Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018

Debate between Baroness Kramer and Baroness Drake

Wednesday 21st November 2018 Grand Committee

[Baroness Drake (Lab)]

My Lords, I welcome the order. The FCA’s greater range of powers allows for tougher regulation to address the conduct issues and other problems that we are familiar with in the CMC market. The reauthorising of existing claims management companies will ensure that they can comply with the new regime, and the senior managers regime can be used to hold managers accountable for the actions of their businesses. All this is to be welcomed.

Is there any estimate of how many existing claims management companies will not get authorisation under the new regulatory regime? What will happen to the cases that such companies are handling if they are not authorised? The previous regime required only one permission to enable claims management activity across all six sectors—personal injury, financial products and services, employment, industrial and criminal injuries, and housing disrepair. The order creates seven different permissions across those sectors, which again is a positive because it strengthens and focuses the regulation of the CMCs. However, it maintains the same exclusions and exemptions from FCA regulation that existed in the previous regime, even though there have been a number of responses to consultation suggesting that additional sectors should be brought into scope, particularly claims about cavity wall insulation, aviation and timeshares.

Ofgem’s response to the Treasury consultation, by way of example, was prompted by an increase in correspondence with claims management companies dealing with cavity wall insulation, which are not regulated under the current regime. In eight months it received over 2,250 such requests compared with only 80 in the same period for the previous year. The energy company obligation scheme, which Ofgem administers, places an obligation on larger energy suppliers to deliver energy efficiency measures, including cavity wall insulation, particularly to individuals in fuel poverty and therefore vulnerable households. Ofgem considers that the significant increase in the number of subject access requests reflects claims management companies looking to pursue claims for clients against failed or wrongly installed insulation.

Somewhat wryly, Ofgem observes that over 6.2 million homes have cavity wall insulation under government schemes. It is clearly an emerging area for claims management companies, and it is in the interest of consumers for this area to be regulated. The Government’s response was to the effect that further work was needed to understand whether this and other claims sectors should be regulated. Against that, though, we are hearing from an authoritative regulator telling the Government that there is an escalating problem that needs to be addressed. I ask the Minister to confirm the extent to which the order allows for additional claims sectors to be included in the new regime and to what extent a further statutory instrument is required to extend its scope. When can we expect a decision on the inclusion of cavity wall insulation claims? What other sectors are the Government currently considering whether to include?

It is proposed that the exemption afforded to claims management activity by independent unions, if they adhere to a code of practice, is maintained. Again, in my view that is a positive because thousands of trade union members get service through their union. The existing code applicable to trade unions will be replaced by a new code to be published by the Treasury in time, I understand, for the regulatory transfer on 1 April 2019. What is the process for consulting the trade unions? Could the Minister give a steer on what areas in the code the Treasury is looking to change?

The Minister referred to solicitors carrying on claims management activity also being exempt if that activity is carried on as part of their ordinary legal practice because regulation comes via the Solicitors Regulation Authority. If a solicitor is not acting in the ordinary course of their legal practice but is carrying on claims management activity separately, the exclusion does not apply. Again, I noted that several responses to the Treasury consultation questioned that exemption or expressed concern about the robustness of the Solicitors Regulation Authority, suggesting, as one sees if one reads the submissions, that a risk of regulatory arbitrage could arise where the presence of a legal professional in a company allows it to seek SRA authorisation rather than meeting the more robust FCA process. Although the SRA and the FCA can develop memorandums, which I am sure they will, what assurances can the Minister give that this risk of regulatory arbitrage will be closely monitored, and does this order allow the FCA to revoke that exemption—that is, if it wants to consider that exemption, can it do so under this regulation?

Finally, under the General Data Protection Regulation 2018 and the Data Protection Act 2018, where personal data is obtained through an unlawful cold call, further use of it is prohibited. This is something that many of my colleagues were concerned about during the debate on this matter in the House. I know from reading the documents that the FCA is consulting on requiring claims management companies that buy leads from third parties to carry out due diligence to determine whether the lead generator is authorised and complies with the relevant legislation and regulations. However, again, I ask the Minister: when will the FCA conclude what is required of claims management companies—that is, to undertake due diligence and ensure that the leads they are buying are authorised—and will that be available before April 2019?

