Financial Services Bill

Baroness Penn Excerpts

Report stage
Wednesday 24th March 2021 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, during our debates on this Bill, we have referred several times to the success of principles-based regulation in this country. We have contrasted it with the more prescriptive regulatory structures introduced within the European Union. The idea of a duty of care is a prime example of principles-based regulation because it presents a principle from which particular actions can be derived. It is now very important, given the financial stresses created by the pandemic to which several noble Lords have referred in their contributions to this debate. This is but one example of the unexpected pressures in the financial system that arise on a regular basis, not least because of the fintech innovations referred to earlier which require a flexible, principles-based approach. The strength of this approach is that is encompasses financial innovation—the changes to which many noble Lords have referred.

I understand that later in the consideration of this Bill the Government will bring forward measures to regulate the “buy now, pay later” market. This would already have been encompassed in a duty of care. It would not have slipped through the gap. If there had been a general duty of care in place, consumers would have received some degree of protection already.

One of the striking things about the issue of a duty of care and the FCA rulebook is that a number of measures that amount to a duty of care exist in the rulebook already. There are “know your customer”, “treating customers fairly” and the consumer credit rules, which require assessment of creditworthiness. What is striking is that this specific list has gaps in it.

Many noble Lords referred to the examples of malfeasance; it is this structure that creates the environment for and encourages malfeasance. It encourages testing of boundaries and of gaps. If there were instead a broad principle it would significantly discourage that persistent, competitive drive to test the gaps that exist in the current list of consumer protection measures in the FCA rulebook.

It is not simply that the lack of a duty of care creates the inability to deal with malfeasance; it actually creates it by the structure it presents for a very competitive market. We all know that this particular structure—having a specific list of something in a legal document—always raises the question of what has been left out. That is exactly the case in the FCA rulebook. It lacks the firm foundation of principle.

In Grand Committee, the noble Baroness, Lady Penn, was quite right to argue in summing up that

“the FCA is already taking steps to ensure that financial services firms exercise due care and regard when offering products, services and advice to consumers.”

She was right that there is a list, but she was quite wrong to then argue that a statutory duty of care

“does not add to the FCA’s existing powers in this area.”—[Official Report, 22/2/21; col. GC 116.]

Of course it does. It must do, in one of the most dynamic industries in the United Kingdom, associated with innovation, change and competition. It is the very nature of successful principles-based regulation that actions should derive from general principles.

The FCA lacks this statutory declaration of general principle. This is why Macmillan Cancer Support’s campaign Banking on Change was necessary, and why it is so important to place a general principle of duty of care on the statute book. My noble friend Lord Stevenson has made a very specific offer to the Minister with respect to Third Reading. I strongly urge her to accept it.

[Baroness Penn (Con)]

My Lords, I am grateful to the noble Lords who have put forward this amendment, and I appreciate the strength of feeling that exists around this important issue. I also pay tribute to the arguments made in previous stages of this Bill, including in Grand Committee. Noble Lords have spoken passionately about the need to tackle issues of consumer harm that exist in the financial services industry, and I agree that it is essential that this issue is addressed effectively.

The Government are committed to ensuring that financial services consumers are protected and that steps are taken quickly to address issues when they are identified. The noble Lord, Lord Eatwell, argued for a principles-based approach to financial services regulation. That is what is contained in the FCA’s principles for business, which govern financial services firms’ treatment of their customers, as well as the specific requirements in the FCA’s handbook.

I hope noble Lords will not mind if I set out the principles of business, because that will help us in considering the amendment. The principles include:

“A firm must conduct its business with integrity … A firm must conduct its business with due skill, care, and diligence … A firm must pay due regard to the interests of its customers and treat them fairly … A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair, and not misleading … A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client … A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.”


These fundamental principles aim to protect consumers who often have less knowledge and expertise than the firms providing them services.

--- Later in debate ---

[Lord Eatwell (Lab)]

My Lords, we should all be grateful to the noble Baroness, Lady Noakes, for her persistence in this vital area. She is quite right that the clock is ticking: with nine months to go, we really need to do something about this issue; to do otherwise would be irresponsible.

Amendment 4 is valuable in defining continuity of contract, but there remains a problem that it does not and cannot solve: if the foundation of a contract is changed, its value can change. That leads on to Amendment 5. Here, I regret to say that I differ with the noble Baroness, Lady Noakes, and with the noble Baroness, Lady Bowles. It is surely the responsibility of Parliament in this case primarily to protect the retail investor, as it is the retail investor who is not the professional, who typically does not have the same information as the professional and who is likely to be more financially vulnerable, not least because retail investment is dominated by pension savings. I therefore conclude that the provision of a safe harbour is inappropriate in this case and would be looking instead for some mechanism of reconciliation rather than prevention of claim.

However, I am delighted to express my support for Amendment 6—which is not surprising as my name is on it. Here the noble Baroness, Lady Noakes, has actually saved the Government from considerable embarrassment by presenting an amendment which succinctly encapsulates, without being prescriptive, the issues the FCA must address in facing the difficulties created by the replacement of Libor: continuity of contract and reconciling the damages. Unlike Amendments 4 and 5, Amendment 6 incorporates those. I express strong support for Amendment 6 and recommend it wholeheartedly to the Government. In terms of the buffet approach, it is the healthy option.

[Baroness Penn (Con)]

Noble Lords will remember from previous stages that the Bill provides the FCA with the powers to manage an orderly wind-down of a critical benchmark such as the Libor benchmark.

In 2015, the Financial Stability Board recommended a transition away from certain interest rate benchmarks, including Libor, to alternative rates based on active and liquid underlying markets. In 2017, the FCA secured agreement from the panel banks that contribute to Libor that they would continue submissions until the end of 2021, providing time for firms to move away from use of the Libor wherever possible.

However, it has been clear for some time that there will be certain “tough legacy” contracts that will be unable to transition away from Libor in time. It is for the benefit of these contracts that the Bill grants the FCA the power under Article 23D of the Benchmarks Regulation to direct a change in how a benchmark is calculated, so that the benchmark can continue for a limited time after banks stop providing their contributions. The Bill therefore represents a critical step in providing for a smooth transition away from Libor, mitigating the risk of the financial instability and market disruption that could be caused by a disorderly transition or end to Libor. It has been widely welcomed by the financial services industry and internationally.

The proposed amendments seek to supplement the Bill’s provisions, reducing further the scope for uncertainty, contractual disputes or litigation between parties over the reference to a benchmark within a contract where the FCA has directed a change in the methodology on which the benchmark is calculated. Amendment 4 seeks to provide for contract continuity where the FCA uses its Article 23D power to impose a change in the methodology of a critical benchmark, providing that parties must interpret references to that benchmark in their contracts as references to the revised benchmark. Amendment 5 seeks to reduce the scope for litigation where the FCA has exercised its Article 23D power on a critical benchmark, providing a safe harbour for the use of that benchmark.

As stated in Committee and in the other place, the Government are committed to ensuring that an appropriate framework is in place for the orderly wind-down of Libor. We take this matter very seriously. As my noble friend Lady Noakes noted, the Government’s consultation on this issue has only recently closed, on 15 March. The consultation responses have underscored that there are complex and wide-ranging policy and legal considerations that must be fully understood before taking any further action on this issue. That range of considerations and views has been illustrated by the range of views expressed in this evening’s debate, but my noble friend Lady Noakes is correct to say that the industry has indicated, including through its responses to the consultation, that it is supportive of the approach set by the Government in the consultation.