Financial Services Bill

Debate between Baroness Drake and Lord Sassoon

Wednesday 25th July 2012 Lords Chamber

[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.

Financial Services Bill

Debate between Baroness Drake and Lord Sassoon

Wednesday 25th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, let me first speak to government Amendment 140E. When considering the regulation of discretionary payments in with-profits business there is no easy split between prudential and conduct issues. The Bill deals with this by giving the PRA sole responsibility for issues relating to discretionary payments. The FCA remains responsible for all other conduct regulation. However, under the Bill as drafted, use of “includes” in new Section 3F(1) could be interpreted to suggest that the PRA is responsible for other elements of conduct regulation as well. This amendment simply clarifies the drafting, by removing the implication that the PRA could be responsible for other conduct issues.

I turn to the non-government amendments in this group. Amendment 128BH would remove the reference to those “who may become policyholders” from the PRA’s insurance objectives. However, I can assure my noble friend that the inclusion of this reference to future policyholders is both deliberate and important. It is there for completely different reasons from those advanced by the noble Baroness, Lady Hayter, with whom I agree in rejecting the amendment but for much narrower and more technical reasons related to the nature of a with-profits fund.

Let me give an example of what we are thinking about here. If one considers the scenario where the PRA is considering whether a with-profits insurer should be permitted to make a very large distribution to its policyholders, and if the PRA is only required to consider the interests of current policyholders, it might be inclined to allow the distribution. However, that might leave insufficient assets in the fund to ensure that policyholders coming into the fund—if it is operating on a going-concern basis—obtain fair and adequate payments from the fund.

I should reassure my noble friend that the reference to those becoming policyholders does not require the PRA to go out in some proactive way to protect those who have no current plan to take out a contract of insurance, but who might at some point decide to do so. The PRA is only obliged to provide an appropriate degree of protection and what is appropriate will depend on the facts of the case. In this case, it is the needs of a person who is about to sign on the dotted line for a with-profits policy who needs to be assured by the regulator that the fund to which they are about to subscribe is appropriately strong according to the rules. This provision allows for that.

Amendment 141 would require the PRA to regulate with-profits funds on the basis that the fund should be managed for the purpose of distributing profits to policyholders, as opposed to any other purpose. This is an important issue and I welcome the opportunity to set out broadly how with-profits will be regulated under the new system. It might be worth just pointing out to the noble Baroness, Lady Drake, that new Section 3F—the “With-profits insurance policies” section on page 31 of the Bill—makes it quite clear that the PRA must secure an appropriate degree of protection for policyholders. That is very clear. It is different from the looser wording, to which she referred, about the insurance objective “contributing” to securing protection. It is clear that the language in new Section 3F for with-profits is stronger than in new Section 2C on the insurance objective. That is an important background to the consideration of this amendment, and a point to which the noble Baroness drew attention.

When regulating a with-profits firm, the regulator is concerned with ensuring that the firm recognises a proper balance between the different interests in the fund. These interests include one that is highlighted in this amendment—the interests of with-profits policyholders to the distribution of profits made by the fund. However, there are other legitimate interests in a with-profits fund. They include the interests of the members of the insurer in the case, for example, of a mutual. In a proprietary firm, the shareholders also have an interest in the profits to be distributed. There are also considerations to be balanced between different types of policyholder. I do not suggest for a minute that the noble Baroness seeks to disapply all these other interests in the with-profits fund. Maybe she does—no, I see that she does not. I am glad about that as we would be fundamentally rewriting the law. That would be the effect of the amendment.

I am grateful to the noble Baroness for bringing up this issue. I must say that a balance needs to be struck between the interests of current policyholders, who will be keen to see all available funds distributed, if they are distributed to them, and the interests of future policyholders, which we have discussed, who will pay the price of excessive generosity to previous generations of policyholders. There is also the overriding concern to ensure that the fund remains solvent and able to make distributions.

As I said, under the Bill, the PRA is required to secure an appropriate degree of protection for with-profits policyholders in new Section 3F, and it will have to take all of these factors into account. Although the factors to be taken into consideration are complex, in essence the objective of regulation remains the same for with-profits as for any other type of business. The objective fundamentally is to ensure the firm’s safety and soundness, while ensuring its proper conduct, including the fair treatment of consumers. In asking the Committee in due course to support the Government’s amendment, I ask my noble friend Lord Flight to withdraw his amendment.

