so the absence of parliamentary engagement in the process as envisaged in the noble Baroness’s amendment troubles me hugely.
I say to the noble Lord, Lord Tunnicliffe, that we are very supportive of his amendment on buy now, pay later. I am disturbed by the growth of the industry, particularly at a time of such huge economic pressure. I think something like 17 million people in the UK have used buy now, pay later, with two in five young people using it regularly. It is particularly around young people that there is the greatest concern because they lack life experience to recognise the consequences of their purchasing habits and find it particularly tempting to exceed the budget that they should observe because buy now, pay later makes it sound so utterly painless. In discussing this issue, many people have looked at what happens to people when repayment eventually becomes due: individuals find themselves is very deep trouble indeed. That is one of the reasons why I am supportive of this amendment.
I have to say that I get angry with many of the companies that offer this because credit is never free. Someone is picking up the time value of money; in other words, the cost of the financing, the cost that is embedded in the reality that payment comes later. That presumably encompasses all the people who pay on time. I am curious to know whether we have any kind of assessment of how much more people who pay on time are paying as they pick up the cost of the credit that is extended to others. I think there might be some backlash to buy now, pay later, if people were conscious of what is added to their bills as a consequence. I admit that I am one of those stuffy people—I am sure we are laughed at—who pay on time rather than trying to use some mechanism to provide credit, so I admit to a personal interest but, in the end, young people may find themselves trapped.
Lord Mitchell (Lab)
My Lords, I thank the noble Baroness, Lady Kramer, for drawing your Lordships’ attention to the three-year campaign we had on payday lending, which in the end won. We removed a great scourge from consumer credit in this country. I apologise for not speaking at Second Reading; I intended to, then Covid got me.
I will make a couple of general points before getting into buy now, pay later. When I was 16, I was asked to leave school. One mock GCE pass out of seven subjects at O-level led to my marching orders. I got a job at Hoover selling vacuum cleaners and washing machines door to door. That truly was the school of hard knocks. It was 1959. We were sent to sales training school to learn how to complete a sale. They told us, “Wear a dark suit, white shirt, firm handshake, and at all costs, get your foot in the door. Demonstrate the product to the lady of the house and then present her”—it was always her—“with the dual positive suggestion: ‘Will madam like to pay cash, or would she prefer hire purchase?’ Whatever the outcome, you’ve got the deal.”
So, I know about deferred payments, which in those days were also called “the never-never”. I emphasise to noble Lords that I am not against buy now, pay later. In fact, I think it is a good thing. People’s budgets are squeezed, and if a financial mechanism can be devised to make purchasing easier, it surely must be applauded. The problem is when it gets out of control, as many noble Lords have said.
Buy now, pay later has no interest component, and because of this, it is not regulated by the FCA, it is not protected by Section 75 of the Consumer Credit Act and individuals do not have recourse to the Financial Ombudsman Service. This loophole was surely never intended and ought to be closed.
It is currently too easy for consumers to acquire debt beyond their affordability, and therein lies the danger. Plus, of course, consumers can acquire payment liabilities through a host of different providers, each of whom has no knowledge of the existence of the other. We saw that in payday lending, whereby you got to your limit with one payday lender, so you went to another and then another, you got the money from here to repay this one, and so it went, until people got into terrible situations.
I do not have the foggiest why the Government have said that they want to regulate that but are telling us that it is not appropriate. I ask the Minister: why are the Government dragging their feet on something that seems so dangerous, obvious and uncontentious?
I have one further point to make. Buy now, pay later is growing exponentially and we now have a measure of just how big it is. Half the population use this unregulated form of finance. Casting our minds back to the financial collapse of 2008, we cannot ignore the subprime mortgage crisis in the US that triggered all the turmoil. We are not there yet, but massive and increasingly unaffordable debt is simmering below the radar, and it is a huge potential danger. Can the Minster assure the Committee that the Government are tracking this sector and are aware of the risk?
Baroness Penn (Con)
My Lords, I shall turn first to Amendment 43, tabled by my noble friend Lady Noakes, before dealing with buy now, pay later. The Government fully support the intention behind this amendment to facilitate the swift reform of the Consumer Credit Act, and work is under way to do just that. There is no doubt that this legislation needs updating. The Act is becoming increasingly outdated, and its prescriptive nature means that it is unable to keep pace with advances in the market without modernising reform.
However, we must appreciate that the Act is complex, and any work to review it requires careful consideration to ensure that any future approach is fit for purpose. For this reason, a first public consultation on this reform was published in December, which will close for responses in March. As part of the review, the Government are seeking views on how to rectify the complex split of regulation currently contained in primary legislation, secondary legislation and FCA rules which is hard for consumers and businesses to navigate.
Baroness Penn (Con)
My Lords, as I was saying, we can also simplify the way in which information is provided to consumers throughout the lending process, which can be both inefficient and ineffective. This reform will also allow us to review retained EU law in the Act and amend regulation to better suit UK businesses and consumers.
