Financial Services Bill

Lord Blackwell Excerpts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Monday 22nd February 2021 Grand Committee

In his introduction, the noble Lord, Lord Sharkey, noted the work of Macmillan Cancer Support and other campaigners in driving this amendment forward, but we need to realise that this is not just for the few; it is for the many, for all of us. We need to create some equity and equality in our society and this amendment would go some way towards delivering that.

[Lord Blackwell (Con) [V]]

My Lords, I understand the motives of these amendments and sympathise with a lot of what has been said. However, I will be a dissenting voice on whether the form of the amendments is proportionate and practical in meeting the objectives set out.

As we all recognise, financial services have a social purpose. They play a critical role in society and in people’s lives and they have to recognise that in their responsibilities. There are clearly still failures in the way the industry operates, some unintended and some still involving bad behaviour, and, as many noble Lords have pointed out, there is a problem in the unregulated sector. However, most of the major institutions now exercise their responsibilities carefully, trying to do so in the best interests of their customers. I do not recognise in some of the comments made the tens of thousands—in fact, over 100,000—ordinary bank workers who go into their branches or call centres every day and try desperately to do their best for customers, motivated by the most genuine service obligations. In the way that the banks have operated in providing basic bank accounts and the responsibilities that they have shown in their lending practices, the industry is by and large showing how it can evolve and act responsibly.

There are, of course, failures, as there will always be in any industry, but these can be dealt with under the existing FCA principles, reinforced as they are now by the SMCR regime. There has to be a boundary on what is reasonable to expect of the duty of care. We cannot expect financial services to take on the duties of the state as a social service for those who need extended financial support. Yes, it has obligations, but there is a limit to what the financial services sector can do for those in financial need.

My issue with the general duty of care is that it has no clear boundaries setting out when a financial service company has reached the limits of what it is reasonable to do under that duty of care. We have to recognise the reality that any intervention to increase customer support or protection has a cost. The direct costs of subsidising support to customers in financial need are now covered, as in utilities, through cross-subsidies—higher charges on other customers to pay for the extended credit or basic bank accounts for those customers in need. It is accepted within the industry and within society that a measure of cross-subsidy within the financial services sector is part of being a universal provider.

However, the indirect costs of compliance are more damaging; they may disadvantage those that they are meant to help. The more questions you need to ask your customers, the more detailed information you have to ensure they have understood and the more you have to penetrate into their lives, the more banks and insurance companies are forced to rely on formulaic compliance bureaucracy that erects barriers to simply understanding and addressing customers’ issues. People spend more time ticking the boxes than they do just listening and trying to provide a genuine real-world answer to the issues in front of the customer.

The danger is that, despite the best intentions of helping to ensure that people get good advice, there is an increase in costs and risks to compliance to the point where, as happened with the retail distribution review that took place some years ago, financial services companies simply withdraw from offering any services to those customers because they cannot take the risks and costs and the compliance burden pushes customers out of access to financial services.

Not having boundaries around what that duty of care comprises opens up the risks to financial services companies of court judgments and CMC claims that continually push the obligations and costs of compliance far beyond what is reasonable for a financial services company to do—one doing its best to offer financial products and serve its customers—and what is reasonable for the customer to take on, in terms of their responsibilities in setting out their needs.

I believe that, despite the motives behind this, it is much better to be prescriptive about what obligations there are for reasonable behaviour, as set out in the current FCA principles, which include the obligation to treat customers fairly and fairly communicate the information they require. These considerations require a high level of care and compliance, not always correctly done—but there are penalties when they are not done correctly. The SMCR regime is reinforcing that. As such, despite my sympathy for the motives behind these amendments, I believe that the intent behind them, however good, would not result in a proportionate or practical improvement in regulation and carries many dangers and risks both to financial services companies and, more importantly, to the customers whom we seek to protect.

[Lord Davies of Brixton (Lab) [V]]

My Lords, I agree with much of what has been said and it is not necessary to repeat it. I support the objective of the amendments—in particular, I support my noble friend’s Amendment 4—and I look forward to the Minister’s reply. It is difficult to see how the principle of these amendments can be refused.

However, it is necessary to make an overarching point, which I base on my experience over 50 years as a close observer of the financial services industry. The truth is that the industry has a systemic tendency to malfeasance. This is not an attack on the great many good people who work within the industry, as the last contribution mentioned, in banks and insurance companies, who only wish to do a good day’s work. However, the unremitting succession of scandals involving finance is not just a series of unfortunate one-offs; it is built into its very nature. This is a big issue, but I emphasise two simple reasons. First, there is an inevitable asymmetry of information. As Amendment 4 highlights, there are

“a consumer’s vulnerability, behavioural biases or constrained choices”.

This situation is bound to create the sort of problem that we have seen. The second, even simpler, reason, using the classic but apocryphal words of Willie Sutton, is because it is “where the money is”. People seek to gain money from where there is lots of it and there is lots of it in the finance industry.

There is much to be done to solve this problem. It is systemic but it still needs to be addressed because people need help. However, what is in these amendments seems to me simply a minimum of what might be done to address the problems that the industry so clearly incorporates.

