Bank of England and Financial Services Bill [HL]

Lord Ashton of Hyde Excerpts

Wednesday 11th November 2015 Lords Chamber

22: Clause 20, page 17, line 18, leave out paragraph (d)

[Lord Ashton of Hyde (Con)]

My Lords, Clause 20 makes a number of technical amendments to the provisions governing the administration of the senior managers regime, including those relating to the provision of updated statements of responsibilities.

On government Amendments 22 and 23, Clause 20(3)(f) imposes a restriction that prevents firms using an application to vary a condition or time limit as a device to appeal against enforcement action taken by the regulators. This is appropriate because the regulators can take enforcement action only after following the procedure laid down in the Financial Services and Markets Act 2000. That procedure naturally includes proper provision for appeals. It would not be right to allow a further quasi-appeal route by means of application to vary conditions or time limits when those had been imposed as part of enforcement action.

However, Clause 20 goes a bit further than we intended. Subsection (4)(d) would impose a similar restriction preventing the regulators from varying conditions or time limits imposed as a result of enforcement action on their own initiative. That would clearly be unnecessary and could prevent regulators from responding appropriately when circumstances have genuinely changed. Government Amendment 22 corrects this oversight.

Government Amendment 23 makes some consequential changes to Section 204A of the Financial Services and Markets Act 2000. That section ensures that each regulator has the power to take enforcement action when regulatory obligations owed, in effect, to it are breached. This amendment simply makes sure that the section will work correctly where the regulators wish to take enforcement action in relation to breach of a requirement to provide a revised statement of responsibilities.

[Lord Davies of Oldham (Lab)]

My Lords, we are in agreement with the Government.

[Lord Ashton of Hyde]

Then I beg to move.

Amendment 22 agreed.

Moved by

[Lord Ashton of Hyde]

23: Clause 20, page 17, line 22, at end insert—
“( ) In section 204A (meaning of appropriate regulator)—
(a) in subsection (3)(d) for the words from “the authorised person” to the end substitute “the revised statement of responsibilities is to be provided to the PRA only;”;(b) in subsection (3A), after paragraph (b) insert—“(ba) a requirement under section 62A(2) where the revised statement of responsibilities is to be provided to the FCA and the PRA;”.”

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[Lord Tunnicliffe (Lab)]

My Lords, I support the amendment from the noble Lord, Lord Sharkey. One of the main concerns of the Financial Services Consumer Panel has been the uneven playing field between paid-for and not-for-profit debt management services. People are being exposed to poor debt advice, as the noble Lord said, and this needs to be addressed both directly and in the round.

The central concern is this curse of our modern time: cold calling. Something could be done quickly. A Labour amendment was voted through in this House during the passage of the Consumer Rights Act on caller identification, but it has not yet been commenced. In response to my noble friend Lady Hayter, the noble Baroness, Lady Neville-Rolfe, stated that the Government were about to begin a consultation on caller ID. Can the Minister say now, or in writing at a later date, what the timetable is for this consultation? When can we expect to see some action on this issue?

Are the Government considering any other measures that could help tackle unsolicited market practices? They include the automated reporting of nuisance calls; the collation of nuisance calls—for example, more than 100 complaints and the calling number’s owner could be automatically referred to Ofcom, the Information Commissioner’s Office and perhaps the police; and appropriate victim redress for persistent cold calls from the same organisation.

The concern highlighted by the noble Lord, Lord Sharkey, is important in its own right, and so is the whole issue of cold calling. The two come together in this amendment, which we support.

[Lord Ashton of Hyde]

My Lords, the Government share the concern of the noble Lord, Lord Sharkey, about long-standing problems in the debt management market. Indeed, I have had the pleasure of answering questions from the noble Lord on this subject, and had a subsequent meeting with him and officials from the Treasury. We agree that it is imperative that vulnerable consumers in this market are treated fairly by firms and provided with the services that meet their needs.

