Financial Services Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Monday 22nd February 2021 Grand Committee

[Lord Sharkey (LD) [V]]

Amendment 1 would require the FCA to

“make rules introducing a duty of care … owed by authorised persons to consumers in carrying out regulated activities”

under FSMA 2000. The Government understand the value of a duty of care; they are about to introduce exactly that in the forthcoming online harms Bill. They understand the immense harm that can be done to consumers without this duty, especially in complex and asymmetric environments.

We have already seen too many examples of the immense harm inflicted by our financial services industry on ordinary consumers—I am thinking here of PPI, which was a product sold to consumers at an 87% commission rate. The scandal ended up costing £53.8 billion in redress and administration costs. I am also thinking of mis-sold interest-rate hedging products and the general and widespread unfair treatment of small businesses in financial difficulty. There was also the long-running saga of overcharging for overdrafts and of leaving loyal customers languishing in poor-value products.

The existing rules did not prevent any of these things, which is not a surprise. There is no explicit requirement in FSMA or in the FCA’s principles for business for firms to prevent harms to customers. The FCA’s “treating customers fairly” business principle is substantially weakened by the legal principle in FSMA that consumers should

“take responsibility for their decisions”.

This fails to take into account the imbalance in power and information between firms and their customers.

Things are not getting any better. Recent examples of misbehaviour include the banks’ response to the authorised push payment fraud, inadequate assessment of affordability by payday lenders, the scandal in Woodford Investment Management, sales of risky investment products on the boundary of the FCA’s perimeter and the outrageous behaviour of some insurers during the pandemic trying to welsh on their business interruption policies.

The Minister will be aware of the Banking Standards Board’s annual survey of 29 member banks’ behaviour and competence. There was some welcome improvement in these areas between 2016 and 2017 but none since. In 2019, 13% of employees of these banks said that they had seen instances of unethical behaviour being rewarded and 14% felt that it was difficult to make career progression without flexing their ethical standards.

The FCA knows all this, of course, and has occasionally acted. However, within the existing legal framework it often takes many years for the FCA to respond to firms’ harmful practices. An example of this is the treatment of loyal general insurance customers, which the FCA is only just beginning to tackle.

Then there is the question of the high-cost short-term credit sector. Wonga may have gone, thanks largely to pressure from this House, and after intense pressure from Parliament there is now a price cap on rent to own. But problems persist with, for example, doorstep lending, guarantor loans and new, automated overdraft products.

The FCA tackles unacceptable practices slowly and piecemeal, allowing harm to persist for many years. It was particularly late in spotting the rapid growth of buy now pay later and its potential for harm. I believe that the Government have said that they intend to address this problem and I hope that they will use this Bill as an opportunity to do that. I would be pleased if that were to be the case, but the slow and cumbersome engine of primary legislation would not have been necessary had a duty of care extended over the sector.

The FCA has published eight papers in the last five years dealing wholly or in part with the question of duty of care, but it still has not developed a clear view or a recommendation. In its consultation feedback paper of April 2019, the FCA noted:

“Most respondents consider that levels of harm to consumers are high and there needs to be change to better protect them.”


It then sat on the fence about what this change should be, reporting that none of the financial service providers favoured a duty of care. Mandy Rice-Davies would have known what to say to that.

In any case, as the FCA’s consumer panel noted,

“Much of the debate on a duty of care has centred on legalistic arguments about whether there is a ‘gap’ in protection. What matters is whether consumers get the treatment they want and expect from their financial services providers.”


The consumer panel commissioned Populus to ask individual and small business customers about their experiences. The research showed that the customer is not at the heart of business decisions and that 92% of respondents were in favour of a duty of care in financial services.

While sitting on the fence, the FCA has also managed to hit the ball into the long grass. It promised to initiate yet another consultation on the issue, initially due last year but now postponed. In the meantime, levels of financial vulnerability grow. The FCA’s latest Financial Lives survey, published 11 days ago, makes grim reading. It notes that Covid-19 has reversed the previous positive trend in vulnerability. Between March and October last year, the number of adults with characteristics of vulnerability increased by 3.7 million to 27.7 million. That means that over half of all adults are financially vulnerable—a truly alarming figure.

