Financial Services and Markets Bill

Baroness Noakes Excerpts

Committee stage
Monday 13th March 2023 Grand Committee

[Baroness Bennett of Manor Castle (GP)]

My Lords, I rise briefly to offer Green support for this amendment and to agree entirely with everything that has been said thus far. I feel a sense of déjà vu all over again. I was just looking back at the comments I made in 2021, when, it is worth noting for the record, this issue of mortgage prisoners went to ping-pong: the House of Lords passed an amendment, and it went back and forth between the two Houses. Back then, we were talking about people suffering under high rates of 4% or 5%, and some were suffering with the vulture funds of 9%. As we have heard set out clearly, the situation has not improved but has got much worse, and we also have a cost of living crisis.

The noble Lord, Lord Sharkey, noted that Martin Lewis is now involved in this, with his crucial supporting research. What a state our country is in when everyone can feel a great sense of relief and hope because someone who is, after all, only a private individual has stepped in where Parliament has failed. Surely this is the stage where Parliament—or the Government—can step up and rescue people trapped in often terrible situations through no fault of their own.

[Baroness Noakes (Con)]

My Lords, like the noble Baroness, Lady Bennett of Manor Castle, I recall our debates on this subject in 2021. Indeed, I think the amendment that the noble Lord, Lord Sharkey, has tabled is word for word the amendment he tabled on Report during the passage of what became the Financial Services Act 2021. It will not surprise the noble Lord that familiarity with it has not made me any warmer to the amendment.

As the noble Lord, Lord Sharkey, reminded us, mortgage prisoners derive from lending practices before the financial crisis. These mortgage borrowers were much more likely to have got a mortgage without proof of income or with an impaired credit history. They still have relatively high loan-to-value ratios, and they often have unsecured debt as well. Many of them have interest-only mortgages, with no repayment plan. Put simply, they typically have higher-risk characteristics than borrowers with active lenders.

The noble Lord, Lord Sharkey, has correctly excluded 50,000 or so of the population of mortgage prisoners from his amendment, because they are in arrears or within the last 12 months of their mortgage term, but I think he intends the remaining 143,000 to benefit from the largesse provided by this amendment. This is notwithstanding that the FCA estimates that 66,000 of them could, in fact, switch to active lenders because the active lenders in the market have changed their risk appetite, with the encouragement of the FCA, and they would now be able to remortgage. I do not believe that it is right to legislate to give preferential financial terms to those who choose not to take advantage of the opportunities available to them in the market.

The FCA’s last review found that around 30,000 of the remaining 47,000 would be unlikely to benefit from switching, because if they did find a deal it would cost them more than the interest rates that they are currently paying. High-risk borrowers do not get the best rates in the market, however much they might wish to. Amendment 197 would give these borrowers a rate that did not reflect the market for them, and I do not believe that it is fair to give them a special advantage by legislating for them.

The FCA has proposed some practical steps to assist the remaining population, but it does not propose anything like that which is contained in Amendment 197. That is not surprising because the LSE in its earlier, independent study—I have yet to see the study that the noble Lord, Lord Sharkey, referred to—concluded that market interventions were not justified and could cause markets harms.

We all have sympathy for those stuck with debt that they struggle to afford, but the problem is not confined to mortgage prisoners, and it is just not fair to single out this group of problem borrowers for special treatment. It is also an extraordinary departure from regulatory norms. The FCA does not tell lenders to whom they must lend money; that is not how regulation works. Under this amendment, the FCA would be telling lenders what their risk appetite should be, which raises big issues of moral hazard and fails to deal with the prudential consequences in terms of capital, on which the PRA is the arbiter.

Furthermore, the FCA is required to set interest rate caps, but only by reference to LTVs. This ignores the other key driver of interest rates—namely, the credit risk of the borrower. Whatever rate the FCA comes up with, it will be the wrong answer for some borrowers, and it would be plainly unfair if the FCA set the rate assuming high credit quality, because that is very likely to be at odds with the facts. In addition, requiring the standard variable rates to be no more than two percentage points above base rate ignores any evidence about the correct uplift for the particular type of loan and borrower characteristics, which can produce outcomes that do not reflect objective market realities. I hope that the noble Lord, Lord Sharkey, does not pursue this amendment, as he did in the 2021 Bill; it really does not make sense.