As the Committee will be aware, responsibility for consumer credit regulation, including debt management firms, transferred from the Office of Fair Trading to the Financial Conduct Authority on 1 April 2014. The ensuing, more robust regime is dramatically improving consumer protections. The Government have ensured that the FCA has wide enforcement powers to take action where its rules are breached. There is no limit to the fines that it can levy and, crucially, it can force firms to provide redress to consumers.

Debt management firms are in the first group of firms to require full authorisation, with the FCA thoroughly scrutinising firms’ business models and practices. Every debt management firm will have to demonstrate compliance with the FCA’s rules and principles, including the requirement to treat customers fairly. Firms which do not meet the FCA’s threshold conditions will not be able to continue in the market. Decisions on those authorisations are due to take place—the first ones by the end of this year.

The FCA has also introduced tough new rules to protect consumers in the debt management sector, and the FCA actively monitors that market. It has flexible rule-making powers and, if it finds further problems, it will not hesitate to take action. The FCA requires that all advertisements and other promotions must be clear, fair and not misleading, and it is able to impose tough sanctions where wrongdoing is found.

Regarding the noble Lord’s specific points about unsolicited marketing, the financial promotions regime applies to those providing debt management services. The FCA requires that unsolicited marketing by phone, text or email makes clear both the identity of the firm and the purpose of the communication so that the consumer can decide whether to proceed. This was highlighted by the noble Lord, Lord Sharkey.

The FCA also requires regulated debt management firms that accept leads from lead generators to satisfy themselves that business has been procured fairly and in accordance with data protection and privacy in electronic communications law. More broadly, in 2014 the Department for Culture, Media and Sport published its Nuisance Calls Action Plan. This set out the actions being taken by government, regulators, consumer groups and industry to tackle nuisance calls.

Importantly, the FCA has already committed to undertake a review of unsolicited marketing calls, emails and text messages from consumer credit firms, which will begin early next year. The Government believe that requiring the FCA to take a particular course of action before this review has taken place would limit the FCA’s ability to exercise its powers independently and would not necessarily achieve the desired result.

In answer to the question, “Why not act now?”, asked by the noble Lord, Lord Tunnicliffe—and I think that the noble Lord, Lord Sharkey, implied that even if he did not say it directly—it is worth noting that, if additional requirements for debt management firms were introduced at present, those firms would be required to alter their internal processes. That would cause disruption to the FCA’s ongoing authorisation process, which is due to begin producing results within the next couple of months.

I shall take advantage of the offer from the noble Lord, Lord Tunnicliffe, to write to him on the caller ID review timetable, because I do not have that to hand.

In summary, the authorisation process is well under way and will not take a year, and the FCA review of unsolicited marketing calls will begin early next year, so I submit that the noble Lord’s amendment is not appropriate at this time. I therefore ask him to withdraw it, confident in the knowledge that he will continue to hold the Government to account on this subject.

[Lord Sharkey]

I thank the Minister for that answer, a lot of which was, as I knew it would be, very encouraging. There remains just one issue. This is going to take some time, during which a substantial number of people will be exposed to risk. I think that that is unnecessary. The mortgages example suggests that we can, without interfering with the FCA’s processes, do something simple and quick now to stop this abuse. Having said that, I beg leave to withdraw the amendment.

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Moved by

[Lord Ashton of Hyde]

27: After Clause 23, insert the following new Clause—
“Enforceability of agreements relating to credit
(1) Section 26A of the Financial Services and Markets Act 2000 (agreements relating to credit) is amended as follows.
(2) In subsection (4)—
(a) the words from “has” to the end become paragraph (a);(b) after that paragraph insert—“(b) is an appointed representative in relation to that activity,“(c) is an exempt person in relation to that activity, or(d) is a person to whom, as a result of Part 20, the general prohibition does not apply in relation to that activity.” (3) In subsection (5)—
(a) the words from “the agreement” (in the third place they occur) to the end become paragraph (a) (and the existing paragraphs (a) and (b) become sub-paragraphs (i) and (ii) of that paragraph);(b) after that paragraph insert—“(b) that person is an appointed representative in relation to that activity,“(c) that person is an exempt person in relation to that activity, or(d) that person is a person to whom, as a result of Part 20, the general prohibition does not apply in relation to that activity.””

