Financial Services Bill

Baroness Altmann Excerpts

Report stage
Wednesday 24th March 2021 Lords Chamber

FiSMA 2000 does not protect consumers adequately. The FCA is always playing catch-up. Malfeasance continues to grow and to take new forms. Redress is patchy, time-consuming and stressful. A duty of care would address these problems. That is what the FCA consumer panel recommended in its submission to the Treasury’s FSFRF review last month. A duty of care would provide a strong and clear incentive for real, lasting cultural change in our financial services industry. I hope that the Minister will be able to accept our amendment or commit to bringing an equivalent to us at Third Reading. If not, I hope that the noble Lord, Lord Stevenson, will press this amendment to a vote.

[Baroness Altmann (Con) [V]]

My Lords, I am pleased to speak to this amendment. I have worked in this industry for many years. The numerous scams, frauds and scandals that have plagued consumers are ongoing. It seems clear, as the noble Lord, Lord Sharkey, said, that the Financial Services and Markets Acts 2000 does not protect consumers. I thank the noble Lord, Lord Stevenson, for his clear explanation of why the amendment, in all its parts, is required.

A duty of care on providers to make sure that they are considering the interests of their customers would certainly help to address the asymmetry of information between the providers and the consumers. It might also assist customers in the manner that the products that are developed are offered. Too often, providers develop new products with new complexities that are clearly not user-friendly. The FCA requirements are that the risks and details of the products must be disclosed, but the disclosure documents are impenetrable to the ordinary person. Those working at the FCA and those working for the providers understand the language used—it is natural to them—but the vast majority of the public do not understand the specific product literature which the FCA has been relying on to offer this kind of protection. It is clearly not helping consumers to be faced with bamboozling jargon and many pages of legalese in the product descriptions and the terms and conditions.

The FCA consulted on this in 2017 and it released a statement in 2019, and other consultations have covered this as well. I congratulate the Government for having engaged on this issue, and my noble friends Lord True, Lady Penn and Lord Howe; I know they have all worked on this issue. But, from a practical perspective, and as someone who has worked in this industry, developed product for consumers and worked with consumers on the other side who have suffered detriment, I believe that the fears about competition are somewhat overdone. All firms, if they have a duty of care, will then have to look after customers, so the issue of competition should not really pose so much of an impediment. Markets currently function in the interests of providers rather than consumers, and regulators are reactive to problems rather than trying to pre-empt problems that have been highlighted and pointed out for two or three years before anything is actually done—by which time so many consumers have lost out.

Of course I believe that firms should not profit from exploiting the public’s lack of understanding and education when it comes to retail financial services. Successive Governments have talked about improving financial literacy, but they have not managed to achieve this. In practice, providers do not know their customers, the customers do not understand the product literature and, indeed, it seems that there is very often no requirement for the provider to even ask basic questions of the consumer before the consumer buys a particular product. There are countless examples of areas where just a basic question could have prevented a consumer buying an inappropriate product.

So I urge my noble friend on the Front Bench to take up the offer of the noble Lord, Lord Stevenson, and work with him and other interested Peers to come up with a form of words for Third Reading that can prevent a vote on this issue and can also help accelerate the important duty of care that is required. Waiting for a consultation later this year is simply not good enough when it comes to the kinds of scandals and scams that we know are going on day in and day out.

[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, it is a great pleasure to follow the noble Baroness, Lady Altmann, and her powerful plea, which I hope the Government will listen to. I also speak to Amendment 1 in the names of the noble Lords, Lord Stevenson of Balmacara, Lord Sharkey and Lord Eatwell, to which I was pleased to attach my name, as I did to a very similar amendment in Committee.

Any noble Lords who have read the Second Reading debate will note that I majored on a “duty of care” in my speech. I used what you might call an expanded definition of “duty of care” to suggest that it might not be too much to put on the face of the Bill a demand that the financial sector should not engage in reckless, fraudulent, corrupt, obviously damaging systemic behaviour, including shipping off tranches of cash into tax havens, deploying complex financial instruments that they clearly do not understand and handing over control of markets to automated systems without adequate controls—things that threaten the security of all of us. But while I believe that principle remains sound, the lawyers convinced me that, in narrow legal terms, “duty of care” could not be stretched that far.

