Financial Services and Markets Bill
Monday 6th February 2023
(1 year, 10 months ago)
Grand CommitteeFinancial 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-IV(b) Amendments for Grand Committee (Supplementary to the Fourth Marshalled List) - (6 Feb 2023)
Lord Moylan
“(3A) In section 2B (PRA’s general objective), insert—“(3A) In advancing its general objective, the PRA must act so as to minimise barriers to the wider ownership of regulated investments by the general public consistently with its general objective in subsection (2).””
Lord Moylan (Con)
My Lords, I will also speak to Amendment 241, also in my name. I hope this will be the least controversial mini-debate on the Bill, because I do not think anybody in the Committee is other than opposed to financial exclusion. We favour financial inclusion, especially in a modern digital age. What is normally meant by financial inclusion is the opportunity for people of limited means or living in marginalised circumstances to participate in the financial and banking system—something that is all the more necessary now that people are so dependent on access to it, not least for benefits but also for other, ordinary means of getting about in life and so forth. Who can be against that? A number of amendments in this group tend towards strengthening the obligations on the regulators to promote financial inclusion, and I am happy to lend my general support to them.
Amendments 55 and 241 in my name relate to a different sort of financial exclusion that has grown up over the last 25 or 30 years: the general tendency to exclude the retail investor from the opportunities to invest in regulated products. For example, we have gone from a situation 30 years ago where it was possible to buy gilts—UK government bonds—at the Post Office, or to bid for new issues of gilts at an average price through cutting out a coupon in the newspaper, to a situation where it is very difficult for ordinary people to buy government bonds.
In the case of highly rated corporate bonds, an EU regulation incorporated from its prospectus directive has set the minimum denomination of new issues of bonds at €100,000, which we have applied of course. The result is that very few sterling bonds are in denominations small enough for ordinary investors to buy, and even they are long-dated issues that are running off, so soon there will be no more unless we take some action.
The days of Sid are long gone. Nowadays, when companies do new share issues—what have come to be known as IPOs, initial public offerings, or even subsequent offerings—corporate treasurers are simply uninterested in engaging with retail investors, partly because the burden of additional regulation involved deters them from doing so. Shares are generally placed in private placements with institutional investors, because it is easier and quicker—no room for the retail investor.
There have been two reasons for this. The first is overcaution on the part of regulators. They feel responsible for regulated investments, so they do not want anyone to lose any money unless they are a really big player. The easiest way of preventing smaller players such as retail investors from losing money and complaining is to prevent them from investing in the first place. The second is the reluctance of corporate treasurers to engage with the retail market, because they have no incentive to do so, only additional burdens.
This might have been motivated by a good sentiment for protecting investors, but the results have been completely perverse. Nothing prevents retail investors investing in unregulated investments, so we see people out there quite freely putting their money into spread-betting; contracts for difference, which are similar to spread-betting; and even some things misleadingly known as mini-bonds, on which they regularly lose their shirts. Indeed, one issue of mini-bonds, from London Capital & Finance, was unregulated; it was ambivalent whether or not the regulator had actually regulated it. Noble Lords will recall that, last year, we had to pass a special Act of Parliament to allow the Treasury to indemnify those investors, because they had potentially been misled on the legal position. The core point is not that we had to indemnify them; it is that they were perfectly able to invest and to lose their shirts. But we stopped them—regulators and the circumstances prevent them—from investing in much safer, regulated products.
Amendment 55, in my name—I am grateful for the support of my noble friends, Lord Trenchard and Lord Naseby, and the noble Baroness, Lady Kramer—puts a new objective on the Prudential Regulation Authority to ensure that, as part of its work, it aims to minimise the barriers to retail participation in regulated products in the financial market.
Amendment 241 deals specifically with the narrow point that denominations of corporate bonds are required at the moment to be a minimum of €100,000 and replaces that with what we were used to many years ago, by having £1,000. That would make them accessible to retail investors.
I have had conversations with brokers—and I am grateful for them—who deal with retail investors in the City. I know that they are already in contact with the Treasury and that the Treasury is sympathetic to these arguments. There is nothing in what I say that will come as a surprise to the Minister, and I hope that, when she stands up, she will say many warm words in support of both my amendments, which I would appreciate. But I am concerned that there should be more than simply warm words and unbankable promises about what regulators might be asked to do in the future, so my inclination at the moment is that legislation would be a jolly good way forward. I beg to move.
Viscount Trenchard (Con)
My Lords, I declare my interests as a director of two investment companies, as stated in the register. I support my noble friend Lord Moylan in his Amendments 55 and 241, to which I have added my name. My noble friend has explained the purpose of his amendments very well and he spoke persuasively on this subject at Second Reading.
I was involved in much of the privatisation programme of the 1980s, and the Government’s efforts to increase the shareholder base, especially the retail shareholder base, were rather successful. Regulation has increasingly stymied retail investors’ ability to buy equities and bonds since that time, and I strongly support my noble friend’s wish to bring back Sid. New issues of equities used to be widely available to retail investors, but additional regulatory requirements now discourage corporate treasurers from including retail tranches in public offerings.
Amendment 55 requires the PRA, in advancing its general objective, to minimise barriers to wider securities ownership. This will create a better balance of factors, which it must take into account without in any way weakening the stability of the UK financial system.
As my noble friend mentioned, the prospectus directive is a strong candidate for early reform, in particular its requirement for a minimum transaction amount in a corporate bond issue of €100,000, which obviously excludes most retail investors from the market.
I also support Amendment 241, for the reasons that my noble friend has well explained to the Committee.
My noble friend Lord Holmes of Richmond proposes a new financial inclusion objective for the FCA. I welcome the steps that the Treasury and the DWP have taken to support financial inclusion. Could my noble friend the Minister tell the Committee how the welcome decision to release £65 million of dormant assets funding to Fair4All Finance has improved access to fair, affordable and appropriate financial products for those in financial difficulty? How do the Government intend to honour their commitment to protect the long-term viability of the UK’s cash infrastructure as we move inexorably towards a cashless society.
The Money and Pensions Service, in its national well-being strategy published in 2020, set out an agenda for change containing various ways in which to help people manage their money more effectively. I welcome this and other steps that the Government are taking in this area. I am also mindful of the fact that the Government have legislated to create a consumer financial education body, and I ask my noble friend what plans the Treasury has for that body. I welcome what is being done, and I am not sure that it is sensible to give a further objective to the FCA in this area, because it would dilute the attention that the FCA must give to its existing objective and two new ones—both the one already included in the Bill, the competitiveness and growth objective, and that proposed by my noble friend Lord Lilley, the predictability and consistency objective.
I also have sympathy with Amendment 75, in the name of the noble Lord, Lord Tunnicliffe, on financial inclusion, and I look forward to what he has to say. When I look at the matters to which the FCA must have regard in furthering its consumer protection objective, I am surprised that retail investors are allowed to invest at all. I am not sure that Amendment 75 would help reduce the barriers to market participation by ordinary investors.
I have sympathy with Amendment 117, because I think it will help if the FCA has a duty to address the issue. But I cannot support Amendment 228 in the name of the noble Baroness, Lady Kramer, because it may unfairly prescribe a bank’s ability to decide within reason the businesses that it wants to undertake, and its obligations to its shareholders and depositors to invest their money wisely. I am also not sure how the noble Baroness would define low-income communities. Our markets have been adversely affected both by the impediments to new authorisations and by unwarranted restrictions on the businesses of licensed banks. The result of this is often the reverse of what is intended, by dissuading new entrants from seeking authorisation, which negatively affects competitiveness and consumer choice.
Lord Tunnicliffe (Lab)
I rise to speak to this group, particularly my Amendments 75 and 117. The group contains the important amendment which would give the FCA a “have regard” duty for financial inclusion within its existing consumer protection objective. The FCA’s and the Government’s argument is that its consumer duty means that it does not need a financial inclusion “have regard”, but there is a fundamental difference between the two. A consumer duty deals with people who are able to access products. I want to know how the FCA—and, incidentally, the Government—will be required to consider those who are not yet consumers.
We are not arguing for a new primary or even secondary objective, and very much want to wait for the outcome of the FCA’s consumer duty work. A “have regard” duty is the proportionate approach to ensure that those who are currently excluded are supported to become consumers and begin to benefit from the new consumer duty that we have heard so much about. We are not being radical or party political in this; we have Lib Dem and Cross-Bench support for Amendment 75. Nor are we alone: the Phoenix Group, a FTSE 100 company, is also arguing for the FCA to have regard to financial inclusion.
I hope that the Minister will consider this amendment favourably and, if she does not, I want to know why not, and what the Government will do to tackle financial inclusion issues, including the poverty premium—the fact that people who can pay for things only monthly rather than in an annual lump sum pay more.
We also have in this group Amendment 117, which
“would require the FCA to report on financial inclusion”
yearly. Perhaps the Minister would value having evidence on how to fix the manifold problems in this area, enabling HMT and stakeholders to feed in too.
Lord Naseby (Con)
My Lords, I thank my noble friend Lord Moylan for tabling these amendments and digging fairly deep in this area. There is a lot happening in the City of London and in the whole financial world. There are opportunities for people who want to stay but, at this point in time, the windscreen is pretty misty as to what exactly is out there and whether or not it is regulated. What my noble friend has done is draw attention to this important area.
I talked to my two granddaughters, who take an interest in financial affairs, about what they think about their savings. What is interesting to me is that, for sixth-formers today, maths is absolutely key to their progress. Secondly, somebody is making them take an interest in their futures. That says a lot.
I support Amendment 55; I am very much behind it. I should mention—I think the Committee already knows this—that I have been deeply involved in the mutual movement, which wants to go into new waters to look at what is available and sensible within its clienteles. The same applies to the credit unions.
Noble Lords have spoken about financial inclusion. It is very important. However, I am not sure that there needs to be a report every 12 months. I can see that it should be so initially, but it seems like quite a burden on the authority to produce what I assume would be a long and detailed report.
As regards Amendments 228 and 241, I will wait to hear what my noble friend the Minister says but, in my experience, the joint-stock banks and anything with the Royal Bank of Scotland are in a pretty disastrous state at the moment. Branch after branch is being closed. People are not answering the phone. Emails are not being responded to. The banks do not even tell us when a branch will be closed; they forget then apologise afterwards. It is an absolute, unmitigated disaster; I hope that my noble friend on the Front Bench will try to get a grip on it.
I make no comment on Amendment 241 other than to say that I am really interested to hear the answer on it from my noble friend on the Front Bench.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in day 4 of the Committee’s deliberations on the Bill. I declare my financial services interests as set out in the register.
I agree with all the amendments in this group. My noble friend Lord Moylan’s amendments are clear, and I ask my noble friend the Minister to answer him in the affirmative when she comes to respond and to say that legislating in this area would be helpful on whatever agenda it was measured against. He also reminded us of Sid, who was the poster child for British Gas. It seems only appropriate, in that I find myself sitting next to a former prima ballerina, for me to say that I seem to remember BT using the music from “Swan Lake” for its initial public offerings—all to the good. It must be right that people have an opportunity to take part, with all the correct safeguards and rails around it, in these activities. I very much support Amendments 55 and 241.
Similarly, I support the amendments around the “have regard” duty for the FCA. My noble friend the Minister will be familiar with these arguments; we talked about them very much in our debates on the 2021 Bill, now an Act. We have had Oral Questions and Written Questions on the subject, so she will be well rehearsed in her answer on a “have regard” duty.
For this reason, I tabled Amendment 67A. It is time for the FCA to have a financial inclusion objective. That is in no sense to fetter the regulator’s independence or existing objectives. The financial inclusion objective could only be additive and assistive to its existing objectives on consumer protection, market integrity and competition, and to any potential future objectives as set out in the Bill.
Following the intervening two years since we last discussed financial inclusion in detail on the 2021 Bill, are there now more or fewer bank branches and ATMs? Is there more or less cash acceptance and financial inclusion? Whatever government agenda we consider—growth, levelling up, or increased connectivity and creativity for our citizens, communities, cities and country—a financial inclusion objective for the FCA makes sense. Will my noble friend agree that it is now time to enable the FCA to play a spearheading role in financial inclusion, and to accept Amendment 67A?
Baroness Tyler of Enfield (LD)
My Lords, as this is my first intervention in Committee, I refer to my interests in the register as a member of the Financial Inclusion Commission and as president of the Money Advice Trust.
I will speak to Amendments 75 and 117 in the name of the noble Lord, Lord Tunnicliffe, to which I attached my name, and Amendment 228 in the name of my noble friend Lady Kramer, to which my name is also attached. I also support Amendment 67A in the name of the noble Lord, Lord Holmes, who we have just heard from. Indeed, I would have been pleased to add my name to his amendment had I been able to do so.
In its 2017 report, the House of Lords Select Committee on Financial Exclusion, which I had the privilege to chair, recommended on a unanimous, cross-party basis that
“the Government should expand the remit of the FCA to include a statutory duty to promote financial inclusion as one of its key objectives.”
These key recommendations were reiterated in the 2021 follow-up Liaison Committee report, so this issue has been around for quite a long time. In my view, the Bill is an excellent opportunity finally to make some progress.