[Baroness Kramer (LD)]

My Lords, given the hour, I shall try to be very brief. I support this statutory instrument but want to reiterate some of the points made by the noble Baroness, Lady Drake, and others.

Obviously, I support the transfer of supervisory responsibility to the FCA and the Financial Ombudsman Service, but it will be effective only if the FCA decides that it will use its powers. The notes accompanying the statutory instrument refer to the senior managers and certification regime, which has been in place for two and a half years. The industry was initially very afraid of that regime and the discipline that might follow, but it is not so any longer. Can the Minister tell us or ask his officials to write to us setting out how many actions have been taken under that regime? Obviously, you do not expect anything in the first months but, by now, given the fairly constant level of misbehaviour within the financial services industry, we should be seeing something coming through. I fear that the number will be quite low—possibly even zero.

I also reflect the concerns that the noble Baroness, Lady Drake, expressed about exemptions. The Minister referred in particular to the concerns expressed in consultation about the exemption for the legal profession, and he talked of the Solicitors Regulation Authority. I am afraid that its reputation is not good, and it is certainly not one of a body that is rigorous in its enforcement. I understand that there will be a memorandum of understanding and some sort of joint regime between that body and the FCA, but it would have been handy to have sight of that before we saw the SI. Can the Minister expand on that to give us some level of confidence both that these two bodies will work together and that they will be determined to be rigorous—something that, frankly, sits in neither’s history?

I pick up the issue of cold calling, which the noble Baroness, Lady Drake, addressed. As the Minister knows, we have been very concerned that there is not a much more vigorous prohibition on using data obtained in an unauthorised way, and cold calling was a particular issue. The fact that no penalty will be paid by those who use the information is a really significant loophole. Can the Minister give us any update on whether there will be action in this arena? He will know that, although Parliament has provided many powers for regulators to tackle cold calling, anecdotally we are aware that its incidence has not slacked; it has just become much more targeted against vulnerable people. That is almost the worst outcome that any of us could have anticipated and something that needs to be dealt with very rapidly.

Lastly, I turn to the issue of new areas. This industry has a long history of producing one new wheeze after another. We could use some assurance that the FCA and others will be able to move rapidly as it begins to become evident that the industry has found yet another way to target individuals in some abusive form. I do not want to damn all claims companies. Some of them are very good; some are extremely responsible, but it is an industry that has managed to draw in quite a number of rogues. We all want them to be expelled as soon as possible.

Financial Guidance and Claims Bill [HL]

Debate between Baroness Kramer and Baroness Drake

Report: 1st sitting: House of Lords
Tuesday 24th October 2017 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I support and very much welcome these government amendments. I thank the Minister for the consideration she has given to the arguments put forward in Committee. These amendments would make the guidance and advice free to the user and impartial. It is very important that it should be free to the user and not vulnerable to ministerial discretion to decide to charge a fee at some later point for three important reasons.

I do not want to prolong the debate, having got the amendments but, just in case there were ever to be reconsideration of the point, I say that if the new body is to be effective in meeting its objectives it needs to be trusted and universally recognised for supporting members of the public and those most in need. To charge for information and guidance would make the relationship transactional, which risks undermining trust and public perception of the purpose and ethos of the service. It also needs to be free to the user if it is to reach the people who need it most. Charging a fee could deter many people on low and moderate incomes. In many instances, getting customers even to seek guidance often needs a pull, and charging just makes that problem more difficult. If the service is not free to the user but subject to a fee, the new body’s priorities and impartiality could be compromised because of potential conflicts over where to put resource from the organisation—towards those most in need or to the services with the greatest potential to raise revenues.

The requirement in the Bill that guidance and advice given must be impartial is very important. The Minister referenced arguments used in Committee that there are so many providers of information and guidance that they nudge or encourage the consumer in directions that are not driven solely by their needs. It will be the fact that the new body is impartial in the advice and guidance it gives that will distinguish it and allow it to build trust and to deliver its statutory objectives. I thank the Minister for bringing these amendments forward.