What the amendment here clearly introduces is a duty of care to individual customers. As proposed new subsection (2)(ea) says, their

“vulnerability, behavioural biases or constrained choices”

should not be exploited. Once, perhaps, such a clause was not necessary. There was a not ideal, but certainly useful, constraining paternalism: your local bank manager would look after you, both in limiting borrowing and in making allowances for unexpected disasters, personal and business. That has long gone—as of course has, almost universally, the local bank manager and, all too often, the local bank branch—so we need the law to step in to protect people to constrain the behaviour of financial institutions. As noble Lord, Lord Sharkey, said, we are in a situation where malfeasance has just continued to grow, with technical developments being one cause of that and, as noble Baroness, Lady Altmann, said, scandals and fraud have plagued consumers.

So that is the institutional side of where we are, but we also have to think about the state that people and our society are in today and make the law fit for our modern times, for these are times of massive insecurity. The idea of saving, or of even making the incoming funds match the essential outgoings each month, was an impossible dream for millions of people even before the arrival of the SARS-CoV-2 virus.

No one can know when sudden illness might strike—this Bill has been championed by Macmillan Cancer Support, to whose work I give credit—or it could be a redundancy or a pandemic that strikes people unexpectedly. That is one side of vulnerability and care that financial institutions should acknowledge. As Macmillan highlights, almost one in three of those severely financially impacted by their cancer diagnosis had to take out a loan or credit card debt. That is a public health issue. What we have are institutions that have been making profit from customers, sometimes for decades, and they have a duty to act compassionately and fairly in such circumstances.

But I think we also need to pay a bit of attention to the elements of the proposed new clause referring to “behavioural biases” and “constrained choices”. The noble Lord, Lord Holmes of Richmond, has been a rather isolated champion in this Bill on issues around the use of artificial intelligence algorithms and issues such as their potential bias, but he has also highlighted the way in which financial companies now have a historically uniquely detailed understanding of customer behaviour and the chance to exploit that through complex, opaque mechanisms.

As the noble Lord, Lord Stevenson of Balmacara, said in introducing an amendment, there has always been asymmetrical access to information between financial sector companies and their clients, but this has been massively magnified by technology—something that is only likely to grow. To create an assumption that this inequality of arms should not be misused should, we hope, constrain the behaviour of the financial sector—or at least, if it does not do that, provide a potential route for redress should it occur. There are already many who have need to seek redress for the behaviour of financial sector companies. I spent time with some of them this morning at a meeting of the Transparency Task Force.

As noble Lord, Lord Stevenson, said, the Government are likely now to say “Wait”—but why? We know that there is already an existing massive problem and a huge risk. If the Government do not acknowledge the need to act now, I offer the Green group’s strong support for the intention of the noble Lord, Lord Stevenson, to test the view of the House.

--- Later in debate ---

[The Deputy Speaker (Baroness McIntosh of Hudnall) (Lab)]

We appear to have lost contact with the noble Lord, Lord Holmes. Perhaps we should move on to the next contributor, the noble Baroness, Lady Altmann.

[Baroness Altmann (Con) [V]]

My Lords, I have added my name to Amendment 3, moved so excellently by the noble Lord, Lord Oates. I congratulate him on his work on the issues relevant to this group of amendments.

I also commend my noble friend the Minister and his department for listening to the concerns expressed in Committee and for laying his own amendments to the Bill, which previously made no mention of climate change at all. I believe that the Government are committed to making a real difference on climate change and environmental issues, and have recognised the dangers that our precious planet faces due to climate change and biodiversity risks, as the noble Baroness, Lady Bennett, mentioned and as is in her amendment. I welcome the Government’s Amendments 43, 46, 47 and 49, and hope that the issue of climate risk will continue to move up the agenda in financial services.