Amendment 75 would mean that the FCA must “have regard” to financial inclusion in the consumer protection objective. Amendment 117 would insert a statutory duty to report to Parliament annually on the state of financial inclusion, measures that the FCA has taken, and any recommendations to the Treasury that the FCA wants to give. I know some have argued that that would be onerous. I see it as adding a critical layer of parliamentary scrutiny and accountability to discussions on financial inclusion—something, frankly, that is sorely lacking at the moment. It has been a key theme of many of our deliberations on the Bill.
Whether through a primary duty, as in Amendment 67A from the noble Lord, Lord Holmes, or as a must “have regard” duty, as in the amendment from the noble Lord, Lord Tunnicliffe, such a duty would directly remedy the fact that the FCA’s consumer duty, which we will look at in a later group, deals primarily with existing customers—a point made by the noble Lord, Lord Tunnicliffe. The consumer duty does not address the needs of the customers whom the market views as more expensive and less profitable to serve and who are therefore excluded from the market.
This proposed new duty would also future-proof policy decisions made after the Bill passes. This would ensure that financial inclusion issues, such as free access to cash, which featured so heavily in our Second Reading debate, are dealt with as they emerge rather than dragging on for years, resulting in a race against time before the cash delivery infrastructure disappears completely.
Our previous debates on people’s need to have free access to their own cash are an excellent example of how the regulator is currently unable to act early on such financial inclusion issues, because they are viewed as outside its remit. The heart of my argument is that, by giving the FCA a cross-cutting “must have regard to” duty, with a requirement to publish findings, it will have the ability, and perhaps more importantly the incentive, to ensure that the needs of those currently denied access due to affordability issues are considered.
Why is this so important? Briefly, in a competitive market firms will naturally design a market around the people who are the most profitable. Certain consumers—we need to be honest about this—are seen as not desirable. These consumers tend to be those who are the most vulnerable and equipped with the least resources. That has consequences for those on the lowest incomes: they struggle to afford or have to pay extra for particular services or products and, if they cannot, they are often unable to access these products at all and are therefore excluded altogether.
Essentially, these amendments seek to remedy that harm. We have already heard a couple of examples of this: some people are paying more for insurance because of where they live, and some are excluded from credit or are paying more for credit due to their credit rating or, frankly, because they cannot benefit from direct debits or they need to use cash. We all know what has happened with the terrible scandal of forcible entry to install prepayment meters.
I will finish by talking briefly about the black hole between the FCA and the Treasury, and why what are seen as social policy issues too often fall through the cracks. That point was repeatedly made by witnesses giving evidence to the Select Committee. In essence, the problem is that industry is just not providing products to meet the needs of all consumers, and some customers it will never be profitable for the industry to serve. If consumer representatives take the issue to the Treasury and the FCA, the Treasury says that it requires more data to act. It sends consumer representatives to the FCA, which says that it is not its responsibility to investigate issues that touch on social policy, so it sends consumer representatives back to the Treasury. That is a totally Catch-22 situation.
It is not just people like me banging on about this. I was very pleased to speak last week to a senior representative of Phoenix, a FTSE-100 company focusing on savings and pensions, which is also calling on government to add a new regulatory principle so that the regulations must have regard to the need to tackle financial inclusion. I thought it was very telling that the company saw this as critical to the growth agenda.
I want to explain briefly why I have added my name to Amendment 228 in the name of my noble friend Lady Kramer. It very ingeniously adds a clear financial inclusion element to the authorisation or renewing of a bank’s licence, while requiring the FCA to have regard to a bank’s services to low-income communities. Major banks, frankly, have had little interest in people on low incomes and were, in my view, dragged pretty reluctantly into having basic banking accounts. That has got a bit better but not an awful lot. If we use bank licences, that gives banks another way to provide such services by supporting credit unions and community banks—institutions that are often better placed to provide banking that is properly tailored to low-income and excluded people.
There is a lot of scope for expansion here. The UK has a far smaller community bank and credit union sector than many other countries. I will not go through all the figures, but certainly the penetration rates in the USA, Canada and Australia are far bigger. Having this sort of arrangement in place is also very much linked to people's desires to have continuing access to face-to-face services, something that we have heard so much about, particularly from the excluded groups, older people and others. Although the banking industry has made some limited progress in addressing this issue, particularly through the launch of shared banking hubs, it has, frankly, been pretty glacial so far. As this amendment so cleverly says, however, there are other things that banks can do to ensure the provision of services, including face-to-face services in low-income communities, and that is why I support it.
Baroness Bull (CB)
My Lords, I will speak to Amendment 75, to which I have added my name, and in support of Amendment 117, which complements Amendment 75 by looking to provide greater clarity and transparency on how financial inclusion issues can be effectively tackled in future. The noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Tyler, have said all there is to be said, so I will be very brief. I also support Amendment 67A in the name of the noble Lord, Lord Holmes of Richmond, which makes many of the same points.
Lord Davies of Brixton (Lab)
My Lords, I will speak to Amendment 55. I broadly support the other amendments on financial inclusion and will perhaps say a bit more about that aspect when discussing the amendments in later groups. I thank the noble Lord, Lord Moylan, for explaining many of the points on which I had questions about his amendment, although I am still unclear what is covered by the term “regulated investments”. I do not think it is defined in the legislation, so perhaps it could be clarified.
I want to add a note of caution. I am not against the idea—obviously, it is motherhood and apple pie, and we are all in favour—but our old friend shareholder democracy is coming up again, and we should recognise that it has a political subtext. The truth is that, unfortunately, that ship has sailed, the bus has left the stop and it has gone the other way. Quite rightly, reference was made to our old friend Sid: the “Tell Sid” campaign was a masterpiece of promoting a policy that has had a lasting legacy, but that legacy has not been greater share ownership—greater ownership of regulated investments. In fact, we have seen the reverse, as the noble Lord mentioned in his introductory remarks. The whole thing has gone into reverse such that now, according to the ONS, only 12% by value of UK shares, for example, are owned by individuals, with the majority of shares owned by overseas entities. It is true that other shares are owned through other bodies, such as pension funds and unit trusts, but, in total, that is less than 10%, which I do not believe provides the individual holders with any sense of ownership.
There are many reasons for the shift away from individual ownership, and I think the attitude of the regulator is only a very minor part of it. In a sense, the objectives set out in the amendment have been overwhelmed by bigger forces. There are many reasons why people do not have individual ownership; many people are too poor and simply do not have the money. Even those who have some money in savings—this is a bit of a caricature—have it for rainy days. Regulated investments are not necessarily, depending on the definition, the best place to put your rainy day money.
My concern is the extent to which this amendment suggests it is advisable for people to use their money in this way. It would be very unfortunate and of great concern—perhaps the noble Lord can give me an assurance on this—if the regulatory bodies by implication were providing investment advice. I certainly do not think investment advice belongs in an Act of Parliament.
Baroness Twycross (Lab)
My Lords, I declare an interest as London’s Deputy Mayor for Fire and Resilience, as risks associated with access to cash were noted as a risk to financial inclusion in the London City Resilience Strategy published in 2020.
I am grateful to my noble friend Lord Tunnicliffe and the noble Baroness, Lady Tyler, for allowing me to add my name to their excellent Amendment 117 on financial inclusion. I will speak particularly on digital inclusion. The other signatories have already outlined in much better words than I could why this amendment is required. This amendment would ensure that the heart of this legislation takes account of the needs of the most vulnerable and that we have the opportunity to mitigate the risk that a significant minority of the population may be unwittingly left behind or excluded from crucial financial services. This amendment would be an important addition to the legislation. I agree with my noble friend Lord Tunnicliffe that this is not party political. It is a really sensible and pragmatic measure which should afford significant protection.
On financial inclusion, I ask noble Lords to note specific issues of digital inclusion. This relates to financial inclusion as, without access to a smartphone or computer, it is almost impossible to carry out online banking or transfer money to a family member or a business.
I apologise for using a string of statistics, but beneath them there is a significant minority of the population whose stories and suffering because of financial exclusion often get missed. These people may be unable to access basic banking services online, relying heavily on cash or even cheques, and may struggle to pay for very basic things we all take for granted—for instance, automated parking.
Latest figures from the ONS estimated that, in January to February 2020, 96% of households in Great Britain had internet access. This increased from 93% the year before and 57% in 2006, when comparable records began. Although this number is increasing, and statistically it looks as if there is not a huge number of people without internet access, in the same period 76% of adults were using online banking. This leaves a significant minority who still do not. Estimates suggest that over 7 million adults in the UK—around 14%—could be classed as potentially financially excluded, with around 5.8 million having no record of an open or closed bank account. There are well over 600,000 people who could be classed as credit invisible, with the issues that causes for affordable credit.
Digital exclusion’s effects fall disproportionately, and research by the Centre for Social Justice has found that digital exclusion is significantly higher among those on the lowest incomes. It has a disproportionate impact on those who can least afford it. A fifth of adults with a household income below £15,000 are digitally excluded, compared to just 1% of those with an income of £50,000 or more. In turn, this adds to the poverty premium they already pay, as they cannot access the best prices or deals. This poverty premium, which has already been mentioned in this debate, includes borrowing and other financial services, so the proposed duty to be placed on the FCA would ensure that it, as well as the Government and the banking sector, can act to mitigate the risks posed by increasing digitalisation of the sector.
I note that technology often moves faster than we can imagine, Covid changed behaviours that now cannot be unchanged, and any duties imposed on the FCA in relation to financial exclusion will need to assume that the discussion about cash versus card that we are currently having will move to card versus phone, as well as include other technological approaches. Ensuring that the FCA has oversight over that would provide additional protection for the most vulnerable in our society, and I hope the Minister sees the merit of safeguarding which this amendment would provide and agree to include it in the Bill.
Baroness Kramer (LD)
I shall combine speaking as a winding speaker with addressing the amendment that sits in my name. I added my name to the two amendments from the noble Lord, Lord Moylan, Amendments 55 and 241. Like him, I am very conscious of many of the recent scandals we have seen—he mentioned London Capital & Finance, but there is also Blackmore Bond and mini-bonds, to mention just two of the most recent. They were fuelled by ordinary investors looking for improved returns. I would hope that with easier access to regulated markets, which typically come with information and analysis by independent entities such as the rating agencies, an investor would be far less likely to fall into unscrupulous hands. That is a consequence that neither the regulator nor the Government have been fully aware of. They are always surprised when an unscrupulous product appears, and they should not, given the general track record.
I also join the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Tyler, in their amendments to insert at least “have regard” for financial inclusion and for proper reporting on financial inclusion. I also support Amendment 67A, in the name of the noble Lord, Lord Holmes, to turn that into an objective.
My biggest gripe with the FCA on the financial inclusion agenda is that it is passive. If a new product or organisation were to come forward serving part or all of that community, it would of course appropriately regulate it. The problem is that it does not use its incredibly powerful and influential role as a regulator to spearhead the actual change—to pick up the words of the noble Lord, Lord Holmes. It does not, for example, ask the competition to come up with a product or even look at mechanisms such as bank in a box, which is very popular across the globe. That makes it very easy for new entities to come to market, because the whole core regulatory piece comes off the shelf. That changes the dynamic dramatically. It does not take the initiative and, until it does, I can see that no one else will.
All of that in a sense leads me to my Amendment 228. Others have talked about the intractable problem of financial inclusion, and I suspect that many in this Room, like me, have been to round table after round table, meeting after meeting, conference after conference, with banks, credit unions, mutuals, fintechs and civil society groups to hear proposals for cracking the financial inclusion problem. Year after year, it is the same conversation, with relatively little headway. Others may correct me, but the number I have is that we still have 1.2 million people without a bank or credit union account, and in modern society that means that you simply cannot function.
I have huge respect for credit unions; I am delighted that there are amendments to support them and mutuals in the Bill. However, only 1.4 million people in the UK actually use them. That is a fraction of those who could benefit. Other forms of community development financial institutions are scattered, tend to be small and have limited scope. Local and community banks, as well as the old savings and loans, have largely been absorbed by the high street banks. In turn, as others have said, they have rapidly closed branches and anyway rely on a centralised system of decision-making that does little for local businesses or circumstances; we saw that graphically after the 2007 crash. There is a regional mutual bank movement—the noble Lord, Lord Holmes, addressed this in our debate on a previous set of amendments—that is trying to build, but the lack of capital is a major hurdle. Again, my noble friend Lady Tyler referred to the banking hub scheme driven by the access to cash task force, but it is growing exceedingly slowly.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I will speak first to Amendments 55 and 241, tabled by my noble friend Lord Moylan, before turning to Amendments 67A, 75, 117 and 228, tabled by my noble friend Lord Holmes, the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Kramer.
On Amendments 55 and 241, I am happy to report that action is already being taken to reduce barriers for retail investors, while ensuring that appropriate consumer protection measures are in place. The Government are reforming the UK prospectus regime through the powers that are being legislated for as part of this Bill. These reforms will remove barriers to retail participation in equity and bond markets by removing the duplication and disincentives that exist in the current regime. Additionally, the reforms will require the FCA, as the responsible regulator, to have regard to the desirability of offers of securities being made to a wide range of investors when making rules in this area.
Separately, the Government appointed Freshfields’ partner Mark Austin to lead the secondary capital raising review and have accepted all his recommendations addressed to the Government. One of the objectives of the review was to promote retail shareholders’ inclusion in further issuances by listed companies. I assure my noble friend that this is not jam tomorrow; the reforms to the prospectus regime are set out in a draft statutory instrument published alongside the Edinburgh reforms. Taking that SI forward is part of the first-priority tranche of work that will happen once we have passed this legislation. We have a very clear plan.