[Lord Ashton of Hyde]

My Lords, government Amendments 27 and 28 make some minor and technical changes to the Financial Services and Markets Act 2000 in relation to the regulation of consumer credit. The Government fundamentally reformed consumer credit regulation, transferring responsibility from the Office of Fair Trading to the Financial Conduct Authority on 1 April 2014.

The FCA regime is already having a substantial positive impact and is helping to deliver the Government’s vision for an effective and sustainable consumer credit market which is able to meet consumers’ needs. The amendments considered today are, as I have already said, technical in nature. They concern the application of provisions relating to the enforceability of agreements.

Amendment 27 amends subsections (4) and (5) of Section 26A of the Financial Services and Markets Act 2000, which concern the enforcement of credit agreements by persons acting on behalf of the lender, either by administering the agreement or by collecting debts under the agreement. This amendment makes it clear that a consumer credit agreement may be enforced by anyone who is able to carry on a credit-related regulated activity lawfully under the Financial Services and Markets Act 2000. This includes firms that are exempt from the need to have FCA authorisation to carry out these activities either because the firm has an individual exemption or because it is entitled to an exemption as a member of a designated professional body. It also includes appointed representatives of authorised persons.

The current provision requires the person to have a relevant permission under the Act. The amendment clarifies that this is not limited to persons who are directly authorised by the FCA but also includes persons who are exempt from needing authorisation either by virtue of a specific exemption or because they are appointed representatives or members of a designated professional body. In such cases, the person does not need FCA authorisation, provided that, in the case of an appointed representative, another firm with the relevant debt collecting or debt administration permission takes responsibility, as principal, for their activities and compliance with FCA regulations. In the case of designated professional bodies, if the FCA has approved the professional body’s rules under Part 20 of FISMA, and these cover debt collecting or debt administration, then members of the body can carry on those activities without needing direct authorisation from the FCA, provided that they do not engage in regulated activities which are outside the scope of the Part 20 permission. It was always the Government’s intention that subsections (4) and (5) of Section 26A should cover such persons, but the amendment puts this beyond doubt.

Government Amendment 28 amends Section 27 of FSMA, which deals with agreements made through unauthorised persons. Subsection (1) of Section 27 provides that an agreement made by an authorised person carrying on a regulated activity is unenforceable where it is made in consequence of something said or done by a third party in circumstances where that third party should have had, but did not have, permission. In the case of consumer credit and hire agreements, this could potentially cover any credit broker in what could be a long chain of multiple brokers, even if the provider is not aware of the particular third party or their involvement in the transaction.

This is in contrast to the position under the Consumer Credit Act 1974 prior to the transfer of regulation from the OFT to the FCA. Section 149 of that Act, which was repealed as part of the transfer, limited unenforceability to situations where the introducing broker was unlicensed and it was immaterial whether any other broker in the chain was unlicensed. The amendment would ensure that Section 27 is proportionate for consumer credit lenders and consumer hire providers in the context of the consumer credit market, where chains of credit brokers are often involved in bringing together the consumer and the lender.

Specifically, the amendment would ensure that this applies only if the provider knows—before the agreement is made—that the third party, such as a credit broker, had some involvement in the making of the agreement or in matters preparatory to its making. In such cases, if the broker is acting in breach of the general prohibition, the agreement will be unenforceable against the consumer, as is currently the case. However, if the provider is unaware of the broker’s involvement, the fact that it did not have permission when it should have done would not in itself make the agreement unenforceable.

The Government believe that this strikes the right balance between protecting consumers and ensuring that burdens on firms are reasonable and proportionate. I beg to move.

[Lord Davies of Oldham]

My Lords, we consulted the Financial Services Consumer Panel on these amendments, and it confirmed that they were entirely technical. As I always take the panel’s advice, I think they are technical and agree with the Minister.

[Lord Ashton of Hyde]

I am grateful to the noble Lord.

Amendment 27 agreed.

