Financial Services Bill

Baroness Kramer Excerpts

Tuesday 10th July 2012 Lords Chamber

[Baroness Kramer]

My Lords, I was delighted to add my name to Amendment 139A. The excellent speeches which precede me really laid out the case, so I have just a couple of comments. Although the financial services industry is currently the target of very much justified anger, I hope that this legislation sets a regulator in place which will last more than a decade. I think that the previous legislation lasted pretty much for 12 years. We have to take the long-term view and make sure that it is fit for purpose for the long term and when the period of correction within the industry has passed.

It also seems that the language is carefully crafted in such a way that it did not in any way encourage the regulator to look at this as an opportunity to take more risk but as an opportunity to make sure that there was healthy and sustainable growth within the financial services sector. Perhaps I may give a simple example: in a few later amendments we will look at social investment, which is one of the new fields that are beginning to gather some momentum. That is an aspect of the financial services industry which has initially gone to Luxembourg.

The City now is expressing serious interest in the opportunities. Many institutions in the UK could use those kinds of instruments. But the regulator has not been aware of the differences between that sector and other sectors and, therefore, the sensitivity of regulation necessary to support the growth in a new area. I think most people would agree that we are not talking about unethical behaviour or the kind of risk that might be involved in some aspects of the more casino side of investment banking.

There are many areas where there is huge potential going forward. It will be absolutely essential that the regulator takes that on board and is a supporter of the healthy and sustainable growth of this industry, both to support the real economy and the many direct jobs involved with the sector.

[Lord Hodgson of Astley Abbotts]

My Lords, I support Amendment 101A in the name of my noble friend Lord Flight about the importance of maintaining the competitive position and that that needs to be uppermost in our minds. But I am also attracted by Amendment 139A which has drawn in the regulatory principles that are to be followed by both regulators. It seems to me that here we will be starting to set the culture. It is the culture of the regulator that will have such an important impact on the way our financial services develop and the way the people who work in them behave. As my noble friend Lady Noakes said, it is important not just to see this through the prism of City eyes but to realise that there are a wide range of financial services in Edinburgh and the provinces of this country which require the appropriate regulatory framework.

Competition, by its nature, introduces novelty—novelty being something that the regulators tend to fear. It carries risk, but of course what is old and familiar is much easier to deal with. In a way, that is liked. But, particularly when established firms tend to draw attention to the risks of novelty, the regulator tends to back down. I am not suggesting that we should not take risks. We need to be risk aware but we must not be risk averse. There is a danger that in the pendulum within the Financial Services Authority and, no doubt, driven by the criticism that it has faced, we have gone to the end of the risk-averse scale. There is a great deal we still need to do in this Bill to provide the right framework and culture. I shall look forward to returning to this in amendments to which we will come shortly. For the time being, I am delighted to support my noble friends’ two amendments.

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[Lord Flight]

My Lords, I shall speak briefly to Amendments 108A and 117A, which essentially cover the same territory. They seek legislation which explicitly encourages the FCA to extend consumer access to financial services that meet their needs.

To that end, it is desirable that the FCA should assess the impact on markets and consumers when making regulatory decisions. For example—we have yet to see the result—the RDR reforms, though from many aspects fully justified, run the risk of having the reverse effect of reducing substantially the access to financial services and products for the great majority of people. In the absence of a requirement there is the risk that the FCA will always be steered towards risk-averse regulation, preferring to see markets restricted for large groups of consumers in order to avoid any individual consumer getting sub-optimal products.

The issue also arises in the context of the Government’s welcome initiative to encourage the development of simple financial products. If it is to succeed, it will need a regulator which is working with the grain of that policy rather than in the other direction, and which has a clear brief to act in a way to help extend consumer access to financial services that meet their needs, and not the reverse.

[Baroness Kramer]

My Lords, Amendments 102, 118 and 121 are very dear to my heart. They are perhaps some of the most important amendments to the Bill that have been brought forward. I have been interested in financial services for deprived communities for more than 20 years, partly from living in Chicago and seeing the impact that community development banking had on the revival and regeneration of Chicago’s south side. It was an area once written off because it was both black and impoverished and, in the end, it was only action by the banking regulator, under legislation, that drove forward change which was, and continues to be, dramatic.