[Baroness Kramer]

My Lords, I join in thanking the Minister for bringing these amendments forward. I think she recognises that the three existing bodies to be merged all have a reputation for impartiality. Their services are free and she is making it absolutely clear that those vital elements which she respects and appreciates so much in the existing bodies will carry through into the new body. It seems to me that stating it clearly, rather than leaving it to be read and potentially misconstrued, is exceptionally helpful.

Financial Guidance and Claims Bill [HL]

Debate between Baroness Kramer and Baroness Drake

Committee: 4th sitting (Hansard): House of Lords
Wednesday 13th September 2017 Lords Chamber

[Baroness Drake]

My Lords, I too rise to express my sympathy with the views articulated by the noble Lord, Lord Sharkey, and the noble Baroness, Lady Altmann. I also empathise with the point made by the noble Earl, Lord Kinnoull. I listen to what he says because he often makes some very wise nuggets on a point that warrant reflection.

We do not want to regulate CMCs out of existence, because people need access to redress where they have been poorly treated or have experienced a serious problem. Public policy has been pushing assisting people with access to justice out to the private sector, so we have to come up with a toughened regulatory system that does not deny that. In a well-regulated, well-run system where public policy itself is making it more difficult for people to pay for access to justice, well-regulated claims management companies have a role to play.

However, the way the CMC industry currently operates is clearly totally dysfunctional. It gives rise to three key problems. One that the noble Lord, Lord Hunt of Wirral, articulated in the previous debate is that it stirs up such an artificial level of claims without merit that it risks undermining that very protection regime for the genuine claimant. It raises the costs and charges faced by other customers for what they have to pay for products and services, often hurting those on lower incomes.

We know that the ease of entrance to the market means that claims management companies often do not treat claimants well. They give poor value to the claimant on fees and service; there is little inhibiting them doing so. I see that, a couple of years ago, 22% of claims management companies in one year lost their accreditation or received a formal warning—basically one-quarter of the industry having its card marked or forced out.

Also, we have a situation where new technology allows claims management companies to operate on a huge scale. They are harassing the public with very aggressive techniques, using new technology that allows such mass approaches. People are being bombarded with calls and texts; if you answer them by mistake, God are you hooked in. That triggers another series of harassing texts and calls. Very often the person does not even have the product or has not had the experience the call management company is targeting. These call management activities are one huge fishing trip that new technology allows which has got completely out of control. That trawling simply has to stop. There needs to be some appropriate intervention.

In supporting that, I go back to the reflective point that the noble Earl made. In a situation where assisting people with access to justice is increasingly being put into the private sector, we want a well-regulated claims management company that will help the genuine claimant get access to justice.

[Baroness Kramer]

My Lords, I intervene because it is important to stress that it is essential to ban cold calling, not give it a space. For example, those who are concerned about PPI claims can see advertising on the television. That is not cold calling or a sort of personal assault on your letterbox or your phone, whether by call, messaging or email. It is the personalised cold call that arrives. Often it is content that is intimidating and unless every phone call is recorded and checked there is absolutely no way to make sure it is not intimidating. It is the number of these things. If, for example, you say, “You can send five texts to every individual”, you will simply have a much greater group of people all sending five texts. It becomes almost impossible to manage unless you go for the ban strategy.

There are many ways to communicate. For example, I look at the way the FCA is now communicating with the general public over PPI. It has some excellent ads on television making it clear that there is a free way to call. It provides a phone number and a website. The whole process is easy. We would all be offended if the FCA now started cold calling individuals across the country, even to provide a free service. It is an invasion of private space. We have to protect private space, and cold calling is a mechanism which violates it. I hope that, in the interests of making sure people remain informed about the options available to them, we do not require them to give up control of that private space.

Financial Guidance and Claims Bill [HL]

Debate between Baroness Kramer and Baroness Drake

Committee: 3rd sitting (Hansard): House of Lords
Monday 11th September 2017 Lords Chamber

[Baroness Drake (Lab)]

My Lords, Amendment 62 seeks to make it a criminal offence for a person to mimic, impersonate or behave in a way which indicates that they are giving advice and guidance on behalf of the single financial guidance body when they not in fact giving guidance on its behalf and are not authorised to do so. This is not a novel proposal. Under existing legislation, it is a criminal offence to impersonate Pension Wise. This provision would not stop every organisation seeking to use or mimic government initiative statements to give credibility to their approach to attract members of the public, but it would be a powerful deterrent. A deterrent is definitely needed because the human cost of receiving fraudulent, wrong, conflicted or partial guidance from organisations or persons who win people’s trust by misleading them into believing they are acting under an authorised government initiative can be just dreadful, leading to irreversible financial losses, life-changing losses, debt and more.