The remaining amendments in this group relate to promoting financial inclusion through a different lens from that put forward by my noble friend. The Government seek to ensure that people, regardless of their background or income, have access to useful and affordable financial products and services. We work closely with regulators and stakeholders from the public, private and third sectors to improve people’s access to useful and affordable financial services, and we are taking a significant step to protect the most vulnerable by legislating to protect access to cash through this Bill—something noted by my noble friend Lord Trenchard and others.
Amendments 75 and 67A, tabled by the noble Lord, Lord Tunnicliffe, and my noble friend Lord Holmes, respectively, seek to add financial inclusion to the FCA’s objectives. While I commend these amendments and agree with their intention, the FCA’s objectives are core to its functions and should not be changed lightly or without detailed consultation, given the complexity of, and the risk of unintended consequences for, the way financial services are regulated in the UK.
Where there are gaps in the market that mean that some consumers struggle to access appropriate financial products, it is right that the Government, not the regulator, take the lead on action to address them. The Government have done this by, for example, requiring major banks to provide basic bank accounts for those who might otherwise be unbanked.
The FCA plays an important role in supporting this work. In his evidence to the Public Bill Committee, Sheldon Mills, the executive director of consumers and competition at the FCA, highlighted the proactive approach that the FCA takes on this issue, in line with its existing objectives, working in partnership with Fair4All Finance and others, and using the FCA’s innovation labs to explore how innovation can promote financial inclusion.
Amendment 67A also highlights the important issue of the accessibility of financial services products. I know that my noble friend Lord Holmes is a champion of consumers in this area. I agree that it is important that this continues to be an area of focus for industry. I am pleased that UK Finance has been working closely with the Royal National Institute for the Blind to develop accessibility guidelines for touchscreen chip and pin devices, as well as an approved list of accessible card terminals. The Government’s Disability and Access Ambassador for the banking sector, Kathryn Townsend, is encouraging firms to drive a more consistent consumer experience, as well as continuing engagement with deaf advocacy groups to identify opportunities for improved accessibility. The Economic Secretary will shortly convene the next Financial Inclusion Policy Forum with senior representatives from across financial services and the third sector, which will include a discussion specifically on accessibility in financial services. I hope that this provides reassurance that the Government are taking this issue seriously.
Amendment 67A raises financial literacy. My noble friend is right to recognise the importance of financial literacy, and financial education forms part of a broad and balanced school curriculum. However, it is the Government’s view that delivery of financial literacy in primary and secondary settings is a matter for government, rather than for the financial services regulator.
The amendment refers to digital inclusion, an issue also raised by the noble Baroness, Lady Twycross. Again, we absolutely recognise that digital skills and access to technology are increasingly required to take full advantage of services made available by financial services providers. Some examples of action in this space are that the DCMS has negotiated a range of high-quality, low-cost broadband and mobile social tariffs for those in receipt of universal credit and other means-tested benefits. Libraries are also a key focus, able to serve as an alternative point of internet access with in-person support. The digital entitlement allows for adults with no or low digital skills to study for new essential digital skills qualifications for free. There are also banks and financial services providers taking their own action to promote digital skills with their customers.
Amendments 67A and 117 would require the FCA to report on financial inclusion, but that would largely duplicate existing publications, including the FCA’s annual reports, its comprehensive Financial Lives Survey, and the Government’s financial inclusion report, which details joint work with the FCA to promote financial inclusion. On digital inclusion specifically, Ofcom’s latest data on digital equality was published on 30 January.
Finally, I turn to Amendment 228, tabled by the noble Baroness, Lady Kramer. While I sympathise with the intention of the amendment—and I hope that I have set out some of the ways in which the Government are seeking to tackle some of the issues that the noble Baroness raised today—it has the potential for unintended consequences which could harm consumers. As part of the authorisation process, the regulators already take into account a range of different objectives, such as promoting effective competition in the interests of consumers, including those in low-income communities. Adding additional complexity to the process of acquiring a banking licence could create barriers to entry and therefore harm the consumers we are trying to help by reducing the provision of services in the market and limiting competition.
As I have noted already, there are other policies in place which will do this without creating potentially burdensome expectations, particularly on new entrants to the market—for example, through the provision of basic bank accounts. We have also taken action to increase the provision of affordable credit for vulnerable consumers, including those on low incomes, such as providing £3.8 million of funding to pilot a no-interest loan scheme.
I hope that I have set out for noble Lords the wide-ranging government work on the issue of financial inclusion—
Lord Tunnicliffe (Lab)
My Lords, it is obvious that there is a problem, because virtually everybody has spoken to a problem and said that it must be addressed. It seems to me that the speech the Minister just made was that it is all right, because all these things that the Government are going to do will make it all right. The beauty of the amendments that have been put forward is that somebody is expected to do something. If government has such an important role, who in government will be personally responsible for delivering the improvement that we all seek?
Baroness Penn (Con)
In government, the Financial Inclusion Policy Forum is jointly chaired by my honourable friend the Economic Secretary to the Treasury and a Minister from the DWP; I will confirm who to noble Lords, because I would not want to get it wrong. That is the forum by which the Government drive the work and bring other actors into this space to co-ordinate on issues.
We recognise financial exclusion and the need to promote financial inclusion as an important area of policy work. We recognise some of the gaps raised today. I would point noble Lords towards progress that is being made in some areas.
We have also heard today about a changing landscape and how we will need to continue our work to keep up with it. As use of cash changes, we are legislating to protect access to cash, but we also need to consider how we can promote digital inclusion, so that, as services move online, people can access them in the same way as they have been able to previously.
The point of difference is not whether there is a problem but whether it is for the Government to lead on co-ordinating the response to that programme, with an important role for the regulators, or whether it is the regulators that should have more emphasis on driving this work.
Baroness Kramer (LD)
Can I put in a real request to the Minister? I understand that she is keeping to her brief, but could she get back to the department and tell it that it is time to do something about this, not just to have endless meetings, gatherings, reports, reviews or pieces of minor tinkering at the corners about it? This needs a driven central initiative. If she can answer me at all, can she take that on and go back to the department to tell it that it is time to do, not just to talk?
Baroness Penn (Con)
I will absolutely take that back to the department, but I disagree with the noble Baroness that no action is happening on this issue. We talked about access to cash; that is being legislated for in the Bill. On access to low-cost finance, I have talked about the money that the Government have put in to pilot a programme of interest-free finance for those who are most vulnerable. We have talked about access to bank branches. I acknowledge that the initiatives on banking hubs have not been as fast as people would want, but they put forward a solution to an issue that we face. We agree that it is a common issue. I have given examples of what we are doing on digital inclusion. In a later group, we will discuss the importance of mental health. We have put in place the Breathing Space scheme for those who are in problem debt and have mental health problems.
Yes, there is a lot more action to take. I recognise the problem and I will take the noble Baroness’s words back to the department, but we are legislating on some measures in the Bill. I have set out very specific measures that we are taking in other areas. It does not mean that the job is done, but it does mean that action is happening.
Lord Moylan (Con)
My Lords, I am grateful to all noble Lords who have spoken in the debate and for the support that has been given generally for the amendments tabled. It is true that one or two noble Lords have quibbled about the detail of particular proposals in the amendments, but I think there was universal support for the general principles underlying them.
It falls on me briefly to deal with the quibbles raised by the noble Lord, Lord Davies of Brixton, because they were pointed directly at amendments in my name. First, he is right to say that over a period of 30 or 40 years there will be a large number of sociological and economic changes that might explain the appetite for different types of investment among the population at large, but surely he will accept that these are completely dwarfed and made irrelevant if the fact is that you are not allowed to purchase the investments in the first place. The object of the amendment here is to allow this to happen. If you have to put €100,000 on the table to buy a corporate bond, people are excluded in very large measure, and questions of their appetite for different types of risk simply do not arise. If there is routinely no retail element to a new issue of shares, retail investors will not be able to buy those shares, so that is that.
The noble Lord, Lord Davies, also picked me up on what I meant by regulated investments. It is true that if the amendment were to come back on Report, it should perhaps be drafted more carefully to say, “investments traded in regulated markets”. I accept that it might have been infelicitously drafted but, to give a more substantive answer, perhaps one should take a more apophatic approach and define what non-regulated investments are. They are things such as betting, spread-betting, contracts for difference and mini-bonds.
The noble Lord is concerned that putting your money into highly rated shares, corporate bonds or gilts might be a little risky and inappropriate for somebody setting aside money for the future, but he has not tabled the amendment that I would hope to see in that case that would have prevented them investing in all these different products, which are there freely available and which people invest in. As the noble Baroness, Lady Kramer, pointed out, the mini-bond crisis was about perfectly respectable people believing that they were investing in something that looked like a bond, when it was not at all, for a return that appeared attractive. If we do nothing for them and allow that, why are we worried about them investing in real bonds?
Finally, there is the question of whether by agreeing such an objective for the regulators they would in effect be giving advice. I simply refute that: to remove a barrier to investment is not to give advice. I do not know where the noble Lord keeps his money for a rainy day. Perhaps it is all in a savings account somewhere, but I would encourage him to think a little more broadly and to look upon various safe and regular opportunities that would be available to him for his spare cash if he were to swing in behind this amendment. I am sure he would benefit in many ways from that.
I turn briefly to the remarks of my noble friend the Minister. I am grateful to her for the encouragement she has given and will look carefully at what she has said. I am still not wholly persuaded that proceeding on the basis of the Treasury’s current work, rather than by way of legislation, is entirely the best way. I will consider whether these amendments, or one of them, might come back on Report.
On the broader question of the financial inclusion of people who are marginalised by the financial system—I hope I am not presuming too much if I speak for the Committee at large—my noble friend might want to reflect a little further on whether a process of engagement with noble Lords on all sides of the Committee who have brought these issues up would be beneficial between now and the issue returning on Report. I know that it is not in her personal nature to sound negative and unwelcoming, but her speech had that tone of saying that everything was a little too complicated and might have an unintended consequence. Well, anything might have an unintended consequence; by definition, one would not know. I wonder whether she might consider some process of engagement on the issue, because I think the feeling around the Committee is quite strong. With that, I beg leave to withdraw my amendment.
“Prevention of fraud objective
In section 1B of FSMA 2000 (FCA’s general duties), in subsection (3) at the end insert—“(d) the prevention and detection of fraud perpetrated in or through financial services.””
Baroness Bowles of Berkhamsted (LD)
My Lords, in this group, we return to the issues of fraud and encouraging the financial regulators to be more active. Fraud now accounts for nearly half of all crime and there are still issues around ensuring that there are preventive steps.
I have three amendments in this group, which I offer in order to probe the best way to engage the regulators more actively in matters of fraud. I thank the noble Lord, Lord Vaux, for his support on two of my amendments; I also thank the noble Lord, Lord Naseby, for his support on one of them. I note the overlapping of some of my amendments with those in the name of the noble Lord, Lord Hunt.
My first amendment in this group, Amendment 67, would add an additional operational objective for the FCA in
“the prevention and detection of fraud perpetrated in or through financial services.”
As I have indicated on previous days of our debates, there are questions about where best to place requirements so as to ensure that they are effective. In this case, I put it high in the layering of the objectives, although the requirement of the FCA is in fact only to do things that advance one or more of its operational objectives. As has been said previously, this allows the regulators to pick and choose, and underlies what the public and many parliamentarians see as manifest failure.
With that in mind, I concluded that it perhaps needed to be a strategic objective because that cannot be dodged. After all, fraud is already a significant factor undermining payment systems—in particular, the faster payment system—and calling into question the general sustainability of instant payments.
With that strategic thought, I proposed Amendment 73, which would add to the definition of “relevant markets” in the FCA’s strategic objective. My addition—proposed new paragraph (d)—would include
“the financial markets and the markets for financial services, whether regulated or not, in matters of fraud.”
Given the role of banks, the PRA should also have a similar objective, although my thinking is that it would need to be wider than its applicability to rule-making. I hope that, collectively, we will be able to return to the issue of best placing when it comes to Report. The fact is that our financial services regulators are, or should be, well placed to discover fraud beyond the confines of specifically regulated financial services. There may be freedom in those services being unrestrained, but that does not mean cheating and fraud, as with the Libor rigging case, for example, and other matters that have been discussed earlier.
Lord Hunt of Kings Heath (Lab)
My Lords, I have Amendments 71 and 210 in this group, which deal with financial fraud. I very much support what the noble Baroness, Lady Bowles, said, and am sure that, between now and Report, there can be further discussions about the best way to embed in the Bill the tackling of financial fraud. As she said, we have two pieces of legislation going through in parallel, and we need to ensure that at the end of the day there is a concerted strategy to deal with financial fraud, which has been lamentably missing from our affairs over many years. The Bill certainly provides protection for victims of authorised push payment scans, but little else to address the growing and worrying problem of financial fraud.
We had a canter round some of these issues last Monday, when the Minister was very reassuring. She said that
“tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector”;
that
“strong punishments … already exist under the Fraud Act”;
that
“the police and the National Crime Agency already have the powers to investigate fraud, with the FCA providing strong support”;
and that
“The Home Office is investing £400 million in tackling economic crime over the spending review period, including £100 million dedicated to fraud.”—[Official Report, 30/1/23; cols. GC 123-24.]
She mentioned the Joint Fraud Taskforce on a number of occasions and said that the Home Office will shortly publish a long-awaited new strategy—which I think was briefed out in some of yesterday’s Sunday newspapers.
