Financial Services and Markets Bill

Debate between Lord Davies of Brixton and Lord Blackwell

Report stage
Tuesday 13th June 2023 Lords Chamber

[Lord Blackwell (Con)]

My Lords, I am concerned that, while seemingly innocuous, this amendment might turn out to be the thin end of the wedge of government intervention in pension investment. Clearly, the obligation on pension trustees should be to do their best to get the right returns for their investors. Once we start incentivising trustees to take decisions based on incentives offered to them, that raises the question of who then bears the consequences and the responsibility if those investments turn out in the long term not to be the right thing for their pensioners to be invested in.

I do not dispute the point that pension fund investments have not been optimal in the past, but to my mind that is to do with regulatory restrictions that have been placed on pension funds and the requirements to meet those restrictions. I think there is a case to look at the regulations around pension funds that restrict their investment choices and to enable them to invest in a wider set of assets, but I do not think the right way to do that is to start proposing incentives that would turn into the Government mandating the way that pension funds should be invested.

[Lord Davies of Brixton (Lab)]

My Lords, I support the amendment. I still think of myself as a relatively new Member of the House, so it is useful to remind the House of my lifetime spent working in the pensions industry, broadly in support of scheme members. I have been a scheme trustee, I have chaired the Greater London Council investment panel and I have advised trustees of pension schemes as the scheme actuary. I am just stating my expertise here.

I support the amendment because I think a review is required. I take on board the remarks about the thin end of the wedge, but unless we have the review those concerns cannot be addressed. As the noble Baroness, Lady Bowles, said, there is now a big conversation about using pension scheme money to promote the British economy. There is actually a long history of that sort of proposal going back over many years, but it seems to have reached a crescendo over the last year or so.

It is essential that we have a review. What is also essential, of course, is that the review is undertaken by those who know what they are talking about, but that has not necessarily been true about all the comments made so far. For example, I draw the attention of the House to the recent useful report produced by the Pensions and Lifetime Savings Association—not a body that I consistently agree with—on supporting pension investment in UK growth and thinking up quicker and simpler ways to promote pension fund investment in our economy.

I was going to raise two issues. One has already been explained clearly by my noble friend Lord Eatwell: the funding standards that have been established work against the principles that I am sure we all support. Another problem that we have is the Conservative Government’s introduction of freedom and choice. It is difficult to oppose freedom and choice but, when you come to pensions, which are long-term arrangements depending on long-term investment, giving people freedom of choice weakens the very basis upon which they are being organised. It is all very well saying to pension funds, “You’ve got to invest in infrastructure”, but if the members of that scheme have the right to pull their money out at any time, it is very difficult to take the long-term view. That is a fundamental incoherence behind the so-called policy of freedom and choice. Those issues need to be addressed in the review.

I also hope that the list of consultees for the review is not a complete list; to the extent that it is possible to consult the scheme members, they should be consulted as well. I also hope that the issues can go somewhat broader than those listed in the amendment.

In general terms, a review is needed, and I hope it will lead to the objective being clearly set out of promoting the UK economy.

Financial Services Bill

Debate between Lord Davies of Brixton and Lord Blackwell

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

[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.