Those vulnerable to the activities of the misleading, mimicking guidance operators are not only the struggling, the stretched and those with more basic levels of numeracy and literacy, although their needs are very important; in the context of finances, those individuals who are vulnerable and at risk go up the income chain as consumers deal with products and services that can be diverse, complex and rapidly changing. Those with retirement savings, for example, are usually people who have typically had good and sustained periods of employment over their working life and have usually compulsorily or voluntarily set aside money aside for their later life. These impersonators can be ingenious in their hunt to claim fresh victims, as a recent press release from the Pensions Regulator demonstrated when it warned that,

“rogue pension websites that are carrying anti-scam messages to try to trick consumers into believing that they are legitimate businesses”.

Some even imply they are regulated by carrying warning messages designed to prevent people falling victim to scams. These imitators are using material owned by the regulators or other government initiatives to impersonate and mislead the public. Therefore, in this instance, a mechanism designed to protect consumers is now used to dupe them.

The deterrent of criminal proceedings is needed not only to protect the public and the integrity of the services of the new financial guidance body but to protect the legacy names of its predecessor bodies, such as Pension Wise and the Pensions Advisory Service, names which the public will continue to recollect for some time before they recognise and internalise the name of the new body. It must be a criminal act to mimic not only the new brand but any of the existing brands that will move into the new single financial guidance body.

The Government thought it necessary to make an explicit criminal offence to imitate Pension Wise but no provision is contained in the Bill for it to be an offence to mimic the new financial guidance body. At Second Reading the Minister commented that there was no need for such a criminal offence provision in the Bill, as:

“The brand and service offer of the new body will be protected by existing stringent criminal offences under fraud and copyright laws”.—[Official Report, 5/7/17; col. 946.]


However, that view was not considered sufficient to protect the public from operators imitating Pension Wise—such imitation was made a specific criminal offence. I remain concerned that the absence of a specific provision to make it a criminal offence to mimic the new financial guidance body is a weakness in the Bill. Why was it considered appropriate to create a specific criminal offence of imitating Pension Wise rather than relying on existing fraud and copyright laws? Which existing legislation would ensure that any form of imitation of the new financial guidance body was a criminal offence, and why is that not referenced in the Bill? How will the Government ensure that imitating any of the existing brands that will move into the new single financial guidance body, including Pension Wise, will continue to be a criminal offence? I beg to move.

[Baroness Kramer (LD)]

My Lords, I strongly support the amendment moved by the noble Baroness, Lady Drake. This is an area where we need belt and braces—every mechanism that we can to make the new body and the services that it will deliver resistant to the scammers, who are ingenious beyond the capacity that most of us find credible, until we experience or hear about a scam ourselves.

In many cases, when people seek advice or guidance over an important matter in their lives, they turn to an organisation in which they have built trust over many years, where they have a whole series of experience and where they have neighbours and friends who share that experience. From that, they can be quite informed in choosing to whom they turn. However, that tends not to be true in the kind of issues that this body will deal with. People who are under debt pressure often panic when they finally reach the moment when they feel they must turn to somebody. It makes them particularly open to scammers, who will do things such as charging them, taking commission and exploiting their vulnerability at that moment. In the area of pensions people are exceedingly confused and, again, are hesitant to turn to names that they might know or which are well established for fear that they will meet a sales opportunity. Therefore, someone who sets themselves up as providing impartial advice suddenly becomes productive. Again, they have no testing mechanism due to previous experience of that body.

Therefore, in supporting the noble Baroness, Lady Drake, on this amendment, we very much seek belt-and-braces protection for consumers, recognising that people are increasingly vulnerable to scamming, particularly with modern instruments such as the internet. The Government need to be motivated to make sure that real and significant protection is in place.

