Financial Services Bill

Baroness Hayter of Kentish Town Excerpts

Monday 12th November 2012 Lords Chamber

Moved by

[Baroness Hayter of Kentish Town]

25D: Clause 6, page 21, line 13, at end insert—
“( ) the general principle that, where consumers properly repose trust in a firm’s discretion and are vulnerable to the exercise of that discretion, the firm has a duty to act in the consumer’s best interests”

[Baroness Hayter of Kentish Town]

My Lords, financial services is perhaps less problematic than broadcasting at the moment. Amendment 25D stands in my name and that of my noble friend Lord Eatwell. This is perhaps the key amendment in all the ones that we will discuss today. We will simply not get this industry back on track and working in the interests of its savers and borrowers until firms put clients’ interests above their own bonus levels, remuneration or promotion prospects. Rather as doctors take care—above all else—of their patients, so must the banks, the insurance companies, those who lend us money and those who care for our savings put our interests centre stage.

These amendments seek to ensure that where consumers put trust in a firm’s discretion, and are vulnerable to the exercise of that discretion, the firm must act in their best interests. Trust is key to this industry. As John Kay wrote in his July review for the Government:

“Financial intermediation depends on trust and confidence: the trust and confidence that savers who invest funds have in those they choose to manage these funds”.

This goes to the heart of the behaviours, ethics and very thought patterns of this vital industry. Surely, as we have heard already today, we have enough evidence from LIBOR, precipice bonds, mortgage mis-selling and interest rate swaps that cultural change is needed in this industry. The costs of the PPI scandal, which has already been referred to, are now being picked up by those very offending banks. I believe that this amendment is in their interests. If they were stopped from doing these things beforehand, they would not then have to put things right afterwards.

The PPI scandal has sometimes been blamed on the lack of early intervention by the FSA, on the insufficiently rapid transmission of intelligence from the Financial Ombudsman, or on absolutely anything or anyone other than the mis-selling banks themselves. Had those banks had a duty of care towards clients, or been required to consider their best interests, there is no way that they could have continued to sell those products once they realised how few of their purchases would actually be covered by them.

Surely it is strange that where a saver puts their money into a trust-based pension scheme it is governed by trustees who have fiduciary duties to act in the best interests of beneficiaries, but that if that same saver puts their money in a contract-based pension scheme or similar scheme run by commercial providers, the FSA’s rules governing such contracts impose no duty on providers to put beneficiaries’ interests first. That cannot be right. It is not what savers expect of their provider.

The amendments would ensure, in an enforceable way, that authorised persons act in the best interests of their clients. As I argued in Committee, the Bill expects consumers to,

“take responsibility for their decisions”—[Official Report, 11/6/12; col. 1255]—

but without placing a corresponding requirement on firms to act in the best interests of their clients. This lacks balance. As the Kay review says:

“Stewardship is incompatible with conflict of interest”.

Kay calls for all those involved in the equity investment chain to observe fiduciary standards in their relationships with clients. Thus financial services should owe their customers the same duty of care as a lawyer or other professional by acting honestly, fairly and professionally in the best interests of their customers and in managing conflicts of interest. It is no good relying on rules to ensure this. Such requirements on firms have been in the FSA’s principles for business, yet consumers have still been shabbily treated.

We want there to be a duty of care in the Bill to ensure proper oversight and to emphasise its importance both to the regulators and the regulated. Such a duty of care will ensure that financial services can no longer profit unfairly at the expense of their customers. It is not enough—in case the Minister is going to say it—to leave this simply to the banking commission. It should be central to the Bill.

The Kay review calls for the application of fiduciary standards of care by all those who manage or advise on the investments of others. That is what we seek in these amendments and what I hope this House will now support. I beg to move.

[Lord Stoneham of Droxford]

My Lords, I support the amendment. The issue behind the amendments in this group is that the investment industry’s duties to savers appear to be poorly understood and observed. As the Law Commission has confirmed, where firms are managing other people’s money or giving them financial advice, they have strict fiduciary duties to act in those people’s interests. This includes both individual clients and institutions such as pension funds which represent large numbers of underlying savers.