That is all well and good. The problem is that one needs an act of faith to believe that the Government have finally recognised that they have to grip this in a much stronger way than has been evident over the last 12 years. The figures from the NAO are stark: in the year ending June 2022, fraud represented 41% of all crime against individuals, and there were an estimated 3.8 million incidents of actual or attempted fraud against individuals. Yet the number of fraud offences resulting in a charge or summons was paltry. In the year ending March 2022, 4,816 fraud cases resulted in a charge or summons. Less than 1% of police personnel were involved in conducting fraud investigations in the year ending March 2020. The public know that it is just hopeless going to the police; the default position is that they have no interest and want to give no help whatever, apart from encouraging you to go to Action Fraud—which your Lordships’ Select Committee on fighting fraud renamed “Report Fraud”, because it is a completely useless organisation.
I am particularly concerned about the financial abuse of older people, and noble Lords will see that my second amendment in this group is tailored towards that. It struck me that the previous debate on inclusivity is very much related to some points that I wish to raise this afternoon. The excellent organisation Hourglass has pointed out that the impact of financial abuse on older people can be devastating, especially as so many of them are on limited incomes such as the state pension. There are so many examples of frail older people losing large sums of money or property that they have lived in for years, or incurring large debts.
In September 2021, Hourglass and Hodge Bank collaborated on a survey to gain insights into the scale of financial and economic abuse and the impact of the digital divide. The report noted that 14.1% of respondents indicated that an older person they knew or cared for had been a victim of financial abuse in the past year. Research also pointed to a significant number of older people falling victim to economic abuse, in part due to the digital nature of banking and the digital divide.
Your Lordships’ Select Committee report, Fighting Fraud: Breaking the Chain, published only last November, was explicit about the scale of the problem generally. It said:
“A person aged 16 or over is more likely to become a victim of fraud than any other individual type of crime, including violence or burglary”,
and that
“Even though fraud is a massive problem,”
it is hardly given any priority at all. Indeed, my understanding is that fraud statistics are removed from public statements on crime rates. I wonder why that is. We know that law enforcement is hopelessly underresourced for the fight against fraud. Law enforcement agencies and digital investigation remain outside the capacity of mainstream policing, despite police forces operating in a highly digitalised society.
The Select Committee points out that
“The organisational structure for policing fraud is complex and confusing”—
it certainly is for members of the public seeking to report fraud—and that
“The criminal justice system has also failed to keep pace with the threat, resulting in a significant decrease in the prosecution of fraudsters over the last decade.”
The Select Committee warns that
“The telecoms sector has no … incentive to prevent fraud and has allowed blame to be placed elsewhere for too long.”
Similarly, the tech sector does not do anything like enough to
“slam the brakes on fraudsters using online advertising and social media platforms to reel in consumers”
and must
“do more to verify the identity of those using online dating platforms before they commit romance fraud.”
The Select Committee makes the point that all these industries, which are doing very well and enable fraud to take place, do not fear any significant financial, legal and reputational risks for failing to prevent fraud.
When fraudulent payments slip through the net, it should not be the sole responsibility of the financial services sector—in particular, the victim’s bank—to pick up the bill, although I believe that banks need to do much more than they do at present. All stakeholders in the fraud chain, including the payee’s bank, must know that they have a duty to prevent fraud and to address their failings and the victim’s losses once it has occurred. Despite the Minister’s confidence, the Government have shown very little enthusiasm. It has taken so long to even produce a strategy, that one really doubts the commitment to taking this forward.
My first amendment would add to the list of regulatory principles to be applied to the FCA and PRA
“the need to promote the detection, prevention and investigation of fraud in relation to the provision or use of financial services.”
In a sense, this can be seen in parallel to the amendment in the name of the noble Baroness, Lady Bowles. My Amendment 210 complements and adds to my noble friend’s amendment by emphasising the strategy he proposes, which I very much support, but there are some special arrangements in relation to older people.
I am sure that we will want to come back to this on Report. I am sure that noble Lords with an interest in this can come together with a unified amendment—I almost said composited amendment, but I hesitate to use those wonderful words in your Lordships’ Committee. We have to persuade the Government that, once and for all, we take fraud seriously. We need to kick a lot of the regulatory bodies, including the police, into taking this seriously.
Lord Tunnicliffe (Lab)
My Lords, I will speak to my Amendment 209. This Committee is unusual, in that the level of consensus seems enormous. A lot of the differences are around how to achieve where we want to go, but the coming together should worry the Government.
I will say a word or two about fraud. My noble friend has set out the fraud world. The two features, certainly of personal fraud, which are supposed to solve the problem are compensation, and investigation and prosecution. I am not against the idea of compensation being clearer and more open, but this has the potential for moral hazard. I will say no more than that. The problem with the compensation solution is that it takes the incentive away from proper investigation into criminality and prosecution. That is a bad thing.
There is so much fraud that there is an industry, and that industry breeds its own criminality—I fear that somewhere in the Bahamas they are setting up a university course on it. That spreads the atmosphere or culture more widely. We know that London has a horrible reputation for financial criminality in general—for example, money laundering. This is bad. We do not want big chunks of our society, particularly bright, competent people, involved in criminality. From every point of view, we must up the effectiveness of prosecution—treating the fraudsters as criminals and, where appropriate, locking them up.
Lord Davies of Brixton (Lab)
My Lords, like my noble friend Lord Hunt, I make a point in my amendment about the link between financial fraud—in practice this now broadly means “online scams”—and mental health. I made this point last Wednesday, in dodging between the Committee and the House, when I raised this issue in the context of the Online Safety Bill. The same issue arises under this Bill and should be dealt with.
There is no doubt that people who have problems with their mental health are, for a variety of reasons, more vulnerable to fraud than people generally. According to a recent survey, people with mental health problems are three times more likely to say that they have been the victim of an online scam than people generally. In reverse, scams are a threat to people with normal health that risk their mental health.
I will talk about this in a bit more detail during debate on the next group of amendments, but we must understand that the result of fraud, however perpetrated, is much misery, destroying people’s finances, in many cases their families and, in some cases, tragically, their lives, so the Bill should address the issue and face up to the need to provide adequate protection. Anyone can fall victim to a scam, but people with mental health problems are at particular risk and can suffer more as a result. We must do what we can, therefore, to improve scam protection and ensure that, when people fall victim to scams, they receive adequate support.
I must pay tribute to the great work being done on this area by the Money and Mental Health Policy Institute. It has drawn attention to the fact that although harm can arise in diverse areas—gambling, retail and scams—across them all, including financial services, there are recurring themes. There is the lack of friction in transactions, advertising of investment opportunities, and high-pressure techniques applied which can put people under pressure, particularly in online spaces.
The institute concludes that these concerns have, up to now, gone relatively unchecked and underexamined, with current regulation either lacking or poorly matched to the real environments in which people find themselves. Although the Online Safety Bill has an important role in this area, it needs to work with the regulations in this Bill to address the problems that cause so much misery.
Lord Flight (Con)
My Lords, might there be a case for the regulators to play a more active role in addressing fraud?
Lord Thomas of Cwmgiedd (CB)
My Lords, I want to make just four points on fraud, which damages the markets so greatly and damages individuals. The amendments reflect the four points. First, we need a strategy. I do not see how we can go forward any longer without one. I have two comments on strategy. First, the bodies to be consulted should include lawyers and accountants, not because there might be a bent lawyer or bent accountant in the fraud but because often it is their failure to see a flaw in the system that has caused the fraud. Therefore, they need to be part of those consulted. Secondly, five years is a long time for a new strategy. We need some form of accountability for the performance of the strategy in the meantime.
My second point is the object, the principle or the duty—however you put it—of the regulators looking into fraud. This seems critical, and there are two primary reasons for this. First, there is the prevention of fraud. I have too often been told after a fraud has come to knowledge and things are being done about it by those in the market, “Oh, the return was too good to be true. Him? We would not have touched him with a bargepole.” Regulators ought to be able to pick that up, and the duty on them ought to emphasise that responsibility.
Secondly, if fraud occurs—and it is bound to—the expertise of the regulators is needed to guide the way in which prosecutions take place. These days, because virtually everything is documented, you cannot move money. In the old days you could take a suitcase of cash somewhere, but you cannot do that any more. You need someone who can interpret what is usually the defence, “Yes, I did this but I wasn’t dishonest”. The skill and expertise of those in the market who can point to and make clear why it was so obviously dishonest are critical.
Thirdly, dealing with fraud is expensive. If you are accused of fraud, you have nothing to lose by spending all you have in defending yourself. If you fail, that was the end anyway, so you might as well have tried to save your money. If you are successful, you generally get most of it back. In a sense, there is an imbalance. Therefore, I warmly support the amendment saying that the Treasury should hand over the cash. There is no conflict of interest there, because the decision on the level of fine is made by the court. That is a good idea.
Fourthly and finally, the idea of criminalisation is essential. It is often nice to be able to pay tribute to the wisdom of His Majesty’s Treasury. One of the most effective tools in its armoury in relation to sanctions has been criminalisation, because that is what frightens people. Therefore, criminalising the failure to act would be a welcome step, and is something that I hope His Majesty’s Treasury, with all its wisdom, will see the force of.
Lord Naseby (Con)
My Lords, I support Amendments 67 and 75—obviously, as I added my name. I will speak only to Amendment 67. I have spent nearly 50 years in Parliament, legislating on issues that needed urgent attention. I cannot think of any issue more important in monetary affairs, now or in previous years, than the one before us in this group of amendments.
In particular, I am very grateful to the UK Finance Annual Fraud Report, which highlights in some detail what is happening. Indeed, one of the paragraphs at the end says that the Bill before us, which the Government proposed, will legislate to deal with it. Look at the figures and the sheer scale of it:
“Most notable is the rise in impersonation scams and in authorised push payment (APP) fraud overall. In 2021 communications regulator Ofcom found that eight out of ten people that were surveyed had been targeted with scam texts or phone calls, intended to convince them that they were from trusted organisations such as banks, the NHS or government departments.”
The report goes on to say:
“The majority of APP fraud starts with some type of social engineering. As well as scam texts, phone calls and emails, more and more of us are paying for goods and services remotely”,
which opens the door to the fraudsters.
I will say no more other than this. My friend the noble Baroness, Lady Bowles—I greatly respect the work she does in this area—has produced a very simple amendment, but it is very powerful and clear and I highly recommend it to His Majesty’s Government.
Lord Sikka (Lab)
My Lords, I find all the amendments and all the arguments made by various speakers very persuasive, and I hope the Government take note of that.
I have some concerns that I do not think have yet been aired. Do we have the regulatory architecture to deal with fraud? There are at least 41 financial regulators. Just think about the duplication and buck-passing. Is it not time for us to have a British version of the Securities and Exchange Commission, or something equivalent, to deal with that? It may help not only to save resources but to have a co-ordinated approach.
The people perpetrating banking fraud do not live in one particular district of the UK; they are spread all over. The police in Bristol cannot go and raid somebody in Reading or Glasgow; they need permission from and to co-ordinate with somebody there. We do not have a national police squad to look for or investigate fraud. They are utterly fragmented. That itself encourages buck-passing.
Lord Northbrook (Con)
My Lords, I declare an interest as a consultant to an FCA-regulated investment management firm. Like the noble Lord, Lord Hunt of Kings Heath, and others I find it disappointing that the Bill fails to address the growing problem of financial fraud.
There was an interesting article in the Times on Saturday. It said that
“according to the National Fraud Intelligence Bureau, in the last 13 months there has been a reported loss of £4.3 billion from fraud and cybercrime. That is an eyewatering amount of money going into the pockets of criminals … Criminals are getting away scot-free but what is even more worrying is that they know that it is unlikely that any law enforcement are looking for them. This is not because the police are not interested, but simple maths. According to the Social Market Foundation, in 2021 in England and Wales just 1,753 officers and staff were dedicated to economic crimes such as fraud. That equates to just 0.8 per cent of the total workforce and yet”—
as other noble Lords have said—
“fraud accounts for 40 per cent of all reported crime. In many cases … the victims were simply given a crime reference number by the police and told there was nothing more they could do. It remained up to them to try to get their money back from their bank.
If one is determined to find the culprits, an alphabet soup of crime agencies such as the NCA, NECC and NCSC, all with different remits and jurisdictions, awaits. Most people give up and the scammers get to keep their cash.
Unless we increase the number of officers and staff that investigate fraud to reflect the amount of fraud reported we will continue to lose billions to criminals.”
Clause 62 addresses the issue only partly. It enhances protections for victims of authorised push payment fraud, which, according to the shadow Treasury Minister in the other place, quoting UK Finance figures, reached an all-time high of £1.3 billion in 2021. In the other place, the Government promised a review without giving a timescale, but more immediate action is needed.
The Bill ignores the fact that digitally savvy criminals are increasingly exploiting a range of financial institutions, such as payment systems operators, electronic money institutions and crypto asset firms, to scam the public. As my noble friend Lord Naseby mentioned, UK Finance pointed out that, in 2021, 44% of fraud was authorised push payments, about 40% was payment card fraud and 15% was remote banking.