Given that this work is at an early stage of policy development, the Government believe that it would be premature to consider legislative changes at this stage. I heard what my noble friend said about introducing more parliamentary scrutiny into her amendment but I am not sure that that would be sufficient to address the fact that we are not yet at the stage where we can bring forward our proposals and legislate on this issue.
On Amendment 212, the Government are working at pace to regulate buy now, pay later products, recognising the risks they may pose to consumers. We are now drafting secondary legislation and intend to consult on it very shortly. Subject to the outcome of the consultation, the Government aim to lay regulations later this year.
Lord Tunnicliffe (Lab)
I just point out to the Minister that “later this year” could be December. I hope the Government have a rather more optimistic view than that.
Baroness Penn (Con)
I would like to share the noble Lord’s optimism. We need to have the consultation on the secondary legislation, which we are expecting very shortly, and then progress as quickly as we can to lay the regulations after we have completed that consultation. I completely accept the point from the noble Lord and the Committee more widely that there is a desire for swift action in this area. We understand that there are concerns about the pace of the delivery of this secondary legislation. This is a new and developing market, and it is important to get the regulation right. We need to ensure that it is proportionate and that lenders can continue to offer a useful form of interest-free credit to consumers responsibly.
While work continues to bring this fully into regulation, I should stress that buy now, pay later borrowers already benefit from wider consumer protection regulation. This includes standards on advertising, rights concerning the fairness of contracts and regulations to protect consumers from unfair commercial practices. However, to reiterate, I reassure the noble Lord, Lord Tunnicliffe, and other noble Lords in the Committee that they can expect to see draft legislation very soon and that we are committed to progressing this as quickly as we can.
I therefore hope my noble friend Lady Noakes will withdraw her amendment and that the noble Lord, Lord Tunnicliffe, will not move his when it is reached.
Baroness Noakes (Con)
Will my noble friend say how she sees the timetable going forward? I think she said that the Treasury is at the first stage of consultation, but it would be interesting to see the outline timetable that my noble friend thinks the Government will work to on this. It has taken a long time even to get to this stage, and it would be very useful to have an idea of when something tangible might be expected.
Baroness Penn (Con)
I will do my best, but I am afraid it will disappoint my noble friend. We expect to publish a second-stage consultation in due course, and it is likely that the FCA will also consult. Implementation of the final approach will require primary legislation, which will be brought forward when parliamentary time allows. I hope she draws some comfort from the fact that this process has started and that this reform is under way. We heard from everyone that this legislation is long overdue for reform, but we also heard a desire from the Committee that appropriate parliamentary scrutiny be applied when the Government bring forward proposals for reform.
Baroness Noakes (Con)
I thank all noble Lords who spoke in this debate, especially those who supported my amendment. I freely concede that, as I said in my introductory remarks, more parliamentary involvement would be required before any proposals were finalised.
Consumer groups have already been heavily involved. There are problems because the Consumer Credit Act focuses on paperwork and processes and not on whether it produces good outcomes. For example, it has no concept of vulnerable customers. There are real, good reasons for progressing this into law.
I was not surprised but somewhat disappointed by my noble friend’s response; it is a big step to take a big Henry VIII power when dealing with anything other than EU law. Normally, of course, the Committee would be criticising such a power, but I was particularly disappointed not to get a sense of the real urgency from my noble friend. Having a secondary consultation in due course is the kind of timetable beloved by Governments who do not really want to do anything. I hope that my noble friend will go back to her department, the Treasury, and say that this issue must be progressed. With that, I beg leave to withdraw the amendment.
Baroness Hayman
Baroness Hayman (CB)
My Lords, this group of amendments aims to ensure that the future regulatory framework of the financial services sector supports the Government’s net-zero and nature commitments. I have Amendments 44, 53, 56, 62 and 68 in this group, and I thank the noble Lords, Lord Vaux of Harrowden and Lord Randall of Uxbridge, and the noble Baroness, Lady Northover—I wish her a speedy recovery—for supporting and adding their names to the amendments.
Before I turn to the rationale for these amendments, I will say a word about another amendment to which I have added my name: Amendment 69, in the name of the noble Baroness, Lady Sheehan. She will of course explain her amendment when she speaks later in the debate, but it might seem slightly perverse to have added my name to it, since it is amending the regulatory principle that I will argue against in principle in a moment. However, at Second Reading, I and many others drew attention to the fact that the Bill as written and presented to the House is totally silent on issues of nature, nature-based solutions and investments in natural solutions. This is a ridiculous and wrong omission, and it was in some way recognised in Committee in another place, when Andrew Griffith, the Economic Secretary to the Treasury, recognised that
“we cannot achieve our climate goals without acknowledging the vital role of nature. That should concern us all, as it is part of the carbon ecosystem.”