Moved by

[Lord Ashton of Hyde]

28: After Clause 23, insert the following new Clause—
“Enforceability of credit agreements made through unauthorised persons
(1) Section 27 of the Financial Services and Markets Act 2000 (agreements made through unauthorised persons) is amended as follows.
(2) After subsection (1) insert—
“(1ZA) But this section does not apply to a regulated credit agreement or a regulated consumer hire agreement unless the provider knows before the agreement is made that the third party had some involvement in the making of the agreement or matters preparatory to its making.”
(3) In subsection (1A) for “The agreement” substitute “An agreement to which this section applies”.
(4) After subsection (4) insert—
“(5) For the purposes of subsection (1ZA)—
“regulated consumer hire agreement” has the meaning given by article 60N of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;“regulated credit agreement” has the meaning given by article 60B of that Order.””

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Moved by

[Lord Ashton of Hyde]

29: After Clause 23, insert the following new Clause—
“Transformer vehicles
(1) The Financial Services and Markets Act 2000 is amended as follows.
(2) After Part 17 insert—
“Part 17ATransformer Vehicles284A Transformer vehicles
(1) In this section “transformer vehicle” means an undertaking (“A”) which—
(a) is established for the purposes of carrying on the activities mentioned in subsection (2), or(b) carries on those activities.(2) The activities referred to in subsection (1) are—
(a) assuming risk from another undertaking (“B”), and(b) fully funding A’s exposure to that risk by issuing investments where the repayment rights of the investors are subordinated to A’s obligations to B in respect of the risk.(3) The Treasury may by regulations make provision for facilitating, and provision for regulating—
(a) the establishment and operation of transformer vehicles;(b) the activities mentioned in subsection (2);(c) the trading of investments issued by transformer vehicles.(4) Regulations under subsection (3) may (amongst other things) make provision—
(a) for the incorporation and registration in the United Kingdom of bodies corporate;(b) for a body incorporated by virtue of the regulations to take such form and name as may be determined in accordance with the regulations;(c) as to the purposes for which such a body may exist and the investments which it may issue;(d) as to the constitution, ownership, management and operation of such a body;(e) for such a body to comprise different parts;(f) for such parts to have legal personality distinct from that of the body;(g) as to the holding and management of the assets and liabilities of such a body, including provision for the segregation of assets and liabilities relating to different risks; (h) as to the powers, duties, rights and liabilities of such a body and of other persons, including—(i) its directors and other officers;(ii) its shareholders, and persons who hold the beneficial title to shares in it without holding the legal title;(iii) its auditor;(iv) any persons holding assets for it;(v) any persons who act or purport to act on its behalf;(i) as to the merger of one or more such bodies and the division of such a body;(j) for the appointment and removal of an auditor for such a body;(k) as to the winding up and dissolution of such a body;(l) enabling the FCA or the PRA to apply to a court for an order removing or replacing any director of, or person holding assets for, such a body;(m) for the carrying out of investigations by persons appointed by the FCA or the PRA.(5) If regulations under subsection (3) make the provision mentioned in subsection (4)(e) references in subsection (4) to a body include its constituent parts.
(6) Regulations under subsection (3) may—
(a) impose criminal liability;(b) confer functions on the FCA or the PRA (including the functions of making rules and giving directions);(c) authorise the FCA or the PRA to require the Council of Lloyd’s to exercise functions on its behalf (including functions conferred otherwise than by the regulations);(d) confer jurisdiction on any court or on the Tribunal;(e) provide for fees to be charged by the FCA or the PRA in connection with the carrying out of any of their functions under the regulations (including fees payable on a periodical basis);(f) modify, exclude or apply (with or without modifications) any primary or subordinate legislation (including any provision of, or made under, this Act);(g) make consequential amendments, repeals and revocations of any such legislation;(h) modify or exclude any rule of law.(7) The provision that may be made by virtue of subsection (6)(f) includes provision extending or adapting any power to make subordinate legislation.
(8) Regulations under subsection (3) may provide that a reference in the regulations to, or to any provision of, legislation (including an EU instrument and legislation of a country or territory outside the United Kingdom), is to be construed as a reference to that legislation or that provision as amended from time to time.
(9) In this section—
“investment” includes any asset, right or interest;“primary legislation” means an Act, an Act of the Scottish Parliament, a Measure or Act of the National Assembly for Wales, or Northern Ireland legislation;“subordinate legislation” means an instrument made under primary legislation.(10) If a statutory instrument containing regulations under this section would, apart from this subsection, be treated as a hybrid instrument for the purposes of the Standing Orders of either House of Parliament, it is to proceed in that House as if it were not a hybrid instrument.”
(3) In section 429(2) (regulations subject to the affirmative procedure), after “262,” insert “284A,”.”