As several noble Lords have already stated, last November, our House of Lords Fraud Act 2006 and Digital Fraud Committee released a report stating that the Government should introduce a new corporate criminal offence to ensure that big tech platforms and telecom companies tackle financial crimes. Under the Online Safety Bill, which is currently going through its stages, online platforms will face a duty of care to protect their users from fraud, but that Bill does not cover telecoms and other related sectors. It is a very good step but more needs to be done, including requiring tech companies to publish data on the nature and volume of scams on their platforms.
Of the amendments in this group, I am very much in favour of the all-encompassing Amendment 209 from the noble Lord, Lord Tunnicliffe, particularly as it includes, under the proposed new subsections (3)(d) and (e),
“telecommunications stakeholders, and … technology-based communication platforms”.
I have been disappointed by the Government’s reaction so far. Although Mr Griffith said in the other place that the Government
“are dedicated to protecting the public from that devastating and sadly growing crime”,
he also said that the Government want
“to be right rather than quick”.—[Official Report, Commons, 7/12/22; cols. 446-47.]
Well, one can be right and quick. As with several other points on this Bill, such as credit card monitoring, the Government do not seem to be moving very fast at all. If we believe the Sunday press, something may be happening, but I await the Minister’s response with interest.
Baroness Kramer (LD)
My Lords, the Minister will have picked up the mood of the Committee and I hope she takes it into consideration when she looks at and decides on her remarks. The concern that has been expressed from all sides of the Committee on fraud and the absence of action on it is loud and strong.
I support all the amendments in this group, including those from my noble friend Lady Bowles, and the noble Lords, Lord Hunt, Lord Davies and Lord Tunnicliffe. I particularly recommend my noble friend Lady Bowles’s Amendment 214, which goes after the enablers and facilitators with a “failure to prevent” clause. This group is continuously overlooked and is absolutely pivotal. Action in this area could be really effective and leverage some significant change.
My Amendment 217, in a small way, tries to counter one of the reasons why financial fraud flourishes: the lack of resources for investigation and enforcement against the perpetrators. The noble Lord, Lord Sikka, has addressed some of this.
I, too, am a great fan of Anthony Stansfeld and his personal courage in deciding, as the then police and crime commissioner of Thames Valley Police, to pursue the HBOS Reading fraud case when others had turned it away. That fraud amounted to £800 million and six people—I thought that it was five but the noble Lord, Lord Sikka, said six—went to prison. However, the fine that was levied on Lloyds, as HBOS’s parent, was £45 million. As the noble Lord said, not a single penny of that went back to Thames Valley Police even though the pursuit of the case cost that force £7 million. The consequence of that was heard loud and clear by police forces across the country. They expected that, because of its success, Thames Valley would end up getting reimbursed, and saw clearly when it did not. Since then, no police force has taken on a major case of financial fraud; that dates back to 1977. Frankly, it is a failure of duty. I hope that the Government will finally understand the consequences of that kind of funding decision.
Baroness Penn (Con)
My Lords, I will first cover Amendments 67, 71, 73 and 214 tabled by the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Hunt of Kings Heath. The question of the FCA’s powers on fraud has been raised before in this Committee, as noted. Before I address the detail of the amendments, it may be helpful if I set out for the Committee the FCA’s role under FSMA in relation to fraud. The noble Baroness, Lady Kramer, asked me specifically about this last Monday. I will write, but I thought it might also be useful to set it out in the context of these amendments.
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. If fraud is committed by an authorised firm in the course of a regulated activity, or if it carries out a regulated activity without the correct authorisations, the FCA will be able to take action against the firm on the basis of a breach of the FCA’s rules or other FSMA requirements. If a senior manager within the firm is responsible for the fraud or has culpably failed to prevent one occurring within the area of their responsibility, the FCA can take action against that firm and senior manager.
Where a firm is authorised for one activity, but is also carrying out an unregulated activity, FCA powers in relation to the unregulated activity will depend on the specific details of the case. In the case of a serious fraud, the FCA is able to take action, including on the basis that the firm or the senior manager is not fit and proper. If a firm provides regulated products or services without being authorised, unless exempt, it may be carrying on unauthorised business in contravention of the “general prohibition” in Section 19 of FSMA.
The FCA does not have powers to investigate a firm that is unauthorised and not carrying out any regulated activities unless, for example, that unauthorised person is carrying out market abuse—where the FCA has a specific role. In these circumstances, where problems fall outside the FCA’s statutory remit, the FCA assists other agencies and regulators wherever it can. That is important context for the noble Baroness’s amendments.
As I said last week, the Government take the issue of fraud very seriously. I repeat the point made by the noble Lord, Lord Hunt, that the prevention of fraud is a cross-cutting policy that requires a unified and co-ordinated response from many stakeholders. However, I acknowledge that the financial regulators, including the FCA, play a critical role in that, but many levers for change also sit elsewhere.
The Government’s view is that the FCA’s broad existing remit in relation to reducing and preventing financial crime, including fraud, allows it to take proactive steps to tackle fraud and wider financial crime, while driving a whole-system approach with relevant stakeholders. The FCA is an active and named agency in the national economic crime plan and the soon-to-be-published fraud strategy. Most crucially, the FCA and the PRA require regulated financial services firms to maintain effective systems and controls to prevent their being used to further financial crime, including fraud. In the first half of 2022, UK banks blocked over £580 million being stolen from customers. In its 2022-23 business plan, the FCA announced that it was developing its approach to supervision to include further oversight of firms’ anti-fraud systems and controls.
The noble Baroness, Lady Kramer, asked about the number of vacancies in the FCA for those working on fraud. I will write to the Committee to provide that detail. Under the FCA’s existing remit, it is able to have a leading role in this important issue. It does not require further powers to pursue fraud, but I will come on to address other points raised in the Committee about what more must be done overall about fraud.
In respect of Amendment 214, as noted by the noble Baroness, Lady Bowles, the Government are currently assessing options presented by the Law Commission for strengthening the law on corporate criminal liability, including for fraud. This includes committing to address the need for a new offence of failure to prevent fraud through the Economic Crime and Corporate Transparency Bill. I note the differences highlighted by the noble Baroness, but the Government believe that that Bill is the right approach and vehicle for dealing with the failure to prevent offence.
Amendments 209, 210 and 211, tabled by the noble Lords, Lord Tunnicliffe, Lord Hunt of Kings Heath, and Lord Davies of Brixton, respectively, relate to a national financial fraud strategy. As I have said, the Home Office will shortly publish a new strategy that will set out the Government’s plan on fraud, including fraud prevention, consumer protection and criminal prosecution. I am afraid that I did not read the Sunday papers as closely as other noble Lords, but I hear, understand and note the great interest in the strategy from this Committee and a desire to see it published as soon as possible. I reassure noble Lords that that continues to be a key priority for the Home Office, which is working closely with the Treasury and other government departments to make sure that we get it right.
Lord Hunt of Kings Heath (Lab)
I am grateful to the Minister for giving way. As part of this work, are the Government looking at the costs to the various statutory agencies of pursuing fraud? The noble Baroness, Lady Kramer, raised the example of the cost to Thames Valley Police—I think—of a prosecution, which on their budget was enormous. The fine was substantial, but there seemed to be no way of compensating the police for those costs. Can the Minister say whether that will be looked at within the strategy?
Baroness Penn (Con)
Funding is of course an important part of any strategy, and I have set out to noble Lords previously the increased funding that has gone to the specific issue of tackling fraud. I will turn to the specific proposal from the noble Baroness a little later, but I understand the point about not just the amount of funding but the incentives that different approaches can create.
The noble Lord, Lord Tunnicliffe, and other noble Lords talked about the devastating personal costs that fraud can have and the societal costs that having high levels of fraud in our society can bring. I agree with noble Lords on that. The noble Lord spoke about compensation not overshadowing the need for investigation and prosecution, and I also agree with that. Those considerations are all being taken forward through the strategy.
Lord Sikka (Lab)
I am encouraged by the Minister’s determination to tackle fraud. Can she answer the three specific questions I asked? First, can she give us a commitment that a copy of the Sandstorm report in relation to BCCI, which is now more than 30 years old, will be placed in the Library of this House? Secondly, can she make a statement now or come to the House soon to tell us why the Government covered up criminal conduct by HSBC in the US and how many other instances there are of that kind of cover-up?
Thirdly, in this country we have virtually eliminated the risk of bankruptcy for major banks and insurance companies. That then raises questions about the pressure points on directors to behave and act honourably. Fines are fairly puny and have not made much of a difference. Personal prosecutions of directors of banks hardly ever take place, and neither do they face any personal fines. Can the Minister explain what the pressure points are on the directors of major financial institutions to act with honesty and integrity?
Baroness Penn (Con)
I am afraid I will not be able to address the noble Lord’s first two points, but I will happily write to him. On his third point, I referred to the fact that, as part of the Economic Crime and Corporate Transparency Bill, we are looking to take forward the issue of corporate criminal liability and the offence of failure to prevent fraud, which would strengthen action in the areas he talks about.
I was talking about our work with other sectors. My noble friend Lord Northbrook and the noble Lord, Lord Sikka, raised the issue of online fraud. There is an intention to bring forward a tech sector charter with industry, to include public and private actions to drive down fraud in this area. Of course, fraud has been brought into the scope of the Online Safety Bill to better protect the public from online scams through, among other measures, a new stand-alone duty requiring large internet firms to tackle fraudulent advertising, including that of financial services.
The Government also recognise the particularly devastating impact that fraud can have on the elderly and the most vulnerable people in society and on people’s mental health. They have taken various steps, including banning cold calls from personal injury firms and pension providers and supporting National Trading Standards to improve the quality of care available to vulnerable fraud victims. More broadly, the FCA’s guidance on vulnerability explores how firms can understand the needs of vulnerable customers. This includes those who are older or have mental health conditions and sets out how the sector can provide targeted services for this cohort, including in the context of fraud. Where firms fail to meet their obligations to treat customers fairly, the FCA will take further action. I hope noble Lords are assured that further work is being taken forward on data sharing and on supporting older people and those with mental health conditions who are victims of financial fraud.
The noble Lord, Lord Davies of Brixton, mentioned measures in the Online Safety Bill, as have I. I have also mentioned the measures in the Economic Crime and Corporate Transparency Bill and revisions to the Data Protection Act. I am cognisant of the need to ensure that this work is well co-ordinated and that the progress we are making in other Bills is co-ordinated with the work we are doing on this issue more generally.
I turn finally to Amendment 217. Currently, the proceeds of such fines imposed by the courts must, by law, be paid—
Lord Hunt of Kings Heath (Lab)
I am sorry to interrupt the Minister again, but her comments have prompted a thought. Many of us are trying to cover, albeit not always successfully, three or four different Bills that are running through your Lordships’ House with slightly similar amendments around this issue of financial fraud. I do not know whether it would be possible for the Ministers dealing with all these Bills to come together at some point for a more general discussion; it might make this easier for us all. The Minister will know that these debates are going to be repeated on a number of occasions.
Baroness Penn (Con)
I will absolutely take away the noble Lord’s suggestion. I cannot speak for others but I would be happy to engage further on this before Report, drawing on the other strands of government work; I agree with the noble Lord that it might be useful to have other Ministers there too. I recognise that the other Bills are not as far along as this one is, so we will not be able to pre-empt some of that work, but I think we can co-ordinate it for noble Lords if that would be helpful.
Finally, I was dealing with Amendment 217 and noting that, by law, income from fines imposed by the courts needs to be paid into the consolidated fund. That income is not ring-fenced but is used towards general government expenditure on public services. The Government agree that it is important for bodies responsible for investigating and prosecuting fraud to be appropriately resourced to discharge their responsibility. The NCA’s budget is made up of a number of different funding streams. That budget has increased every year since 2019-20 and, as part of the 2021 spending review, it was allocated a settlement of more than £810 million. This represents an uplift of approximately 14%, or £100 million, compared with the previous spending review. The noble Baroness, Lady Kramer, asked me a few more specific questions beneath those headline figures; perhaps I can write to her and the Committee with that information.
The FCA and the PRA are operationally independent regulators funded by a levy on the firms they regulate. I would like to reassure the noble Baroness that the regulators already have the power to ensure that they are resourced appropriately, without the need to divert funds away from general government expenditure. As I said to the noble Lord, Lord Hunt, I recognise the important principle behind this amendment—that consideration should be given to how the proceeds of fines can support the costs of enforcement activity.
Lord Northbrook (Con)
Can the Minister address the point about Thames Valley Police not being reimbursed for the £7 million it spent, which has discouraged other police forces from carrying out those sorts of investigations? Will there be any sort of move to reimburse police forces investigating crimes of this sort?
Baroness Penn (Con)
I have heard the point and I acknowledge the principle that this amendment seeks to explore in terms of those incentives, but I point to the NCA’s budget and the regulators’ budgets. We seek to ensure that enforcement agencies have the proper money available to them to take enforcement activity. I also point out that, while the funds currently go into general expenditure, that funding is spent on other public services, so it does not go unspent elsewhere.
Lord Flight (Con)
This point seems absolutely central to me. Unless police forces have either a strong negative or a strong positive incentive, they are not going to be bothered, if you like, to prosecute serious fraud crime. I do not know what the Government’s preference is, but it has to be one way or the other.