He promised to consider the issue further
“to see whether there is anything … that can be done.”—[Official Report, Commons, Financial Services and Markets Bill Committee, 27/10/22; col. 162.]
So I hope that, in the spirit of a probing amendment, the Minister will be able to respond to the general principle of the inclusion of nature objectives in the Bill.
But, as I say, I want to go beyond a statutory principle to a statutory objective—a new secondary statutory objective that would sit alongside the proposed competitiveness and growth objectives. My amendments mirror the same drafting structure. The intention is that a climate and nature objective would require the regulators actively to facilitate or contribute to net zero and nature’s recovery through their activities and bring financial services regulation in line with government policy. The amendment uses existing drafting and recognised targets. On the climate, the objective attaches the targets under Section 1 of the Climate Change Act 2008, and, on nature, it follows the language included in the Natural Environment and Rural Communities Act 2006 and suggests supporting the targets in Part 1 of the Environment Act 2021 as a starting point. As I say, the Government’s proposed regulatory principle on net zero would be removed to avoid duplication.
It was clear from the Minister’s comments at Second Reading that the Government intend the new regulatory principle to embed net zero within the regulator’s functions, but I am afraid this step remains insufficiently robust to support their commitment to become
“the world’s first Net Zero-aligned Financial Centre”
or to invest, as was stated in their response to the Treasury-commissioned Dasgupta review,
“in nature and a nature-positive economy.”
Baroness Sheehan (LD)
My Lords, I rise to speak to Amendment 69 in my name and those of the noble Baronesses, Lady Hayman and Lady Young of Old Scone. I should say at the outset that I support all the amendments in this group. It is heartening to see support from across your Lordships’ House for strengthening the Bill’s remit on green finance.
My noble friend Lady Northover is unable to be with us today as she has Covid. I know other noble Lords will join me in wishing her a speedy recovery.
Baroness Sheehan (LD)
I thank your Lordships. In my noble friend’s absence, I will speak briefly in support of the amendments to which she has added her name.
I turn first to Amendment 69, which should not have been necessary if the Government truly understood how intertwined the twin threats of climate change and nature loss are. They are two sides of the same coin. Climate change is destroying nature and the destruction of the natural world is accelerating climate change; it is us humans who have set this downward spiral in motion, and it is us who can put a stop to it. My Amendment 69 would add nature to the new regulatory principle on net-zero emissions; I tabled it purely for the sake of completeness and to make the point that the Government have, at best, been careless in leaving out nature from the single line that they have devoted to this issue in the entire Bill. I quote from the Explanatory Notes:
“This clause embeds the UK’s net zero target into the regulatory principles for the PRA and the FCA.”
It patently does not do that. My tabling this amendment in no way takes away my support for the series of amendments in this group tabled by the noble Baroness, Lady Hayman, which is a far more satisfactory way of embedding the net-zero target and nature loss into the Bill. She has already introduced her amendments in such comprehensive style that I have little left to say on them.
In any case, let me turn to those amendments in the names of the noble Baroness, Lady Hayman, my noble friend Lady Northover and the noble Lords, Lord Vaux of Harrowden and Lord Randall of Uxbridge. I strongly support their Amendment 44, as well as the consequential Amendments 53, 56, 62 and 68. That is because Amendment 44 would introduce a climate and nature secondary objective for the FCA, alongside the competitiveness and growth objective. That has to be the correct place for this objective. It must be clear that it is an overarching objective for the two most important regulators in the financial space.
Government is as government does. Failure to put in place firm rules on the drivers of the economy, the institutions of the financial services and markets sector, would be irresponsible on the part of the Government. The reason why this is important is because there will inevitably be difficult decisions ahead, where the fork in the road points one way to a short-term gain but with negative effects on the environment while the other fork points to a safer, greener investment that will mature later but will be beneficial to future generations. Decisions must be made to favour the greener, more sustainable path. There must be no incentive to take the quick buck to the detriment of the carbon budget or nature.
Amendment 65 in the name of the noble Lord, Lord Tunnicliffe, is not in this group and will appear later. However, it is interesting because it probes such a dilemma, albeit from the point of view of potential conflict between primary and secondary objectives. I look forward to the debate on that amendment.
Where in the Bill are the safeguards for future generations, the respect for nature and the recognition and acceptance of the findings of the seminal Dasgupta review? Nowhere. It unleashes the power of money to do its worst and seek short-term profit. I say to the Minister, for whom I have a great deal of respect, that a reference to the medium and long term does not cut it without clear direction to the financial sector that green growth and international competitiveness in long-term, net-zero and nature-compatible investment is where sound investment decisions must be directed.
In the US, the IRA—the Inflation Reduction Act—is showing the power of government to unleash private investment into this century’s big growth opportunities. All that UK investors need is a regulatory nod from the Government, then they will take money to where it can deliver good green growth. Growth is the holy grail and future growth will be green; of that, there is no doubt. We will let UK Ltd down big time if we do not put in place policy and regulatory levers to deliver the confidence that business needs to move forward.