Fiduciary duties are stricter than FSA rules, yet they are not universally accepted within the industry. There is anecdotal evidence that firms often seek to exclude or restrict their liability for breach of fiduciary duties through contractual terms which may not be read or understood by the lay trustees of pension funds. Even where they are accepted, it is very clear that they are not being applied. In the past week, the FSA has published a “Dear CEO” letter on conflicts of interests among asset managers which found that,

“many firms had failed to establish an adequate framework for identifying and managing conflicts of interests”,

and that,

“in most cases senior management failed to show us they understood and communicated this sense of duty to customers”.

In other words, firms are often not meeting even the FSA’s standards regarding conflicts of interest, which are lower than fiduciary standards.

As these are common law duties, they do not form part of the FSA’s regulatory approach. Indeed, there is confusion over whether it is appropriate for the FSA to enforce them, with some arguing that it is for beneficiaries to pursue court actions if duties are breached.

Where pension savings are concerned, this is unrealistic and unsatisfactory as a means of achieving high standards of care across the market. An explicit, best-interests principle in a Financial Services Bill would give the FCA a powerful tool to ensure that consumers’ interests were protected.

The concern is that the Bill’s new wording is significantly weaker than that proposed by the Joint Committee and may not provide a high enough level of protection for consumers. It lacks clarity in what might constitute an appropriate level of care, thereby leaving open the very question it was intended to resolve. Where those managing people’s long-term savings are concerned, the problem is precisely that there is confusion and misinformation about what is the appropriate level of care. Explicit confirmation that those managing other people’s money must act in their best interests would be a clear and effective way to help achieve the Joint Committee’s intention. Amendment 25D would provide that confirmation, since anyone managing somebody else’s money would meet the criteria of discretion and consumer vulnerability.

The noble Baroness, Lady Hayter, drew attention to the fact that this issue has the potential to seriously undermine the aims of auto-enrolment. In trust-based pension schemes, it is clear that the trustees are there to act in beneficiaries’ best interests. Indeed, as the ABI pointed out in oral evidence to the Joint Committee, one positive feature of the National Employment Savings Trust—NEST—is that it has a trustee structure that looks to protect its members. However, many savers are likely to be auto-enrolled into contract-based pension products where, as things currently stand, no such protection exists. Since the House of Lords considered the Bill in Committee, we have had the Kay review of UK equity markets. It recommended that:

“Regulatory authorities … should apply fiduciary standards to all relationships in the investment chain which involve discretion over the investments of others, or advice on investment decisions. These obligations should be independent of the classification of the client, and should not be capable of being contractually overridden”.

This amendment seeks to address a number of objections to similar amendments raised in the Commons and in the Lords in Committee. First, it does not rely on the term “fiduciary duty” but rather seeks to enshrine the common sense principle that underpins these duties—that where consumers rely on a firm’s discretion, that discretion must be exercised in the consumers’ best interests. Secondly, it would not supersede or restrict the specific standards to be laid down in FCA rules but rather would provide an overarching principle that the FCA should bear in mind when setting those rules. Thirdly, it would not apply across the board but only where appropriate—that is, where consumers have a particular relationship with providers that justifies a best-interest standard.

When we looked at a similar amendment to Amendment 25D in Committee, my noble friend Lord Sassoon expressed sympathy with the intent but argued that it was a matter for the FCA to make detailed rules on, rather than to be included in the Bill. However, as I have already said, part of the problem is that the common law status of fiduciary duties makes it unclear whether it falls within the FCA’s remit to uphold them, hence the need for an explicit reference in the Bill. It has also been suggested that refusal to amend the Bill in this way indicates a lack of political support for robust action to challenge the interests of financial intermediaries. Indeed, this could make the FCA feel that it has limited room for manoeuvre. Therefore, I hope that my noble friend will be more prepared to consider accepting the amendment and, at the very least, that he will give some indication of the support that the Government will give to the full implementation of the Kay recommendations.