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Moved by

[Baroness Noakes]

201A: After Clause 65, insert the following new Clause—
“Financial Ombudsman Service
(1) FSMA 2000 is amended as follows.(2) After section 229 insert—“229A Power of FCA to require Financial Ombudsman Service to refrain from specified action (1) Where the first, second and third conditions are met, the FCA may give a direction under this section to the Financial Ombudsman Service.(2) The first condition is that the Financial Ombudsman Service is proposing to exercise any of its powers in relation to the determination of a complaint.(3) The second condition is that the FCA is of the opinion that the exercise of the power in the manner proposed may have implications beyond the specifics of the complaint in question.(4) The third condition is that the FCA is of the opinion that the giving of the direction is necessary in order to avoid the possible consequence described in subsection (3).(5) A direction under this section is a direction requiring the Financial Ombudsman Service not to exercise the power or not to exercise it in a specified manner.(6) The FCA must consult the Financial Ombudsman Service before giving a direction under this section.”(3) In paragraph 15(1) of Schedule 17 (fees) after “respondent” insert “or relevant party”.”Member’s explanatory statement
This amendment gives power to the FCA to overrule a decision of the FOS where this would have implications which would affect the FCA’s ability to regulate effectively and to allow the FOS to make persons other than the complainant make a payment towards the costs of a case.

[Baroness Noakes (Con)]

My Lords, this amendment concerns the Financial Ombudsman Service. It is in fact two amendments in one; I should have separated them. The amendments were suggested by UK Finance and I will speak to each leg separately.

The first two subsections of proposed new Section 229A of FSMA, which my amendment would insert, would establish that, in certain circumstances, the FCA can direct the FOS in a particular complaint determination. I should say that I welcome Clause 38, which will set up a new duty of co-operation and consultation between the FCA, the FOS and the Financial Services Compensation Scheme. It was curious that FSMA provided for co-operation and consultation for the FCA and the PRA but the FOS was left out. In practice, I understand that Clause 38 would do little more than formalise what has already been happening in practice as part of the FOS’s wider implications framework, although that is entirely voluntary and Clause 38 would make it mandatory.

In the past, there have been problems with regulated firms having acted in a way that they believed was wholly in accordance with the FCA rulebook, including the principles that should guide how firms act. Firms believed that their actions were in accordance with the FCA’s expectations as well, although those are notoriously hard to pin down. Then, following a complaint, the FOS took a different view. As we know, the FOS is required to determine each complaint individually and makes its determinations using the FSMA formula of what is fair and reasonable in the circumstances of the individual complaint. That can and does result in outcomes that are, at best, frustrating for the firms involved when they believe that they have been doing exactly what was expected of them. A particular source of concern has been fraud cases, where the FOS has often gone beyond the requirements of the banking protocol, which was supposed to set out agreed expectations of what banks need to do in relation to suspicious transactions.

In addition, the FCA handbook requires firms to apply the outcome of FOS determinations to future complaints, so individual FOS decisions in effect become precedents, even though they were determined on the facts of individual cases. Another frustration can be that FOS decisions are not always internally coherent, so a confusing pattern of precedents can be created. In effect, a parallel rulebook grows up, but one created out of specific cases without underlying principles—certainly without any underlying principles that have been consulted on.

I think it fair to say that, although the financial services sector values the fact that the FOS represents a low-cost dispute-resolution service, it has for some time had concerns about how it operates and how its decisions become quasi-law. These concerns are now amplified, with the advent of the new consumer duty, which rests on the principle of delivering good outcomes for consumers. This adds a layer of complexity and uncertainty into an already challenging environment. There are concerns about precisely what firms are expected to do in the case of closed products and whether new vectors are being opened up for claims management companies. There will be an ongoing tension between the consumer principle, which is not intended to operate at the level of individual consumers, and the FOS, which is unambiguously focused on individual cases.