In the blink of an eye, the US has transformed international investor confidence in renewable energies. The EU will follow suit. Where are we in giving the clear direction that business is calling for? Chris Skidmore’s review and the report from the Industry and Regulators Committee by the noble Lord, Lord Hollick, made it clear that there is a large quantity of money waiting for a clear signal from the Government to invest in the UK. In the words of the Minister at Second Reading,
“this Bill is a landmark piece of legislation—the most ambitious reform of our financial services regulatory framework in over 20 years.”—[Official Report, 10/1/23; col. 1331.]
Our Government cannot let this historic opportunity pass by without adding those words to a third secondary objective: climate change and nature.
I have added my name to Amendment 208 in the name of the noble Lord, Lord Tunnicliffe, for the simple reason that the Government have stated their ambition for the UK to become the world’s first net-zero financial sector yet we are still waiting for an updated green finance strategy. For the regulators to be able to do their job on net-zero and nature targets, we must have sustainable disclosure requirements and a green taxonomy.
Finally, I support the amendment in the name of my noble friend Lady Northover, which seeks to place a requirement on the PRA and the FCA to report on the ways in which they have promoted and incentivised green finance and green investment. It would be very useful if that information were placed in Parliament.
To conclude, we do not have the luxury of waiting another 20 years for the next financial services Bill. This is the Bill that will decide whether the transformative change that we need in our big investment decisions gets the nod from the Government. The answer has to be yes.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise to speak to Amendment 69A in my name and briefly express my support for all the other amendments in this group. They have been very ably and clearly introduced.
I had something of a flashback to the Pension Schemes Bill, which was the first time I spoke in this Room. I believe that that was the first time that climate had ever appeared in any finance Bill. The noble Baroness, Lady Sherlock, did a great job of supporting me through that: I had no idea when to speak so she gave me a nudge with her elbow. That was three years ago. We have now got to the point where we are trying to get nature to join climate, which is so obviously necessary.
As you might expect from a Green, my Amendment 69A goes further. I do not know whether the Minister can respond to this but the fact is that the economy and financial system are complete subsets of the environment. There is no financial system on a dead planet, to amend a phrase. All the amendments on climate and nature are clearly essential but we know that they do not fully cover the way in which we are breaking the limits of this planet.
Baroness Lawlor (Con)
My Lords, I thank the noble Baroness, Lady Bennett, who I am very pleased to follow, and the noble Baronesses, Lady Hayman and Lady Sheehan, for their lucid and eloquent statements, but I oppose Amendments 44, 53, 56, 62, 69 and 69A. I see no grounds for increasing or extending the obligation as the amendments in this group propose. The Bill already includes a new regulatory principle for the FCA and the PRA, requiring them when discharging their role to have regard to the need to contribute towards achieving compliance with Section 1 of the Climate Change Act 2008. Were we to go along with this group of amendments, we would see as a consequence the further erosion of the competitiveness of the sector. Adding a climate and nature objective, as Amendments 53, 56 and 62 would, or adding, as Amendment 69 proposes, a further regulatory principle on the natural environment to that in Clause 25, would do likewise.
To my mind, such a way of thinking is vague and aspirational. “Climate and nature” or “the natural environment” are vague, whereas the tangible aims of clean water or clean air, or of mitigating against pollution, are serious and important aims of policy. There, the policy is clear and has been pointed out in the legal context; the law is clear. The “polluter pays” principle of tort law establishes the obligation to compensate those injured by these kinds of harm. Indeed, there is scope for strengthening the prohibition on dumping industrial chemicals in rivers or disincentivising the use of petrol engines in crowded cities.
The amendments in this group would undermine competition. The UK is competing in a world in which it is already legally bound by net-zero emissions law, although many of its rivals are not. In the Global Financial Centres Index table of the various global financial centres, New York and London stand at the top and are followed—in this order—by Hong Kong, Shanghai, Los Angeles, Mumbai, Singapore, Beijing and Tokyo. Tokyo is under a net-zero target regime, and Los Angeles has recently introduced a law. Of the top greenhouse gas emitters, only Japan, Canada and the EU have legally binding net-zero commitments. The bulk of Asian markets and those rising in China do not. As matters stand, these are the competitors.
There is also a danger that such amendments are parochial, whereas the sector is—and must continue to be—global, not retreating into a little UK or little EU syndrome. The result of putting the extra demands on the UK’s financial services and market would be to handicap the sector and make it less competitive—a less attractive place to do business, with global competitors edging their way up the league tables. The world has changed since London overtook Amsterdam in the 17th century and Paris at the end of the 18th. Since the 20th century, it is rivalled only by New York.