[Lord Ashton of Hyde]

My Lords, Amendment 29 introduces a power into the Financial Services and Markets Act 2000 for the Treasury to make regulations relating to transformer vehicles. Transformer vehicles are used for risk-mitigation purposes, particularly in the insurance and reinsurance industry. The Government plan to use this power to implement a new framework for insurance-linked securities business.

In an insurance-linked securities transaction, an insurer contracts with an entity specifically established to take on insurance risk. These entities come within the definition of “transformer vehicles” in the amendment. The insurer transfers risk to the transformer vehicle and the vehicle raises collateral to cover that risk by issuing securities to capital market investors. The vehicles exist solely to transform risk into capital market instruments and to compensate the insurer should the insured event take place. Investors receive a return from the premiums paid by the insurer and the collateral is returned to investors if the insured event does not take place. Unlike conventional reinsurers, ILS transactions do not pool risk. The transformer vehicle takes on a specific risk and typically holds collateral that is at least equal to the risk transferred. This key safeguard will be a firm requirement in the UK framework. The framework will ensure that insurers can rely on the protection they arrange through ILS deals.

Insurance-linked securities are now an important and growing part of the global specialist reinsurance market. By enabling insurers to access the capital markets as an alternative way of reinsuring risk, this business has brought additional capacity to parts of the reinsurance market. But despite the importance of London as a global insurance hub, that growth has taken place elsewhere. In London Matters, a report by the London Market Group on the competitiveness of the London insurance market, the UK’s out-of-date regulatory framework for insurance-linked securities was highlighted as inhibiting London’s ability to compete as a reinsurance hub.

Therefore, the March 2015 Budget announced that the Treasury, the PRA and the FCA would work closely with the London market to develop a more effective framework for insurance-linked securities business. The London market established the insurance-linked securities task force, which is working with the Treasury and the financial regulators to design a fit-for-purpose regime. Work is ongoing, but it is clear that the Financial Services and Markets Act needs to be amended to provide for the introduction of detailed regulations which will implement the new framework. In particular, the Government intend to use the power to create a bespoke corporate structure for transformer vehicles which assume risk from insurers and reinsurers. This will ensure that these vehicles are robust and managed in a way so that they can meet their obligations to insurers and investors. Given that this is a rapidly evolving market, the power will enable the Treasury and financial regulators to keep the regulatory framework up to date.

The clause enables the regulatory arrangements of Lloyd’s of London to be updated, should that be needed to facilitate the Lloyd’s market adapting to ILS business or the use of transformer vehicles. If this requires amendments to the Lloyd’s Acts then the regulations concerned will be dehybridised, so that the amendments are not delayed in Parliament by the hybrid procedure. I am grateful to the Delegated Powers Committee for its report on this clause, which recommends that the clause be amended to ensure that the consent of the council of Lloyd’s is needed before the FCA or PRA can be enabled to require the council to carry out functions on their behalf. I fully understand that the committee would want to be reassured that those affected by the use of a dehybridising provision are afforded an alternative protection. The Government will therefore give careful consideration to the committee’s report.

Although the Government’s current plan is to introduce a framework focused on the insurance industry, it is possible that the use of transformer vehicles by non-insurance entities, for example a company seeking to mitigate the longevity risk associated with an employee pension scheme, may become more common in the future. The power provides the flexibility for regulation to keep pace with such market developments, should that be required.