My amendment does not give the FCA an unconstrained ability to override the FOS; it is drafted to apply only where there are implications beyond the specifics of the particular complaint. The PRA has long had the power to overrule the FCA where it thinks it will have an adverse impact, as specified in Section 31 of FSMA. Similarly, the banking reform Act of 2013 gave powers to the Bank of England, the PRA and the FCA to intervene against the payment services regulator. It is genuinely puzzling that a similar power in relation to the FOS was not granted to the FCA when it was set up, or to the FSA under FSMA. This is a modest provision designed to ensure that the activities covered by both the FOS and the FCA are dealt with in a coherent way.

The second leg of my amendment is on a slightly different subject: it is a minor amendment to paragraph 15 of Schedule 17 to FSMA. Under this paragraph, the financial services firms complained about pay fees to the FOS—there is no problem with that. My amendment adds “or relevant party” to this, so that firms or individuals other than the firm complained about could be required to pay fees. This is obviously not intended to enable the FOS to charge fees to complainants, which I am sure it would never do, even if it had the power. Instead, it is intended to give some flexibility to the FOS so that, for example, claims management companies might be asked to pay fees if they have been responsible for unmeritorious complaints. That in turn could help disrupt the business model of the worst offenders in this parasitic industry. I hope this will be seen as a modest change that will give greater flexibility to the FOS. I beg to move.

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The Government are clear that all consumers should be able to access the FOS without the need of any CMC support in bringing their complaints. Ensuring that the FOS remains a free and impartial alternative to the courts is critical, and any legislative changes to this model would need to be appropriately targeted to maintain free access to the FOS for consumers. I am trying to say that we see the case being made and will look at it further, but we need to ensure that, in doing so, we do not override that fundamental principle of access for consumers. With that, I hope that, at this stage, my noble friend Lady Noakes is able to withdraw her amendment.

[Baroness Noakes (Con)]

My Lords, I thank my noble friend Lord Trenchard for his support; I was not expecting the noble Baroness, Lady Bowles, to support my amendment, because she and I have discussed the FOS in the past.

There is a potential problem in the relationship between the FCA and the FOS with the introduction of the new consumer duty. I think that is particularly concerning people: we are going a little into the unknown. We know that if regulatory pressures get too difficult for firms, their natural response is, ultimately, to leave or severely curtail the elements of the market that they are prepared to operate in. We need look only at the availability of advised investment to see what can be the consequence of heavy-handed regulatory action. If the new consumer duty becomes a nightmare, with individual cases being settled on particular circumstances but then having to be read across because of the FCA handbook, which requires cases to then be followed by firms, we could end up with a very confused understanding of what the consumer duty involves. That was the main burden of my tabling the amendment, but we may just need to see what happens when the consumer duty operates in practice to see whether those harms genuinely emerge.

As for the second leg of my amendment, which should have been a separate amendment, I was very interested to hear what my noble friend said about the case having been made. What I am not quite clear about, which she may be able to clarify, is on what timescale she believes the Government will be looking at this, because not many financial services Bills come along to get things done in.

[Baroness Penn (Con)]

I will have to write to the Committee to clarify the timescale for the noble Baroness.

[Baroness Noakes (Con)]

My Lords, I look forward to that letter with great anticipation. With that, I beg leave to withdraw the amendment.

Amendment 201A withdrawn.

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This is not what the AML regulations are meant to be used for. They are being misused. The Government have to step up to the mark and stop this. If they will not do it, let us put it into law.

[Baroness Noakes (Con)]

My Lords, I am sure we all have our own stories of how we have fallen foul of the PEP regulations. My own relatively recent one is that Revolut refused to let me have an international payment card, with no real explanation. It must have been because it tagged me as a PEP, because I cannot think of any other reason why it would not want to give me one. But I do not think this is really about our individual experiences, even though they are extremely aggravating for us and, indeed, our families.

I have Amendment 227 in this group, and I am grateful to my noble friend Lord Trenchard for adding his name to it. The Minister will see that the four amendments in this group are all slightly different, but she should take no comfort that they are not taking a consistent approach to this problem. They demonstrate, as I am sure this debate will, that we have a united resolve that this has to be dealt with.

