Financial Services Bill

Baroness Drake Excerpts

Wednesday 25th July 2012 Lords Chamber

Moved by

[Baroness Drake]

117: Clause 5, page 17, line 35, at end insert “, and
(e) the ease with which consumers can identify and obtain services which are appropriate to their needs and represent good value for money”

[Baroness Drake]

My Lords, the FCA’s objective to promote “effective competition” will deliver fully on the Government’s commitment to putting the consumer at the heart of the financial system only if there is no ambiguity about the FCA’s authority to tackle hidden and rip-off charges. The FCA can judge the effectiveness of competition only if it is explicitly required to take into account the ease with which consumers can identify and obtain services that are appropriate to their needs and represent good value for money. The amendment provides for that.

During the Commons Committee stage, the Financial Secretary argued that the FCA had,

“the powers and the mandate to intervene on matters of price and value for money, if the case to do so is made. It does not need bespoke powers”.—[Official Report, Commons, Financial Services Bill Committee, 1/3/12; col. 261.]

Unfortunately, experience does not reinforce such confidence. We are all too familiar with the industry’s willingness to mobilise its resources to mount a legal challenge to the regulator if ambiguity exists. When the OFT decided to investigate unauthorised overdraft charges, the banks challenged its ability to do so. Two years of uncertainty, nearly £1 million in legal fees and many other resources later for the OFT, the legal case eventually concluded with a ruling that the OFT could not assess the fairness of those charges. In respect of payment protection insurance, the banks put up a sustained legal fight before accepting that they had mis-sold a product to millions of people. The FCA ran up around £900,000 in legal fees when the industry asked for a judicial review into its judgment on PPI complaints. In the face of a powerful industry, the absence of bespoke powers may make the FCA reluctant to take action and could lead to successful challenges against the authority in the courts.

The FCA is not a price regulator but that must not be interpreted as a reluctance to act on charging structures. The FCA’s competition objective as drafted requires it to have regard to innovation, ease of entry to market, ease with which consumers can change providers and the consumers’ need for information to make an informed choice. As is so well documented, so many consumers struggle to process the information provided and there is a danger of too much reliance on disclosure and informed choice to protect the consumer, given the systemic imbalance in knowledge and understanding between consumer and provider—a view shared in Professor Kay’s recent report. Similarly, the financial needs of most people are probably pretty simple but the industry often sells the more complex products because they attract higher charges. This is not an argument against innovation but a recognition that more complex products give rise to the need to ensure that they represent good value for money.

The FCA’s authority will be strengthened by such an explicit reference in its competition objective. The public’s loss of trust following the litany of product mis-selling has to be addressed. Just look at some of those products. “Behind-the-scenes” prices reduce direct price competition as apparently low “headline” prices mask the true costs once ancillary charges, such as for unauthorised overdrafts or rejected transitions and default charges, are accounted for. Consumers need to be confident that once they have entered into a contract they will not be subject to any unexpected or nasty surprises. Which? recently published research which showed that banks’ fee structures are so complicated that even a maths PhD student found it virtually impossible to compare charges between banks and to calculate how much a bank charges for using an unauthorised overdraft. Some particularly toxic forms of payment protection insurance paid commission rates of 87% of the premium to the bank that sold the policy. That means that if a consumer pays out £10,000 on a PPI policy, £8,700 goes back to the bank in commission.

Some consumers who took out an equity release plan at the turn of the century now face substantial early repayment charges amounting to 25% of the outstanding loan. On an equity release loan of £200,000, the consumer could now face early repayment charges of over £50,000. More recently, in the sale of products to protect small firms taking out loans against rising interest rates, the FSA found a lack of clarity about the cost of stopping a product, failure to check whether a consumer understood the risk, and selling based on personal rewards rather than on the needs of those businesses. Time and time again we see products sold to consumers that are not value for money, do not meet their needs and take advantage of their lack of understanding.

Furthermore, consumer credit regulation is to transfer to the FCA, affecting a market for consumer and small business credit of about £270 billion, where vulnerability to high charges is a significant issue. The FCA’s competition objective will, I understand, apply to consumer credit products, which is another compelling reason for placing a requirement on the FCA to have regard to value for money.

Opacity and complexity in the pensions and savings market results in excessive charges, fuelled by the increasing subcontracting of investment activity to a lengthy chain of agents. Each has access to more information than the consumer, which helps them to maintain charges which deliver generous revenues for them and less real value to the customer. The recent plethora of reports on charges reiterates the evidence of a problem which we know has persisted for a long time and which the regulator has got to tackle.

The mathematics of an annual management charge is too complex for most savers. That charge is not a true statement of the total expenses ratio, and even that ratio excludes other hidden costs. As the noble Lord, Lord Turner, said in his City speech yesterday, there is far greater potential in retail services than in other sectors for producers to rip off customers. I beg to move.