The same survey also notes that unsolicited approaches have increased during the pandemic, increasing the risk of fraud and scams. Over a third of adults say that they have received at least one such approach and 1.4 million say that they have paid out money as a result of a possible Covid scam. Unsurprisingly but regrettably, people with characteristics of vulnerability have been the more susceptible: 12% paid out money, compared with 1% of the non-vulnerable. None of this will get any better when the furlough and business support arrangements come to an end. Financial pressures and desperation will inevitably increase; vulnerable people will be disadvantaged, treated unfairly and scammed.

Dealing with all this would be made significantly easier if the FCA were to impose a duty of care on service providers. The idea has widespread support. In May 2019, the Treasury Select Committee published its report on the inquiry into consumers’ access to financial services. Paragraph 210 of the report says:

“All retail financial services, no matter which sector of the industry they operate in, should be acting in their customers’ best interests at all times. If the FCA is unable to enforce such behaviour in firms under its current rule book and principles, the Committee would support a legal duty of care, analogous to that in the legal industry, creating a legal obligation for firms to act in their customers’ best interests.”


The FCA’s own financial services consumer panel, responding to the FCA’s discussion paper, said:

“A new duty is required to improve the position of all consumers … including those who need more support.”


The Money and Pensions Service said:

“MaPS remains convinced that a formal ‘duty of care’ on financial firms could provide a better balance between firm and consumer responsibilities and help deliver extra protection and better treatment to vulnerable consumers.”


StepChange is in favour, as is Fair by Design, and so are many organisations with direct and in-depth experience of the financial catastrophes that can be visited on the poor and the vulnerable. I am grateful for the explicit support and encouragement in pressing for a duty of care from Age UK and the Alzheimer’s Society and I am especially grateful to Macmillan Cancer Support for its unfailing help and advice. I am also indebted to the former chair of the FCA’s consumer panel, Sue Lewis, for her support.

Despite all this support, the Government will no doubt resist the idea of introducing a formal duty of care. When this issue was raised at Report in the Commons, John Glen addressed it by saying simply:

“As the FCA is already taking steps to ensure that financial services firms exercise due care and regard when offering products, services and advice, a statutory duty of care, as proposed by new clause 21, is not necessary.”—[Official Report, Commons, 13/1/21; col. 366.]


He did not say what these steps were or make any assessment of their actual or likely effectiveness. Today the Government may add to John Glen’s reasons for rejecting a duty of care and may advance the argument that they need to wait to give the SMCR time to work. Surely five years is long enough—five years in which there has been just one successful conviction. The FCA’s consumer panel points out that this is essentially a category error and notes:

“The SMCR is primarily a supervision tool—it will be a valuable mechanism to ensure that firms are complying with a new duty.”


The Minister may also pray in aid the reinforced, better-resourced and more active FOS. It is true that FOS dealt with around 250,000 cases in 2019-20. In these cases overall, one-third of judgments were in the consumers’ favour. This is evidence enough of large-scale misbehaviour, but the figures are much worse for products aimed at the financially vulnerable: 89% for guarantor loans, 84% for doorstep loans and 78% for logbook loans.

This is not—absolutely not—evidence of successful regulation. Every one of these judgments is evidence of a failure to sell the right product to the right individual or small business, to explain it clearly or to handle a complaint properly. The FCA’s current rules and principles are failing to stop this tidal wave of mis-selling, malfeasance and malpractice. We need a new approach that focuses on prevention of harm and delivers extra protection and better treatment for vulnerable customers. We need a duty of care and I beg to move.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I declare my interests as in the register. I support all the amendments in this group and what has already been expertly said by my noble friend Lord Sharkey. I will comment on the duty of care later, but first I will introduce my Amendment 72, which calls for warnings relating to non-regulated activity.