--- Later in debate ---

[Baroness Drake]

My Lords, Clause 6 requires the single financial guidance body to set and publish the standards that it will meet in the provision of information, guidance and debt advice. It is specifically required to obtain the approval of the FCA to those standards. Clause 7 requires that every three years the FCA must review whether those standards are appropriate, review how they are being monitored and enforced, and make recommendations. Amendment 68 would place a requirement on the FCA that, when discharging its duty to approve these standards, it will act in the interests of consumers and promote financial inclusion. The intention of the amendment is to strengthen the remit of the FCA, in this instance, to act in the consumer’s interests.

The single financial guidance body is an organisation whose function is expressly to support individual members of the public. Its objectives are to improve individuals’ financial capability and their ability to make informed decisions and to manage debt. Problems of access undermine the general principle that consumers should take responsibility for their own decisions. People cannot reasonably exercise that responsibility if they struggle to understand the nature, processes, terms and conditions of products and services.

The financial guidance body standards have to be approved by the FCA, whose remit is different—its remit is to ensure well-functioning competitive markets. If there is a gap in the market, the FCA often does not have the power to fill it, and if there is a market failure it seeks to address it by improving competition, even though in many instances the weakness of the consumer buy-side market forces cannot exert the necessary force to achieve a well-functioning market in parts of the financial services industry. The FCA acknowledged in its Retirement Outcomes Review Interim Report that competition is not working well for consumers who do not seek advice; it has concerns about whether a competitive market can develop in future; and consumers can struggle with the complexity of decisions. This echoes the view of the OFT, in its 2013 report on workplace pensions, that the buy side there was one of the weakest that it had ever encountered.

Competition will not always be an effective way to overcome access problems; the very creation of the financial body is a recognition of that fact. As for the wider market, in its paper on Access to Financial Services in the UK, the FCA observed that,

“left to the market, some consumers will be unable to access the products or services they want or at a price they are willing or able to pay”.

The market can go only so far in addressing the various financial needs of people.

The FCA is an economic regulator with a statutory objective to secure an appropriate degree of protection for consumers of financial services, which is largely focused on the provision of information and disclosure, given the general principle that consumers should take responsibility for their decisions and providers should give consumers a level of care that is appropriate, having regard to the capabilities of the consumer. However, the FCA does not have a specific objective or duty relating to consumers’ access to financial services or financial inclusion. The extent of the FCA toolkit in assisting vulnerable customers can appear uncertain.

The single financial guidance body, by comparison, is created to focus expressly on the needs of the public and the consumer, to improve their financial capability to make informed decisions. It is given the power in Clause 2(3) to do anything that is conducive to the exercise of its function.

So there is clearly a potential for tension between the remit of the FCA, when it considers whether to authorise the guidance body standards, and the aspirations of the guidance body on how to support the public when setting those standards. The objectives of the FCA and the financial guidance body need to be aligned when the standards for the provision of service by the new body are set and approved. That is the purpose of my amendment, which would give the FCA the duty to act in the consumer’s interest when authorising those standards.

The standards are a matter for the new body when it is set up. I do not seek to debate what the standards should be, but as a way of illustrating my point I could speculate on matters where tensions could arise: the qualitative standards for the guidance and how far guiders can go in their role in enhancing individuals’ ability to manage their financial affairs and make informed decisions; the guidance output given to the customer; standards for determining when the provision of guidance and debt advice are considered lacking such that the new body has a locus; the consumer’s journey, including how they get the guidance; the ability of vulnerable customers to access financial guidance; and the extent of active promotion of the financial guidance service by relevant organisations.

The answers to the questions of what the standards should be on these and other matters may be different depending on whether they are looked at wholly through the lens of the individual—the consumer’s interest—or from the perspective of a competitive, well-functioning market. The FCA and the new financial guidance body should look at these standards through the same lens, that of the consumer’s interest. That is what my amendment seeks to do. I beg to move.

[Baroness Kramer]

My Lords, I will speak in support of this very important amendment moved by the noble Baroness, Lady Drake. Much of the difficulty in the conversations we have had around this Bill has come over the role and obligations of the FCA. If the Minister or her officials care to look at the FCA website, they will understand that consumer protection is very much interpreted in the realm of preventing mis-selling and preventing scams; it is not a broader protection of the consumer in the way that some might interpret that language—for example, to make sure that the consumer has successful routes to navigate financial services.