If we are to take the competitiveness object seriously, the law must facilitate and encourage competition, not handicap it. Each successful demand for an extra law in pursuit of one or the other’s picture of an ideal world will handicap our financial sector and make this country a less attractive place to do business. At the moment, London and New York, static at the peak of the pyramid, face stiff competition.
This is a very controversial question—too controversial and political to be slipped into the Financial Services and Markets Bill. The measure will have an impact on our whole economy, as noble Lords have quite rightly pointed out throughout. Constitutionally, we have not the mandate to change the policy and, politically, I doubt whether there is an appetite for extending the law beyond what there now is. If anything, there may be an appetite to suspend it during these periods of shock.
Lord Naseby (Con)
My Lords, I declare an interest: I am a trustee of the parliamentary pension fund. I am also a former chairman of a financial services organisation, Invesco. I have tried to put myself in the shoes of when I did that, some 15 years ago.
It comes down to what my noble friend has been talking about: the practical side of financial services. There have been major changes in the time since I last chaired an organisation, but the trustees of the parliamentary pension fund have a meeting this Thursday and we always have to balance the objectives of that fund, which is primarily to ensure that there are adequate funds to pay the pensions of our membership—that is the primary purpose of that organisation. Secondly, we have to respond to the laws of the land; indeed, because we are a parliamentary group, we are adamant that we should keep track of what is happening on the green dimensions as they affect financial services.
In her speech, which we have just listened to and which I was certainly listening to, my noble friend Lady Lawlor made it clear that, in her view, the amendments before us—with one exception, which I will come to in a minute—are, frankly, not practical. On Thursday, I will have to be practical. If anything, as matters stand at the moment, the amendments will handicap the financial services world. This worries me even more because it undermines competition. We must remember the primary new dimension that we are talking about in financial services: the requirement for growth. We look for the key kernel of that growth to come from the City of London and financial services in general. For my money, this is a stage too far. Having previously been an RAF jet pilot, I must say that, when I read about planetary limits et cetera in Amendment 69A, I think that that is going too far.
However, although I am not sure that it is ideally written, I think that there is merit in Amendment 240 —particularly proposed new subsection (1), which would require a reporting system on green material—in broad terms. Whether that is the right phraseology, I am not able to judge, but, from a practical point of view, I do not think that the amendments we have before us are appropriate at this point in time.
Lord Vaux of Harrowden (CB)
My Lords, as this is the first time I have spoken in Committee, I should start by declaring my interest in Fidelity National Information Services, which, among other things, owns Worldpay.
I support the amendments in this group—particularly those in the name of the noble Baroness, Lady Hayman, to which I have added my name. She and other noble Lords have already explained the reasoning for them, so I will try not to be repetitive. I have added my name to them because I think that the climate and nature objective is so important that it deserves at least equal billing with the other secondary objectives of growth and competitiveness. For the record, I wholeheartedly support those growth and competitiveness objectives.
As we heard from the noble Baroness, Lady Lawlor, a few moments ago, some have argued that the climate and nature objectives conflict with the growth and competitiveness objectives. Frankly, I do not believe that that is the case. There are always trade-offs, of course, but, if done well, encouraging and facilitating the financing of the technologies and businesses that will enable the path to net zero will be a substantial driver for growth. I want to see the UK financial market become the global leader in financing and facilitating these exciting technologies. I believe that there is an enormous opportunity for the UK here.
The noble Baroness talked about this being a somewhat parochial objective. I could not disagree more. This is a global opportunity. Just the other day, I was talking to the ambassador from Vietnam, a country that is looking to expand its offshore wind arrangements massively; it has the most perfect coastline for it. That is something that this country could be hugely involved in from both a technology point of view and a financial services point of view—that is, financing this stuff.
Another argument that I hear against the climate and nature objective is that it is a negative objective focused on banning and stopping activities. In my view—this is where I suspect I disagree with the noble Baroness, Lady Bennett of Manor Castle—a climate and nature objective should not be about, for example, preventing investment in companies that are involved in fossil fuels or other activities.
Baroness Young of Old Scone (Lab)
My Lords, I very much enjoyed what was just said by my fellow countryman. I will talk to Amendment 69 in the name of the noble Baroness, Lady Sheehan, which I have also put my name to. The amendment adds nature to the new regulatory principle on net-zero emissions. I also recognise everything that the noble Baroness, Lady Hayman, said about needing an objective rather than a regulatory principle. However, if we are to be stuck with a regulatory principle, it needs to address the twin existential crises we are facing globally and as a nation: climate and nature decline.
I must confess that I was kind of taken aback by the two previous speakers. The fact that climate and nature are such major things and go hand in hand, with one not being able to be resolved without the other, is now so commonly recognised globally by the business and financial communities and by Governments that I felt there was a whiff of quill pen coming from the other side, which is most distressing. The reality is that our financial institutions have a key role in enabling the financing of decarbonisation of the economy but also in promoting nature-based solutions. It is partly about making sure that the natural environment is lending its full hand to solving the climate change crisis, because we need every lever in the kit—every tool in the toolbox—to step up to that challenge. The financial institutions have a key role in that.