The issue here is one where firms that are authorised in respect of regulated activity also conduct unregulated activity, and customers are misled by the fact that the firm is authorised for some activity into thinking that the authorisation is some kind of guarantee of quality. It is what Dame Elizabeth Gloster called in her report “the halo effect”, and about which she said again to the Treasury Select Committee a couple of weeks ago that something should be done.

One thing that is done by the Bill is enabling unused authorisations to be more easily cancelled, but that does not solve the problem when there are still used authorisations. This is a problem that has long been known about and does not affect only unscrupulous businesses. Therefore, the amendment aims to make it quite clear to consumers what the situation is in three ways.

First, authorisation must not be referenced in any communication, including on letterheads or websites, as a reputational guarantee regarding non-regulated activity. In practice that should mean the ending of straplines. Secondly, when non-regulated activity is being conducted, that must be made clear, together with an explanation that it means that access to the Financial Ombudsman Service and/or Financial Services Compensation Scheme is not available. Thirdly, it would be an offence to imply that a non-regulated activity is covered by an authorisation.

The first two provisions relate to authorised firms aiming to stop the halo effect in as far as that is possible. I do not expect firms to write to clients saying, “This is the rogue side of our business”, but I hope that clients will be more aware that that might be so. The third point is a general point and would apply beyond regulated firms, but my aim is to catch passive implications, so that active steps to inform have to be taken.

The amendment has been drafted to make the point clear, rather than as a perfect draft to weave in among other regulatory provisions, and I hope that the Minister will take up the idea and recognise that reducing a problem by eliminating surplus authorisations does not reduce the problem to its smallest possibilities.

Turning now to the duty of care, I want to add that a duty of care should apply to the regulators as well. Of course, they say that they act in the public interest, but they are every bit as aggressive about protecting themselves—of all things from the public and from liability—as the firms that they supervise. My view of this is simple: “If you don’t live by it, you don’t really understand it”.

If one examines the responses to the FCA’s discussion paper in July 2019, the majority were in favour, two of the main reasons being that it was critical to triggering a fundamental culture change away from asking “Is this within the regulations?” and into “Is this right?” Secondly, it would give a duty to avoid harm that would incentivise firms to evaluate consumer risk at every stage.

What is not to like in that? It seems that just a handful of respondents did not want any more than was already in those principles about treating customers fairly. But they were very much in the minority and, sadly, it seems that some of those in favour of a duty of care are not in favour of it being actionable. I am in favour of a duty of care, I am in favour of it being actionable and I am in favour of it applying to regulators as well, because something is going wrong all round and, frankly, I find the FCA’s hesitancy a matter of serious concern.

--- Later in debate ---

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, Amendment 3 in my name and that of my noble friend Lord Sharkey is an amendment to Amendment 2 and probes what is meant by “high market standards”. Could these mean, “no lower than current standards”, and what are they measured by? Are they just rules, which we hear a lot about, or do they also include enforcement? Regrettably, we also hear about that when it has all gone wrong, with the Gloster and Connaught reports being the latest examples of that. Like a taster menu, our amendment then leads on to the connection between standards and oversight of regulatory performance with respect to both rule-making and enforcement, and suggests that there should be regular independent reviews every three years. For clarification, that would not be instead of whatever Parliament decides it wants to do; it would be additional.

I will put my cards on the table and say that I am nervous about any introduction of competitiveness as a general duty, even with the qualification, or as a bidding, to consider ranking. If one thing was learned from the FSA’s demise and the financial crisis it is that giving a financial services regulator a competition duty can lead to disaster through creating incentives to balance industry profit against safety and consumer protection. It can potentially lead the regulator astray from its essential objective of safety and soundness. If there is such a remit it will inevitably lead to calls from parts of industry that do not want fetters, or even from shareholders that want profits. If competition appears as a duty there will be pressures to go just a little bit lighter touch, then just a little bit more, with arguments that this is all okay because it is among experienced market participants.