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[Lord Sassoon]

Yes, I can confirm that. The information may come from a whole range of sources. Obviously, consumer complaints could be one source, but I know that the noble Lord postulated a circumstance in which there was no consumer complaint. It will clearly be going in regularly to review how a firm operates and conducts its business. That will be another source of information. I am sure that it will regularly compare products on offer, one against another, and if there are outlying products, that is another source of information. There is a whole range of sources of information. The key thing here is that we have in the FCA a regulator that does not have to be concerned, as the FSA does, with all the considerations of prudential regulation and supervision and can therefore take a much clearer approach. As we discussed, there are specific product intervention powers, which the FSA does not have.

The noble Lord helpfully raises the general background. We are putting the FCA in a much better position to tackle those issues proactively. Specifically, Amendment 25D would insert a factor that the FCA would have to consider when advancing its consumer protection objective. Namely, it would require the FCA to have regard to,

“the general principle that, where consumers properly repose trust in a firm’s discretion and are vulnerable to the exercise of that discretion, the firm has a duty to act in the consumer’s best interests”.

As I reflected in Committee, this is a cleverly worded amendment and the motivation behind it is noble, but I am still not convinced that it would result in firms acting in the way that the amendment is intended to ensure.

I am clear that the best way for the regulator to ensure that firms act in the best interests of their customers is through detailed, clear and unambiguous rules. Noble Lords have already highlighted the FSA’s “treating customers fairly” principle, under which it has carried out important work to protect consumers. With the renewed focus on consumer protection which I have just highlighted, the FCA will be empowered to go further. The precision attached to rules offers a much more effective shield for consumers than a broad duty, which will be near-impossible for the FCA—or, indeed, firms or consumers—to interpret, given the breadth of interests of different consumers at different times.

Moving to Amendment 26B, we return to the thorny question of fiduciary duty. Amendment 26B is drafted to reflect the recommendations of the Kay review in this area. The Government are in the process of responding formally to the recommendations of the review, and I hope that the House will concede that it would be inappropriate for me to pre-empt that response. I assure my noble friend Lord Stoneham of Droxford that we are taking the Kay review recommendations very seriously and that they will receive a substantive response.

I reassure the noble Baroness, Lady Hayter of Kentish Town, that the regulatory framework that we are establishing will enable the FCA to consider to what extent current regulatory rules in this area support these standards, if they advance its objectives. However, I am concerned that there are aspects of this amendment which would not have the effect that we desire. In particular, the proposal that the regulator gives guidance as to what is the effect of common law, notwithstanding what we have heard, seems very dangerous to me. It risks absolving firms of the duty to consider their role and duty under common law and places the burden on the regulator to outline how the common law applies. Seeking to codify common law in guidance in this way also means that the scope for the common law to develop and adapt to reflect changing circumstances—which is, of course, one of the great virtues of the common law—may be impeded. As a general point of principle, this amendment is unnecessary, because the FCA is empowered to issue such guidance as it sees fit.

The last amendment in this group, Amendment 45A, is another that we have seen before. It would require the FCA and PRA to have regard to,

“the principle that authorised persons should act honestly, fairly and professionally in the best interests of consumers who are their clients”.

Of course firms should act in this way. The right way to ensure that is to empower the FCA, when firms do not act in that way, to act under its consumer protection objective, with strong mechanisms in place to ensure that it co-ordinates effectively with the PRA when it does.

I agree that we want financial services firms to act in a way that puts customers first. It is precisely for this reason that we are creating the FCA as a focused conduct and business regulator. I maintain that the regulatory framework that we are putting in place will lead to better outcomes for consumers, with a focused regulator empowered to act and armed with substantial new powers to ensure that it does. On this understanding, I ask the noble Baroness to withdraw her amendment.

[Baroness Hayter of Kentish Town]

My Lords, I thank the noble Lord, Lord Stoneham of Droxford, and my noble friend Lord Peston for their support. When my noble friend Lord Peston spoke of vacuous statements, it slightly reminded me of the Simon Hoggart test of everything: if one says the opposite of a statement and it is absolutely meaningless, then maybe the statement was not worth saying anyway. If one says the opposite of “firms should act in their clients’ best interests”—that is, “firms should act in their clients’ worst interests”—it shows that this is an important statement and is worth considering.