However, we also already have government commitments on the natural environment in this country: the Environment Act targets. That was the first time we have had statutory nature conservation targets in this country, which the Environment Act introduced and which become binding on government at midnight tomorrow night. We have to recognise that, if we have big bucks that are directed by the financial institutions and by investment, they absolutely have to tackle both climate change and nature conservation.
We should not look at this as a sort of dead-weight cost on the regulatory process or the financial markets because these investments in nature and climate are vital for our future economic growth. They are the heartland of our future economic growth; the jobs of the future are green jobs. We are behind the curve at the moment; the director-general of the CBI and others are all commenting that we are falling behind and losing our international competitiveness because we are not being vigorous enough in getting investment streams into climate change and nature. So we need the regulators to drive green growth and green investment really hard, for both net zero and nature recovery, to give businesses the confidence to invest.
These are very big bucks: the director-general of the CBI was absolutely clear that, in the past two years, the UK has lost its market share in green tech, which is equivalent to a potential value of £4.3 billion by 2030. Globally, an estimated $32 trillion of investment is needed by 2030 just to tackle climate change. So we are talking about big bucks, big investment, big jobs, big economy and big growth, and we were on it until a very small number of years ago. We have to get back on it to be able to hold our heads up in the international economic community.
So I hope that some of the things I have heard tonight are not government policy and that the Government are still absolutely clear about their commitment to action on the twin crises to turn them into opportunities. So, if the amendment moved by the noble Baroness, Lady Hayman, on regulatory objectives is not adopted, I ask the Minister at least to ensure that the regulatory principles reflect that commitment.
Baroness Bowles of Berkhamsted (LD)
My Lords, I had not intended to speak on this subject, but I very much agree with everything that has been said, especially by the noble Baroness, Lady Young, just now, about the lost opportunity if we do not take climate change and embedding it in financial services seriously. ESG investing is the big growth area at the moment, and what message are we giving if we say, “Well, we’re not really that interested in the ‘E’”? I am not sure about the “S” and the “G” either. We will potentially lose out.
It is not as if this will be an environmental tax on every business, or as if it has to be woven into every last little bit of financial services, like some chain round their neck. I spend some time looking at the general duties of the regulators, and, if I were to say anything about the positioning of this, I would say that it is not necessarily high enough up in the hierarchy because it is entirely forgettable within the layering that we have. I object to the notion that we are still in an era where we can do damage and compensate; you cannot compensate for a ruined planet. That is very much old thinking. It is almost centuries old in my book.
The FCA’s general duties state:
“In discharging its general functions, the FCA must, so far as is reasonably possible, act in a way which … is compatible with its strategic objective and … advances one or more of its operational objectives.”
What we are talking about here is a secondary operational objective, but the whole thing could be forgotten. If you ask me, it should be in the strategic objective, which is the only thing that cannot be rubbed out, because that is where we are at. We can go through this lovely list. Integrity gets rubbed out when it comes to SMEs—we have been through that debate—so climate things will be rubbed out if you want to be one of the rough-and-tumble financial firms that wants to deal with gas and oil exploration. Money is needed for that to work it all through and make sure that there are no stranded assets.
What is the big problem with what I would call a measly secondary objective? I understand the competitiveness and growth objective, which seems to be liberally sprinkled throughout to try to give it some kind of priority, but you have to balance that with sustainability in its broadest sense. All these things are about balance. We cannot have a Climate Change Act that says we will do things and then just ignore it in our biggest industry. It is the biggest case out there and we need something on it here. I will look at this again on Report and the Minister jolly well knows where I will put it.
Baroness Kramer (LD)
My Lords, this has been such an enjoyable debate, although I fear that the Government may not be listening as much as they should. When I first looked at this Bill, I was absolutely shocked that the word “sustainable” was not in front of “economic growth”. That seemed quite extraordinary in the era in which we live. It is a very old-fashioned, limited kind of approach that does not recognise the significant intertwining between finance, economic growth, the future of the planet and meeting our targets on climate change and protecting nature. It is extraordinary that it was removed.
I want to pick up the comments of the noble Baroness, Lady Lawlor, in particular. I disagree with her purpose but in one thing she is exactly right: as this Bill is currently written, that international competitiveness objective will largely drive us to try to compete with Asian financial centres that, frankly, could not give a single hoot about climate change and nature. That is why, frankly, the way in which the Bill is currently structured is so weak. As my noble friend Lady Bowles, who knows about this even more than I do, said, we have seen how the FCA deals with secondary operating objectives—I forget the exact phrase—in the past. Occasionally, it might pay attention to them if it suits it but they are certainly not embedded in its culture and do not light the core of its thinking or drive most of the decisions it makes.