Unfortunately, light touch in one part of a market that may seem remote from retail consumers does not prevent contagion. Let us not forget the investment bank “slice and dice” of subprime mortgages, which fuelled the financial crisis by stimulating yet more subprime lending—what gets made gets sold and invested in. Later amendments deal with what happens nowadays with regulated mortgages that are sold on to unregulated entities, so let us not kid ourselves that different parts of the market are in self-isolation or lockdown.

However phrased, a competition mandate is different from a proportionality mandate, which the regulators already have. I am all for regulators making it much clearer how they categorise activity as part of proportionality and transparency. I wish they would do more of it—it can aid competitiveness too—but put in an additional competitiveness mandate and what does that mean, other than to go lighter than proportionality requires?

On the other hand, it is necessary to recognise that regulation is a good way to end up with a closed shop, preventing new entrants and new products, and there can be incentives on regulators to seek the stability of the graveyard. I can think of areas where I would lay that charge, such as fixation on gilts and sluggishness around approving new banking models. However, I do not see a primary competitiveness mandate solving that, even alongside a “high market standards” statement.

This takes us back to what is meant by high market standards. Who sets those? Whatever they are, I am sure they will be lauded as “world beating” even before the rest of the world has been looked at. However, I think that a regular, expert independent assessment can check and report on all aspects—the standard of rules, whether they are gold plated, how good enforcement and operational systems are and, yes, what can be learned by comparison with elsewhere. However, I do not think it is for the regulators to advise on whether they are better at doing things than elsewhere. I already know their answer.

The final part of my amendment suggests that the regulators pay for the reviews—so it is rather like a Section 77 review. Then it says that the review must be published without modification, because there was a certain amount of photoshopping of the Promontory report about GRG and it was made public only via the Treasury Select Committee publishing a leaked copy.

However, there are other ways that regular independent reviews could be done—more like an independent person FiSMA Section 1S review that the Treasury can require—or through an oversight body led by a handful of skilled individuals, as the Australians are now doing. It seems to me that, if you want assurance on high standards, which I do, that is the way to do it, in line with what looks like becoming the new best practice, and that is where the UK should be.

[Baroness Neville-Rolfe (Con) [V]]

My Lords, I will speak to Amendments 6 and 7 in my name and that of my noble friend Lord Trenchard, who has a lifetime of experience in the financial services sector and understands the whole issue of competitiveness and UK influence from banking for many years in Japan. I am so sorry that because of procedural changes he is now unable to speak to these amendments.

I refer to my interests in the register, particularly as a non-executive director of Secure Trust Bank plc in Solihull and of Capita plc and as a member of this House’s EU Financial Affairs Sub-Committee. I was especially sorry to miss Second Reading of this very important Bill.

These amendments—like the one moved by my noble friend Lord Blackwell and those in the name of my noble friend Lord Bridges—introduce a competitiveness objective for the FCA and PRA. My Amendment 7 also applies to the Bank of England itself. My amendments differ because they spell out aspects of competitiveness that I know are important from a lifetime in business and from nearly three years as UK Minister attending the Competitiveness Council in Brussels.

Of course, consumer protection, stability and standards are important, but they are very well looked after in the structure of financial services regulation, even if the regulators do not always deliver or enforce properly, as we have heard from the noble Baroness, Lady Bowles. I come from a different perspective. Those of us with an understanding of economics know that needless red tape, inefficiency and lack of care for UK interests end up hurting UK consumers with prices that are higher than they need to be, delays that frustrate, and a failure to get things right first time. These also hamper innovation and productivity growth, two of the best ways to both benefit consumers—and I come from a consumer background—and stay ahead internationally.

This matters today even more than in the past. Financial services are the leading sector in the British economy, not only in London but in many other areas of the UK: Edinburgh, Cardiff, Newcastle and Birmingham, to name but a few. In the wake of coronavirus, Brexit and international competition, we need to treasure and enhance our leading position. France, the Netherlands, Germany, Ireland and Luxembourg are trying to steal our lead—but ineffectively, as this hurts their business and consumers and encourages investors and services to move to New York or Singapore. As Mr Barney Reynolds has argued, we must look again at the legacy of EU law, and I know my noble friend Lord Trenchard will have more to say on his ideas on another day.