Like my noble friend Lord Moylan’s amendment, mine seeks to amend the 2017 money laundering regulations to exclude people with a UK nexus from the PEP regime in the area of financial services. My noble friend’s amendment excludes individuals who are “ordinarily resident” in the UK for tax purposes, while mine focuses on UK citizens. My amendment says that UK citizens are not to be treated as PEPs unless the FCA considers that any of the categories of PEPs set out in the regulation—my noble friend Lord Moylan read this out—presents a money laundering risk. My amendment is predicated on UK MPs, Ministers and all the others in the list not presenting a higher money laundering risk than the rest of the UK population. There may well be some bad apples in the PEP barrel, but no more so than in other segments of UK society.

I believe that the money laundering regulations are based on an erroneous assumption, at least so far as the UK is concerned, that all PEPs—and their families and associates—present a high risk in money laundering terms. My amendment leaves the decision on risk to the FCA, on the basis of a risk assessment, but I would be staggered if the FCA concluded that UK PEPs presented a particular money laundering risk. Indeed, its own 2017 guidance, which the noble Baroness, Lady Hayter, referred to—and apparently enjoys reading in the evenings—states that UK PEPs should normally be treated as low risk.

My amendment is based on citizenship. I believe that is a fairly straightforward way, because it can be established by way of a passport, which will often be required in any event as part of proof of identity for money laundering purposes, for all categories of individual. I believe it is administratively less complex than the way based on tax status in my noble friend Lord Moylan’s amendment, for a number of reasons, including the fact that more than four times as many people have passports than fill in tax returns.

In addition, my noble friend’s amendment seems to admit that foreigners can be exempt from the PEP rules if they are resident in the UK and paying tax here. I am somewhat uncomfortable with that proposition. My noble friend may not be aware that the term “ordinarily resident”, which appears in the amendment, disappeared from the tax code 10 years ago.

I am similarly not convinced that the other two amendments in this group will do the trick, because they call for consultations and reviews by the FCA, but the FCA has consulted on and reviewed this before. As we heard, the latest set of guidance, which came out in 2017, recognised that UK PEPs are not high risk, but nothing has changed, as the noble Baroness, Lady Hayter, said. The fundamental problem remains that the regulations require enhanced due diligence for all PEPs, and that is where the aggravation arises. Even low-risk PEPs have to be subjected to enhanced due diligence, with all the record keeping and evidence that entails.

Furthermore, the regulated firms that have to comply with money laundering laws are, frankly, terrified of falling foul of their regulators, whether here or abroad. It has cost them a small fortune in regulatory fines and compliance costs, and they simply will not take unnecessary risks. From their perspective, upsetting a few PEPs and their families is a lot less expensive than getting entangled in regulatory enforcement. That is why I believe that we have to change the regulations if we are to achieve a step change and get UK PEPs treated with common sense in our own country.

[Lord Sharkey (LD)]

My Lords, I have added my name to Amendment 215 from the noble Lord, Lord Moylan. I congratulate him on his opening remarks.

I first encountered the PEP problem in 2016, as the banks were preparing for and, in some cases, anticipating AML regulations. For years I had had money with NS&I with minimal fuss and no difficulties at all, so I was very surprised when it wrote to me demanding very much more detail about my finances and sources of funds. My three children were even more surprised to get the same letter from NS&I—they did not even have NS&I accounts, which showed overzealousness on the part of the organisation.

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[Baroness Penn (Con)]

My Lords, although I have not been following the detail of that Bill, I am aware of the provisions in it. As part of looking at this question, one question asked is, in our broader ecosystem of the checks and balances that we have on our politicians and people defined as PEPs—the other requirements of disclosure that they are held to and the other tools that we have at our disposal—how they influence the risk assessment has been done. I reassure noble Lords that that question has been asked. I should also reassure noble Lords that I am seeing the Security Minister tomorrow to discuss economic crime, but also that issue. We are seeking wherever possible to ensure that there is join-up across government in our assessment of the risks and the tools available to deal with them, ensuring that where we have measures in place they remain proportionate. That is something that I continue to engage with, with the Security Minister and others across government.