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Moved by

[Lord Blackwell]

2: Before Clause 1, insert the following new Clause—
“Competitiveness as an FCA and PRA objective
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) In section 1B (the FCA’s general duties), after subsection (1)(b) insert “and—(c) supports the standing and competitiveness of the United Kingdom as a leading global financial centre with high market standards.”(3) In section 2B (the PRA’s general objective), in subsection (1) at end insert “, while supporting the standing and competitiveness of the United Kingdom as a leading global financial centre with high market standards.”(4) In section 2C (insurance objective), after subsection (1)(b) insert—“(c) which supports the standing and competitiveness of the United Kingdom as a leading global financial centre with high market standards.””

[Lord Blackwell (Con) [V]]

My Lords, Amendment 2 is in the name of my noble friend Lord Bridges, who gives his apologies that he is unable to be present this afternoon and has asked me to move the amendment in his place. It seeks to introduce the international competitiveness of financial services as part of the general duties of the PRA and FCA. I would have thought that the amendment is unexceptional and uncontroversial, in the sense that it is difficult to imagine how one could sustain the opposite view: that it is not desirable for the UK to maintain its standing and competitiveness as a global financial centre, or for the regulators not to have regard to that. I am sure that this is already implicit in the approach to regulation taken by the Bank of England, as in that taken by Her Majesty’s Treasury, but it is not formalised in the remit of the PRA and the FCA. This amendment would remedy that deficiency.

I do not need to labour the Committee with facts and figures about the huge importance of financial services to the UK economy and the wealth created by its global trading activities. If this were any other industry of major economic importance, for example the automotive industry or telecommunications, the need for international competitiveness would be taken as given. For financial services, the nature of the industry means that the regulators have, of course, been tasked to oversee other important objectives: the maintenance of prudential standards to avoid financial collapse and, as we have just been talking about, the protection of consumers in complex and life-changing financial transactions.

The amendment does not seek to override those. It would simply add to the general duties of the PRA and the FCA the need to have regard to the aim of supporting the standing and competitiveness of the United Kingdom as a global financial centre in the way those regulators carry out their specific objectives. To avoid any suggestion that this would mandate a drive to lower standards as a way of becoming more competitive, the amendment is clear that the mandate is for a global financial centre with high market standards. I believe it is widely accepted in this House, and in the industry at large, that our standing and competitiveness as a global financial centre can be maintained in the long run only by maintaining confidence in the soundness and integrity of the UK’s financial markets.

In practice, the amendment would mean that the regulators, in considering the design and implementation of regulations and rules, would consciously have regard to ways of achieving the desired outcomes with minimum unnecessary overhead costs and market restrictions. For example, in implementing the measures in this Bill for the regulation of investment firms under the investment firms prudential regime, the implementation of remaining Basel III banking standards and, more generally, reviewing the imported EU MiFID regulations, the regulators would have an explicit concern to pursue the simplification and streamlining of those regulations, moving to the UK’s preferred model of regulating through principles and outcomes to achieve the required standards for a more efficient regulatory approach that improves our international competitiveness.

The Bill in fact goes part way there already in new Section 143G, as introduced by Schedule 2, in which the FCA is required, in applying regulations to investment firms, to have regard to the likely impact of the rules

“on the relative standing of the United Kingdom as a place for internationally active investment firms to be based”.

However, this is applied only to this one limited area of regulation, rather than as a general duty.

If there were seen to be a conflict between international competitiveness and other objectives on some specific measure, it is surely right that this should be identified and an explicit trade-off decision made on the most appropriate priority, which may of course override the competitiveness concern. However, in most cases, efficient regulation, high standards and international competitiveness go hand in hand, rather than conflict.

Take, for example, the current consultation on the Bank of England’s proposal to remove the capitalisation of software from the calculation of banks’ regulatory capital. This is contrary to the practice adopted in the EU and in the US. At first sight that could look like it would put UK banks at a competitive disadvantage. However, not only is that change a sensible way to maintain the integrity of the prudential standard, but doing so would reinforce the UK as a leading global financial centre with high market standards, and, therefore, its competitiveness. The notion that these would often lead to conflict is mistaken: competitiveness can complement high standards.

In proposing the amendment, alongside my noble friend Lord Bridges, I believe that the arguments, including support for international competitiveness in the regulators’ general duties, are important and incontrovertible. I hope my noble friend the Minister will find some way to accommodate this in the remaining stages of the Bill or, if not, give a clear indication of how it will be addressed in other measures that the Government intend to bring forward. I beg to move.

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Amendment 3, as an amendment to Amendment 2, withdrawn.

[Lord Blackwell (Con) [V]]

My Lords, I thank my noble friend the Minister for his very fulsome responses and other noble Lords for their contributions. In many of the contributions there was agreement that competitiveness was important for the financial services industry. I cannot agree with the noble Lord, Lord Sharkey, that because the House reached one view 10 years ago, we cannot learn the lessons and think again about this issue. Neither can I agree with the noble Baroness, Lady Bennett, that a smaller financial services industry that created less wealth would be beneficial for the UK.