We must not forget one point: small and entrepreneurial businesses are the backbone of this country. Everyone should remember that the big, powerful multinationals find it relatively easy to adapt to new regulations, rules and requirements, and to lobby for arrangements that suit their interests.

We must also create a benign climate for innovation, which is a vital part of improving efficiency. There is one great example: the Financial Conduct Authority’s so-called “sandbox”—clear, simple and easy regulation for fintech. Thanks for this are due to the current Governor of the Bank of England, but Mr Bailey and I were promoting this as good practice in India four years ago. It is dispiriting that there are not more such initiatives.

As my amendment states, we need “efficiency” and “competitiveness” in the interests of UK plc to feature in the purview of our regulators. A competition objective is not enough; indeed, it can sometimes harm smaller players, driving them bankrupt and causing problems for their customers, as bigger institutions mop up and take over their client base. Competitiveness is sometimes wrongly associated with bad aspects of globalisation. That is wrong: UK competitiveness is what this country now needs to strive for to support the UK base, rather than encouraging the sale of wonderful companies such as Arm to overseas interests. Alex Brummer has argued this forcefully in a series of books, and I agree with him.

While we come at the issue from different angles, I really do want my noble friend the Deputy Leader to listen to those of us who are seeking a change to the Bill to bring in considerations of “competitiveness”. So I will finish with the word’s dictionary definition:

“1. Possession of a strong desire to be more successful than others … 2. The quality of being as good as or better than others of a comparable nature.”


What could be better than that?

--- Later in debate ---

[Earl Howe (Con)]

My Lords, this is clearly a detailed and analytical question, which is probably not appropriate for Grand Committee. I would be happy to write to the noble Baroness, giving her chapter and verse as far as I am able to do.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I thank all who have spoken in this debate, and the Minister for the extensive replies. As he said, we have heard a lot of views, a lot of which I felt coincided with one another, at least in terms of what was said, more perhaps than appears in the amendments. Ultimately, a lot of the things that were complained against could be dealt with through proportionality. Yes, it is not competitive if the actions of the regulator are not proportionate—be that in rules or supervision. Therefore, I think there is less need to give a specific competitiveness mandate, because that confuses whether you are seeking something else on top. I refer to what the noble Lord, Lord Blackwell, said in introducing his amendment, when he said that these things were probably taken into account but not formally, or they would be taken as given in any other industry.

--- Later in debate ---

Moved by

[Baroness Bowles of Berkhamsted]

5: Before Clause 1, insert the following new Clause—
“Non-exploitation of consumers or small businesses
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) In section 1C (the consumer protection objective), after subsection (2)(e) insert—“(ea) the general principle that firms should not exploit a consumer’s or small business’s vulnerability, behavioural biases or constrained choices;”.(3) After subsection (2) insert—“(3) Exploitation under subsection (2)(e) includes, but is not limited to, situations where—(a) there is a system of conduct, or pattern of behaviour, that relies upon unequal power between the parties to impose disadvantage on consumers or small businesses or gain advantage for the larger party;(b) notice or other compliance terms are imposed which make it impractical for consumers or small businesses to comply;(c) there is use of notice terms to coerce consumers or small businesses into unfavourable contracts;(d) conduct by a supplier causes a consumer or small business to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; or(e) there are risks that the supplier should have foreseen would not be apparent to the customer or small business.In this section, “small business” is as defined in Part 15 of the Companies Act 2006 (accounts and reports).””Member’s explanatory statement
This amendment is to protect consumers and small businesses from exploitation.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, Amendment 5 builds upon Amendment 4, tabled by the noble Lord, Lord Tunnicliffe, which was discussed within the first group and in turn built upon Amendment 1, moved by my noble friend Lord Sharkey. I will not revisit the “duty of care” part of the amendment, as it has already been well discussed, but the point about Amendment 5 and the similar Amendment 73 is to bring small businesses within the non-exploitation principle—defined by the noble Lord, Lord Tunnicliffe, in his amendment—and to highlight some things that regularly happen in contractual terms and which can be exploitative. Amendment 73 is more explicit and would allow the FCA to intervene where there is “Unconscionable conduct”, even if a consumer or small business has entered into a contract.