I can give the Minister one simple example of which she will be aware. Many of us around this Committee—and, indeed, probably the Minister herself—believe that a breathing space scheme would be very advantageous in helping people to move through debt management to restore their finances. However, the FCA cannot mandate such a thing. It cannot act, as it were, to protect the consumer even though one might consider, if using just the English language, that such an action would be captured by the words “consumer protection”.

In the same way, on the issue of access the FCA can try and act so that a banking institution, for example, does not put up barriers that would discriminate or set itself up in such a way that people could not get on to the relevant website to access the service, but that is not access as in, “What financial services do members of the public require, and are those kinds of services being provided by the financial service sector and industry?”. So it cannot gap-fill. Actually, it is quite unusual to have an arrangement where such gap-filling is not possible. For example, in the United States, that may be done indirectly through things such as the Community Reinvestment Act, so there are paths by which that kind of back-filling can be pursued by the regulator.

I hope very much that the Government will understand that, in terms of providing advice and guidance, the FCA in looking at the standards that have been set cannot operate within the usual realm of an economic regulator of essentially promoting market efficiency or market fairness, which is its fundamental and underlying approach and responsibility. That is why the inclusion of language that talks about acting in the interests of consumers and about promoting financial inclusion is very appropriate when the FCA is now engaged in something that steps outside its traditional, typical overarching role.

Bank of England and Financial Services Bill [HL]

Debate between Baroness Kramer and Baroness Drake

Tuesday 3rd May 2016 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I take this opportunity to thank the Minister for meeting my noble friend Lord McKenzie and me to discuss this amendment in detail. I am most grateful for that. As has been said, the amendment places a new duty on the FCA to make rules to prohibit or cap early exit charges that act as a deterrent to people accessing their savings under the new freedoms. This amendment is particularly interesting for two reasons. Unusually, it introduces legislation with retrospective effect on existing contracts and a new deterrent regime in addition to the existing fairness regime in financial conduct regulation—in effect, charges must not be at a level that deters people from accessing their savings.

The Government believe the legislation needs retrospective effect because of the need to protect existing and future consumers, and—more interestingly, when one reads the detail of their proposals—that fairness should not be determined solely by reference to whether or not it was fair to include a term in a pension contract a decade or decades ago, but that it has to be looked at against how unfair contracts legislation has evolved since those contracts were entered into, and through the new lens of the recent pension freedom reforms, all of which arguments I agree with. But given that the Government have taken the decision through this amendment to enable retrospective changes to existing pension contracts and recovery of amounts paid or payment of compensation for charges made in contravention of the new FCA rules coming into force in March 2017, and that the pension freedoms, which provide the new lens for looking at fairness, were introduced in April 2015, I cannot understand why the consumer protection in the new FCA duty does not apply with effect from April 2015. Why is it necessary to wait until March 2017 when the FCA rules are implemented—a full two years after the pension freedoms were introduced—before consumers are protected by the provisions on fair access to savings?

The Minister advised in his letter of 16 March that the Government are introducing this amendment,

“in light of detailed evidence gathering, and an imperative to act quickly in order to limit the extent of consumer detriment caused by early exit charges”.

The Government’s main defence for this two-year gap from April 2015 to March 2017 in protecting consumers is that savers who access savings between these two dates from a scheme whose early exit charges are considered excessive under FCA rules to be implemented in March 2017 cannot have been deterred by those charges and presumably are therefore not in need of retrospective protection. That argument simply does not sit comfortably with the Government’s view that some people are being denied fair access to their savings. It suggests that the new deterrent regime trumps fairness—in effect, if a person accessed their savings they have not been deterred, ergo the early access terms are fair.

There are many reasons why people may access their pension savings during that two-year gap, even though the charges may be excessive. There may be ill health or other compelling personal circumstances that override the deterrent effect. People may not be aware of, or understand, the excessive early exit charges, so do not make their decision on an informed basis. The FCA data reveal that 78% of affected consumers rated their pension provider’s explanation of the exit charge and its level as poor.