However, I was very struck by the contributions from my noble friend Lord Holmes and others about the importance of innovation in the area of payments, among others. I am reminded that you cannot have innovation without some element of risk. This is an example of where, if there were no consideration of international competitiveness, there might be no reason for the regulators to allow any risk into the system. They would play completely safe, whereas a measured management of risk to allow innovation is important. You cannot innovate without risk. Financial services is not about eliminating risk but about managing risk. If it were about eliminating risk, no bank would ever grant any loan and no insurance company would ever issue any insurance policy. I think that is a good example of how innovation is an important part of competitiveness.

I was grateful to the noble Baroness, Lady Bowles, for her amendment on the definition of “standards”, on which we had a constructive debate. This is not about the lowest common denominator; it is about high standards, and she challenged how we define that. It cannot be about keeping every rule exactly as it is now; it has to be about outcomes, and I think everyone would agree that high standards must mean maintaining or improving standards of outcomes.

However, if you take the example that was given on the impact of SARs regimes or, indeed, the way MiFID is implemented, there will be many opportunities to improve the effectiveness of regulation to produce better outcomes. This will not necessarily involve keeping exactly the same rules and regulations; it will involve improving them. This comes back to the point made by my noble friends Lady Neville-Rolfe and Lord Hodgson: this is about the efficiency of regulation and doing it better, which is, and should be, the driving force for a more competitive regulatory regime.

I was grateful for the Minister’s acknowledgement that the Government support promoting the competitiveness of financial services. I note his comments that this needs to be balanced against other objectives; I simply say that it is not balanced if the objective is completely missing—it has to be there so that it can be balanced. He made the point that, rather than introducing this measure now, he would like time to consider it in the policy framework. I and other noble Lords will need to reflect on that and what words of assurance he can give us, as the Bill passes, that there will be a commitment to do something about competitiveness as an objective. However, in the meantime, I beg leave to withdraw Amendment 2.

Amendment 2 withdrawn.

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[Baroness McIntosh of Pickering (Con) [V]]

My Lords, I am delighted to support this group of amendments. I take this opportunity to pay tribute to the noble Lord, Lord Stevenson, and my noble friend Lord Holmes for their huge contribution to this field of financial inclusion. I single out the noble Lord, Lord Stevenson, not just for his role on the Front Bench but previously in chairing StepChange. He will be greatly missed from his Front-Bench responsibilities, and I am sure it will not be long before we see him return.

I also congratulate my noble friend Lord Holmes on being indefatigable in his campaigning for financial inclusion and bringing our attention to fintech. I join the authors of these amendments in identifying a need to address this issue, and I hope that my noble friend, in summing up, will answer this point. The noble Lord, Lord Stevenson, has asked for a high-level response, and I shall use that expression later—I like it. Perhaps we might get something more from my noble friend.

No less of an authority than “You and Yours”, of which I am an avid listener—I think there are two compulsory programmes we should listen to, one is that and the other, I have momentarily forgotten what it is, is the one that gives us all the figures and responses—spent the best part of a programme looking at credit ratings. What struck me is that often it is through no fault of an individual that they find that their credit rating has been so badly affected that they can no longer qualify for any credit. It can take months, if not years, to redress this.

I am concerned that if my understanding is correct Expedia is no longer acting for the Government in this regard. Can my noble friend confirm that we are down to two credit rating agencies? Do the Government share my concern that we should address this area of financial inclusion, financial awareness and each of us being aware of what our credit worthiness and credit ratings are? Amendments 8, 9 and 134 have identified issues that are worthy of attention in this Bill and I look forward to the response from the Minister.

[Lord Blackwell (Con) [V]]

My Lords, I have a lot of sympathy for the importance of inclusion. Financial services are clearly important to everyone, and I endorse the comments from my noble friend Lady Neville-Rolfe about the critical importance of financial education in achieving that. However, I have some difficulties with Amendment 8 on the definition of and requirement to consider financial well-being. Those reservations are similar to the ones that I expressed on Amendment 1 on the general duty of care.

Of course, the objective of well-run financial services companies is, and should be, to promote financial well-being. That is what their business is. That is the purpose of financial products. Financial services firms lend in order to allow people to buy houses and cars and to spread the purchases out over time. They help people to save in order to cover emergencies and to provide pensions in old age. They support businesses to help them create wealth. Financial well-being is the business of financial services companies. However, to impose a regulatory requirement to promote financial well-being runs the risk of extending the boundaries of what a regulated individual might be expected to do beyond what is reasonable to expect.

Despite the comments from the noble Lord, Lord McNicol, I am afraid that the amendment would create huge compliance costs and complexity. Of course, we need rules and regulations that protect consumers from unscrupulous firms that seek to exploit customers, but we should do that—as we do—through penalties for improper behaviour rather than by extending a general obligation on financial well-being. Having said that, I understand the motive behind it and I certainly support the objective of improving financial well-being through the financial services industry.