The noble Lord, Lord McFall, who is not in his place today, will remember the visits that the Treasury Select Committee made to community banks in the United States in 2006—I take some credit for nagging the committee into making some of those visits—which made clear how much we are missing in this country. Both individuals and small and new businesses in the United States have a degree of access to financial services and credit that we cannot rely on in the UK.

The changes in the United States came through a piece of civil rights legislation, the Community Reinvestment Act. This amendment is not a copy of that Act, but it attempts to repeat its achievements. The data that the Act forced banks to publish exposed vacuums in lending across the United States and, to no one’s surprise, they matched very much with the boundaries of deprived communities and—I hope that we would not see the same thing here—the boundaries of communities of ethnic minorities. The regulator then stepped in and required those banks to meet the target of serving those communities, or to fund someone else who would, before allowing them to engage in mergers and acquisitions. It was an extremely effective strategy and continues to be so to this day.

The amendment is also a read-over from the banking reform White Paper, because it would allow the regulator to play a significant role that is described in paragraph 4.4 of that White Paper as,

“a more diverse banking sector”.

Surely the areas where banks are failing to play a role should be at the top of the list for new and diverse participants.

On our previous day in Committee, I said that the role of the regulator nowhere seems to touch on a responsibility to make sure that financial services are available all across our complex communities. Competition is focused on making sure that there is multiplicity of products, not that there is coverage of the full range of demand. Surely if we wish all our citizens to be able to participate in the economic growth of the country and want small businesses to become established, to grow and to build our economic future, we have to pay attention to that access and coverage issue as well. The requirements set out in these amendments get us to that point.

[Baroness Hayter of Kentish Town]

My Lords, I rise to support the amendment moved by the noble Lord, Lord Sharkey, and to speak on other amendments in this group. I believe that the Minister received a letter from the Community Development Finance Association which specifically supports the amendment. It is a powerful case and I trust that he will respond positively at the end of this debate.

Although the Bill grants the FCA significant powers, it makes little mention of consumer access to financial services and products. Access to such services is essential in a 21st-century society, but the Bill makes no mention of it. It would be extraordinary for a competition authority, as the FCA will be, to be required to judge the effectiveness of competition in the markets which it regulates without taking into account whether the market is delivering products and services that are good value for money.

There is not much point talking about a fairer, more competitive market if consumers are unable to access the services on offer, yet uncertainty as to whether the FCA can have regard to affordability might make it reluctant to take action on a fundamental aspect of competition for fear of being challenged. Amendment 104AA, in my name and that of my noble friend Lord Eatwell, is about access by consumers to financial service products and the need for good value for money, including for the financially excluded in society.

In many parts of the country, there are individuals who struggle even to open basic banking facilities or to gain access to small levels of credit, yet credit is a necessity of life for many people, bridging the gap, as we know, between when one has to spend and when paydays arrive. I know that in another place Mark Hoban has said he fully agrees that consumers should have access to financial services that meet their needs, but he prayed in aid the FCA’s new competition objective, which he said would give it an explicit mandate to consider the needs of consumers and to act to improve competition. However, that does not necessarily bring people into the market; it is probably only competition for those who are already there.

Amendment 104AA would remove any uncertainty by spelling out accessibility and affordability. Amendment 102 offers a way forward for financial institutions which reflects a decent, responsible approach to the needs and ambitions of communities in a way that would benefit not just them but the economy as a whole. The amendment would promote an appropriate level of services in deprived communities, as we have heard, and ensure that the FCA plays its role in that by its interventions in affordable loans, savings and insurance products. As we have heard, that is crucial for small businesses and social ventures as much as for individual consumers. It is estimated that more than 4.5 million small businesses and social ventures and more than 3 million households are unable to access the fair and responsible finance that they require. It is particularly apposite in the context of the current revulsion—one has to use that word—felt about some parts of the banking community. This is the chance for them to rise to the challenge and show what the good side of banking can be.