I very much support the amendments led by the noble Baroness, Lady Hayman, and joined by others, as well as Amendment 69 in the name of my noble friend Lady Sheehan. However, I will talk in particular to two of the other amendments: first, that from the noble Lord, Lord Tunnicliffe, which asks, as the noble Lord, Lord Vaux, said, that we get this green taxonomy in our sustainable disclosure requirements fast because we desperately need that structure and strategic update.
This is in the context that the European Union already has its sustainable financial disclosure regulations; noble Lords may notice that the initials are exactly the same, bar one letter, which is part of my general concern in all this. Financial investors based in the UK are now using that as their template. As far as they are concerned, having to run one regime if they fall under EU regulations and a different one if they fall under UK regulations would be a nightmare. They are now wondering whether they are being pushed to choose between the two.
In its consultation on sustainable disclosure requirements, the FCA very helpfully provides a chart of how you can cope if you are trying to be under what is contemplated for the UK regime while also dealing with the EU regime. I honestly think that that is in there because the FCA thought that it would be helpful, but I recommend that somebody go and look at it, because it is a nightmare. You can see that it will be incredibly difficult and very costly for companies that work in both arenas to deal with these different alignments.
Lord Tunnicliffe (Lab)
My Lords, the debate this afternoon, not just on this group, has been around how this Bill will influence the future. One of the advantages of being old is that you do not have to look too far, because you know where you are going to be. That is not true for our grandchildren. The present progress on the environment is painfully, frightfully slow. All the stuff I read says that, if there is not a change—if not in direction, then in the commitment and energy we put in—the future for our grandchildren will be very grim.
The other thing that has come out of this debate is the recognition that we have to move beyond carbon. If we crack net-zero carbon by 2050 and do nothing else for all the parts of the green world—the world that should be green—then we will live on a virtually lifeless planet, and we will have lost so many things. There are so many other issues that have to be taken into account in shaping the world of the future.
What does that have to do with financial services? Some may argue that financial services are just about making money and so on, but the way in which people in the past have chosen to make money has had a profound effect on societies—some good, some pretty frighteningly bad—and financial services and the way society develops are intertwined.
I do not support all the amendments in detail in this group, but their direction surely speaks to the fact that financial services will influence the future. The hopeful thing about financial services is that they will be provided by young people. They will not be young when they get around to doing it, but they are young now, and young people grasp this crisis much better than we do. One or two of us in this Room are young but, in general, it is the teenagers and the 20 and 30 year-olds who are really taking this issue on board. They will be the investors and shareholders of the future, so it is right that, in this Bill, we give them the best possible basis for their desire to create a greener world. It has to be a global solution—they will want that to happen.
Our effort, Amendment 208, may be a good vehicle. The Government said that they will publish an updated green finance strategy, relating in particular to a green taxonomy and sustainability disclosure requirements. The concept of a green taxonomy will have the same impact that universal financial reporting standards have had in improving the clarity with which you can look at enterprises. While it remains unregulated, the statements that companies make—especially those that are true—are diluted by the fact that nobody understands the terminology. Only when we bring the descriptions together—at least nationally and ideally internationally—will we start to shape the way that society develops and allow finance, which is so important in creating direction, to play its part.
I commend Amendment 208 to the Committee. Ideally, we should be going with the grain, because Ministers are committed to producing a financial strategy. We are told over and over again in some places—including, I believe, in the other place—that we might expect it imminently. Can we have some clarity about the Government’s commitment? I hope that in doing that, they will see the importance of a green taxonomy and that we can get this in hand and play our small part in what it is not overstating it to call saving the planet.
Baroness Penn (Con)
My Lords, the Government recognise and understand the importance of supporting the growth of sustainable finance in the UK. Indeed, it is because of the importance that Parliament, the Government, the regulators and industry have collectively applied to these issues that London ranks, once again, as one of the leading centres in the world for green finance in the Z/Yen global green finance index. The Government are committed to further strengthening the UK’s financial services regulatory regime relating to climate, which is why Clause 25 introduces a new net-zero regulatory principle for the FCA and the PRA.
Amendments 44, 53, 56, 62 and 68 seek to go further by introducing a secondary objective for the regulators to facilitate alignment of the UK economy with commitments outlined in the Climate Change Act and the Environment Act 2021. Similarly, Amendment 69 seeks to extend the new net-zero regulatory principle to also include nature, and Amendment 69A seeks to oblige the financial services regulators to have regard to a range of environmental concerns beyond the net-zero commitment.
It is important that we consider the regulators’ objectives, secondary objectives and regulatory principles in the round. The FCA and the PRA are required to advance their objectives when discharging their general functions. The FCA’s strategic objective is to ensure that relevant markets function well. Its operational objectives are to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers. The PRA’s general objective is promoting the safety and soundness of PRA-authorised persons. It also has an insurance-specific objective of contributing to the securing of an appropriate degree of protection for those who are, or may become, policyholders. The PRA also has a secondary objective to facilitate effective competition.