In his letter of 16 March, the Minister comments:

“In order to ensure that the provision benefits current consumers who are eligible to use the pension freedoms now … this clause provides that any prohibition or cap imposed by FCA rules applies equally in relation to existing pension contracts, as well as those entered into in future”.

In the light of that statement, it is most unfortunate that the amendment excludes from the protection consumers accessing their savings between April 2015 and March 2017, even though in other circumstances it allows for a retrospective effect.

[Baroness Kramer]

My Lords, I echo the objections just raised by the noble Baroness, Lady Drake. It is quite inexplicable that “retrospective” does not mean that the new regime will be recalculated from the date that people were able to access their pension pots. It seems equally unfair for people to have paid an inappropriate exit fee a year ago as it is for them to pay an inappropriate exit fee a year from now. Has the Minister considered how this will tend to inhibit decision-making by families until the new regulations are revealed? Instead of making the best decision for the family, there will be great pressure to delay that decision until the rules are clearer and, presumably, the exit fees are removed.

The amount of money involved in this process cannot be substantial but to the individual family that has been impacted, it is certainly significant. I really do not understand the Government’s thinking on this issue.

Bank of England and Financial Services Bill [HL]

Debate between Baroness Kramer and Baroness Drake

Wednesday 11th November 2015 Lords Chamber

[Baroness Kramer]

I shall make one relatively small point. This is an area where I do not pretend expertise. At Second Reading, I referred to the importance of both guidance and advice and the significance of distinguishing between the two. At the moment, many people who are retiring will have spent a large part of their careers accruing pension benefits through a defined benefits plan and a relatively small proportion of their career in defined contributions, so for many people now the discretionary pot is probably quite small and many of them may feel that they can therefore make decisions without advice. That picture will rapidly change as a generation comes forward for whom defined contributions have essentially been the framework within which they have provided for most of their pension. We are moving into a situation where advice will become more significant, so this problem needs resolution. I ask that any measure the Government take recognises that this is not a front-loaded problem but a back-loaded problem, so they need to be sure that they are constantly expanding the relevant resources.

[Baroness Drake]

My Lords, I shall speak to paragraph (f)(i) and (ii) in the amendment which refer to the secondary annuity market, and I draw the attention of the Committee to my registered interests, in particular my membership of the board of the Pensions Advisory Service, which is a delivery body for the current Pension Wise.

In the summer Budget Statement, the Chancellor confirmed that he wishes existing annuity owners to have the freedom to sell their annuity income but announced that plans for a secondary annuities market would be delayed until 2017 to ensure that there is an in-depth package to support consumers. The Pensions Minister, the noble Baroness, Lady Altmann, confirmed that the delay was to ensure consumer protection adding:

“We can’t launch without safeguards”.

It is important, as paragraph f(i) in the amendment provides, first to identify very clearly the risks in this market and the potential advantages and disadvantages to the consumer of converting an income for life into a cash sum before agreeing the regulations with regard to guidance to be provided to individuals considering trading their annuities. If the infrastructure of such a secondary annuity market were to be put in place, it is not yet clear who would be the buyers of the annuities. There are still lots of unknowns about how that market would operate. Until we understand more about how that secondary market will operate and what regulatory restrictions will be imposed, it will be difficult to assess whether customers are able to get a good deal. If an individual got a poor deal in the first place, selling the annuity on would not necessarily reverse that; indeed, it could make it worse. If, as the Chancellor argues, the pensioner freedom reforms were needed in part because the annuity market was not working in the best interests of all consumers for the simpler proposition of selling someone an annuity, why would it be expected that the reverse secondary market, where someone would resell an existing annuity, would work any better?

Some people will certainly be tempted to cash in their annuity for what looks like a large sum but their annuity may be bought at a heavily discounted price. Selling their guaranteed income could prove expensive because of the cost of individually underwriting each transaction. There will be costs to trading, complex pricing systems and consumer vulnerability to poor behaviour by some firms. So many pensioners may not be better off as a result, and it may be difficult to assess whether the lump sum that they have been offered is a fair swap for what they would be giving up. Actually, though, once they have given that up, the decision is irreversible.