All of us have heard of small shops or service providers going to the wall thanks to the inappropriate policies of banks. It is not simply about mis-selling of interest rate swaps, important though those were; it is also about the unavailability of financial products for small entrepreneurs or, sometimes, for larger ventures that want to locate in some more deprived areas. There needs to be a proper investment strategy for social enterprise and small businesses, especially where they work in those difficult areas.

In the past, I thought that encouragement alone would work in making banks be socially responsible in such a way as to help consumers and potential consumers in difficult areas. I no longer think that. When the previous Government were trying to set up basic bank accounts, we tried very hard, along with the FSA, but people were still denied access. People need a bank account and insurance these days; they have become essentials rather than nice- to-haves.

Amendment 104AA would make the FCA have regard to consumer access to affordable and appropriate financial services, and Amendment 118A requires an access and choice code to make clear what the FSA expects of those it regulates. I hope that the Minister will be able to accept the amendments and enable the FCA to play a role not just in promoting competition for existing consumers but for those whom we all want to be consumers.

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[Lord Sassoon]

My Lords, I share many of the concerns raised in this debate. Access to financial services and access to lending for individuals and businesses are vital to our society. The question we have to ask is: who should be charged with tackling access issues? The FCA will be a conduct of business regulator with a clear objective concerned with creating the right conditions in which well functioning markets can meet the needs of consumers. Ultimately, the menu of products and services they offer to whom and at what price is a decision for firms themselves. The FCA is there to regulate the market, not to ensure that the market delivers a particular set of services or products.

Where the market fails to provide the services that consumers need, there may well be a case for intervention in the market to promote consumers’ access to financial services. The noble Baroness mentioned that issue in connection with the previous Government’s drive on basic bank accounts. That is rightly the province of government and action needs to be taken. However, I do believe that it is not a matter of regulation. It is a matter of social policy and it is therefore the responsibility of the Government. It is not the job of the FCA to prescribe that there should be universal provision and who should be required to deliver it. That is for the Government.

I will not detain the Committee with the great detail that I could go into of the actions we are taking to promote and extend access to financial services: to boost lending, particularly to small businesses; to nurture and encourage the mutual sector; and to help increase consumers’ capabilities and work with industry to make access to simple products possible. We have touched on some of these issues in considerable detail in the past. There are some areas which my noble friend Lord Sharkey specifically raised, such as bank charges. I draw his attention to the agreement we announced with the banks last November, under which the major personal customer account providers came forward with a new agreement to send text alerts when balances fall below a certain level, and to provide buffer zones and so on. The action there has been significant.

The provision of data is another area which has needed and continues to need attention. It has had some attention. Information is already regularly published concerning lending and the provision of loans and other services in deprived communities. For example, the banks that are members of the British lending task force have publicly committed to continue to publish subregional lending data on an annual basis through the BBA. I could point to a significant number of initiatives. These are things that the Government will continue to work on but they are outside the ambit of the Bill.

[Baroness Kramer]

Is the Minister aware of the mechanism that has been successful in the United States and how much that is tied to action by the regulator under the Community Reinvestment Act? It is the regulator that has driven that process forward, because only when conditions are met does it give permission for the banks to act in ways for which they need the regulator’s permission. Is he abandoning a tool that we know has been successful?

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[Baroness Kramer]

My Lords, I will add only a few words, because of the powerful speeches that have preceded me. After hearing the noble Lords, Lord Phillips and Lord Hodgson, who have spoken with such enthusiasm, the Minister may have the wrong impression that this sector is taking off with great and roaring strength, so why on earth should we worry about the role of the regulator? However, if he looks back at the numbers that have been quoted to him, the amounts of money that are being raised or proposed are extremely small compared to the demand and the need. The regulator needs to act in order to release the energy of this whole sector.