As we have discussed, the Bill provides a secondary growth and competitiveness objective for both the FCA and the PRA. The Government consider that alongside these core responsibilities, it is right that the regulators can act to facilitate medium to long-term growth and international competitiveness, reflecting the importance of the sector as an engine of growth for the wider economy and the need to support the UK as a global financial centre. This proposal received broad support through the FRF review consultation.
These objectives are underpinned by a set of regulatory principles which aim to promote regulatory good practice and set out the considerations that the FCA and the PRA are required to take into account when discharging their functions. The regulators’ primary focus must be to ensure the safety, soundness and integrity of the markets they regulate. While the Government expect that regulators will play a crucial role in supporting the achievement of the Government’s net-zero target, it is not their primary responsibility given that many of the levers for change sit outside financial services regulation.
Having said that, we should not underestimate the significance of Clause 25, which will embed in statute consideration of the UK’s climate target across the full breadth of the regulators’ rule-making and therefore support the Government’s action and ambition to transform the UK economy in line with their net zero strategy and vision.
As noble Lords have noted, the legislation creates a clear hierarchy. However, it is not simply the case that issues relating to climate change will be addressed only through the new regulatory principle. The Government’s view is that consideration of climate is already core to the regulators existing objectives: both safety and soundness for the PRA and market integrity for the FCA.
The Government expect that this will also be the case for their new secondary growth and competitiveness objective. Indeed, the recent recommendation letters from the Chancellor to the FCA and the PRA, published as part of the Edinburgh reforms, set out the Government’s view that delivering net zero is part of the wider economic policy objective of achieving strong, sustainable and balanced growth. This means that the new regulatory principle will ensure that where there are broader issues relating to climate change that are not captured within their existing objectives, the regulators will be required to give them specific consideration, where appropriate, in taking forward their general functions.
Regarding consideration of nature issues, the Environment Act 2021 provides a framework for setting the definitions of the Government’s future targets in this space. Noble Lords will recognise that work is ongoing to understand the interaction between these targets and the work of the financial services regulators, which is not yet clear. The Government consider that it would therefore not be appropriate to place such a requirement within the FiSMA regulatory principles without this clarity. However, I reassure noble Lords that there are clear examples of how the FCA and the PRA are supporting the Government’s work on nature under their existing objectives.
The Government and the financial services regulators are active participants in the work of the Taskforce on Nature-related Financial Disclosures, which aims to help organisations to report and act on evolving nature-related risks. The UK is its largest financial backer. We are also committed to the International Sustainability Standards Board process, which will deliver a global baseline of sustainability disclosures that meet capital market needs, while working to decrease systemic environmental risk. These standards are expected to address aspects of the natural world beyond greenhouse gas emissions. The Government will continue to consider bringing these standards into any UK disclosure framework as they achieve global market consensus.
Baroness Hayman (CB)
My Lords, I am extremely grateful to everyone in Committee who has taken part in this debate. I expected it to be an argument—that did indeed take place and filled much of the Minister’s response—about the hierarchy of objectives and missions that the regulators should employ in meeting an agreed agenda for our financial services to be part of growth, to be central and, indeed, to be world leading. I have no problem with world leading. World beating always worried me, but world leading I am absolutely happy with. I am happy with the aspirations of the now Prime Minister, then Chancellor, in this field.
However, the debate went beyond whether the regulatory principle was enough to do what the Minister agrees should be done and it questioned—the noble Baroness, Lady Lawlor, did this—whether it should be a smaller objective in the first place and whether it was the right strategy to pursue. It was very useful having that debate opened up. In response, the noble Lord, Lord Vaux, spoke eloquently on this issue, but there are three things that I want to say to refute, if you like, the arguments put forward.
One is that this is not a little-Englander debate. It is absolutely a global debate; it is absolutely because other countries are investing in these areas and want their financial centres to be the lead that we are talking about finding the right regulatory framework to allow us to go forward.
I also bridled a little at the suggestion that what we have put forward in these amendments is vague. I have to say that, in terms of definition, my amendments, referring to the targets under Section 1 of the Climate Change Act 2008 and in Part 1 of the Environment Act 2021, are very specific and, might I even say, slightly more specific than “growth” and “competitiveness”—and slightly better defined.
The last thing I will say perhaps mirrors something that the noble Lord, Lord Tunnicliffe, said. The other criticism was that in these amendments we were somehow chasing a picture of an ideal world. Would it were so. We put forward the case for taking strong action on climate and nature because we have a vision not of an ideal world but of a world that is far from ideal and highly dangerous economically and in all other ways for us, our children and grandchildren.
I think we will return to this issue on Report but, for now, I beg leave to withdraw my amendment.