The Bill refers to protecting the interests of those who have an interest in a particular annuity, and that certainly needs to be considered. What is the situation in a joint life annuity? What is the definition of those who have an interest? How will their interest be protected? What if a person is not named on a joint life annuity contract? These may seem irritating points of detail, but they will be matters of significant substance for some people who may be the beneficiaries of an income stream from an annuity.

The Government have also advised, as my noble friend Lord McKenzie said, that they want to consider how to explain the interaction between annuity income, capital and deprivation laws in the welfare, social care and council tax reduction system—something that we rather tripped over when implementing pension freedoms. In making that clear to people who are considering selling their annuity, the guidance would need to explain clearly the implications of that interaction.

In the secondary annuity market, the appropriate form of consumer protection has to be an integral part of any proposals to allow people to resell annuities, and therefore a clear identification and consideration of the safeguards and guidance that are appropriate is required before regulations come into force. It is important to be assured that they are actually fit for purpose. Creating a secondary annuity market is certainly not a simple proposition, which presumably is why the Chancellor has delayed his plans until 2017, although I accept that the proposed expansion of pension guidance to those considering selling their annuity is to be welcomed. However, it will be important for Parliament to understand what guidance will be delivered, and how, to people looking to trade in a secondary annuity market, because such a market will come with risk and complexity and that has to be reflected in the quality and comprehensiveness of the guidance provided. This is not going to be a proposition without problems. Some people have suggested introducing a requirement to take independent advice but even that is not a simple proposition, not least if a requirement to take advice significantly reduces the value of the transaction to the seller.

Lastly, the complexity of a secondary annuity market means it is essential that the pension guidance that is provided is of a high quality, delivered by people with the necessary skills and expertise. This is not going to be a straightforward set of guidance. Reflecting on experience to date, it is very important that those who bear responsibility for signposting to the guidance those who want to trade in the annuity market are not organisations with conflicts of interest in whether that guidance is followed. Sometimes, being better informed and better guided does not make people such good customers. Given that this is even more complex than the pension freedoms market, it is really important to get this proposition right.

Financial Services Bill

Debate between Baroness Kramer and Baroness Drake

Tuesday 26th June 2012 Lords Chamber

[Baroness Kramer]

My Lords, I join with the comments made by the noble Lord, Lord McFall, and I have a couple of quick comments to make on this very substantial proposed new section. I have two queries on it, which I wonder whether the Minister can clarify. The oversight committee, as he conceives it, is to be chaired by the chair of the court. Am I correct in understanding that he expects this to be a non-executive chair? Although there is currently a non-executive chair of the court, the Minister will know that I have concerns about the Banking Act 2009. In Part 7 of that Act, Section 241 seems to be quite ambiguous about whether that is a requirement or merely in the gift of the Chancellor. If I am right, I hope that that can be corrected at some later stage of the Committee.

My second set of comments concern proposed new Section 3C(5), on performance reviews. When the cynics among us—I am afraid that I confess to being one—read a phrase that says:

“In the case of a performance review, the Committee must have regard to the desirability of ensuring that sufficient time has elapsed … for the review to be effective”,

the Minister will understand that there is an element of thought that that could mean the long grass, if we are not careful. Paragraph (b) of that proposed new subsection,

“to avoid the review having a material adverse effect on the exercise by the Bank of its functions”,

could be read as “no serious criticism required”. I would like some assurances from the Minister that that is not a possible reading.

The Minister will understand that some of those concerns are reinforced by widespread criticism of the delay, under the current banking structure, of the three reviews that were started in May this year. Seeing those reviews now in place, it seems an awfully long time since the financial crisis. There are also real questions about the scope of the reviews, particularly the review looking at the provision of emergency liquidity assistance in 2008-09. Many of us would have asked, “Why did this not start in 2007?”. Notwithstanding the fact that the Treasury Select Committee has looked at that, it is surely not a substitute for the Bank of England or the court doing the work itself. There are concerns in that area, and I look for reassurances from the Minister.

[Baroness Drake]

My Lords, perhaps I might ask the Minister a very brief question. Proposed new Section 3E(2) says:

“The Oversight Committee must … if or to the extent that the Bank accepts the recommendations, monitor the implementation of the recommendations”.

My question is very simple. If the Bank does not accept the recommendations, what then happens?