I shall just try to answer the point on the Financial Action Task Force, the difference between domestic and foreign PEPs, and the requirements within that, as I understand it. I commit to following up in writing if it remains unclear or if anything I say is not correct. The requirement for automatic enhanced due diligence applies to foreign PEPs. However, within the FATF guidance on recommendations 12 and 22—I think that this is particularly around 12—there is still the need to take steps to identify whether someone is a domestic politically exposed person and then review the relevant risk factors. So they need to determine whether a customer or beneficial owner is a domestic PEP, then determine the risk of the business relationship in that context—and then, in low-risk cases, there are no further steps to determine whether a customer is a PEP. In other words, there is still a requirement to identify whether someone is a domestic PEP or not and to look at the risk around that.

Where there is a difference, in my understanding, from the Financial Action Task Force requirements, is that for foreign PEPs you need to apply automatic enhanced due diligence. Under the EU regulations, that also applied to domestic PEPs—and we therefore ensured that automatic enhanced due diligence applied to domestic as well as foreign PEPs was a system in our regulations. The review we did last year into all of our anti-money laundering regulations did not conclude that on this matter no further action was to be taken but that we needed to look at the risk profile and risks associated with domestic PEPs before determining whether those requirements of automatic enhanced due diligence remained appropriate, now that we had the ability to vary our money laundering regulations, having left the EU. So that was a further piece of work that needed to be done after the review was published last summer of our money laundering regulations overall. That further piece of work has been undertaken, and I have undertaken to write to noble Lords with further details if I can provide them on that risk assessment, but that concluded that it was appropriate to maintain automatic enhanced due diligence for domestic PEPs.

[Baroness Noakes (Con)]

Did this review involve the FCA? When the FCA reissued its guidance in 2017 it was very clear about domestic PEPs being low risk, but it was constrained by the regulations, which said that you had to do enhanced due diligence. It was within that context. There seems to have been a shift between the FCA’s apparent position on the risk profile of UK PEPs and what my noble friend the Minister is now saying that she is being told by the security services, which will always try to find things that can go wrong. It is quite easy to construct a case that we are potentially capable of being corrupted by whoever and involved in money laundering, but they are not involved in the money laundering processes; the FCA is. I am getting a bit confused about how robust this risk assessment is in the context of money laundering.

[Baroness Penn (Con)]

I believe that it aimed to get relevant information from all those involved and take a holistic view. I appreciate and agree that we need to ensure that, when these measures are put in place, they are proportionate to the risk faced, so it is entirely right to interrogate that risk assessment. I also appreciate that it is a slightly frustrating process when the sensitive nature of some of these issues means that we cannot always go into all the details noble Lords want at this time. I have tried to explain the context as to why domestic PEPs are viewed as having sufficiently high risk so that enhanced due diligence should still apply. I have the FCA guidance in my pack but I will not go through it, but it is also true to say—this is another point that I checked—that although the risk is sufficient to have enhanced due diligence measures, it is lower for domestic PEPs than for foreign PEPs. That assessment still applies.

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Amendment 227 from my noble friend Lady Noakes has similar challenges, although I acknowledge that she has allowed for certain classes of politically exposed persons to be included within those regulations on the authority of the FCA’s judgment of the risks involved. She rightly asked whether the FCA had been involved in the risk assessment that I referred to. One of the challenges with the approach in Amendment 215 is that, although the FCA will have a lot of that information, such a risk assessment would want to take into account wider considerations. We therefore think that it is right that the scope of the money laundering regulations—

[Baroness Noakes (Con)]

This is a risk of money laundering, not anything else. What wider implications should be taken into account? The FCA knows about money laundering and its risks. How could there be wider considerations than money laundering?

[Baroness Penn (Con)]

Others are involved in looking at the risks of money laundering in counterterrorist and proliferation financing, which I believe are subject to these regulations.

[Baroness Noakes (Con)]

As far as financial institutions are concerned, all of those are dealt with by the FCA, not the security services or any other shadowy agencies that seem to be involved in this latest risk assessment, so I am struggling to see what wider issues could possibly have been taken into account.

[Baroness Penn (Con)]

The Government believe that the decision about the scope of the money laundering regulations is best taken by, and should remain with, the Government, rather than being delegated to the FCA.

I turn to Amendment 224 from the noble Baroness, Lady Hayter of Kentish Town. This would require the FCA to consult with consumers with regard to its functions relating to PEPs. In the discussion—