The issues that are highlighted as wrong behaviour, although within an exemplary list, are: patterns of conduct that rely “upon unequal power”; terms of notice

“or other compliance … which make it impractical … to comply”;

the use

“of notice terms to coerce … unfavourable contracts”;

compliance terms that are “not reasonably necessary”; and risks that the larger supplier should have realised would not have been

“apparent to the customer or small business”.

This is not a random list of points—there are rather more in my Private Member’s Bill on the same subject—but a key list of matters that were used by GRG in the exploitation of small businesses, and which the FCA said it could do nothing about because they were outside the regulatory perimeter.

Once more I must look to other countries to see how we compare, and once more I find that Australia has tried harder. It has a general law of unconscionable conduct in commerce that deals with all these issues and more, and which extends to not only consumers but business to business. I do not know how many noble Lords read the various detailed contracts that one is forced to sign as an individual or small business to access almost anything nowadays. In the earlier group, these were similarly referred to by the noble Lord, Lord Eatwell. I have seen barely one that is reasonable. It is only getting worse as everything becomes a leased service rather than a product.

With these amendments I make the point for small businesses as well as individuals, and in the context of financial services, which are among the most fundamental of services, that bullying contracts must stop. They must be within the regulatory perimeter and the FCA must be prepared to intervene. Excuses about GRG and what the FCA did not do there hold no power. We saw what happened; we need strong measures that mean it must not happen again and that imitations of it must not be tolerated in day-to-day operations. I beg to move.

[Baroness McIntosh of Pickering (Con) [V]]

My Lords, I find myself in some sympathy with the noble Baroness, Lady Bowles, on Amendment 5 because this is a grey area where small businesses are perhaps not well served. My noble friend Lord Howe claimed, in his full and comprehensive response to the last debate, that this was not the right time or place to look at the regulatory objectives, as this would better take place under the Government’s future regulatory framework review. I would argue, in support of the noble Baroness, Lady Bowles, that small businesses are not well served by the current provisions. If you look at some of the work of the Financial Ombudsman Service, which the Committee has referred to, I would not hold out much hope for a small business claiming redress and a decision under that agreement. I would be delighted if my noble friend were to prove me wrong in summing up this debate.

Amendment 5, in particular, has strengths to commend it and I would very much like to lend it my support. I look forward very much indeed to hearing what my noble friend will say and whether the Government might look favourably on it, a lacuna having been identified in the regulatory framework.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, clarity around all terms and conditions is, of course, to be welcomed. I agree with my noble friend that one challenge with these amendments is potentially introducing new concepts, which might need to be defined through regulation, where we think that there are existing protections in place and the effect could be duplicative.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I thank all those who have taken part in this debate; it has been short but interesting, and I thank those who have supported the concept that I am trying to elaborate. What the noble Viscount, Lord Trenchard, has just said is probably true to some extent—why should we rely upon the FCA for this? It is true that this probably should be more of a general legal offence of unconscionable conduct, which is what they have in Australia. So there is no point trying to argue that, in a common law country with a similar kind of legal system, you cannot work out how it happens and whether it is effective: I can tell you that it is.

As the Minister elaborated, the problem with having a subjective measure—as the noble Viscount, Lord Trenchard, called it—is that you then have to put a whole load of rules around it. That is exactly the problem with the FCA. It has done it with the senior managers regime, something that I always understood Parliament wanted to be a subjective measure—that is, if you behaved badly and something happened on your watch, you were responsible. That has now been tied up with contracts approved between the regulator and the employees in the businesses. Instead of capturing the people at the top, it has pushed responsibility down the chain. The same has happened with “fit and proper”. The FCA has chosen to redefine what that means so it will catch only very extreme cases rather than bad behaviour.