[Baroness Drake]

There is an issue that I am not sure the Minister has addressed. The PRA will be focused on prudential regulation, so its approach on how discretion should be applied on with-profits policies could be influenced by a preoccupation with the prudential responsibility, and through that focus may become unfair in how it has balanced the consumer’s interests.

[Lord Sassoon]

My Lords, I do not believe that to be the case but it might be helpful if I write to the noble Baroness, copying in the Committee, with a fuller explanation of how that will be taken care of.

Financial Services Bill

Debate between Baroness Drake and Lord Sassoon

Tuesday 26th June 2012 Lords Chamber

[Baroness Drake]

On that point, I am sure that it would leak or become obvious but what is laid before Parliament is not the report that the Treasury receives but the report that the Bank publishes. This provision allows for the Bank not to publish on the grounds of its view of a public interest issue.

[Lord Sassoon]

My Lords, it is generally accepted that carve-outs are needed, particularly in relation to the time-sensitivity of reports. As I have explained, this is very tightly circumscribed and the question of when it is appropriate to publish must be kept under review. The publication of the report, or any delay to that publication, can be achieved by the Bank only in those very circumscribed circumstances. They must keep publication under review. Therefore, there will be publication and appropriate challenge at the earliest appropriate time. It is difficult to see what the circumstances might be in which the Bank’s not agreeing with a recommendation would justify non-publication. There is proper but not excessive protection of the position here.

There was also a question from my noble friend Lord Hodgson about the Treasury’s possible ability to step in and in some way redact or hold back reports. The Treasury has no powers here. It merely receives a report. It is up to the Bank, again on public interest grounds, to hold back parts or the whole of a report. I should not say that I quite understand my noble friend’s cynicism about references to the Treasury because I certainly do not. However, I understand why he has properly raised the question.

I think I have already touched on this point but the noble Lord, Lord Eatwell, specifically referred to proposed new Section 3A and whether the government amendment allows the committee to consider the merits of the Bank’s action. Proposed new Section 3A provides that the committee is to keep,

“under review the Bank’s performance in relation to … the Bank’s objectives”.

I reiterate that the main concern here has been addressed.

On the broader question of what the Government have done not only in relation to the Treasury Committee but about the recommendations that the Bank made in January, there is nothing that I can add to what I said in my opening remarks, in which I attempted to be very clear on that point.

Banking Reform

Debate between Baroness Drake and Lord Sassoon

Thursday 14th June 2012 Lords Chamber

[Lord Sassoon]

My Lords, the noble Lord, Lord Jones of Birmingham, is always rightly concerned about the financing of British business, which is very important. Today’s measures are not principally about that. I could talk about the £21 billion national loan guarantee scheme or the fact that our 10-year sterling sovereign rate has been in the 1.5% to 1.7% range for the past few weeks, which is an unprecedented level. That all flows through. Here, we are significantly reducing the risk of another banking crisis. It was that crisis—the disruption and its aftermath—that caused such difficulty in the flow of loans to our businesses. Whatever we do here to minimise the chances of it happening again must be good for our businesses.

As for the UK being a competitive centre of banking, the Government are working incredibly hard. For example, only this morning I was at a very important meeting with businesses and authorities from the UK and Hong Kong, talking about how we would build the offshore RMB centre in London. That is an example of the forward-looking approach that we take to making sure that the UK and London continue to be the global financial centres of choice.

[Baroness Drake]

My Lords, I have only just had time to read the White Paper but I ask the Minister to elaborate on two issues. The Statement makes it clear that the strength of a country’s banking sector strengthens its stability and gives it a competitive advantage—a view that I endorse. However, that view clearly worried the European authorities, as evidenced by Mr Enria’s evidence to the Joint Committee on the Financial Services Bill. These are my words, not his, but he expressed the view that capital requirements for banks in Europe should have both a minimum and a maximum. However, the White Paper confirms that the Government support the ICB view that further buffers should be added to those of the Basel III international standards, and that the Government will, through the CRD4 negotiations, work to ensure that they can be implemented in accordance with EU law. Therefore, my first question is: how confident are the Government of securing the national regulatory freedom to impose the additional capital buffers that they would like to see?

Secondly, I am pleased to read in the White Paper that, for the first time, the position of pension funds in the ring-fencing will be important. The issue is to do with making sure that the regulatory framework for pension funding is not breached when dealing with the banking separation.

[Lord Sassoon]

In answer to the noble Baroness’s first point, we are confident, and we are absolutely on top of and watching her second point, which is important.