I know that the Government are constantly concerned that no one sector should be favoured above the other, but it is important to recognise that this sector is distinctively different. I draw his attention to one example that may help clarify the matter—and which I have raised with the regulator, which acknowledges that it is clearly a problem. This is based on a communication that I received from someone involved as a financial adviser, who directed me towards a report done by Nesta in collaboration with Worthstone called Financial Planners as Catalysts for Social Investment. The response that they got back in the course of this work made it clear that the regulatory environment is not yet appropriate for this sector. The report contains quotes such as:

“The social investment asset class, due to its early-stage of development lacks the regulatory clarity of other markets”.

That lack of clarity is turning into a real problem. It is not clear, for example, that an independent financial adviser can advise a client on a social investment because the return is a combination of some sort of more traditional manner of financial return, but also of a social benefit—and how is that to be measured? More to the point, how is it to be set within the suitability requirements that financial planners have to observe when they advise clients? The report states:

“Ultimately, there is a need for the FSA”—

which I suppose is the FCA now—

“to establish clear guidelines around suitability to provide financial planners with a frame of reference. Consistency is required, together with a set of understood and agreed practices and procedures”.

That is one small example. Rather than tackle this issue by issue and try to hoe the ground in the most difficult kind of way, we should make sure that the regulator clearly understands that they need to act in a way that would enable this industry to develop to its full potential. That would accelerate the flow of funding, and I believe that as an economy we would only benefit from that.

[Baroness Hayter of Kentish Town]

My Lords, I first apologise to the Committee, because I would like to degroup Amendment 128AA, which is in this group. I know that the Minister has had minutes’ notice of this, but I apologise to others. It is an important issue, and clearly we will return to that.

I support the amendment moved by the noble Lord, Lord Phillips, and I will also speak to Amendment 104ZA. As we have heard, social enterprises are businesses that trade to tackle social problems and improve communities, people’s life chances, or the environment. They make their money from selling goods and services in the open market, but they reinvest their profits back into the business or the local community. So when they make profits, society profits. They do not make profits for the shareholders. In future, perhaps we should adopt the words of the noble Lord, Lord Hodgson, and call them not-for-profit distribution, NFPDs, which may be the new word for them.

Funding is certainly needed to start up enterprises but, just as critical is the need to scale up and sustain them. That means getting access to modest and responsible sources of finance which will grow profits and jobs in this case, and make the local and national economy work. Appropriately funded social enterprises can lead an economic fight-back in the most deprived communities. The more deprived the community, the more likely you are to find social enterprises working there. They reinvest in the community. Indeed, 39% work in the 20% most deprived communities. They employ more people relative to turnover than mainstream small business and are outstripping other SMEs in terms of growth and sustainability. Just as access to funding can unlock the social enterprise sector’s potential, so it is the single largest barrier to the sustainability of this sector. Last year, 44% of respondents to a survey said that they were hampered by the availability and affordability of finance.

I make no apology that our Amendment 104ZA asks the FCA to discharge its general functions in a way that promotes growth and development of social finance and social investment. We ask that it should promote competition. This is, if you like, an emerging market, which needs a little help at the moment. I think that the word “promote” is not too dangerous but if the Minister would accept “enable”, I would settle for that. There is a distinctive difference to this sector. I hope that our regulatory system is big enough to engage with it.

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[Baroness Kramer]

I am sorry and recognise the late hour, but if we let this opportunity go we will not get it back again. I wonder whether the Minister will—even if it is afterwards—sit back and think through this issue. I am a simple person. I come from a banking background where you look at outputs. We know that investors are seriously interested in these kinds of products. We know that there is a need on the far side, whether individuals, small start-up businesses, charities, social enterprises and whatever else. In the middle we have a regulatory pattern of behaviour. If the regulation was not acting as a barrier, surely the outputs we would have would be a thriving community development banking sector, a thriving social investment sector, and a thriving social bond market. We can look at other countries and see these things in far more advanced states of development than we have. The conclusion has to be that the regulator is playing a significant role as a barrier in this process. If we cannot tackle that in this legislation, how on earth can we tackle it?

[Lord Hodgson of Astley Abbotts]

The FSA currently has responsibility for one particular sector of the social enterprise movement—the industrial and provident societies. I suggest that the Minister asks his officials in the morning to ring the FSA and ask how many people are working in the industrial and provident society section. The answer is half.