I have enormous respect for my noble friend Lady Noakes and her experience in banking. She makes relevant distinctions between assets held by insurance companies, regulated by the FCA, which hold investments directly in fossil fuel or environmentally damaging firms and activities, whereas banks’ main assets are loans rather than more direct investments. Their balance sheets, as she noted, have some leasing, but, should the worst predictions of climate catastrophe materialise in a shorter timeframe than currently anticipated, there could be unexpected defaults on a number of the loans on the loan books, which also needs to be considered, I would hope, in terms of risk weightings.

In Committee, I supported the noble Lord, Lord Oates, in seeking to update the existing capital risk weightings to reflect climate change risk. Having listened carefully to the Committee’s arguments, he has taken care to adjust his amendment for Report. As we have all discussed in this group, climate change is now recognised widely as posing a significant risk to the entire global financial system and, in fact, to our expected and hoped-for way of life. Current central bank policy risks reinforcing a carbon lock-in through a systemic bias to fossil fuel investments—indeed, insurance arrangements and pension funds also have significant investments in this area. I believe we need a twin-track approach that both reports on and quantifies climate-related financial risks and, at the same time, amends prudential risk tools to reflect the risk of loss or stranding in relation to fossil fuel investments or, indeed, loan books.

Such an approach would reflect the urgency of the challenge we face and, as Andrew Bailey said in a speech last year:

“Investments that look safe on a backward look may be existentially risky given climate risks.”


The Minister’s response in Committee was that the proposed amendments would require the PRA to set punitively high risk weights against exposure to existing and new fossil fuel production and exploitation, and that these risk weights would, in effect, make it more expensive to finance such activities and thereby make them less attractive. Loans would be more expensive, potentially, to companies involved in this area. Is this not the very point that we should be seeking to achieve—to reflect the risks of carbon-intensive investments quantitatively, through higher risk weightings, and potentially through the issuing of loans to such companies?

Amendment 3 recognises the Government’s concerns and now proposes only that the PRA carry out a review of the current risk weightings applied to existing and new fossil fuel activities. In this regard, such a review may indeed confirm what my noble friend Lady Noakes suggested would be the outcome but, without such a review, I feel that we will not necessarily be taking this sufficiently seriously. I hope my noble friend can agree that this is a reasonable and prudent way to recognise the urgency of the climate change challenges we face, and that it would provide evidence to inform any necessary future changes to existing prudential rules around capital weightings, should that be found to be required.

In addition, two reports have just been published highlighting the systemic nature of climate risks. The LSE’s Grantham Research Institute report—I declare an interest as a visiting professor—Net-Zero Central Banking stated:

“Central banks and supervisors will need to take a systemic perspective, addressing both micro- and macroprudential risks over a much longer time horizon than they do now, and work to ensure that financial flows become aligned with net-zero.”


Policy Exchange’s report Capital Shift recently stated:

“Whereas international banking codes require banks to include emerging risks such as cybersecurity in capital adequacy compliance … climate change barely features.”


It recommended:

“Central banks and supervisors should introduce higher capital charges for assets at greater risk from climate and nature-related financial risks.”


I hope my noble friend the Minister can provide assurances that an urgent review of this vital area is possible and will be considered.

I speak briefly in support of the aims of Amendment 22 in the name of the noble Baroness, Lady Hayman, on climate-related financial risk reporting. I commend her for her work in this area and declare a further interest as a member of the Peers for the Planet group, which she so ably leads. Amendment 22 would require adjustments to reflect the systemic risk in the whole financial system. I hope my noble friend will commit to a future consultation, at least, on the FCA and PRA objectives having regard to net zero targets.

Finally, I have added my name to Amendment 23, also in the name of the noble Baroness, Lady Hayman, whose work on environmental protection has been so powerful. I congratulate the new chief executive of the FCA, Nikhil Rathi, on the latest announcement that he is recruiting a senior role focused specifically on environmental and other ESG matters, so I suspect that this amendment may no longer be required.