Baroness Penn (Con)
I have listened very carefully to the debate, and I see the point that noble Lords are making. This operates in other areas of government—there is the Proceeds of Crime Act and how that operates—but I slightly counter leaning too heavily into the fact that the police would have no incentive to investigate serious organised crime unless the costs of the investigation and the prosecution are reimbursed to them. Their fundamental role is to investigate and prosecute crime. I understand that there is a complex landscape when it comes to investigating and prosecuting fraud, and that is something that the Government have tried to tackle with the establishment of the economic crime command at the NCA—but it is ongoing work for us. The challenge before me today is that the funding that comes from these fines currently goes to the consolidated fund and is spent elsewhere on public services, so any change of this nature would have implications that go—
Baroness Kramer (LD)
If the Minister is able to persuade the Treasury or the Government to look again at this issue, can she make the point that, if you can get much more activity from the police forces on pursuing fraud, you end up with much more coming in in fines? To look at the US example, it makes far more money out of financial crime because it prosecutes financial crime far more extensively.
Baroness Penn (Con)
I absolutely note the noble Baroness’s point. That same principle has informed our approach to proceeds under the Proceeds of Crime Act, so this has happened elsewhere in Government.
I was going to note that, previously, the FSA was able to keep all the income it took from penalties and use it to subsidise the levy it charged on the firms it regulated. That was changed because, when the regulators took a large amount of money from those they had fined, they reduced the charges they made on those firms. In thinking about these issues, we would want to avoid similar unintended consequences in the future.
I close by saying that I have heard noble Lords’ strength of feeling on this debate. As I said on the previous group, I am always open to meeting noble Lords to discuss issues further. We have different ways in which we think those issues can be tackled, but it is always right to see what more we can do. The noble Lord, Lord Hunt of Kings Heath, suggested perhaps having a co-ordinating meeting on fraud, particularly to cover the specific issues raised in the different Bills before your Lordships. I will endeavour to take that forward ahead of Report.
Baroness Bowles of Berkhamsted (LD)
Your Lordships will be pleased to know that I cannot possibly go through everything, yet again, that has been spoken about. I thank all noble Lords who have spoken in this debate. The Minister must have heard the concern from all sides of the Committee.
The only bit of good news that I can hang on to from what was said is that more work is being done on data sharing between banks. That is important. The list of roles of the FCA just proves that it does not have a great deal of power to do things within financial services in general. It can do things with regulated bodies, but that is very limited, as we discussed previously, so I will not go into it again. It can do things with bodies that are pretending to be regulated but are not, but we are for ever bashing up against this regulatory perimeter, one way or another. That just does not deal with fraud, because fraudsters are well aware of it and are going to use it.
We have tried to cover various different types of fraud. Fraud by and in financial services surely should be caught, even if it is by a regulated entity but in an unregulated area. The financial services regulator should still be able to prosecute the entity, not just through cases that deal with criminal matters which it can take; there should also be some regulatory approach. Then there is fraud in which financial services are the final vehicle. Financial services are in a special place because, ultimately, how can you monetise your fraud? You have to put it through a bank or somewhere else, no matter whether it was started or perhaps enabled by a telecoms company, online platform and so on. Ultimately, financial services firms have a special duty for extra vigilance, because that is where this all funnels down.
I agree that probably more has been done to capture these things in financial services than in some of the online platforms and telecoms companies. I will not go through the whole of the very thick fraud report, but there are issues in it that go across the piece. That is part of the problem. We have this complete alphabet soup of organisations that are supposed to be helping us address crime, and fraud in particular, in different ways. However, it is not well co-ordinated, and fraud falls between the gaps, and so it is with the financial services side of it.
One thing that was in the report from the Fraud Act committee was about engaging regulators more in the fight—that is, regulators in general—through having regulatory offences. Here, the imagination has to be used. We should not just pin down regulators to doing very small things within a tiny regulated bit, while everywhere else people can either get away with it or it has to go over to less specialised people to deal with. There are big holes, and we will have to come back to this.
At the bottom of it, there are issues around the funding. You will have to fund regulators more if they are to address fraud more. I do not see any harm in the recycling of fines. They should not be recycled so as to say “Right, now the levy is less”, but they could be recycled specifically for prosecutions. Given that you can turn a profit from them and that you are helping individuals who have had their money stolen, it is very bad if the Treasury does not look at that more favourably. Everybody is crying out for this, but we acknowledge that you have to have money to do it.
For now, I will obviously withdraw my amendment. However, we will have to come back on Report with one or two amendments aimed at furthering things, unless the Minister is able to persuade the rest of the Treasury that it needs to act in this area, as there would be ways in which it could ring-fence the financing and turn a net profit.
The Deputy Chairman of Committees (Lord Faulkner of Worcester) (Lab)
At this point, it might be convenient if the Committee were to adjourn for 10 minutes.
Lord Sharkey
“Duty of the FCA to make rules introducing a duty of care to replace the Consumer Duty
(1) After section 137C of FSMA 2000, insert—“137CA FCA general rules: duty of care and replacement of the consumer duty(1) The power of the FCA to make general rules incudes the power to replace the consumer duty with a duty of care owed by authorised persons to consumers in carrying out regulated activities under this Act.(2) In this section—“consumer” has the meaning given in section 2(3) of the Consumer Rights Act 2015 (key definitions);“consumer duty” means the rules and guidance contained in the FCA’s Policy Statement PS22/9 and in the FCA’s Final Guidance FG22/5 of July 2022;“duty of care” means an obligation to act in consumers’ best interests and to exercise reasonable care and skill when providing a product or service.”(2) The FCA must make rules in accordance with section 137CA of FSMA 2000 which come into force no later than six months after the day on which this Act is passed.(3) In section 138D of FSMA 2000 (action for damages), omit subsection (3).(4) The FCA may not make rules which change or qualify the definition of “duty of care” as provided for by virtue of subsection (2), reduce its scope of applicability, or disapply or fetter the private right of action afforded to consumers by section 138D of FSMA 2000.”Member’s explanatory statement
This is a probing amendment to allow debate on the FCA’s new Consumer Duty and a replacement Duty of Care and on a Private Right of Action.
Lord Sharkey (LD)
My Lords, Amendment 76 in my name and that of my noble friend Lady Tyler of Enfield—I am very grateful for her support and look forward to hearing her speak later on in our debate—would require the FCA to make rules replacing the new consumer duty that it has devised with a duty of care. This duty of care would be
“owed by authorised persons to consumers in carrying out regulated activities under”
FSMA 2000. The amendment also makes provision for redress via a private right of action; it does this by removing the barrier contained in Section 138D of FSMA. Finally, the amendment contains provisions to prevent the FCA using its rule-making powers to
“change … the definition of ‘duty of care’ … reduce its scope of applicability, or disapply or fetter the private right of action afforded to consumers by section 138D of FSMA 2000.”
This last bit is to ensure that Parliament’s intentions are rigorously carried out and reduce the opportunities for dilution.
The questions of imposing a duty of care on financial services providers and creating a private right of action have been debated in this place many times. The last time was during the passage of what is now the Financial Services Act 2021. In Committee on that Bill, I proposed the introduction of a duty of care in terms that were very similar to the text of the amendment before us; that amendment had strong support. I closed the debate by setting out the five key reasons for adopting a duty of care:
“The first is that FSMA does not protect consumers adequately; the second is that the FCA is always playing catch-up. The third reason is that poor behaviour by firms continues … The fourth is that getting redress after the event is time-consuming and very stressful, and the fifth is the incentive for real and lasting cultural change in our financial services industry.”—[Official Report, 22/2/21; col. GC 120.]
All those points remain valid today. Indeed, the FCA has openly acknowledged the need for significant improvement in how consumers are treated.
At the Report stage of the same Bill, in March 2021, the noble Lord, Lord Stevenson of Balmacara, put forward a duty of care amendment in terms nearly identical to the one that we debated in Committee and nearly identical to the text now before us. All the speakers in that debate—apart from the Minister, the noble Baroness, Lady Penn—were in favour of the amendment, which was passed in the House by 296 votes to 255—a majority of 41. The Commons removed our amendment and, in ping-pong, proposed an amendment in lieu. This amendment required, among other things, the FCA to carry out
“a public consultation about whether it should make general rules providing that authorised persons owe a duty of care to consumers.”
It was also required to consult on whether it
“should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care.”
Whether that actually happened in any meaningful way is strongly contested. The Transparency Task Force has long argued that the consultation was deeply flawed. It has argued, and continues to argue, that the FCA only ever really consulted on its proposed new consumer duty and not, since the 2021 Act was passed, on a duty of care. It is a contentious area, but there is merit in these criticisms. At the very least, I understand how the impression might form that the FCA had it regulatory thumb firmly on the scales.
This matters because the FCA’s new consumer duty is not a duty of care; it is significantly different and significantly weaker. These differences can be summarised as follows. First, there is no private right of action for breaches of the consumer duty. This means that the FCA will not be able to implement a redress scheme using its powers under FSMA if there are breaches of the consumer duty. This lack of a power to order redress will weaken the incentive to comply with the consumer duty.
The second flaw in the consumer duty is the lack of disclosure of information about how firms are complying with it. A firm’s board is required to assess only annually whether the required outcomes under the consumer duty are being achieved and agree any actions needed for compliance, but the firm will be able to keep that assessment secret from its customers and shareholders and will not have to publicly disclose any action it has taken. That is hardly transparent. For example, Which? has noted that:
“Without some kind of compulsory form of publication, it’s very hard to see how industry commentators, stakeholders and consumer representatives will gain an insight into the impact of the consumer duty.”
The third flaw in the consumer duty is that the standard required by firms to comply with its terms is based on the “reasonable expectation” of consumers. All this brings to mind the Equitable Life debacle and the difficulty of imposing a regulatory standard based on the reasonable expectations of consumers. In 2001, Sir Howard Davies described the concept as having a “chequered history” and as
“lacking in clarity and definition.”
The concept was also described by the then Treasury Minister as “nebulous”. The concept was eventually removed from the FSA’s regulatory framework in 2001-02. With the new consumer duty, it will be impossible to measure what the “reasonable expectations” of consumers are in any particular case. There would be obvious problems if the FCA or firms believed that consumers could be treated poorly because they had low expectations.
When the Government proposed the reintroduction of the concept of “reasonable expectations” during the passage of what became the Financial Services Act 2012, the Joint Committee that examined the Bill noted that the concept would make it difficult for the regulator to be clear on the meaning of its duties and near to impossible for consumers and Parliament to hold the regulator to account. The Joint Committee described the concept as “problematic” and concluded that its reintroduction would be unwise. Yet here it is again.
The final flaw is that the fair value assessment that firms are required to do under the consumer duty allows them to consider
“The market rates and charges for comparable products or services and whether the product is a significant outlier compared to these”.
There is a significant risk that this will allow firms to continue to exploit trapped customers as long as other firms are doing it at the same time. For example, in the case of mortgage prisoners who are trapped with their existing lender, a firm will say that they are being offered the “market rate” because they are being charged a similar rate to other mortgage prisoners at other vulture funds. All the customers across many firms are being exploited, but it is not a breach of the consumer duty.
The FCA’s proposed new consumer duty is deeply flawed and is not a duty of care. It is an enormous addition to the box-ticking culture and the antithesis of an aid to judgment. The new rules and feedback run to 161 pages with a further 121 pages of guidance to help. Diligent application of all these rules and guidance notes will not produce the required consumer benefits, nor drive a change of culture in the regulator or the firms it regulates.
The fact is that FSMA does not adequately protect consumers. Malfeasance continues and is unlikely to be much influenced by the new consumer duty. Under the new duty, redress is patchy, lengthy, uncertain and not really available to those who need it most. We should return to what this House originally voted for: a statutory duty of care. I beg to move.
Lord Tunnicliffe (Lab)
My Lords, this group contains Amendment 120, signed by me, my noble friend Lady Hayter of Kentish Town, the noble Baroness, Lady Altmann, and the noble Lord, Lord Morse. Our amendment would facilitate further parliamentary and public
“scrutiny of the work of the FCA to protect consumers by requiring the Financial Services Consumer Panel to lay an annual report before Parliament outlining”
the extent to which the FCA is successfully fulfilling
“its statutory duty to protect consumers.”
We have included the provision that the Consumer Panel must comment on the “adequacy and appropriateness” of its use of its powers; the measures it
“has taken to protect vulnerable consumers, including pensioners, people with disabilities, and people receiving forms of income support”;
and its “receptiveness to the recommendations” of the panel. We need a mechanism to encourage the FCA to exercise its regulatory duties more readily and consistently.
This is all in the context of very serious FCA failings. I am thinking particularly of the British Steel pension scheme scandal to which the FCA was found to be “slow to respond” at every turn, according to the Public Accounts Committee. If the Government are inclined to reject this amendment, I would appreciate further work in this space in the interests of all those who have fallen foul of FCA failures. I urge the Minister to look seriously at this amendment, given its cross-party support across the House and in the other place.
Baroness Kramer (LD)
My Lords, I am speaking a little earlier than I usually do on my amendments in case others want to join in on the Equitable Life issue. I thank the noble Baroness, Lady Altmann, for signing my first amendment; it is hard to tell what happened with the second. I hope she signed both of them. Yes? Fantastic.
I want quickly to follow up on the comments from my noble friend Lord Sharkey. Perhaps the Minister can clarify this for me. She will remember that the PPI scandal was widely spread across the industry. It was not unique to one or two companies, therefore no company that invested in that mis-selling was behaving as an outlier. Again, when interest rate caps were inappropriately sold to small businesses, it was not the action of one or two particular banks. It was industry-wide, therefore nobody was the outlier. Can she explain to me what this new consumer duty will contribute to enabling the FCA to act on these kinds of abuses? She will note that the FCA did not act until there was a major scandal and a huge amount of public pressure and pressure in Parliament because, when it looked at it, it could see no basis for action. Perhaps she might tell us how the consumer duty would have worked in those two key cases. I am sure that the Government must have tested those cases in coming to their decision to support the consumer duty, so I think she will be able to give us clarification on that.