[Lord Peston]

My Lords, this is a very important amendment. It is important in its own right, but it also exposes what is fundamentally wrong with this Bill, which is that it is based on an economics model of the rationally informed consumer.

No one doubts that there are large numbers of rationally informed consumers out there, able to take optimal decisions, but a vast amount of research has been undertaken in recent years that shows that there are considerable numbers of consumers who are not best described as part of the rationally well informed model. Indeed, one can go further. I have seen research papers that show that even for what one might call brilliant consumers, the complexity of the instruments they are dealing with is so great that it would take them several years to do all the calculations required to make an informed decision. Therefore, what is wrong with this part of the Bill is its fundamental philosophy of the rationally informed consumer.

The other point to bear in mind is that the objective of the financial intermediaries that this applies to is not, in any sense, to be helpful to anybody. Their objective is to make money. What they are looking for are instruments, some of which are so complex—like CDOs, and so on—that you have to be a genius to understand what they amount to in the first place. There are several other examples of that that have got my head spinning.

What this leads us to is a matter that arose the last time that the Committee met and the subject of duty of care was raised. You will not find anything like that in this Bill or any of the philosophy behind it. What is required in the Bill is that everybody acting as a financial intermediary should be instructed that they have a duty of care. That duty of care should involve presenting information in a way that quite ordinary people can understand and pointing out the perils of all the mistakes that can be made.

I myself am not that rational a consumer in this regard. As for the idea that I would look at every bank and work out the optimal one that I should deal with, I take the view that there is more to life. If I end up paying rather more for any financial intermediation that I am involved with, I have to bear that cost because there are other things I want to do with my time. Then again, I am not badly off and I can afford to do that. But very poor consumers need something much more. I repeat that what needs to be in the Bill is the equivalent of a duty of care on the part of all financial intermediaries dealing with ordinary consumers and an acceptance of responsibility for what they are offering them.

--- Later in debate ---

[Lord Sassoon]

My Lords, all I can usefully say is that while I believe that this amendment is well meant, it is based on a legal construction that the Government do not accept. The FCA has all the powers that it needs and there are some dangers in putting this amendment in. That is what we are discussing.

[Baroness Drake]

My Lords, perhaps I might respond to some of the issues that have arisen in the debate and in the reply from the noble Lord, Lord Sassoon. The Minister is arguing that the FCA has a sufficient mandate through the competition and consumer objectives, as drafted, to tackle these matters. My problem is that I do not share that confidence in the absence of the amendment to the competition objective that I seek. I accept his point that the FCA’s powers are much broader than those of the OFT, but with the bank charges case I was trying to illustrate the disposition of the industry to mobilise quite effectively if there is ambiguity in the statutory or regulated provisions. Rather than arguing whose legal advice is better, I was seeking simply to nail this issue by saying clearly that effective competition means that consumers have to be able to identify whether services are appropriate to their needs and represent good value for money. The lawyers could then argue as much as they like, but that provision of what effective competition embraces would be laid out in the Bill.

The Minister made too much of my use of “must” in my speech, rather than “may” as it is in the Bill. I am seeking not to challenge the word “may” but to establish with clarity that competition cannot be effective without it being value for money for the consumer. My amendment does not seek to establish a long list but it seeks to give clarity on a very important issue, which goes to the heart of what effective competition is. I think that 20 million people out there are with me, based on their personal experiences of the financial services sector in recent times.

In response to the noble Baroness, Lady Noakes, in my own defence I have tabled amendments to both the consumer and competition objectives. My noble friend Lord Whitty very ably answered the question in part. However, I am seeking an amendment to the competition objective because on this occasion, at the risk of repetition, I am trying to give clarity to the definition of effective competition in terms of the matters that the FCA has to have regard to which, I reiterate, is the ability of consumers to identify what is appropriate to their needs and represents good value. At the heart of my argument is that the FCA cannot judge effective competition unless it has regard to those matters. I feel they are so fundamental to a judgment of effective competition that they are worthy of being spelt out in the Bill as a matter to which the FCA may have regard.

On the market integrity point, there is consistency in my amendment in terms of what I am arguing in respect of both market integrity and the competition objective. My argument would be that a key characteristic of well functioning markets is that they can provide consumers with products and services having value for money. The wording of the market integrity clause does not address or mitigate my concern, hence the amendment I have tabled.

--- Later in debate ---

[Lord Sassoon]

My Lords, I briefly draw my noble friend’s attention to a couple of things that I have already highlighted this morning. First, there are the additional product intervention powers that the FCA will have, as opposed to those which the FSA has had. Those go to the heart of his concerns, because we are certainly not giving those powers to the FCA, and it is not receiving them, without an intention to use them. Secondly, I drew attention to the consultation on the mortgage review, which indicates a developing line of thinking that goes precisely to his points. The evidence points in the direction that my noble friend is looking for.

[Baroness Drake]

My Lords, I had come to the point where I was reserving this for Report and begging leave to withdraw the amendment.

Amendment 117 withdrawn.