The uncertain and rather confusing reply from the Minister is not the one he should have given. His reply is not good for the industry, it is certainly not good for consumers, and it is not good for UK plc, which needs this industry to be thriving and therefore trusted. He is not right in saying that detailed rules are the answer; they did not work before. Treating customers fairly—that phrase that some of us know very well—is not the answer either, because it did not work before. A broad duty is needed.

In these amendments we ask for what we believe to be the common law position, and what the Kay report recommended. Why the Government could not have responded to that report by today so that we could have known whether this could be in the Bill I do not know; they have had it since July—I had a holiday, I do not know if the Government did. In these amendments we ask for what every other profession has to offer its clients or patients. It is what consumers, whether savers or borrowers, expect from their providers—that authorised persons, managing other people’s business, have a duty to act in their clients’ best interests. This means avoiding conflicts of interest, acting in good faith, not profiting unreasonably at the expense of customers without their knowledge and consent, and a duty of confidentiality. It is not that painful. This needs to be in the Bill: first, to make sure it happens; and secondly, to empower the FCA. I feel sure that noble Lords will support this move, and I therefore wish to test the opinion of the House.

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Moved by

[Baroness Hayter of Kentish Town]

26ZA: Clause 6, page 21, line 31, at end insert—
“( ) the need of the Consumer Panel to have its views heard by the PRA”

--- Later in debate ---

[Baroness Hayter of Kentish Town]

My Lords, there are two major reasons for these amendments, which seek to ensure that the PRA hears the views of consumers or their spokespeople. First, it is imperative that those who understand, follow and monitor the experience and needs of users of financial services—whether individual clients, SMEs, or holders of collective investments—can input into the decision-making of the regulator of banks, the PRA. There will be many decisions falling to the PRA, not least on leverage rates and, if the press is to be believed, even over bank charges. In both the mortgage and the insurance markets, there is clear interaction between conduct and prudential regulation and the potential for overlap between the PRA and the FCA. The importance of co-ordination is illustrated by the role the consumer panel played in the FSA’s review of mortgage market regulation, where it ensured that unnecessary or onerous restrictions on lending were not introduced.

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[Lord Newby]

My Lords, the Government obviously recognise that consumers have an interest in the outcome of the PRA’s actions and decisions. In particular, consumers will be beneficiaries of a safer and more stable financial system. However, the PRA will not focus on consumer protection as an end in itself. That will be the job of the FCA.

New Section 3D in the Bill requires the PRA and the FCA to co-ordinate their functions in areas of common regulatory interest where one may have relevant expertise or a material adverse impact on the objectives of the other. This means that while it is right that the PRA must focus on its safety and soundness objective, where its actions may impact adversely on consumer protection it will need to listen to the FCA, which obviously has the lead consumer protection objective. As the regulator with expertise and analytical capacity in relation to consumer protection, it is right that the FCA should consider stakeholder perspectives, including the views of the consumer panel, come to a balanced view and then communicate this view to the PRA. I do not think that it would be sensible to require the PRA, which will not have detailed expertise in general consumer issues, to consider separate consumer representations and potentially develop an alternative rival consumer view about the best way to deliver consumer protection.

For these reasons, I cannot support the amendment. I hope the noble Baroness will be satisfied that the system will enable all consumer concerns to be represented to the PRA, but that that will be done through the principal channel of the consumer panel that the FCA is to establish.

[Baroness Hayter of Kentish Town]

My Lords, I thank the noble Baroness, Lady Noakes, and my noble friend Lord McFall for their support. I am sorry the amendment does not find favour with the Minister. I think he misunderstands. If he thinks consumer protection is just about conduct, he does not understand the impact of things that the PRA will be doing. The FCA will put only a combined view to the PRA; it will not put the consumer viewpoint.

If we listen to the Minister, the PRA will still listen to consumers but through newspapers, through lobbying, through letters, and so on. I would like something different: a grown-up dialogue between the consumer panel and the PRA, rather than the sort of campaigning that the rest of us have done as lobbyists for many a year. I still hope for that. Therefore, I would like to test the opinion of the House.