Both of the amendments in my name arise out of the Equitable Life policyholder cases. I thank the Equitable Members Action Group, which has been frankly magnificent in support of the victims of the collapse of Equitable Life. It has fought for them in the past and continues to fight for justice.
Amendment 225 is a direct plea for compensation. When Equitable Life collapsed, 1 million people lost a significant part of their retirement savings. In 2008, the Parliamentary Ombudsman concluded that the victims’ losses were directly attributable to a decade of serious, serial regulatory maladministration.
The ombudsman made 10 determinations of maladmin-istration: one against the DTI; four against the Government Actuary’s Department; and five against the FSA, which
“resulted in the true financial position of the Society being concealed and misrepresented”.
I cannot think it extraordinary that, in a situation such as that, one would have expected the loss to the victims to have been remedied in full. In recommending redress, the ombudsman said that she would
“normally expect that, where appropriate, such a loss should be remedied in full”
and she called for the Government to
“fund a compensation scheme to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred.”
The Government later accepted that the amount of compensation to achieve that would have amounted to £4.5 billion but only £1.5 billion in compensation was announced by George Osborne. Some 37,000 with-profits annuitants were fully compensated but a further 10,000 received only £5,000—or £10,000 if they were on pension credit—because they took their annuities before September 1992. The vast majority of the victims—895,000 people who were not with-profits annuitants—received only 22.4% of their acknowledged losses. My amendment would carry out the recommendation of the Parliamentary Ombudsman and put everyone back into the position that they would have been in had maladministration not occurred.
This leads to my second amendment, Amendment 226, which would establish in law a requirement that, when the ombudsman finds maladministration by the regulators or government departments, all consumers affected
“are put back into the position they would have been in had that maladministration not occurred.”
Just imagine how we would react if a bank decided that, instead of paying the full compensation it owed, it would pay just a portion of it. I cannot see why the Government should be treated differently from an entity such as a bank. We would expect compensation to be paid in full.
How can we ask people to turn with confidence to the Parliamentary Ombudsman when recommendations are watered down after the fact? How we ask people to save when a rogue society—I think that describes Equitable Life quite well—cheats them? The Government make appalling mistakes to the level of maladministration —that is a very high bar; it is not a low bar—and then will not make it right. Many of the victims are now in their eighties and nineties so time is running out for justice; indeed, many have died without justice. That is the reason behind my two amendments. I very much hope that there is support for that perspective; indeed, I hope that we will finally see support from government.
In making a brief comment on the amendment proposed by my noble friend Lord Sharkey, on a return to a proper duty of care—it is one of the most important amendments that we are considering today —I want to stress, in this context, the private right of action. It seems to me that, without a proper duty of care or private right of action, we can never make banking institutions or other regulated financial services sector institutions live up to their full responsibilities to consumers.
Lord Davies of Brixton (Lab)
My Lords, I support all the amendments in this group. I dipped down the order a little because I wanted to hear what the noble Baroness, Lady Kramer, would say on Equitable Life. I have nothing to add. I was an Equitable Life policyholder twice over and no one came out of that whole sorry saga well. I do not think that all the necessary lessons have been learned, but that is perhaps for another debate.
I will address my Amendment 77. I am sure all noble Lords accept the principle that financial regulation should pay regard to the particular problems faced by people who have problems with their mental health. The issue is not about the principle but about whether it requires or deserves a place in Section 1C of the Financial Services and Markets Act 2000. I think it does, which is why I start by re-emphasising something. Many noble Lords might have heard this part of this speech before, because it has arisen in debates on the Online Safety Bill and on the last group—although the personnel attending this part of the Committee has changed somewhat, so I am not that embarrassed at repeating myself.
There are strong links between having a mental health problem and experiencing worse financial outcomes. Either a financial problem leads to poor mental health or pre-existing poor mental health leads to financial problems. Either way, mental health difficulties all too frequently make it harder to earn money, manage spending and get a fair deal on products and services. Life is likely to cost more precisely when we have less money available to spend.
Facing financial difficulties should not result in needing mental health treatment, but too often these things come hand in hand. Financial difficulties do not just cause stress and anxiety; this is often made worse by the follow-up actions—collections activity and having to go without essentials. It is not just an occasional problem. Here I must pay tribute again to the work of the Money and Mental Health Policy Institute, which in a series of reports has amply illustrated the scale of the problem and the relationship between good mental health and well-regulated financial markets.
Common symptoms of mental health problems, such as low motivation, unreliable memory, limited concentration and reduced planning and problem-solving abilities, are just the things that make managing money significantly harder. These symptoms can also make it more difficult to interact with financial services firms. For example, people with mental health problems are three and a half times more likely to be in problem debt than those without. Just under half of adults in problem debt also have a mental health problem. In nationally representative polling from November last year, the institute found that around half of those who were behind on multiple bills have had suicidal thoughts as a result of the increasing cost of living. More than 100,000 people in England attempt suicide while in problem debt.
A problem we face is that communicating with financial services providers can be particularly challenging for people with mental health problems. Three-quarters of people with mental health problems found at least one communication channel difficult to navigate, with four in 10 saying they found it difficult or distressing to make phone calls, for example. This has to be taken into account in FCA guidance. Part of the problem is that providers simply do not have the information about their customers to enable them to make better decisions. That is a crucial issue that will have to be addressed.
Baroness Tyler of Enfield (LD)
I support Amendment 76 in the name of my noble friend Lord Sharkey, to which my name is attached. I will say briefly that I support Amendment 77, which we have just heard set out very persuasively by the noble Lord, Lord Davies of Brixton. The links between money problems and mental health are now very well established. They were covered in some detail by the 2017 Lords Select Committee on Financial Exclusion, which I have already referred to. We had a number of recommendations in this area. Five years on, the case is stronger than ever. I hope the Minister will be able to respond sympathetically to that point.
Turning to the duty of care to replace the consumer duty—indeed, having a duty of care was another of the Select Committee’s recommendations—I concur with the sentiments expressed by my noble friend Lord Sharkey. A consumer duty of the sort in the Bill and which was brought forward for consultation by the FCA is not a duty of care. The former has many exemptions and, critically, does not provide wronged consumers with the right to secure monetary redress through litigation. This point was made very compellingly by my noble friend. While the purpose of the consumer duty is to deliver improved outcomes for consumers, because the proposals are diluted from the duty of care—which was voted on in Parliament and enshrined in the Financial Services Act 2021—we have to ask why this has happened.
The external bodies calling for a duty of care, the financial services Consumer Panel, many consumer organisations and the House of Lords Liaison Committee were all clear that what they wanted was a duty of care, not a consumer duty. I would be grateful to the Minister if in summing up she can explain why this move from a duty of care to a consumer duty was made and why it was allowed to happen. In terms of accountability and parliamentary sovereignty it is of real concern that, after Parliament passed the Financial Services Act 2021, the regulator chose to consult and bring forward rules on something different. This amendment provides an opportunity to remedy a very unsatisfactory state of affairs.
In my view, the consumer duty provides little more consumer protection than is in the existing “treating customers fairly” principle. Nor do these proposals really help to rebalance the power and information imbalance between financial services providers and vulnerable customers, which is a real concern of mine. We need a convincing explanation of how the consumer duty enhances the “treating customers fairly” principle and how this new approach will provide the regulator with more of an ability to ensure better outcomes for consumers than at present. I must say that is not at all clear to me.
Finally, the problem is that, as currently drafted, the consumer duty places the responsibility on consumers to understand the benefits and risks of different products and services. There needs to be less emphasis on what consumers should be able to discern for themselves and more emphasis on what should be in place to stop firms exploiting that power and information imbalance between themselves and customers. This is something that a duty of care amendment would do.
Lord Sikka (Lab)
My Lords, I will speak to Amendments 229 to 231. They overlap with the amendments tabled by the noble Lord, Lord Sharkey; I congratulate him on his excellent speech and the wonderful case that he made for a duty of care.
The key theme of these three amendments is the empowerment of consumers—that is, enabling consumers to secure redress from negligent authorised persons for failure to act with due care as well as enabling them to seek compensation from regulatory bodies for their failures. Empowering consumers generates pressure points for regulatory bodies and authorised persons to ensure that they act diligently, efficiently, honestly, fairly and with some care.
The key element in these amendments is a duty of care, about which the noble Lord, Lord Sharkey, has already said a few things; I will add just a few more. The FCA has failed to carry out the mandate given to it by Section 29 of the Financial Services Act 2021. The consultation was fundamentally flawed; indeed, the wording of its questions indicated the bias against its mandate to create a duty of care.
I have time to go through only one example. Question 12 on the consultation paper was very badly designed. As an academic, I have carried out many questionnaires over the years, but I have never written a question like this with so many questions in one:
“Do you agree that what we have proposed amounts to a duty of care? If not, what further measures would be needed? Do you think it should be labelled as a duty of care, and might there be upsides or downsides in doing so?”
That is supposed to be one question. This question and the accompanying information provided in the consultation paper are severely misleading. The FCA asks, “Do you agree that what we have proposed amounts to a duty of care?” Does it not know what a duty of care is? Has nobody there ever studied any English case law from the 20th century to understand what it is? What a strange question to ask.
First, it was not for the respondents to inform the FCA whether or not it had proposed a duty of care; that was for the FCA itself to do. Secondly, if it is not a duty of care but the majority of respondents believe it to be one, does that make it so? Thirdly, if it is a duty of care but the majority of respondents believe it not to be, does that mean it is not one? It is very strange. Fourthly, if it is a duty of care then the FCA has proposed such a duty without asking the question, specifically mandated by Section 29 of the 2021 Act, as to whether there should be one. Fifthly, if it is not a duty of care then the FCA has proposed that there should not be one. If you look at it on logical grounds, none of it makes any sense. The questions and the accompanying statements do not make any sense, so the FCA has not really consulted on a duty of care.
The FCA’s consultation paper says that a duty of care “may have different meanings”—in other words, that is why it did not really want to go down that route. That is misleading. Just because the meaning of duty of care evolves does not mean that the FCA should not carry out its statutory duties. The principle of duty of care is well established in English law, especially since the 1932 case of Donoghue v Stevenson. It is found in fields as diverse as sale of goods and professional negligence, but it seems to have eluded the FCA.
The FCA has failed to create a duty of care as that phrase is commonly understood in law. What it has done is propose general rules about the level of care that must be provided to consumers by authorised persons. That is not a duty of care. Principle 2 of the FCA’s handbook does not create a duty of care because a breach of the FCA’s Principles for Businesses does not give rise to a right of private action by parties injured by a breach thereof. That has already been commented on; unless consumers can enforce something, it is not really a duty of care.
The FCA’s chair, Charles Randell, rejects the commonly accepted legal definition of the term “duty of care” and states that, for the FCA, it means nothing more than
“a positive obligation on a person to ensure that their conduct meets a set standard.”
That does not sound like a duty of care. Randell further commented in relation to the consultation paper that
“whether or not a private right of action for damages should attach to the duty … there would be alternative ways of enforcing such a duty. These include not only voluntary redress or a restitution order, but also our routine supervision and enforcement activities. And individuals have the ability to seek compensation by referring complaints to the Financial Ombudsman Service, which would have regard to the duty in its decisions.”
In a sense, I have no problem with regulatory remedies being in place in addition to the private right of action—I welcome them—but they cannot be a substitute for that right, which is what Amendment 229 calls for. There are two reasons for rejecting the FCA’s position. First, elsewhere—for example, in the sale of goods or professional negligence—a breach of a duty of care is by definition actionable, so why is that prevented in the world of finance? Why are the financial services and the FCA an exception to it? Secondly, the alternatives listed by Randell and the FCA have consistently been shown to be unsatisfactory. Individuals are therefore left in the lurch with nowhere to go.
A right of private action is desirable and creates a pressure point for financial services providers. While the consumer duty has many exclusions and qualifications I do not welcome, attaching a private right of action to it would materially strengthen consumers’ rights in relation to wrong scores and be of benefit to consumers. A right of private action would enable consumers to seek redress and compensation in the event that they are dealt with badly by a financial company. In the absence of that right, consumers, investors and pension savers remain dependent on the FCA. As we have already heard, the FCA is always dragging its feet to do anything. We need to set consumers free. In essence, I am supporting what the noble Lord, Lord Sharkey, said.
Baroness Altmann (Con)
My Lords, I added my name to three of the amendments in this group. I will speak to Amendments 225 and 226 first. The noble Baroness, Lady Kramer, has expertly explained the issues surrounding the Equitable Life compensation scheme and the problems suffered by more than 1 million people who lost money through what was reputed to be an extremely strong and stable investment company. Even though the Parliamentary Ombudsman ruled that this was due to official maladministration across a wide range of actors, about 900,000 people have received only 22% of the compensation due.
