Financial Services Bill

Baroness Noakes Excerpts

Monday 12th November 2012 Lords Chamber

[Baroness Noakes]

I added my name to this amendment because my noble friend has raised some important issues, and I support everything he said. When approaching consumer protection, it is often easy to want to insure or underpin the consumer in every possible way, but we have to have a market in which financial service providers can be confident that when they provide a financial product, whether it is a mortgage, an ISA or an insurance or pension product, they know the risks they are undertaking in relation to that. Understanding the balance that will be taken by the FCA when approaching its consumer protection objective is extremely important to the financial services industry. If the financial service industry gets very unconfident about how this will play out in practice, we will end up with a worse outcome for consumers because it is almost certain that the range of products and the degree of financial innovation that will be invested in would decline. It will not happen immediately, but it will decline over time because firms will not be confident about how they can approach them.

The financial service industry reads very carefully what the people involved in regulation say about these things. The FSA recently put out a document dealing with the direction for the new FCA. It was very useful to be updated how those in the part of the FSA which is migrating to the FCA developed their thinking. In the introduction to that document, Mr Martin Wheatley, who will be the chief executive of the FCA, said:

“We expect a mortgage that is affordable”.

That sounds like an uncontroversial statement, until you think that that might mean that a variable rate mortgage could never be provided to a consumer if it were at all possible that plausible fluctuations in the interest rate could end up with some kind of consumer detriment. We might end up closing off certain products that would benefit consumers because the firm cannot be confident that the standard by which it would be judged will allow it to provide those products safely. The issues raised by my noble friend are extremely important, and I look forward to hearing what the Minister has to say.

[Lord Deben]

My Lords, I refer again to my declaration of interests. I understand the reason for this amendment, but it seems not the right way to achieve its end. To suggest that you have to balance protection on the one hand with access on the other seems a misunderstanding of what protection ought to be. I am sorry that the Government have so far been unwilling to place upon the regulator a responsibility to have regard to the extent to which advice is available. That ought to be part of what the regulator does when he thinks about how he is going to regulate and the demands that he is going to make. There is a real argument that we are going to find that there will be fewer opportunities for those of modest means to get proper advice. It is important for the regulator to take that into account when he lays burdens upon the industry. I think that is right, but I am sure that this is not the way to achieve that end, partly because it does not help the industry to suggest that somehow or other protection for consumers is necessarily contrary to the need to provide for a wider range of people to have advice. The failure to get this right has been one of the problems with the industry in the past.

I hope that the Minister will resist this amendment, but that he will do so recognising that there is a real concern behind it, which is that the cost of regulation and the degree to which regulation is disproportionate falls most on those who most need advice and very often are not in receipt of a great income and do not have large reserves. I hope that the Minister will accept that there is a concern here. It is one that the Government have failed properly to address, and it is not well addressed by suggesting that there is a kind of conflict where conflict does not necessarily occur.

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[Lord Phillips of Sudbury]

My Lords, my name is on Amendment 31, but before saying a word or two about that I would like to thank my noble friend the Minister for government Amendment 26, which is surely another big step forward to take account of social investment.

Amendment 31 is a harmless amendment, I am almost inclined to say, which gives a bit of flexibility in the light of experience for the Government to amend the considerations to which they must have regard when considering what degree of protection to make for consumers under proposed new Section 1C. That seems a bit of good common sense, so I hope that the Government will accept it.

[Baroness Noakes]

My Lords, I hear what the Minister said about the drafting of Amendment 26 not referring to social investment or anything like that. As drafted, however, it says that the things which the FCA must take into account include,

“the differing expectations that consumers may have in relation to different kinds of investment or other transaction”.

Read as it is, that seems to require the FCA to take account of consumers’ expectations, whether or not they are reasonable. So if consumers have unrealistic expectations about what they will have in return from their pension investment, for example—and that is a fairly widespread misconception—because the Government have chosen to use this unspecific form of drafting this could quite easily be interpreted as applying to expectations that operate in a quite different sphere from that intended. While the Government might say that it is intended only for social investment, these are clear words; they do not need any other explanation from the Government to make them understandable. It may be dangerous in its current drafting to leave it without the reference to social investment that my noble friend’s Amendment 31 has. His amendment is clearly rooted in what it is that is trying to be achieved.