Finally, I am pleased to say that the London Market Group, which represents London’s insurers and reinsurers, has welcomed this first step in implementing a new framework for ILS business. I beg to move.

[Lord Davies of Oldham]

My Lords, it is third time unlucky for the Government because we do not consider these amendments to be entirely technical and they contain some aspects on which we seek clarification. The Minister has already recognised the significance of the report by the Delegated Powers and Regulatory Reform Committee, which I know will be studied with care. I make the assumption that the Government will come back before or on Report with a clear response to the committee’s conclusions. If the Government do not act on them then I can assure the Minister that we will, as the committee was quite clear that it thought there should be an amendment to the legislation.

The noble Lord, Lord Ashton, has already indicated the extent to which the Government have looked at the issue in relation to the council of Lloyd’s. I therefore hope that we will have clarity on this matter on Report. We will of course look at his remarks today with the greatest care. I give the obvious indication that while we will not object to these amendments at this stage, we will be coming back to this issue and, more accurately, we hope that the Government will be coming back to it as well.

[Lord Ashton of Hyde]

My Lords, I note what the noble Lord has said and, as I said before, we are considering this carefully. As I think I indicated, we accept what the Delegated Powers and Regulatory Reform Committee has said. We are looking carefully at this and a response will be forthcoming before Report.

Amendment 29 agreed.

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[Lord Davies of Oldham]

My Lords, I congratulate the noble Lord, Lord Naseby, both on his amendment, for which he has secured widespread support, including from this Bench, and on the way in which he detailed the key arguments behind it, which I know the Government will take seriously. It is somewhat unnecessary for me to fill in any of the interstices that the noble Lord, Lord Naseby, may have left—which were not many—because the noble Baroness, Lady Kramer, has certainly emphasised the significant point, which is that British banking needs to be a good deal more diverse than it is at present.

After all, the Competition and Markets Authority disclosed its findings last month from its review of competition in the retail banking market and found—predictably—that the four largest banks had long dominated the British scene, stifling competition that would give consumers and businesses a better deal. We all know the limited success that has been obtained by the various reforms to make the switching of accounts easier. The British people, I am afraid, are somewhat inured to minor blandishments when it comes to their bank accounts, so there is a need for much more imaginary thought at the centre on how we can make our financial provision more diverse.

We have support from the Treasury Select Committee. The chair, Andrew Tyrie, has written to the CMA to ask it to report back before the Budget in March next year regarding the 8% surcharge on bank profits. He wants to know what impact that has had on the big four and what implications it has for the wider banking sector. It is clearly the case, he believes, that one size does not fit all. That phrase has obtained throughout this short debate and is one to which I entirely subscribe. The Minister will be all too well aware that the Building Societies Association has made it clear that the problems encountered by financial mutuals in recent years almost certainly would have been fewer if there had been greater diversity in the sector.

I think that the case for this amendment has been made strongly. No doubt the noble Lord will be withdrawing it on this occasion but the purpose of this debate is to give the Government the chance to show a constructive response to what we all recognise is a real issue with regard to British banking. The noble Baroness, Lady Kramer, cited the German position. Is it not somewhat extraordinary that even under the so-called northern powerhouse, our great cities do not have individual banks? They no longer have individual building societies, either. That says something about the structure of finance in this country, which surely the Government should address in the context of a Bill about the most significant banking structure of them all—the Bank of England.

[Lord Ashton of Hyde]

My Lords, I am grateful to noble Lords who contributed to the debate. I have listened carefully to the interesting points, particularly on banking diversity and availability, especially for SMEs, made by the noble Baroness, Lady Kramer, and the noble Lord, Lord Davies, but I will concentrate on the amendment in hand.

I am glad to say that noble Lords are pushing at an open door—or, at least, one that is slightly ajar. This amendment would add a duty to the PRA to consider diversity of ownership model and size alongside its competition objectives. For the FCA, the amendment would add diversity of ownership model and size to the list of factors to which it may have regard as part of its competition objective.