I understand that taxpayer money is not a bottomless pit and that it is difficult when there is such an enormous number of people involved for any Government to consider this kind of compensation, but we have a Parliamentary Ombudsman for a reason. If a Parliamentary Ombudsman rules in a particular direction, it is troubling to me that the Government would suggest that they disagree with their own referee and therefore are not going to comply. The amendments from the noble Baroness, Lady Kramer, would require the Government to honour the recommendations of the ombudsman. I urge my noble friend to look seriously and carefully at how much has been paid out and to whom, and whether the Government can justify not complying with the recommendations of their own ombudsman.
I have personal experience in the case of the Financial Assistance Scheme where the Parliamentary Ombudsman ruled that government must compensate. The then Government in 2005-06 simply said that they were not going to and that they disagreed. We had to take the Government to court. They lost in the High Court and then in the Court of Appeal. It was only after that and at the risk of the complainants losing their homes and everything else, after also having lost their pensions, that in 2008, thankfully, a proper redress scheme was set up. So it is possible, but it was very much dependent on the Secretary of State at the time being willing to agree.
Amendment 120 in the name of the noble Lord, Lord Tunnicliffe, to which I added my name too, refers to the Financial Conduct Authority’s Consumer Panel. The amendment would like to see the Consumer Panel reporting to Parliament. At the moment this excellent panel is doing quite a bit of work trying to look at the interests of consumers. Clearly, consumers as a group and individually do not have the resources that the financial services industry has in order to promote their interests relative to those of the financial services companies. The Consumer Panel has often come up with important recommendations to the board of the FCA to look at and act on behalf of consumers who have been wronged in different ways. But Parliament generally does not tend to hear about what the Consumer Panel says, and the board of the FCA is at liberty not to agree or comply with recommendations of the Consumer Panel.
It would be helpful for parliamentarians, particularly Members in the other place representing their own constituents who may have been wronged in these cases, to know what has been considered by the Consumer Panel. I hope that my noble friend might consider this very reasonable amendment, which is just asking that Parliament is directly informed by the Consumer Panel of its concerns at actions taken by the financial services industry to the detriment of consumers.
That leads me finally to the other amendments in this group. The Consumer Panel has recommended that a duty of care is required in the financial services industry. As we know, Section 29 of the Financial Services Act called for a duty of care, and Parliament was supposed to introduce a duty of care, yet what we have is this consumer duty rather than a fully fledged duty of care.
Amendment 76 calls for a duty of care, and the amendments tabled and so eloquently explained by the noble Lord, Lord Sikka, Amendments 229, 230 and 231, also represent what could be considered a duty of care—as, indeed, does Amendment 77 from the noble Lord, Lord Davies, which talks about consumers with mental health issues, and how the industry looks after them. These are all extremely important for the Government to consider in strengthening the protection for the public.
To give one brief example, if noble Lords will indulge me, most recently we have had the problem of liability-driven investments and the dislocations in the government bond markets caused by the market turmoil a few months ago. For many investors in personal pensions—where the Financial Conduct Authority oversees the supposed “know your customer” and new duty of care requirement—the products and offerings given to ordinary members of the public in pensions under auto-enrolment and in other areas have default options, which the majority of workers are put into. They typically use what is called a life-styling or target date approach, which means that, in the approximately 10 years running up to retirement, those customers are switched out of assets with higher expected returns such as equities into what are meant to be safe assets such as bonds, in the expectation that they will buy an annuity when they reach retirement—and annuities are priced relative to bonds, so everything should be fine.
There is no duty on those pension providers to ask a customer once a year, for example, if they are planning to retire at the date that they are gearing towards or if they plan to buy an annuity. They may plan to keep the money invested. If that is the case, we have seen millions of people—potentially, certainly hundreds of thousands, although we do not have the number—who have been coming up to retirement and lost a huge chunk of their pension, because the price of those supposedly safe assets has fallen significantly. They were never asked whether they were going to buy an annuity, and the majority of them will not do so. No provider had any requirement to check with their customer, on something as fundamentally important as this, whether they planned to buy an annuity or even to take out any money at all at the date that the product automatically switches them to. Nothing has been updated on that since the pension freedoms were introduced.
That is just an example of where, I hope, my noble friend will understand that a duty of care must extend beyond where the industry is today, so that the interests of individuals are taken into consideration by the financial services industry.
Baroness Penn (Con)
My Lords, let me start by dealing directly with Amendment 76, moved by the noble Lord, Lord Sharkey, and spoken to by many other members of the Committee.
I assure noble Lords that, in coming to this debate, I took the time to remind myself of our debate on the then Financial Services Bill in 2021; it is either an advantage or disadvantage, depending on your perspective, that I participated at the time. It is worth going through what that Bill, now the Financial Services Act 2021, required. It required the FCA to consult on whether it should make rules requiring regulated financial services providers to owe a duty of care to consumers. It also set out that the consultation must include
“whether the FCA should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care”.
The then Bill further set out that the consultation must be carried out by the end of 2021 and any new rules introduced, if considered appropriate, before 1 August 2022. The FCA publicly consulted on its consumer duty in May 2021 and again in December 2021, and issued its final consumer duty policy statement in July 2022. In its consultation, the FCA noted that its proposals met the requirements in the Financial Services Act 2021.
Baroness Kramer (LD)
I think the Minister said that the legislation, as it finally went through, gave the FCA the option of either a duty of care or something else. Did that imply that it could be much weaker than a duty of care—and did anybody signing up to it understand that?—or was there a sense that it might be done in a different way but would be equally as strong and effective as a duty of care?
Lord Flight (Con)
The other fundamental point is that it is not the law; it is a sort of quasi-law that does not have the same power as law.
Baroness Penn (Con)
If I may, I will come on to address the noble Baroness’s point and the questions from the noble Baroness, Lady Tyler, on why the FCA took the approach it did in selecting the consumer duty approach rather than a duty of care. It is the FCA’s view that it provides not a weaker response but a stronger one; I will set that out in more detail.
The consumer duty sets a higher and clearer standard of care that firms owe their customers than now, and includes a new principle requiring firms to act to deliver good outcomes for customers. It is a package of measures comprising an overarching principle, cross-cutting rules and four “outcome rules”. It is also accompanied by extensive guidance, as noble Lords have noted, to provide clarity for firms on what is expected from them.
The FCA developed the consumer duty following extensive consultation with a wide range of stakeholders, including consumer representatives. Noble Lords may be aware that, in its consumer duty consultations, the FCA specifically sought views on whether the new principle should instead require firms to act in customers’ best interests. On balance, the FCA concluded that requiring firms to act to deliver “good outcomes” was the most appropriate approach. The FCA explained that “good outcomes” best reflects the outcomes-focused nature of the consumer duty and underlines that firms should not focus simply on processes but on the impact of their actions on consumers. The FCA also noted concerns raised by some stakeholders that “best interests” language could be confused with a fiduciary duty or a policy that required the best outcome to be achieved for each consumer, potentially resulting in unintended consequences concerning the availability of products and services to some consumers.
I hope noble Lords are therefore assured that the FCA carefully considered the wording of its consumer duty in the manner proposed by Amendment 76 and concluded that a different approach would deliver better outcomes. As the UK’s independent conduct regulator for financial services, it is responsible for developing its rules independently of the Government.
The noble Baroness, Lady Kramer, asked about the potential for the consumer duty to operate in the context of past problems. She highlighted the mis-selling of PPI and interest rate hedging products. As I said, the consumer duty sets clearer and higher standards for firms to follow, and that means clearer and higher standards for the FCA to supervise and enforce, which will enable the FCA to act more quickly and assertively where it identifies poor practice. However, within this system, even the best regulators doing everything right will not be able to, and cannot be expected to, ensure a zero-failure regime.
In respect of the two specific cases of PPI and interest rate hedging products, the Government have always been clear that mis-selling financial products is unacceptable. That is why we supported unequivocally the FCA’s work on PPI to ensure that consumers who were mis-sold PPI receive appropriate redress, and the review process into the mis-selling of interest rate hedging products, which saw over £2.2 billion of redress being paid out to almost 14,000 businesses.
Lord Sharkey (LD)
Before the Minister moves on, what are her views on the point I made about “reasonable expectations” for consumers, which is the standard required by firms to comply with the terms of the new consumer duty? The Minister will have heard the historical criticisms of the notion of reasonable expectations for consumers. How would she feel about having this concept at the heart of this new duty?
Baroness Penn (Con)
The noble Lord gave other examples of the concept in the past, but it is important to root it in this particular context. Perhaps I can write to the Committee to expand on that point.
Baroness Kramer (LD)
Can I ask the Minister to follow up seriously on this? The reasonable expectation point matters so much. If it is a case only of outcomes, but that is then qualified by reasonable expectations, the reasonable expectations provide a complete out for PPI, interest rate swaps or virtually anything else that we see. The core concept of the consumer duty is that somebody has to be behaving outside the norm within the industry. The problem is that the norm within the industry was abusive.
Baroness Penn (Con)
The points that I gave in reply to the noble Baroness’s specific question on PPI and interest rate hedging products were in the context of the consumer duty as written, with the reasonable expectations provision in there. However, of course I take seriously the point raised by the noble Lord, Lord Sharkey, and I will write to the Committee to further expand on that.
Baroness Bowles of Berkhamsted (LD)
My recollection from the passage of the 2021 Act was that the final wording was government wording, put in as a concession to amendments from my noble friend Lord Sharkey. The government amendment said that a duty of care, or variations thereof, could be consulted on. Was it the Treasury’s, or the Minister’s, expectation at the time that it would be severely diluted? Was that the point of those extra bits?
Baroness Penn (Con)
I think I said directly what was required of the FCA, and the FCA has fulfilled its obligations under that Act. Furthermore, the FCA is not of the view that it has diluted the approach; it has taken a different approach from the duty of care. I have attempted to set out some of the reasoning and thinking behind the approach it has chosen to take versus the alternatives that were put to it. I am happy to write further.
Lord Sharkey (LD)
I am afraid to say that I am not sure I take much comfort from the FCA saying that it is right. Mandy Rice-Davies would know how to deal with that. My next question is about the lack of redress provided by the new consumer duty.
Baroness Penn (Con)
With apologies, the lack of redress is around the right to private action. I will come to that point and, when I have said my piece, the noble Lord can intervene, if it is not sufficient.
Amendment 231 from the noble Lord, Lord Sikka, is similar in intention and would introduce a statutory duty of care owed by authorised persons to consumers. Again, this proposal was considered by the FCA, and it sought views from stakeholders through its consultations. As noble Lords have noted, this issue has been under consideration for some time. In its 2019 feedback statement on a duty of care and potential alternative approaches, the FCA explained that most respondents, including industry stakeholders and a number of consumer groups, did not support a statutory duty of care. Of course, the two subsequent consultations were undertaken by the FCA in response to the amendment put down by Parliament and included in the Financial Services Act 2021.
The new consumer duty comes into force on 31 July for new and existing products. It represents a significant shift in regulatory expectations, and there is a large programme of work under way within the sector to implement it. It would be wrong to seek to replace it now or seek to duplicate it with an additional statutory duty of care before it has been given a chance to succeed.
Amendment 229, along with Amendment 76, seeks to attach a private right of action to the consumer duty. This is an issue that the FCA has considered and consulted on extensively as it developed the consumer duty.
Lord Sikka (Lab)
Could the Minister clarify something? If I buy a bar of chocolate, the producer owes me a duty of care and, if I get injured, I have a right of redress. If I buy financial services, why can I not have the same rights?
Baroness Penn (Con)
My Lords, the concept of a duty of care in financial services may be different to the concept of a duty of care in other contexts. This was considered very carefully and consulted on by the FCA in 2019 and in 2021. It considered these questions and the issues we have discussed in the Committee today.
Baroness Altmann (Con)
I thank my noble friend for giving way. On these consultations, did the financial services companies generally respond not wishing to have the right of redress? Were the consumer organisations in favour of it?
Baroness Penn (Con)
I do not have a breakdown of the different responses to the consultations. However, as I said, in its feedback statement on a previous consultation on the duty of care, the FCA noted that industry stakeholders did not support a statutory duty of care. It also noted that a number of consumer groups did not support a statutory duty of care. I can point back to when that was considered in 2019 as not being a single view from a single source of consultees.
Baroness Bowles of Berkhamsted (LD)
One is a number, as I was always taught when I was training as a patent attorney. It might mean that one consumer organisation did not agree, but the vast majority did.
Baroness Penn (Con)
The noble Baroness has made her point.
I was turning to the private right of action, which was also consulted on by the FCA. It has concluded that it will not be beneficial at this time to introduce a private right of action, as it sees benefit in giving firms time to implement the significant changes that the duty entails without the threat of private action.
However, the FCA has committed to keeping this matter under review. The FCA has the power to introduce a private right of action through its rules, without the need for legislative change, if it considers it appropriate to do so in future. In addition, as noble Lords know, consumers will remain able to seek redress via the Financial Ombudsman Service where they believe a financial services firm has breached the consumer duty.
Lord Sharkey (LD)
I thank the Minister for that reply. It is hard to understand exactly what the defence of the new consumer duty is, and why the private right of action is not included. I am very grateful for all the contributions made. I note that the Minister did not really address the defects of the consumer duty that we set out in detail, and I hope she will write to me and explain her views on that.
I close by saying that there is a slight Alice in Wonderland quality to this argument because, essentially, it boils down to something that we have discussed before: that it is not in the consumer’s best interests that financial service providers act in their best interests. That simply cannot be right. There is something fundamentally wrong with all this, and I look forward to having more time on Report to return to the issues.