[Baroness Kramer]

My Lords, I just want to join in the chorus that essentially says to the Government that we appreciate the move forward that comes with their amendment. I am very supportive of the noble Lord, Lord Hodgson of Astley Abbotts, and his thought process over Amendment 31. It has tremendous overlap with Amendment 26—and I think that I can be very happy with Amendment 26 today. But the financial promotions order issue is going to have to be tackled. I would like to reply very briefly to the noble Lord, Lord Flight, who suggested that a social investment should be marketed only to sophisticated or high net worth individuals. The kinds of projects involved in social investment may be an extension to a local school, or a resettlement programme attached to a local prison. It is quite likely to be a small project—that is the whole point—of the kind that cannot afford to go and get regulated so that it can be marketed to the general public. It is the kind of project of £1 million or £2 million, which cannot pay the £150,000 that would put it into a regulated environment so that it could be marketed to the general public. The whole point is to provide those people with an alternative who, typically, might be asked to donate to a local project, so that they could invest in that local project. You are talking about people who would be close to the project, understand the community and perhaps even engage themselves in the work that the community does. So we are looking at a very different range of projects when we talk about social investment.

Although the language is very tricky and I recognise that it will not be easy, at some point the Government will have to get a grip on the financial promotions language and find a way to craft it so that it can be sold appropriately to people who know and understand what is going on but will never meet that benchmark of being a high net worth individual or a sophisticated investor. They might put £1,000 or £2,000 into a project, or perhaps even £50 or £100. At the moment, they are barred from doing anything other than donate, which seems reasonably insane when we look at the kind of projects that are involved.

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[Lord Newby]

Yes, we do indeed, but the government amendment is broader and gives considerable flexibility to the FCA in the way that it deals with this new mandate.

The noble Baroness, Lady Noakes, raised the question of what happens if consumers have unrealistic expectations, and she thought that this could, in effect, be a dangerous amendment. I do not think that it is, because I do not believe that this is the way that the amendment will be interpreted by the FCA when it looks at products in this area and gives advice about them. While I can see where she gets the arguments from, I am confident that the FCA will ensure that we do not have the kind of dangerous consequences which she mentions.

[Baroness Noakes]

I thank the Minister for that, but how can he be confident that the FCA will—for all time—interpret the words in the way that he wishes them to be interpreted?

[Lord Newby]

My Lords, it is very dangerous to be confident about anything for all time, but if you turn the proposition of the noble Baroness on its head, is it conceivable that the FCA would interpret this clause at any point in a way that would be dangerous? Frankly, I cannot see why it would. One can never say absolutely that in 50 years’ time—assuming that this piece of legislation is on the statute book—interpretations might be exactly the same as they are today, but it would be perverse to think that the FCA would interpret this provision in a way that opened up the dangers about which the noble Baroness is concerned.

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[Baroness Noakes]

My Lords, I am grateful to the Government for the amendments that they have tabled, commencing with Amendment 32, in regard to the PRA practitioner panel. However, as the noble Baroness, Lady Hayter, said, that is not the solution that the industry wanted and it is a rather narrow solution. Therefore, I have considerable sympathy with what the noble Baroness said in relation to the need for the PRA to listen to a broad spectrum of views, including that of the consumer panel. In particular, I am more attracted to her Amendment 37ZB, which would require the PRA to have some sort of dialogue with each of the panels which are being set up for the FCA: that is, the practitioner panel, the smaller business practitioner panel, the consumer panel and the markets practitioner panel. Each will have their own particular issues which would be usefully communicated to the PRA in certain circumstances.

Notwithstanding the fact that there will now be a practitioner panel for the PRA, I continue to have concerns that the PRA’s concept of consultation is a narrow one when it should be a broad one based on regular dialogue and feedback loops with the industry. Therefore, I have very great sympathy with what the noble Baroness, Lady Hayter, has said.

[Lord McFall of Alcluith]

My Lords, I support the amendment and the proposition of the noble Baroness, Lady Noakes. If we look at the history of prudential regulation and consumer interest, we find that prudential regulation has trumped conduct of business for a number of years. I suggest that the PRA will be a more enhanced body than the FCA and therefore will win out all the time. Therefore, what the noble Baroness is saying about a broader range of opinion is extremely important. We need to look at the history of the representation of consumers in the financial services industry over a number of years. I lobbied the FSA for years to get a consumer representative on board. It came back to me very excited one day and said, “We have someone on board”. However, one out of 12 or one out of 13 is inadequate. It is very important that we redress the asymmetry of knowledge that is at the centre of selling because we have to restore trust and confidence in the industry, and to do that we have to balance the needs of the industry with those of the consumer. Therefore, I could not agree more with the need to have broader representation. That would put the status of the PRA at one with that of the FCA so that they served the interests of the industry and the consumer.